<PAGE> 1
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 (No fee required,
effective October 7, 1996)
For the fiscal year ended Commission File Number
December 31, 1996 0-18827
FIRST COMMUNITY BANKING SERVICES, INC.
(Exact name of registrant as specified on its charter)
Georgia 58-18357525
(State or other Jurisdiction of (I.R.S. Employer 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
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 $10,013,597.
The aggregate market value of the voting stock held by non-affiliates of
the Registrant at March 20, 1997, was $12,571,219.50 based on the sales price of
the Common Stock of $25.50. 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 20,
1997, was 646,062 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 30, 1997, are incorporated by
reference in answer to Part III of this report.
<PAGE> 2
PART I
ITEM 1. BUSINESS
This Report contains statements which constitute forward-looking
statements within the meaning of Section 27A of the Securities Act of 1933 and
the Securities Exchange Act of 1934. These statements appear in a number of
places in this Report and include all statements regarding the intent, belief or
current expectations of the Company, its directors or its officers with respect
to, among other things: (i) the Company's financing plans; (ii) trends affecting
the Company's financial condition or results of operations; and (iv) the
declaration and payment of dividends. Investors are cautioned that any such
forward-looking statements are not guarantees of future performance and involve
risks and uncertainties, and that actual results may differ materially from
those projected in the forward-looking statements as a result of various factors
discussed herein and those factors discussed in detail in the Company's filings
with the Securities and Exchange Commission.
GENERAL
First Community Banking Services, Inc. (the "Company"), Peachtree City,
Georgia was incorporated as a Georgia business corporation on November 1, 1988.
The Company was incorporated as Fayette County Bancshares, Inc. and, on November
8, 1996, the Company changed its name to "First Community Banking Services,
Inc." 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 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.
2
<PAGE> 3
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 and
Federal Home Loan Bank. As compensation for services provided by a
correspondent, the Bank maintains certain balances with its correspondents in
interest bearing and 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.
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 several 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
3
<PAGE> 4
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 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.
4
<PAGE> 5
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.
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.
5
<PAGE> 6
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.
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.
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 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.
6
<PAGE> 7
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. In 1996, the
Bank's assessment rate on BIF and SAIF deposits per $100 was $.00 and $.23,
respectively, and the Bank was therefore subject to the minimum $1,000 BIF
semi-annual assessment. The combined assessment per $100 is $.10 on insured
deposits. The Deposit Insurance Funds Act of 1996 eliminated the minimum
assessment required by statute. It also separates, effective January 1, 1997,
the Financial Corporation (FICO) assessment to service the interest on its bond
obligations. The amount assessed on individual institutions, including the Bank,
by FICO will be in addition to the amount paid for deposit insurance according
to the risk-related assessment rate schedule. FICO assessment rates for the
first semi-annual period of 1997 were set at 1.30 basis points annually for BIF
deposits. For the first semi-annual period of 1997, the FDIC Board of Directors
maintained the adjusted rate schedule and the Bank's insurance assessment will
remain at $.00 per $100 in deposits through June, 1997. Increases in deposit
insurance premiums or changes in risk classification will increase the Bank's
cost of funds, and there can be no assurance that such cost can be passed on to
the Bank's customers.
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
7
<PAGE> 8
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.
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 signed
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, 1996,
8
<PAGE> 9
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."
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.
Effective January 1, 1997, the OCC amended the risk-based capital
standards to incorporate a measure for market risk to cover all positions
located in an institution's trading account, and foreign exchange and commodity
positions wherever located. The effect of the rule is that it requires any bank
or holding company with significant exposure to market risk to measure the risk
and hold capital commensurate with that risk. Since the Bank does not currently
engage, nor has any plans to engage, in trading, foreign exchange or commodity
position activities, the rule does not have an effect on the required Bank
capital levels.
Both the Company and the Bank exceeded their respective regulatory
capital requirements at December 31, 1996. See "Management Discussion and
Analysis of Financial Condition and Results of Operations - Capital."
RECENT LEGISLATIVE DEVELOPMENTS
Interstate Banking and Branching Restrictions
On September 29, 1994, the federal government enacted the Riegle-Neal
Interstate Banking and Branching Efficiency Act of 1994 (the Interstate Banking
Act). This Act became effective on September 29, 1995, and permits eligible bank
holding companies in any state, with regulatory approval, to acquire banking
organizations in any other state. Effective June 1, 1997, the Interstate Banking
Act will allow banks with different home states to merge, unless a particular
state opts out of the statute. Consistent with the Interstate Banking Act,
Georgia adopted legislation in 1996 which will permit interstate bank mergers
beginning June 1, 1997.
In addition, beginning June 1, 1997, the Interstate Banking Act will
permit national and state banks to establish de novo branches in another state
if there is a law in that state which applies equally to all banks and expressly
permits all out-of-state banks to establish de novo branches. However, in 1996,
9
<PAGE> 10
Georgia adopted legislation which opts out of this provision. The Georgia
legislation provides that, with the prior approval of the Department of Banking
and Finance, after July 1, 1996, a bank may establish three new or additional
branch banks anywhere in the state with prior regulatory approval. 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 of financial condition of the Company or the Bank.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matter was submitted during the fourth quarter ended December 31,
1996, to a vote of security holders of the Company.
10
<PAGE> 11
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED
STOCKHOLDER MATTERS
The Company had 646,062 shares of Common Stock issued and outstanding to
approximately 953 shareholders on March 20, 1997.
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>
Fourth Quarter 1995 $22.50 $18.50
First Quarter 1996 $19.87 $18.50
Second Quarter 1996 $21.00 $18.50
Third Quarter 1996 $21.25 $18.50
Fourth Quarter 1996 $29.50 $18.75
</TABLE>
Prior to September 29, 1995, there was no established trading market for
the Common Stock. On March 20, 1997, the last reported sales price of the Common
Stock on the Nasdaq SmallCap Market was $25.50 per share.
In April 1996, the Company paid to its shareholders a $.30 per share
cash dividend, and in June 1995 the Company paid to its shareholders a $.25 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. MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
FOR THE YEARS ENDED DECEMBER 31, 1996 AND 1995
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: 1996 1995 1994 1993 1992
--------- ---------- ----------- ---------- ----------
<S> <C> <C> <C> <C> <C>
Total Interest Income $ 9,369 $ 7,187 $ 5,269 $ 4,440 $ 4,192
Total Interest Expense 3,687 2,789 1,559 1,312 1,536
Net Interest Income 5,682 4,398 3,710 3,128 2,666
Provision for Loan Loss 856 335 92 412 596
Non Interest Income 645 536 381 536 385
Non Interest Expense 3,517 3,015 2,831 2,348 1,986
Provision for Income Taxes 700 562 373 325 225
Extraordinary Item -0- -0- -0- -0- 96
Change in accounting -0- -0- -0- 27 -0-
Net Income 1,254 1,022 795 606 329
Net Income Per Share 1.85 1.60 1.25 1.00 .55
Dividends paid Per Share .30 .25 .20 .10 -0-
Average Shares 679,790 610,130 606,440 605,940 603,440
Dividend Payout Ratio 16.21% 14.89% 15.26% 10.0% -0-
</TABLE>
<TABLE>
<CAPTION>
At December 31,
1996 1995 1994 1993 1992
---------- ---------- ---------- ---------- ----------
Balance Sheet Data:
<S> <C> <C> <C> <C> <C>
Total Assets $108,554 $90,933 $64,965 $67,814 $52,321
Loans, Net of Allowance
for Loan Loss 80,702 66,853 41,695 42,182 32,349
Demand & Savings 42,019 40,948 33,852 42,773 28,731
Time Deposits 56,125 40,489 22,735 17,232 16,797
Stockholders' Equity 9,165 8,136 6,857 6,624 6,053
Book Value Per Share 14.25 13.29 11.31 10.92 10.03
Equity to Asset Ratio 8.44% 8.95% 10.55% 9.77% 11.57%
</TABLE>
12
<PAGE> 13
RESULTS OF OPERATIONS
The Company's net income increased $232,164, or 22.71%, to $1,254,411 in
the year ended December 31, 1996, from $1,022,247 in the year ended December 31,
1995. This increase predominantly reflects an increase in net interest income
and an increase in other income. Return on average assets for 1996 was 1.23%
compared to 1.26% for 1995, and return on average equity was 15.07% in 1996
compared to 14.83% in 1995. Earnings per share increased $.25 to $1.85 in 1996
or 15.62% from $1.60 in 1995.
Net interest income increased $1,284,905, or 29.22%, to $5,682,195 in
1996 from $4,397,290 in 1995, resulting from a $2,181,964 increase in interest
income and a $897,059 increase in interest expense. The improvement resulted
predominantly from an increase in the loans outstanding and the net interest
spread to 5.09% in 1996 from 5.07% in 1995, as the general rising interest rate
environment affected assets more rapidly than liabilities. The net interest
margin increased to 6.10% in 1996 from 6.03% in 1995.
The provision for loan losses was $856,312 in 1996, an increase of
$521,312 from the provision of $335,000 in 1995, primarily as a result of the
increase of $14,144,631 from 1995 in the loan portfolio and the charge off of
commercial loans totaling $391,099. 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 1.48% at December 31, 1996, compared to
1.36% at year end 1995. The Company had net charge-offs of $560,175 in 1996,
resulting in a ratio of net charge-offs to average loans of .76%.
Noninterest income increased $108,356, or 20.19%, to $644,972 in 1996
from $536,616 in 1995. The increase was due primarily to the increase in service
charges on deposit accounts. Service charges accounted for an increase of
$85,459, to $503,621, up 20.43% from $418,162 in 1995. The Bank continues to
increase the number of deposit accounts. Other miscellaneous income such as safe
deposit box rental, check charges and fees for research increased $9,370 or
15.42% to $70,102 in 1996 from $60,732 in 1995.
Noninterest expense increased $501,687, or 16.63%, to $3,516,871 in
1996, from $3,015,184 in 1995. Salaries and employee benefits increased
$237,844, or 17.19%, to $1,620,921 in 1996 as compared to $1,383,077 in 1995.
This increase is due to the addition of two lenders and support staff for them,
which were staffed the full year of 1996 as compared to 8 months in 1995, and a
one time assessment by the FDIC of $167,056. 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
55.58% in 1996 from 61.12% in 1995.
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
13
<PAGE> 14
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>
1996 1995
---- ----
Average Yield/ Average Yield/
Balance Rate Balance Rate
<S> <C> <C> <C> <C>
Assets
Cash & due from banks $ 3,167,769 0.00% $ 3,156,360 0.00%
Federal funds sold 3,929,727 5.60% 4,462,767 5.96%
Interest-bearing deposits with
other banks 179,738 4.86% 235,906 5.08%
Taxable securities 13,694,088 6.12% 12,855,049 6.38%
Tax exempt securities (1) 1,687,934 4.68% 1,862,014 4.60%
Other investments 264,981 7.34% 42,636 7.83%
Loans(2) 73,446,044 11.17% 54,099,512 11.09%
Other assets 5,232,802 0.00% 4,693,799 0.00%
------------ -----------
Total $101,603,083 $81,408,043
============ ===========
Liabilities
Demand deposits 16,135,113 0.00% 13,621,030 0.00%
Interest-bearing demand deposits 21,929,897 3.09% 20,239,475 3.22%
Savings deposits 5,963,929 2.42% 5,146,849 2.44%
Time deposits 46,138,495 6.18% 33,674,596 5.94%
Federal funds purchased 268,005 4.52% 101,528 6.54%
Securities sold under agreements
to repurchase -0- 0.00% 140,069 4.20%
Other liabilities 2,846,296 0.00% 1,591,243 0.00%
Shareholders' equity 8,321,348 0.00% 6,893,253 0.00%
------------ -----------
Total $101,603,083 $81,408,043
============ ===========
</TABLE>
<TABLE>
<CAPTION>
1996 1995
---------- ---------
<S> <C> <C>
Average yield on interest-earning assets 10.05% 9.77%
Average rate paid on interest-bearing liabilities 4.96% 4.70%
Net interest spread 5.09% 5.07%
Net interest margin (net interest earnings divided
by total interest-earning assets) 6.10% 5.98%
</TABLE>
<TABLE>
<CAPTION>
<S> <C> <C>
Interest income:
Interest and fees on loans (3) $8,202,657 $5,999,755
Investment securities:
U.S. Treasury securities 133,473 87,499
U.S. Government agencies & corp. 705,175 732,659
States & political subdivisions 79,048 85,707
Other investments 19,460 3,340
Interest on federal funds sold 220,072 265,766
Interest on deposits with other banks 8,740 11,935
----------- ----------
Total interest income $9,368,625 $7,186,661
----------- ----------
</TABLE>
15
<PAGE> 16
<TABLE>
<CAPTION>
<S> <C> <C>
Interest expense:
Interest on deposits:
Demand 678,718 651,957
Savings 144,098 125,551
Time deposits of $100,000 or more 912,059 632,954
Other time deposits 1,939,439 1,366,384
---------- ---------
Total interest on deposits 3,674,314 2,776,846
Interest on federal funds purchased and securities 12,116 12,525
---------- ----------
sold under agreements to repurchase
Total interest expense 3,686,430 2,789,371
---------- ----------
Net interest income $5,682,195 $4,397,290
========== ==========
</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, 1996, and 1995.
(3) Fee income on loans totaled $614,866 for the year ended December 31,
1996, and $395,549 for the year ended December 31, 1995.
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. Volume change is calculated as the change in volume times the old rate
while rate change is the change in rate times the old volume. The change in
interest due to both rate and volume has been allocated to the volume and rate
components in proportion to the relationship of the dollar amounts of the
absolute change in each.
16
<PAGE> 17
Year Ended December 31, 1996
compared with
Year Ended December 31, 1995
<TABLE>
<CAPTION>
Increase (Decrease) Due To:
Volume Rate Total
------------ -------- ------------
<S> <C> <C> <C>
Interest earned on:
Interest-earning deposits in
other banks ............ $ (2,703) $ (492) $ (3,196)
Taxable securities ........ 65,323 (30,713) 34,610
Tax exempt securities ..... (8,127) 1,468 (6,659)
Federal funds sold ........ (30,347) (15,347) 45,694
Net loans ................. 2,159,344 43,558 2,202,902
----------- -------- -----------
Total interest income ........ $ 2,183,490 $ (1,526) $ 2,181,964
=========== ======== ===========
Interest paid on:
Demand deposits ........... 53,515 (26,754) 26,761
Savings deposits .......... 19,594 (1,047) 18,547
Time deposits ............. 768,291 83,869 852,160
Federal funds purchased ... 1,283 (1,692) (409)
Securities sold under
agreements to repurchase -0- -0- -0-
Total interest expense .... $ 842,683 $ 54,376 $ 897,059
----------- -------- -----------
Change in net interest
income .................... $ 1,340,807 $(55,902) $ 1,284,905
=========== ======== ===========
</TABLE>
17
<PAGE> 18
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 ..... (8,799) 4,539 (4,260)
----------- --------- -----------
agreements to repurchase
Total interest expense .... $ 463,266 $ 766,847 $ 1,230,113
----------- --------- -----------
Change in net interest .... $ 979,455 $(291,822) $ 687,633
income ................... =========== ========== ==========
</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, 1996.
19
<PAGE> 20
Interest Rate Sensitivity
December 31, 1996
(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 $ 25 $ -0- $ -0- $ -0- $ 25
Investment Securities 5,894 400 7,252 1,532 15,078
Federal Funds Sold 1,860 -0- -0- -0- 1,860
Loans 43,875 3,303 23,677 1,061 81,916
---------- --------- ---------- -------- --------
Total Rate Sensitive 51,654 3,703 30,929 2,593 98,879
Assets ---------- --------- ---------- -------- --------
NOW and MMDA Dep. 19,229 -0- -0- -0- 19,229
Savings Deposits 5,667 -0- -0- -0- 5,667
Time Deposits 21,324 19,910 14,891 -0- 56,125
Securities Sold Under
Agreements to
Repurchase -0- -0- -0- -0- -0-
---------- --------- ---------- -------- --------
Total Rate Sensitive
Liabilities $ 46,220 19,910 14,891 -0- -81,021
---------- --------- ---------- -------- --------
Excess (Deficiency) of
Rate Sensetive Assets
Less Rate Sensitive
Liabilities $ 5,434 $ (6,207) $ 16,038 $ 2,593 17,858
========== ========= ========== ======== ========
Cumulative GAP $ 5,434 $ (773) $ 15,265 $ 17,858
Percent of Cumulative Gap
to Total Earning Assets 5.49% (.78) 15.43% 18.06%
</TABLE>
20
<PAGE> 21
As indicated in the above table, the positive gap between rate sensitive
assets and rate sensitive liabilities during the 0-3 month period would allow
the Company to reprice its assets faster than its liabilities in a rising
interest rate environment, which would have a positive effect on earnings.
However, in an decreasing interest rate environment, the Company would
experience a decrease in earnings. The negative gap between rate sensitive
assets and rate sensitive liabilities represents the liabilities repricing
faster than assets. In a increasing 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>
1996 1995
------------- -------------
<S> <C> <C>
Balance, beginning of year $ 918,036 $ 715,230
Provision charged to operations 856,312 335,000
Loans charged off:
Commercial (391,099) (53,826)
Real Estate Mortgage (10,143) -0-
Consumer (71,099) (28,374)
Credit Cards (110,991) (88,709)
------------ ---------
$ (583,332) $ (170,909)
Loan recoveries:
Commercial 17,569 $ 26,892
Real Estate 199 -0-
Consumer 3,907 647
Credit Card 1,482 11,176
------------ ----------
23,157 38,715
------------ ----------
Net Loans Charged Off $ (560,175) $ (132,194)
Balance, end of year $ 1,214,173 $ 918,036
============ ============
Ratio of net charge-offs during the .76% .24%
period to total loans outstanding
during the period
</TABLE>
The provision for loan losses was $856,312 in the year ended December 31, 1996,
compared to $335,000 in the year ended December 31, 1995. The increase in the
provision was the result of the increase in the loan portfolio from $67,771,350
at December 31, 1995, to $81,915,981 at December 31, 1996 and the charge off of
commercial loans totalling $391,099.
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,
--------------------------------------------------------------------------
1996 1995
----------------------------------- -----------------------------------
% 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 $ 466,027 52.43% $ 305,625 19.69%
Real Estate-construction 242,254 23.75% 140,000 20.64%
Real Estate-mortgage 397,019 15.71% 327,156 48.71%
Consumer 63,711 6.44% 55,313 8.54%
Credit Cards 45,162 1.67% 89,942 2.42%
---------- ------- --------- -------
$1,214,173 100.00% $ 918,036 100.00%
========== ======= ========= ======
</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 Accrual
-------------- ------------ ---------
<S> <C> <C> <C>
December 31, 1996 $ 564,530 $ 303,913 $ 14,854
December 31, 1995 $ 379,009 $ 513,000 $ 118,130
</TABLE>
Of the $564,530 in loans past due 90 days and over, at December 31, 1996,
$489,646 is represented by two commercial loans, three consumer loans totalling
$32,895, and credit card related loans totalling $41,989. The $303,913 in
restructured loans at December 31, 1996, represents one commercial loan of
which the Bank is negotiating a settlement with the borrower. At December 31,
1996, there was $250,000 in the reserve account allocated for this commercial
loan. Restructured loans at December 31, 1995, represents one commercial loan.
In addition to loans reflected as restructed in the table above, the bank also
had $662,087 and $500,000 at December 31, 1996 and 1995, respectively, which
are considered impaired under the provision of FAS 114. If the nonaccrual
loans had been accruing interest for the full year, the Bank would have
recognized an additional $2,000 and $9,000 income in 1996 and 1995,
respectively. The Bank recognized approximately $250 and $4,000 in interest
income from these loans in 1996 and 1995, respectively.
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 interest which
has been accrued on the loan but remains unpaid
23
<PAGE> 24
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 loans as a percentage of
period end loans were .38% at December 31, 1996, compared to .94% at December
31, 1995. The decrease is due primarily to the reduction of restructured loans.
Of the $631,130 nonperforming loans outstanding at December 31, 1995, $325,000
was charged off in 1996. Management views this as a one time occurrence with
one borrower and it does not represent any trends of deterioration of the loan
portfolio.
As of December 31, 1996, there were 21 loans totaling $2,000,429
classified for regulatory purposes as 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 of the borrower, 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, if
any are required, 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 $108,356, or 20.19%, to
$644,972 in 1996 from $536,616 in 1995. The largest component of noninterest
income is service charges on deposit accounts, which totaled $503,621 in 1996, a
20.43% increase over the 1995 level of $418,162. Other income increased $8,812,
or 14.51%, to $69,544 in 1996 as compared to $60,732 in 1995.
The following table sets forth, for the periods indicated, the principal
components of noninterest income:
24
<PAGE> 25
Noninterest Income
<TABLE>
Year Ended December 31,
1996 1995
<S> <C> <C>
Service charges on deposit accounts $ 503,621 $ 418,162
Securities gains (losses) 142 32
Gain on sale of SBA loans 71,825 57,690
Other 69,384 60,732
------------ -----------
Total noninterest income $ 644,972 $ 536,616
============ ===========
</TABLE>
Noninterest Expense
<TABLE>
<CAPTION>
Year Ended December 31,
1996 1995
------------ ------------
<S> <C> <C>
Salaries and employee benefits $ 1,620,921 $ 1,383,077
Net Occupancy expense 391,969 373,084
Amortization of intangibles 97,857 97,857
Professional fees 427,219 361,460
Other 978,905 799,706
------------ ------------
Total noninterest expense $ 3,516,871 $ 3,015,184
============ ============
Efficiency ratio 55.58% 61.12%
</TABLE>
Salaries and employees benefits increased $237,844, or 17.20%, to
$1,620,921 in 1996 from $1,383,077 in 1995 due to the increase in staffing,
including the addition of two senior loan officers. Net occupancy increased
$18,885, or 5.06%, to $391,969 in 1996, from $373,084 in 1995. This was due
primarily to an upgrade of dated computer equipment and incorporating a network
environment between the three banking locations. Other expenses increased
$179,199 or 18.31% to $978,905 in 1996 from $799,706 in 1995. This increase is
due to a one time assessment by the FDIC based on the thrift deposits the Bank
had. This assessment totaled $167,056 and was reflected in the third quarter
earnings report.
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 $73,446,044 in
1996 compared to $54,099,512 in 1995, an increase of $19,346,532 or
25
<PAGE> 26
35.76%. At December 31, 1996, total loans were $81,915,981 compared to
$67,771,350 at the end of 1995.
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 1996 1995
------------- ---------------
<S> <C> <C>
Commercial $ 17,340,052 $ 13,352,445
Real estate - commercial 25,713,790 19,508,647
Real estate - individual 12,898,096 13,533,383
Real estate - construction 19,505,888 14,000,093
Installment & single payment ind. 5,255,715 5,413,624
Credit Cards 1,375,249 1,635,306
Other 28,799 396,491
--------------- ---------------
Total loans 82,117,589 67,839,989
Net deferred loan fees/cost (201,608) (68,639)
--------------- ---------------
Total net loans $ 81,915,981 $ 67,771,350
============== ==============
</TABLE>
The principal component of the Company's loan portfolio is real estate
loans. At year end 1996, loans secured by real estate totalled $58,117,774, or
70.77% of the portfolio. Commercial real estate made up $25,713,790 of the
portfolio and represents the principal component of the Bank's loan portfolio.
This category of loans increased $6,205,143, or 31.80%, from 1995 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. Nonresidential mortgage loans, which include
commercial loans, single family construction, and other loans secured by
multi-family properties and farmland, increased $9,493,402, or 34.70%, to
$36,845,940 at December 31, 1996, from $27,352,538 at year end 1995. 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 decreased $785,658, or 10.55%, to $6,659,763 in 1996,
from $7,445,421 in 1995. The credit card portfolio decreased $260,057, or
15.90%, to $1,375,249 at December 31, 1996. Due to the increase in national
trends of bankruptcy and the Bank's increase in credit card charge offs,
management has entered into an agreement in 1997 with another financial
institution to sell the credit card portfolio. This portfolio did not perform as
expected over the past years and management did not forsee any increase in its
performance. Settlement for this
26
<PAGE> 27
transaction will occur on January 31, 1997, based on that day's balances. The
sale of the portfolio will result in an approximate $73,000 write off of the
unamortized premium from the purchase of this portfolio in 1991.
The following is a presentation of an analysis of maturities of loans as
of December 31, 1996 (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 $ 12,651 $ 4,467 $ 222 $ 17,340
Real estate (commercial) 15,982 9,455 277 25,714
Real estate (industrial) 6,894 5,569 435 12,898
Real estate (construction) 19,207 299 -0- 19,506
Installment 1,252 3,877 126 5,255
Credit Card 1,375 -0- -0- 1,375
Other 29 -0- -0- 29
---------- ----------- ---------- ----------
Total $ 57,390 $ 23,667 $ 1,060 $ 82,117
========== =========== ========== =========
</TABLE>
Scheduled repayments are reported in the maturity category in which the payment
is due based upon contract terms. Demand loans, loans having non-stated schedule
of repayments, and overdrafts are reported as due in one year or less. The above
maturity schedule is not necessarily indicative of future principal reductions
since each loan is evaluated at maturity and, in many instances, is renewed in
part or in total.
The following is a presentation of an analysis of sensitivities of loans
to changes in interest rates as of December 31, 1996 (in thousands) :
<TABLE>
<CAPTION>
<S> <C>
Loans due after 1 year with
predetermined interest rates.................. $ 23,128
Loans due after 1 year with
floating interest rates....................... $ 1,599
</TABLE>
INVESTMENT PORTFOLIO. Investment securities comprised approximately 14%
and 15% of the Bank's assets on December 31, 1996 and 1995, respectively. The
Bank invests primarily in obligations of the United States or obligations
guaranteed as to principal and interest by the United
27
<PAGE> 28
States and other taxable and tax exempt securities. During 1995 and 1996, 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 1997 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 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. 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.
The Financial Accounting Standards Board has issued Statement of
Financial Accounting Standards No. 115 (SFAS 115) on the accounting and
reporting for investments in all debt and equity securities that have readily
determinable fair values. SFAS 115 requires that investments are to be
classified as held-to-maturity, available-for-sale or trading securities.
Held-to-maturity securities are to be reported at amortized cost, while
available-for-sale securities and trading securities are to be reported at fair
value. The Bank elected to adopt SFAS 115 as of December 31, 1993. Retroactive
application of SFAS 115 to prior years is not allowed. At December 31, 1996, the
Bank had $13,145,260 in investment securities available-for-sale and $1,659,519
in securities held-to-maturity. The net unrealized loss on available
for-sale-securities, net of deferred income taxes of $71,110, was $138,034 on
December 31, 1996.
The carrying value and estimated market value of investment securities held to
maturity are as follows at December 31:
<TABLE>
<CAPTION>
1996
-------------------------------------------------------------------
Carrying Unrealized Unrealized Market
Value Gains Losses Value
------------ ----------- --------- ---------
<S> <C> <C> <C> <C>
States and political
subdivisions $ 1,659,519 $ 12,652 $6,208 $ 1,665,963
</TABLE>
<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
</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>
1996
---------------------------------------------------------------------
Amortized Unrealized Unrealized Market
Cost Gains Losses Value
------------- ----------- ----------- --------------
<S> <C> <C> <C> <C>
U.S. Treasury Securities $ 496,410 $ 152 $ -0- $ 496,562
U.S. Government
Agencies and
Corporations 7,882,039 3,660 23,787 7,861,912
Mortgage-backed 4,975,955 2,189 191,358 4,786,786
securities
</TABLE>
<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 35,250 5,703,296
Mortgage-backed
securities 4,079,081 871 155,422 3,924,530
</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, 1996, 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 $ 1,344,715 $ 1,346,327 $ -0- $ -0- 5.65%
Due after one year
through five
years 8,144,198 8,135,232 614,994 616,418 5.92%
Due after five
years through
ten years 500,000 487,656 784,537 784,498 5.35%
Due after ten years 3,365,491 3,173,045 259,988 265,047 6.10%
</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, 1996. 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. $ -0- $ 496,410 $ -0- $ -0-
U.S. Government Agencies
& Corp. 1,344,715 6,037,324 500,000 -0-
Mortgage Backed -0- 1,610,463 -0- 3,365,492
States & Political
subdivisions -0- 614,994 784,537 259,988
-------------- -------------- ------------ --------------
Total $ 1,344,715 $ 8,759,191 $ 1,284,537 $ 3,625,480
</TABLE>
SHORT-TERM INVESTMENTS. Short-term investments, which consist primarily
of federal funds sold and interest bearing deposits with other banks, averaged
$4,109,465 in 1996, compared to $4,698,673 in 1995. At December 31, 1996,
short-term investments totaled $1,885,088. 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>
1996 Rate 1995 Rate
---------------- ------- ---------------- -----
<S> <C> <C> <C> <C>
(1) Non-interest Bearing
Demand Deposits $ 16,135,113 0.00% $ 13,621,030 0.00%
(2) Interest Bearing Demand
Deposits 21,929,897 3.09% 20,239,475 3.22%
(3) Savings Deposits 5,963,929 2.42% 5,146,849 2.44%
(4) Time Deposits 46,138,495 6.18% 33,674,596 5.94%
</TABLE>
At December 31, 1996, the Bank had $15,290,467 on deposit 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 $ 11,772,653
3 months to 6 months 1,318,566
6 months to 12 months 1,173,219
12 months & over 1,026,029
Total $ 15,290,467
===============
</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, 1996, was $9,164,716, or
8.44% of total assets. The increase of $1,029,113 from 1995 was primarily
attributable to the retention of earnings for 1996 offset by the decrease in
market value 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 well capitalized capital ratios for the Bank and
the actual capital ratios for that entity as of December 31, 1996:
<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 5.0% 8.2% 4.0% 10.2% 10.0% 11.4%
</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 $3,929,727 during the year ended December 31, 1996 and was
$1,860,000 at December 31, 1996; averaged $4,462,767 during the year ended
December 31, 1995, and was $2,880,000 at December 31, 1995. 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 $4,500,000
with several financial institutions, although these are seldom utilized. Other
sources of liquidity include the maturing and selling of investment securities
as well as cash generated from the repayment of loans.
The Bank also offers repurchase agreements (Repo's) to one commercial
customer. Repo's are obligations of the Bank to collateralized 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, 1996, the Bank had $21,845,000 in unfunded loan
commitments. There were $6,074,000 included in the above number that represents
credit card commitments and $15,771,000 in unfunded commercial real estate
construction and land development loans. If these loans were to be funded the
bank has procedures in place to provide the needed cash. In addition to these
lines of credit, the Bank has a repurchase agreement with a correspondent bank
which has a credit limit of $12,000,000. Any advances under this agreement will
be collateralized by investment securities of the Bank. The Bank also has a line
of credit established with the Federal Home Loan Bank which totals $5,000,000.
Any advances under this agreement will be collateralized by real estate mortgage
loans. There were no advances under these lines during 1996 or 1995.
32
<PAGE> 33
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.
ACCOUNTING RULE CHANGES
ACCOUNTING FOR TRANSFERS AND SERVICING OF FINANCIAL ASSETS AND
EXTINGUISHMENTS OF LIABILITIES. The Financial Accounting Standards Board has
issued Statement of Financial Accounting Standards No. 125 (SFAS 125),
"Accounting for Transfers and Servicing of Financial Assets and Extinguishers of
Liabilities." SFAS 125 is effective for such transactions entered into
subsequent to December 31, 1996, and for certain excess servicing rights
recorded at December 31, 1996. Under SFAS 125, a company recognizes the
financial and servicing assets it controls and the liabilities it has incurred
and derecognizes financial assets when control has been surrendered and
liabilities when extinguished. The Financial Accounting Standards Board has
issued Statement of Financial Accounting Standards No. 127 (SFAS 127), "Deferral
of the Effective Date of FASB Statement of No. 125," which delays the effective
date of certain provisions of SFAS 125 until 1998. The adoption of SFAS 125 and
SFAS 127 is not expected to have a significant impact on the financial
conditions or results of operations of the Company.
ACCOUNTING FOR STOCK BASED COMPENSATIon. Effective January 1, 1996, the
Company adopted the disclosure requirements of Statement of Financial Accounting
Standards No. 123 (SFAS 123), "Accounting for Stock-Based Compensation." As
provided by SFAS 123, the Company has elected to continue applying the
provisions of APB 25 in determining its net income relative to stock-based
compensation. The Company has adopted the SFAS 123 requirement that a company
disclose the pro forma net income and pro forma earnings per share, as if the
alternative fair-value-based accounting method in SFAS 123 had been used in
determining net income. The adoption of SFAS 123 did not have a significant
impact on the financial condition or results of operations of the Company.
ACCOUNTING FOR THE IMPAIRMENT OF LONG-LIVED ASSETS AND FOR LONG LIVED
ASSETS TO BE DISPOSED OF. Effective January 1, 1996, the Company adopted
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 provisions of SFAS 121 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 121 did
not have a significant impact on the financial condition or results of
operations of 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 7. 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.
F-1 Report of Independent Auditors
F-2 Consolidated Balance Sheets, December 31, 1996 and 1995
F-5 Consolidated Statements of Income for the years ended December 31,
1996, 1995 and 1994
F-8 Consolidated Statements of Changes in Stockholders' Equity for the
years ended December 31, 1996, 1995 and 1994
F-9 Consolidated Statements of Cash Flows for the years ended December 31,
1996, 1995 and 1994
F-12 Notes to Consolidated Financial Statements
ITEM 8. 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 "1997 Proxy Statement") to be filed with the
Securities and Exchange Commission pursuant to Regulation 14A for the Company's
1997 Annual Meeting of Shareholders to be held on April 24, 1997.
ITEM 9. 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
1997 Proxy Statement is incorporated herein by reference.
ITEM 10. EXECUTIVE COMPENSATION
The information contained under the caption "Compensation of Directors and
Executive Officers" in the 1997 Proxy Statement is incorporated herein by
reference.
ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information contained under the caption "Security Ownership of Certain
Beneficial Owners and Management" in the 1997 Proxy Statement is incorporated
herein by reference.
ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information contained under the caption "Certain Relationships and
Related Transactions" in the 1997 Proxy Statement is incorporated herein by
reference.
35
<PAGE> 36
PART IV
ITEM 13. 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
Exhibit
Number Description
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
10.7 Purchase Agreement-Credit Card Accounts dated January
23, 1997 between Fayette County Bank and Carolina First
11 Computation of Net Income Per Share
21.1** Subsidiaries of the Company
24 Power of Attorney (contained on the Signature Page)
27 Financial Data Schedule (for SEC use only)
* 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, 1997.
FIRST COMMUNITY BANKING SERVICES, 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, 1997.
Signature Title
/s/ Robert W. Bertelsbeck Director
- -------------------------
Robert W. Bertelsbeck
/s/ Joseph S. Black Director
- -------------------------
Joseph S. Black
/s/ Robert C. Gasko Director
- -------------------------
Robert C. Gasko
37
<PAGE> 38
/s/ Kerstin M. Gasko Director
- -------------------------
Kerstin M. Gasko
/s/ Mukut Gupta Director
- -------------------------
Mukut Gupta
/s/ G. Webb Howell 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
/s/ Donnie H. Russell Director
- -------------------------
Donnie H. Russell
/s/ Fred B. Sheats Director
- -------------------------
Fred B. Sheats
/s/ H. Geoffrey Slade, Sr. Director
- -------------------------
H. Geoffrey Slade, Sr.
/s/ Enrico A. Stanziale Director
- -------------------------
Enrico A. Stanziale
/s/ John R. Torretto Director
- -------------------------
John R. Torretto
/s/ Mark B. Kearsley /s/ Ira P. Shepherd
- ------------------------- ---------------------
Mark B. Kearsley Ira P. Shepherd
Principal Financial and Principal Executive Officer
Accounting Officer
38
<PAGE> 39
INDEPENDENT AUDITORS' REPORT
The Board of Directors and Stockholders
First Community Banking Services, Inc.
and Subsidiary
Peachtree City, Georgia
We have audited the accompanying consolidated balance sheets of First
Community Banking Services, Inc. and subsidiary as of December 31, 1996 and
1995, and the related consolidated statements of income, changes in
stockholders' equity and cash flows for each of the three years ended December
31, 1996. These consolidated financial statements are the responsibility of
First Community Banking Services, 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
First Community Banking Services, Inc. and subsidiary as of December 31, 1996
and 1995, and the results of their operations and their cash flows for each of
the three years in the period ended December 31, 1996, in conformity with
generally accepted accounting principles.
As discussed in Note A to the consolidated financial statements, in
1996 First Community Banking Services, Inc. and subsidiary changed its method of
disclosure for stock-based compensation.
BRICKER & MELTON, P.A.
January 31, 1997
Duluth, Georgia
F1
<PAGE> 40
FIRST COMMUNITY BANKING SERVICES, INC.
AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
December 31,
-----------------------------------
1996 1995
-------------- --------------
ASSETS
<S> <C> <C>
Cash and due from banks (Note B) $ 5,317,785 $ 2,972,249
Federal funds sold 1,860,000 2,880,000
Interest-bearing deposits in other financial institutions 25,088 195,000
Investment securities held to maturity (market value of
$1,665,963 and $1,861,509, respectively) 1,659,519 1,858,720
(Note C)
Investment securities available for sale (Note C) 13,145,260 10,891,420
Other investments (Note C) 273,200 251,000
Loans, net of deferred loan fees (Notes D and J) 81,915,981 67,771,350
Less: Allowance for loan losses (Note D) 1,214,173 918,036
-------------- --------------
Loans, net 80,701,808 66,853,314
Premises and equipment, net (Note E) 3,352,404 3,266,404
Other real estate 399,199 68,931
Accrued interest receivable 885,625 700,771
Intangible assets, net of accumulated amortization of
$539,226 and $441,369, respectively 470,774 568,631
Other assets (Note H) 463,027 426,163
-------------- --------------
TOTAL ASSETS $ 108,553,689 $ 90,932,603
============== ==============
LIABILITIES AND STOCKHOLDERS' EQUITY
LIABILITIES
Deposits (Notes G and N):
Noninterest-bearing demand $ 17,122,818 $ 13,650,114
Interest-bearing demand and money 19,229,218 21,964,114
market
Savings 5,666,954 5,333,685
Time deposits of $100,000 or more 15,290,467 12,301,137
Other time deposits 40,834,909 28,187,826
-------------- --------------
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F2
<PAGE> 41
FIRST COMMUNITY BANKING SERVICES, INC.
AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
December 31,
-----------------------------------
1996 1995
-------------- --------------
<S> <C> <C>
Total Deposits 98,144,366 81,436,876
Federal funds purchased and securities sold
under agreements to repurchase (Note F) -- 1,161
F)
Accrued interest payable 941,468 1,169,413
Other liabilities (Note H) 303,139 189,550
-------------- --------------
TOTAL 99,388,973 82,797,000
LIABILITIES
-------------- --------------
</TABLE>
(Continued)
The accompanying notes are an integral part of these consolidated financial
statements.
F3
<PAGE> 42
FIRST COMMUNITY BANKING SERVICES, INC.
AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS, (Continued)
<TABLE>
<CAPTION>
December 31,
-----------------------------------
1996 1995
-------------- --------------
<S> <C> <C>
STOCKHOLDERS' EQUITY (Notes K and L)
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, 643,062 and
612,440 shares issued and outstanding 643,062 612,440
Surplus 6,096,901 5,561,016
Retained earnings 2,562,787 2,058,615
Market valuation reserve on investment
securities available for sale (Note C) (138,034) (96,468)
-------------- --------------
TOTAL 9,164,716 8,135,603
STOCKHOLDERS'
EQUITY -------------- --------------
Commitments and contingent liabilities (Note M)
TOTAL
LIABILITIES $ 108,553,689 $ 90,932,603
AND
STOCKHOL
DERS' ============== ==============
EQUITY
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F4
<PAGE> 43
FIRST COMMUNITY BANKING SERVICES, INC.
AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF INCOME
<TABLE>
<CAPTION>
For the years ended December 31,
--------------------------------------------------------
1996 1995 1994
--------------- -------------- --------------
<S> <C> <C> <C>
INTEREST INCOME
Loans, including fees $ 8,202,657 $ 5,999,755 $ 4,376,205
Investment securities:
U.S. Treasury securities 133,473 87,499 83,882
U.S. Government agencies and 705,175 732,659 578,090
corporations
States and political subdivisions 79,048 85,707 83,642
Other investments 19,460 3,340 --
Federal funds sold 220,072 265,766 130,857
Interest-bearing deposits in other financial
institutions 8,740 11,935 16,239
--------------- -------------- --------------
TOTAL INTEREST 9,368,625 7,186,661 5,268,915
--------------- -------------- --------------
INTEREST EXPENSE
Interest-bearing demand and money market 678,718 651,957 534,305
Savings 144,098 125,551 132,289
Time deposits of $100,000 or more 912,059 632,954 46,806
Other time deposits 1,939,439 1,366,384 832,306
Federal funds purchased and securities sold
under agreements to repurchase 12,116 12,525 13,552
--------------- -------------- --------------
TOTAL INTEREST 3,686,430 2,789,371 1,559,258
EXPENSE --------------- -------------- --------------
NET INTEREST INCOME 5,682,195 4,397,290 3,709,657
PROVISION FOR LOAN LOSSES (Note D) 856,312 335,000 92,000
--------------- -------------- --------------
NET INTEREST INCOME
AFTER 4,825,883 4,062,290 3,617,657
PROVISION FOR
LOAN LOSSES
--------------- -------------- --------------
OTHER INCOME
Service charges on deposit accounts 503,621 418,162 341,911
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F5
<PAGE> 44
FIRST COMMUNITY BANKING SERVICES, INC.
AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF INCOME
<TABLE>
<CAPTION>
For the years ended December 31,
-------------------------------------
1996 1995 1994
------- ------- -------
<S> <C> <C> <C>
Investment securities gains(losses), net (Note 142 32 (101,126)
Gains on sales of SBA loans 71,825 57,690 102,742
Loss on sale of loans (160) -- --
Other income 69,544 60,732 37,504
------- ------- -------
TOTAL OTHER INCOME 644,972 536,616 381,031
------- ------- -------
</TABLE>
(Continued)
The accompanying notes are an integral part of these consolidated financial
statements.
F6
<PAGE> 45
FIRST COMMUNITY BANKING SERVICES, INC.
AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF INCOME, (Continued)
<TABLE>
<CAPTION>
--------------------------------------------------------
1996 1995 1994
--------------- -------------- --------------
<S> <C> <C> <C>
OTHER EXPENSE
Salaries and wages $ 1,395,694 $ 1,210,974 $ 973,658
Employee benefits (Note I) 225,227 172,103 174,709
Net occupancy expense 181,831 198,565 179,818
Furniture, fixtures and equipment expense 210,138 174,519 193,369
Professional and outside services 427,219 361,460 390,223
Amortization of intangible assets 97,857 97,857 97,857
Other expense (Note O) 978,905 799,706 821,444
--------------- -------------- --------------
TOTAL OTHER EXPENSES 3,516,871 3,015,184 2,831,078
--------------- -------------- --------------
INCOME BEFORE
INCOME TAX 1,953,984 1,583,722 1,167,610
EXPENSE
INCOME TAX EXPENSE (Note H) 699,573 561,475 372,236
--------------- -------------- --------------
NET INCOME $ 1,254,411 $ 1,022,247 $ 795,374
=============== ============== ==============
EARNINGS PER SHARE (Note A) $ 1.85 $ 1.60 $ 1.25
=============== ============== ==============
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F7
<PAGE> 46
FIRST COMMUNITY BANKING SERVICES, INC.
AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
For the years ended December 31, 1996, 1995 and 1994
----------------------------------------------------------------------------
Retained Market
Common Earnings Valuation
Stock Surplus (Deficit) Reserve Total
---------- ----------- ----------- ---------- -----------
<S> <C> <C> <C> <C> <C>
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 - $.19 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 - $.24 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
Net income -- -- 1,254,411 -- 1,254,411
Cash dividends declared - $.27 per share -- -- (183,732) -- (183,732)
Stock dividends declared - 5 percent 30,622 535,885 (566,507) -- --
Market valuation adjustment -- -- -- (41,566) (41,566)
---------- ----------- ----------- ---------- ------------
BALANCE AT DECEMBER 31, 1996 $ 643,062 $ 6,096,901 $ 2,562,787 $ (138,034) $ 9,164,716
========== =========== =========== ========== ===========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F8
<PAGE> 47
FIRST COMMUNITY BANKING SERVICES, INC.
AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
For the years ended December 31,
--------------------------------------------------------
1996 1995 1994
--------------- -------------- --------------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net income $ 1,254,411 $ 1,022,247 $ 795,374
Adjustments to reconcile net income to net
cash provided by operating activities:
Net amortization (accretion) of (12,425) (34,487) 7,548
investments
Amortization of intangible 97,857 97,857 97,857
assets
Depreciation of premises and 216,060 189,228 203,817
equipment
Provision for loan losses 856,312 335,000 92,000
Deferred income tax provision (132,179) 59,456 48,418
(benefit)
Deferred net loan fees 132,968 82,026 (55,891)
Investment securities (gains) (142) (32) 101,126
losses, net
Gains on sales of SBA loans (71,825) (57,690) (102,742)
Loss on sale of loans 160 -- --
Increase in interest receivable (184,854) (150,098) (106,534)
Increase (decrease) in interest (227,945) 803,360 83,818
payable
(Increase) decrease in other 116,729 (90,557) 47,734
assets
Increase (decrease) in other 113,589 72,258 (284,442)
liabilities
--------------- -------------- --------------
NET CASH
PROVIDED 2,158,716 2,328,568 928,083
BY
OPERATING
ACTIVITIES
--------------- -------------- --------------
CASH FLOWS FROM INVESTING ACTIVITIES
Net decrease in interest-bearing deposits in
other financial institutions 169,912 199,000 --
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F9
<PAGE> 48
FIRST COMMUNITY BANKING SERVICES, INC.
AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
For the years ended December 31,
--------------------------------------------------------
1996 1995 1994
--------------- -------------- --------------
<S> <C> <C> <C>
Purchases of investment securities held to -- -- (2,000,000)
maturity
Maturities of investment securities held to 200,000 -- --
maturity
Purchases of investment securities available (15,840,688) (3,695,725) (7,269,558)
for sale
Purchases of other investments (22,200) (251,000) --
Sales of investment securities available for sale 9,612,343 -- 4,182,800
Maturities of investment securities available 3,923,293 5,971,482 1,981,332
for sale
Proceeds from sales of SBA loans 2,262,441 1,015,625 1,201,400
Proceeds from sales of loans 3,767,646 -- --
Loans originated or acquired, net of principal
repayments (21,233,730) (26,532,829) (819,552)
Purchases of premises and equipment (302,060) (102,365) (559,100)
Sales of premises and equipment -- -- 68,098
Sales of other real estate 107,266 424,295 168,350
--------------- -------------- --------------
NET CASH USED BY
INVESTING (17,355,777) (22,971,517) (1,246,230)
ACTIVITIES ----------- ----------- ----------
(Continued)
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F10
<PAGE> 49
FIRST COMMUNITY BANKING SERVICES, INC.
AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS, (Continued)
<TABLE>
<CAPTION>
For the years ended December 31,
--------------------------------------------------------
1996 1995 1994
--------------- -------------- --------------
<S> <C> <C> <C>
CASH FLOWS FROM FINANCING ACTIVITIES
Net increase (decrease) in federal funds
purchased and securities sold under
agreements to repurchase $ (1,161) $ (1,036,703) $ 535,790
Net increase (decrease) in demand, money
market and savings accounts 1,071,077 7,096,301 (8,921,263)
Time deposits accepted, net of repayments 15,636,413 17,753,553 5,503,590
Proceeds from exercise of stock options and
warrants -- 60,000 --
Cash dividends paid (183,732) (152,360) (121,288)
--------------- -------------- --------------
NET CASH
PROVIDED 16,522,597 23,720,791 (3,003,171)
(USED) BY
FINANCING
ACTIVITIES
--------------- -------------- --------------
NET INCREASE (DECREASE) IN CASH AND
CASH EQUIVALENTS 1,325,536 3,077,842 (3,321,318)
CASH AND CASH EQUIVALENTS AT
BEGINNING OF YEAR 5,852,249 2,774,407 6,095,725
--------------- -------------- --------------
CASH AND CASH EQUIVALENTS AT END OF
YEAR $ 7,177,785 $ 5,852,249 $ 2,774,407
=============== ============== ==============
SUPPLEMENTAL DISCLOSURES OF CASH
PAID:
Interest $ 3,914,375 $ 1,986,011 $ 1,475,440
=============== ============== ==============
Income taxes $ 751,000 $ 508,650 $ 556,932
=============== ============== ==============
SUPPLEMENTAL DISCLOSURES OF NONCASH
FINANCING AND INVESTING
ACTIVITIES:
Acquisition of real estate in settlement $ 437,534 $ -- $ 171,520
of loans
=============== ============== ==============
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F11
<PAGE> 50
FIRST COMMUNITY BANKING SERVICES, INC.
AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
NOTE A--SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
During 1996, the Company changed its name from Fayette County
Bancshares, Inc. to First Community Banking Services, Inc. First Community
Banking Services, Inc. and subsidiary provide fullservice commercial banking
services primarily in Fayette County, Georgia.
The accounting and reporting policies of First Community Banking
Services, 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 First
Community Banking Services, 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 and has interest-bearing deposits with the Federal Home Loan Bank.
F12
<PAGE> 51
FIRST COMMUNITY BANKING SERVICES, INC.
AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
Interest-bearing deposits are reported at cost. Interest income is
recognized based on the simple interest method for principal amounts
outstanding.
F13
<PAGE> 52
FIRST COMMUNITY BANKING SERVICES, INC.
AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
NOTE A--SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, (Continued)
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.
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 Small
Business Administration 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.
Effective January 1, 1996, the Company adopted Statement of Financial
Accounting Standards No. 122 (SFAS 122), "Accounting for Mortgage Servicing
Rights," an amendment of Statement of Financial Accounting Standards No. 65,
"Accounting for Certain Mortgage Banking Activities." The provisions of SFAS 122
denote the accounting distinction between rights to service mortgage loans that
are acquired through loan origination and those acquired through purchase. The
adoption of SFAS 122 did not have a significant impact on the financial
condition or results of operations of 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
F14
<PAGE> 53
FIRST COMMUNITY BANKING SERVICES, INC.
AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
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.
F15
<PAGE> 54
FIRST COMMUNITY BANKING SERVICES, INC.
AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
NOTE A--SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, (Continued)
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.
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.
Effective January 1, 1996, the Company adopted 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 provisions
of SFAS 121 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 121 did not have a
significant impact on the financial condition or results of operations of the
Company.
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.
EARNINGS PER SHARE
F16
<PAGE> 55
FIRST COMMUNITY BANKING SERVICES, INC.
AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
Earnings per share has been computed based on the weighted average
number of common shares outstanding during the period, which totaled 679,790,
640,752 and 637,062 shares in 1996, 1995 and 1994, respectively. Stock options
and warrants, as described in Note L, 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 the year ended December 31, 1996 is dilutive. Stock dividends issued have
been retroactively recognized for all periods presented.
F17
<PAGE> 56
FIRST COMMUNITY BANKING SERVICES, INC.
AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
NOTE A--SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, (Continued)
STOCK-BASED COMPENSATION
The Company accounts for stock options under Accounting Principles
Board Opinion No. 25, "Accounting for Stock Issued to Employees" (APB 25). Under
APB 25, because the exercise price of the Company's stock options equals the
market price of the underlying stock on the date of grant, no compensation
expense is recognized.
Effective January 1, 1996, the Company adopted the disclosure
requirements of Statement of Financial Accounting Standards No. 123 (SFAS 123),
"Accounting for Stock-Based Compensation." As provided by SFAS 123, the Company
has elected to continue applying the provisions of APB 25 in determining its net
income relative to stock-based compensation. The Company has adopted the SFAS
123 requirement that a company disclose the pro forma net income and pro forma
earnings per share, as if the alternative fair-value-based accounting method in
SFAS 123 had been used in determining net income. The adoption of SFAS 123 did
not have a significant impact on the financial condition or results of
operations of the Company.
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 P):
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
F18
<PAGE> 57
FIRST COMMUNITY BANKING SERVICES, INC.
AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
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.
F19
<PAGE> 58
FIRST COMMUNITY BANKING SERVICES, INC.
AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
NOTE A--SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, (Continued)
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
borrower's 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.
PENDING ACCOUNTING PRONOUNCEMENTS
The Financial Accounting Standards Board has issued Statement of
Financial Accounting Standards No. 125 (SFAS 125), "Accounting for Transfers and
Servicing of Financial Assets and Extinguishments of Liabilities." SFAS 125 is
effective for such transactions entered into subsequent to December 31, 1996,
and for certain excess servicing rights recorded at December 31, 1996. Under
SFAS 125, a company recognizes the financial and servicing assets it controls
and the liabilities it has incurred and derecognizes financial assets when
control has been surrendered and liabilities when extinguished. The Financial
Accounting Standards Board has issued Statement of Financial Accounting
Standards No. 127 (SFAS 127), "Deferral of the Effective Date of the FASB
Statement No. 125," which delays the effective date of certain provisions of
SFAS 125 until 1998. The adoption of SFAS 125 and SFAS 127 is not expected to
have a significant impact on the financial condition or results of operations of
the Company.
RECLASSIFICATIONS
Certain reclassifications have been made in the 1995 and 1994 financial
statements to conform with the 1996 presentation.
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 at December 31, 1996 and 1995
F20
<PAGE> 59
FIRST COMMUNITY BANKING SERVICES, INC.
AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
was approximately $720,000 and $450,000, respectively. The Bank maintained cash
balances which were adequate to meet this requirement.
F21
<PAGE> 60
FIRST COMMUNITY BANKING SERVICES, INC.
AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
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>
1996
--------------------------------------------------------------------------
Amortized Unrealized Unrealized Market
Cost Gains Losses Value
------------- ------------ ------------ -------------
<S> <C> <C> <C> <C>
States and political subdivisions $ 1,659,519 $ 12,652 $ 6,208 $ 1,665,963
============= ======== ========== =============
1995
--------------------------------------------------------------------------
Amortized Unrealized Unrealized Market
Cost Gains Losses Value
------------- ------------ ------------ -------------
States and political subdivisions $ 1,858,720 $ 11,140 $ 8,351 $ 1,861,509
============= ======== ========== =============
</TABLE>
The amortized cost and estimated market value of investment securities
available for sale are as follows at December 31:
<TABLE>
<CAPTION>
1996
--------------------------------------------------------------------------
Amortized Unrealized Unrealized Market
Cost Gains Losses Value
------------- ------------ ------------ -------------
<S> <C> <C> <C> <C>
U.S. Treasury securities $ 496,410 $ 152 $ -- $ 496,562
U.S. Government agencies and
corporations 7,882,039 3,660 23,787 7,861,912
Mortgage-backed securities 4,975,955 2,189 191,358 4,786,786
------------- -------- ---------- -------------
$ 13,354,404 $ 6,001 $ 215,145 $ 13,145,260
============= ======== ========== =============
1995
--------------------------------------------------------------------------
Amortized Unrealized Unrealized Market
Cost Gains Losses Value
------------- ------------ ------------ -------------
U.S. Treasury securities $ 1,254,124 $ 9,470 $ - $ 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
------------- -------- ---------- -------------
$ 11,037,584 $ 45,508 $ 191,672 $ 10,891,420
============= ======== ========== =============
</TABLE>
Other investments at December 31, 1996 and 1995 consists of stock in
the Federal Home Loan Bank of Atlanta.
F22
<PAGE> 61
FIRST COMMUNITY BANKING SERVICES, INC.
AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
NOTE C--INVESTMENT SECURITIES, (Continued)
The net unrealized loss on available for sale securities at December
31, 1996 and 1995, net of the related deferred taxes of $71,110 and $49,696, is
$138,034 and $96,468, respectively, and is included as a separate component of
stockholders' equity.
The investment securities classified as available for sale at December
31, 1996, with a market value of approximately $13,145,000, 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 $5,864,000 of these securities are derivative
securities. These securities have stated maturities ranging from 1997 through
2023 and have a current weighted average net yield of 5.92 percent. 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, 1996, 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 $ -- $ -- $ 1,344,715 $ 1,346,327
Due after one year through five years 614,994 616,418 8,144,198 8,135,232
Due after five years through ten years 784,537 784,498 500,000 487,656
Due after ten years 259,988 265,047 3,365,491 3,176,045
------------- ------------- -------------- -------------
$ 1,659,519 $ 1,665,963 $ 13,354,404 $ 13,145,260
============= ============= ============== =============
</TABLE>
Proceeds from sales of investment securities available for sale during
1996 and 1994 were $9,612,201 and $4,182,800, respectively, with gross gains of
$27,287 and $27,663 and gross losses of $27,458 and $127,545 realized on those
sales. There were no sales of investment securities in 1995. Maturities of
investment securities available for sale during 1996, 1995 and 1994 were
$3,923,293, $5,971,418 and $1,981,332, respectively, with gross gains of $660,
$32 and $55 and gross losses of $347, $0 and $1,299 realized on those
transactions.
F23
<PAGE> 62
FIRST COMMUNITY BANKING SERVICES, INC.
AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
Investment securities with amortized costs of approximately $600,000
and $500,000 and market values of approximately $600,000 and $501,000 at
December 31, 1996 and 1995, 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, 1996, the Bank has no outstanding off-balance-sheet
derivative financial instruments such as swaps, options, futures or forward
contracts.
F24
<PAGE> 63
FIRST COMMUNITY BANKING SERVICES, INC.
AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
NOTE D--LOANS
Major classifications of loans are as follows at December 31:
<TABLE>
<CAPTION>
1996 1995
-------------- -------------
<S> <C> <C>
Commercial, financial and agricultural $ 17,340,052 $ 13,352,445
Real estate--commercial 25,713,790 19,508,647
Real estate--individual 12,898,096 13,533,383
Real estate--construction 19,505,888 14,000,093
Installment and single payment individual 5,255,715 5,413,624
Credit cards (see Note Q) 1,375,249 1,635,306
Other 28,799 396,491
-------------- -------------
Total loans 82,117,589 67,839,989
Net deferred loan fees (201,608) (68,639)
-------------- -------------
Loans, net of deferred loan fees $ 81,915,981 $ 67,771,350
============== =============
</TABLE>
Substantially all loans are made to borrowers in the Bank's primary
market area of Fayette, Coweta and Fulton counties. At December 31, 1996 and
1995, the Bank had approximately $58,000,000 and $47,000,000, respectively, of
its portfolio secured by real estate.
Nonaccrual and restructured loans totaled $14,854 and $118,130 at
December 31, 1996 and 1995, respectively. If such loans had been on a
full-accrual basis, interest income would have been approximately $2,000 and
$9,000 higher in 1996 and 1995, respectively. Interest income recognized on
these loans totaled approximately $250 and $4,000, respectively.
At December 31, 1996 and 1995, the Bank has approximately $966,000 and
$1,013,000, respectively, in loans which are impaired under SFAS 114. The
allowance for loan losses related to these loans is approximately $150,000 and
$247,000, respectively, for those years ended. During 1996 and 1995, the average
balance outstanding on these loans was approximately $1,087,000 and $1,017,000,
respectively.
The following is a summary of transactions in the allowance for loan
losses for the years ended December 31:
F25
<PAGE> 64
FIRST COMMUNITY BANKING SERVICES, INC.
AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
<TABLE>
<CAPTION>
1996 1995 1994
------------ ------------ ------------
<S> <C> <C> <C>
Balance, beginning of year $ 918,036 $ 715,230 $ 832,938
1996 1995 1994
------------ ------------ ------------
Provision charged to expense 856,312 335,000 92,000
Loans charged off (583,332) (170,909) (244,549)
Recoveries of loans previously charged off 23,157 38,715 34,841
------------ ------------ ------------
Balance, end of year $ 1,214,173 $ 918,036 $ 715,230
============ ============ ============
Included in loans charged off for 1996 and 1995 were approximately
$325,000 and $14,000 of impaired loans.
</TABLE>
F26
<PAGE> 65
FIRST COMMUNITY BANKING SERVICES, INC.
AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
NOTE E--PREMISES AND EQUIPMENT
Premises and equipment are comprised of the following at December 31:
<TABLE>
<CAPTION>
1996 1995
------------ ------------
<S> <C> <C>
Land $ 900,187 $ 900,187
Buildings 2,054,685 2,051,185
Furniture, fixtures and equipment 1,373,301 1,141,487
------------ ------------
4,328,173 4,092,859
Less: Accumulated depreciation (975,769) (826,455)
------------ ------------
Premises and equipment, net $ 3,352,404 $ 3,266,404
============ ============
</TABLE>
The charge to operating expense for depreciation totaled $216,060,
$189,228 and $203,817 in 1996, 1995 and 1994, 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 $4,500,000 at December 31, 1996. There were no amounts
outstanding under these lines at December 31, 1996 and 1995. The maximum and
daily average amounts of federal funds purchased during 1996 and 1995 were
approximately $4,840,000 and $268,000, respectively, for 1996 and $4,000,000 and
$101,000, respectively, for 1995. The maximum outstanding amount was greater
than the credit line in 1996 due to temporary increases in existing federal
funds lines with a correspondent bank. The average interest rate paid on the
federal funds purchased in 1996 and 1995 was 4.52 and 6.54 percent,
respectively.
There were no securities sold under agreements to repurchase
outstanding during 1996. At December 31, 1995, the Bank had outstanding
securities sold under agreements to repurchase of $1,161. The maximum and daily
average amounts of securities sold under agreements to repurchase during 1995
were approximately $848,000 and $140,000, respectively, and the average interest
rate paid was 4.2 percent.
The Bank also has established a $12,000,000 repurchase agreement with a
correspondent bank. Any advances under this agreement will be collateralized by
investment securities of the Bank. There were no advances under this agreement
during 1996 or 1995.
F27
<PAGE> 66
FIRST COMMUNITY BANKING SERVICES, INC.
AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
The Bank has also established a $5,000,000 line of credit
with the Federal Home Loan Bank. Any advances under this agreement will be
collateralized by real estate mortgage loans. There were no advances under this
agreement in 1996 or 1995.
F28
<PAGE> 67
FIRST COMMUNITY BANKING SERVICES, INC.
AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
NOTE G--TIME DEPOSITS
At December 31, 1996, the scheduled maturities of time deposits are as
follows:
<TABLE>
<CAPTION>
1996
-------------
<S> <C>
1997 $ 41,234,679
1998 11,135,975
1999 and thereafter 3,754,722
-------------
$ 56,125,376
=============
</TABLE>
NOTE H--INCOME TAXES
The following are the components of income tax expense as provided for
the years ended December 31:
<TABLE>
<CAPTION>
1996 1995 1994
------------ ------------ ------------
<S> <C> <C> <C>
Current income tax provision:
Federal $ 748,799 $ 466,188 $ 293,626
State 82,953 35,831 30,192
Deferred income tax provision (benefit) (132,179) 59,456 48,418
------------ ------------ ------------
$ 699,573 $ 561,475 $ 372,236
============ ============ ============
</TABLE>
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:
<TABLE>
<CAPTION>
1996 1995 1994
------------ ------------ ------------
<S> <C> <C> <C>
Pretax income $ 1,953,984 $ 1,583,722 $ 1,167,610
============ ============ ============
Income taxes computed at Federal statutory tax rate $ 664,355 $ 538,465 $ 396,987
Increase (decrease) resulting from:
Tax-exempt interest income (26,876) (29,079) (28,438)
State income taxes 49,938 35,831 30,192
Other, net 12,156 16,258 (26,505)
------------ ------------ ------------
$ 699,573 $ 561,475 $ 372,236
============ ============ ============
</TABLE>
F29
<PAGE> 68
FIRST COMMUNITY BANKING SERVICES, INC.
AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
NOTE H--INCOME TAXES, (Continued)
The following summarizes the tax effects of temporary differences which
comprise the net deferred tax assets at December 31:
<TABLE>
<CAPTION>
1996 1995
----------- -----------
<S> <C> <C>
Reserve for loan losses $ 311,515 $ 240,150
Intangible assets (74,186) (78,173)
Accumulated depreciation (127,857) (113,113)
Deferred loan fees 99,724 26,083
Market valuation reserve 71,110 49,696
Other, net 32,974 35,044
----------- -----------
$ 313,280 $ 159,687
=========== ===========
</TABLE>
NOTE I--EMPLOYEE BENEFIT PLAN
The Bank sponsors an Internal Revenue Code Section 401(k) Employee Savings
Plan that permits an employee to defer annual cash compensation. The Bank's
Board of Directors determines the Bank's contribution, which was $34,526 in
1996, $16,920 in 1995 and $8,341 in 1994, respectively.
NOTE J--RELATED PARTY TRANSACTIONS
As of December 31, 1996 and 1995, the Bank had direct and indirect loans
which aggregated $2,229,706 and $1,702,209, respectively, outstanding to or for
the benefit of certain of the Bank's officers, directors, and their related
interests. During 1996, $1,037,836 of such loans were made and repayments
totaled $440,339. 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.
As discussed in Note N, the Bank had a concentration of deposits with three
customers in 1996 and two customers and their related entities in 1995. Of these
amounts, approximately $9,046,000 and $6,852,000 were from certain bank
directors and their related interests at December 31, 1996 and 1995,
respectively. These deposits were made in conformity with normal banking terms
and rates prevailing at the time of origination.
F30
<PAGE> 69
FIRST COMMUNITY BANKING SERVICES, INC.
AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
NOTE K--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
following table) 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). As of December 31, 1996, the most
recent notification from the Federal Deposit Insurance Corporation categorized
the Bank as well capitalized under the regulatory framework for prompt
corrective action. There are no conditions or events since that notification
that management believes has changed the Bank's category. To be considered well
capitalized and 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>
1996
----------------------------------------------------------------------------
Adequately
Well Capitalized Capitalized
Requirement Requirement Actual
Amount (Ratio) Amount (Ratio) Amount (Ratio)
----------------------- ----------------------- ----------------------
<S> <C> <C> <C> <C> <C> <C>
Tier 1 Capital (to Average Assets) $> 5,377,626 >= 5.0% $ 4,302,101 4.0% $ 8,817,186 8.2%
-
Tier 1 Capital (to Risk Weighted Assets) $> 5,213,522 >= 6.0% $ 3,475,681 4.0% $ 8,817,186 10.2%
-
Total Capital (to Risk Weighted Assets) $> 8,689,203 >=10.0% $ 6,951,362 8.0% $ 9,903,347 11.4%
</TABLE> -
<TABLE>
<CAPTION>
1995
----------------------------------------------------------------------------
Adequately
Well Capitalized Capitalized
Requirement Requirement Actual
Amount (Ratio) Amount (Ratio) Amount (Ratio)
----------------------- ----------------------- ----------------------
<S> <C> <C> <C> <C> <C>
Tier 1 Capital (to Average Assets) $> 4,591,746 >= 5.0% $ 3,673,397 4.0% $ 7,613,050 8.3%
-
Tier 1 Capital (to Risk Weighted Assets) $> 4,316,719 >= 6.0% $ 2,877,813 4.0% $ 7,613,050 10.6%
-
Total Capital (to Risk Weighted Assets) $> 7,194,532 >=10.0% $ 5,755,626 8.0% $ 8,512,406 11.8%
-
</TABLE>
Management believes, as of December 31, 1996, that the Bank meets all
capital requirements to which it is subject.
F31
<PAGE> 70
FIRST COMMUNITY BANKING SERVICES, INC.
AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
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,
1996, total stockholder's equity of the Bank was $9,287,901 of which
approximately $549,000 was available for dividends without prior approval or
violation of regulatory capital requirements.
F32
<PAGE> 71
FIRST COMMUNITY BANKING SERVICES, INC.
AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
NOTE K--STOCKHOLDERS' EQUITY, (Continued)
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.
NOTE L--STOCK-BASED COMPENSATION
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 at the
date of grant 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>
1996 1995
----------------------- -----------------------
Weighted Weighted
Average Average
Exercise Exercise
Shares Price Shares Price
-------- ---------- -------- -----------
<S> <C> <C> <C> <C>
Outstanding, beginning of year 8,000 $ 10.00 14,000 $ 10.00
Granted during year -- -- -- --
Exercised during year -- -- (6,000) 10.00
Expired during year -- -- -- --
----- ------ ----- ------
Outstanding, end of year 8,000 $ 10.00 8,000 $ 10.00
===== ======= ===== =======
Options exercisable at year-end 8,000 8,000
===== =====
</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. In 1995, a total of 64,000 shares were granted to
directors with an exercise price of $11.31 per share. The options vest over
a four-year period and expire in 2004. An additional 16,600 shares were
granted in 1995 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.
During 1996, the Company granted 18,500 shares to executive officers with
an exercise price of $20.00 per share. The options vest over a five-year
period and expire in 2007. Summarized information related to these options
is as follows at December 31:
F33
<PAGE> 72
FIRST COMMUNITY BANKING SERVICES, INC.
AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
NOTE L--STOCK-BASED COMPENSATION, (Continued)
<TABLE>
<CAPTION>
1996 1995
----------------------- -----------------------
Weighted Weighted
Average Average
Exercise Exercise
Shares Price Shares Price
-------- ---------- -------- -----------
<S> <C> <C> <C> <C>
Outstanding, beginning of year 79,400 $ 11.49 -- $ --
Granted during year 18,500 20.00 80,600 11.51
Exercised during year -- -- -- --
Forfeited during year -- -- (1,200) 12.26
Expired during year -- -- -- --
-------- ------ -------- -----
Outstanding, end of year 97,900 $ 13.10 79,400 $11.49
======== ======= ======== ======
Options exercisable at year-end 35,080 16,000
======== ========
Weighted average fair value of options granted
during the year $ 8.68 $ 5.75
======== ========
</TABLE>
The following table summarizes information about the Company's two fixed
stock option plans at December 31, 1996:
<TABLE>
<CAPTION>
Options Outstanding Options Exercisable
------------------------------------------------------- -------------------------------------
Weighted
Average Weighted Weighted
Range of Number Remaining Average Number Average
Exercise Outstanding at Contractual Exercise Exercisable at Exercise
Price December 31, 1996 Life Price December 31,1996 Price
--------------- ---------------------- ------------- ----------- ---------------------- ----------
<S> <C> <C> <C> <C> <C>
$ 10.00 - 14.25 87,400 6.7 $ 11.36 43,080 $ 11.13
20.00 18,500 10.0 20.00 -- --
---------- ------ ------ --------- ------
105,900 7.3 $ 12.87 43,080 $ 11.13
========== ====== ======= ========= =======
</TABLE>
At December 31, 1996, the Company has two stock-based compensation plans
which are described in the preceding table. The Company applies APB 25 and
related Interpretation in accounting for its plans. Accordingly, no compensation
cost has been recognized for the Company's stock option plans in 1996 or 1995.
Had compensation cost for the Company's stock-based compensation plans been
determined based
F34
<PAGE> 73
FIRST COMMUNITY BANKING SERVICES, INC.
AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
on the fair value at the grant dates for awards under those plans consistent
with the method of SFAS 123, the Company's net income and earnings per share
would have been reduced to the pro forma amounts indicated as follows:
F35
<PAGE> 74
FIRST COMMUNITY BANKING SERVICES, INC.
AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
NOTE L--STOCK-BASED COMPENSATION, (Continued)
<TABLE>
<CAPTION>
For the years
ended December 31,
------------------------------
1996 1995
------------ ------------
<S> <C> <C>
Net income
As reported $ 1,254,411 $ 1,022,247
Pro forma 1,148,428 716,629
Earnings per share
As reported $ 1.85 $ 1.60
Pro forma 1.69 1.12
</TABLE>
The fair value of each option grant is estimated on the date of grant using
the Black-Scholes option- pricing model with the following weighted average
assumptions used for grants in 1996 and 1995: dividend yield of 1.5 percent and
1.8 percent, expected volatility of 38 percent for both years, risk-free
interest rate of 6.5 percent and 5.8 percent, and expected lives of ten years
and seven years, respectively.
NOTE M--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 it does for on-balance-sheet instruments.
A commitment to extend credit is an agreement to lend to a customer as long
as there is no violation of any condition established in the commitment
agreement. Commitments generally have fixed expiration dates or other
termination clauses and may require the 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, 1996 and 1995, total commitments to extend credit were
approximately $15,771,000 and $12,177,000, respectively, in unfunded loan
commitments and $6,074,000 and $6,492,000, respectively, in available credit
card advances (see Note Q). The Bank's experience has been that approximately 60
percent of loan commitments are drawn upon by customers.
F36
<PAGE> 75
FIRST COMMUNITY BANKING SERVICES, INC.
AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
NOTE M--OFF-BALANCE-SHEET FINANCIAL INSTRUMENTS, (Continued)
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, 1996 and 1995, commitments
under standby letters of credit aggregated approximately $70,000 and $28,000,
respectively. In 1996 and 1995, the Bank was required to perform on a standby
letter of credit totaling approximately $0 and $16,000, respectively.
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 N--DEPOSIT CONCENTRATIONS
At December 31, 1996 and 1995, the Bank had deposits of approximately
$13,021,000 from three customers and their related entities and $14,607,000 from
two customers and their related entities, respectively. (See Note J)
NOTE O--SUPPLEMENTAL FINANCIAL DATA
Components of other expense in excess of 1 percent of total interest and
other income are as follows for the years ended December 31:
<TABLE>
<CAPTION>
1996 1995 1994
--------- ---------- ----------
<S> <C> <C> <C>
Printing and supplies $ 89,164 $ 57,160 $ 57,160
FDIC assessment 240,303 113,654 150,897
Insurance premiums on loans 47,782 75,958 72,843
Director fees 106,900 84,600 66,481
</TABLE>
F37
<PAGE> 76
FIRST COMMUNITY BANKING SERVICES, INC.
AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
NOTE P--FAIR VALUES OF FINANCIAL INSTRUMENTS
The estimated fair values of the Company's financial instruments are as
follows at December 31:
<TABLE>
<CAPTION>
1996 1995
--------------------------------- ---------------------------------
Carrying Estimated Carrying Estimated
Value Fair Value Value Fair Value
------------- ------------- -------------- -------------
<S> <C> <C> <C> <C>
Financial assets:
Cash and cash equivalents $ 7,177,785 $ 7,177,785 $ 5,852,249 $ 5,852,249
Interest-bearing deposits 25,088 25,088 195,000 195,000
Investment securities held to
maturity 1,659,519 1,665,963 1,858,720 1,861,509
Investment securities available for
sale 13,145,260 13,145,260 10,891,420 10,891,420
Other investments 273,200 273,200 251,000 251,000
Loans 81,915,981 81,989,000 67,771,350 67,885,000
Accrued interest receivable 885,625 885,625 700,771 700,771
Financial liabilities:
Noncontractual deposits $42,018,990 $42,018,990 $40,947,913 $40,947,913
Contractual deposits 56,125,376 56,424,000 40,488,963 40,628,000
Short-term borrowings -- -- 1,161 1,161
Accrued interest payable 941,468 941,468 1,169,413 1,169,413
Off-balance-sheet instruments:
Undisbursed credit lines $15,771,000 $12,194,048
Available credit card advances 6,074,000 6,501,089
Standby letters of credit 69,575 28,039
</TABLE>
NOTE Q--SUBSEQUENT EVENT
On January 30, 1997, the Company sold its credit card portfolio to a third
party. At December 31, 1996, $1,375,249 was outstanding in credit card loans.
Total proceeds from this sale were approximately $1,366,000, which resulted in a
loss of $72,970, including $72,863 in write-off of unamortized purchase premium.
This transaction will be reflected in the Company's 1997 financial statements.
F38
<PAGE> 77
FIRST COMMUNITY BANKING SERVICES, INC.
AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
NOTE R--CONDENSED FINANCIAL INFORMATION OF FIRST COMMUNITY BANKING
SERVICES, INC.
CONDENSED BALANCE SHEETS
(Parent Only)
<TABLE>
<CAPTION>
December 31,
---------------------------------
1996 1995
-------------- -------------
ASSETS
<S> <C> <C>
Cash on deposit with subsidiary $ 17,291 $ 15,575
Investment in subsidiary 9,149,867 8,083,254
Other assets -- 39,036
----------- -----------
TOTAL ASSETS $ 9,167,158 $ 8,137,865
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
LIABILITIES
Accounts payable $ 2,442 $ 2,262
----------- -----------
TOTAL LIABILITIES 2,442 2,262
----------- -----------
STOCKHOLDERS' EQUITY
Common stock 643,062 612,440
Surplus 6,096,901 5,561,016
Retained earnings 2,562,787 2,058,615
Market valuation reserve on investment securities
available for sale (138,034) (96,468)
----------- -----------
TOTAL STOCKHOLDERS' EQUITY 9,164,716 8,135,603
----------- -----------
TOTAL LIABILITIES AND
STOCKHOLDERS' EQUITY $ 9,167,158 $ 8,137,865
=========== ===========
</TABLE>
F39
<PAGE> 78
FIRST COMMUNITY BANKING SERVICES, INC.
AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
NOTE R--CONDENSED FINANCIAL INFORMATION OF FIRST COMMUNITY BANKING
SERVICES, INC., (Continued)
CONDENSED STATEMENTS OF INCOME
(Parent Only)
<TABLE>
<CAPTION>
For the years ended December 31,
----------------------------------------------------
1996 1995 1994
------------- -------------- -------------
<S> <C> <C> <C>
OPERATING INCOME
Dividends from subsidiary $ 183,732 $ 20,000 $ 121,288
Other income 562 651 49
------------- -------------- -------------
TOTAL OPERATING INCOME 184,294 20,651 121,337
------------- -------------- -------------
OPERATING EXPENSE
Amortization of organization costs -- -- 5,772
Depreciation of premises -- -- 722
Other expense 56,903 115,462 17,468
------------- -------------- -------------
TOTAL OPERATING EXPENSE 56,903 115,462 23,962
------------- -------------- -------------
INCOME (LOSS) BEFORE INCOME TAX
BENEFIT AND EQUITY IN UNDISTRIBUTED
EARNINGS OF SUBSIDIARY 127,391 (94,811) 97,375
INCOME TAX BENEFIT 18,841 39,036 9,571
------------- -------------- -------------
INCOME (LOSS) BEFORE EQUITY IN
UNDISTRIBUTED EARNINGS OF
SUBSIDIARY 146,232 (55,775) 106,946
EQUITY IN UNDISTRIBUTED EARNINGS OF
SUBSIDIARY 1,108,179 1,078,022 688,428
------------- -------------- -------------
NET INCOME $ 1,254,411 $ 1,022,247 $ 795,374
============= ============== =============
</TABLE>
F40
<PAGE> 79
FIRST COMMUNITY BANKING SERVICES, INC.
AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
NOTE R--CONDENSED FINANCIAL INFORMATION OF FIRST COMMUNITY BANKING
SERVICES, INC., (Continued)
CONDENSED STATEMENTS OF CASH FLOWS
(Parent Only)
<TABLE>
<CAPTION>
For the years ended December 31,
----------------------------------------------------
1996 1995 1994
------------- -------------- -------------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING
ACTIVITIES
Net income $ 1,254,411 $ 1,022,247 $ 795,374
Equity in undistributed earnings of subsidiary (1,108,179) (1,078,022) (688,428)
Amortization of organization costs -- -- 5,772
Depreciation of premises -- -- 722
Increase (decrease) in other assets 39,036 (21,673) (9,571)
Increase (decrease) in other liabilities 180 (1,164) 213
------------- -------------- -------------
NET CASH PROVIDED (USED) BY
OPERATING ACTIVITIES 185,448 (78,612) 104,082
------------- -------------- -------------
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 --
Dividends paid (183,732) (152,360) (121,288)
------------- -------------- -------------
NET CASH USED BY FINANCING
ACTIVITIES (183,732) (92,360) (121,288)
------------- -------------- -------------
NET INCREASE (DECREASE) IN CASH 1,716 (170,972) 50,892
CASH, BEGINNING OF YEAR 15,575 186,547 135,655
------------- -------------- -------------
CASH, END OF YEAR $ 17,291 $ 15,575 $ 186,547
</TABLE>
F41
<PAGE> 1
EXHIBIT 10.7
PURCHASE AGREEMENT
CREDIT CARD ACCOUNTS
THIS AGREEMENT is made and entered into as of the 23rd day of January,
1997, by and between Carolina First Bank, a banking corporation organized
under the laws of the State of South Carolina and located at 102 South Main
Street, Greenville, South Carolina 29601 (Carolina First) and Fayette County
Bank, a Georgia based bank located at 300 Peachtree Parkway South, Peachtree
City, Georgia 30269 (Bank).
WITNESSETH:
WHEREAS, Bank owns a portfolio ("Credit Card Portfolio") of credit card
receivable accounts (individually, an "Account"); and
WHEREAS, Carolina First desires to purchase the Credit Card Portfolio
from Bank; and Bank desires to sell such Credit Card Portfolio to Carolina
First subject to the terms and conditions herein set forth.
NOW, THEREFORE, in consideration of the foregoing, and the mutual
covenants contained herein, and other good and valuable consideration, the
receipt and sufficiency of which is hereby acknowledged, the parties agree as
follows:
1. General. On the Closing Date as defined below, Bank shall, subject to
the terms and conditions of this Agreement and pursuant to the Bill of Sale and
Assignment, substantially in the form attached as Exhibit A (the "Bill of
Sale") convey, transfer, assign, sell and deliver to Carolina First (i) all
right, title and interest of Bank in and to all of the rights of Bank related
to the Credit Card Portfolio with the exception of those Accounts deemed to be
Non-Conforming Accounts as defined below, and (ii) all right, title and
interest of Bank in and to any payments, past due interest, penalties, fees,
and any other charges or amounts due of any kind or nature whatsoever received
or arising after a specific cut-off date which shall be established by mutual
agreement of the parties ("Cut-Off Date"). This Agreement shall govern the
sale and transfer of such Credit Card Portfolio by Bank to Carolina First and
each Account shall be subject to the warranties, representations, and
agreements herein.
2. Price. The purchase price for the Credit Card Portfolio ("Purchase
Price") shall be one hundred twelve percent (I 12.00%) of the outstanding
balance of Accounts as of the Cut-Off Date that have no Negative Condition or
History. These accounts will never have been thirty-five (35) days or more
delinquent or reaged and will not be thirty-five (35) days or more delinquent
as of the Cut-Off Date. The Purchase Price for all other accounts shall be
eighty -five percent (85.00%) of the outstanding balance of Accounts as of the
Cut-Off Date.
3. Non-Conforming Accounts. Not later than the Cut-Off Date, Bank shall
provide to Carolina First a list of all Accounts which Bank proposes to
transfer to Carolina First pursuant to this Agreement, together with all
information relating to such Accounts. Carolina First shall review such
Accounts and information and shall have the right to reject any such Accounts
with
<PAGE> 2
the following characteristics ("Non-Conforming Accounts"):
a. Accounts for which notice has been given to Bank or Resource
Processing Group Inc. ("Servicer") on or before the Cut-Off Date that the
primary account debtor is in bankruptcy or is seeking similar relief or
protection from creditors;
b. Accounts for which Bank or Servicer have notice as of the
Cut-Off Date that the primary Account debtor was deceased;
c. Accounts for which Bank or Servicer have notice as of the
Cut-Off Date that the card has been lost or stolen or otherwise fraudulent;
d. Accounts for a person or entity who had either filed a lawsuit
against Bank or Servicer arising out of or in connection with the account, or
for any person or entity who or which had, given oral or written notice to Bank
or Servicer, threatening to instigate litigation against Seller or Servicer in
connection with or arising out of the account or accounts or the servicing
thereof by Servicer.
4. Closing. The closing of the transactions contemplated herein (the
"Closing") shall take place, via facsimile transmission and/or overnight
delivery of executed documents, unless otherwise agreed to by the parties
hereto, on January 31,1997 (the "Closing Date"). The closing shall be subject
to the fulfillment of all terms and conditions set forth herein which are
applicable prior to the Closing, unless such terms and conditions have been
effectively waived.
5. Representations and Warranties of Carolina First. As of the date
hereof and as of the Closing Date, Carolina First represents and warrants to
Bank as follows:
a. Carolina First Bank is a state chartered banking association
duly organized, validly existing and in good standing under the laws of the
state of South Carolina and (i) has, in all material respects, all requisite
corporate power and authority to own, operate and lease its material properties
and carry on its business as it is currently being conducted; (ii) is in good
standing and is duly qualified to do business in each jurisdiction where the
character of its properties owned or held under lease or the nature of its
business makes such qualification necessary.
b. Carolina First has all requisite corporate power and authority
to execute and deliver this Agreement and to consummate the transactions
contemplated hereby. This Agreement, and all other agreements contemplated to
be executed in connection herewith by Carolina First have been (or upon
execution will have been) effectively authorized by all necessary action,
corporate or otherwise, and no other proceedings on the part of Carolina First
are (or will be) necessary to authorize such execution, delivery, and
consummation of the purchase and the other transactions contemplated hereby and
constitute (or upon execution will constitute) legal, valid and enforceable
obligations of Carolina First, subject, as to enforceability, to applicable
bankruptcy, insolvency, reorganization, moratorium or similar laws affecting
the enforcement of creditors rights generally, and to the application of
equitable principles and judicial discretion.
<PAGE> 3
c. The execution and delivery of this Agreement, the consummation
of the transactions contemplated hereby and the fulfillment of the terms hereof
will not result in a breach of any of the terms or provisions of, or constitute
a default under (or an event which, with the passage of time or the giving of
notice or both, would constitute a default under), or conflict with, or permit
the acceleration of any obligation under, any mortgage, lease, covenant,
agreement, indenture or other instrument to which Carolina First is a party or
by which it or its property or any of its assets is bound; the Articles of
Association or Bylaws of Carolina First; or any judgment, decree, order or
award of any court, governmental body, or arbitrator by which Carolina First is
bound; or any ordinance, rule or regulation applicable to Carolina First or its
properties; or result in the creation of any lien, claim, security interest,
encumbrance, charge, restriction or right of any third party of any kind
whatsoever upon the property or assets of Carolina First.
d. Carolina First is not a party to, subject to or bound by any
agreement, judgment, order, writ, prohibition, injunction or decree of any
court or other governmental body of competent jurisdiction which would prevent
the execution of this Agreement by Carolina First, its delivery to Bank or the
consummation of the transactions contemplated hereby, and no action or
proceeding is pending against Carolina First in which the validity of this
Agreement, any of the transactions contemplated hereby or any action which has
been taken by any of the parties in connection herewith or in connection with
any of the transactions contemplated hereby is at issue.
e. No consent, approval, order or authorization of, or
registration, declaration or filing with any federal, state or local
governmental authority is required to be made or obtained by Carolina First in
connection with the execution and delivery of this Agreement or the
consummation of the transactions contemplated hereby by Carolina First.
6. Representations and Warranties of Bank. As of the date hereof and as
of the Closing Date, Bank represents and warrants to Carolina First as follows:
a. Bank is a corporation duly organized, validly existing and in
good standing under the laws of the State of Georgia and (i) has, in all
material respects, all requisite corporate power and authority to own, operate
and lease its material properties and carry on its business as it is currently
being conducted; (ii) is in good standing and is duly qualified to do business
in each jurisdiction where the character of its properties owned or held under
lease or the nature of its business makes such qualification necessary.
b. Bank has all requisite corporate power and authority to
execute and deliver this Agreement and to consummate the transactions
contemplated hereby. This Agreement, and all other agreements contemplated to
be executed in connection herewith by Bank have been (or upon execution will
have been) effectively authorized by all necessary action, corporate or
otherwise, and no other proceedings on the part of Bank are (or will be)
necessary to authorize such execution, delivery, and consummation of the
purchase and the other transactions contemplated hereby and constitute (or upon
execution will constitute) legal, valid and enforceable obligations of Bank,
subject, as to enforceability, to applicable bankruptcy, insolvency,
reorganization, moratorium or similar laws relating to right of creditors of
FDIC
<PAGE> 4
insured institutions, or affecting the enforcement of creditors rights
generally, and to the application of equitable principles and judicial
discretion.
c. The execution and delivery of this Agreement, the consummation
of the transactions contemplated hereby and the fulfillment of the terms hereof
will not result in a breach of any of the terms or provisions of, or constitute
a default under (or an event which, with the passage of time or the giving of
notice or both, would constitute a default under), or conflict with or permit
the acceleration of any obligation under, any mortgage, lease, covenant,
agreement, indenture or other instrument to which Bank is a party or by which
it or its property or any of its assets is bound; the Articles of Incorporation
or Bylaws of Bank; or any judgment, decree, order or award of any court,
governmental body, or arbitrator by which Bank is bound; or any ordinance, rule
or regulation applicable to Bank or its properties;. or result in the creation
of any lien, claim, security interest, encumbrance, charge, restriction or
right of any third party of any kind whatsoever upon the property or assets of
Bank.
d. Bank is not a party to, subject to or bound by any agreement,
judgment, order, writ, prohibition, injunction or decree of any court or other
governmental body of competent jurisdiction which would prevent the execution
of this Agreement by Bank, its delivery to Carolina First or the consummation
of the transactions contemplated hereby, and no action or proceeding is pending
against Bank in which the validity of this Agreement, any of the transactions
contemplated hereby or any action which has been taken by any of the parties in
connection herewith or in connection with any of the transactions contemplated
hereby is at issue.
e. Bank is the sole owner and holder of the Credit Card Portfolio
and has full rights, subject to no interest or participation of, or agreement
with, any other party to sell or assign the same to any other party. To the
best knowledge of Bank, delivery to Carolina First of the instruments of
transfer of ownership contemplated by this Agreement will vest good and
marketable title to the Credit Card Portfolio in Carolina First, free and clear
of all liens, charges, and encumbrances of any party claiming through the Bank.
f. The terms and conditions of each individual Account agreement
has been accepted by the obligor(s) and creates a valid and legally binding
obligation of the obligor(s).
g. The Bill of Sale is valid and sufficient to assign to and
perfect in Carolina First all of the Bank's right, title, and interest in and
to each Account. The Credit Card Portfolio is freely assignable and
transferable to Carolina First.
h. The documents submitted by Bank pursuant to this Agreement are
genuine; any documents submitted by Bank to Carolina First which Carolina First
requires to be original documents, are original documents; all certified copies
of original documents are true copies of the originals; all Account data
provided by Bank is correct in all material respects; and all other
representations by Bank as to the Credit Card Portfolio are true and correct in
all material respects.
i. Bank has observed all applicable federal, state, and local
laws, regulations and
<PAGE> 5
rules in the process of originating the Accounts, including, but not limited
to, the Equal Credit Opportunity Act and Regulation B, the Federal Truth in
Lending Act and Regulation Z, licensing laws, usury laws, sale-of-servicing
laws, and any other applicable laws, rules, or regulations which prohibit or
limit fees, charges, or costs which lenders may impose on borrowers. Bank will
continue to comply with applicable record retention and similar requirements as
to the Credit Card Portfolio. As and when required, Bank shall provide to
Carolina First any necessary information to enable Carolina First to comply
with reporting requirements incident to acting as purchaser and/or servicer of
the Credit Card Portfolio.
j. This Agreement and all information and documentation provided
now and in the future pursuant to this Agreement is true, complete and correct
to the Bank's best knowledge, and no such information or documentation contains
any misrepresentation or untrue statement of fact or omits or will omit to
state a fact necessary to make the information not misleading.
7. Covenants of Carolina First:
a. Until the consummation of the transactions contemplated
hereby, Carolina First and its agents and authorized representatives shall keep
confidential all non-public information with respect to the Credit Card
Portfolio or the Bank obtained by them pursuant to this Agreement.
b. On and after the Closing Date Carolina First shall give such
further assurances to Bank and upon Banks request shall execute, acknowledge
and deliver all such acknowledgments and other instruments and take such
further action as may be necessary and appropriate to performing its
obligations under the Accounts in accordance with the terms thereof and with
applicable law.
8. Covenants of Bank:
a. Between the date of this agreement and Closing Date, Bank
shall afford to Carolina First and its authorized agents and representatives
access to the properties, operations, books, records, contracts, documents,
credit files, and other information of or relating to the Credit Card
Portfolio, whether such information is maintained by Bank or by Servicer. Bank
shall cause its personnel and Servicer to provide reasonable assistance to
Carolina First in its investigation of matters relating to the Credit Card
Portfolio. Bank shall also cause Servicer to provide to Carolina First access
to all information in Servicer's possession relating to its servicing the
Credit Card Portfolio.
b. Except as otherwise permitted by this Agreement, or consented
to by Carolina First in writing, prior to the Closing, Bank will continue to
conduct its business with respect to the Credit Card Portfolio only in the
ordinary course of business and will not do or permit to be done, anything
which is represented and warranted not to have occurred since the date hereof.
c. Bank and Carolina First shall mutually agree upon an
appropriate form of notice to named Account holders. Each party shall agree
upon the contents of any such notification letter.
<PAGE> 6
Bank shall maintain a current listing of all Account holders, which shall be
the mailing list utilized for notification purposes.
d. Following any Account holder notification referenced in
subparagraph (c) above, Carolina First may communicate with and deliver
information brochures, bulletins and other communications to the named account
holders within the Credit Card Portfolio concerning the transactions
contemplated by this Agreement and concerning the business and operations of
Carolina First.
e. Bank shall accrue to the benefit of Carolina First any
payments of principal and interest received by Bank from individual borrowers
within the Credit Card Portfolio after the Cut-Off Date.
f. At all times to and including, and as of, the Closing, Bank
shall inform Carolina First in writing of any and all facts necessary to amend
or supplement the representations and warranties made herein and any Schedules
attached hereto as necessary so that the information contained herein and
therein accurately reflects the current status of the Credit Card Portfolio;
provided however, that any such updates to Schedules shall be required prior to
the Closing only with respect to matters which represent material changes to
the Schedules and the information contained therein; and further provided that
Carolina First shall have agreed in writing to all amendments, supplements or
updates to the Schedules made subsequent to the date of the Agreement as an
amendment to this Agreement.
g. On and after the Closing Date, Bank shall (i) give such
further reasonable assurances to Carolina First and shall execute, acknowledge
and deliver all such bills of sale, assignments, acknowledgements and other
instruments (including execution of all necessary UCC financing statements) and
take such further action as may be necessary and appropriate effectively to
vest in Carolina First full, legal and equitable title to the Credit Card
Portfolio and the benefits thereof, and (ii) use its best efforts to timely
assist Carolina First in the orderly transition of the Credit Card Portfolio.
Without limiting the foregoing, Bank agrees to the following specific
undertakings on Bank's part:
i. Bank shall remit to Carolina First promptly after
receipt by Bank after the Closing Date at any of its offices all payments
relating to the Credit Card Portfolio or amounts intended for deposit to the
Accounts or otherwise properly payable with respect to the Credit Card
Portfolio;
ii. With respect to charges, checks or drafts drawn
against accounts which comprise the Credit Card Portfolio, Bank and Carolina
First will cooperate with each other and take all reasonable steps requested by
either party to ensure that, on and after the Cut-Off Date, each such item
which is coded for presentment to Bank or for the account of Bank is delivered
to Carolina First in a timely manner and in accordance with applicable law and
applicable clearing house rules or agreements.
9. Conditions to Obligations of Bank to Close. Unless waived in writing
by Bank, the
<PAGE> 7
obligation of Bank to consummate the transactions contemplated by this
Agreement is subject to the satisfaction at or prior to the Closing Date of the
following conditions:
a. Each of the material acts and undertakings of Carolina First
to be performed at or before the Closing Date pursuant to this Agreement shall
have been duly performed.
b. The representations and warranties of Carolina First contained
in this Agreement shall be true and complete, in all material respects, on and
as of the Closing Date with the same effect as though made on and as of the
Closing Date.
c. Bank shall have received the following documents and
instruments from Carolina First:
i. a certificate from the Secretary or Assistant
Secretary of Carolina First dated as of the Closing Date certifying that:
(1) The Chairman of Carolina First Bank ("CFB")
is duly authorized to execute this Agreement and authorize the consummation of
the transactions contemplated herein, and by and through his signature attached
hereto has so approved the substantive terms of this Agreement, authorized the
consummation of the transactions contemplated by this Agreement, and such
approval and authorization is binding upon Carolina First;
(2) Each person executing this Agreement on
behalf of Carolina First is an officer of Carolina First holding the office or
offices specified therein and that the signature of each person set forth on
such certificate is his or her genuine signature;
(3) The charter documents of Carolina First
remain in full force and effect; and
(4) Carolina First is a state bank in good
standing with the South Carolina Banking Commission
ii. a certificate signed by a duly authorized officer of
Carolina First stating that the conditions set forth in Sections 9(a) and 9(b)
above have been fulfilled.
d. Bank shall have received any Purchase Price or other sums due
Bank pursuant to the terms of this Agreement.
10. Conditions to the Obligation of Carolina First to Close. Unless
waived in writing by Carolina First, the obligation of Carolina First to
consummate the transactions contemplated by this Agreement is subject to the
satisfaction at or prior to the Closing Date of the following conditions:
a. Each of the material acts and undertakings of Bank to be
performed at or before the Closing Date pursuant to the Agreement shall have
been duly performed.
<PAGE> 8
b. The representations and warranties of Bank contained in this
Agreement shall be true and complete, in all material respects, on and as of
the Closing Date with the same effect as though made on and as of the Closing,
Date.
c. Carolina First shall have received the following documents and
instruments from Bank:
i. a certificate from the Secretary or Assistant
Secretary of Bank dated as of the Closing Date certifying that:
(1) The substantive terms of the Agreement have
been approved by Bank's Board of Directors (copies of the resolution evidencing
such shall be attached to such certificate) approving the substantive terms of
this Agreement and authorizing the consummation of the transactions
contemplated by this Agreement and that such resolutions have not been amended
or modified and remain in full force and effect
(2) Each person executing this Agreement on
behalf of Bank is an officer of Bank holding the office or offices specified
therein and that the signature of each person set forth on such certificate is
his or her genuine signature;
(3) The charter documents of Bank remain in full
force and effect; and
(4) Bank is in good standing with the State of
Georgia, the appropriate agency of the State of Georgia which regulates the
activities of banks and financial institutions within the state, and the FDIC;
ii. a certificate signed by a duly authorized officer of
Bank stating that the conditions set forth in Sections 10(a) and 10(b) above
have been fulfilled;
iii. A Bill of Sale and Assignment, duly executed by Bank,
together with all documents and instruments required thereby to be delivered to
Carolina First;
iv. A final listing of all individual accounts contained
within the Credit Card Portfolio current as of the Closing Date;
v. All records maintained by Bank in the ordinary course
of its business, including original instruments and other documentation,
pertaining to the Credit Card Portfolio or the processing thereof necessary or
customary for Carolina First to conduct business with respect to the Credit
Card Portfolio as it was conducted by Bank (the "Records"); and
vi. Such bills of sale, assignments and other instruments
or documents as Carolina First may reasonable require as necessary for
transferring, assigning and conveying to Carolina First good, marketable and
insurable title to the Credit Card Portfolio and the benefits thereof, all in
form and substance reasonably satisfactory to Carolina First.
<PAGE> 9
d. No material adverse change in the Credit Card Portfolio, taken
as a whole, shall have occurred since the date of this Agreement. In the event
of such a material adverse change with respect to the Credit Card Portfolio,
Carolina First may elect either (i) to purchase the Credit Card Portfolio with
an adjustment to the calculation to the Purchase Price set forth in this
Agreement in an amount mutually agreed to by Carolina First and Bank, or (ii)
to terminate this Agreement pursuant to the terms set forth in Section 12 of
this Agreement.
11. Conditions to Obligations of the Parties. The obligation of each
party to effect the purchase of the Credit Card Portfolio or any other
transactions contemplated hereby shall be subject to (a) the fulfillment, at or
prior to the Closing, of the condition that no claim, action, suit,
investigation or other proceeding shall be pending or threatened before any
court or governmental agency which presents, in the reasonable business
judgment of either Bank or Carolina First, a substantial risk of the restraint
or prohibition of Carolina First or any other transactions contemplated by this
Agreement or the obtaining of material damages or other relief in connection
therewith, and (b) the receipt by the parties of all applicable governmental
approvals, if any, for the consummation of the transactions contemplated
hereby.
12. Repurchase. Bank agrees to repurchase any Accounts within ten (1O)
days of written demand by Carolina First, in any of the following events or
circumstances:
a. If, during the one (1) year period immediately following the
Closing Date, a material breach of any warranty by Bank under this Agreement is
discovered with respect to an Account by Carolina First or Bank.
b. If at any time within ninety (90) days after the Closing Date,
it is determined that an Account was a Non-Conforming Account as of the Cut-Off
Date. Bank shall repurchase such Non-Conforming Accounts for the amount of the
Account balance as of the date of notification to the Bank of the exercise of
the right of repurchase, and including any premium paid by Carolina First. The
parties agree that any dispute arising pursuant to the terms of this Section
12(b), concerning whether or not an Account was Non-Conforming, shall be
submitted to an independent third-party mutually agreed upon by the parties for
resolution, and the decision of such third party shall be final and binding
upon the parties as to the dispute in issue.
c. Notwithstanding anything to the contrary herein, the
repurchase price payable by Bank with respect to the repurchase of any Accounts
under this Section 12 shall not include any principal amount which are late
fees, over-limit fees, or similar non-cash advances by Purchaser which become
characterized as principal; but shall include advances for purchases made on
the Account, cash advances to the Account, accrued interest and any other cash
items advanced in connection with the Account.
13. Termination. This Agreement may be terminated at any time prior to the
Closing, as follows:
a. By mutual consent in writing of the parties;
<PAGE> 10
b. By either Bank or Carolina First if the Closing has not
occurred by or on February 5, 1997 (the "Termination Date") unless the failure
of the Closing to occur is due to the failure of the party seeking to terminate
this Agreement to perform its obligations hereunder.
c. By Carolina First if the conditions set forth in Sections 10
and 11 above are not satisfied in all material respects as of the Closing
Date, or by Bank if the conditions in Section 9 and 11 above are not satisfied
in all material respects as of the Closing Date, and such failure has not been
waived in writing on or prior to the Closing by the party which is the
beneficiary of such condition(s);
d. By Carolina First in the event that there shall have been a
material adverse change in the Credit Card Portfolio taken as a whole; or
e. By Carolina First or Bank in the event that there shall have
been a material breach of any obligation of the other party hereunder and such
breach shall not have been remedied within thirty (30) days after receipt by
the breaching party of written notice from the other party specifying the
nature of such breach and requesting that it be remedied.
If a party elects to terminate this Agreement pursuant to paragraph
(b), (c), (d) or (e) of this Section, it shall give notice, in writing, of its
election to the other party in the manner prescribed in this Agreement.
In the event that this Agreement is terminated pursuant to this
Section, all further obligations of the parties under this Agreement shall
terminate without further liability of any party to another, provided that a
termination under this Section shall not relieve any party of any liability for
a breach of this Agreement or for any misstatement or misrepresentation made
hereunder prior to such termination, or be deemed to constitute a waiver of any
available remedy for any such breach, misstatement or misrepresentation.
14. Power of Attorney. Bank does hereby irrevocably authorize and empower
Carolina First without notice to Bank, whether in its own name or in the name
of the Bank, to endorse in the name of Bank any checks, drafts, or other orders
payable to the Bank for application to the respective individual accounts in
the Credit Card Portfolio.
15. No Agency. Except as set forth in Section 14 above, Bank is not the
agent or representative of Carolina First and Carolina First is not the agent
or representative of Bank, and nothing in this Agreement shall be construed or
deemed to create an agency relationship between Carolina First and Bank. No
representations shall be made by either Bank or Carolina First to any third
parties which would imply such an arrangement.
16. Indemnification.
a. Bank hereby agrees to indemnify, defend and hold Carolina
First, its agents and affiliates harmless from and in respect of any liability,
loss, cost, damage, expense, failure to collect, or payment, including, without
limitation, reasonable attorney's and accountants' fees and
<PAGE> 11
expenses (each such liability, loss, cost, damage, expense, failure and payment
being referred to herein as a "Buyer Loss"), incurred or suffered as a result
of any (i) misrepresentation, breach of a warranty or representation, or any
breach of any covenant or agreement, given or made by Bank in this Agreement;
or (ii) any negligent action taken or omitted to be taken by Bank or any
transaction or any events occurring on or before the Closing Date relating to
the Credit Card Portfolio or the processing thereof, and any suits or
proceedings commenced in connection with any of the foregoing.
b. Carolina First hereby agrees to indemnify, defend and hold
Bank, its agents and affiliates harmless from and in respect of any liability,
loss, cost, damage, expense, failure to collect, or payment including, without
limitation, reasonable attorney's and accountants' fees and expenses (each such
liability, loss, cost, damage, expense, failure and payment being referred to
herein as a "Seller Loss"), incurred or suffered as a result of any (i)
misrepresentation, breach of a warranty or representation, or any breach of any
covenant or agreement, given or made by Carolina First in the Agreement; or
(ii) any negligent action taken or omitted to be taken by Bank or any
transaction or any events occurring after the Closing Date relating to the
Credit Card Portfolio or the processing thereof, and any suits or proceedings
commenced in connection with any of the foregoing.
c. Notice of Claim. The party claiming indemnification rights
hereunder ("Indemnified Party") shall give the party from whom indemnification
is being claimed ("Indemnifying Party") a written notice (the "Notice of
Claim") within 90 days of the discovery of any matter in respect of which the
right to indemnification may be claimed; provided that except to the extent
provided in subparagraph (e) below, the failure to give such notice within such
90 day period shall not result in the waiver or loss of any right to bring such
claim hereunder after such 90 day period. Notwithstanding the foregoing,
failure to give such notice will terminate any obligation of any Indemnifying
Party hereunder with respect to such claim to the extent the Indemnifying Party
has been materially and adversely affected thereby.
d. Notice of Possible Claim. In the event a claim is pending or
threatened or there exists a reasonable basis for such claim (which shall
include, at the least, sufficient facts from which to describe with specificity
the nature of the claim, a reasonably estimated amount of the contemplated loss
and the Section or Sections of this Agreement upon which the claim for
indemnification for such loss is based) and the Indemnified Party has notice of
such basis, the Indemnified Party may give written notice (the "Notice of
Possible Claim") of such claim to the Indemnifying Party, regardless of whether
a loss has arisen from such claim; provided, however, that any Notice of
Possible Claim shall expire two years after given ( the "Expiration Date"),
with the effect of such expiration being that if there has not been any action
or proceeding instituted or overtly threatened based on the subject matter of
such notice on or before such Expiration Date, the respective Indemnifying
Party shall cease as of the day immediately after such Expiration Date to have
any indemnification obligation with respect to such subject matter except to
the extent a subsequent notice is properly given.
e. Limitation. The indemnification obligations set forth in this
section are subject to the limitation that the Indemnifying Party shall not be
required to indemnify the Indemnified Party
<PAGE> 12
under this Section unless the party claiming indemnification furnishes the
other party with a Notice of Claim or a Notice of Possible Claim, on or before
the first anniversary of the Closing Date, except as to any matter which is
based upon willful fraud by the Indemnifying Party.
f. The Indemnifying Party shall have the right to, and shall at
the request of the Indemnified Party, assume the defense of any such action or
proceeding at its own expense. The Indemnified Party shall assist the
Indemnifying Party in the defense of any such action or proceeding. In any
such action or proceeding, the Indemnified Party shall have the right to retain
its own counsel, but the fees and expenses of such counsel shall be at its own
expense unless (i) the Indemnifying Party and the Indemnified Party shall have
mutually agreed to the retention of such counsel or (ii) the named parties to
any such suit, action or proceeding (including any impleaded parties) include
both the Indemnifying Party and the Indemnified Party and in the reasonable
judgment of the Indemnified Party, representation of both parties by the same
counsel would be inappropriate due to actual or potential differing interest
between them.
g. An Indemnifying Party shall not be liable under this Section
for any settlement effected without its consent of any claim, litigation or
proceedings in respect of which indemnity may be sought hereunder, such consent
not to be unreasonably withheld. The Indemnifying Party may settle any claim
without the consent of the Indemnified Party, but only if the sole relief
awarded is monetary damages that are paid in full by the Indemnifying Party.
17. Miscellaneous.
a. Notices. All notices hereunder shall be made by registered or
certified mail, return receipt requested, facsimile, telex, telegraph, or
orally and confirmed by any means of written electronic communication or other
commercially reasonable method as follows:
i. If to Carolina First:
Carolina First Bank
P.O. Box 1029
Greenville, SC 29602
Attn: Williams S. Hummers, III
ii. If to Bank:
Fayette County Bank
300 Peachtree Parkway South
Peachtree City, GA 30269
Attn: Pat Shepherd
Notices shall be deemed to have been given on the date
delivered to or received at the premises of the addresses set forth above (as
evidenced, in the case of registered or certified mail, by the date noted on
the receipt).
<PAGE> 13
b. Best Efforts. Carolina First and Bank agree to each use its
respective best efforts to complete the transactions contemplated by this
Agreement.
c. Publicity.- The parties agree that press releases and other
public announcements to be made by any of them with respect to the transactions
contemplated hereby shall be subject to mutual agreement. Notwithstanding the
foregoing, (i) any party hereto may make such filings and issue such news
releases as such party deems appropriate under applicable banking and
securities laws and (ii) each of the parties hereto may respond to inquiries
relating to this Agreement and the transactions contemplated hereby by the
press, employees or customers without any notice of further consent of the
other parties.
d. Payment of Expenses. Except as set forth herein, Bank and
Carolina First each shall pay it own fees and expenses (including, without
limitation, legal fees and expenses) incurred by them in connection with the
transactions contemplated hereunder.
e. Attorneys's Fees. If any party hereto shall bring an action
at law or in equity to enforce its rights under this Agreement (including an
action based upon a misrepresentation or the breach of any warranty, covenant,
agreement or obligation contained herein), the prevailing party in such action
shall be entitled to recover from the other party its reasonable costs and
expenses necessarily incurred in connection with such action (including fees,
disbursements and expenses of attorneys and cost of investigation).
f. Finders and Brokers. Carolina First and Bank represent to
each other that they have employed no broker or finder in connection with this
Agreement under an agreement pursuant to which a fee is due to such broker or
finder as a result of the execution of this Agreement. If any such fee
ultimately is found to be due, however, it shall be paid by the party which
incurred it.
g. Assignment. This Agreement may not be assigned by any party
without the prior written consent of the other party. However, Carolina First
reserves the right to assign its rights under this Agreement to any of its
present or future affiliates. Such assignment shall not relieve Carolina First
of its obligations hereunder not satisfied by such assignee. Any attempted
assignment other than according to the terms of this paragraph shall be void
and of no effect.
h. Parties in Interest. This Agreement shall inure to the
benefit of and be binding upon the parties, and their respective heirs,
executors, administrators, successors, and permitted assigns.,
i. Governing Law. This Agreement and all transactions
contemplated by this Agreement shall be governed by, and construed and enforced
in accordance with, the laws of the State of South Carolina, unless and to the
extent that federal law controls. Bank and Carolina First hereby submit to the
jurisdiction and venue of any appropriate state or federal court located in
Greenville, Greenville County, South Carolina.
j. Sections and Other Headings. Section headings contained in
this Agreement are
<PAGE> 14
for reference purposes only and shall not affect the interpretation of this
Agreement.
k. Counterparts and Facsimile Transmission. This Agreement may
be executed in one or more identical counterparts, each of which shall be
deemed to be an original and all of which taken together shall be deemed to
constitute the Agreement when a duly authorized representative of each party
has signed a counterpart. The parties may sign and deliver this Agreement by
facsimile transmission. Each party agrees that the delivery of the Agreement
by facsimile shall have the same force and effect as delivery of original
signatures and that each party may use such facsimile signatures as evidence of
the execution and delivery of the Agreement by all parties to the same extent
that an original signature could be used.
l. Effectiveness. This Agreement shall become effective, as of
the date specified above, upon the execution by all of the parties of at least
one counterpart hereof, and it shall not be necessary that any single
counterpart bear the signatures of all parties.
m. Severability. If any one or more of the provisions contained
in this Agreement shall for any reason be held invalid, illegal or
unenforceable for any reason, such invalidity, illegality or unenforceability
shall not affect any other provisions of this Agreement, which shall be
construed as if such invalid, illegal or unenforceable provision had never been
contained herein. It is the intention of the parties that if any provision of
this Agreement is capable of two constructions, one of which would render the
provision void and the other of which would render the provision valid, then
the provision shall have the meaning which renders it valid.
n. Entire Agreement. This Agreement sets forth the entire
understanding of the parties, and supersedes all other representations,
agreements and understandings, oral or otherwise, between or among the parties
with respect to the matters contained herein.
o. Modification, Amendment and Waiver. Each and every
modification and amendment of this Agreement must be in writing and signed by
all of the parties. Each and every waiver of any covenant, representation,
warranty or other provision of this Agreement must be in writing and signed by
each party whose interests are adversely affected by such waiver. The parties
may extend the time for the performance of any of the obligations or other acts
of the other parties hereto by mutual agreement in writing and signed by all of
the parties. No waiver granted in any one instance shall be construed as a
continuing waiver applicable in any other instance.
No delay or omission by a party in exercising any power or right hereunder
shall impair any such right or power or be construed as a waiver or
acquiescence, and no single or partial exercise of a right or power under this
Agreement shall be construed to preclude any additional or further exercise of
such power, nor the exercise of other rights or powers available by the terms
of this Agreement.
p. Remedies. All rights and remedies of the parties hereunder
are cumulative and the exercise of one or more right or remedies shall not
prejudice or impair the concurrent or subsequent exercise of other rights or
remedies that the parties may have according to: i) the
<PAGE> 15
terms of this Agreement, ii) general principles of law or equity, or iii) any
other contract applicable to the transactions contemplated by this Agreement.
q. Survival of Provisions. All of the covenants and agreements
made by the parties to this Agreement shall survive and continue in effect
after the termination of the Agreement or the consummation of the transactions
contemplated by the Agreement. All representations and warranties made by
parties to this Agreement shall survive the Closing Date for a period of one
year.
IN WITNESS WHEREOF, the parties have set their hands as of the date
first above written.
CAROLINA FIRST BANK
By:
------------------------------
FAYETTE COUNTY BANK
By: /s/ Pat Shephard
------------------------------
President/CEO
<PAGE> 16
CAROLINA FIRST BANK
SECRETARY'S CERTIFICATE
I, Williams S. Hummers III, hereby certify that I am the Secretary of
Carolina First Bank, a state-chartered bank organized under the laws of the
state of South Carolina, and that I have been duly elected and am presently
serving in that capacity.
I further certify that H. Bryce Solomon is Senior Vice President of
Carolina First Bank, and as Senior Vice President is authorized to sign,
execute, and acknowledge, in the name of or on behalf of this Association, all
documents, deeds, contracts, agreements and releases which may be expedient or
necessary to the conduct of the regular business of the Association.
IN WITNESS WHEREOF, I have hereunder set my hand on this the
__________day of 1997.
/s/ William S. Hummers III
----------------------------------
William S. Hummers III
Secretary
Carolina First Bank
<PAGE> 17
BILL OF SALE AND ASSIGNMENT
KNOW ALL MEN BY THESE PRESENTS, that pursuant to the terms of that
certain Purchase Agreement Credit Card Accounts dated January 31, 1997 (the
"Agreement"), by and between Fayette County Bank, a Georgia based bank,
("Bank") and Carolina First Bank, a South Carolina corporation (the
"Purchaser"), Seller, for value received does hereby sell assign, deliver
transfer and convey to Buyer:
(i) all right, title and interest of Bank in and to all of the
rights of Bank related to the Credit Card Portfolio (as
defined in the Agreement); and
(ii) all right, title and interest of Bank in and to any payments,
past due interest, penalties, fees, and any other charges or
amounts due of any kind or nature whatsoever received or
arising after the Cut-Off Date (as defined in the Agreement).
Notwithstanding the foregoing, Bank does not transfer any Accounts
which are NonConforming Accounts (as such are defined in the Agreement).
A listing of the Accounts comprising the Credit Card Portfolio
(excluding NonConforming Accounts) is attached hereto as Exhibit A.
This Bill of Sale and Assignment is subject to and shall be construed
in accordance with all of the terms and conditions of the Agreement.
In Witness Whereof, this Bill of Sale and Assignment has been executed
as of this 31st day of January, 1997.
FAYETTE COUNTY BANK
By: /s/ Pat Shephard
------------------------------------
President/CEO
<PAGE> 18
FAYETTE COUNTY BANK
SECRETARY'S CERTIFICATE
I, MARK B. KEARSLEY, hereby certify that I am the Assistant Secretary
of Fayette County Bank,
and that I have been duly elected and am presently serving in that capacity.
I further certify that Pat Shepherd III
is authorized to sign, execute, and acknowledge, in the name of or on
behalf of this Association, all documents, deeds, contracts, agreements, and
releases which may be expedient or necessary to the conduct of the regular
business of the Association.
IN WITNESS WHEREOF, I have hereunder set my hand on the 23rd
day of January, 1997
/s/ Mark Kearsley
-------------------------------
Mark Kearsley
<PAGE> 1
First Community Banking Services, Inc.
Exhibit 11 - Computation of Net Income Per Share
<TABLE>
<CAPTION>
Primary 1996 1995 1994
-------- ---- ---- ----
<S> <C> <C> <C>
Net Income used for primary share amounts $ 1,254,411 $ 1,022,247 $ 795,374
========= ========= ========
Weighted average of common shares outstanding 643,062 640,742 637,062
Add-Common stock equivalents determined
using the "Treasury Stock" method
representing shares issuable upon exercise
of director and employee stock options using
annual average market price 36,728 15,545 * 36,728 15,545 * -0-
------ ------ -----
Weighted average number of shares used in
calculation of primary earnings per share 679,790 656,287 637,062
========= ======== ========
Primary earnings per share including no
dilutive stock options $ 1.85 $ 1.56 $ 1.25
========= ======== ========
Primary earnings per share used $ 1.85 $ ** 1.60 $ 1.25
========= ======== ========
</TABLE>
*The effect of common stock equivalents in 1994 is anti-dilutive.
**The effect of stock options treated as common stock equivalents is immaterial
for 1995. Weighted average of common shares outstanding was used.
<TABLE> <S> <C>
<ARTICLE> 9
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-01-1996
<PERIOD-END> DEC-31-1996
<CASH> 5,317,785
<INT-BEARING-DEPOSITS> 25,088
<FED-FUNDS-SOLD> 1,860,000
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 13,145,260
<INVESTMENTS-CARRYING> 1,659,519
<INVESTMENTS-MARKET> 1,665,963
<LOANS> 81,915,981
<ALLOWANCE> 1,214,173
<TOTAL-ASSETS> 108,553,689
<DEPOSITS> 98,144,366
<SHORT-TERM> 0
<LIABILITIES-OTHER> 1,244,607
<LONG-TERM> 0
0
0
<COMMON> 643,062
<OTHER-SE> 8,521,654
<TOTAL-LIABILITIES-AND-EQUITY> 108,553,689
<INTEREST-LOAN> 8,202,657
<INTEREST-INVEST> 1,165,968
<INTEREST-OTHER> 0
<INTEREST-TOTAL> 9,368,625
<INTEREST-DEPOSIT> 3,674,314
<INTEREST-EXPENSE> 3,686,430
<INTEREST-INCOME-NET> 5,682,195
<LOAN-LOSSES> 856,312
<SECURITIES-GAINS> 142
<EXPENSE-OTHER> 3,516,871
<INCOME-PRETAX> 1,953,984
<INCOME-PRE-EXTRAORDINARY> 1,953,984
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 1,254,411
<EPS-PRIMARY> 1.85
<EPS-DILUTED> 1.68
<YIELD-ACTUAL> 10.05
<LOANS-NON> 14,854
<LOANS-PAST> 564,530
<LOANS-TROUBLED> 303,913
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 918,036
<CHARGE-OFFS> 583,332
<RECOVERIES> 23,157
<ALLOWANCE-CLOSE> 1,214,173
<ALLOWANCE-DOMESTIC> 1,214,173
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 0
</TABLE>
