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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-KSB
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended Commission File Number
December 31, 1995 0-18827
FAYETTE COUNTY BANCSHARES, INC.
(Exact name of registrant as specified on its charter)
<TABLE>
<S> <C>
Georgia 58-18357525
(State or other Jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
300 Peachtree Parkway South Registrant's telephone number, including
Peachtree City, Georgia 30269 area code (770-631-2265)
(Address of principal executive offices)
Securities registered pursuant to Section 12 (b) of the Act: None
Securities registered pursuant to Section 12 (g) of the Act: Common Stock, $1.00 par value per share
</TABLE>
Indicate by check mark whether the registrant (1) has filed all
reports required to be filed by Section 13 or 15 (d) of the Securities Exchange
Act of 1934 during the preceding 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
---- ----
Indicate by check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-B is not contained herein, 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. ( )
--
The Company's revenues for its most recent fiscal year were
$7,723,000.
The aggregate market value of the voting stock held by non-affiliates
of the Registrant at March 18, 1996, was $8,569,015 based on the sales price of
the Common Stock of $18.50. Although the Company's Common Stock has been
listed on the NASDAQ SmallCap Market since September 29, 1995, there is limited
trading activity for the Common Stock.
The number of shares outstanding of the Registrant's common stock at March 22,
1996, was 612,440 shares.
Documents Incorporated by Reference:
Portions of the Company's Proxy Statement for its 1996 Annual
Meeting of Shareholders, scheduled to be held on April 25, 1996, are
incorporated by reference in answer to Part III of this report.
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PART I
ITEM 1. BUSINESS
GENERAL
Fayette County Bancshares, Inc. (the "Company"), Peachtree City,
Georgia was incorporated as a Georgia business corporation on November 1, 1988.
The Company commenced operations in November 1989 as a bank holding company
under the federal Bank Holding Company Act of 1956. Fayette County Bank (the
"Bank") is presently the sole operating subsidiary of the Company.
The Bank is a full-service commercial bank. The Bank offers personal
and business checking accounts, interest- bearing checking accounts, savings
accounts, and various types of certificates of deposit. The Bank also offers a
full complement of lending activities, including consumer/installment loans,
construction loans, commercial loans (with a particular emphasis on small
business loans), and home equity lines of credit. In addition, the Bank
provides such services as official bank checks and money orders, Visa credit
cards, travelers' checks, bank by mail, direct deposit of payroll and social
security checks, U.S. Savings Bonds, wire transfer of funds, and a night
depository. The Bank also offers individual retirement accounts. The Company
and the Bank conduct business from their main office located at 300 Peachtree
Parkway South, Peachtree City, Georgia. The Bank has branch facilities at 150
West Lanier Avenue, Fayetteville, Georgia, which opened July 4, 1991, and the
Kedron Village branch at 100 Kedron Drive, Peachtree City, Georgia, which
opened March 24, 1994.
MARKET AREA AND COMPETITION. The primary market area of the Bank is
Fayette County, Georgia, and the surrounding area, which is approximately 30
miles southeast of downtown Atlanta, Georgia. The Bank's primary market area
has experienced growth in employment, average per capita income, retail sales,
deposits, housing, and commercial development, and boasts one of the highest
average per capita incomes of any county in Georgia. The banking business in
Fayette County is highly competitive with respect to both loans and deposits
and is dominated by a number of major banks having many offices in the area.
The Bank competes for deposits and loans principally with these banks, as well
as with savings and loan associations, credit unions, mortgage companies,
insurance companies, and other financial institutions which have recently been
invading the traditional banking markets.
CORRESPONDENT BANKING. Correspondent banking involves the provision
of services by one bank to another bank that cannot provide that service for
itself from an economic or practical standpoint. The Bank purchases
correspondent services offered by larger banks and service companies, including
data processing services, check collections, purchases of Federal Funds,
security safekeeping, investment services, wire transfer services, coin and
currency supplies, overline and liquidity loan participations, and sales of
loans to or participations with correspondent banks.
The Bank will sell loan participations to upstream correspondent banks
with respect to loans that exceed the Bank's lending limit. The Bank has
established correspondent relationships with The Bankers Bank, AmSouth Bank,
Republic National Bank, and First Community Bank & Trust of Macon. As
compensation for services provided by a correspondent, the Bank maintains
certain balances with its correspondents in non-interest bearing accounts.
EMPLOYEES. The Bank has 40 full-time employees and 7 part-time
employees. The Company does not have any employees who are not also employees
of the Bank.
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SUPERVISION AND REGULATION
The Company and the Bank are subject to state and federal banking laws
and regulations which impose specific requirements or restrictions on and
provide for general regulatory oversight with respect to virtually all aspects
of operations. These laws and regulations are generally intended to protect
depositors, not shareholders. To the extent that the following summary
describes statutory or regulatory provisions, it is qualified in its entirety
by reference to the particular statutory and regulatory provisions. Any change
in applicable laws or regulations may have a material effect on the business
and prospects of the Company. Beginning with the enactment of the Financial
Institutions Reform, Recovery and Enforcement Act of 1989 ("FIRREA") and
following with the FDICIA, which was enacted in 1991, numerous additional
regulatory requirements have been placed on the banking industry in the past
five years, and additional changes have been proposed. The banking industry is
also likely to change significantly as a result of the passage of the
Riegle-Neal Interstate Banking and Branching Efficiency Act of 1994 (the
"Interstate Banking Act"). The operations of the Company and the Bank may be
affected by legislative changes and the policies of various regulatory
authorities. The Company is unable to predict the nature or the extent of the
effect on its business and earnings that fiscal or monetary policies, economic
control, or new federal or state legislation may have in the future.
FEDERAL BANK HOLDING COMPANY REGULATION
The Company is a bank holding company within the meaning of the Bank
Holding Company Act of 1956 (the "BHCA"). Under the BHCA, the Company is
subject to periodic examination by the Federal Reserve and is required to file
periodic reports of its operations and such additional information as the
Federal Reserve may require. The Company's and the Bank's activities are
limited to banking, managing or controlling banks, furnishing services to or
performing services for its subsidiaries, or engaging in any other activity
that the Federal Reserve determines to be so closely related to banking or
managing or controlling banks as to be a proper incident thereto.
INVESTMENTS, CONTROL, AND ACTIVITIES. With certain limited
exceptions, the BHCA requires every bank holding company to obtain the prior
approval of the Federal Reserve before (i) acquiring substantially all the
assets of any bank, (ii) acquiring direct or indirect ownership or control of
any voting shares of any bank if after such acquisition it would own or control
more than 5% of the voting shares of such bank (unless it already owns or
controls the majority of such shares), or (iii) merging or consolidating with
another bank holding company.
In addition, and subject to certain exceptions, the BHCA and the
Change in Bank Control Act, together with regulations thereunder, require
Federal Reserve approval (or, depending on the circumstances, no notice of
disapproval) prior to any person or company acquiring "control" of a bank
holding company, such as the Company. Control is conclusively presumed to
exist if an individual or company acquires 25% or more of any class of voting
securities of the bank holding company. Because the Company's class of Common
Stock has been registered under the Securities Exchange Act of 1934, under
Federal Reserve regulations control is rebuttably presumed to exist if a person
acquires at least 10% of the outstanding shares of any class of the Company's
voting securities. The regulations provide a procedure for challenge of the
rebuttable control presumption.
Under the BHCA, the Company is generally prohibited from engaging in,
or acquiring direct or indirect control of more than 5% of the voting shares of
any company engaged in nonbanking activities, unless the Federal Reserve, by
order or regulation, has found those activities to be so closely related to
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banking or managing or controlling banks as to be a proper incident thereto.
Some of the activities that the Federal Reserve has determined by regulation to
be proper incidents to the business of banking include making or servicing
loans and certain types of leases, engaging in certain insurance and discount
brokerage activities, performing certain data processing services, acting in
certain circumstances as a fiduciary or investment or financial advisor, owning
savings associations, and making investments in certain corporations or
projects designed primarily to promote community welfare.
SOURCE OF STRENGTH; CROSS-GUARANTEE. In accordance with Federal
Reserve policy, the Company is expected to act as a source of financial
strength to the Bank and to commit resources to support the Bank in
circumstances in which the Company might not otherwise do so. Under the BHCA,
the Federal Reserve may require a bank holding company to terminate any
activity or relinquish control of a nonbank subsidiary (other than a nonbank
subsidiary of a bank) upon the Federal Reserve's determination that such
activity or control constitutes a serious risk to the financial soundness or
stability of any subsidiary depository institution of the bank holding company.
Further, federal bank regulatory authorities have additional discretion to
require a bank holding company to divest itself of any bank or nonbank
subsidiary if the agency determines that divestiture may aid the depository
institution's financial condition. The Bank may be required to indemnify, or
cross-guarantee, the FDIC against losses it incurs with respect to any other
Bank controlled by the Company, which in effect makes the Company's equity
investments in healthy bank subsidiaries available to the FDIC to assist any
failing or failed bank subsidiary of the Company.
The Financial Institutions Code. All Georgia bank holding companies
must register with the Georgia Department of Banking and Finance (the "Georgia
Department") under the Financial Institutions Code. A registered bank holding
company must provide the Georgia Department with information with respect to
the financial condition, operations, management and inter-company relationships
of the holding company and its subsidiaries. The Georgia Department may also
require such other information as is necessary to keep itself informed about
whether the provisions of Georgia law and the regulations and orders issued
thereunder by the Georgia Department have been complied with, and the Georgia
Department may make examinations of any bank holding company and its
subsidiaries.
Under the Financial Institutions Code, it is unlawful without the
prior approval of the Georgia Department (i) for any bank holding company to
acquire direct or indirect ownership or control of more than 5% of the voting
shares of the 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 is also unlawful for any bank holding company to
acquire direct or indirect ownership or control of more than 5% of the voting
shares of any bank 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 Georgia Department for approval of such
acquisition. In addition, in any such acquisition by an existing bank holding
company, the initial banking subsidiary of such bank holding company must have
been incorporated for not less than two years before the holding company can
acquire another bank.
The Financial Institutions Code allows regional interstate banking by
permitting banking organizations in certain Southeastern states to acquire
Georgia banking organizations if Georgia banking associations are allowed to
acquire banking organizations in their states. As a result of this provision
of the Financial Institutions Code, which became effective on July 1, 1985,
banking organizations in other states, most significantly North Carolina,
Florida and Alabama, have entered the Georgia market through acquisitions of
Georgia institutions. Moreover, legislation prohibiting de novo interstate
bank branching
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and restricting other kinds of interstate bank activities has been proposed in
recent sessions of the Georgia legislature, and there can be no guarantee that
future additional regulatory restrictions will not affect the Company or the
Bank. Those acquisitions are subject to federal and Georgia approval as
described above.
Glass-Steagall Act. The Company is also restricted in its activities
by the provisions of the Glass-Steagall Act, which will prohibit the Company
from owning subsidiaries that are engaged principally in the issue, flotation,
underwriting, public sale or distribution of securities. The interpretation,
scope, and application of the provisions of the Glass-Steagall Act currently
are being considered and reviewed by regulators and legislators, and the
interpretation and application of those provisions have been challenged in the
federal courts.
THE BANK
GENERAL. The Bank is a Georgia banking corporation and state
non-member bank. The Georgia Department and the FDIC are the primary
regulators for the Bank. These regulatory authorities regulate or monitor all
areas of the Bank's operations, including security devices and procedures,
adequacy of capitalization and loss reserves, loans, investments, borrowings,
deposits, mergers, issuances of securities, payment of dividends, interest
rates payable on deposits, interest rates or fees chargeable on loans,
establishment of branches, corporate reorganizations, maintenance of books and
records, and adequacy of staff training to carry on safe lending and deposit
gathering practices. The Bank must maintain certain capital ratios and is
subject to limitations on aggregate investments in real estate, bank premises,
and furniture and fixtures. In addition, the Bank, as a subsidiary of the
Company, will be subject to restrictions under federal law in dealing with the
Company and other affiliates, if any. These restrictions apply to extensions
of credit to an affiliate, investments in the securities of an affiliate and
the purchase of assets from an affiliate.
Under FDICIA, all insured institutions must undergo regular on site
examinations by their appropriate banking agency. The cost of examinations of
insured depository institutions and any affiliates may be assessed by the
appropriate agency against each institution or affiliate as it deems necessary
or appropriate. Insured institutions are required to submit annual reports to
the FDIC and the appropriate agency (and state supervisor when applicable).
FDICIA also directs the FDIC to develop with other appropriate agencies a
method for insured depository institutions to provide supplemental disclosure
of the estimated fair market value of assets and liabilities, to the extent
feasible and practicable, in any balance sheet, financial statement, report of
condition or any other report of any insured depository institution. FDICIA
also requires the federal banking regulatory agencies to prescribe, by
regulation, standards for all insured depository institutions and depository
institution holding companies relating, among other things, to (i) internal
controls, information systems, and audit systems; (ii) loan documentation;
(iii) credit underwriting; (iv) interest rate risk exposure; and (v) asset
quality.
State nonmember banks and their holding companies which have been
chartered or registered or have undergone a change in control within the past
two years or which have been deemed by the DBF or the Federal Reserve Board,
respectively, to be troubled institutions must give the DBF or the Federal
Reserve Board, respectively, thirty days prior notice of the appointment of any
senior executive officer or director. Within the thirty day period, the DBF or
the Federal Reserve Board, as the case may be, may approve or disapprove any
such appointment. The Company and the Bank will meet the criteria which
trigger this additional approval during the first two years after they are
registered or chartered, respectively.
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TRANSACTIONS WITH AFFILIATES AND INSIDERS. The Bank is subject to the
provisions of Section 23A of the Federal Reserve Act, which place limits on the
amount of loans or extensions of credit to, or investments in, or certain other
transactions with, affiliates and on the amount of advances to third parties
collateralized by the securities or obligations of affiliates. In addition,
most of these loans and certain other transactions must be secured in
prescribed amounts. The Bank is also subject to the provisions of Section 23B
of the Federal Reserve Act that, among other things, prohibit an institution
from engaging in certain transactions with certain affiliates unless the
transactions are on terms substantially the same, or at least as favorable to
such institution or its subsidiaries, as those prevailing at the time for
comparable transactions with non-affiliated companies. The Bank is subject to
certain restrictions on extensions of credit to executive officers, directors,
certain principal stockholders, and their related interests. Such extensions
of credit (i) must be made on substantially the same terms, including interest
rates and collateral, as those prevailing at the time for comparable
transactions with third parties and (ii) must not involve more than the normal
risk of repayment or present other unfavorable features.
BRANCHING. Georgia law presently limits the establishment of branches
by a state or national bank located in Georgia to the county in which the
bank's main office is located, but provides an exception for branches
established through the acquisition of certain existing institutions. However,
both the Georgia House and Senate have passed a bill which would eventually
permit unlimited statewide bank branching. This bill is expected to be signed
into law by Governor Zell Miller on or before April 21, 1996. If this law is
enacted, effective July 1, 1996, banks will be able to branch into three
additional counties besides the county in which their principal office is
located with approval of the Department (for a bank which is part of a bank
holding company, all affiliates would be treated as one and the holding company
would be limited to three counties). Effective July 1, 1998, statewide
branching with approval of the Department would be permitted.
Although the Bank currently has no definitive plans for opening any
other branch offices, depending on profitability and community needs, other
branches may be considered. The Company, with prior regulatory approval, will
be permitted to acquire interest in and operate banks throughout the State;
under Georgia law, any bank acquired by the Company could be merged into the
Bank and its offices could then be operated as branches of the Bank. There are
currently no definite plans for the Company to make any such acquisition, but
the Company remains open to such acquisitions as part of its strategic growth
plan.
COMMUNITY REINVESTMENT ACT. The Community Reinvestment Act requires
that each insured depository institution shall be evaluated by its primary
federal regulator with respect to its record in meeting the credit needs of its
local community, including low and moderate income neighborhoods, consistent
with the safe and sound operation of those institutions. These factors are
also considered in evaluating mergers, acquisitions, and applications to open a
branch or facility. The Bank received an "excellent" rating in its most
recent evaluation.
OTHER REGULATIONS. Interest and certain other charges collected or
contracted for by the Bank are subject to state usury laws and certain federal
laws concerning interest rates. The Bank's loan operations are also subject to
certain federal laws applicable to credit transactions, such as the federal
Truth-In-Lending Act governing disclosures of credit terms to consumer
borrowers, the Home Mortgage Disclosure Act of 1975 requiring financial
institutions to provide information to enable the public and public officials
to determine whether a financial institution is fulfilling its obligation to
help meet the housing needs of the community it serves, the Equal Credit
Opportunity Act prohibiting discrimination on the basis of race, creed or other
prohibited factors in extending credit, the Fair Credit Reporting Act
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of 1978 governing the use and provision of information to credit reporting
agencies, the Fair Debt Collection Act governing the manner in which consumer
debts may be collected by collection agencies, and the rules and regulations of
the various federal agencies charged with the responsibility of implementing
such federal laws. The deposit operations of the Bank also are subject to the
Right to Financial Privacy Act, which imposes a duty to maintain
confidentiality of consumer financial records and prescribes procedures for
complying with administrative subpoenas of financial records, and the
Electronic Funds Transfer Act and Regulation E issued by the Federal Reserve
Board to implement that act, which governs automatic deposits to and
withdrawals from deposit accounts and customers' rights and liabilities arising
from the use of automated teller machines and other electronic banking
services.
DEPOSIT INSURANCE
The deposits of the Bank are currently insured to a maximum of
$100,000 per depositor, subject to certain aggregation rules. The FDIC
establishes rates for the payment of premiums by federally insured banks and
thrifts for deposit insurance. Separate insurance funds (BIF and SAIF) are
maintained for commercial banks and thrifts, with insurance premiums from the
industry used to offset losses from insurance payouts when banks and thrifts
fail. Due to the high rate of failures in recent years, the fees that
commercial banks and thrifts pay to BIF and SAIF increased. Since 1993,
insured depository institutions like the Bank have paid for deposit insurance
under a risk-based premium system. Under this system, until mid-1995 depositor
institutions paid to BIF or SAIF from $0.23 to $0.31 per $100 of insured
deposits depending on its capital levels and risk profile, as determined by its
primary federal regulator on a semi-annual basis. Once the BIF reached its
legally mandated reserve ratio in mid-1995, the FDIC lowered premiums for
well-capitalized banks to $.04 per $100. Subsequently, the FDIC revised the
range of premiums from $.00 to $.31 per $100. The Bank's assessment rate on
BIF and SAIF deposits per $100 is $.00 and $.23, respectively. The combined
assessment per $100 is $.10 on insured deposits. The FDIC also imposes a
$1,000 minimum semiannual assessment on all institutions.
DIVIDENDS
The principal source of the Company's cash revenues comes from
dividends received from the Bank. The amount of dividends that may be paid by
the Bank to the company depends on the Bank's earnings and capital position and
is limited by federal and state law, regulations, and policies. In addition,
the Board of Governors has stated that bank holding companies should refrain
from or limit dividend increases or reduce or eliminate dividends under
circumstances in which the bank holding company fails to meet minimum capital
requirements or in which its earnings are impaired.
Cash dividends on the Bank's common stock may be declared and paid
only out of its retained earnings, and dividends may not be declared at any
time at which the Bank's paid-in capital and appropriated retained earnings do
not, in combination, equal at least 20% of its capital stock account. In
addition, the Department's current rules and regulations require prior
Department approval before cash dividends may be declared and paid if: (i) the
Bank's ratio of equity capital to adjusted total assets is less than 6%; (ii)
the aggregate amount of dividends declared or anticipated to be declared in
that calendar year exceeds 50% of the Bank's net profits, after taxes but
before dividends, for the previous calendar year; or (iii) the percentage of
the Bank's assets classified as adverse as to repayment or recovery by the
Department at the most recent examination of the Bank exceeds 80% of the Bank's
equity capital as reflected at such examination. Under FDICIA, the Bank may
not pay a dividend if, after paying the dividend, the Bank would be
undercapitalized. See "Capital Regulations" below. See Item 5 below for a
discussion of dividends paid by the Bank in the past two years.
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CAPITAL REGULATIONS
The federal bank regulatory authorities have adopted risk-based
capital guidelines for banks and bank holding companies that are designed to
make regulatory capital requirements more sensitive to differences in risk
profile among banks and bank holding companies, account for off-balance sheet
exposure, and minimize disincentives for holding liquid assets. The resulting
capital ratios represent qualifying capital as a percentage of total
risk-weighted assets and off-balance sheet items. The guidelines are minimums,
and the federal regulators have noted that banks and bank holding companies
contemplating significant expansion programs should not allow expansion to
diminish their capital ratios and should maintain ratios well in excess of the
minimums. The current guidelines require all bank holding companies and
federally-regulated banks to maintain a minimum risk-based total capital ratio
equal to 8%, of which at least 4% must be Tier 1 capital. Tier 1 capital
includes common stockholders' equity, qualifying perpetual preferred stock, and
minority interests in equity accounts of consolidated subsidiaries, but
excludes goodwill and most other intangibles and excludes the allowance for
loan and lease losses. Tier 2 capital includes the excess of any preferred
stock not included in Tier 1 capital, mandatory convertible securities, hybrid
capital instruments, subordinated debt and intermediate term-preferred stock,
and general reserves for loan and lease losses up to 1.25% of risk-weighted
assets.
Under the guidelines, banks' and bank holding companies' assets are
given risk-weights of 0%, 20%, 50%, or 100%. In addition, certain off-balance
sheet items are given credit conversion factors to convert them to asset
equivalent amounts to which an appropriate risk-weight will apply. These
computations result in the total risk-weighted assets. Most loans are assigned
to the 100% risk category, except for first mortgage loans fully secured by
residential property and, under certain circumstances, residential construction
loans, both of which carry a 50% rating. Most investment securities are
assigned to the 20% category, except for municipal or state revenue bonds,
which have a 50% rating, and direct obligations of or obligations guaranteed by
the United States Treasury or United States Government agencies, which have a
0% rating.
The federal bank regulatory authorities have also implemented a
leverage ratio, which is Tier 1 capital as a percentage of average total assets
less intangibles, to be used as a supplement to the risk-based guidelines. The
principal objective of the leverage ratio is to place a constraint on the
maximum degree to which a bank holding company may leverage its equity capital
base. The minimum required leverage ratio for top-rated institutions is 3%,
but most institutions are required to maintain an additional cushion of at
least 100 to 200 basis points.
FDICIA established a new capital-based regulatory scheme designed to
promote early intervention for troubled banks and requires the FDIC to choose
the least expensive resolution of bank failures. The new capital-based
regulatory framework contains five categories of compliance with regulatory
capital requirements, including "well capitalized," "adequately capitalized,"
"undercapitalized," "significantly undercapitalized," and "critically
undercapitalized." To qualify as a "well capitalized" institution, a bank must
have a leverage ratio of no less than 5%, a Tier 1 risk-based ratio of no less
than 6%, and a total risk-based capital ratio of no less than 10%, and the bank
must not be under any order or directive from the appropriate regulatory agency
to meet and maintain a specific capital level. As of December 31, 1995, the
Company and the Bank were qualified as "well-capitalized." See "Item 6.
Management's Discussion and Analysis of Financial Condition and Results of
Operations -- Capital."
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Both the capital standards and the safety and soundness standards are
designed to bolster and protect the deposit insurance fund. In response to the
directive issued under FDICIA, the regulators have adopted regulations which,
among other things, prescribe the capital thresholds for each of the five
capital categories established by FDICIA. The following table reflects these
capital thresholds:
<TABLE>
<CAPTION>
Total Risk- Tier 1 Risk- Tier 1
Based Capital Based Capital Leverage
------------- ------------- --------
<S> <C> <C> <C>
Well Capitalized (1) 10% 6% 5%
Adequately Capitalized (1) 8% 4% 4% (2)
Undercapitalized (3) < 8% < 4% < 4%
Significantly Undercapitalized < 6% < 3% < 3%
Critically Undercapitalized - - < 2%
</TABLE>
(1) An institution must meet all three minimums.
(2) 3% for composite 1-rated institutions, subject to appropriate federal
banking agency guidelines.
(3) An institution falls into this category if it is below the specified
capital level for any of the three capital measures.
Under the FDICIA regulations, the applicable agency can treat an
institution as if it were in the next lower category if the agency determines
(after notice and an opportunity for hearing) that the institution is in an
unsafe or unsound condition or is engaging in an unsafe or unsound practice.
The degree of regulatory scrutiny of a financial institution will increase, and
the permissible activities of the institution will decrease, as it moves
downward through the capital categories. Institutions that fall into one of
the three undercapitalized categories may be required to (i) submit a capital
restoration plan; (ii) raise additional capital; (iii) restrict their growth,
deposit interest rates, and other activities; (iv) improve their management;
(v) eliminate management fees; or (vi) divest themselves of all or part of
their operations. Bank holding companies controlling financial institutions
can be called upon to boost the institutions' capital and to partially
guarantee the institutions' performance under their capital restoration plans.
These capital guidelines can affect the Company in several ways.
Rapid growth, poor loan portfolio performance, or poor earnings performance, or
a combination of these factors, could change the Company's capital position in
a relatively short period of time, making an additional capital infusion
necessary.
FDICIA requires the federal banking regulators to revise the
risk-based capital standards to provide for explicit consideration of
interest-rate risk, concentration of credit risk, and the risks of
non-traditional activities. It is uncertain what affect these regulations,
when implemented, would have on the Company and the Bank.
Both the Company and the Bank exceeded their respective regulatory
capital requirements at December 31, 1995. See "Management's Discussion and
Analysis of Financial Condition and Results of Operations - Capital."
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RECENT LEGISLATIVE DEVELOPMENTS
The Interstate Banking Act, passed by Congress in 1994, allows
unrestricted interstate bank mergers and interstate acquisition of banks by
bank holding companies, and ultimately will permit interstate de novo branching
by banks. The states, however, may opt in or opt out of several of the
Interstate Banking Act's provisions. The Georgia legislature has considered
certain bills in its most recent legislature session which would opt in to
permit interstate bank branching by merger or acquisition with Department
approval, but which would opt out and not allow de novo bank branching.
Further, the new Georgia branch banking bill, which is expected to be signed
into law on or before April 21, 1996, also will make it easier for banks to
establish branches in additional counties. As a result of these new laws and
proposed legislation, the number of competitors in the Company's market may
increase. However, the Company believes it can compete effectively in the
market and that the legislation will not have a material adverse impact on the
Company or the Bank. From time to time, various bills are introduced in the
United States Congress and at the state legislative level with respect to the
regulation of financial institutions. Certain of these proposals, if adopted,
could significantly change the regulation of banks and the financial services
industry. The Company cannot predict whether any of these proposals will be
adopted or, if adopted, how these proposals would affect the Company.
MONETARY POLICIES
The earnings of the Company and the Bank are significantly affected by
the policies of the Federal Reserve Board which regulates the money supply in
order to mitigate recessionary and inflationary pressures. Among the
techniques used to implement these objectives are open market operations in
United States government securities, changes in the rates paid by banks on bank
borrowings, and changes in reserve requirements against bank deposits. These
techniques are used in varying combinations to influence overall growth and
distribution of bank loans, investments, and deposits. Their use may also
affect interest rates charged on loans or paid for deposits for financial
institutions.
ITEM 2. DESCRIPTION OF PROPERTY
The Company owns the Bank's main banking facility located at 300
Peachtree Parkway South, Peachtree City, Georgia. This facility consists of a
9,700 square foot three floor complete banking center, housing the Bank's
corporate offices and a full service bank. The Bank owns the Fayetteville
branch facility located at 150 West Lanier Avenue, Fayetteville, Georgia. This
building is approximately 2,400 square feet occupying two floors. The main
floor is a complete banking floor with three teller stations and two offices.
The basement houses the vault, safe deposit boxes, a break room, and storage.
A third banking facility is located at 100 Kedron Drive, Peachtree
City, Georgia. The facility is 5,000 square feet and consists of two floors.
The operations center and human resources occupy the basement and a complete
banking facility is on the upper level.
ITEM 3. LEGAL PROCEEDINGS
Neither the Company nor the Bank is a party to any pending legal
proceedings other than routine litigation incidental to the Bank's business,
and management does not believe such litigation would have a material adverse
effect upon the operations or financial condition of the Company or the Bank.
10
<PAGE> 11
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matter was submitted during the fourth quarter ended December 31,
1995, to a vote of security holders of the Company.
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
The Company had 612,440 shares of Common Stock issued and outstanding
to approximately 953 shareholders on March 20, 1996.
Although the Common Stock has been listed on the NASDAQ SmallCap
Market since September 29, 1995, there is very little trading activity for the
Common Stock. The following table sets forth the reported high and low sales
prices of the Common Stock for the quarter indicated as reported on the Nasdaq
SmallCap Market.
<TABLE>
<CAPTION>
High Low
------ ------
<S> <C> <C> <C>
1995
Fourth Quarter . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $22.50 $18.50
</TABLE>
Prior to September 29, 1995, there was no established trading market
for the Common Stock. On March 18, 1996, the last reported sales price of the
Common Stock on the Nasdaq SmallCap Market was $18.50 per share.
In June 1995, the Company paid to its shareholders a $.25 per share
cash dividend, and in June 1994 the Company paid to its shareholders a $.20 per
share cash dividend. Presently, the only source of funds available for the
payment of dividends by the Company would be dividends paid to the Company by
the Bank. The amount of dividends that may be paid by the Bank to the Company
depends on the Bank's earnings and capital position and is limited by federal
and state law, regulations, and policies. In addition, the Board of Governors
has stated that bank holding companies should refrain from or limit dividend
increases or reduce or eliminate dividends under circumstances in which the
bank holding company fails to meet minimum capital requirements or in which its
earnings are impaired.
The Bank is subject to restrictions on the payment of dividends under
Georgia law and Georgia Banking Department regulations. See "Supervision and
Regulation -- Dividends" above. No assurance can be given that any dividends
will be declared by the Company in the future, or if declared, what the amount
of the dividends would be or whether such dividends, once declared, would
continue. Future dividend policy will depend on the Bank's earnings, capital
requirements, financial condition, and other factors considered relevant by the
Board of Directors of the Company.
11
<PAGE> 12
ITEM 6. SELECTED FINANCIAL DATA
The information presented below should be read in conjunction with the
consolidated financial statements, which are included herein, and the
Management's Discussion and Analysis of Financial Condition and Results of
Operations. Amounts shown below are in thousands except for earnings and
dividends per share information and shares outstanding.
<TABLE>
<CAPTION>
Year Ended December 31,
Income Statement Data: 1995 1994 1993 1992 1991
---------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C>
Total Interest Income $ 7,187 $ 5,269 $ 4,440 $ 4,192 $ 3,514
Total Interest Expense 2,789 1,559 1,312 1,536 1,804
Net Interest Income 4,398 3,710 3,128 2,656 1,710
Provision for Loan Loss 335 92 412 596 234
Non Interest Income 536 381 536 385 95
Non Interest Expense 3,015 2,831 2,348 1,986 1,435
Provision for Income Taxes 562 372 325 225 43
Extraordinary Item -0- -0- -0- 96 43
Change in accounting* -0- -0- 27 -0- -0-
Net Income 1,022 795 606 329 136
Net Income Per Share 1.68 1.31 1.00 .55 .25
Dividends paid Per Share .25 .20 .10 -0- -0-
Average Shares 610,130 606,440 605,940 603,440 542,308
Dividend Payout Ratio 14.89% 15.26% 10.0% -0- -0-
</TABLE>
<TABLE>
<CAPTION>
At December 31,
1995 1994 1993 1992 1991
--------- ---------- ---------- ---------- ---------
<S> <C> <C> <C> <C> <C>
Balance Sheet Data:
Total Assets $ 90,933 $ 64,965 $ 67,814 $ 52,321 $ 49,276
Loans, Net of Allowance
for Loan Loss 66,853 41,695 42,182 32,349 28,175
Demand & Savings Deposits 40,948 33,852 42,773 28,731 19,751
Time Deposits 40,489 22,735 17,232 16,797 23,358
Stockholders' Equity 8,136 6,857 6,624 6,053 5,710
Book Value Per Share 13.29 11.31 10.92 10.03 9.46
Equity to Asset Ratio 8.95% 10.55% 9.77% 11.57% 11.59%
</TABLE>
*See Note G of Accountants Notes to Consolidated Financial Statements
12
<PAGE> 13
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
FOR THE YEARS ENDED DECEMBER 31, 1995 AND 1994
RESULTS OF OPERATIONS
The Company's net income increased $226,873, or 28.53%, to $1,022,247
in the year ended December 31, 1995, from $795,374 in the year ended December
31, 1994. This increase predominantly reflects an increase in net interest
income and an increase in other income. Return on average assets for 1995 was
1.26% compared to 1.18% for 1994, and return on average equity was 14.83% in
1995 compared to 12.93% in 1994.
Net interest income increased $687,633, or 18.54%, to $4,397,290 in
1995 from $3,709,657 in 1994, resulting from a $1,917,746 increase in interest
income and a $1,230,113 increase in interest expense. The improvement resulted
predominantly from an increase in the average loans outstanding as the net
interest spread decreased to 5.07% in 1995 from 5.54% in 1994. The net
interest margin decreased to 5.98% in 1995 from 6.22% in 1994.
The provision for loan losses was $335,000 in 1995, an increase of
$243,000 from the provision of $92,000 in 1994, primarily as a result of the
increase of $25,360,674 from 1994 in the loan portfolio. The addition of two
senior loan officers transferring loan relationships to the Bank from other
financial institutions aided in the growth of the Company's loan portfolio.
The Company's allowance for loan losses as a percentage of loans was 1.36% at
December 31, 1995, compared to 1.69% at year end 1994. The Company had net
charge-offs of $132,194 in 1995, resulting in a ratio of net charge-offs to
average loans of .24%.
Noninterest income increased $155,585, or 40.84%, to $536,616 in 1995
from $381,031 in 1994. The increase was due primarily to a loss of $101,126 on
the sale of investment securities in 1994 which did not recur in 1995. The
Bank's gain on the sale of SBA loans decreased $45,052, or 43.85%, to $57,690
in 1995 from $102,742 in 1994. This decrease is a result of the Bank selling
fewer SBA qualified loans in the open market during 1995 as compared to 1994.
Other income increased $23,228, or 61.94%, to $60,732 in 1995 as compared to
$37,504 in 1994. This is predominately due to the Bank closing its mortgage
department in May of 1995. Service charges on deposit accounts increased
$76,251, or 22.31%, to $418,162 in 1995 from $341,911 in 1994. The increase is
due to an increase in accounts opened and serviced by the Bank.
Noninterest expense increased $184,106, or 6.51%, to $3,015,184 in
1995, from $2,831,078 in 1994. Salaries and employee benefits increased
$234,710, or 20.44%, to $1,383,077 in 1995 as compared to $1,148,367 in 1994.
This increase is due to the addition of two lenders and support staff for them.
Also the Bank staffed its Kedron office for the full year of 1995 as compared
to only nine months in 1994. Professional and outside services decreased
$28,763, or 7.37%, to $361,460 in 1995. The Company had an increase in
professional fees associated with an unsuccessful attempt to purchase another
financial institution which totalled approximately $28,000. However, this
increase was offset by a decrease due to nonrecurring fees and expenses
associated with certain litigation in 1994. The Company's efficiency ratio,
which is noninterest expense as a percentage of net interest income plus
noninterest income, net of gains and losses on the sale of assets, decreased to
61.12% in 1995 from 69.21% in 1994.
13
<PAGE> 14
NET INTEREST INCOME
GENERAL. The largest component of the Company's net income is its net
interest income, which is the difference between the income earned on assets
and interest paid on deposits and borrowings used to support such assets. Net
interest income is the difference between the income earned on assets and
interest paid on deposits and borrowings used to support such assets. Net
interest income is determined by the rates earned on the Company's
interest-earning assets, the rates paid on its interest-bearing liabilities,
the relative amounts of interest-earning assets and interest-bearing
liabilities, and the degree of mismatch and the maturity and repricing
characteristics of its interest-earning assets and interest bearing
liabilities. Net interest income divided by average interest-earning assets
represents the Company's net interest margin.
AVERAGE BALANCES, INCOME EXPENSES AND RATES. The following tables
depict for the periods indicated, certain information related to the Company's
average balance sheet and its average yields on assets and average costs of
liabilities. Such yields are derived by dividing income or expense by the
average balance of the corresponding assets or liabilities. Average balances
have been derived from daily averages.
14
<PAGE> 15
<TABLE>
<CAPTION>
1995 1994
---- ----
Average Yield/ Average Yield/
Balance Rate Balance Rate
-------------------- ------------ -------------------- ------------
<S> <C> <C> <C> <C>
Assets
Cash & due from banks $ 3,156,360 0.00% $ 2,490,487 0.00%
Federal funds sold 4,462,767 5.96% 3,134,887 4.17%
Interest-bearing deposits with other
banks 235,906 5.08% 394,000 4.12%
Taxable securities 12,855,049 6.38% 12,257,200 5.40%
Tax exempt securities (1) 1,862,014 4.60% 1,823,864 4.59%
Other investments 42,636 7.83% -0-
Loans(2) 54,099,512 11.09% 42,006,774 10.42%
Other assets 4,693,799 0.00% 4,925,756 0.00%
--------------- ---------------
Total $ 81,408,043 $ 67,032,968
=============== ===============
Liabilities
Demand deposits 13,621,030 0.00% 11,785,792 0.00%
Interest-bearing demand deposits 20,239,475 3.22% 20,943,839 2.56%
Savings deposits 5,146,849 2.44% 5,413,402 2.44%
Time deposits 33,674,596 5.94% 21,183,195 4.15%
Federal funds purchased 101,528 6.54% 71,644 4.76%
Securities sold under agreements to
repurchase 140,069 4.20% 402,772 2.52%
Other liabilities 1,591,243 0.00% 1,084,335 0.00%
Shareholders' equity 6,893,253 0.00% 6,147,989 0.00%
--------------- ---------------
Total $ 81,408,043 $ 67,032,968
=============== ===============
</TABLE>
<TABLE>
<CAPTION>
1995 1994
------------- --------------
<S> <C> <C>
Average yield on interest-earning assets 9.77% 8.79%
Average rate paid on interest-bearing liabilities 4.70% 3.25%
Net interest spread 5.07% 5.54%
Net interest margin (net interest earnings divided
by total interest-earning assets) 5.98% 6.22%
Interest income: 1995 1994
------------- --------------
Interest and fees on loans (3) $ 5,999,755 $ 4,376,205
Investment securities:
U.S. Treasury securities 87,499 83,882
U.S. Government agencies & corp. 732,659 578,090
States & political subdivisions 85,707 83,642
Other investments 3,340
Interest on federal funds sold 265,766 130,857
Interest on deposits with other banks 11,935 16,239
------------- --------------
Total interest income 7,186,661 5,268,915
------------- --------------
</TABLE>
15
<PAGE> 16
<TABLE>
<S> <C> <C>
Interest expense:
Interest on deposits:
Demand $ 651,957 $ 534,305
Savings 125,551 132,289
Time deposits of $100,000 or more 632,954 46,806
Other time deposits 1,366,384 832,306
------------- --------------
Total interest on deposits 2,776,846 1,545,706
Interest on federal funds purchased and securities sold
under agreements to repurchase 12,525 13,552
------------- --------------
Total interest expense 2,789,371 1,559,258
------------- --------------
Net interest income $ 4,397,290 $ 3,709,657
============= ==============
</TABLE>
(1) Yields on tax exempt securities have not been computed on a tax
equivalent basis.
(2) Nonaccrual loans are included in average loans for the years ended
December 31, 1995, and 1994.
(3) Fee income on loans totaled $395,549 for the year ended December 31,
1995, and $292,929 for the year ended December 31, 1994.
RATE/VOLUME ANALYSIS OF NET INTEREST INCOME. The effect on interest
income, interest expense and net interest income, in the periods indicated, of
changes in average balance and rate from the corresponding prior period is
shown below. The effect of a change in average balance has been determined by
applying the average rate in the earlier period to the change in average
balance in the later period, as compared with the earlier period. Changes
resulting from average balance/rate variances are included in changes resulting
from volume. The balance of the change in interest income or expense and net
interest income has been attributed to a change in average rate.
16
<PAGE> 17
Year Ended December 31, 1995
compared with
Year Ended December 31, 1994
Increase (Decrease) Due To:
<TABLE>
<CAPTION>
Volume Rate Total
------------- ------------- -------------
<S> <C> <C> <C>
Interest earned on:
Interest-earning deposits in
other banks . . . . . . . . . $ (7,466) $ 3,162 $ (4,304)
Taxable securities . . . . . . . 36,110 125,416 161,526
Tax exempt securities . . . . . 1,871 194 2,065
Federal funds sold . . . . . . . 67,006 67,903 134,909
Net loans . . . . . . . . . . . 1,345,200 278,350 1,623,550
---------- --------- -------------
Total interest income . . . . . . . 1,442,721 475,025 1,917,746
---------- --------- -------------
Interest paid on:
Demand deposits . . . . . . . . (169,889) 287,541 117,652
Savings deposits . . . . . . . . (6,738) 0 (6,738)
Time deposits . . . . . . . . . 646,987 473,239 1,120,226
Federal funds purchased . . . . 1,705 1,528 3,233
Securities sold under agreements
to repurchase (8,799) 4,539 (4,260)
---------- --------- -------------
Total interest expense . . . . . 463,266 766,847 1,230,113
---------- --------- -------------
Change in net interest income . . $ 979,455 $(291,822) $ 687,633
========== ========= =============
</TABLE>
17
<PAGE> 18
Year Ended December 31, 1994
compared with
Year Ended December 31, 1993
Increase (decrease) due to:
<TABLE>
<CAPTION>
Volume Rate Total
----------- ----------- -----------
<S> <C> <C> <C>
Interest earned on:
Interest-earning deposits in
other Banks . . . . . . . . . $ 3,203 $ (4,648) $ (1,445)
Taxable securities . . . . . . . 110,877 8,323 119,200
Tax exempt securities . . . . . 54,785 707 55,492
Federal funds sold . . . . . . . (80,470) 51,352 (29,118)
Net loans . . . . . . . . . . . 592,109 92,614 684,723
----------- ----------- -----------
Total interest income . . . . . . . $ 680,504 $ 148,348 $ 828,852
=========== =========== ===========
Interest paid on:
Demand deposits . . . . . . . . 62,164 (3,804) 58,360
Savings deposits . . . . . . . . 17,590 (1,421) 16,169
Time deposits . . . . . . . . . 153,020 8,841 161,861
Federal funds purchased . . . . 3,412 -- 3,412
Securities sold under agreements
to repurchase . . . . . . . . 7,541 258 7,799
----------- ----------- -----------
Total interest expense . . . . . $ 243,727 $ 3,874 $ 247,601
----------- ----------- -----------
Change in net interest income. . $ 436,777 $ 144,474 $ 581,251
=========== =========== ===========
</TABLE>
INTEREST SENSITIVITY. The Company monitors and manages the pricing
and maturity of its assets and liabilities in order to diminish the potential
adverse impact that changes in interest rates could have on its net interest
income. The principal monitoring technique employed by the Company is the
measurement of the Company's interest sensitivity "gap," which is the positive
or negative dollar difference between assets and liabilities that are subject
to interest rate repricing within a given period of time. Interest rate
sensitivity can be managed by repricing assets or liabilities, selling
available for sale securities, replacing an asset or liability at maturity, or
adjusting the interest rate during the life of an asset or liability. Managing
the amount of assets and liabilities repricing in this same time interval helps
to hedge the risk and minimize the impact on net interest income of rising or
falling interest rates.
18
<PAGE> 19
The Company evaluates interest sensitivity risk and then formulates
guidelines regarding asset generation and repricing, funding sources and
pricing, and off-balance sheet commitments in order to decrease interest
sensitivity risk.
ASSET/LIABILITY MANAGEMENT. It is the objective of the Bank 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 of the Bank and the Bank's
Investment and Asset/Liability Committees are charged with the responsibility
for developing and monitoring policies and procedures that are designed to seek
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, which include deposits of all categories made by individuals,
partnerships, and corporations. Management of the Bank seeks to invest the
largest portion of the Bank's assets in consumer/installment, commercial, real
estate, and construction loans.
The Bank's asset/liability mix is monitored with a report reflecting
the interest-sensitive assets and interest-sensitive liabilities being prepared
and presented to the Bank's Investment Committee on a monthly basis. The
objective of this policy is to match interest-sensitive assets and liabilities
so as to minimize the impact of substantial movements in interest rates on the
Bank's earnings.
Gap analysis measures how the Bank is positioned for interest rate
changes. Below is an analysis of rate sensitive assets and liabilities as of
December 31, 1995.
19
<PAGE> 20
Interest Rate Sensitivity
December 31, 1995
(Dollars in thousands)
<TABLE>
<CAPTION>
0-3 3-12 5 Yr.
Months Months 1-5 Yr More Total
------------ ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C>
Interest Earning Deposits $ -0- $ 195 $ -0- $ -0- $ 195
Investment Securities 4,824 2,814 3,299 2,064 13,001
Federal Funds Sold 2,880 -0- -0- -0- 2,880
Loans 26,579 18,728 19,989 2,475 67,771
------------ ---------- ---------- ---------- ----------
Total Rate Sensitive Assets 34,283 21,737 23,288 4,539 83,847
------------ ---------- ---------- ---------- ----------
NOW and MMDA Dep. 21,964 -0- -0- -0- 21,964
Savings Deposits 5,334 -0- -0- -0- 5,334
Time Deposits 16,206 17,301 6,978 4 40,489
Securities Sold Under
Agreements to Repurchase 1,161 -0- -0- -0- 1,161
------------ ---------- ---------- ---------- ----------
Total Rate Sensitive
Liabilities $ 44,665 $ 17,301 $ 6,978 $ 4 $ 68,948
------------ ---------- ---------- ---------- ----------
Excess (Deficiency) of Rate
Sensitive Assets Less Rate
Sensitive Liabilities $ (10,382) $ 4,436 $ 16,310 $ 4,535 $ 14,899
============ ========== ========== ========== ==========
Cumulative GAP $ (10,382) $ (5,946) $ 10,364 $ 14,899
============ ========== ========== ==========
Percent of Cumulative Gap to
Total Earning Assets (12.38)% (7.10)% 12.37% 17.77%
</TABLE>
20
<PAGE> 21
As indicated in the above table, the negative gap between rate
sensitive assets and rate sensitive liabilities during the 0-3 month period
would allow the Company to reprice its liabilities faster than its assets in a
falling interest rate environment, which would have a positive effect on
earnings. However, in an increasing interest rate environment, the Company
would experience a decrease in earnings. The positive gap between rate
sensitive assets and rate sensitive liabilities during the 3-12 month through
five years or more periods represents the assets repricing faster than
liabilities. In a decreasing interest rate market, the opposite would result.
However, the Company's gap analysis is not a precise indicator of its interest
sensitivity position. The analysis presents only a static view of the timing
of maturities and repricing opportunities, without taking into consideration
that changes in interest rates do not affect all assets and liabilities
equally. Net interest income may be impacted by other significant factors in
a given interest rate environment, including changes in the volume and mix of
earning assets and interest-bearing liabilities.
The above table has been prepared based on principal payment due
dates, contractual maturity dates, or repricing intervals on variable rate
instruments. With regard to mortgage pools in the investment portfolio, the
anticipated principal paydown as provided by the investor is used.
PROVISION AND ALLOWANCE FOR LOAN LOSSES
GENERAL. The Company has developed policies and procedures for
evaluating the overall quality of its credit portfolio and the timely
identification of potential problem credits. On a monthly basis, management of
the Bank recommends and the Board of Directors of the Bank approves the
appropriate level for the allowance for loan losses based on the results of the
internal monitoring and reporting system, analysis of economic conditions in
its market, and a review of historical data for both the Company and other
financial institutions. Management's judgment as to the adequacy of the
allowance is based upon a number of assumptions about future events which it
believes to be reasonable, but which may or may not be valid. Thus, there can
be no assurance that charge-offs in future periods will not exceed the
allowance for loan losses or that additional increases in the loan loss
allowance will not be required. The adequacy of the allowance for loan losses
and the effectiveness of the Company's monitoring and analysis system are also
reviewed periodically by the banking regulators and the Company's independent
auditors and independent loan review firm.
Additions to the allowance for loan losses, which are expended as the
provision for loan losses on the Company's income statement, are made
periodically to maintain the allowance at an appropriate level based on
management's analysis of the potential risk in the loan portfolio. Loan losses
and recoveries are charged or credited directly to the allowance. The amount
of the provision is a function of the levels of loans outstanding, the level of
nonperforming loans, historical loan loss experience, the amount of loan losses
actually charged against the reserve during a given period, and current and
anticipated economic conditions.
21
<PAGE> 22
The table below summarizes certain information with respect to the
Company's allowance for loan losses and the composition of charge-offs and
recoveries for each of the last two years.
<TABLE>
<CAPTION>
1995 1994
------------ ------------
<S> <C> <C>
Balance, beginning of year $ 715,230 $ 832,938
Provision charged to operations 335,000 92,000
Loans charged off:
Commercial (53,826) (93,507)
Real Estate Mortgage -0- -0-
Consumer (28,374) (6,505)
Credit Cards (88,709) (144,537)
------------ ------------
$ (170,909) $ (244,549)
Loan recoveries:
Commercial 26,892 $ 21,295
Real Estate -0- 9,030
Consumer/Credit Cards 11,823 4,516
Net Loans Charged Off (132,194) (209,708)
Balance, end of year $ 918,036 $ 715,230
============ ============
Ratio of net charge-offs during the period
to total loans outstanding during the
period .24% .50%
</TABLE>
The provision for loan losses was $335,000 in the year ended December 31, 1995,
compared to $92,000 in the year ended December 31, 1994. The increase in the
provision was primarily the result of the increase in the loan portfolio from
$42,410,676 at December 31, 1994, to $67,771,350 at December 31, 1995.
ALLOCATION OF ALLOWANCE. The table below sets forth the amount of the
allowance for loan losses allocated by the Company by loan categories.
22
<PAGE> 23
ALLOCATION OF THE ALLOWANCE FOR LOAN LOSSES
<TABLE>
<CAPTION>
December 31,
----------------------------------------------------------------
1995 1994
------------------------------- -----------------------------
% of % of
Category to Category to
Allowance for loan loss Total Total
balance applicable to: Amount Loans Amount Loans
----------- --------------- ----------- ---------------
<S> <C> <C> <C> <C>
Commercial $ 305,625 19.69% $ 313,460 26.02%
Real Estate-construction 140,000 20.64% 83,242 18.30%
Real Estate-mortgage 327,156 48.71% 106,322 39.96%
Consumer 55,313 8.54% 59,875 11.20%
Credit Cards 89,942 2.42% 152,331 4.52%
----------- -------- ----------- ---------
$ 918,036 100.00% $ 715,230 100.00%
=========== ======== =========== =========
</TABLE>
Nonaccrual, past due and restructured loans at the end of each
reported period are as follows:
<TABLE>
<CAPTION>
90 Days & Over Non-
Past Due Restructured/Impaired Accrual
-------------------- -------------------------- ----------------
<S> <C> <C> <C>
December 31, 1995 $ 379,009 $ 1,013,000 $ 118,130
December 31, 1994 $ 19,552 $ 522,108 $ 144,888
</TABLE>
Of the $379,009 in loans past due 90 days and over, at December 31,
1995, $336,833 is represented by five loans secured by real estate, one
consumer loan in the amount of $14,363, and credit card related loans totalling
$27,813. The real estate loans and the consumer loan are classified as past
due, rather than nonaccrual, because management believes they are fully
collateralized. The loans past due 90 days and over at December 31, 1994, were
all credit card related loans. At December 31, 1995, the Bank had one
commercial loan customer with two loans totaling $1,013,000 which were impaired
under Statement of Financial Accounting Standards No. 114. SFAS 114 requires
that impaired loans be measured based on the present value of expected future
cash flows discounted at the loan's effective interest rate, or at the loan's
fair value, if the loan is collateral dependent. The $1,013,000 loans are
considered collateral dependent, and $247,000 has been allocated in the loan
loss reserves as a specific reserve for these impaired loans. Restructured
loans at December 31, 1994, represents a single commercial loan totalling
$522,108. If the nonaccrual loans had been accruing interest for the full
year, the Bank would have recognized an additional $2,000 and $5,000 income in
1995 and 1994, respectively. The Bank recognized approximately $1,000 and
$54,000 in interest income from these loans in 1995 and 1994, respectively.
23
<PAGE> 24
The Bank places a non credit card related loan on nonaccrual status
when the loan is 90 days or more past due and management feels the collection
of this debt is doubtful. When a loan is placed in nonaccrual status, all
current year interest which has been accrued on the loan but remains unpaid is
reversed and deducted from earnings as a reduction of reported interest income.
No additional interest is accrued on the loan balance until the collection of
both principal and interest becomes reasonably certain. When a problem loan
is finally resolved, there may ultimately be an actual writedown or charge-off
of the principal balance of the loan which would necessitate additional charges
to earnings. Credit card loans are carried for a term of 180 days past due
before being charged off. Nonperforming, restructured, and impaired loans as a
percentage of period end loans were 1.67% at December 31, 1995, compared to
1.58% at December 31, 1994. This increase is due primarily to the loans with
the one commercial loan customer being categorized as impaired under SFAS 114.
As of December 31, 1995, there were 20 loans totaling $940,000
classified for regulatory purposes as doubtful or substandard that have not
been disclosed in the above table, which (i) represent or result from trends or
uncertainties which management reasonably expects may materially impact future
operating results, liquidity, or capital resources, or (ii) represent material
credits with respect to which management has serious doubts as to the ability
of the borrowers to comply with the loan repayment terms. Reserves are
specifically allocated to each of these loans based on management's assessment
of risk and the value of collateral, if any, pledged to secure such loans.
The Bank grants loans and extensions of credit to individuals and a
variety of firms and corporations located in its trade area, which includes
portions of Coweta and Fulton Counties and all of Fayette County, Georgia.
Although the Bank has a diversified loan portfolio, a substantial portion of
the loan portfolio is collateralized by improved and unimproved real estate,
the value of which is generally dependent upon the conditions in the real
estate market.
NONINTEREST INCOME AND EXPENSE
NONINTEREST INCOME. Noninterest income increased $155,585, or 40.84%,
to $536,616 in 1995 from $381,031 in 1994. The largest component of
noninterest income is service charges on deposit accounts, which totaled
$418,162 in 1995, a 22.31% increase over the 1994 level of $341,911. The
increase is also attributable to a loss of $101,126 on the sale of investment
securities in 1994 which did not recur in 1995. The Bank's gain on the sale of
SBA loans decreased $45,052 or 43.85% to $57,690 in 1995 from $102,742 in 1994.
This decrease is a result of the Bank selling fewer SBA qualified loans in the
open market during 1995 as compared to 1994. Other income increased $23,228,
or 61.94%, to $60,732 in 1995 as compared to $37,504 in 1994. This is
predominately due to the Bank closing its mortgage department in May of 1995.
The following table sets forth, for the periods indicated, the
principal components of noninterest income:
24
<PAGE> 25
Noninterest Income
<TABLE>
<CAPTION>
Year Ended December 31,
1995 1994
--------- ---------
<S> <C> <C>
Service charges on deposit accounts $ 418,162 $ 341,911
Securities gains (losses), net 32 (101,126)
Gain on sale of SBA loans 57,690 102,742
Other 60,732 37,504
----------- -----------
Total noninterest income $ 536,616 $ 381,031
=========== ===========
</TABLE>
Noninterest Expense
<TABLE>
<CAPTION>
Year Ended December 31,
1995 1994
----------- -----------
<S> <C> <C>
Salaries and employee benefits $ 1,383,077 $ 1,148,367
Net occupancy expense 373,084 373,187
Amortization of intangibles 97,857 97,857
Professional fees 361,460 390,223
Other 799,706 821,444
------------- -------------
Total noninterest expense $ 3,015,184 $ 2,831,078
============= =============
Efficiency ratio 61.12% 69.21%
</TABLE>
Salaries and employees benefits increased $234,710, or 20.44%, to
$1,383,077 in 1995 from $1,148,367 in 1994 due to the increase in staffing,
including the addition of two senior loan officers. Net occupancy decreased
$103, or .03%, to $373,084 in 1995, from $373,187 in 1994. Professional fees
decreased $28,763, or 7.37%, in 1995 to $361,460, from $390,223 in 1994. This
decrease was due to nonrecurring fees and expenses associated with certain
litigation in 1994.
EARNING ASSETS
LOANS. Loans are the largest category of earning assets and typically
provide higher yields than the other types of earning assets. Associated with
the higher loan yields are the inherent credit and liquidity risks which
management attempts to control and counterbalance. Loans averaged $54,099,512
in 1995 compared to $42,006,774 in 1994, an increase of $12,092,738, or 28.79%.
At December 31, 1995, total loans were $67,771,350 compared to $42,410,676 at
the end of 1994.
25
<PAGE> 26
The following table shows the comparison of the loan portfolio by
category at the dates indicated.
COMPOSITION OF LOAN PORTFOLIO
<TABLE>
<CAPTION>
Types of Loans 1995 1994
------------- --------------
<S> <C> <C>
Commercial $ 13,352,445 $ 11,034,220
Real estate - commercial 19,508,647 6,914,045
Real estate - individual 13,533,383 10,035,689
Real estate - construction 14,000,093 7,759,806
Installment & single payment ind. 5,413,624 4,733,431
Credit Cards 1,635,306 1,916,232
Other 396,491 3,866
--------------- --------------
Total loans 67,839,989 42,397,289
Net deferred loan fees/cost (68,639) 13,387
--------------- --------------
Total net loans $ 67,771,350 $ 42,410,676
============== =============
</TABLE>
The principal component of the Company's loan portfolio is real estate
loans. At year end 1995, loans secured by real estate totalled $47,042,123, or
69.35% of the portfolio. Commercial real estate made up $19,508,647 of the
portfolio and represents the principal component of the Bank's loan portfolio.
This category of loans increased $12,594,602, or 182.16%, from 1994 due to
relationships moving from another financial institution in connection with the
Bank's hiring of two senior loan officers who had previously been with that
other financial institution. Residential mortgage loans increased $3,497,694,
or 34.86%, to $13,533,383 at December 31, 1995, from $10,035,689 at year end
1994. Nonresidential mortgage loans, which include commercial loans, single
family construction, and other loans secured by multi-family properties and
farmland, increased $18,834,889, or 128.36%, to $33,508,740 at December 31,
1995, from $14,673,851 at year end 1994. The increase in nonresidential
mortgage loans also reflects the growth of the Company's lending for commercial
real estate purposes and an increase in commercial loans in which a security
interest in real estate was obtained as primary collateral.
Consumer loans increased $791,892, or 11.91%, to $7,445,421 in 1995,
from $6,653,529 in 1994. The credit card portfolio decreased $280,926, or
14.67%, to $1,635,306 at December 31, 1995.
26
<PAGE> 27
The following is a presentation of an analysis of maturities of loans
as of December 31, 1995 (in thousands) :
<TABLE>
<CAPTION>
Maturing Maturing Maturing
in 1 Year in 1 to After
Type of Loan or less 5 years 5 years Total
------------ --------------- --------------- ------------- --------------
<S> <C> <C> <C> <C>
Commercial $ 10,669 $ 2,648 $ 35 $ 13,352
Real estate (commercial) 11,219 8,061 229 19,509
Real estate (industrial) 5,438 6,013 2,082 13,533
Real estate (construction) 13,631 369 -0- 14,000
Installment 2,405 2,880 129 5,414
Credit Card 1,635 -0- -0- 1,635
Other 397 -0- -0- 397
---------- ---------- -------- ----------
Total $ 45,394 $ 19,971 $ 2,475 $ 67,840
========== ========== ======== ==========
</TABLE>
Scheduled repayments are reported in the maturity category in which the payment
is due based upon contract terms. Demand loans, loans having no stated
schedule of repayments, and overdrafts are reported as due in one year or less.
The following is a presentation of an analysis of sensitivities of
loans to changes in interest rates as of December 31, 1995 (in thousands) :
<TABLE>
<S> <C>
Loans due after 1 year with
predetermined interest rates.............. $20,418
Loans due after 1 year with
floating interest rates........................ 2,028
</TABLE>
INVESTMENT PORTFOLIO. Investment securities comprised approximately
14% and 21% of the Bank's assets on December 31, 1995 and 1994, respectively.
The Bank invests primarily in obligations of the United States or obligations
guaranteed as to principal and interest by the United States and other taxable
and tax exempt securities. During 1993 the Bank diversified the investment
portfolio to include municipal investments and mutual funds. The portfolio
maintained similar characteristics in 1995 with respect to mixture. During
1995, the Bank purchased primarily securities issued by U.S. Government
Agencies and Treasuries with maturities of three years or less. This will be
the investing philosophy of management during 1996 as well. The Bank has
included in its investment portfolio instruments described as a derivative,
and, in particular, structured note derivatives. Structured notes are debt
securities
27
<PAGE> 28
whose cash flow characteristics depend on one or more indexes. Structured
notes carry high credit ratings and are issued as floating-rate instruments.
In a rising interest rate environment the market value of these securities can
decrease due to the fact that the embedded options, puts, calls, etc., become
evident and in contrast to predictions. The Bank experienced this market
adjustment during 1995, which is reflected in the capital section of the 1995
consolidated balance sheet. There can be no assurance that as interest rates
change in the future the amount of unrealized loss will not increase, but if
these securities are held until they mature and are repaid in accordance with
their terms, these principal losses will not be realized.
The Bank also engages in Federal Funds transactions with its principal
correspondent banks and primarily acts as a net seller of such funds. The sale
of Federal Funds amounts to a short-term loan from the Bank to another bank.
At December 31, 1995, the Bank had $10,891,420 in investment
securities classified as available-for-sale and $1,858,720 in securities
held-to-maturity. The net unrealized loss on available for-sale-securities,
net of deferred income taxes of $49,696, was $96,468 on December 31, 1995, as
compared to $445,554 on December 31, 1994. The improvement in the net
unrealized loss is attributable to the improvement of economic conditions which
resulted in an increase in the value of the securities held by the Bank.
The carrying value and estimated market value of investment securities held to
maturity are as follows at December 31:
<TABLE>
<CAPTION>
1995
-----------------------------------------------------------------------
Carrying Unrealized Unrealized Market
Value Gains Losses Value
------------------- -------------- ------------- -------------------
<S> <C> <C> <C> <C>
States and political subdivisions $ 1,858,720 $ 11,140 $ 8,351 $ 1,861,509
1994
-------------------------------------------------------------------------
Carrying Unrealized Unrealized Market
Value Gains Losses Value
------------------ --------------- ---------------- ------------------
States and political subdivisions $ 1,858,537 -0- $ 154,930 $ 1,703,607
</TABLE>
28
<PAGE> 29
The amortized cost and estimated market value of investment securities
available for sale are as follows at December 31:
<TABLE>
<CAPTION>
1995
--------------------------------------------------------------------------
Amortized Unrealized Unrealized Market
Cost Gains Losses Value
------------------- -------------- ---------------- -------------------
<S> <C> <C> <C> <C>
U.S. Treasury Securities $ 1,254,124 $ 9,470 $ -0- $ 1,263,594
U.S. Government Agencies and
Corporations 5,704,379 35,167 36,250 5,703,296
Mortgage-backed securities 4,079,081 871 155,422 3,924,530
</TABLE>
<TABLE>
<CAPTION>
1994
------------------------------------------------------------------------
Amortized Unrealized Unrealized Market
Cost Gains Losses Value
------------------ ------------ ---------------- ---------------------
<S> <C> <C> <C> <C>
U.S. Treasury Securities $ 1,259,037 $ -0- $ 21,224 $ 1,237,813
U.S. Government Agencies and
Corporations 7,862,249 47 310,162 7,552,134
Mortgage-backed securities 4,117,718 -0- 343,672 3,774,046
States and political
subdivisions 40,000 -0- 70 39,930
</TABLE>
The carrying value and estimated market value of investment securities
held-to-maturity and the amortized cost and estimated market value of
investment securities available-for-sale at December 31, 1995, by contractual
maturity, are shown below. Expected maturities differ from contractual
maturities because borrowers may have the right to call or repay obligations
without call or prepayment penalties. Mortgage-backed securities have been
allocated based on stated maturity dates after considering assumed prepayment
patterns.
29
<PAGE> 30
<TABLE>
<CAPTION>
Investment Securities Investment Securities
Available-for-Sale Held-to-Maturity
---------------------------------- -----------------------------
Carrying Market Amortized Market Net
Value Value Cost Value Yield
---------------- ---------------- --------------- --------------- ----------
<S> <C> <C> <C> <C> <C>
Due in one year or
less $ 2,501,999 $ 2,502,187 $ 200,000 $ 200,224 5.51%
Due after one year
through five years 3,956,166 3,972,047 95,000 95,000 6.52%
Due after five years
through ten years 500,338 492,656 1,303,733 1,302,894 6.90%
Due after ten years 4,079,081 3,924,530 259,987 263,391 4.74%
</TABLE>
The yields stated above have not been computed on a tax equivalent basis.
Breakdown on maturity by category of the investment securities
held-to-maturity and available-for-sale as of December 31, 1995. Items below
are shown at amortized cost.
<TABLE>
<CAPTION>
0-1 Year 1-5 Years 5-10 Years Over 10
------------------ ------------------- ---------------- -------------------
<S> <C> <C> <C> <C>
U.S. Treasury Sec. $ 1,254,124 $ -0- $ -0- $ -0-
U.S. Government Agencies & Corp. 1,247,875 3,956,166 500,338 -0-
Mortgage Backed -0- -0- -0- 4,079,081
States & Political subdivisions 200,000 614,992 783,741 259,987
</TABLE>
SHORT-TERM INVESTMENTS. Short-term investments, which consist
primarily of federal funds sold and interest bearing deposits with other banks,
averaged $4,698,673 in 1995, compared to $3,528,887 in 1994. At December 31,
1995, short-term investments totaled $3,075,000. Federal funds sold are a
primary source of the Bank's liquidity and are generally invested in an earning
capacity on an overnight basis.
DEPOSITS. The Bank offers a wide range of commercial and consumer
deposit accounts, including non-interest bearing checking accounts, money
market checking accounts (consumer and commercial), negotiable order of
withdrawal ("NOW") accounts, individual retirement accounts, time certificates
of deposit, and regular savings accounts. The following table contains a
breakdown of the average amount and the average rate paid on each of the
categories.
30
<PAGE> 31
<TABLE>
<CAPTION>
1995 Rate 1994 Rate
--------------- ------- --------------- -------
<S> <C> <C> <C> <C>
(1) Non-interest Bearing Demand
Deposits $ 13,621,030 0.00% $ 11,785,792 0.00%
(2) Interest Bearing Demand Deposits 20,239,475 3.22% 20,943,839 2.56%
(3) Savings Deposits 5,146,849 2.44% 5,413,402 2.44%
(4) Time Deposits 33,674,596 5.94% 21,183,195 4.15%
</TABLE>
At December 31, 1995, the Bank had $12,301,137 in certificates of deposit of
$100,000 or more. The table below indicates the remaining maturities of
certificates of deposit over $100,000. Management believes that these deposits
are with individuals or businesses within the Bank's local market area and with
whom or which the Company has had consistent deposit relationships. The
Company does not have brokered deposits.
<TABLE>
<S> <C>
3 months or less $ 8,587,868
3 months to 6 months
1,267,627
6 months to 12 months
1,123,991
12 months & over 1,321,651
----------------
Total $ 12,301,137
================
</TABLE>
The sources of deposits typically are residents and businesses and
their employees within the Bank's market area, obtained through personal
solicitation by the Bank's officers and directors, direct mail solicitation,
and advertisements published in the local media. The Bank pays competitive
interest rates on time and savings deposits and has implemented a service
charge fee schedule competitive with other financial institutions in the Bank's
market area, covering such matters as maintenance fees on checking accounts,
per item processing fees on checking accounts, returned check charges, and the
like.
CAPITAL. Shareholders' equity at December 31, 1995, was $8,135,603,
or 8.95% of total assets. The increase of $1,278,973 from 1994 was a
combination of earnings for 1995 and the decrease in market value reserve of
investment securities available for sale. These changes were partially offset
by the payment of cash dividends. The following table sets forth the
applicable required capital ratios for the Bank and the actual capital ratios
for that entity as of December 31, 1995:
<TABLE>
<CAPTION>
Leverage Capital Tier 1 Capital Risk-Based Capital
---------------- -------------- ------------------
Regulatory Regulatory Regulatory
Minimum Actual Minimum Actual Minimum Actual
------- ------ ------- ------ ------- ------
<S> <C> <C> <C> <C> <C> <C>
Bank 3.0% 8.29 4.0% 10.58 8.00% 11.83
</TABLE>
31
<PAGE> 32
LIQUIDITY MANAGEMENT AND CAPITAL RESOURCES
Liquidity management involves monitoring the Company's sources and
uses of funds in order to meet its day-to-day cash flow requirements while
maximizing profits. Liquidity represents the ability of a company to convert
assets into cash or cash equivalents without significant loss and to raise
additional funds by increasing liabilities. Without proper liquidity
management, the Company will not be able to perform the primary function of a
financial intermediary and would, therefore, not be able to meet the needs of
the communities it serves.
Increased liquidity in typical interest rate environments often
involves decreasing profits by investing in earning assets with shorter
maturities. Liquidity management is made more complex because different
balance sheet components are subject to varying degrees of management control.
For example, the timing of maturities of the investment portfolio is very
predictable and subject to a high degree of control at the time investment
decisions are made. However, net deposit inflows and outflows are far less
predictable and are not subject to nearly the same degree of control.
The Company's federal funds sold position, its primary source of
liquidity, averaged $4,462,767 during the year ended December 31, 1995 and was
$2,880,000 at December 31, 1995; averaged $3,134,887 during the year ended
December 31, 1994, and was $-0- at December 31, 1994. Liquidity can also be
managed using the overnight and short-term borrowings market, generally selling
excess funds. The Company has short-term borrowing lines of $2,500,000 with
several financial institutions, although these are seldom utilized.
The Bank also offers repurchase agreements (Repo's) to one commercial
customer. Repo's are obligations of the Bank to collateralize funds on deposit
with U.S. Treasuries in the Bank's investment portfolio. The commercial
customer is paid a percentage of the interest rate the Bank earns on the
investment. The funds on deposit with the Bank are not FDIC insured because
they are collateralized by these investments.
At December 31, 1995, the Bank had $18,669,000 in unfunded loan
commitments. There were $6,492,000 included in the above number that
represents credit card commitments and $12,177,000 in unfunded loan
commitments. If these loans were to be funded the Bank has procedures in place
to provide the needed cash. Sources of liquidity include the maturing of
investment securities and the selling of available for sale investment
securities, as well as cash generated from the repayment of loans.
The Company, as a stand alone corporation, has more limited access to
liquidity sources than the Bank and depends on dividends from the Bank as its
primary source of liquidity. The ability of the Bank to pay dividends is
subject to general regulatory restrictions which may, but are not expected to,
have a material negative impact on the liquidity available to the Company. See
"Supervision and Regulation - Dividends." If circumstances warrant, the
Company's liquidity needs can also be met by borrowings from third parties,
subject to the availability of loan funds on appropriate terms and the
Company's ability to service the debt.
32
<PAGE> 33
ACCOUNTING RULE CHANGES
ACCOUNTING FOR LOAN IMPAIRMENTS. In May 1994, the Financial
Accounting Standards Board issued Statement of Financial Accounting Standards
("SFAS") 114, Accounting by Creditors for Impairment of a Loan. SFAS No. 114
requires that impaired loans be measured based on the present value of expected
future cash flows discounted at the loan's effective interest rate, which is
the contractual interest rate adjusted for any deferred loan fees or costs,
premium, or discount existing at the inception or acquisition of the loan.
SFAS No. 114 was effective for fiscal years beginning after December 15, 1994,
with earlier adoption permitted. The Company adopted SFAS No. 114 in fiscal
1995 without a material impact.
DISCLOSURE ABOUT DERIVATIVE FINANCIAL INSTRUMENTS AND FAIR VALUE OF
FINANCIAL INSTRUMENTS. The Financial Accounting Standards Board has issued
Statement of Financial Accounting Standards No. 119, Disclosure About
Derivative Financial Instruments and Fair Value of Financial Instruments. The
provisions of SFAS 119 require and encourage disclosure of information about
derivative financial instruments, such as options, swaps, futures and forward
contracts. The Company has no such items; therefore, the adoption of SFAS 119
in 1995 had no significant impact on the Company.
ACCOUNTING FOR THE IMPAIRMENT OF LONG-LIVED ASSETS. The Financial
Accounting Standards Board has issued SFAS No. 121, Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of.
The Company is required to implement SFAS No. 121 by December 31, 1996. The
provisions of SFAS No. 121 will require the Company to review long-lived assets
for impairment whenever events or changes in circumstances indicate that the
carrying amount of an asset may not be recoverable. The adoption of SFAS No.
121 is not expected to have a significant impact on the Company.
ACCOUNTING FOR MORTGAGE SERVICING RIGHTS. The Financial Accounting
Standards Board has issued Statement of Financial Accounting Standards No. 122,
Mortgage Servicing Rights, as an amendment to SFAS 65. The Company is required
to implement SFAS 122 by December 31, 1996. The provisions of SFAS 122
eliminate the accounting distinction between rights to service mortgage loans
that are acquired through loan origination and those acquired through purchase.
The adoption is not expected to have a significant impact on the Company.
ACCOUNTING FOR STOCK-BASED COMPENSATION. The Financial Accounting
Standards Board has issued Statement of Financial Accounting Standards No. 123,
Accounting for Stock-Based Compensation. The Company is required to implement
SFAS 123 in 1996. SFAS 123 establishes a method of accounting for stock
compensation plans based on fair value. Companies are permitted to continue to
use the existing method of accounting but are required to disclose pro forma
net income and earnings per share as if SFAS 123 had been used to measure
compensation cost. The adoption of SFAS 123 is not expected to have a
significant impact on the Company.
33
<PAGE> 34
IMPACT OF INFLATION
Unlike most industrial companies, the assets and liabilities of
financial institutions such as the Company and the Bank are primarily monetary
in nature. Therefore, interest rates have a more significant effect on the
Company's performance than do the effects of changes in the general rate of
inflation and change in prices. In addition, interest rates do not necessarily
move in the same direction or in the same magnitude as the prices of goods and
services. As discussed previously, management seeks to manage the
relationships between interest sensitive assets and liabilities in order to
protect against wide interest rate fluctuations, including those resulting from
inflation. See "Net Interest Income" and "Interest Sensitivity."
Certain recently enacted and proposed legislation could have an effect
on both the costs of doing business and the competitive factors facing the
financial institutions industry. The Company is unable at this time to assess
the impact of this legislation on its financial condition or results of
operations. See "Regulatory Matters--Interstate Banking."
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The consolidated financial statements, notes thereto and independent
accountant's report thereon included on the following pages are incorporated
herein by reference.
(i) Report of Independent Auditors
(ii) Consolidated Balance Sheets, December 31, 1995 and 1994
(iii) Consolidated Statements of Income for the years ended December
31 1995, 1994 and 1993
(iv) Consolidated Statements of Changes in Stockholders' Equity for
the years ended December 31, 1995, 1994 and 1993
(v) Consolidated Statements of Cash Flows for the years ended
December 31, 1995, 1994 and 1993
(vi) Notes to Consolidated Financial Statements
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
34
<PAGE> 35
PART III
The information required by Part III of Form 10-KSB is, pursuant to
General Information G(3) of Form 10-KSB, incorporated by reference from the
Company's definitive proxy statement (the "1996 Proxy Statement") to be filed
with the Securities and Exchange Commission pursuant to Regulation 14A for the
Company's 1996 Annual Meeting of Shareholders to be held on April 25, 1996.
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The information set forth under the caption "Directors and Executive
Officers of the Company and the Bank" and "Compensation of Directors and
Executive Officers--Compliance with Beneficial Ownership Reporting Rules" in
the 1996 Proxy Statement is incorporated herein by reference.
ITEM 11. EXECUTIVE COMPENSATION
The information contained under the caption "Compensation of Directors
and Executive Officers" in the 1996 Proxy Statement is incorporated herein by
reference.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information contained under the caption "Security Ownership of
Certain Beneficial Owners and Management" in the 1996 Proxy Statement is
incorporated herein by reference.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information contained under the caption "Certain Relationships and
Related Transactions" in the 1996 Proxy Statement is incorporated herein by
reference.
35
<PAGE> 36
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON
FORM 8-K
(a) 1. Financial Statements
The consolidated financial statements, notes thereto and independent
accountant's report thereon, filed as part hereof, are listed in the
Index to Item 8.
2. Financial Statement Schedules
All other financial statements or schedules have been omitted since
the required information is included in the consolidated financial
statements or notes thereto or is not applicable or required.
3. Exhibits
<TABLE>
<CAPTION>
Exhibit
Number Description
------ -----------
<S> <C>
3.1* Articles of Incorporation
3.2* Bylaws
10.5*** Settlement Agreement and Release with Fayette County Bancshares, Inc. and Terry L. Miller as of
October 21, 1994.
10.6*** Fayette County Bancshares, Inc. Stock Option Plan
21.1** Subsidiaries of the Company
24 Power of Attorney (contained on the Signature Page)
27 Financial Data Schedule (for SEC use only).
</TABLE>
* Previously filed as exhibits to the Company's Registration Statement
on Form S-18 (Registration No. 33-6658-A) and incorporated herein by
reference.
** Previously filed as exhibit to the Company's Annual Report on Form
10-KSB for the year ended December 31, 1990.
*** Previously filed as exhibits to the Company's Annual Report on Form
10-KSB for the year ended December 31, 1994.
(b) Reports on Form 8-K
NONE.
36
<PAGE> 37
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
and Exchange Act of 1934, the Registrant has duly caused this Report to be
signed on its behalf by the undersigned, thereunto duly authorized March 27,
1996.
FAYETTE COUNTY BANCSHARES, INC.
By: /s/Mark B. Kearsley By: /s/Ira P. Shepherd
------------------------- --------------------------
Mark B. Kearsley Ira P. Shepherd
Chief Financial Officer Chief Executive Officer
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS, that each person whose signature
appears on the signature page to this Registration Statement constitutes and
appoints Ira P. Shepherd and Mark B. Kearsley, and each of them, his true and
lawful attorneys-in-fact and agents, with full power of substitution and
resubstitution, for him and in his name, place, and stead, in any and all
capacities, to sign any and all amendments to this Report, and to file the
same, with all exhibits thereto, and other documents in connection therewith
with the Securities and Exchange Commission, granting unto these
attorneys-in-fact and agents and each of them, full power and authority to do
and perform each and every act and thing requisite and necessary to be done in
and about the premises, as fully to all intents and purposes as he might or
could do in person, hereby ratifying and confirming all that these
attorneys-in-fact and agents or any of them, or their or his substitute or
substitutes, may lawfully do or cause to be done by virtue hereof.
Pursuant to the requirements of the Securities Exchange Act of 1934,
this Report has been signed below by the following persons on behalf of the
Registrant and in the capacities on March 27, 1996.
Signature Title
--------- -----
- ------------------------------------------- Director
Arlie C. Aukerman
- ------------------------------------------- Director
Robert W. Bertelsbeck
/s/ Joseph S. Black
- ------------------------------------------- Secretary/Director
Joseph S. Black
/s/ Robert C. Gasko
- ------------------------------------------- Director
Robert C. Gasko
37
<PAGE> 38
<TABLE>
<S> <C>
/s/ Kerstin M. Gasko
- --------------------------------- Director
Kerstin M. Gasko
- --------------------------------- Director
Mukut Gupta
- --------------------------------- Director
G. Webb Howell
/s/ Mark A. Jungers
- --------------------------------- Director
Mark A. Jungers
/s/ John E. Molis
- --------------------------------- Director
John E. Molis
/s/ Richard A. Parlontieri
- --------------------------------- Director
Richard A. Parlontieri
- --------------------------------- Director
Donnie H. Russell
- --------------------------------- Director
Fred B. Sheats
/s/ Ira P. Shepherd
- --------------------------------- President/CEO/Director
Ira P. Shepherd
/s/ H. Geoffrey Slade, Sr.
- --------------------------------- Director
H. Geoffrey Slade, Sr.
/s/ Enrico A. Stanziale
- --------------------------------- Director
Enrico A. Stanziale
- --------------------------------- Director
John R. Torretto
/s/ Mark B. Kearsley
- --------------------------------- /s/ Ira P. Shepherd
Mark B. Kearsley ---------------------------
Principal Financial and Ira P. Shepherd
Accounting Officer Principal Executive Officer
</TABLE>
38
<PAGE> 39
============================================================================
FAYETTE COUNTY BANCSHARES, INC.
AND SUBSIDIARY
PEACHTREE CITY, GEORGIA
CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1995, 1994 AND 1993
============================================================================
<PAGE> 40
C O N T E N T S
<TABLE>
<CAPTION>
Page
----
<S> <C>
INDEPENDENT AUDITORS' REPORT . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1
CONSOLIDATED BALANCE SHEETS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2
CONSOLIDATED STATEMENTS OF INCOME . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6
CONSOLIDATED STATEMENTS OF CASH FLOWS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9
</TABLE>
<PAGE> 41
B & M
---------------------
BRICKER & MELTON, P.A.
---------------------
CERTIFIED PUBLIC ACCOUNTANTS
3700 CRESTWOOD PARKWAY
SUITE 590
DULUTH, GEORGIA 30136
(770) 717-1175
INDEPENDENT AUDITORS' REPORT
The Board of Directors and Stockholders
Fayette County Bancshares, Inc.
and Subsidiary
Peachtree City, Georgia
We have audited the accompanying consolidated balance sheets of
Fayette County Bancshares, Inc. and subsidiary as of December 31, 1995 and
1994, and the related consolidated statements of income, changes in
stockholders' equity and cash flows for each of the three years ended December
31, 1995. These consolidated financial statements are the responsibility of
Fayette County Bancshares, Inc.'s management. Our responsibility is to express
an opinion on these consolidated financial statements based on our audits.
We conducted our audits 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 audits provide a reasonable basis
for our opinion.
In our opinion, the consolidated financial statements referred to
above present fairly, in all material respects, the consolidated financial
position of Fayette County Bancshares, Inc. and subsidiary as of December 31,
1995 and 1994, and the results of their operations and their cash flows for
each of the three years ended December 31, 1995, in conformity with generally
accepted accounting principles.
As discussed in Note A to the consolidated financial statements, in
1995 the Company adopted the provisions of Statement of Financial Accounting
Standards No. 114 on the accounting for impaired loans.
BRICKER & MELTON, P.A.
January 26, 1996
Duluth, Georgia
<PAGE> 42
FAYETTE COUNTY BANCSHARES, INC.
AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
================================================================================
<TABLE>
<CAPTION>
December 31,
----------------------------------------
1995 1994
--------------- ----------------
<S> <C> <C>
ASSETS
Cash and due from banks (Note B) $ 2,972,249 $ 2,774,407
Federal funds sold 2,880,000 -
Interest-bearing deposits in other financial institutions 195,000 394,000
Investment securities held to maturity (market value of $1,861,509 and
$1,703,607, respectively) (Note C) 1,858,720 1,858,537
Investment securities available for sale (Note C) 10,891,420 12,603,923
Other investments (Note C) 251,000 -
Loans, net of deferred loan fees (Notes D and I) 67,771,350 42,410,676
Less: Allowance for loan losses (Note D) 918,036 715,230
--------------- ----------------
Loans, net 66,853,314 41,695,446
Premises and equipment, net (Note E) 3,266,404 3,353,267
Other real estate 68,931 493,226
Accrued interest receivable 700,771 550,673
Intangible assets, net of accumulated amortization of $441,369 and
$343,512, respectively 568,631 666,488
Other assets (Note G) 426,163 574,894
--------------- ----------------
TOTAL ASSETS
$ 90,932,603 $ 64,964,861
=============== ================
LIABILITIES AND STOCKHOLDERS' EQUITY
LIABILITIES
Deposits (Note L):
Non-interest-bearing demand $ 13,650,114 $ 11,091,308
Interest-bearing demand and money market 21,964,114 17,500,614
Savings 5,333,685 5,259,690
Time deposits of $100,000 or more 12,301,137 2,196,467
Other time deposits 28,187,826 20,538,943
--------------- ----------------
TOTAL DEPOSITS 81,436,876 56,587,022
Federal funds purchased and securities sold under
agreements to
repurchase (Note F) 1,161 1,037,864
Accrued interest payable 1,169,413 366,053
Other liabilities (Note G) 189,550 117,292
--------------- ----------------
TOTAL LIABILITIES 82,797,000 58,108,231
--------------- ----------------
STOCKHOLDERS' EQUITY (i.e.)
Preferred stock - $1.00 par value:
5,000,000 shares authorized, no shares issued
and outstanding $ - $ -
Common stock - $1.00 par value:
5,000,000 shares authorized, 612,440 and
606,440 shares issued and outstanding 612,440 606,440
Surplus 5,561,016 5,507,016
Retained earnings 2,058,615 1,188,728
Market valuation reserve on investment securities
available for sale (Note C) (96,468) (445,554)
--------------- ----------------
TOTAL STOCKHOLDERS' EQUITY
8,135,603 6,856,630
--------------- ----------------
Commitments and contingent liabilities (Note K)
TOTAL LIABILITIES AND STOCKHOLDERS'
EQUITY $ 90,932,603 $ 64,964,861
=============== ================
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
1
<PAGE> 43
FAYETTE COUNTY BANCSHARES, INC.
AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF INCOME
================================================================================
<TABLE>
<CAPTION>
For the years ended December 31,
------------------------------------------------------
1995 1994 1993
------------- ------------- -------------
<S> <C> <C> <C>
INTEREST INCOME
Loans, including fees $ 5,999,755 $ 4,376,205 $ 3,691,482
Investment securities:
U.S. Treasury securities 87,499 83,882 37,909
U.S. Government agencies and corporations 732,659 578,090 504,863
States and political subdivisions 85,707 83,642 28,150
Other investments 3,340 - -
Federal funds sold
265,766 130,857 159,975
Interest-bearing deposits in other financial
institutions 11,935 16,239 17,684
------------- ------------- -------------
TOTAL INTEREST INCOME
7,186,661 5,268,915 4,440,063
------------- ------------- -------------
INTEREST EXPENSE
Interest-bearing demand and money market 651,957 534,305 475,945
Savings 125,551 132,289 116,120
Time deposits of $100,000 or more 632,954 46,806 17,340
Other time deposits 1,366,384 832,306 699,911
Federal funds purchased and securities sold under
agreement to repurchase 12,525 13,552 2,341
------------- ------------- -------------
TOTAL INTEREST EXPENSE 2,789,371 1,559,258 1,311,657
------------- ------------- -------------
NET INTEREST INCOME 4,397,290 3,709,657 3,128,406
PROVISION FOR LOAN LOSSES (Note D) 335,000 92,000 411,815
------------- ------------- -------------
NET INTEREST INCOME AFTER
PROVISION FOR LOAN LOSSES 4,062,290 3,617,657 2,716,591
------------- ------------- -------------
OTHER INCOME
Service charges on deposit accounts 418,162 341,911 356,477
Investment securities gains (losses), net (Note C) 32 (101,126) 55,681
Gains on sales of SBA loans 57,690 102,742 32,173
Other income 60,732 37,504 91,873
------------- ------------- -------------
TOTAL OTHER INCOME
536,616 381,031 536,204
------------- ------------- -------------
OTHER EXPENSE
Salaries and wages $ 1,210,974 $ 973,658 $ 874,640
Employee benefits (Note H) 172,103 174,709 182,051
Net occupancy expense 198,565 179,818 145,278
Furniture, fixtures and equipment expense 174,519 193,369 157,309
Professional and outside services 361,460 390,223 271,250
Amortization of intangible assets 97,857 97,857 97,857
Other expense (Note M) 799,706 821,444 619,933
------------- ------------- -------------
TOTAL OTHER EXPENSE 3,015,184 2,831,078 2,348,318
------------- ------------- -------------
INCOME BEFORE INCOME TAX
EXPENSE 1,583,722 1,167,610 904,477
INCOME TAX EXPENSE (Note G) 561,475 372,236 325,364
------------- ------------- -------------
INCOME BEFORE CUMULATIVE EFFECT
OF CHANGE IN ACCOUNTING
PRINCIPLES
1,022,247 795,374 579,113
CUMULATIVE EFFECT OF CHANGE IN ACCOUNTING PRINCIPLES
FOR INCOME TAXES (Note G) - - 26,818
------------- ------------- -------------
NET INCOME $ 1,022,247 $ 795,374 $ 605,931
============= ============= =============
EARNINGS PER SHARE -
Before cumulative effect of change $ 1.68 $ 1.31 $ .96
Cumulative effect of change - -- .04
------------- ------------- -------------
$ 1.68 $ 1.31 $ 1.00
============= ============= =============
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
2
<PAGE> 44
FAYETTE COUNTY BANCSHARES, INC.
AND SUBSIDIARY
CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY
================================================================================
<TABLE>
<CAPTION>
For the years ended December 31, 1995, 1994 and 1993
---------------------------------------------------------------------------
Retained Market
Common Earnings Valuation
Stock Surplus (Deficit) Reserve Total
----------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C>
BALANCE AT DECEMBER 31, 1992 $ 603,440 $ 5,479,986 $ (30,645) $ - $ 6,052,781
Net income - - 605,931 - 605,931
Cash dividends declared $.10 per share - - (60,644) - (60,644)
Proceeds from exercise of stock warrants 3,000 27,030 - - 30,030
Market valuation adjustment - - - (4,177) (4,177)
----------- ----------- ----------- ----------- -----------
BALANCE AT DECEMBER 31, 1993 606,440 5,507,016 514,642 (4,177) 6,623,921
Net income - - 795,374 - 795,374
Cash dividends declared, $.20 per share - - (121,288) - (121,288)
Market valuation adjustment - - - (441,377) (441,377)
----------- ----------- ----------- ----------- -----------
BALANCE AT DECEMBER 31, 1994 606,440 5,507,016 1,188,728 (445,554) 6,856,630
Net income - - 1,022,247 - 1,022,247
Cash dividends declared, $.25 per share - - (152,360) - (152,360)
Proceeds from exercise of stock options 6,000 54,000 - - 60,000
Market valuation adjustment - - - 349,086 349,086
----------- ----------- ----------- ----------- -----------
BALANCE AT DECEMBER 31, 1995 $ 612,440 $ 5,561,016 $ 2,058,615 (96,468) $ 8,135,603
=========== =========== =========== =========== ===========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
3
<PAGE> 45
FAYETTE COUNTY BANCSHARES, INC.
AND SUBSIDIARY
CONSOLIDATED STATEMENT OF CASH FLOWS
================================================================================
<TABLE>
<CAPTION>
For the years ended December 31,
-------------------------------------------------------
1995 1994 1993
------------- ------------- -------------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net income $ 1,022,247 $ 795,374 $ 605,931
Adjustments to reconcile net income to net cash
provided by
operating activities:
Cumulative effect of change in accounting
principles - - (26,818)
Net amortization (accretion) of investments (34,487) 7,548 11,554
Amortization of intangible assets 97,857 97,857 97,857
Depreciation of premises and equipment 189,228 203,817 160,744
Provision for loan losses 335,000 92,000 411,815
Deferred income tax provision (benefit) 59,456 48,418 (18,670)
Deferred net loan fees 82,026 (55,891) (32,743)
Investment securities (gains) losses, net (32) 101,126 (55,681)
Gains on sales of SBA loans (57,690) (102,742) (32,173)
Increase in interest receivable (150,098) (106,534) (113,460)
Increase in interest payable 803,360 83,818 25,277
(Increase) decrease in other assets (90,557) 47,734 209,759
Increase (decrease) in other liabilities 72,258 (284,442) (81,558)
------------- ------------- -------------
NET CASH PROVIDED BY
OPERATING ACTIVITIES 2,328,568 928,083 1,161,834
------------- ------------- -------------
CASH FLOWS FROM INVESTING ACTIVITIES
Net decrease in interest-bearing deposits in other
financial institutions 199,000 - 4,000
Purchases of investment securities held to maturity - (200,000) (1,658,354)
Purchases of investment securities available for
sale (3,695,725) (7,269,558) (13,569,549)
Purchase of other investments (251,000) - -
Sales of investment securities available for sale - 4,182,800 4,120,707
Maturities of investment securities available for
sale 5,971,482 1,981,332 6,207,153
Proceeds from sales of SBA loans 1,015,625 1,201,400 332,000
Loans originated or acquired, net of principal
repayments (26,532,829) (819,552) (11,002,352)
Purchases of premises and equipment (102,365) (559,100) (418,780)
Sales of premises and equipment - 68,098 -
Sales of other real estate 424,295 168,350 80,998
------------- ------------- -------------
NET CASH USED BY INVESTING ACTIVITIES (22,971,517) (1,246,230) (15,904,177)
------------- ------------- -------------
CASH FLOWS FROM FINANCING ACTIVITIES
Net increase (decrease) in federal funds purchased
and securities sold under agreements to repurchase (1,036,703) 535,790 502,074
Net increase (decrease) in demand, money market and
savings accounts 7,096,301 (8,921,263) 14,042,136
Time deposits accepted, net of repayments 17,753,553 5,503,590 434,896
Proceeds from exercise of stock options and
warrants 60,000 - 30,030
Cash dividends paid (152,360) (121,288) (60,644)
------------- ------------- -------------
NET CASH PROVIDED (USED) BY FINANCING
ACTIVITIES 23,720,791 (3,003,171) 14,948,492
------------- ------------- -------------
</TABLE>
CONTINUED
The accompanying notes are an integral part of these consolidated financial
statements.
4
<PAGE> 46
FAYETTE COUNTY BANCSHARES, INC.
AND SUBSIDIARY
CONSOLIDATED STATEMENT OF CASH FLOWS
================================================================================
<TABLE>
<CAPTION>
For the years ended December 31,
-------------------------------------------------------
1995 1994 1993
------------- ------------- -------------
<S> <C> <C> <C>
NET INCREASE (DECREASE) IN BEGINNING AND CASH EQUIVALENTS 3,077,842 (3,321,318) 206,149
CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR 2,774,407 6,095,725 5,889,576
------------- ------------- -------------
CASH AND CASH EQUIVALENTS AT END OF YEAR $ 5,852,249 $ 2,774,407 $ 6,095,725
============= ============= =============
SUPPLEMENTAL DISCLOSURES OF CASH PAID:
Interest $ 1,986,011 $ 1,475,440 $ 1,286,380
============= ============= =============
Income taxes $ 508,650 $ 556,932 $ 192,000
============= ============= =============
SUPPLEMENTAL DISCLOSURES OF NONCASH FINANCING AND INVESTING
ACTIVITIES:
Acquisition of real estate in settlement of loans $ - $ 171,520 $ 490,056
============= ============= =============
Transfer of investment securities to available for
sale $ - $ - $ 12,276,108
============= ============= =============
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
5
<PAGE> 47
FAYETTE COUNTY BANCSHARES, INC.
AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1995, 1994 AND 1993
================================================================================
NOTE A - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Cont'd)
The accounting and reporting policies of Fayette County Bancshares,
Inc. and subsidiary conform to generally accepted accounting principles and to
general practices within the banking industry. The following is a summary of
the more significant of these policies.
The financial statements have been prepared in conformity with
generally accepted accounting principles. In preparing the financial
statements, management is required to make estimates and assumptions that
affect the reported amounts of assets and liabilities as of the date of the
balance sheet and revenues and expenses for the period. Actual results could
differ significantly from those estimates. Material estimates that are
particularly susceptible to significant change in the near term relate to the
determination of the market valuation reserve on investment securities
available for sale, the allowance for loan losses and the valuation of other
real estate acquired in connection with foreclosures or in satisfaction of
loans. Management believes that the allowance for loan losses is adequate, the
decline in market value of investment securities available for sale is
temporary, and the valuation of other real estate is appropriate. While
management uses available information to recognize losses on loans, future
additions to the allowance may be necessary based on changes in economic
conditions. In addition, various regulatory agencies, as an integral part of
their examination process, periodically review the allowance for loan losses
and valuation of other real estate. Such agencies may require additions to the
allowance or valuation adjustments to other real estate based on their
judgments about information available to them at the time of their examination.
BASIS OF PRESENTATION
The consolidated financial statements include the accounts of Fayette
County Bancshares, Inc. (Parent Company) and its wholly-owned subsidiary,
Fayette County Bank (Bank), collectively known as the Company. All significant
intercompany accounts and transactions have been eliminated in consolidation.
INTEREST-BEARING DEPOSITS IN OTHER FINANCIAL INSTITUTIONS
The Bank purchases certificates of deposit from various financial
institutions. These certificates are in the amount of $100,000 or less and are,
therefore, fully insured by the Federal Deposit Insurance Corporation.
Interest-bearing deposits are reported at cost. Interest income is
recognized based on the simple interest method for principal amounts
outstanding.
INVESTMENT SECURITIES
Investment securities which management has the ability and intent to
hold to maturity are reported at cost, adjusted for amortization of premium and
accretion of discount. Investment securities available for sale are reported
at fair value, with unrealized gains and losses reported as a separate
component of stockholders' equity, net of the related tax effect. Other
investments are reported at cost and, accordingly, earnings are reported when
interest is accrued or when dividends are received.
6
<PAGE> 48
FAYETTE COUNTY BANCSHARES, INC.
AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1995, 1994 AND 1993
================================================================================
NOTE A - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Cont'd)
Premium and discount on all investment securities are amortized
(deducted) and accreted (added), respectively, to interest income on the
effective-yield method over the period to the maturity of the related
securities. Premium and discount on mortgage-backed securities are amortized
(deducted) and accreted (added), respectively, to interest income on the
effective-yield method over the period to maturity of the related securities
taking into consideration assumed prepayment patterns.
Gains or losses on disposition are computed by the specific
identification method for all securities.
LOANS
Loans are reported at the gross amount outstanding, reduced by net
deferred loan fees and a valuation allowance for loan losses. Interest income
on all loans is recognized over the terms of the loans based on the unpaid
daily principal amount outstanding. If the collectibility of interest appears
doubtful, the accrual thereof is discontinued. Loan origination fees, net of
direct loan origination costs, are deferred and recognized as income over the
life of the related loan on a level-yield basis. Gains on sales of SBA loans
are deferred and recognized as income when all conditions of the sale have been
met. Interest income on impaired loans is recognized using primarily the
interest income method.
The Financial Accounting Standards Board has issued Statement of
Financial Accounting Standards No. 114 (SFAS 114) on accounting by creditors
for impairment of a loan. SFAS 114, as amended by SFAS 118, requires that
impaired loans be measured based on the present value of expected future cash
flows discounted at the loan's effective interest rate, or at the loan's fair
value if the loan is collateral dependent. The provisions of SFAS 114 were
effective for the Company beginning in 1995. The adoption did not have a
significant adverse effect on the Company.
ALLOWANCE FOR LOAN LOSSES
The allowance for loan losses is established through a provision for
loan losses charged to expense. The allowance represents an amount which, in
management's judgment, will be adequate to absorb probable losses on existing
loans that may become uncollectible. Management's judgment in determining the
adequacy of the allowance is based on evaluations of the collectibility of
loans and takes into consideration such factors as changes in the nature and
volume of the loan portfolio, current economic conditions that may affect the
borrower's ability to pay, overall portfolio quality and review of specific
problem loans. Periodic revisions are made to the allowance when circumstances
which necessitate such revisions become known. Recognized losses are charged to
the allowance for loan losses, while subsequent recoveries are added to the
allowance.
PREMISES AND EQUIPMENT
Premises and equipment are reported at cost less accumulated
depreciation. For financial reporting purposes, depreciation is computed using
primarily the straight-line method over the estimated useful lives of the
assets. Expenditures for maintenance and repairs are charged to operations as
incurred, while major renewals and betterments are capitalized. When property
is disposed of, the related cost and accumulated depreciation are removed from
the accounts, and any gain or loss is reflected in income. For Federal tax
reporting purposes, depreciation is computed using primarily accelerated
methods.
7
<PAGE> 49
FAYETTE COUNTY BANCSHARES, INC.
AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1995, 1994 AND 1993
================================================================================
NOTE A - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Cont'd)
OTHER REAL ESTATE
Other real estate represents property acquired through foreclosure or
in settlement of loans and is reported at the lower of cost or fair value less
estimated selling expenses. Losses incurred in the acquisition of foreclosed
properties are charged against the allowance for loan losses at the time of
foreclosure. Subsequent write-downs of other real estate are charged against
the current period's operations.
INTANGIBLE ASSETS
Intangible assets include amounts for goodwill, deposit assumption
premium, and premium for purchased credit card loans. Goodwill and the deposit
assumption premium are being amortized over 14 years, the estimated average
life of the deposit base acquired, using the straight-line method. The premium
for credit card loans is being amortized on the straight-line basis over seven
years, the estimated life of the portfolio.
INCOME TAXES
The tax effect of transactions is recorded at current tax rates in the
periods the transactions are reported for financial statement purposes.
Deferred income taxes are established for the temporary differences between the
financial reporting basis and the tax basis of the Company's assets and
liabilities at enacted tax rates expected to be in effect when such amounts are
realized or settled. The Company files its income tax returns on a consolidated
basis.
PENDING ACCOUNTING PRONOUNCEMENTS
The Financial Accounting Standards Board has issued Statement of
Financial Accounting Standards No. 121 (SFAS 121), "Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of."
The Company is required to implement SFAS 121 by December 31, 1996. The
provisions of SFAS 121 will require the Company to review long- lived assets
for impairment whenever events or changes in circumstances indicate that the
carrying amount of an asset may not be recoverable. The adoption is not
expected to have a significant impact on the Company.
The Financial Accounting Standards Board has issued Statement of
Financial Accounting Standards No. 122 (SFAS 122), "Mortgage Servicing Rights,"
as an amendment to SFAS 65. The Company is required to implement SFAS 122 by
December 31, 1996. The provisions of SFAS 122 eliminate the accounting
distinction between rights to service mortgage loans that are acquired through
loan origination and those acquired through purchase. The adoption is not
expected to have a significant impact on the Company.
EARNINGS PER SHARE
Earnings per share has been computed based on the weighted average
number of common shares outstanding during the period, which totaled 610,130,
606,440 and 605,940 shares in 1995, 1994 and 1993, respectively. Stock options
and warrants, as described in Note J, are considered to be common stock
equivalents for purposes of calculating earnings per share. The effect of
including these common stock equivalents in the earnings per share calculations
for each of the three years in the period ended December 31, 1995 is
anti-dilutive.
8
<PAGE> 50
FAYETTE COUNTY BANCSHARES, INC.
AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1995, 1994 AND 1993
================================================================================
NOTE A - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Cont'd)
FINANCIAL INSTRUMENTS
In the ordinary course of business, the Bank has entered into
off-balance-sheet financial instruments consisting of commitments to extend
credit and standby letters of credit. Such financial instruments are recorded
in the financial statements when they are funded or related fees are incurred
or received.
FAIR VALUES OF FINANCIAL INSTRUMENTS
The Company uses the following methods and assumptions in estimating
fair values of financial instruments (see Note N):
Cash and cash equivalents--The carrying amount of cash and cash
equivalents approximates fair value.
Interest-bearing deposits--The carrying amount of interest-bearing
deposits approximates fair value.
Investment securities--The fair value of investment securities held to
maturity and available for sale is estimated based on bid quotations received
from independent pricing services. The carrying amount of other investments
approximates fair value.
Loans--For variable rate loans that reprice frequently and have no
significant change in credit risk, fair values are based on carrying values.
For all other loans, fair values are calculated by discounting the contractual
cash flows using estimated market discount rates which reflect the credit and
interest rate risk inherent in the loan, or by using the current rates at which
similar loans would be made to borrowers with similar credit ratings and for
the same remaining maturities.
Deposits--The fair value of deposits with no stated maturity, such as
demand, NOW and money market, and savings accounts, is equal to the amount
payable on demand at year-end. The fair value of certificates of deposit is
based on the discounted value of contractual cash flows using the rates
currently offered for deposits of similar remaining maturities.
Short-term borrowings--The carrying amount of federal funds purchased
and other short- term borrowings maturing within 30 days approximates fair
value.
Accrued interest--The carrying amount of accrued interest receivable
and payable approximates fair value.
Off-balance-sheet instruments--Fair values for off-balance-sheet
lending commitments are based on fees currently charged to enter into similar
agreements, taking into account the remaining terms of the agreements and the
borrowers' credit standing.
CASH AND CASH EQUIVALENTS
For purposes of reporting cash flows, cash and cash equivalents
include cash on hand, amounts due from banks and federal funds sold. Generally,
federal funds are purchased and sold for one-day periods.
9
<PAGE> 51
FAYETTE COUNTY BANCSHARES, INC.
AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1995, 1994 AND 1993
================================================================================
NOTE B - CASH AND DUE FROM BANKS
A bank is required to maintain average reserve balances with the
Federal Reserve Bank, on deposit with national banks or in cash. The Bank's
average reserve requirement for the years ended December 31, 1995 and 1994 was
approximately $450,000 and $401,000, respectively. The Bank maintained cash
balances which were adequate to meet this requirement.
NOTE C - INVESTMENT SECURITIES
The amortized cost and estimated market value of investment securities
held to maturity are as follows at December 31:
<TABLE>
<CAPTION>
1995
-----------------------------------------------------------------------------
Amortized Unrealized Unrealized Market
Cost Gains Losses Value
---------------- ------------- ------------- --------------
<S> <C> <C> <C> <C>
States and political subdivisions $ 1,858,720 $ 11,140 $ 8,351 $ 1,861,509
================ ============= ============= ==============
</TABLE>
<TABLE>
<CAPTION>
1994
-----------------------------------------------------------------------------
Amortized Unrealized Unrealized Market
Cost Gains Losses Value
---------------- ------------- ------------- --------------
<S> <C> <C> <C> <C>
States and political subdivisions $ 1,858,537 $ - $ 154,930 $ 1,703,607
================ ============= ============= ==============
</TABLE>
The amortized cost and estimated market value of investment securities
available for sale are as follows at December 31:
<TABLE>
<CAPTION>
1995
-----------------------------------------------------------------------------
Amortized Unrealized Unrealized Market
Cost Gains Losses Value
---------------- ------------- ------------- --------------
<S> <C> <C> <C> <C>
U.S. Treasury securities $ 1,254,124 $ 9,470 $ - $ 1,263,594
U.S. Government agencies and 5,704,379 35,167 36,250 5,703,296
corporations
Mortgage-backed securities 4,079,081 871 155,422 3,924,530
---------------- ------------- ------------- --------------
$ 11,037,584 $ 45,508 $ 191,672 $ 10,891,420
================ ============= ============= ==============
</TABLE>
<TABLE>
<CAPTION>
1994
-----------------------------------------------------------------------------
Amortized Unrealized Unrealized Market
Cost Gains Losses Value
---------------- ------------- ------------- --------------
<S> <C> <C> <C> <C>
U.S. Treasury securities $ 1,259,037 $ - $ 21,224 $ 1,237,813
U.S. Government agencies and 7,862,249 47 310,162 7,552,134
corporations
Mortgage-backed securities 4,117,718 - 343,672 3,774,046
States and political subdivisions 40,000 - 70 39,930
---------------- ------------- ------------- --------------
$ 13,279,004 $ 47 $ 675,128 $ 12,603,923
================ ============= ============= ==============
</TABLE>
Other investments at December 31, 1995, consist of stock in the
Federal Home Loan Bank of Atlanta.
10
<PAGE> 52
FAYETTE COUNTY BANCSHARES, INC.
AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1995, 1994 AND 1993
================================================================================
NOTE C - INVESTMENT SECURITIES (Cont'd)
The net unrealized loss on available for sale securities at December
31, 1995 and 1994, net of the related deferred taxes of $49,696 and $229,528,
is $96,468 and $445,554, respectively, and is included as a separate component
of stockholders' equity.
The investment securities classified as available for sale at December
31, 1995, with a market value of approximately $10,891,000, consist of
Government National Mortgage Association, Federal Home Loan Mortgage
Corporation and Federal National Mortgage Association mortgage-backed pools and
collateralized mortgage obligations which have floating-rate yields with caps
on the yields. Approximately $5,402,000 of these securities are derivative
securities. These securities have stated maturities ranging from 1996 through
2024 and have a current weighted-average net yield of 4.74%. The market value
of these securities is generally affected positively by declining interest
rates and negatively by increasing interest rates. In addition, the market
value increases or decreases based on supply and/or demand for a particular
type of security and various other factors. Presently, the market value of
these securities is volatile due to the above interest and market factors.
The amortized cost and estimated market value of investment securities
held to maturity and available for sale at December 31, 1995, by contractual
maturity, are shown below. Expected maturities differ from contractual
maturities because borrowers may have the right to call or repay obligations
without call or prepayment penalties. Mortgage-backed securities have been
allocated based on stated maturity dates after considering assumed prepayment
patterns.
<TABLE>
<CAPTION>
Investment Securities Investment Securities
Held to Maturity Available for Sale
----------------------------------- ---------------------------------
Amortized Market Amortized Market
Cost Value Cost Value
---------------- ------------- ------------- ---------------
<S> <C> <C> <C> <C>
Due in one year or less $ 200,000 $ 200,224 $ 2,501,999 $ 2,502,187
Due after one year through five years 95,000 95,000 3,956,166 3,972,047
Due after five years through ten 1,303,733 1,302,894 500,338 492,656
years
Due after ten years 259,987 263,391 4,079,081 3,924,530
---------------- ------------- ------------- ---------------
$ 1,858,720 $ 1,861,509 $ 11,037,584 $ 10,891,420
================ ============= ============= ===============
</TABLE>
There were no sales of investment securities in 1995. Proceeds from
sales of investment securities available for sale during 1994 and 1993 were
$4,182,800 and $4,120,707, respectively, with gross gains of $27,663 and
$28,461 and gross losses of $127,545 and $12,525 realized on those sales.
Maturities of investment securities available for sale during 1995, 1994 and
1993 were $5,971,418, $1,981,332 and $6,207,153, respectively, with gross gains
of $32, $55 and $55,733 and gross losses of $0, $1,299 and $15,988 realized on
those transactions.
Investment securities with amortized costs of approximately $500,000
and $1,512,000 and market values of approximately $501,000 and $1,458,000 at
December 31, 1995 and 1994, respectively, were pledged to secure public funds
on deposit, securities sold under agreements to repurchase, and other purposes
as required by law.
At December 31, 1995, the Bank has no outstanding off-balance-sheet
derivative financial instruments such as swaps, options, futures or forward
contracts.
11
<PAGE> 53
FAYETTE COUNTY BANCSHARES, INC.
AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1995, 1994 AND 1993
================================================================================
NOTE D - LOANS
Major classifications of loans are as follows at December 31:
<TABLE>
<CAPTION>
1995 1994
---------------- --------------
<S> <C> <C>
Commercial, financial and agricultural $ 13,352,445 $ 11,034,220
Real estate - commercial 19,508,647 6,914,045
Real estate - individual 13,533,383 10,035,689
Real estate - construction 14,000,093 7,759,806
Installment and single payment individual 5,413,624 4,733,431
Credit cards 1,635,306 1,916,232
Other 396,491 3,866
---------------- --------------
Total loans 67,839,989 42,397,289
Net deferred loan fees (68,639) 13,387
---------------- --------------
Loans, net of deferred loan fees $ 67,771,350 $ 42,410,676
================ ==============
</TABLE>
Substantially all loans are made to borrowers in the Bank's primary
market area of Fayette, Coweta and Fulton counties. At December 31, 1995 and
1994, the Bank had approximately $47,000,000 and $25,000,000, respectively, of
its portfolio secured by real estate.
Nonaccrual and restructured loans totaled $118,130 and $668,588 at
December 31, 1995 and 1994, respectively. If such loans had been on a
full-accrual basis, interest income would have been approximately $2,000 and
$5,000 higher in 1995 and 1994, respectively. Interest income recognized on
these loans totaled approximately $1,000 and $54,000, respectively.
At December 31, 1995, the Bank has approximately $1,013,000 in loans
which are impaired under SFAS 114. The allowance for loan losses related to
these loans is approximately $247,000. The average balance outstanding on these
loans during the year was approximately $1,017,000.
The following is a summary of transactions in the allowance for loan
losses for the years ended December 31:
<TABLE>
<CAPTION>
1995 1994 1993
---------------- ---------------- --------------
<S> <C> <C> <C>
Balance, beginning of year $ 715,230 $ 832,938 $ 838,897
Provision charged to expense 335,000 92,000 411,815
Loans charged off (170,909) (244,549) (421,774)
Recoveries of loans previously charged off 38,715 34,841 4,000
---------------- ---------------- --------------
Balance, end of year $ 918,036 $ 715,230 $ 832,938
================ ================ ==============
</TABLE>
NOTE E - PREMISES AND EQUIPMENT
Premises and equipment are comprised of the following at December 31:
12
<PAGE> 54
FAYETTE COUNTY BANCSHARES, INC.
AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1995, 1994 AND 1993
================================================================================
NOTE E - PREMISES AND EQUIPMENT
<TABLE>
<CAPTION>
1995 1994
-------------- -------------
<S> <C> <C>
Land $ 900,187 $ 887,130
Buildings 2,051,185 2,035,823
Furniture, fixtures and equipment 1,141,487 1,092,317
Other - -
-------------- -------------
4,092,859 4,015,270
Less: Accumulated depreciation (826,455) (662,003)
-------------- -------------
Premises and equipment, net $ 3,266,404 $ 3,353,267
============== =============
</TABLE>
The charge to operating expense for depreciation totaled $189,228,
$203,817 and $160,744 in 1995, 1994 and 1993, respectively.
NOTE F - SHORT-TERM BORROWINGS
The Bank utilizes short-term borrowings as needed for liquidity
purposes in the form of federal funds purchased and securities sold under
agreements to repurchase, which generally represent overnight borrowing
transactions. The Bank has unsecured lines of credit for federal funds
purchased from other banks totaling $2,500,000 at December 31, 1995. At
December 31, 1995 and 1994, $0 and $190,000, respectively, were outstanding
under these lines. The maximum and average amounts of federal funds purchased
during 1995 and 1994 were approximately $4,000,000 and $101,000, respectively,
for 1995 and $570,000 and $72,000, respectively, for 1994. The maximum
outstanding amount is greater than $2,500,000 due to a temporary increase in an
existing federal funds line with a correspondent bank. The average interest
rate paid on the federal funds purchased in 1995 and 1994 was 6.54% and 4.76%,
respectively.
At December 31, 1995 and 1994, the Bank had outstanding securities
sold under agreements to repurchase of $1,161 and $847,864, respectively. The
maximum and average amounts of securities sold under agreements to repurchase
during 1995 and 1994 were approximately $848,000 and $140,000, respectively,
for 1995 and $955,000 and $403,000, respectively, for 1994. The average
interest rate paid on the securities sold under agreements to repurchase in
1995 and 1994 was 4.20% and 2.52%, respectively.
The Bank also has established a $12,000,000 repurchase agreement with
a correspondent bank. In the event that the Bank receives advances under this
agreement, investment securities of the Bank will be pledged as collateral.
There has been no activity under this agreement during 1995 or 1994.
NOTE G - INCOME TAXES
The following are the components of income tax expense as provided for
the years ended December 31:
<TABLE>
<CAPTION>
1995 1994 1993
---------------- ---------------- --------------
<S> <C> <C> <C>
Current income tax provision $ 502,019 $ 323,818 $ 344,034
Deferred income tax provision (benefit) 59,456 48,418 (18,670)
---------------- ---------------- --------------
$ 561,475 $ 372,236 $ 325,364
================ ================ ==============
</TABLE>
13
<PAGE> 55
FAYETTE COUNTY BANCSHARES, INC.
AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1995, 1994 AND 1993
================================================================================
A reconciliation of income tax computed at the Federal statutory
income tax rate to total income taxes is as follows for the years ended
December 31:
NOTE G - INCOME TAXES
<TABLE>
<CAPTION>
1995 1994 1993
----------- ------------ ----------
<S> <C> <C> <C>
Pretax income $ 1,583,722 $ 1,167,610 $ 904,477
=========== ============ ==========
Income taxes computed at Federal statutory tax rate $ 538,465 $ 396,987 $ 307,522
Increase (decrease) resulting from:
Tax-exempt interest income (29,079) (28,438) (9,571)
Nondeductible interest expense 7,624 3,135 4,868
State income taxes 35,831 30,192 -
Other, net 8,634 (29,640) 22,545
----------- ------------ ----------
$ 561,475 $ 372,236 $ 325,364
=========== ============ ==========
</TABLE>
The following summarizes the tax effects of temporary differences
which comprise the net deferred tax assets at December 31:
<TABLE>
<CAPTION>
1995 1994
---------- ----------
<S> <C> <C>
Reserve for loan losses $ 240,150 $ 200,293
Intangible assets (78,173) (72,884)
Accumulated depreciation (113,113) (88,091)
Deferred loan fees 26,083 (5,053)
Other real estate 14,770 88,287
Capital losses 30,742 45,281
Market valuation reserve 49,696 229,528
Other, net (10,468) 1,614
---------- ----------
$ 159,687 $ 398,975
========== ==========
</TABLE>
The Company adopted Statement of Financial Accounting Standards No.
109 as of January 1, 1993. The cumulative effect on prior years of this change
in accounting principles increased net income in 1993 by $26,818 and is
reported separately in the consolidated statement of income.
NOTE H - EMPLOYEE BENEFIT PLAN
The Bank has established a contributory profit sharing plan which is
available to substantially all employees subject to certain age and service
requirements. Contributions to the plan are determined annually by the Board of
Directors. The Bank contributed $16,920 to the plan in 1995, $8,341 in 1994 and
$6,589 in 1993.
NOTE I - RELATED PARTY TRANSACTIONS
As of December 31, 1995 and 1994, the Bank had direct and indirect
loans which aggregated $1,528,606 and $1,400,554, respectively, outstanding to
or for the benefit of certain of the Bank's officers, directors, and their
related interests. During 1995, $649,798 of such loans were made and repayments
totaled $521,746. These loans were made in the ordinary course of business in
conformity with normal credit terms, including interest rates and collateral
requirements prevailing at the time for comparable transactions with other
borrowers. These individuals and their related interests also maintain
customary demand and time deposit accounts with the Bank.
14
<PAGE> 56
FAYETTE COUNTY BANCSHARES, INC.
AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1995, 1994 AND 1993
================================================================================
NOTE J - STOCKHOLDERS' EQUITY
The Bank is 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 Bank's financial statements. The regulations require the
Bank to meet specific capital adequacy guidelines that involve quantitative
measures of the Bank's assets, liabilities, and certain off-balance-sheet items
as calculated under regulatory accounting practices. The Bank's capital
classification is 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 Bank to maintain minimum amounts and ratios (set forth in
the table below) of Tier 1 capital (as defined in the regulations) to total
average assets (as defined), and minimum ratios of Tier 1 and total capital (as
defined) to risk-weighted assets (as defined). To be considered adequately
capitalized (as defined) under the regulatory framework for prompt corrective
action, the Bank must maintain minimum Tier 1 leverage, Tier 1 risk- based, and
total risk-based ratios as set forth in the table. The Bank's actual capital
amounts and ratios are also presented in the table.
<TABLE>
<CAPTION>
1995
-----------------------------------------------------------
Required Actual
Amount (Ratio) Amount (Ratio)
----------------------- ------------------------
<S> <C> <C> <C> <C>
Tier 1 Capital (to Average Assets) $ 3,673,397 4% $ 7,613,050 8.3%
Tier 1 Capital (to Risk Weighted Assets) $ 2,877,813 4% $ 7,613,050 10.6%
Total Capital (to Risk Weighted Assets) $ 5,755,626 8% $ 8,512,406 11.8%
</TABLE>
<TABLE>
<CAPTION>
1994
-----------------------------------------------------------
Required Actual
Amount (Ratio) Amount (Ratio)
----------------------- ------------------------
<S> <C> <C> <C> <C>
Tier Capital (to Average Assets) $ 2,601,881 4% $ 6,435,211 10.0%
Tier 1 Capital (to Risk Weighted Assets) $ 2,516,320 4% $ 6,435,211 10.2%
Total Capital (to Risk Weighted Assets) $ 5,032,640 8% $ 7,150,440 11.4%
</TABLE>
Management believes, as of December 31, 1995, that the Bank meets all
capital requirements to which it is subject.
The Parent Company's primary source of funds is the receipt of
dividends from the Bank. Banking regulations limit the amount of dividends that
may be paid without prior approval of the Bank's regulatory agency. At December
31, 1995, total stockholder's equity of the Bank was $8,179,722 of which
approximately $405,000 was available for dividends without prior approval or
violation of regulatory capital requirements.
Shares of preferred stock may be issued from time to time in one or
more series, as may be established by resolution of the Board of Directors of
the Company. Each resolution shall include the number of shares issued,
distinctive designation or title, voting powers, preferences, special rights
and restrictions as determined by the Board. The Board is also further
authorized to increase or decrease the number of shares of any series
subsequent to the issuance of shares of that series.
Each director involved in the organization of the Company was granted
one warrant to purchase one share of the Company's common stock for each share
purchased at inception. The warrants were exercisable at any time within four
years following the incorporation of the Company at a price equal to the
greater of $10 per share or the then current book value of the common stock. A
total of 3,000 warrants were exercised in 1993 for total proceeds of $30,030.
All remaining warrants expired at December 31, 1993.
15
<PAGE> 57
FAYETTE COUNTY BANCSHARES, INC.
AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1995, 1994 AND 1993
================================================================================
NOTE J - STOCKHOLDERS' EQUITY (Cont'd)
The Company granted a total of 15,000 common stock options to a former
executive. The options were granted at the rate of 3,000 per year through
January 3, 1994. The option price is the greater of book value per share or the
initial offering price of $10 per share. Each option must be exercised within
five years of the grant date. Summarized information related to these options
is as follows at December 31:
<TABLE>
<CAPTION>
1995 1994
------ ------
<S> <C> <C>
Outstanding, beginning of year 14,000 11,000
Granted during year - 3,000
Exercised during year at $10 per share (6,000) -
Expired during year - -
------ ------
Outstanding, end of year 8,000 14,000
====== ======
</TABLE>
During 1995, the Company's stockholders approved a stock option plan
which allows for a total of 98,000 options to be granted to directors and
executive officers. A total of 64,000 shares have been granted to directors
with an exercise price of $11.31 per share. The options vest over a five-year
period and expire in 2004. A total of 16,600 shares have been granted to
executive officers with an exercise price of $12.26 per share. These options
also vest over a five-year period and expire in 2005. Summarized information
related to these options is as follows at December 31:
<TABLE>
<CAPTION>
1995
------
<S> <C>
Outstanding, beginning of year -
Granted during year 80,600
Exercised during year -
Forfeited during year (1,200)
Expired during year -
------
79,400
======
</TABLE>
NOTE K - OFF-BALANCE-SHEET FINANCIAL INSTRUMENTS
The Bank is party to financial instruments with off-balance-sheet risk
in the normal course of business to meet the financing needs of its customers.
These financial instruments include commitments to extend credit and standby
letters of credit. These instruments involve, to varying degrees, elements of
credit and interest rate risk in excess of the amount recognized in the
consolidated balance sheets. The contract amounts of these instruments reflect
the extent of involvement the Bank has in particular classes of financial
instruments.
The Bank's exposure to credit loss in the event of nonperformance by
the customer on the financial instrument for commitments to extend credit and
standby letters of credit is represented by the contractual amounts of those
instruments. The Bank uses the same credit policies in making commitments and
conditional obligations as they do for on- balance-sheet instruments.
Commitments to extend credit are agreements to lend to a customer as
long as there is no violation of any condition established in the contract.
Commitments 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. At December 31, 1995 and 1994,
total commitments to extend credit were approximately $12,177,000 and
$8,176,000, respectively, in unfunded loan commitments and $6,492,000 and
$6,081,000, respectively, in available credit card advances. The Bank's
experience has been that approximately 60% of loan commitments are drawn upon
by customers.
16
<PAGE> 58
FAYETTE COUNTY BANCSHARES, INC.
AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1995, 1994 AND 1993
================================================================================
NOTE K - OFF-BALANCE-SHEET FINANCIAL INSTRUMENTS (Cont'd)
Standby letters of credit are conditional commitments issued by the
Bank to guarantee the performance of a customer to a third party. The credit
risk involved in issuing letters of credit is essentially the same as that
involved in extending loan facilities to customers. Since most of the letters
of credit are expected to expire without being drawn upon, they do not
necessarily represent future cash requirements. At December 31, 1995 and 1994,
commitments under standby letters of credit aggregated approximately $28,000
and $33,200, respectively. In 1995, the Bank was required to perform on a
standby letter of credit totaling approximately $16,000. The Bank was not
required to perform on any standby letters of credit in 1994.
The Bank evaluates each customer's creditworthiness on a case-by-case
basis. The amount of collateral obtained, if deemed necessary by the Bank upon
extension of credit, is based on management's credit evaluation of the
borrower. Collateral held varies but may include accounts receivable,
inventory, property, plant and equipment, residential real estate and
income-producing commercial properties on those commitments for which
collateral is deemed necessary.
NOTE L - DEPOSIT CONCENTRATIONS
At December 31, 1995 and 1994, the Bank had approximately $14,607,000
and $5,973,000, respectively, in deposits from two customers and their related
entities.
NOTE M - SUPPLEMENTAL FINANCIAL DATA
Components of other expense in excess of 1% of total interest and
other income for the years ended December 31, 1995, 1994 and 1993 are as
follows:
<TABLE>
<CAPTION>
1995 1994 1993
----------- ----------- -----------
<S> <C> <C> <C>
Printing and supplies $ 57,160 $ 57,160 $ 72,272
Credit card processing $ 43,371 $ 54,637 $ 61,758
Advertising and business development $ 52,903 $ 52,250 $ 36,928
FDIC assessment $ 113,654 $ 150,897 $ 114,922
Insurance premiums on loans $ 75,958 $ 72,843 $ 20,451
Director fees $ 84,600 $ 66,481 $ 39,940
</TABLE>
NOTE N - FAIR VALUES OF FINANCIAL INSTRUMENTS
The estimated fair values of the Company's financial instruments are
as follows at December 31:
<TABLE>
<CAPTION>
1995
-------------------------------------
Estimated
Carrying Fair
Value Value
-------------- --------------
<S> <C> <C>
Financial assets:
Cash and cash equivalents $ 5,852,249 $ 5,852,249
Interest-bearing deposits 195,000 195,000
Investment securities held to maturity 1,858,720 1,861,509
Investment securities available for sale 10,891,420 10,891,420
Other investments 251,000 251,000
Loans 67,771,350 67,885,000
Accrued interest receivable 700,771 700,771
</TABLE>
17
<PAGE> 59
FAYETTE COUNTY BANCSHARES, INC.
AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1995, 1994 AND 1993
================================================================================
NOTE N - FAIR VALUES OF FINANCIAL INSTRUMENTS (Cont'd)
<TABLE>
<S> <C> <C>
Financial liabilities:
Noncontractual deposits $ 40,947,913 $ 40,947,913
Contractual deposits 40,488,963 40,628,000
Short-term borrowings 1,161 1,161
Accrued interest payable 1,169,413 1,169,413
Off-balance-sheet instruments:
Undisbursed credit lines $ 12,194,048
Available credit card advances 6,501,089
Standby letters of credit 28,039
</TABLE>
NOTE O - CONDENSED FINANCIAL INFORMATION OF FAYETTE COUNTY BANCSHARES, INC.
CONDENSED BALANCE SHEETS
(Parent Only)
<TABLE>
<CAPTION>
December 31,
------------------------------------------
1995 1994
------------------ ------------------
ASSETS
<S> <C> <C>
Cash on deposit with subsidiary $ 15,575 $ 186,547
Investment in subsidiary 8,083,254 6,656,145
Other assets 39,036 17,363
------------------ ------------------
TOTAL ASSETS $ 8,137,865 $ 6,860,055
================== ==================
LIABILITIES AND STOCKHOLDERS' EQUITY
LIABILITIES
Dividends payable $ 2,262 $ 3,425
----------------- ------------------
STOCKHOLDERS' EQUITY
Common stock 612,440 606,440
Surplus 5,561,016 5,507,016
Retained earnings 2,058,615 1,188,728
Market valuation reserve on investment securities available for
sale (96,468) (445,554)
------------------ ------------------
TOTAL STOCKHOLDERS' EQUITY 8,135,603 6,856,630
------------------ ------------------
TOTAL LIABILITIES AND STOCKHOLDERS'
EQUITY $ 8,137,865 $ 6,860,055
================== ==================
</TABLE>
18
<PAGE> 60
FAYETTE COUNTY BANCSHARES, INC.
AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1995, 1994 AND 1993
================================================================================
NOTE O - CONDENSED FINANCIAL INFORMATION OF FAYETTE COUNTY BANCSHARES, INC.
(Cont'd)
CONDENSED STATEMENTS OF INCOME
(Parent Only)
<TABLE>
<CAPTION>
For the years ended December 31,
-------------------------------------------------------
1995 1994 1993
-------------- ------------ -----------
<S> <C> <C> <C>
OPERATING INCOME
Dividends from subsidiary $ 20,000 $ 121,288 $ 60,644
Other income 651 49 1,958
-------------- ------------ -----------
TOTAL OPERATING INCOME 20,651 121,337 62,602
-------------- ------------ -----------
OPERATING EXPENSE
Amortization of organization costs - 5,772 6,929
Depreciation of premises - 722 1,731
Other expense 115,462 17,468 6,291
-------------- ------------ -----------
TOTAL OPERATING EXPENSE 115,462 23,962 14,951
-------------- ------------ -----------
INCOME (LOSS) BEFORE INCOME TAX BENEFIT AND EQUITY IN
UNDISTRIBUTED EARNINGS OF SUBSIDIARY (94,811) 97,375 47,651
INCOME TAX BENEFIT 39,036 9,571 4,672
-------------- ------------ -----------
INCOME (LOSS) BEFORE EQUITY IN UNDISTRIBUTED EARNINGS OF
SUBSIDIARY (55,775) 106,946 52,323
EQUITY IN UNDISTRIBUTED EARNINGS OF
SUBSIDIARY 1,078,022 688,428 553,608
-------------- ------------ -----------
NET INCOME $ 1,022,247 $ 795,374 $ 605,931
============== ============ ===========
</TABLE>
19
<PAGE> 61
FAYETTE COUNTY BANCSHARES, INC.
AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1995, 1994 AND 1993
================================================================================
NOTE O - CONDENSED FINANCIAL INFORMATION OF FAYETTE COUNTY BANCSHARES, INC.
(Cont'd)
CONDENSED STATEMENTS OF CASH FLOWS
(Parent Only)
<TABLE>
<CAPTION>
For the years ended December 31,
---------------------------------------------------
1995 1994 1993
------------ ----------- -----------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net income $ 1,022,247 $ 795,374 $ 605,931
Equity in undistributed earnings of subsidiary (1,078,022) (688,428) (553,608)
Amortization of organization costs - 5,772 6,929
Depreciation of premises - 722 1,731
Increase in other assets (21,673) (9,571) (3,672)
Increase (decrease) in other liabilities (1,164) 213 3,212
------------ ----------- -----------
NET CASH PROVIDED (USED) BY OPERATING ACTIVITIES (78,612) 104,082 60,523
------------ ----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES
Sale of premises - 68,098 -
------------ ----------- -----------
NET CASH PROVIDED BY INVESTING ACTIVITIES - 68,098 -
------------ ----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from exercise of stock options and warrants 60,000 - 30,030
Dividends paid (152,360) (121,288) (60,644)
------------ ----------- -----------
NET CASH USED BY FINANCING ACTIVITIES (92,360) (121,288) (30,614)
------------ ----------- -----------
NET INCREASE (DECREASE) IN CASH (170,972) 50,892 29,909
CASH, BEGINNING OF YEAR 186,547 135,655 105,746
------------ ----------- -----------
CASH, END OF YEAR $ 15,575 $ 186,547 $ 135,655
============ =========== ===========
</TABLE>
20
<TABLE> <S> <C>
<ARTICLE> 9
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1995
<PERIOD-START> JAN-01-1995
<PERIOD-END> DEC-31-1995
<CASH> 2,972,249
<INT-BEARING-DEPOSITS> 195,000
<FED-FUNDS-SOLD> 2,880,000
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 10,891,420
<INVESTMENTS-CARRYING> 1,858,720
<INVESTMENTS-MARKET> 1,861,509
<LOANS> 67,771,350
<ALLOWANCE> 918,036
<TOTAL-ASSETS> 90,932,603
<DEPOSITS> 81,436,876
<SHORT-TERM> 0
<LIABILITIES-OTHER> 1,360,124
<LONG-TERM> 0
0
0
<COMMON> 612,440
<OTHER-SE> 7,523,163
<TOTAL-LIABILITIES-AND-EQUITY> 90,932,603
<INTEREST-LOAN> 5,999,755
<INTEREST-INVEST> 1,183,566
<INTEREST-OTHER> 3,340
<INTEREST-TOTAL> 7,186,661
<INTEREST-DEPOSIT> 2,776,846
<INTEREST-EXPENSE> 2,789,371
<INTEREST-INCOME-NET> 4,397,290
<LOAN-LOSSES> 335,000
<SECURITIES-GAINS> 32
<EXPENSE-OTHER> 3,015,184
<INCOME-PRETAX> 1,583,722
<INCOME-PRE-EXTRAORDINARY> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 1,022,247
<EPS-PRIMARY> 1.68
<EPS-DILUTED> 1.46
<YIELD-ACTUAL> 9.77
<LOANS-NON> 118,130
<LOANS-PAST> 379,009
<LOANS-TROUBLED> 1,013,000
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 715,230
<CHARGE-OFFS> 170,909
<RECOVERIES> 38,715
<ALLOWANCE-CLOSE> 918,036
<ALLOWANCE-DOMESTIC> 918,036
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 0
</TABLE>
