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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-KSB
Mark One
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 1998
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from ________ to ________
Commission file number: 000-24899
UB&T FINANCIAL SERVICES CORPORATION
(Exact name of small business issuer as specified in its charter)
Georgia 58-2378257
(State or other jurisdiction of (IRS Employer
incorporation or organization) Identification)
129 East Elm Street, Rockmart, Georgia 30153
(Address of principal executive offices) (Zip Code)
Issuer's telephone number: 770-684-8888
Securities registered under Section 12(b) of the Exchange Act: None
Securities registered under Section 12(g) of the Exchange Act: Common Stock,
$5.00 par value per share
Check whether the issuer (1) filed all reports required to be filed by Section
13 or 15(d) of the Exchange Act during the past 12 months (or for such shorter
period that the registrant was required to file such reports) and (2) has been
subject to such filing requirements for the past 90 days. Yes X No
---- ----
Check if there is no disclosure of delinquent filers pursuant to Item 405 of
Regulation S-B contained in this form, and will not be contained, to the best of
registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-KSB or any amendment to
this Form 10-KSB. [ ]
State issuer's revenues for its most recent fiscal year: $3,878,000
The aggregate market value of the common equity held by non-affiliates computed
by reference to the price at which the common equity was sold, or the average
bid and ask price of such common equity, as of a specified date within the past
60 days: $4,370,448 at March 15, 1999 based on private trades at $16.00 per
share, although there is no established trading market.
There were 426,370 shares of Registrant's common stock outstanding at March 15,
1999.
Documents Incorporated By Reference: Portions of Registrant's 1998 Annual Report
to Shareholders are incorporated by reference into Part II of this Report and
portion's of Registrant's definitive Proxy Statement for its 1999 Annual Meeting
of Shareholders are incorporated by reference into Part III of this Report.
Transitional Small Business Disclosure Format (check one): Yes No X
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TABLE OF CONTENTS
PAGE
PART I
ITEM 1: Description of Business 3
ITEM 2: Description of Properties 9
ITEM 3: Legal Proceedings 9
ITEM 4: Submission of Matters to a Vote of Security Holders 9
PART II
ITEM 5: Market for Common Equity and Related Stockholder Matters 9
ITEM 6: Management's Discussion and Analysis or Plan of Operation 10
ITEM 7: Financial Statements 24
ITEM 8: Changes in and Disagreements with Accountants on Accounting 24
and Financial Disclosure
PART III
ITEM 9: Directors, Executive Officers, Promoters and Control Persons: 25
Compliance with Section 16(a) of the Exchange Act
ITEM 10: Executive Compensation 26
ITEM 11: Security Ownership of Certain Beneficial Owners and Management 26
ITEM 12: Certain Relationships and Related Transactions 26
ITEM 13: Exhibits and Reports on Form 8-K 26
SIGNATURES
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CAUTIONARY NOTICE REGARDING FORWARD-LOOKING STATEMENTS
This Report contains statements that constitute "forward-looking statements"
within the meaning of Section 27A of the Securities Act of 1933 and Section 21E
of the Securities Exchange Act of 1934. These statements appear in a number of
places in this Report and include statements regarding the intent, belief or
current expectations of the Company, its directors or its officers with respect
to, among other things, trends affecting the Company's financial condition or
results of operations and the Company's business and growth strategies.
Investors are cautioned that any such forward-looking statements are not
guarantees of future performance and involve risks and uncertainties, and that
actual results may differ materially from those projected in the forward-looking
statements as a result of various factors. These factors include the following:
(a) competitive pressure in the banking industry and the Bank's market area; (b)
changes in the interest rate environment; (c) the fact that general economic
conditions may be less favorable in the Bank's market area than we expect; and
(d) changes in our regulatory environment. The accompanying information
contained in this Report, including, without limitation, the information set
forth under the headings "Management's Discussion and Analysis of Financial
Condition and Results of Operations" and "Business," as well as in the Company's
Securities Act filings, identifies important additional factors that could
adversely affect actual results and performance. Prospective investors are urged
to carefully consider such factors.
All forward-looking statements attributable to the Company are expressly
qualified in their entirety by the foregoing cautionary statements.
PART I
Item 1. Description of Business.
(a) Business Development
UB&T Financial Services Corporation (the "Company"), a Georgia corporation, was
organized on May 28, 1998 for the purpose of acquiring all of the issued and
outstanding common stock of United Bank & Trust (the "Bank") and becoming the
bank holding company for the Bank. Pursuant to an Agreement and Plan of
Reorganization approved by the Bank's shareholders in May 1998, each outstanding
share of common stock of the Bank was converted into and exchanged for one share
of the $5.00 par value common stock of the Company ("Company Common Stock"), the
shareholders of the Bank became shareholders of the Company, and the Bank became
a wholly owned subsidiary of the Company effective September 1, 1998. The
Company is registered and regulated as a bank holding company pursuant to the
Bank Holding Company Act of 1956, as amended.
The Bank is a financial institution which was organized under the laws of the
State of Georgia on October 27, 1988 and completed its initial offering of
451,105 shares of its common stock at a price of $10.00 per share on December
20, 1989. On January 16, 1990, the Bank received Bank Insurance Fund insurance
of its accounts from the Federal Deposit Insurance Corporation ("FDIC") and its
permit to begin business as a commercial bank under the laws of the State of
Georgia from the Georgia Department of Banking and Finance (the "Department").
On July 10, 1995, the Bank opened a full-service branch in Cedartown, Polk
County, Georgia.
The headquarters of the Company and the Bank are located at 129 East Elm Street
in Rockmart, Polk County, Georgia.
(b) Business of Issuer
The Company does not currently have any subsidiaries other than the Bank or
conduct independent business operations. The Bank's operations are primarily
retail and commercial oriented and are targeted at individuals and small to
medium-sized businesses located within its market area. The Bank considers its
primary market area to be Polk County, the area within a five-mile radius of
Taylorsville located half in Polk County and half in Bartow County, and nearby
areas of Floyd, Paulding, Haralson and Carroll Counties. While the Bank provides
most traditional commercial and consumer banking services, its principal
activities are the taking of demand and time deposits and the making of secured
and unsecured consumer and business loans, including, but not limited to: (i)
working capital loans; (ii) long-term fixed asset purchase or expansion loans;
(iii) consumer for automobiles, appliances and household equipment ; (iv)
residential real
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estate loans and home improvement loans; (v) residential construction loans;
(vi) industrial and agricultural equipment loans; (vii) educational loans; and
(viii) county and city development authority loans. The Bank also acts as an
issuing agent for U.S. Savings Bonds, travelers checks, money orders and
cashiers checks. The Bank does not presently provide trust services.
Competition
Consistent with its community banking approach, the Bank's loan and deposit
customers are located primarily in Polk County and surrounding areas. The Bank
competes directly for deposits in its market area with other commercial banks,
thrifts, credit unions, brokerage firms, agencies issuing United States
government securities and all other organizations and institutions engaged in
money market transactions. In its lending activities, the Bank competes with
other financial institutions as well as consumer finance companies, mortgage
companies, insurance companies and other lenders engaged in the business of
extending credit in its market area. Interest rates, both on loans and deposits,
and prices of services are highly competitive among financial institutions
generally. Office location, types and quality of services and products, office
hours, customer service, community reputation and continuity of personnel are
also important competitive factors.
The Company and Bank may compete with numerous other companies and financial
institutions engaged in similar lines of business, such as other bank holding
companies, leasing companies and insurance companies. Many of these other
financial institutions and companies will have far greater resources than either
the Bank or the Company.
On September 29, 1994, the "Riegle-Neal Interstate Banking and Branching
Efficiency Act of 1994" (the "Interstate Banking Act") was enacted. In general,
the Interstate Banking Act, among other matters, permits bank holding companies,
upon receipt of appropriate regulatory approvals, (i) to merge their multi state
bank subsidiaries into a single bank by June 1, 1997, unless the state
legislatures act to "opt-out" of this provision; and (ii) to acquire banks in
any state one year after the effective date of the Interstate Banking Act. It
also permits banks, upon receipt of appropriate regulatory approvals, to
establish de novo branches across state lines, so long as the individual states
into which the potential entrant proposes to branch specifically pass
legislation to "opt-in" and allow out of state banks to branch in that state on
a de novo basis.
The Bank, as a state chartered bank, is permitted to branch to the extent that
banks are permitted to branch under Georgia law. In 1996, the Georgia
legislature passed a bill designed to eliminate Georgia's current branching
restrictions by allowing banks in Georgia, with prior approval of the Department
(and the appropriate Federal regulatory authority), to establish up to three new
branches to be located in any county in the state. Effective July 1, 1998,
Georgia banks may establish an unlimited number of branches in any county in the
state, upon receipt of appropriate regulatory approvals.
The United States Congress and the Georgia General Assembly have periodically
considered and adopted legislation that has resulted in, and could further
result in, deregulation of both banks and other financial institutions. Such
legislature could further eliminate geographic restrictions on banks and bank
holding companies and current prohibitions against banks engaging in certain
nonbanking activities. Such legislative changes could place the Bank in more
direct competition with other financial institutions, including mutual funds,
securities brokerage firms, insurance companies, and investment banking firms.
The effect of any such legislation on the business of the Bank cannot be
accurately predicted. The Bank cannot predict what other legislation might be
enacted or what other regulations might be adopted and, if enacted or adopted,
the effect thereof.
As a result of the enactment of such statutes, the competitive environment in
which financial institutions must conduct their business, and the potential for
competition among financial institutions of all types has increased
significantly. Management of the Company and the Bank believes that there is a
need and demand in its market area for locally owned and operated financial
institutions such as the Bank. However, there is no assurance that the Bank can
remain an effective competitor in such a deregulated financial services
environment.
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Employees
As of December 31, 1998, the Bank had 26 full-time and 3 part-time employees.
The Company has no employees. Neither the Company nor the Bank is a party to any
collective bargaining agreement, and, in the opinion of management, the Bank
enjoys satisfactory relations with its employees.
Supervision and Regulation
Regulation of the Bank. The operations of the Bank are subject to state and
federal statutes applicable to state chartered banks whose deposits are insured
by the FDIC and the regulations of the Department and the FDIC. Such statutes
and regulations relate to, among other things, required reserves, investments,
loans, mergers and consolidations, issuances of securities, payment of
dividends, establishment of branches and other aspects of the Bank's operations.
Under the provisions of the Federal Reserve Act, the Bank is subject to certain
restrictions on any extensions of credit to the Company or, with certain
exceptions, other affiliates, and on the taking of such stock or securities as
collateral on loans to any borrower. In addition, the Bank is prohibited from
engaging in certain tie-in arrangements in connection with any extension of
credit or the providing of any property or service.
The Bank, as a state chartered bank, is permitted to branch only to the extent
that banks are permitted to branch under Georgia law. In January 1996, the
Georgia legislature passed a bill designed to eliminate Georgia's current
intra-county branching restrictions. The legislation provided that effective
after July 1, 1996, banks in Georgia, with prior approval of the Department (and
the appropriate federal regulatory authority), may establish additional branches
in up to three new counties in the state per year. On July 1, 1998, full
statewide branching went into effect as Georgia banks may establish new branches
in any county in the state with prior approval of the appropriate regulatory
authorities.
The FDIC adopted final risk-based capital guidelines for all FDIC insured state
chartered banks that are not members of the Federal Reserve System effective
December 31, 1990. As of December 31, 1992, all banks are required to maintain a
minimum ratio of total capital to risk weighted assets of 8 percent (of which at
least 4 percent must consist of Tier 1 capital). Tier 1 capital of state
chartered banks (as defined in regulations) generally consists of (i) common
stockholders equity; (ii) noncumulative perpetual preferred stock and related
surplus; and (iii) minority interests in the equity accounts of consolidated
subsidiaries.
In addition, the FDIC adopted a minimum ratio of Tier 1 capital to total assets
of banks. This capital measure is generally referred to as the leverage capital
ratio. The FDIC has established a minimum leverage capital ratio of 3 percent if
the FDIC determines that the institution is not anticipating or experiencing
significant growth and has well-diversified risk, including no undue interest
rate exposure, excellent asset quality, high liquidity, good earnings and, in
general, is considered a strong banking organization, rated Composite 1 under
the Uniform Financial Institutions Rating System. Other financial institutions
are expected to maintain leverage capital at least 100 to 200 basis points above
the minimum level. Banking regulators continue to indicate their desire to raise
capital requirements applicable to banking organizations, including a proposal
to add an interest rate risk component to risk-based capital requirements.
The Federal Deposit Insurance Corporation Improvement Act of 1991, enacted in
December 1991 ("FDICIA"), specifies, among other things, the following five
capital standard categories for depository institutions: (i) well capitalized,
(ii) adequately capitalized, (iii) undercapitalized, (iv) significantly
undercapitalized and (v) critically undercapitalized. FDICIA imposes
progressively more restrictive constraints on operations, management and capital
distributions depending on the category in which an institution is classified.
Each of the federal banking agencies has issued final uniform regulations that
became effective December 19, 1992, which, among other things, define the
capital levels described above. Under the final regulations, a bank is
considered "well capitalized" if it (i) has a total risk-based capital ratio of
10% or greater, (ii) has a Tier 1 risk-based capital ratio of 6% or greater,
(iii) has a leverage ratio of 5% or greater, and (iv) is not subject to any
order or written directive to meet and maintain a specific capital level for any
capital measure. An "adequately capitalized" bank is defined as one that has (i)
a total risk-based capital ratio for 8% or greater, (ii) a Tier 1 risk-based
capital ratio of 4% or greater and (iii) a leverage ratio of 4% or greater. An
"undercapitalized" bank is defined as one that has (i) a total risk-based
capital ratio of less than 8%, (ii) a Tier I risk-based capital ratio of less
than 4% or (iii) a leverage ratio of less than 3%. A "significantly
undercapitalized" bank is defined as one that has a total risk-based capital
ratio of less than 6%, a Tier 1 risk-based capital ratio of less than 3% or a
leverage ratio of less than 3% and a bank is "critically undercapitalized" if
the bank has a leverage ratio equal to
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or less than 2%. The applicable federal regulatory agency for a bank that is
"well capitalized" may reclassify it as "adequately capitalized" or
"undercapitalized" and subject the institution to the supervisory actions
applicable to the next lower capital category, if it determines that the Bank is
in an unsafe or unsound condition or deems the bank to be engaged in an unsafe
or unsound practice and not to have corrected the deficiency. As of December 31,
1998, the Bank met the definition of a "well capitalized" institution.
"Undercapitalized" depository institutions, among other things, are subject to
growth limitations, are prohibited, with certain exceptions, from making capital
distributions, are limited in their ability to obtain funding from a Federal
Reserve Bank and are required to submit a capital restoration plan. The federal
banking agencies may not accept a capital plan without determining, among other
things, that the plan is based on realistic assumptions and is likely to succeed
in restoring the depository institution's capital. In addition, for a capital
restoration plan to be acceptable, the depository institution's parent holding
company must guarantee that the institution will comply with such capital
restoration plan and provide appropriate assurances of performance. If a
depository institution fails to submit an acceptable plan, including if the
holding company refuses or is unable to make the guarantee described in the
previous sentence, it is treated as if it is "significantly undercapitalized".
Failure to submit or implement an acceptable capital plan also is grounds for
the appointment of a conservator or a receiver. "Significantly undercapitalized"
depository institutions may be subject to a number of additional requirements
and restrictions such as orders to sell sufficient voting stock to become
adequately capitalized, requirements to reduce total assets and cessation of
receipt of deposits from correspondent banks. "Critically undercapitalized"
institutions, among other things, are prohibited from making any payments of
principal and interest on subordinated debt, and are subject to the appointment
of a receiver or conservator.
Under FDICIA, the FDIC is permitted to provide financial assistance to an
insured bank before appointment of a conservator or receiver only if (i) such
assistance would be the least costly method of meeting the FDIC's insurance
obligations, (ii) grounds for appointment of a conservator or a receiver exist
or are likely to exist, (iii) it is unlikely that the bank can meet all capital
standards without assistance and (iv) the bank's management has been competent,
has complied with applicable laws, regulations, rules and supervisory directives
and has not engaged in any insider dealing, speculative practice or other
abusive activity.
The Bank is subject to FDIC deposit insurance assessments for the Bank Insurance
Fund ("BIF"). The FDIC has implemented a risk-based assessment system whereby
banks are assessed on a sliding scale depending on their placement in nine
separate supervisory categories. Recent legislation provides that BIF insured
institutions, such as the Bank, will share the Financial Corporation ("FICO")
bond service obligation. Previously, only Savings Association Insurance Fund
("SAIF") insured institutions were obligated to contribute to the FICO bond
service. The BIF deposit insurance premium will be less than $.02 per $100 of
BIF insured deposits for the highest-rated institutions.
On April 19, 1995, the federal bank regulatory agencies adopted uniform
revisions to the regulations promulgated pursuant to the Community Reinvestment
Act (the "CRA"), which are intended to set standards for financial institutions.
The revised regulation contains three evaluation tests: (a) a lending test which
will compare the institution's market share of loans in low and moderate income
areas to its market share of loans in its entire service area and the percentage
of a bank's outstanding loans to low and moderate income areas or individuals,
(b) a services test which will evaluate the provision of services that promote
the availability of credit to low and moderate income areas, and (c) an
investment test, which will evaluate an institution's record of investments in
organizations designed to foster community developments, small and minority
owned businesses and affordable housing lending, including state and local
government housing or revenue bonds. The regulation is designed to reduce the
paperwork requirements of the current regulations and provide regulatory
agencies, institutions, and community groups with a more objective and
predictable manner with which to evaluate the CRA performance of financial
institutions. The rule became effective on January 1, 1996 when evaluation under
streamlined procedures began for institutions with total assets of less than
$250 million that are owned by a holding company with total assets of less than
$1 billion.
Congress and various federal agencies (including, in addition to the bank
regulatory agencies, the Department of Housing and Urban Development, the
Federal Trade Commission and the Department of Justice (collectively, the
"Federal Agencies") responsible for implementing the nation's fair lending laws
have been increasingly concerned that the prospective home buyers and other
borrowers are experiencing discrimination in their efforts to obtain loans. The
Justice Department filed suit against financial institutions which it determined
had discriminated, seeking fines and
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restitution for borrowers who allegedly suffered from discriminatory practices.
Most, if not all, of these suites have been settled (some for substantial sums)
without a full adjudication on the merits.
On March 8, 1994, the Federal Agencies, in an effort to clarify what constitutes
discrimination in lending and to specify the factors the agencies will consider
in determining if lending discrimination exists, announced a joint policy
statement detailing specific discriminatory practices prohibited under the Equal
Credit Opportunity Act and the Fair Housing Act. In the policy statement, three
methods of establishing discrimination in lending were identified: (a) overt
evidence of discrimination, when a lender blatantly discriminates on a
prohibited basis, or (b) where there is no showing that the treatment was
motivated by intent to discriminate against a person, and (c) evidence of
disparate impact, when a lender applies a practice uniformly to all applicants,
but the practice has a discriminatory effect on a protected class, even where
such practices are neutral on their face and are applied equally, unless the
practice can be justified on the basis of business necessity.
Regulation of the Company. The Company is a bank holding company within the
meaning of the Federal Bank Holding Company Act (the "Act") and the Georgia bank
holding company law (the "Georgia Act"). As a bank holding company, the Company
is required to file with the Federal Reserve Board (the "Board") an annual
report and such additional information as the Board may require pursuant to the
Act. The Board may also make examinations of the Company and each of its
subsidiaries. Bank holding companies are required by the Act to obtain approval
from the Board prior to acquiring, directly or indirectly, ownership or control
of more than 5% of the voting shares of a bank. The Act also prohibits bank
holding companies, with certain exceptions, from acquiring more than 5% of the
voting shares of any company that is not a bank and from engaging in any
nonbanking business (other than a business closely related to banking as
determined by the Board) or from managing or controlling banks and other
subsidiaries authorized by the Act or furnishing services to, or performing
services for, its subsidiaries without the prior approval of the Board. The
Board is empowered to differentiate between activities that are initiated de
novo by a bank holding company or a subsidiary and activities commenced by
acquisition of a going concern. The Company has no present intention to engage
in nonbanking activities. As a bank holding company, the Company is subject to
capital adequacy guidelines as established by the Board. The Board established
risk based capital guidelines for bank holding companies effective March 15,
1989. Beginning on December 31, 1992, the minimum required ratio for total
capital to risk weighted assets became 8 percent (of which at least 4 percent
must consist of Tier 1 capital). Tier 1 capital (as defined in regulations of
the Board) consists of common and qualifying preferred stock and minority
interests in equity accounts of consolidated subsidiaries, less goodwill and
other intangible assets required to be deducted under the Board's guidelines.
The Board's guidelines apply on a consolidated basis to bank holding companies
with total consolidated assets of $150 million or more. For bank holding
companies with less than $150 million in total consolidated assets (such as the
Company), the guidelines will be applied on a bank only basis, unless the bank
holding company is engaged in nonbanking activity involving significant leverage
or has significant amount of debt outstanding that is held by the general
public. The Board has stated that risk based capital guidelines establish
minimum standards and that bank holding companies generally are expected to
operate well above the minimum standards. The Company is also a bank holding
company within the meaning of the Georgia Act, which provides that, without the
prior approval of the Department, it is unlawful (i) for any bank holding
company to acquire direct or indirect ownership or control of more than 5% of
the voting shares of any bank, (ii) for any bank holding company or subsidiary
thereof, other than a bank, to acquire all or substantially all of the assets of
a bank, or (iii) for any bank holding company to merge or consolidate with any
other bank holding company. It also is unlawful for any company to acquire
direct or indirect ownership or control of more than 5% of the voting shares of
any bank in Georgia unless such bank has been in existence and continuously
operating or incorporated as a bank for a period of five years or more prior to
the date of application to the Department for approval of such acquisition. Bank
holding companies themselves are prohibited from acquiring another bank until
the initial bank in the bank holding company has been incorporated for a period
of twenty-four months. The Riegle-Neal Interstate Banking and Branching
Efficiency Act of 1994 (the "Interstate Banking Act"), subject to certain
restrictions, allows adequately capitalized and managed bank holding companies
to acquire existing banks across state lines, regardless of state statutes that
would prohibit acquisitions by out-of-state institutions. Further, effective
June 1, 1997, a bank holding company may consolidate interstate bank
subsidiaries into branches and a bank may merge with an unaffiliated bank across
state lines to the extent that the applicable states have not "opted out" of
interstate branching prior to such effective date. Some states may elect to
permit interstate mergers prior to June 1, 1997. The Interstate Banking Act
generally prohibits an interstate acquisition (other than the initial entry into
a state by a bank holding company) that would result in either the control of
more than (i) 10% of the total amount of insured deposits in the United States,
or (ii) 30% of the total insured deposits in the home state of the target bank,
unless such 30% limitation is waived by the home state on a basis which does not
discriminate against out-of-state institutions. As
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a result of this legislation, the Company may become a candidate for acquisition
by, or may itself seek to acquire, banking organizations located in other
states. The Riegle Community Development and Regulatory Improvement Act of 1994
(the "Improvement Act") provides for the creation of a community development
financial institutions' fund to promote economic revitalization in community
development. Banks and thrift institutions are allowed to participate in such
community development banks. The Improvement Act also contains (i) provisions
designed to enhance small business capital formation and to enhance disclosure
with regard to high cost mortgages for the protection of consumers, and (ii)
more than 50 regulatory relief provisions that apply to banks and thrift
institutions, including the coordination of examinations by various federal
agencies, coordination of frequency and types of reports financial institutions
are required to file and reduction of examinations for well capitalized
institutions.
Bank holding companies may be compelled by bank regulatory authorities to invest
additional capital in the event a subsidiary bank experiences either significant
loan losses or rapid growth of loans or deposits. In addition, the Company may
be required to provide additional capital to any additional banks it acquires as
a condition to obtaining the approvals and consents of regulatory authorities in
connection with such acquisitions.
The Company and the Bank are subject to the Federal Reserve Act, Section 23A,
which limits a bank's "covered transactions" (generally, any extension of
credit) with any single affiliate to no more than 10% of a bank's capital and
surplus. Covered transactions with all affiliates combined are limited to no
more than 20% of a bank's capital and surplus. All covered and exempt
transactions between a bank and its affiliates must be on terms and conditions
consistent with safe and sound banking practices, and a bank and its
subsidiaries are prohibited from purchasing low quality assets from the bank's
affiliates. Finally, Section 23A requires that all of a bank's extensions of
credit to an affiliate be appropriately secured by collateral. The Company and
the Bank are also subject to Section 23B of the Federal Reserve Act, which
further limits transactions among affiliates. Sections 22(g) and 22(h) of the
Federal Reserve Act and implementing regulations also prohibit extensions of
credit by a state non-member bank (such as the Bank) to its directors, officers
and controlling shareholders on terms which are more favorable than those
afforded other borrowers, and impose limits on the amounts of loans to
individual affiliates and all affiliates as a group.
The United States Congress and the Georgia General Assembly periodically
consider and adopt legislation that results in, and could further result in,
deregulation, among other matters, of banks and other financial institutions.
Such legislation could modify or eliminate geographic restrictions on banks and
bank holding companies and current prohibitions with other financial
institutions, including mutual funds, securities brokerage firms, insurance
companies, banks from other states and investment banking firms. The effect of
any such legislation on the business of the Company or the Bank cannot be
accurately predicted. The Company cannot predict what legislation might be
enacted or what other implementing regulations might be adopted, and if enacted
or adopted, the effect thereof.
Monetary Policy
The earnings of the Bank are affected by domestic and foreign economic
conditions, particularly by the monetary and fiscal policies of the United
States Government and its agencies.
The Federal Reserve has had, and will continue to have, an important impact on
the operating results of commercial banks through its power to implement
national monetary policy in order, among other things, to mitigate recessionary
and inflationary pressures by regulating the national money supply.
The techniques used by the Federal Reserve include setting the reserve
requirements of member banks and establishing the discount rate on member banks'
borrowings. The Federal Reserve also conducts open market transactions in United
States Government securities.
Periodically, bills are pending before the United States Congress which contain
wide-ranging proposals for altering the structures, regulations and competitive
relationships of the nation's financial institutions. Among such bills are
proposals to prohibit banks and bank holding companies from conducting certain
types of activities, to subject banks to increased disclosure and reporting
requirements, to eliminate on a regional or other basis the present restriction
on interstate expansion by banks or bank holding companies, to alter the
statutory separation of commercial and investment banking and to alter the
powers of thrift institutions and other competitors of banks. It cannot be
predicted whether or in what form any of these proposals will be adopted or the
extent to which the business of the Company may be affected thereby.
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Item 2. Properties.
The Company's corporate office and the Bank's main office is located at 129 East
Elm Street near downtown Rockmart, Georgia. The site is adjacent to Rockmart's
central business district. The main office is accessible directly from East Elm
Street and Slate Street. In July 1995, the Bank opened a branch office in
Cedartown, Georgia located at 632 N.Main Street.
The main office is an office building owned by the Bank and contains
approximately 8,000 square feet of finished space used for Bank offices,
operations, storage, teller windows and the Bank lobby. The Bank building also
has drive-in facilities and an automated teller machine with 24-hour access. The
total cost of constructing the building, including site improvements, was
approximately $1.0 million. Furnishings, including vault, teller facilities,
safe deposit boxes, drive-up windows, one automated teller machine and other
necessary furniture, fixtures and equipment, cost approximately $785,000.
The Cedartown office is an office building owned by the Bank and contains
approximately 4,700 square feet of finished space used for Bank offices,
storage, computer back-up site, teller windows, and the Bank lobby. The Bank
building also has drive-in facilities and an automated teller machine with
24-hour access. The total cost of constructing the building, including site
improvements, was approximately $750,000. Furnishings, including vault, teller
facilities, safe deposit boxes, drive-up windows, one automated teller machine,
and other necessary furniture, fixtures, and equipment, cost approximately
$268,000.
Item 3. Legal Proceedings.
The Company and the Bank are not parties to, nor is any of their property the
subject of, any material pending legal proceedings, other than ordinary routine
litigation incidental to their business, and no such proceedings are known to be
contemplated by governmental authorities. There are no material legal
proceedings to which any director, officer, affiliate or more than 5%
shareholder is a party adverse to or that has a material interest adverse to the
Company or the Bank.
Item 4. Submission of Matters to a Vote of Security Holders.
No matter was submitted to a vote of shareholders of the Company during the
fourth quarter ended December 31, 1998.
PART II
Item 5. Market for Registrant's Common Equity and Related Stockholder Matters.
The stock of the Company (and of the Bank prior to September 1, 1998) has not
been traded publicly and no specific market sales prices can be quoted. The
Company and the Bank have maintained partial records of share prices based upon
actual transactions disclosed. However, these records are incomplete since they
do not reflect prices for all transactions in the common stock of the Company or
the Bank. To the extent such information has been disclosed to the Company or
the Bank, the share prices of the common stock of the Company and the Bank are
as follows:
Year/Quarter High Selling Price Low Selling Price
------------ ------------------ -----------------
1997
First Quarter $14.00 $ 14.00
Second Quarter $14.00 $ 14.00
Third Quarter $14.00 $ 14.00
Fourth Quarter $14.00 $ 14.00
1998
First Quarter $15.00 $ 14.00
Second Quarter $16.00 $ 14.00
Third Quarter $17.00 $ 16.00
Fourth Quarter $17.00 $ 16.00
9
<PAGE>
During the period covered by this report and to date, sales not reported to
management may have occurred at share prices not reflected in this table.
As of March 1, 1999, the Company had 569 shareholders of record.
Under the Georgia Business Corporation Code, the Company may from time to time
make distributions, including the payment of dividends, to its shareholders in
money, indebtedness or other property (except its own shares) unless, after
giving effect to such distribution, the Company would not be able to pay its
debts as they become due in the usual course of business or the Company's total
assets would be less than the sum of its total liabilities, plus the amount that
would be needed, if the Company were to be dissolved at the time of the
distribution, to satisfy any preferential rights of shareholders upon
dissolution. The Company may also distribute its shares pro rata and without
consideration to its shareholders or to the shareholders of one or more classes
or series, which constitutes a share dividend.
However, the only current source of funds with which the Company can pay
dividends is from amounts received as dividends from the Bank. The Board of
Directors of the Bank is limited in its ability to pay cash dividends on the
outstanding capital stock of the Bank without regulatory approval. The Georgia
Financial Institutions Code provides that dividends may be declared and paid
only from a bank's cumulative retained earnings which have not been appropriated
as permanent capital. Approval from the Department is required prior to the
payment of dividends by a bank under certain circumstances. Generally, a bank
may declare and pay dividends without the prior approval of the Department so
long as (i) a bank's ratio of equity capital to adjusted total assets equals or
exceeds 6%, (ii) the aggregate amount of dividends declared or anticipated to be
declared by a bank in the calendar year does not exceed 50% of such bank's net
profits after taxes but before dividends for the prior calendar year, and (iii)
the total classified assets at the most recently completed and delivered
examination of the bank do not exceed 80% of the equity capital reflected at
such examination. The Bank will be governed by the aforementioned restrictions
with regard to the payment of dividends to the Company which, in turn, may serve
as a limitation on any future dividend payments by the Company to its
shareholders.
On February 18, 1997, the Company declared a cash dividend of $0.20 per share
payable to shareholders of record as of February 18, 1997. On January 20, 1998,
the Company declared a cash dividend of $0.25 per share payable to shareholders
of record as of January 20, 1998. On February 16, 1999, the Company declared a
cash dividend of $0.25 per share payable to shareholders of record as of
February 16, 1999. In addition, the information set forth in Note 11 of the
Notes to Consolidated Financial Statements included in the Company's 1998 Annual
Report to Shareholders' for the year ended December 31, 1998 (the "Annual
Report") is incorporated by reference herein in partial answer to Item 5 of this
Form 10-KSB.
Item 6. Management's Discussion and Analysis or Plan of Operation.
Management's Discussion and Analysis
of Financial Condition and Results of Operations
The following discussion should be read in conjunction with the Consolidated
Financial Statements of the Company (including the notes thereto) contained
elsewhere in this Report. The following discussion compares results of
operations for the years ended December 31, 1998 and 1997.
The following is a discussion of the financial condition of the Company and
subsidiary at December 31, 1998 and 1997 and the results of operations for the
years ended December 31, 1998 and 1997. The purpose of this discussion is to
focus on information about the Company's financial condition and results of
operations which are not otherwise apparent from the audited consolidated
financial statements. Reference should be made to those statements and the
selected financial data presented elsewhere in this report for an understanding
of the following discussion and analysis.
Overview
The Company has had steady growth in earning assets and deposits since
inception. Net income had steadily increased until 1998. The decrease in net
income from 1997 to 1998 was a direct result of an increase in the provision for
loan loss. The table below summarizes the growth in average earning assets,
deposits and net income for the previous five years:
10
<PAGE>
1998 1997 1996 1995 1994
---- ---- ---- ---- ----
(dollars in thousands)
Average Earning assets $38,574 36,007 32,814 25,660 22,653
Deposits 36,624 35,850 30,980 26,853 21,648
Net income 281 351 208 188 327
Following is a summary of the Company's balance sheets for the periods indicated
December 31 Increase/(Decrease)
1998 1997 Amount Percent
------- ------ ------ -------
(dollars in thousands)
Cash and due from banks $ 1,166 895 271 30.28%
Interest-bearing deposits in banks
federal funds sold 2,444 1,907 537 28.17
Securities 7,597 13,582 (5,985) (44.06)
Loans, net 29,555 22,432 7,123 31.75
Premises and equipment 1,953 2,051 (98) ( 4.78)
Other assets 501 607 (106) (17.47)
------- ------ ------- -------
$43,216 41,474 1,742 4.20%
------- ------ ------- -------
Deposits 36,624 35,850 774 2.15
Other borrowings 1,181 -- 1,181 100.00
Other liabilities 455 498 ( 43) 8.63
Shareholders' equity 4,956 5,126 (170) 3.31
------- ------ ------- ------
$43,216 41,474 1,742 4.20
------- ------ ------- ------
FINANCIAL CONDITION AT DECEMBER 31, 1998 AND 1997
As indicated in the above table, the Company's assets increased 4.2% during
1998. The growth was due primarily to the increase in loan demand which was
funded by the decrease in investment securities. Investment securities decreased
as a result of the declining rates in the bond market. The decrease was
comprised of $12,873,000 in calls, maturities and sales net of $6,861,000 in
purchases. The loan to deposit ratio of the Company increased from 63.44% in
1997 to 81.68% in 1998. Other borrowings increased due to the additional loan
demand and the Company had advances on its line of credit totaling $356,000 to
purchase 21,549 shares of treasury stock. The minimal increase in deposits from
1997 to 1998 in comparison to the other years noted is a result of lower
interest rates offered by the Bank.
There were $113,000 in dividends declared during 1998, therefore net earnings of
$168,000 were retained by the Company.
The Company has a significant concentration in loans secured by real estate
located in the Company's primary market area of Polk County. The Company's
real estate mortgage and construction portfolio consists of loans collateralized
by one to four family residential properties, multi-family residential
properties and nonresidential properties. The Company generally requires that
the loan values not exceed 75% to 85% of the collateral values for these types
of real estate lending.
11
<PAGE>
The primary risk associated with the Company's real estate portfolio is that a
downturn in the economy could negatively impact the values of the real estate
which is held as collateral for these loans. Also, an economic downturn could
also increase unemployment rates in the Company's market area. These risks could
affect the borrower's ability to repay the loans as well as the Company's
ability to recover its investment if repayment is dependent upon the liquidation
of the collateral. The Company reduces these risks not only by adherence to loan
to value guidelines, but also by evaluating the creditworthiness of the borrower
and monitoring the borrower's financial position. Currently, real estate values
and employment trends in the Company's market area are stable with no
indications of a significant downturn in the general economy. In addition, the
Company monitors the loan portfolio make up and limits concentrations in any one
type of loan based on exposure and economic conditions.
Liquidity and Capital Resources
The purpose of liquidity management is to ensure that there are sufficient cash
flows to satisfy demands for credit, deposit withdrawals and other needs of the
Company. Traditional sources of liquidity include asset maturities and growth in
core deposits. A company may achieve its desired liquidity objectives from the
management of assets and liabilities, and through funds provided by operations.
Funds invested in short-term marketable instruments and the continuous maturing
of other earning assets are sources of liquidity from the asset perspective. The
liability base provides sources of liquidity through deposit growth and the
access to various other borrowing arrangements.
Scheduled loan payments are a relatively stable source of funds, but loan
payoffs and deposit flows fluctuate significantly, being influenced by interest
rates and general economic conditions and competition. The Company attempts to
price its deposits to meet its asset/liability objective consistent with local
market conditions.
The liquidity and capital resources of the Company are monitored on a periodic
basis by State and Federal regulatory authorities. As determined under
guidelines established by those regulatory authorities and internal policy, the
Company's liquidity is considered adequate.
At December 31, 1998, the Company had loan commitments and letters of credit
outstanding of $2,299,000 and $35,000, respectively. Because these commitments
generally have fixed expiration dates and many will expire without being drawn
upon, the total commitment amounts do not necessarily represent future cash
requirements. If needed, the Bank has the ability on a short-term basis, to
borrow and purchase Federal funds from other financial institutions. At December
31, 1998, the Bank has arrangements with commercial banks for additional
short-term advances of approximately $7,500,000.
At December 31, 1998, the subsidiary Bank's capital ratios were considered
adequate based on regulatory minimum capital requirements. The Company's equity
increased due to the retention of net earnings of $168,000. For regulatory
purposes, the net unrealized gains on securities available for sale of $28,000,
net of taxes are not considered in the computation of the capital ratios.
The primary source of funds available to the Company is the payment of dividends
by its subsidiary Bank and the line of credit of $500,000 from The Bankers Bank.
Banking regulations limit the amount of the dividends that may be paid without
prior approval of the Bank's regulatory agency. Approximately $152,000 are
available to be paid as dividends by the Bank at December 31, 1998.
The minimum capital requirements to be considered well-capitalized under prompt
corrective action regulatory guidelines and the actual capital ratios for the
subsidiary bank as of December 31, 1998 are as follows:
Regulatory
Actual Requirement
------ -----------
Leverage capital ratio 12.22% 5.00%
Risk-based capital ratios:
Core capital 17.21% 6.00%
Total capital 18.39% 10.00%
12
<PAGE>
The Company is not aware of any known trends, events or uncertainties that will
have or that are reasonably likely to have a material effect on its liquidity,
capital resources or operations. The Company is also not aware of any current
recommendations by the regulatory authorities which, if they were implemented,
would have such an effect.
Effects of Inflation
The impact of inflation on banks differs from its impact on non-financial
institutions. Banks, as financial intermediaries, have assets which are
primarily monetary in nature and which tend to fluctuate in concert with
inflation. A bank can reduce the impact of inflation if it can manage its rate
sensitivity gap. This gap represents the difference between rate sensitive
assets and rate sensitive liabilities. The Company attempts to structure the
assets and liabilities and manage the rate sensitivity gap, thereby seeking to
minimize the potential effects of inflation. For information on the management
of the Company's interest rate sensitive assets and liabilities, see the
"Asset/Liability Management" section.
Results of Operations for the Years Ended December 31, 1998 and 1997
Following is a summary of the Company's operations for the periods indicated.
Years ended December 31, Increase/(Decrease)
1998 1997 Amount Percent
------- ----- ------ -------
(dollars in thousands)
Interest income and fees $ 3,397 3,222 175 5.43%
Interest expense 1,557 1,517 40 2.64
Net interest income 1,840 1,705 135 7.92
Provision for loan losses 292 93 199 213.98
Other income 481 409 72 17.60
Other expense 1,640 1,528 112 7.33
Pretax income 389 493 (104) (21.10)
Income taxes 108 141 ( 33) (23.40)
------- ----- ----- -------
Net income $ 281 352 ( 71) (20.17)
------- ----- ----- -------
INTEREST INCOME
The Company's results of operations are determined by its ability to effectively
manage interest income and expense, to minimize loan and investment losses, to
generate non-interest income and to control operating expenses. Since interest
rates are determined by market forces and economic conditions beyond the control
of management, the Company's ability to generate net interest income is
dependent upon its ability to obtain an adequate net interest spread between the
rate paid on interest-bearing liabilities and the rate earned on
interest-earning assets.
The increase in interest income and net interest income is a result of the
increase in average loans of $4,328,000 from December 31, 1997 to December 31,
1998. Average loans increased 21.46% in 1998 compared to an increase of 15.16%
in 1997.
The yield on interest earning assets was 8.81% in 1998 compared to 8.95% in
1997. Yields on loans decreased to 10.41% in 1998 compared to 10.86% in 1997.
This decrease was consistent with decreases in the yields of securities, federal
funds sold and deposits in banks. Average interest-earning assets increased
overall by $2,567,000 or 7.13%.
13
<PAGE>
Average interest-bearing liabilities increased by $1,619,000 or 5.12%, while the
overall cost of funds decreased from 4.80% in 1997 to 4.68% in 1998.
Provision for Loan Losses
The provision for loan losses increased by $199,000 during 1998 or 213.98%. The
allowance for loan loss amounted to $359,429 or 1.20% of total loans outstanding
at December 31, 1998 as compared to $312,519 or 1.37% of total loans outstanding
at December 31, 1997. The increase in the allowances for loan losses was due to
the 32% growth in net loans for the year 1998. Although the allowance increased
as a total, it represented a smaller percentage of total loans. This percentage
decline was due to the charge off of 29 loans resulting in net loan losses of
$245,340 for the year 1998 as compared to $20,277 for 1997. Nonaccrual loans
totaled $124,000 at December 31, 1998. Based upon management's evaluation of the
loan portfolio, management believes the allowance for loan losses is adequate to
absorb possible losses on existing loans that may become uncollectible. This
evaluation considers past loan loss experience, past due and classified loans,
underlying collateral values and current economic conditions which may affect
the borrower's ability to pay.
Other Income
Other income increased from $408,871 in 1997 to $481,072 in 1998. The increase
in other income is due to the gain on the sale of investment securities
available for sale which totalled $74,788. Other income consists principally of
service charges on deposit accounts which increased in 1998 from $389,210 to
$392,473.
Other Expenses
The increase in other expenses was due primarily to the growth in the Company
which resulted in increased other expenses of $112,000 in 1998 or 7.34%.
Salaries and employee benefits and other operating expenses are the primary
components of other expense. Salaries and employee benefits increased to
$868,000 in 1998 from $824,000 in 1997. This increase is attributable to the
increases in the average wages paid to employees and other related benefits.
Other operating expenses increased to $508,000 in 1998 from $425,000 in 1997 and
is due to an increase of $15,000 in service charges paid to correspondent banks
and $22,000 of Year 2000 related expenses.
Income Taxes
Income taxes, as a percentage of pre-tax income, remained stable in 1998 and
1997 at approximately 28%.
Asset/Liability Management
It is the Company's objective to manage assets and liabilities to provide a
satisfactory, consistent level of profitability within the framework of
established cash, loan, investment, borrowing and capital policies. Certain
officers are charged with the responsibility for monitoring policies and
procedures that are designed to ensure an acceptable composition of the
asset/liability mix. It is the overall philosophy of management to support asset
growth primarily through growth of core deposits of all categories made by local
individuals, partnerships and corporations.
The Company's asset/liability mix is monitored on a regular basis with a report
reflecting the interest rate sensitive assets and interest rate sensitive
liabilities being prepared and presented to the Board of Directors of the Bank
on a quarterly basis. The objective of this policy is to monitor interest rate
sensitive assets and liabilities so as to minimize the impact of substantial
movements in interest rates on earnings. An asset or liability is considered to
be interest rate-sensitive if it will reprice or mature within the time period
analyzed, usually one year or less. The interest rate-sensitivity gap is the
difference between the interest-earning assets and interest-bearing liabilities
scheduled to mature or reprice within such time period. A gap is considered
positive when the amount of interest rate-sensitive assets exceeds the amount of
interest rate-sensitive liabilities. A gap is considered negative when the
amount of interest rate-sensitive liabilities exceeds the interest
rate-sensitive assets. During a period of rising interest rates, a negative gap
would tend to adversely affect net interest income, while a positive gap would
tend to result in an increase in net interest income. Conversely, during a
period of falling interest rates, a negative gap would tend to result in an
increase in net interest income, while a positive gap would tend to adversely
affect net interest income. If the Company's assets
14
<PAGE>
and liabilities were equally flexible and move concurrently, the impact of any
increase or decrease in interest rates on net interest income would be minimal.
A simple interest rate "gap" analysis by itself may not be an accurate indicator
of how net interest income will be affected by changes in interest rates.
Accordingly, the Company also evaluates how the repayment of particular assets
and liabilities is impacted by changes in interest rates. Income associated with
interest-earning assets and costs associated with interest-bearing liabilities
may not be affected uniformly by changes in interest rates. In addition, the
magnitude and duration of changes in interest rates may have a significant
impact on net interest income. For example, although certain assets and
liabilities may have similar maturities or periods of repricing, they may react
in different degrees to changes in market interest rates. Interest rates on
certain types of assets and liabilities fluctuate in advance of changes in
general market rates, while interest rates on other types may lag behind changes
in general market rates. In addition, certain assets, such as adjustable rate
mortgage loans, have features (generally referred to as 'interest rate caps and
floors") which limit changes in interest rates. Prepayment and early withdrawal
levels also could deviate significantly from those assumed in calculating the
interest rate gap. The ability of many borrowers to service their debts also may
decrease during periods of rising interest rates.
Changes in interest rates also affect the Company's liquidity position. The
Company currently prices deposits in response to market rates and it is
management's intention to continue this policy. If deposits are not priced in
response to market rates, a loss of deposits could occur which would negatively
affect the Company's liquidity position.
The Company's cumulative gap ratio was 50% as of December 31, 1998 which is
considered by management to be highly liability sensitive. This is primarily a
result of lower interest rates and the consumer time deposits remaining in short
term maturities (6 to 12 months). Management did include the Now accounts and
savings accounts in the gap calculation; even though, these are considered to be
our core deposits that are less interest rate sensitive.
Selected Financial Information and Statistical Data
The tables and schedules on the following pages set forth certain significant
financial information and statistical data with respect to: the distribution of
assets, liabilities and shareholders' equity of the Company, the interest rates
and interest differentials experienced by the Company; the investment portfolio
of the Company; the loan portfolio of the Company, including types of loans,
maturities and sensitivitities of loans to changes in interest rates and
information on nonperforming loans; summary of the loan loss experience and
allowance for loan losses of the company; types of deposits of the Company and
the return on equity and assets for the Company.
15
<PAGE>
The following table sets forth the amount of the Company's interest income and
interest expense for each category of interest-earning assets and
interest-bearing liabilities and the average interest rate for total
interest-earning assets and total interest-bearing liabilities, net interest
spread and net yield on average interest-earning assets.
I: Distribution of Assets, Liabilities and Shareholders' Equity
Interest Rates and Interest Differentials
<TABLE>
<CAPTION>
Year Ended December 31, 1998 Year ended December 31, 1997
Average Income/ Yield/ Average Income/ Yield/
balance expense rate balance expense rate
----------- --------- ------ ---------- --------- ------
<S> <C> <C> <C> <C> <C> <C>
ASSETS:
Interest-earning assets:
Loans, net $24,498,823 2,550,972 10.41% 20,171,106 2,190,029 10.86%
Investments 11,525,227 711,589 6.17% 15,055,238 982,411 6.53%
Federal funds 955,168 52,945 5.54% 357,359 20,062 5.61%
Deposits w/other banks 1,594,741 81,416 5.11% 423,375 29,436 6.95%
----------- --------- ---------- ---------
Total interest-
earning assets 38,573,959 3,396,922 8.81% 36,007,018 3,221,938 8.95%
Noninterest-earning
assets-other assets 3,743,044 3,920,926
----------- -----------
Total assets $42,317,003 $39,928,004
----------- -----------
LIABILITIES AND
SHAREHOLDERS'
EQUITY:
Interest-bearing liabilities:
Interest-bearing demand
deposits $ 7,480,253 217,801 2.91% 5,746,712 164,317 2.86%
Savings deposits 5,093,360 162,541 3.19% 5,212,792 185,905 3.57%
Time deposits 20,594,628 1,171,577 5.69% 18,403,922 1,031,042 5.60%
Federal funds purchased
& other borrowed
funds 81,833 4,913 6.00% 2,234,932 135,429 6.06%
----------- --------- ------ ----------- --------- ------
Total interest-
bearing liabilities $33,250,074 1,556,832 4.68% 31,598,358 1,516,692 4.80%
----------- --------- ----------- ---------
NONINTEREST BEARING
LIABILITIES AND
SHAREHOLDERS' EQUITY:
Noninterest-bearing demand
deposits 3,244,708 2,955,350
Other liabilities 606,700 570,812
Shareholders' equity 5,215,521 4,803,484
----------- -----------
$42,317,003 $39,928,004
----------- -----------
Interest rate differential 4.13% 4.15%
Net interest income 1,840,090 1,705,246
Net interest margin 4.77% 4.74%
</TABLE>
16
<PAGE>
<TABLE>
<S> <C> <C>
Average interest-earning
assets to average total assets 91.15% 90.18%
Average loans to average deposits 67.28% 62.41%
</TABLE>
The following table presents the changes in the Bank's net interest income as a
result of changes in volume and rate of its earning assets and interest-bearing
liabilities from 1998 to 1997..
1998 vs 1997
--------------
Net
Volume(1) Rate(1) Change
--------- ------- ------
(dollars in thousands)
Interest income:
Loans, net $ 454 (93) 361
Investment securities (220) (51) (271)
Federal funds sold 33 -- 33
Interest-bearing deposits
in other banks 62 (10) 52
----- ---- -----
Total interest income 329 (154) 175
----- ---- -----
Interest expense:
Interest-bearing demand 50 3 53
Savings deposits ( 4) ( 19) ( 23)
Time deposits 124 16 140
Federal funds purchased
and other borrowed funds (129) (1) (130)
----- ----- -----
Total interest expense 41 (1) 40
Net interest income $ 288 (153) 135
----- ----- -----
11. Investment Portfolio
The amortized cost and estimated fair values of investment securities
available-for-sale are summarized as follows:
December 31, 1998
Gross Gross Estimated
Amortized unrealized unrealized fair
cost gains losses value
------------ ---------- ---------- ---------
U. S. Treasury and U. S.
government agencies $ 3,644,490 17,070 ( 10) 3,661,550
Mortgage-backed securities 2,835,807 20,560 (15,227) 2,841,140
State and municipal 695,000 20,518 - 715,518
Federal Home Loan Bank stock 379,500 - - 379,500
------------ ------ -------- ---------
$ 7,554,797 58,148 (15,237) 7,597,708
------------ ------ -------- ---------
17
<PAGE>
December 31, 1997
U. S. Treasury and U. S.
government agencies $ 7,492,422 41,290 ( 7,934) 7,525,778
Mortgage-backed securities 3,785,845 7,700 (73,003) 3,720,542
State and municipal 1,907,505 54,100 ( 5,761) 1,955,844
Federal Home Loan Bank stock 379,500 - - 379,500
----------- ------- -------- ----------
$13,565,272 103,090 (86,698) 13,581,664
----------- ------- -------- ----------
The Bank has no investment securities held-to-maturity at December 31, 1998 and
1997.
The following table sets forth maturities of investment securities other than
Federal Home Loan Bank stock and the weighted average yields of such securities
as of December 31, 1998.
Maturing
--------
After one After five
Within but within but within After
one year five years 10 years 10 years
Amount Yield Amount Yield Amount Yield Amount Yield
(1) (1) (1) (1)
(dollars in thousands)
State and municipal -- -- $ 522 4.29% 193 4.70% -- --
U. S. Treasury -- -- -- -- -- -- -- --
U. S. Government
Agencies 3,156 5.86% 506 6.03%
Mortgage-backed
securities $26 5.47% 402 6.25% 487 5.54% 1,926 5.81%
--- ----- ----- ----- ----- ----- ----- -----
$26 5.47% 4,080 5.70% 1,186 6.21% 1,926 5.81%
--- ----- ----- ----- ----- ----- ----- -----
(1) The maturities of mortgage-backed securities have been estimated based
upon contractual principal payments on the underlying mortgage loans. Actual
maturities may vary.
III. Loan Portfolio
The following is a summary of loans by type at December 31, 1998 and 1997. The
disclosure of loans by type and by the required maturity classifications (1) one
year or less, (2) after one year through five years and (3) after five years is
not available and would involve undue burden and expense to the Company.
1998 1997
---- ----
Commercial, financial, and agricultural $ 12,174,000 9,327,200
Real estate - construction 2,437,000 1,035,643
Real estate - mortgage 9,111,000 7,211,810
Consumer 6,208,105 5,182,407
------------ ------------
$ 29,930,105 $ 22,757,060
------------ ------------
18
<PAGE>
The following table shows the amount of loans outstanding as of December 31,
1998 that, based on remaining scheduled repayments of principal, are due in the
periods indicated.
Fixed Variable
rate rate Total
-------- ------- -------
One year or less $ 11,591 $ 2,158 $13,749
After one year through five years 15,885 -- 15,885
After five years 296 -- 296
-------- ------- -------
$ 27,772 2,158 29,930
IV. Summary of Loan Loss Experience
The following table summarizes the changes in the allowance for loan losses
arising from loans charged off and recoveries on loans previously charged off by
loan category, and additions to the allowance which have been charged to
operations.
<TABLE>
<CAPTION>
Years ended December 31,
1998 1997
---- ----
(dollars in thousands)
<S> <C> <C>
Average loans, net of unearned income $ 24,499 20,171
Allowance for loan losses at beginning of year 313 240
Loans charged off:
Commercial, financial and agricultural 151 6
Real estate 60 --
Consumer installment 46 26
------------ ----------
Total loans charged off 257 32
Recoveries on loans previously charged off:
Commercial, financial, and agricultural 5 2
Real estate -- 2
Consumer installment 7 8
------------ ----------
Total recoveries on loans previously charged off 12 12
------------ ----------
Net loans charged off 245 20
Additions to allowance for loan losses charged to income 292 93
------------ ----------
Allowance for loan losses at end of year $ 360 313
------------ ----------
Ratio of net loans charged off to average loans outstanding,
net of unearned income 1.00% 10%
------------ ----------
Allowance for loan losses to average loans, net of unearned
income at end of year 1.47% 1.55%
------------ ----------
</TABLE>
19
<PAGE>
The following table shows that amounts of the Bank's nonaccrual, past due and
restructured loans as of December 31, 1998 and 1997.
December 31,
1998 1997
---- ----
(dollars in thousands)
Nonaccrual loans 124 46
Accruing past due 90 days or more 291 230
Restructured loans -- --
---- ---
$415 276
---- ---
The table below provides information concerning nonperforming loans,
nonperforming assets, and certain asset quality ratios for each of the last two
years.
December 31,
1998 1997
---- ----
(dollars in thousands)
Total loans, net of unearned income 29,915 22,744
----------- ----------
Nonperforming loans (nonaccrual loans) $ 124 46
Real estate acquired through foreclosure
and other repossessed assets -- --
----------- ----------
Nonperforming assets 124 46
----------- ----------
Allowance for loan losses 360 313
----------- ----------
Asset quality ratios:
Nonperforming loans to total loans, net of
unearned income .41% .20%
----------- ----------
Nonperforming assets to total loans,
net of unearned income .41% .20%
----------- ----------
Allowance for loan losses to loans,
net of unearned income at year-end 1.20% 1.38%
----------- ----------
Allowance for loan losses to nonperforming loans 2.90x 6.80x
----------- ----------
At December 31, 1998, loans with a total balance of $318,246 were considered
potential problem loans compared to $208,115 at December 31, 1997. Potential
problem loans are those loans for which management has doubts as to the ability
of borrowers to comply with the present loan repayment terms. Such loans have
been classified as substandard, doubtful or loss in the Bank's internal loan
classification system. Management believes that the Bank's risk of ultimate loss
on these loans has been reduced by the underlying collateral which is securing
the loans and other circumstances relating to such loans. Nonaccruals totaled
$124,000 and 46,000 at December 31, 1998 and 1997, respectively.
The Bank has allocated the allowance for loan losses according to the amount
deemed to be reasonably necessary to provide for the possibility of losses being
incurred within the categories of loans set forth in the table below. The
allocation is based on management's evaluation of the loan portfolio under
current economic conditions, past loan loss experience, adequacy and nature of
collateral, and such factors which, in the judgment of management, deserve
recognition in estimating loan losses. Regulatory agencies, as an integral part
of their examination process, periodically
20
<PAGE>
review the Bank's allowances for losses on loans and real estate acquired
through foreclosure and other repossessed assets. Such agencies may require the
Bank to recognize additions to the allowances based on their judgments about
information available to them at the time of their examination. Because the
allocation is based on estimates and subjective judgment, it is not necessarily
indicative of the specific amounts or loan categories in which charge-offs may
occur. The amount of such components of the allowance for loan losses and the
ratio of each loan category to total loans outstanding are presented below.
December 31,
------------
1998 1997
---- ----
% of % of
% of loan % of loan
Allowance total type (1) Allowance total type (1)
--------- ----- -------- --------- ------ --------
Commercial, financial
and agricultural $ 107,828 30.0% 40.7% 104,069 33.3% 41.0%
Real Estate 125,800 35.0% 38.6% 145,946 46.7% 36.2%
Consumer installment
and single payment
individual 125,800 35.0% 20.7% 62,504 20.0% 22.8%
--------- ------ ------ --------- ------ ------
Total $ 359,428 100.0% 100.0% $ 312,519 100.0% 100.0%
--------- ------ ------ --------- ------ ------
(1) Amount in each category expressed as a percentage of total loans
outstanding.
V. Deposits
The following table summarizes average daily balances of deposits and rates paid
on such deposits for the periods indicated:
Year ended December 31,
-----------------------
1998 1997
---- ----
Amount Rate Amount Rate
------ ---- ------ ----
(dollars in thousands)
Noninterest-bearing demand deposits $ 3,245 --% $ 2,955 --%
Interest-bearing demand deposits 7,480 2.91% 5,747 2.86
Savings 5,093 3.19% 5,212 3.57
Time 20,595 5.69% 18,404 5.60
Maturities of time deposits of $ 100,000 and over as of December 31, 1998 (in
thousands) were as follows:
Under 3 months $1,499
3 to 6 months 215
6 to 12 months 938
Over 12 months 800
------
$3,452
------
21
<PAGE>
VI. Return on Equity and Assets
The ratio of net income to average shareholders' equity and to average total
assets, and certain other ratios, were as follows for the indicated periods:
Year ended December 31,
1998 1997
----- -----
Net income to average shareholders' equity 5.38% 7.32%
Net income to average total assets .66% .88%
Average shareholders' equity to
average total assets 12.32% 12.03%
Dividend payout ratio 40.32% 25.64%
Year 2000 Readiness Disclosure
Like many financial institutions, the Company and its subsidiary rely upon
computers for the daily conduct of their business and for data processing
generally. There is concern among industry experts that commencing on January 1,
2000, computers will be unable to "read" the new year and that there may be
widespread computer malfunctions. Management of the Company has assessed the
electronic systems, programs, applications, and other electronic components used
in the operations of the Company and believes that the hardware and software
used by the Company and the Bank have been programmed to be able to accurately
recognize the year 2000, and that significant additional costs will not be
incurred in connection with the year 2000 issue, although there can be no
assurances in this regard.
The Federal Financial Institutions Examination Council (FFIEC), an oversight
authority for financial institutions, has issued several interagency statements
on Year 2000 project awareness. These statements require financial institutions
to, among other things, examine the Year 2000 implications of their reliance on
vendors, determine the potential impact of the Year 2000 issue on their
customers, suppliers and borrowers, and to survey its exposure, measure its risk
and prepare a plan to address the Year 2000 issue. In addition, federal banking
regulators have issued safety and soundness guidelines to be followed by
financial institutions to assure resolution of any Year 2000 problems. The
federal banking agencies have asserted that Year 2000 testing and certification
is a key safety and soundness issue in conjunction with regulatory examinations,
and the failure to appropriately address the Year 2000 issue could result in
supervisory action, including the reduction of the institution's supervisory
ratings, the denial of applications for mergers or acquisitions, or the
imposition of civil monetary penalties.
The Company is utilizing a three-phase plan for achieving Year 2000 readiness.
The Assessment Phase was intended to determine which computers, operating
systems and applications require remediation and prioritizing those remediation
efforts by identifying mission critical systems. The Assessment Phase has been
completed except for the on-going assessment of new systems. The Remediation and
Testing Phase addressed the correction or replacement of any non-compliant
hardware and software related to the mission critical systems and testing of
those systems. Since most of the Bank's information technology systems are
off-the-shelf software, remediation efforts have focused on obtaining Year 2000
compliant application upgrades. The Bank's core banking system, which runs
loans, deposits and the general ledger, has been upgraded to the Year 2000
compliant version and has been forward date tested and to ensure proper
functioning. The Year 2000 releases for all of the Bank's other internal mission
critical systems have also been received and forward date tested. The next step
of this phase, testing mission critical service providers, is anticipated to be
substantially completed by March 31, 1999. During the final phase, the
Implementation Phase, remediated and validated code will be tested in interfaces
with customers, business partners, government institutions, and others. It is
anticipated that the Implementation Phase will be substantially completed by
June 30, 1999.
The Company may be impacted by the Year 2000 compliance issues of governmental
agencies, businesses and other entities who provide data to, or receive data
from, the Company, and by entities, such as borrowers, vendors, customers, and
business partners, whose financial condition or operational capability is
significant to the Company. Therefore, the Company's Year 2000 project also
includes assessing the Year 2000 readiness of certain customers, borrowers,
vendors, business partners, counterparties, and governmental entities. In
addition to assessing the readiness of these external
22
<PAGE>
parties, the Company is developing contingency plans which will include plans to
recover operations and alternatives to mitigate the effects of counterparties
whose own failure to properly address Year 2000 issues may adversely impact the
Company's ability to perform certain functions. These contingency plans are
currently being developed and are expected to be substantially completed by June
30, 1999.
If Year 2000 issues are not adequately addressed by the Company and significant
third parties, the Company's business, results of operations and financial
position could be materially adversely affected. Failure of certain vendors to
be Year 2000 compliant could result in disruption of important services upon
which the Company depends, including, but not limited to, such services as
telecommunications, electrical power and data processing. Failure of the
Company's loan customers to properly prepare for the Year 2000 could also result
in increases in problem loans and credit losses in future years. It is not,
however, possible to quantify the potential impact of any such losses at this
time. Notwithstanding the Company's efforts, there can be no assurance that the
Company or significant third party vendors or other significant third parties
will adequately address their Year 2000 issues. The Company is continuing to
assess the Year 2000 readiness of third parties but does not know at this time
whether the failure of third parties to be Year 2000 compliant will have a
material effect on the Company's results of operations, liquidity and financial
condition.
The Company currently estimates that its total cost for the Year 2000 project
will approximate $55,000. As of December 31, 1998, the Company has incurred
$40,000 in charges related to its Year 2000 remediation effort and expects to
incur $15,000 in 1999. Charges include the cost of external consulting and the
cost of accelerated replacement of hardware, but do not include the cost of
internal staff redeployed to the Year 2000 project. The Company does not believe
that the redeployment of internal staff will have a material impact on its
financial condition or results of operations.
The foregoing paragraphs contain a number of forward-looking statements. These
statements reflect Management's best current estimates, which were based on
numerous assumptions about future events, including the continued availability
of certain resources, representations received from third party service
providers and other factors. There can be no guarantee that these estimates,
including Year 2000 costs, will be achieved, and actual results could differ
materially from those estimates. A number of important factors could cause
Management's estimates and the impact of the Year 2000 issue to differ
materially from what is described in the forward-looking statements contained in
the above paragraphs. Those factors include, but are not limited to, the
availability and cost of programmers and other systems personnel, inaccurate or
incomplete execution of the phases, results of Year 2000 testing, adequate
resolution of Year 2000 issues by the Company's customers, vendors, competitors,
and counterparties, and similar uncertainties.
The forward-looking statements made in the foregoing Year 2000 discussion speak
only as of the date on which such statements are made, and the Company
undertakes no obligation to update any forward-looking statement to reflect
events or circumstances after the date on which such statement is made or to
reflect the occurrence of unanticipated events.
Recent Accounting Pronouncements
In June 1997, the Financial Accounting Standards Board (the "FASB") issued
Statement of Financial Accounting Standards ("SFAS") No. 130, "Reporting
Comprehensive Income." SFAS No. 130 establishes standards for all entities for
reporting comprehensive income and its components in financial statements. This
statement requires that all items which are required to be recognized under
accounting standards as components of comprehensive income be reported in a
financial statement that is displayed with the same prominence as other
financial statements. Comprehensive income is equal to net income plus the
change in "other comprehensive income," as defined by SFAS No. 130. The only
component of other comprehensive income currently applicable to the Company is
the net unrealized gain or loss on available-for-sale investments. SFAS No. 130
requires that an entity: (a) classify items of other comprehensive income by
their nature in a financial statement, and (b) report the accumulated balance of
other comprehensive income separately from common stock and retained earnings in
the equity section of the balance sheet. This statement is effective for
financial statements issued for fiscal years beginning after December 15, 1997
and was adopted by the Company as of January 1, 1998. See "Item 7. Financial
Statements and Supplementary Data--Note 1 to the Consolidated Financial
Statements--Comprehensive Income."
In June 1997, the FASB issued SFAS No. 131, "Disclosures about Segments of an
Enterprise and Related Information." This statement establishes standards for
publicly held entities to follow in reporting information about operating
segments in annual financial statements and requires that those entities also
report selected information about operating
23
<PAGE>
segments in interim financial statements. This statement also establishes
standards for related disclosures about products and services, geographic areas
and major customers. This statement is effective for financial statements issued
for periods beginning after December 15, 1997 and was adopted by the Company as
of December 31, 1998.
SFAS No. 132, "Statement on Employers' Disclosures about Pensions and Other
Post-Retirement Benefits" was issued by the FASB in February 1998. This
statement is effective for financial statements issued for fiscal years
beginning after December 15, 1997. The Company does not have a pension plan or
provide for other post-retirement benefits for employees, and thus this
statement does not have a material impact on the Company's consolidated
financial statements.
In June 1998, the FASB issued SFAS No. 133, "Accounting for Derivative
Instruments and Hedging Activities." This statement requires that an entity
recognize all derivatives as either assets or liabilities in the balance sheet
and measure those instruments at fair value. The statement is effective for
fiscal quarters of fiscal years beginning after June 15, 1999. The Company
expects to adopt this statement on January 1, 2000. The Company has not yet
determined the impact of its adoption on the Company's consolidated financial
statements.
In October 1998, FASB issued SFAS No. 134, "Accounting for Mortgage-Backed
Securities Retained after the Securitization of Mortgage Loans Held for Sale by
a Mortgage Banking Enterprise." SFAS No. 134 amends SFAS No. 65, "Accounting for
Certain Mortgage Banking Activities," which establishes accounting and reporting
standards for certain activities of mortgage banking enterprises and other
enterprises that conduct operations that are substantially similar. SFAS No. 134
requires that after the securitization of mortgage loans held for sale, the
resulting mortgage-backed securities and other retained interests should be
classified in accordance with SFAS No. 115, "Accounting for Certain Investments
in Debt and Equity Securities," based on the company's ability and intent to
sell or hold those investments. SFAS No. 134 is effective for the first fiscal
quarter beginning after December 15, 1998. The Company does not expect the
adoption of this statement to have a material impact on the Company's
consolidated financial statements.
Item 7. Financial Statements.
The financial statements required by this Item are included in the portions of
the Company's 1998 Annual Report to Shareholders filed as Exhibit 13 to this
Report and incorporated herein by reference.
Item 8. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure.
On September 1, 1998, the Company completed the reorganization pursuant to which
it became the parent holding company of the Bank. The Bank currently is the sole
operating subsidiary of the Company. The Bank had previously retained KPMG Peat
Marwick LLP, Atlanta, Georgia ("KPMG"), as its certifying accountants with
respect to its financial statements for the period from its organization and
through December 31, 1997.
After approval by the Company's Board of Directors, on September 24, 1998, the
Company retained Mauldin & Jenkins, LLC, Atlanta, Georgia ("M&J"), and dismissed
KPMG as the certifying accountant for the Company's and the Bank's financial
statements. The reports of KPMG on the financial statements of the Company as of
and for the years ended December 31, 1997 and 1996 contained no adverse opinion
or disclaimer of opinion and were not qualified or modified as to uncertainty,
audit scope or accounting principles. In connection with its audits for the two
years ended December 31, 1997, and the subsequent interim period through
September 24, 1998, there were no disagreements with KPMG on any matter of
accounting principles or practices, financial statement disclosure, or auditing
scope or procedure, which disagreements if not resolved to the satisfaction of
KPMG, would have caused KPMG to make reference thereto in their report on the
financial statements for such period. The Company has requested that KPMG
furnish it with a letter addressed to the Commission stating whether or not it
agrees with the above statements. A copy of such letter, dated October 1, 1998,
was filed as Exhibit 16 to the Company's Current Report on Form 8-K filed on
October 6, 1998.
The Company had not previously retained or consulted M&J with respect to the
application of accounting principles to any transaction, the type of audit
opinion that might be rendered on the Company's financial statements, or as to
any matter that was either the subject of a disagreement on any matter of
accounting principles or practices, financial statement disclosure, or auditing
scope or procedure, or a reportable event (as described in paragraph (a)(1)(iv)
of Item 304 of Regulation S-B).
24
<PAGE>
PART III
Item 9. Directors, Executive Officers, Promoters and Control Persons; Compliance
with Section 16(a) of the Exchange Act.
Directors
The information set forth under the heading "Proposal One -- Election of
Directors - General" and " - Compliance with Section 16(a)" in the Company's
definitive Proxy Statement for its 1999 Annual Meeting of Shareholders (the
"Proxy Statement") is incorporated by reference herein in answer to Item 9 of
this Form 10-KSB.
Principal Officers
The principal officers of the Company and the Bank are elected annually by the
respective Boards of Directors. The names, ages as of December 31, 1998 and
positions of the Bank's principal officers, defined as those persons who have
major policy-making functions with respect to the Bank, who are not also
directors are set forth below.
<TABLE>
<CAPTION>
Name Age Positions and Business Experience
<S> <C> <C>
Melissa Y. Deems 31 Mrs. Deems joined the Bank as its Vice President and Chief
Financial Officer in April 1994 and became the Senior Vice
President, Chief Financial Officer and Secretary of the Company
upon its organization. She was previously with First
Community Bank & Trust of Cartersville, Georgia from May
1992 through April 1994 as their Chief Financial Officer and
Controller. From July 1989 through April 1992, she was with
KPMG LLP as a Senior Auditor.
H. Sue Harris 63 Mrs. Harris has been with the Company since 1989 as their Vice
President and Consumer Lending Officer. She began her banking
career in 1965 with The Taylorsville Bank, now The Calhoun First
National Bank, where she served as Vice President and a Director
until January 1989.
Richard L. Long, Sr. 39 Mr. Long joined the Company as its Senior Vice President and
City Manager of the Cedartown Office in June 1998. Prior to
joining the Company, he was employed with SunTrust Bank of
Northwest Georgia where he served in various capacities for
twenty years. He was their Cedartown, Georgia Branch
Manager/Business Development officer & Vice President when
he resigned in May 1998.
Sharon R. Presley 37 Mrs. Presley has held various positions with the Company since
her initial employment in December 1989, prior to being named
an officer in 1995. She is currently the Vice President & Chief
Operations Officer. Mrs. Presley began her banking career in 1981
with Monroe County Bank in Forsyth, Georgia where she held
the position of Banking Officer and Head Bookkeeper.
</TABLE>
25
<PAGE>
<TABLE>
<S> <C> <C>
Dewey R. Weaver 56 Mr. Weaver joined the Bank as its Vice President and Senior
Lending Officer in December 1991. Prior to joining the
Company, he was employed in various capacities with First
National Bank of Polk County from 1972 through 1991 and was
a Vice President and Branch Manager when he left to join the
Bank. Mr. Weaver left the Bank in January 1999.
</TABLE>
None of the executive officers of the Bank or Company were selected pursuant to
any arrangement or understanding, other than with the directors and executive
officers of the Bank, acting within their capacities as such. There are no
family relationships between the directors and executive officers of the Company
or the Bank and none of the directors or executive officers of the Company or
the Bank serve as directors of any company which has a class of securities
registered under, or which is subject to the periodic reporting requirements of
the Securities Exchange Act of 1934 or any investment company registered under
the Investment Company Act of 1940.
Item 10. Executive Compensation.
The information set forth under the heading "Proposal One -- Election of
Directors - Executive Compensation and Benefits" in the Company's definitive
Proxy Statement for its 1999 Annual Meeting of Shareholders (the "Proxy
Statement") is incorporated by reference herein in answer to Item 10 of this
Form 10-KSB.
Item 11. Security Ownership of Certain Beneficial Owners and Management.
The information set forth under the headings "Proposal One -- Election of
Directors - Ownership of Common Stock by Certain Beneficial Owners and
Management" in the Company's Proxy Statement is incorporated by reference herein
in answer to Item 11 of this Form 10-KSB.
Item 12. Certain Relationships and Related Transactions.
The information set forth under the headings "Proposal One -- Election of
Directors - Compensation of Directors and Attendance at Meetings," " - Certain
Transactions" and " - Compliance with Section 16(a)" in the Company's Proxy
Statement is incorporated by reference herein in answer to Item 12 of this Form
10-KSB.
ITEM 13. EXHIBITS AND REPORTS ON FORM 8-K.
(a) Exhibits
Exhibit Numbers
2 Agreement and Plan of Reorganization and Merger, dated as of
March 16, 1998, by and among the Bank, Interim and the Company.*
3.1 Articles of Incorporation of the Company.*
3.2 Bylaws of the Company.*
13 1998 Annual Report to Shareholders
21 Subsidiaries of the Company.*
27.1 Financial data schedule.
* Incorporated by reference to the correspondingly numbered exhibit to
Registrant's Current Report on Form 8-K dated September 1, 1998 and filed
September 21, 1998.
26
<PAGE>
(b) Reports on Form 8-K
On October 6, 1998, Registrant filed a Current Report on Form 8-K pursuant
to Item 4 with respect to the dismissal of KPMG LLP, Atlanta, Georgia, and
the retention of Mauldin & Jenkins, LLC, Atlanta, Georgia, as its
certifying accountants.
27
<PAGE>
SIGNATURES
In accordance with Section 13 or 15(d) of the Exchange Act, the Registrant has
duly caused this Report to be signed on its behalf by the undersigned, thereunto
duly authorized.
UB&T FINANCIAL SERVICES CORPORATION
Date: March 25, 1999 By: /s/ Sumter R. Nelson
-------------------------------
Sumter R. Nelson, President
In accordance with the Exchange Act, this Report has been signed below by the
following persons on behalf of the Registrant and in the capacities indicated on
the dates indicated:
<TABLE>
<CAPTION>
Signature Title Date
- - --------- ----- ----
<S> <C> <C>
/s/ Sumter R. Nelson
- - ------------------------- President and Director March 25, 1999
Sumter R. Nelson (Principal Executive Officer
/s/ Melissa Y. Deems
- - ------------------------- Senior Vice President and Chief Financial March 25, 1999
Melissa Y. Deems Officer (Principal Financial and
Accounting Officer
/s/ Bruce B. Albea
- - ------------------------- Director March 25, 1999
Bruce B. Albea
/s/ Lee Cummings
- - ------------------------- Director March 25, 1999
Lee Cummings
/s/ Dan Forsyth
- - ------------------------- Director March 25, 1999
Dan Forsyth
/s/ William D. Heath, Jr.
- - ------------------------- Director March 25, 1999
William D. Heath, Jr.
/s/ J. W. LeGrande
- - ------------------------- Director March 25, 1999
J. W. LeGrande
/s/ James L. Lester
- - ------------------------- Director March 25, 1999
James L. Lester
/s/ William L. Lundy, Jr.
- - ------------------------- Director March 25, 1999
William L. Lundy, Jr.
/s/ Elmo Peppers
- - ------------------------- Director March 25, 1999
Elmo Peppers
/s/ William Frank Shelley
- - ------------------------- Director March 25, 1999
William Frank Shelley
/s/ Daniel B. Simon, III
- - ------------------------- Director March 25, 1999
Daniel B. Simon, III
</TABLE>
28
<PAGE>
Exhibits 13 and 27.1
29
<PAGE>
UB & T FINANCIAL SERVICES CORPORATION
AND SUBSIDIARY
CONSOLIDATED FINANCIAL REPORT
DECEMBER 31, 1998
<PAGE>
UB & T FINANCIAL SERVICES CORPORATION
AND SUBSIDIARY
CONSOLIDATED FINANCIAL REPORT
DECEMBER 31, 1998
- - --------------------------------------------------------------------------------
TABLE OF CONTENTS
-----------------
<TABLE>
<CAPTION>
Page
-------
<S> <C>
INDEPENDENT AUDITOR'S REPORT........................ 1
FINANCIAL STATEMENTS
Consolidated balance sheets....................... 2
Consolidated statements of income................. 3
Consolidated statements of comprehensive income... 4
Consolidated statements of shareholders' equity... 5
Consolidated statements of cash flows............. 6 and 7
Notes to consolidated financial statements........ 8-28
</TABLE>
<PAGE>
INDEPENDENT AUDITOR'S REPORT
- - --------------------------------------------------------------------------------
To the Board of Directors
UB & T Financial Services Corporation and Subsidiary
Rockmart, Georgia
We have audited the accompanying consolidated balance sheet of UB & T
Financial Services Corporation and Subsidiary as of December 31, 1998, and the
related consolidated statements of income, comprehensive income, shareholders'
equity, and cash flows for the year then ended. These financial statements are
the responsibility of the Company's management. Our responsibility is to
express an opinion on these financial statements based on our audit. The
financial statements of United Bank and Trust Company for the year ended
December 31, 1997 were audited by other auditors whose report, dated February
20, 1998, expressed an unqualified opinion on those statements.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to
above present fairly, in all material respects, the financial position of UB & T
Financial Services Corporation and Subsidiary as of December 31, 1998, and the
results of their operations and their cash flows for the year then ended in
conformity with generally accepted accounting principles.
/s/ MAULDIN & JENKINS, LLC
Atlanta, Georgia
February 10, 1999
<PAGE>
UB & T FINANCIAL SERVICES CORPORATION
AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 1998 AND 1997
- - --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Assets 1998 1997
------ ------------------ -----------------
<S> <C> <C>
Cash and due from banks $ 1,165,932 $ 895,370
Interest-bearing deposits in banks 2,327,741 286,505
Federal funds sold 115,518 1,621,174
Securities available-for-sale 7,597,708 13,581,664
Loans 29,915,035 22,743,923
Less allowance for loan losses 359,429 312,519
------------------ -----------------
Loans, net 29,555,606 22,431,404
Premises and equipment 1,952,996 2,051,439
Other assets 500,996 606,907
------------------ -----------------
Total assets $ 43,216,497 $ 41,474,463
================== =================
Liabilities and Shareholders' Equity
------------------------------------
Deposits
Noninterest-bearing demand $ 3,491,057 $ 2,968,293
Interest-bearing demand 7,673,165 8,313,266
Savings 4,905,736 5,357,270
Time, $100,000 and over 3,452,463 3,326,836
Other time 17,102,070 15,884,254
------------------ -----------------
Total deposits 36,624,491 35,849,919
Federal funds purchased 825,000 -
Note payable 356,000 -
Other liabilities 454,639 497,884
------------------ -----------------
Total liabilities 38,260,130 36,347,803
------------------ -----------------
Commitments and Contingent Liabilities
--------------------------------------
Shareholders' equity
Common stock, par value $5; 10,000,000 shares
authorized; 451,105 issued 2,255,525 2,255,525
Capital surplus 2,187,292 2,187,292
Retained earnings 841,007 673,099
Accumulated other comprehensive income 28,102 10,744
------------------ -----------------
5,311,926 5,126,660
Less cost of 21,549 shares of treasury stock (355,559) -
------------------ -----------------
Total shareholders' equity 4,956,367 5,126,660
------------------ -----------------
Total liabilities and shareholders' equity 43,216,497 41,474,463
================== =================
</TABLE>
See Notes to Consolidated Financial Statements.
2
<PAGE>
UB & T FINANCIAL SERVICES CORPORATION
AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF INCOME
YEARS ENDED DECEMBER 31, 1998 AND 1997
- - -------------------------------------------------------------------------------
<TABLE>
<CAPTION>
<S> <C> <C>
1998 1997
---------- ----------
Interest income
Loans $2,550,972 $2,190,029
Taxable securities 629,684 881,476
Nontaxable securities 81,905 100,935
Federal funds sold 52,945 20,062
Deposits in other banks 81,416 29,436
---------- ----------
Total interest income 3,396,922 3,221,938
---------- ----------
Interest expense
Deposits 1,551,919 1,381,263
Borrowings 4,913 135,429
---------- ----------
Total interest expense 1,556,832 1,516,692
---------- ----------
Net interest income 1,840,090 1,705,246
Provision for loan losses 292,250 93,050
---------- ----------
Net interest income after provision
for loan losses 1,547,840 1,612,196
---------- ----------
Other income
Service charges on deposit accounts 392,473 389,210
Gain on sale of securities available-for-sale 74,788 6,554
Other operating income 13,811 13,107
---------- ----------
Total other income 481,072 408,871
---------- ----------
Other expenses
Salaries and employee benefits 867,597 823,985
Occupancy expenses 87,430 91,298
Equipment expenses 177,073 187,559
Other operating expenses 508,157 425,140
---------- ----------
Total other expenses 1,640,257 1,527,982
---------- ----------
Income before income taxes 388,655 493,085
Income tax expense 107,971 141,540
---------- ----------
Net income $ 280,684 $ 351,545
========== ==========
Basic earnings per common share $ 0.62 $ 0.78
========== ==========
</TABLE>
See Notes to Consolidated Financial Statements.
3
<PAGE>
UB & T FINANCIAL SERVICES CORPORATION
AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
YEARS ENDED DECEMBER 31, 1998 AND 1997
<TABLE>
<CAPTION>
- - --------------------------------------------------------------------------------------------
1998 1997
---------- ----------
<S> <C> <C>
Net income $ 280,684 $ 351,545
--------- ---------
Other comprehensive income:
Unrealized gains on securities available-for-sale:
Unrealized holding gains arising during period,
net of taxes of $34,370 and $69,001, respectively 66,718 133,943
Reclassification adjustment for gains realized
in net income, net of taxes of
$25,428 and $2,228, respectively (49,360) (4,326)
--------- ---------
Other comprehensive income 17,358 129,617
--------- ---------
Comprehensive income $ 298,042 $ 481,162
========= =========
See Notes to Consolidated Financial Statements.
</TABLE>
4
<PAGE>
UB & T FINANCIAL SERVICES CORPORATION
AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
YEARS ENDED DECEMBER 31, 1998 AND 1997
<TABLE>
<CAPTION>
Common Stock
---------------------- Capital
Shares Par Value Surplus
-------- ---------- ----------
<S> <C> <C> <C>
Balance, December 31, 1996 451,105 $2,255,525 $2,187,292
Net income - - -
Cash dividends declared,
$.20 per share - - -
Other comprehensive income - - -
-------- ---------- ----------
Balance, December 31, 1997 451,105 2,255,525 2,187,292
Net income - - -
Cash dividends declared, $.25 per share - - -
Purchase of treasury stock - - -
Other comprehensive income - - -
-------- ---------- ----------
Balance, December 31, 1998 451,105 $2,255,525 $2,187,292
======== ========== ==========
</TABLE>
See Notes to Consolidated Financial Statements.
<TABLE>
<CAPTION>
Accumulated
Other Treasury Stock Total
Retained Comprehensive ------------------ Shareholders'
Earnings Income Shares Amount Equity
- - -------------- ------------- ------- ------ ------------
<S> <C> <C> <C> <C>
$ 411,775 $ (118,873) - $ - $ 4,735,719
351,545 - - - 351,545
(90,221) - - - (90,221)
- 129,617 - - 129,617
- - -------------- -------------- ------- --------- ------------
673,099 10,744 - - 5,126,660
280,684 - - - 280,684
(112,776) - - - (112,776)
- - 21,549 (355,559) (355,559)
- 17,358 - - 17,358
- - -------------- -------------- ------- --------- ------------
$ 841,007 $ 28,102 21,549 $(355,559) $ 4,956,367
============== ============== ======= ========= ============
</TABLE>
<PAGE>
UB & T FINANCIAL SERVICES CORPORATION
AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31, 1998 AND 1997
<TABLE>
<CAPTION>
- - -------------------------------------------------------------------------------------------------
1998 1997
--------- ---------
<S> <C> <C>
OPERATING ACTIVITIES
Net income $ 280,684 $ 351,545
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation 148,993 158,686
Provision for loan losses 292,250 93,050
Gain on sale of securities available-for-sale (74,788) (6,554)
Deferred income taxes (12,417) (6,909)
Loss on disposal of premises and equipment 14,923 -
(Increase) decrease in interest receivable 100,592 (20,763)
Increase in interest payable 59,885 70,353
Other operating activities (94,336) 79,194
----------- ----------
Net cash provided by operating activities 715,786 718,602
----------- ----------
INVESTING ACTIVITIES
Purchases of securities available-for-sale (6,862,475) (7,141,307)
Proceeds from sale of securities available-for-sale 2,791,436 5,705,770
Proceeds from maturities of securities available-for-sale 10,156,083 2,968,916
Net (increase) decrease in interest-bearing deposits in banks (2,041,236) 596,537
Net (increase) decrease in Federal funds sold 1,505,656 (686,174)
Net increase in loans (7,416,452) (4,777,283)
Purchase of premises and equipment (65,473) (49,930)
----------- ----------
Net cash used in investing activities (1,932,461) (3,383,471)
----------- ----------
FINANCING ACTIVITIES
Proceeds from note payable 390,000 -
Repayment of note payable (34,000) -
Net increase in Federal funds purchased 825,000 -
Net increase in deposits 774,572 4,870,314
Repayment of FHLB advances - (2,600,000)
Purchase of treasury stock (355,559) -
Dividends paid (112,776) (90,221)
----------- ----------
Net cash provided by financing activities 1,487,237 2,180,093
----------- ----------
Net increase (decrease) in cash and due from banks 270,562 (484,776)
Cash and due from banks at beginning of year 895,370 1,380,146
----------- ----------
Cash and due from banks at end of year $ 1,165,932 $ 895,370
=========== ==========
</TABLE>
<PAGE>
UB & T FINANCIAL SERVICES CORPORATION
AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31, 1998 AND 1997
- - -------------------------------------------------------------------------------
<TABLE>
<CAPTION>
<S> <C> <C>
1998 1997
---- ----
SUPPLEMENTAL DISCLOSURES
Cash paid for:
Interest $1,496,947 $1,446,339
Income taxes $ 206,326 $ 52,141
NONCASH TRANSACTION
Unrealized gains on securities available-for-sale $ (26,300) $ (196,390)
Financing of sales of other real estate $ - $ 57,469
</TABLE>
See Notes to Consolidated Financial Statements.
7
<PAGE>
UB & T FINANCIAL SERVICES CORPORATION
AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- - -------------------------------------------------------------------------------
NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Nature of Business
UB & T Financial Services Corporation (the "Company") is a bank
holding company whose business is conducted by its wholly-owned
subsidiary, United Bank & Trust Company (the "Bank"). The Bank is a
commercial bank located in Rockmart, Polk County, Georgia. The Bank
provides a full range of banking services in its primary market area
of Polk County and surrounding counties.
Basis of Presentation
The consolidated financial statements include the accounts of the
Company and its subsidiary. Significant intercompany transactions
and accounts are eliminated in consolidation.
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates
and assumptions that affect the reported amounts of assets and
liabilities and disclosures of contingent assets and liabilities at
the date of the consolidated financial statements and the reported
amounts of revenues and expenses during the reporting period. Actual
results could differ from those estimates.
Cash and Due from Banks
Cash on hand, cash items in process of collection, and amounts due
from banks are included in cash and due from banks.
The Company maintains amounts due from banks which, at times, may
exceed Federally insured limits. The Company has not experienced any
losses in such accounts.
Securities
Securities are classified based on management's intention on the
date of purchase. Securities which management has the intent and
ability to hold to maturity would be classified as held-to-maturity
and reported at amortized cost. All other debt securities are
classified as available-for-sale and carried at fair value with net
unrealized gains and losses included in shareholders' equity, net of
tax. Equity securities without a readily determinable fair value are
carried at cost.
8
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- - -------------------------------------------------------------------------------
NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
Securities (Continued)
Interest and dividends on securities, including amortization of
premiums and accretion of discounts, are included in interest
income. Realized gains and losses from the sale of securities are
determined using the specific identification method.
Loans
Loans are carried at their principal amounts outstanding less
deferred loan fees and the allowance for loan losses. Interest
income on loans is credited to income based on the principal amount
outstanding.
Loan origination fees and certain direct loan origination costs are
deferred and recognized over the life of the loan using a method
which approximates the level yield method.
The allowance for loan losses is maintained at a level that
management believes to be adequate to absorb potential losses in the
loan portfolio. Management's determination of the adequacy of the
allowance is based on an evaluation of the portfolio, past loan loss
experience, current economic conditions, volume, growth, composition
of the loan portfolio, and other risks inherent in the portfolio.
This evaluation is inherently subjective as it requires material
estimates that are susceptible to significant change including the
amounts and timing of future cash flows expected to be received on
impaired loans. In addition, regulatory agencies, as an integral
part of their examination process, periodically review the Company's
allowance for loan losses, and may require the Company to record
additions to the allowance based on their judgment about information
available to them at the time of their examinations.
The accrual of interest on loans is discontinued when, in
management's opinion, the borrower may be unable to meet payments as
they become due. Interest income is subsequently recognized only to
the extent cash payments are received.
9
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- - -------------------------------------------------------------------------------
NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
Loans (Continued)
A loan is considered to be impaired when it is probable the Company
will be unable to collect all principal and interest payments due in
accordance with the terms of the loan agreement. Individually
identified impaired loans are measured based on the present value of
payments expected to be received, using the contractual loan rate as
the discount rate. Alternatively, measurement may be based on
observable market prices or, for loans that are solely dependent on
the collateral for repayment, measurement may be based on the fair
value of the collateral. If the recorded investment in the impaired
loan exceeds the measure of fair value, a valuation allowance is
established as a component of the allowance for loan losses. Changes
to the valuation allowance are recorded as a component of the
provision for loan losses.
Premises and Equipment
Premises and equipment are stated at cost less accumulated
depreciation. Depreciation is computed principally over the
estimated useful lives of the assets using the straight-line method.
Other Real Estate Owned
Other real estate owned represents properties acquired through
foreclosure. Other real estate owned is held for sale and is carried
at the lower of the recorded amount of the loan or fair value of the
properties less estimated selling costs. Any write-down to fair
value at the time of transfer to other real estate owned is charged
to the allowance for loan losses. Subsequent gains or losses on sale
and any subsequent adjustment to the value are recorded in other
operating income or expenses.
Profit-Sharing Plan
Profit-sharing plan costs are based on a percentage of individual
employee's salary, not to exceed the amount that can be deducted for
Federal income tax purposes.
10
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- - -------------------------------------------------------------------------------
NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
Income Taxes
Income tax expense consists of current and deferred taxes. Current
income tax provisions approximate taxes to be paid or refunded for
the applicable year. Deferred income tax assets and liabilities are
determined using the balance sheet method. Under this method, the
net deferred tax asset or liability is determined based on the tax
effects of the differences between the book and tax bases of the
various balance sheet assets and liabilities and gives current
recognition to changes in tax rates and laws.
Recognition of deferred tax balance sheet amounts is based on
management's belief that it is more likely than not that the tax
benefit associated with certain temporary differences, tax operating
loss carryforwards, and tax credits will be realized. A valuation
allowance is recorded for those deferred tax items for which it is
more likely than not that realization will not occur in the near
term.
The Company and the Bank file a consolidated income tax return. Each
entity provides for income taxes based on its contribution to income
taxes (benefits) of the consolidated group.
Earnings Per Common Share
Basic earnings per common share are computed by dividing net income
by the weighted-average number of shares of common stock
outstanding. Diluted earnings per share would be computed by
dividing net income by the sum of the weighted-average number of
shares of common stock outstanding and potential common shares.
There were no potential common shares outstanding at December 31,
1998 or 1997. The weighted average number of shares outstanding for
the years ended December 31, 1998 and 1997 was 450,633 and 451,105,
respectively.
11
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- - -------------------------------------------------------------------------------
NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
Comprehensive Income
In 1998, the Company adopted Statement of Financial Standards No.
130 ("SFAS No. 130"), "Reporting Comprehensive Income". This
statement establishes standards for reporting and display of
comprehensive income and its components in the financial statements.
This statement requires that all items that are required to be
recognized under accounting standards as components of comprehensive
income be reported in a financial statement that is displayed in
equal prominence with the other financial statements. The Company
has elected to report comprehensive income in a separate financial
statement titled "Consolidated Statements of Comprehensive Income".
SFAS No. 130 describes comprehensive income as the total of all
components of comprehensive income including net income. This
statement uses other comprehensive income to refer to revenues,
expenses, gains and losses that under generally accepted accounting
principles are included in comprehensive income but excluded from
net income. Currently, the Company's other comprehensive income
consists of items previously reported directly in equity under SFAS
No. 115, "Accounting for Certain Investments in Debt and Equity
Securities". As required by SFAS No. 130, the financial statements
for the prior year have been reclassified to reflect application of
the provisions of this statement. The adoption of this statement did
not affect the Company's financial position, results of operations
or cash flows.
Recent Developments
In June 1998, Financial Accounting Standards Board issued Statement
of Financial Accounting Standards No. 133 ("SFAS No. 133"),
"Accounting for Derivative Instruments and Hedging Activities". This
statement is required to be adopted for fiscal years beginning after
June 15, 1999. However, the statement permits early adoption as of
the beginning of any fiscal quarter after its issuance. The Company
expects to adopt this statement effective January 1, 2000. SFAS No.
133 requires the Company to recognize all derivatives as either
assets or liabilities in the balance sheet at fair value. For
derivatives that are not designated as hedges, the gain or loss must
be recognized in earnings in the period of change. For derivatives
that are designated as hedges, changes in the fair value of the
hedged assets, liabilities, or firm commitments must be recognized
in earnings or recognized in other comprehensive income until the
hedged item is recognized in earnings, depending on the nature of
the hedge. The ineffective portion of a derivative's change in fair
value must be recognized in earnings immediately.
Management has not yet determined what effect the adoption of SFAS
No. 133 will have on the Company's earnings or financial position.
12
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- - -------------------------------------------------------------------------------
NOTE 2. SECURITIES
The amortized cost and fair value of securities are summarized as
follows:
<TABLE>
<CAPTION>
Gross Gross
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
------------- ------------ ------------ ----------
<S> <C> <C> <C> <C>
Securities Available-for-Sale
December 31, 1998:
U. S. Government and agency
securities $3,644,490 $17,070 $ (10) $3,661,550
Mortgage-backed securities 2,835,807 20,560 (15,227) 2,841,140
State and municipal 695,000 20,518 - 715,518
securities
Equity securities 379,500 - - 379,500
----------- ------- -------- -----------
$ 7,554,797 $58,148 $(15,237) $ 7,597,708
=========== ======= ======== ===========
December 31, 1997:
U. S. Government and agency
securities $ 7,492,422 $ 41,290 $ (7,934) $ 7,525,778
State and municipal 1,907,505 54,100 (5,761) 1,955,844
securities
Mortgage-backed securities 3,785,845 7,700 (73,003) 3,720,542
Equity securities 379,500 - - 379,500
----------- -------- -------- -----------
$13,565,272 $103,090 $(86,698) $13,581,664
=========== ======== ======== ===========
</TABLE>
The amortized cost and fair value of securities as of December 31,
1998 by contractual maturity are shown below. Maturities may differ
from contractual maturities in mortgage-backed securities because
the mortgages underlying the securities may be called or prepaid
with or without penalty. Therefore, these securities and equity
securities are not included in the maturity categories in the
following summary.
<TABLE>
<CAPTION>
Securities Available-for-Sale
-------------------------------------------
Amortized Fair
Cost Value
------------------- -------------------
<S> <C> <C>
Due from one to five years $3,654,490 $3,677,708
Due from five to ten years 685,000 699,360
Mortgage-backed securities 2,835,807 2,841,140
Equity securities 379,500 379,500
---------- ----------
$7,554,797 $7,597,708
========== ==========
</TABLE>
13
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- - -------------------------------------------------------------------------------
NOTE 2. SECURITIES (Continued)
Securities with a carrying value of $506,344 and $-0- at December 31,
1998 and 1997, respectively, were pledged to secure public deposits
and for other purposes.
Gains and losses on sale of securities available-for-sale consist of
the following:
<TABLE>
<CAPTION>
December 31,
--------------------------------------------
1998 1997
------------------- -------------------
<S> <C> <C>
Gross gains $ 89,091 $16,012
Gross losses (14,303) (9,458)
-------- --------
Net realized gains $ 74,788 $ 6,554
======== ========
</TABLE>
NOTE 3. LOANS AND ALLOWANCE FOR LOAN LOSSES
The composition of loans is summarized as follows:
<TABLE>
<CAPTION>
December 31,
--------------------------------------------
1998 1997
------------------- -------------------
<S> <C> <C>
Commercial, financial, and agricultural $12,174,000 $ 9,327,200
Real estate - construction 2,437,000 1,035,643
Real estate - mortgage 9,111,000 7,211,810
Consumer 6,208,105 5,182,407
----------- -----------
29,930,105 22,757,060
Deferred loan fees (15,070) (13,137)
Allowance for loan losses (359,429) (312,519)
----------- -----------
Loans, net $29,555,606 $22,431,404
=========== ===========
</TABLE>
14
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- - -------------------------------------------------------------------------------
NOTE 3. LOANS AND ALLOWANCE FOR LOAN LOSSES (Continued)
Changes in the allowance for loan losses for the years ended December
31 are as follows:
<TABLE>
<CAPTION>
1998 1997
------------- -------------
<S> <C> <C>
Balance, beginning of year $ 312,519 $239,747
Provision for loan losses 292,250 93,050
Loans charged off (257,410) (31,905)
Recoveries of loans previously charged off 12,070 11,627
--------- --------
Balance, end of year $ 359,429 $312,519
========= ========
</TABLE>
The total recorded investment in impaired loans was $124,594 and
$45,304, respectively, at December 31, 1998 and 1997. None of these
loans had a specific allowance for loan losses at December 31, 1998
and 1997, determined in accordance with generally accepted accounting
principles. The average recorded investment in impaired loans for
1998 and 1997 was $93,000 and $53,000, respectively. Interest income
recognized by the Company on impaired loans was not significant.
The Company has granted loans to certain related parties including
directors, executive officers, and their related entities. The
interest rates on these loans were substantially the same as rates
prevailing at the time of the transaction and repayment terms are
customary for the type of loan involved. Changes in related party
loans for the year ended December 31, 1998 are as follows:
<TABLE>
<S> <C>
Balance, beginning of year $ 1,312,626
Advances 1,073,932
Repayments (1,019,134)
-----------
Balance, end of year $ 1,367,424
===========
</TABLE>
15
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- - -------------------------------------------------------------------------------
NOTE 4. PREMISES AND EQUIPMENT
Premises and equipment are summarized as follows:
<TABLE>
<CAPTION>
December 31,
-----------------------------------
1998 1997
-------------- -------------
<S> <C> <C>
Land $ 448,506 $ 448,506
Buildings 1,352,085 1,352,085
Furniture and equipment 1,004,129 1,071,059
---------- ----------
2,804,720 2,871,650
Accumulated depreciation (851,724) (820,211)
---------- ----------
$1,952,996 $2,051,439
========== ==========
</TABLE>
NOTE 5. DEPOSITS
At December 31, 1998, the scheduled maturities of time deposits are as
follows:
<TABLE>
<CAPTION>
<S> <C> <C>
1999 $15,687,387
2000 3,246,943
2001 1,099,920
2002 284,244
2003 236,039
-----------
$20,554,533
===========
</TABLE>
16
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- - --------------------------------------------------------------------------------
NOTE 6. NOTE PAYABLE
Note payable consists of the following line of credit:
<TABLE>
<CAPTION>
December 31,
--------------------------------------
1998 1997
----------------- -----------------
<S> <C> <C>
Note payable to bank with interest due quarterly at
prime less .50%, or 7.75% at December 31, 1998,
collateralized by 451,105 shares of common stock of
the Bank. Principal is due in ten annual instalments
beginning January 1, 2001. $356,000 $ -
======== ========
</TABLE>
Principal maturities as of December 31, 1998 are summarized as
follows:
<TABLE>
<S> <C>
2001 $ 35,600
2002 35,600
2003 35,600
Thereafter 249,200
--------
$356,000
========
</TABLE>
NOTE 7. INCOME TAXES
Income tax expense consists of the following:
<TABLE>
<CAPTION>
December 31,
---------------------------------------
1998 1997
--------------- --------------
<S> <C> <C>
Current $111,446 $148,449
Deferred (12,417) (6,909)
Change in valuation allowance 8,942 -
-------- --------
Income tax expense $107,971 $141,540
======== ========
</TABLE>
17
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- - --------------------------------------------------------------------------------
NOTE 7. INCOME TAXES (Continued)
The Company's income tax expense differs from the amounts computed by
applying the Federal income tax statutory rates to income before
income taxes. A reconciliation of the differences is as follows:
<TABLE>
<CAPTION>
December 31,
-------------------------------------------------------------------------
1998 1997
---------------------------------- ---------------------------------
Amount Percent Amount Percent
-------------- -------------- --------------- -----------
<S> <C> <C> <C> <C>
Income taxes at statutory rate $132,143 34 % $167,649 34 %
Tax-exempt interest (28,020) (7) (29,134) (6)
Other items, net 3,848 1 3,025 1
-------- --- -------- ---
Income tax expense $107,971 28 % $141,540 29 %
======== === ======== ===
</TABLE>
The components of deferred income taxes are as follows:
<TABLE>
<CAPTION>
December 31,
---------------------------------------
1998 1997
--------------- ----------------
<S> <C> <C>
Deferred tax assets:
Loan loss reserves $100,624 $102,719
Organizational costs 10,161 -
State tax credit carryforwards 24,873 16,715
Less valuation allowance (15,915) (6,973)
-------- --------
119,743 112,461
-------- --------
Deferred tax liabilities:
Securities available-for-sale 14,590 5,648
Depreciation 55,819 52,012
-------- --------
70,409 57,660
-------- --------
Net deferred tax assets $ 49,334 $ 54,801
======== ========
</TABLE>
NOTE 8. STOCK OPTIONS
In 1990, the Board of Directors approved a stock option plan reserving
7,500 shares of common stock for the granting of options to key
employees. Option prices reflect the fair market value of the
Company's common stock on the dates the options are granted. The
options may be exercised over a period of ten years. The stock option
plan will terminate on April 2, 2000. No stock options have been
granted under the 1990 stock option plan and all 7,500 shares of
common stock reserved for grants under the plan remain available for
grants.
18
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- - --------------------------------------------------------------------------------
NOTE 9. 401(K) PROFIT SHARING PLAN
The Company has a contributory 401(k) profit sharing plan covering all
employees, subject to certain minimum age and service requirements.
Contributions to the plan charged to expense for the years ended
December 31, 1998 and 1997 amounted to $10,121 and $1,750,
respectively.
NOTE 10. COMMITMENTS AND CONTINGENT LIABILITIES
In the normal course of business, the Company has entered into off-
balance sheet financial instruments which are not reflected in the
financial statements. These financial instruments include commitments
to extend credit and standby letters of credit. Such financial
instruments are included in the financial statements when funds are
disbursed or the instruments become payable. These instruments
involve, to varying degrees, elements of credit risk in excess of the
amount recognized in the balance sheet.
The Company's exposure to credit loss in the event of nonperformance
by the other party to the financial instrument for commitments to
extend credit and standby letters of credit is represented by the
contractual amount of those instruments. A summary of the Company's
commitments is as follows:
<TABLE>
<CAPTION>
December 31,
--------------------------------------
1998 1997
--------------- --------------
<S> <C> <C>
Commitments to extend credit $2,299,000 $2,317,000
Standby letters of credit 35,000 30,500
---------- ----------
$2,334,000 $2,347,500
========== ==========
</TABLE>
Commitments to extend credit generally have fixed expiration dates or
other termination clauses and may require payment of a fee. Since
many of the commitments are expected to expire without being drawn
upon, the total commitment amounts do not necessarily represent future
cash requirements. The credit risk involved in issuing these
financial instruments is essentially the same as that involved in
extending loans to customers. The Company evaluates each customer's
creditworthiness on a case-by-case basis. The amount of collateral
obtained, if deemed necessary by the Company upon extension of credit,
is based on management's credit evaluation of the customer.
Collateral held varies but may include real estate and improvements,
crops, marketable securities, accounts receivable, inventory,
equipment, and personal property.
19
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- - --------------------------------------------------------------------------------
NOTE 10. COMMITMENTS AND CONTINGENT LIABILITIES (Continued)
Standby letters of credit are conditional commitments issued by the
Company to guarantee the performance of a customer to a third party.
Those guarantees are primarily issued to support public and private
borrowing arrangements. The credit risk involved in issuing letters
of credit is essentially the same as that involved in extending loans
to customers. Collateral held varies as specified above and is
required in instances which the Company deems necessary.
In the normal course of business, the Company is involved in various
legal proceedings. In the opinion of management, any liability
resulting from such proceedings would not have a material effect on
the Company's financial statements.
Year 2000
The Year 2000 issue is the result of computer programs being written
using two digits rather than four to define the applicable year.
Systems that do not properly recognize the year "2000" could generate
erroneous data or cause systems to fail. The Company is heavily
dependent on computer processing and telecommunication systems in the
daily conduct of business activities. In addition, the Company must
rely on intermediaries, vendors and customers to appropriately modify
their systems in order that all may continue normal operations and
operate without significant disruptions. The Company has conducted a
review of its computer systems to identify the systems that could be
affected by the Year 2000 issue. The Company presently believes that,
with modifications to its computer systems and conversions to new
systems, the Year 2000 issue will not pose significant operational
problems for the Company or have a material adverse effect on future
operating results. However, absolute assurance cannot be given that;
(1) the modifications and conversions will remedy all deficiencies,
(2) failure of any of the Company's systems will not have a material
impact on operations, or (3) failure of any other companies' systems
with whom the Company conducts business will not have a material
impact on operations.
NOTE 11. CONCENTRATIONS OF CREDIT
The Company originates primarily commercial, residential, and consumer
loans to customers in Polk County and surrounding counties. The
ability of the majority of the Company's customers to honor their
contractual loan obligations is dependent on the economy in the
Company's primary market area.
20
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- - --------------------------------------------------------------------------------
NOTE 11. CONCENTRATIONS OF CREDIT (Continued)
Sixty-three percent of the Company's loan portfolio is concentrated in
loans secured by real estate of which a substantial portion is secured
by real estate in the Company's primary market area. Accordingly, the
ultimate collectibility of the loan portfolio is susceptible to
changes in market conditions in the Company's primary market area.
The other significant concentrations of credit by type of loan are set
forth in Note 3.
The Company, as a matter of policy, does not generally extend credit
to any single borrower or group of related borrowers in excess of 25%
of statutory capital, or approximately $1,100,000.
NOTE 12. REGULATORY MATTERS
The Bank is subject to certain restrictions on the amount of dividends
that may be declared without prior regulatory approval. At December
31, 1998, approximately $152,000 of retained earnings were available
for dividend declaration without regulatory approval.
The Company and the Bank are subject to various regulatory capital
requirements administered by the federal banking agencies. Failure to
meet minimum capital requirements can initiate certain mandatory, and
possibly additional discretionary actions by regulators that, if
undertaken, could have a direct material effect on the financial
statements. Under capital adequacy guidelines and the regulatory
framework for prompt corrective action, the Company and Bank must meet
specific capital guidelines that involve quantitative measures of the
assets, liabilities, and certain off-balance sheet items as calculated
under regulatory accounting practices. The Company's and Bank's
capital amounts and classification are also subject to qualitative
judgments by the regulators about components, risk weightings, and
other factors.
Quantitative measures established by regulation to ensure capital
adequacy require the Company and the Bank to maintain minimum amounts
and ratios of Total and Tier I capital to risk-weighted assets and of
Tier I capital to average assets. Management believes, as of December
31, 1998, the Company and the Bank meet all capital adequacy
requirements to which they are subject.
As of December 31, 1998, the most recent notification from the FDIC
categorized the Bank as well capitalized under the regulatory
framework for prompt corrective action. To be categorized as well
capitalized, the Bank must maintain minimum Total risk-based, Tier I
risk-based, and Tier I leverage ratios as set forth in the following
table. There are no conditions or events since that notification that
management believes have changed the Bank's category.
21
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- - --------------------------------------------------------------------------------
NOTE 12. REGULATORY MATTERS (Continued)
The Company and the Bank's actual capital amounts and ratios are
presented in the following table.
<TABLE>
<CAPTION>
To Be Well
For Capital Capitalized Under
Adequacy Prompt Corrective
Actual Purposes Action Provisions
-------------------------- --------------------------- -------------------------
Amount Ratio Amount Ratio Amount Ratio
---------- --------- ----------- -------- ---------- ---------
(Dollars in Thousands)
------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
As of December 31, 1998:
Total Capital
(to Risk Weighted Assets)
Consolidated $5,287 17.32% $2,442 8 % $3,053 10 %
Bank $5,604 18.39% $2,438 8 % $3,048 10 %
Tier I Capital
(to Risk Weighted Assets)
Consolidated $4,928 16.15% $1,221 4 % $1,831 6 %
Bank $5,245 17.21% $1,219 4 % $1,829 6 %
Tier I Capital
(to Average Assets)
Consolidated $4,928 11.47% $1,719 4 % $2,148 5 %
Bank $5,245 12.22% $1,717 4 % $2,146 5 %
As of December 31, 1997:
Total Capital
(to Risk Weighted Assets)
Bank $5,429 20.36% $2,133 8 % $2,666 10 %
Tier I Capital
(to Risk Weighted Assets)
Bank $5,116 19.19% $1,064 4 % $1,560 6 %
Tier I Capital
(to Average Assets)
Bank $5,116 12.17% $1,682 4 % $2,103 5 %
</TABLE>
22
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- - --------------------------------------------------------------------------------
NOTE 13. SUPPLEMENTAL FINANCIAL DATA
Components of other operating expense in excess of 1% of gross income
for the respective years are as follows:
<TABLE>
<CAPTION>
Years ended December 31,
--------------------------------
1998 1997
------------- -------------
<S> <C> <C>
Expenses
Legal and professional fees $43,974 $45,152
Stationery and supplies 49,862 43,267
Director fees 47,800 42,700
</TABLE>
NOTE 14. FAIR VALUE OF FINANCIAL INSTRUMENTS
The following methods and assumptions were used by the Company in
estimating its fair value disclosures for financial instruments. In
cases where quoted market prices are not available, fair values are
based on estimates using discounted cash flow models. Those models
are significantly affected by the assumptions used, including the
discount rates and estimates of future cash flows. In that regard,
the derived fair value estimates cannot be substantiated by comparison
to independent markets and, in many cases, could not be realized in
immediate settlement of the instrument. The use of different
methodologies may have a material effect on the estimated fair value
amounts. Also, the fair value estimates presented herein are based on
pertinent information available to management as of December 31, 1998
and 1997. Such amounts have not been revalued for purposes of these
financial statements since those dates and, therefore, current
estimates of fair value may differ significantly from the amounts
presented herein.
Cash and Due From Banks, Interest-bearing Deposits in Banks, and
Federal Funds Sold:
The carrying amounts of cash and due from banks, interest-bearing
deposits in banks, and Federal funds sold approximate their fair
value.
Fair values for securities are based on available quoted market
prices. The carrying values of equity securities with no readily
determinable fair value approximate fair values.
23
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- - -------------------------------------------------------------------------------
NOTE 14. FAIR VALUE OF FINANCIAL INSTRUMENTS (Continued)
Loans:
For variable-rate loans that reprice frequently and have no
significant change in credit risk, fair values are based on carrying
values. For other loans, the fair values are estimated using
discounted cash flow models, using current market interest rates
offered for loans with similar terms to borrowers of similar credit
quality. Fair values for impaired loans are estimated using
discounted cash flow models or based on the fair value of the
underlying collateral.
Deposits:
The carrying amounts of demand deposits, savings deposits, and
variable-rate certificates of deposit approximate their fair values.
Fair values for fixed-rate certificates of deposit are estimated
using discounted cash flow models, using current market interest
rates offered on certificates with similar remaining maturities.
Federal Funds Purchased and Note Payable
The carrying amounts of the Company's Federal funds purchased and
note payable approximate their fair value.
Accrued Interest:
The carrying amounts of accrued interest approximate their fair
values.
Off-Balance Sheet Instruments:
Fair values of the Company's off-balance sheet financial instruments
are based on fees charged to enter into similar agreements. However,
commitments to extend credit and standby letters of credit do not
represent a significant value to the Company until such commitments
are funded. The Company has determined that these instruments do not
have a distinguishable fair value and no fair value has been
assigned.
24
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- - --------------------------------------------------------------------------------
NOTE 14. FAIR VALUE OF FINANCIAL INSTRUMENTS (Continued)
The estimated fair values of the Company's financial instruments are
as follows:
<TABLE>
<CAPTION>
December 31, 1998 December 31, 1997
-------------------------------- ----------------------------------
Carrying Fair Carrying Fair
Amount Value Amount Value
-------------- ------------ --------------- --------------
(In Thousands)
<S> <C> <C> <C> <C>
Financial assets:
Cash and due from
banks, interest-bearing
deposits in banks, and
Federal funds sold $ 3,609 $ 3,609 $ 2,803 $ 2,803
Securities available-for-sale 7,598 7,598 13,582 13,582
Loans 29,556 29,710 22,431 22,207
Accrued interest receivable 334 334 435 435
Financial liabilities:
Deposits 36,624 37,100 35,850 35,918
Federal funds purchased 825 825 - -
Note payable 356 356 - -
Accrued interest payable 421 421 361 361
</TABLE>
NOTE 15. BUSINESS COMBINATION
On September 1, 1998, the Company acquired all of the outstanding
common stock of the Bank in exchange for 451,105 shares of $5 par
value common stock. The acquisition has been accounted for as a
pooling of interests, and, accordingly, all prior financial statements
have been restated to reflect the combination. Income of the
subsidiary prior to acquisition on September 1, 1998 was $234,503,
which is included in the consolidated statement of income.
25
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- - --------------------------------------------------------------------------------
NOTE 16. PARENT COMPANY FINANCIAL INFORMATION
The following information presents the condensed balance sheet,
statement of income, and cash flows of UB & T Financial Services
Corporation as of December 31, 1998 and for the period from inception
through December 31, 1998.
CONDENSED BALANCE SHEETS
<TABLE>
<CAPTION>
<S> <C>
Assets
Cash $ 24,376
Investment in subsidiary 5,274,237
Other assets 14,320
----------
Total assets $5,312,933
==========
Note payable 356,000
Other liabilities 566
Shareholders' equity $4,956,367
----------
Total liabilities and shareholders' equity $5,312,933
==========
</TABLE>
26
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- - --------------------------------------------------------------------------------
NOTE 16. PARENT COMPANY FINANCIAL INFORMATION (Continued)
CONDENSED STATEMENTS OF INCOME
<TABLE>
<CAPTION>
<S> <C> <C>
Income
Dividends from subsidiary $ 62,996
--------
Expense
Interest on note payable 2,107
Other expense 36,270
--------
Total expense 38,377
--------
Income before income tax and
equity in undistributed income of subsidiary 24,619
Income tax benefit 13,070
--------
Income before equity in undistributed
income of subsidiary 37,689
Equity in undistributed income of subsidiary 8,492
--------
Net income $ 46,181
========
</TABLE>
27
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- - --------------------------------------------------------------------------------
NOTE 16. PARENT COMPANY FINANCIAL INFORMATION (Continued)
CONDENSED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
<S> <C>
Operating Activities
Net income $ 46,181
Adjustments to reconcile net income to net cash
provided by operating activities:
Undistributed income of subsidiary (8,492)
Other operating activities (13,754)
---------
Net cash provided by operating activities 23,935
---------
Financing Activities
Purchase of treasury stock (355,559)
Proceeds from note payable 390,000
Repayment of note payable (34,000)
---------
Net cash provided by financing activities 441
---------
Net increase in cash 24,376
Cash at beginning of period -
---------
Cash at end of year $ 24,376
=========
</TABLE>
28
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 9
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> DEC-31-1998
<CASH> 1,165,932
<INT-BEARING-DEPOSITS> 2,327,741
<FED-FUNDS-SOLD> 115,518
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 7,597,708
<INVESTMENTS-CARRYING> 0
<INVESTMENTS-MARKET> 0
<LOANS> 29,915,035
<ALLOWANCE> 359,429
<TOTAL-ASSETS> 43,216,497
<DEPOSITS> 36,624,491
<SHORT-TERM> 825,000
<LIABILITIES-OTHER> 454,639
<LONG-TERM> 356,000
0
0
<COMMON> 2,255,525
<OTHER-SE> 2,700,842
<TOTAL-LIABILITIES-AND-EQUITY> 43,216,497
<INTEREST-LOAN> 2,550,972
<INTEREST-INVEST> 711,589
<INTEREST-OTHER> 134,361
<INTEREST-TOTAL> 3,396,922
<INTEREST-DEPOSIT> 1,551,919
<INTEREST-EXPENSE> 1,556,832
<INTEREST-INCOME-NET> 1,840,090
<LOAN-LOSSES> 292,250
<SECURITIES-GAINS> 74,788
<EXPENSE-OTHER> 1,640,257
<INCOME-PRETAX> 388,655
<INCOME-PRE-EXTRAORDINARY> 388,655
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 280,684
<EPS-PRIMARY> .62
<EPS-DILUTED> .62
<YIELD-ACTUAL> 4.12
<LOANS-NON> 124
<LOANS-PAST> 291
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 313
<CHARGE-OFFS> 257
<RECOVERIES> 12
<ALLOWANCE-CLOSE> 360
<ALLOWANCE-DOMESTIC> 360
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 360
</TABLE>
