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U.S. SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-KSB/A
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15 (d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended Commission File Number
December 31, 1997 0-18827
FIRST COMMUNITY BANKING SERVICES, INC.
(Exact name of registrant as specified on its charter)
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Georgia 58-18357525
(State or other Jurisdiction of (I.R.S. Employer Identification No.)
300 South Peachtree Parkway 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
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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
$11,219,756.
The aggregate market value of the voting stock held by non-affiliates
of the Registrant at March 20, 1998, was $25,072,987.50 based on the sales price
of the Common Stock of $24.75. 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,
1998, was 1,369,012 shares.
Documents Incorporated by Reference:
None.
Page 1 of 51
Exhibit Index on Page 48
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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 (iii) 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.
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
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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 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.
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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.
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
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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.
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.
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TRANSACTIONS WITH AFFILIATES AND INSIDERS. The Bank is subject to the
provisions of Section 23A of the Federal Reserve Act, which place limits on the
amount of loans or extensions of credit to, or investments in, or certain other
transactions with, affiliates and on the amount of advances to third parties
collateralized by the securities or obligations of affiliates. In addition, most
of these loans and certain other transactions must be secured in prescribed
amounts. The Bank is also subject to the provisions of Section 23B of the
Federal Reserve Act that, among other things, prohibit an institution from
engaging in certain transactions with certain affiliates unless the transactions
are on terms substantially the same, or at least as favorable to such
institution or its subsidiaries, as those prevailing at the time for comparable
transactions with non-affiliated companies. The Bank is subject to certain
restrictions on extensions of credit to executive officers, directors, certain
principal stockholders, and their related interests. Such extensions of credit
(i) must be made on substantially the same terms, including interest rates and
collateral, as those prevailing at the time for comparable transactions with
third parties and (ii) must not involve more than the normal risk of repayment
or present other unfavorable features.
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.
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. Since 1993, insured
depository institutions like the Bank have paid for deposit insurance under a
risk-based premium system. Under this system, depositor
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institutions pay to BIF or SAIF from $0.00 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 1997, 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
separated, 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. 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 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
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and should maintain ratios well in excess of the minimums. The current
guidelines require all bank holding companies and federally-regulated banks to
maintain a minimum risk-based total capital ratio equal to 8%, of which at least
4% must be Tier 1 capital. Tier 1 capital includes common stockholders' equity,
qualifying perpetual preferred stock, and minority interests in equity accounts
of consolidated subsidiaries, but excludes goodwill and most other intangibles
and excludes the allowance for loan and lease losses. Tier 2 capital includes
the excess of any preferred stock not included in Tier 1 capital, mandatory
convertible securities, hybrid capital instruments, subordinated debt and
intermediate term-preferred stock, and general reserves for loan and lease
losses up to 1.25% of risk-weighted assets.
Under the guidelines, banks' and bank holding companies' assets are
given risk-weights of 0%, 20%, 50%, or 100%. In addition, certain off-balance
sheet items are given credit conversion factors to convert them to asset
equivalent amounts to which an appropriate risk-weight will apply. These
computations result in the total risk-weighted assets. Most loans are assigned
to the 100% risk category, except for first mortgage loans fully secured by
residential property and, under certain circumstances, residential construction
loans, both of which carry a 50% rating. Most investment securities are assigned
to the 20% category, except for municipal or state revenue bonds, which have a
50% rating, and direct obligations of or obligations guaranteed by the United
States Treasury or United States Government agencies, which have a 0% rating.
The federal bank regulatory authorities have also implemented a
leverage ratio, which is Tier 1 capital as a percentage of average total assets
less intangibles, to be used as a supplement to the risk-based guidelines. The
principal objective of the leverage ratio is to place a constraint on the
maximum degree to which a bank holding company may leverage its equity capital
base. The minimum required leverage ratio for top-rated institutions is 3%, but
most institutions are required to maintain an additional cushion of at least 100
to 200 basis points.
FDICIA established a new capital-based regulatory scheme designed to
promote early intervention for troubled banks and requires the FDIC to choose
the least expensive resolution of bank failures. The new capital-based
regulatory framework contains five categories of compliance with regulatory
capital requirements, including "well capitalized," "adequately capitalized,"
"undercapitalized," "significantly undercapitalized," and "critically
undercapitalized." To qualify as a "well capitalized" institution, a bank must
have a leverage ratio of no less than 5%, a Tier 1 risk-based ratio of no less
than 6%, and a total risk-based capital ratio of no less than 10%, and the bank
must not be under any order or directive from the appropriate regulatory agency
to meet and maintain a specific capital level. As of December 31, 1997, 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.
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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, 1997. 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 allowed 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 permitted interstate bank mergers beginning
June 1, 1997.
In addition, beginning June 1, 1997, the Interstate Banking Act
permitted 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, 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.
INDUSTRY DEVELOPMENTS
Proposed legislation could have an effect on both the costs of doing
business and the competitive factors facing the financial services industry. Due
to continued changes in the regulatory environment, additional legisltation
related to the banking industry is likely to continue. While the potential
effects of legislation currently under consideration cannot be measured, the
Company is unaware of any pending
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ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
FOR THE YEARS ENDED DECEMBER 31, 1997 AND 1996
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.
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<CAPTION>
Year Ended December 31,
1997 1996 1995 1994 1993
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<S> <C> <C> <C> <C> <C>
Income Statement Data:
Total Interest Income $10,597 $ 9,369 $ 7,187 $ 5,269 $ 4,440
Total Interest Expense 4,254 3,687 2,789 1,559 1,312
Net Interest Income 6,343 5,682 4,398 3,710 3,128
Provision for Loan Loss 620 856 335 92 412
Non Interest Income 550 645 536 381 536
Non Interest Expense 3,809 3,517 3,015 2,831 2,348
Provision for Income Taxes 896 700 562 373 325
Extraordinary Item -0- -0- -0- -0- -0-
Change in accounting -0- -0- -0- -0- 27
Net Income 1,568 1,254 1,022 795 606
Basic Earnings Per Common Share (1) 1.15 .92 .75 .59 .43
Diluted Earnings per Common Share (1) 1.08 .87 .73 .56 .43
Dividends paid Per Share (1) .15 .15 .13 .10 .05
Basis Weighted Avg. Common Equivalent
Shares Outstanding (1) 1,363,557 1,359,953 1,357,453 1,353,953 1,350,953
Diluted Weighted Avg. Common
Equivalent Shares Outstanding (1) 1,444,909 1,440,939 1,391,729 1,357,529 1,352,997
Dividend Payout Ratio 12.36% 14.65% 14.90% 15.25% 10.01%
</TABLE>
1) Stock Split in 1998, and stock dividends in 1997 and 1996 have been
retroactively reflected in the per share data and weighted average common
and equivalent shares outstanding as if they occurred January 1, 1993.
13
<PAGE> 11
<TABLE>
<CAPTION>
At December 31,
1997 1996 1995 1994 1993
---------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C>
Balance Sheet Data:
Total Assets $ 131,468 $ 108,554 $ 90,933 $ 64,965 $ 67,814
Investment Securities 27,289 15,078 13,001 14,462 13,934
Loans, Net of Allowance
for Loan Loss 83,544 80,702 66,853 41,695 42,182
Demand & Savings 62,951 42,019 40,948 33,852 42,773
Time Deposits 56,083 56,125 40,489 22,735 17,232
Stockholders' Equity 10,731 9,165 8,136 6,857 6,624
Book Value Per Share (1) 7.84 7.13 6.54 5.65 5.46
Equity to Asset Ratio 8.16% 8.44% 8.95% 10.55% 9.77%
</TABLE>
PENDING MERGER
On February 12, 1998, the Company and Regions Financial Corporation
(Regions) executed a definitive agreement (Agreement) to merge the two
companies, whereby Regions would acquire all of the issued and outstanding
shares of common stock of the Company in exchange for Regions common stock. The
Agreement provides for an exchange of .625 shares of Regions common stock for
each outstanding share of the Company's common stock. The merger will be
accounted for as a pooling of interest under generally accepted accounting
principles. The merger is subject to regulatory and shareholder approval and is
expected to be consummated in the third quarter of 1998. See Form 8-K filed on
March 2, 1998 announcing the merger agreement.
RESULTS OF OPERATIONS
The Company's net income increased $313,169, or 24.97%, to $1,567,580
in the year ended December 31, 1997, from $1,254,411 in the year ended December
31, 1996. An increase in total loans outstanding along with higher noninterest
bearing deposits is the primary reason for the increase in net income. Basic
earnings per share increased from $.92 at December 31,1996 to $1.15 at December
31, 1997, an increase of $.23 or 25.00%. Diluted earnings per share increased
24.14% or $.21 for the one year period ending December 31, 1997, as compared to
the same period ending December 31, 1996. The return on average assets increased
to 1.29%, up 1.23% for the one year period ending December 31, 1997 as compared
to the same period ending December 31, 1996. Return on average equity was 16.02%
and 15.07% for the year ended December 31, 1997 and 1996 respectively.
Net interest income increased $660,809, or 11.63%, for the period
ending December 31, 1997. As indicated by the decrease in the net interest
margin from 6.10% in 1996 to 5.66% in 1997, the pricing on interest earning
assets decreased while the cost of funds increased. The narrowing of the net
interest margin is due to economic conditions and competition in the local
market.
The provision for loan losses decreased $236,312 for the one year
period ending December 31, 1997 as compared to the same period ended December
31, 1996. In the first quarter of 1997, the Bank sold a credit card portfolio
totaling $1,347,286 due to the increase in personal bankruptcies nationally.
Management felt that the amount in potential charge offs in this portfolio would
decrease the actual yield below what could be earned in other earning assets.
The Company ended 1997 with a loan loss reserve ratio of 2.00% and net loans
charged off of $129,855. This, as compared to a reserve ratio of 1.48% and net
charged off loans of $560,175 during the one year period ending December 31,
1996. The loan portfolio increased $3,332,290 or 4.07% during the one year
period ending December 31, 1997.
Noninterest income decreased slightly to $549,781, down $95,174 or
14.76% from $644,972 for the period ending December 31, 1997, compared to the
period ending December 31, 1996. Service charges on deposit accounts increased
$23,783 due to the increase in the number of accounts
14
<PAGE> 12
maintained at the Bank. Also, as noted above, the Bank sold its credit card
portfolio in 1997, realizing a loss of $72,970 due to a write off of unamortized
purchase premium. The Bank sold investment securities during 1997, which
resulted in a loss of $8,316, in order to minimize its interest rate and
maturity exposure in certain mortage backed securities. The proceeds from the
sale of these investments was used to purchase shorter term investments with
more certainty in interest rates and marketability. The Bank also disposed of
assets, primarily obsolete computer equipment for a loss of $20,265 during the
one year period ending December 31, 1997.
Noninterest expense increased $292,144, or 8.31%, from $3,516,871 in
1996, to $3,809,015 for the one year period ending December 31,1997. Salaries
and employee benefits increased $261,641 or 16.14% to $1,882,462 for the year
ended December 31, 1997. This increase is due to an increase in the Bank's bonus
plan and the banks matching in the 401-K savings incentive plan to employees and
officers of the Bank. Expenses related to fixed assets increased $63,293 or
16.15% to $455,262 during 1997 due to repairs to the buildings as well as a full
year of depreciation expenses related to computer equipment purchased in the
third quarter of 1996. An analysis of the intangible assets related to the
purchase of deposits from Anchor Savings Bank in 1991 resulted in an excelerated
amortization of the core deposit intangible of an additional $123,811 expense
during 1997. The decrease in the life of the core deposit intangible will result
in an additional expense of $19,050 per year until it is fully amortized in
June, 2001. Other expenses decreased $166,835 to $812,070 at December 31, 1997.
This decrease is primarily due to nonrecurring assessment by the FDIC for
savings deposits during the third quarter of 1996.
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 determined by the rates earned on the Company's
interest-earning assets, the rates paid on its interest-bearing liabilities, the
relative amounts of interest-earning assets and interest- bearing liabilities,
and the degree of mismatch and the maturity and repricing characteristics of its
interest-earning assets and interest bearing liabilities. Net interest income
divided by average interest-earning assets represents the Company's net interest
margin.
AVERAGE BALANCES, INCOME EXPENSES AND RATES. The following tables
depict for the periods indicated, certain information related to the Company's
average balance sheet and its average yields on assets and average costs of
liabilities. Such yields are derived by dividing income or expense by the
average balance of the corresponding assets or liabilities. Average balances
have been derived from daily averages.
15
<PAGE> 13
<TABLE>
<CAPTION>
1997 1996
---- ----
Average Yield/ Average Yield/
Balance Rate Balance Rate
------- ------ -------------- -------
<S> <C> <C> <C> <C>
Assets
Cash & due from banks $ 4,002,204 0.00% $ 3,167,769 0.00%
Federal funds sold 6,359,886 5.59% 3,929,727 5.60%
Interest-bearing deposits with other banks 34,075 5.49% 179,738 4.86%
Taxable securities 18,715,786 6.13% 13,694,088 6.12%
Tax exempt securities (1) 2,600,915 4.75% 1,687,934 4.68%
Other investments 314,466 7.25% 264,981 7.34%
Loans(2) 83,965,872 10.65% 73,446,044 11.17%
Other assets 5,450,327 0.00% 5,232,802 0.00%
-------------- --------------
Total $ 121,443,531 $ 101,603,083
============== ==============
Liabilities
Demand deposits 23,103,245 0.00% 16,135,113 0.00%
Interest-bearing demand deposits 23,522,722 2.95% 21,929,897 3.09%
Savings deposits 6,127,326 2.31% 5,963,929 2.42%
Time deposits 57,206,047 5.94% 46,138,495 6.18%
Federal funds purchased and 4.52%
securities sold under agreements to
repurchase 341,589 5.93% 268,005 0.00%
Other liabilities 1,355,867 0.00% 2,846,296 0.00%
Shareholders' equity 9,786,735 0.00% 8,321,348 0.00%
-------------- --------------
Total $ 121,443,531 $ 101,603,083
============== ==============
<CAPTION>
1997 1996
-------------- ------------
<S> <C> <C>
Average yield on interest-earning assets 9.46% 10.05%
Average rate paid on interest-bearing liabilities 4.88% 4.96%
Net interest spread 4.58% 5.09%
Net interest margin (net interest earnings divided
by total interest-earning assets) 5.66% 6.10%
Interest income:
Interest and fees on loans (3) $ 8,945,541 $ 8,202,657
Investment securities:
U.S. Treasury securities 79,656 133,473
U.S. Government agencies & corp. 1,068,205 705,175
States & political subdivisions 123,603 79,048
Other investments 22,799 19,460
Interest on federal funds sold 355,421 220,072
Interest on deposits with other banks 1,870 8,740
--------------- ------------
Total interest income $ 10,597,095 $ 9,368,625
--------------- ------------
</TABLE>
16
<PAGE> 14
<TABLE>
<CAPTION>
1997 1996
---- ----
<S> <C> <C>
Interest expense:
Interest on deposits:
Demand 694,902 678,718
Savings 141,488 144,098
Time deposits of $100,000 or more 849,732 912,059
Other time deposits 2,547,726 1,939,439
---------- ----------
Total interest on deposits 4,233,848 3,674,314
Interest on federal funds purchased and securities
sold under agreements to repurchase 20,243 12,116
---------- ----------
Total interest expense 4,254,091 3,686,430
---------- ----------
Net interest income $6,343,004 $5,682,195
========== ==========
</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, 1997, and 1996.
(3) Fee income on loans totaled $548,080 for the year ended December 31, 1997,
and $614,866 for the year ended December 31, 1996.
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.
17
<PAGE> 15
Year Ended December 31, 1997
compared with
Year Ended December 31, 1996
Increase (Decrease) Due To:
<TABLE>
<CAPTION>
Volume Rate Total
------ ---- -----
<S> <C> <C> <C>
Interest earned on:
Interest-earning deposits in
other banks.................... $ (7,875) $ 1,005 $ (6,870)
Taxable securities................ 311,422 1,130 312,552
Tax exempt securities............. 43,356 1,199 44,555
Federal funds sold................ 135,743 (394) 135,349
Net loans......................... 1,137,132 (394,248) 742,884
---------- ---------- -----------
Total interest income................ $1,619,778 $ (391,308) $ 1,228,470
========== ========== ===========
Interest paid on:
Demand deposits................... 47,782 (31,598) 16,184
Savings deposits.................. 3,953 (6,563) (2,510)
Time deposits..................... 660,494 (114,534) 545,960
Federal Funds Purchased
and securities sold under
agreements to repurchase.......... 3,804 4,323 8,127
---------- ---------- -----------
Total interest expense............ 716,033 $ (148,372) $ 567,661
Change in net interest ---------- ---------- -----------
income......................... $ 903,745 $ (242,936 $ 660,809
========== ========== ===========
</TABLE>
18
<PAGE> 16
Year Ended December 31, 1996
compared with
Year Ended December 31, 1995
Increase (decrease) due to:
<TABLE>
<CAPTION>
Volume Rate Total
------ ---- -----
<S> <C> <C> <C>
Interest earned on:
Interest-earning deposits in
other Banks ............................. $ (2,703) $ (492) $ (3,195)
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
and securities sold under
agreements to repurchase ................... 1,283 (1,692) (409)
----------- ----------- -----------
Total interest expense ..................... $ 842,683 $ 54,376 $ 897,059
----------- ----------- -----------
Change in net interest ..................... $ 1,340,807 $ (55,902) $ 1,284,905
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
19
<PAGE> 17
helps to hedge the risk and minimize the impact on net interest income of
rising or falling interest rates.
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, 1997.
20
<PAGE> 18
Interest Rate Sensitivity
December 31, 1997
(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 $ 47 $ -0- $ -0- $ -0- $ 47
Investment Securities 1,471 7,573 6,380 11,865 27,289
Federal Funds Sold 9,550 -0- -0- -0- 9,550
Loans 40,979 15,787 26,522 1,960 85,248
--------- ----------- ---------- ---------- -----------
Total Rate Sensitive
Assets 52,047 23,360 32,902 13,825 122,134
--------- ----------- ---------- ---------- -----------
NOW and MMDA Dep. 29,136 -0- -0- -0- 29,136
Savings Deposits 5,920 -0- -0- -0- 5,920
Time Deposits 14,693 24,381 17,006 3 56,083
Securities Sold Under
Agreements to
Repurchase -0- -0- -0- -0- -0-
--------- ----------- ---------- ---------- -----------
Total Rate Sensitive
Liabilities $ 49,749 $ 24,381 $ 17,006 $ 3 $ 91,139
--------- ----------- ---------- ---------- -----------
Excess (Deficiency) of
Rate Sensitive Assets
Less Rate Sensitive
Liabilities $ 2,298 $ (1,021) $ 15,896 $ 13,822 $ 30,995
========= =========== ========== ========== ===========
Cumulative GAP $ 2,298 $ 1,277 $ 17,173 $ 30,955
Percent of Cumulative
Gap to Total Earning
Assets 1.88% 1.05% 14.06% 25.35%
</TABLE>
21
<PAGE> 19
As indicated in the above table, the positive gap between rate
sensitive assets and rate sensitive liabilities during all periods 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. A negative gap between rate sensitive assets
and rate sensitive liabilities would represent that liabilities reprice 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.
22
<PAGE> 20
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 three years.
<TABLE>
<CAPTION>
1997 1996 1995
---- ---- ----
<S> <C> <C> <C>
Balance, beginning of year $1,214,173 $ 918,036 715,230
Provision charged to operations 620,000 856,312 335,000
Loans charged off:
Commercial (315,953) (391,099) (53,826)
Real Estate Mortgage (-0-) (10,143) (-0-)
Consumer (52,559) (71,099) (52,559)
Credit Cards (46,078) (110,991) (88,709)
---------- ----------- -----------
$ (414,590) $ (583,332) (170,909)
Loan recoveries:
Commercial 256,963 17,569 26,892
Real Estate -0- 199 -0-
Consumer 21,914 3,907 -0-
Credit Card 5,858 1,482 11,823
---------- ----------- ----------
284,735 23,157 38,715
---------- ----------- ----------
Net Loans Charged Off (129,855) (560,175) (129,855)
Balance, end of year $1,704,318 $ 1,214,173 $ 918,036
========== =========== ==========
Ratio of net charge-offs during the
period to total loans outstanding
during the period 0.16% 0.68% .19%
</TABLE>
The provision for loan losses was $620,000 in the year ended December 31, 1997,
compared to $856,312 in the year ended December 31, 1996. The decrease in the
provision is due to the Bank reducing its charge offs by selling the credit card
loan portfolio in early 1997 and low net charge offs in other categories of
loans.
ALLOCATION OF ALLOWANCE. The table below sets forth the amount of the
allowance for loan losses allocated by the Company by loan categories.
23
<PAGE> 21
ALLOCATION OF THE ALLOWANCE FOR LOAN LOSSES
<TABLE>
<CAPTION>
December 31,
-------------------------------------------------------------
1997 1996
------------------------------- --------------------------
% of % of
Category to Category to
Total Total
Amount Loans Amount Loans
------------- ------ ---------- -----
<S> <C> <C> <C> <C>
Allowance for loan loss
balance applicable to:
Commercial $ 850,740 47.17% $ 466,027 52.43%
Real Estate-construction 438,896 24.92% 242,254 23.75%
Real Estate-mortgage 301,165 21.24% 397,019 15.71%
Consumer 113,517 6.67% 63,711 6.44%
Credit Cards -0- 0.00% 45,162 1.67%
-------------- ------ ---------- -----
$ 1,704,318 100.00% $1,214,173 100.00%
============== ====== ========== ======
</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, 1997 $ 95,305 $ -0- $ 509,038
December 31, 1996 $ 564,530 $ 303,913 $ 14,854
</TABLE>
Of the $95,305 in loans past due 90 days and over, at December 31,
1997, $59,068 is represented by one construction loan, and three consumer loans
totalling $36,237. Restructured loans at December 31, 1996, represents one
commercial loan. If the nonaccrual loans had been accruing interest for the full
year, the Bank would have recognized an additional $38,000 and $19,000 income in
1997 and 1996, respectively. The Bank recognized approximately $59,000 and
$4,000 in interest income from these loans in 1997 and 1996, 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 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,
24
<PAGE> 22
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 were carried for a term of 180 days past due before being
charged off. Nonperforming loans as a percentage of period end loans were .60%
at December 31, 1997, compared to .38% at December 31, 1996.
As of December 31, 1997, there were 14 loans totaling $1,147,000
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 decreased $95,174, or 14.76%, to
$549,798 in 1997 from $644,972 in 1996. The largest component of noninterest
income is service charges on deposit accounts, which totaled $527,404 in 1997, a
4.72% increase over the 1996 level of $503,621. A portion of the decrease in
noninterest income can be attributed to the sale of the credit card portfolio in
1997; the Bank recognized a loss of $72,970 due to a write off of the
unamortized purchase premium.
The following table sets forth, for the periods indicated, the
principal components of noninterest income:
Noninterest Income
<TABLE>
<CAPTION>
Year Ended December 31,
1997 1996
--------- ----------
<S> <C> <C>
Service charges on deposit accounts $527,404 $503,621
Securities gains (losses) (8,316) 142
Gain on sale of SBA loans 60,994 71,825
Gain (Loss) on Sale of Fixed Assets (20,265) -0-
Loss on Sale of Credit Card (72,970) -0-
Other 62,951 69,384
-------- --------
Total noninterest income $549,798 $644,972
======== ========
</TABLE>
25
<PAGE> 23
Noninterest Expense
<TABLE>
<CAPTION>
Year Ended December 31,
1997 1996
---------- ----------
<S> <C> <C>
Salaries and employee benefits $1,882,562 $1,620,921
Net Occupancy expense 455,262 391,969
Amortization of intangibles 174,519 97,857
Professional fees 484,602 427,219
Other 812,070 978,905
---------- ----------
Total noninterest expense $3,809,015 $3,516,871
========== ==========
Efficiency ratio 55.26% 55.58%
</TABLE>
Salaries and employees benefits increased $261,641, or 16.14%, to
$1,882,562 in 1997 from $1,620,921 in 1996 due to annual merit increases as well
as the increase in employer matching in contributions into the 401-K savings
incentive plan sponsored by the Bank to its employees. Net occupancy increased
$63,293, or 16.15%, to $455,262 in 1997, from $391,969 in 1996. This was due
primarily to an increase in depreciation related to the upgrade of computer
equipment in late 1996, thus resulting in twelve months depreciation in 1997
compared to three months in 1996. The Bank also had maintenance expenses related
to the branch facilities higher in 1997 than in previous years. Other expenses
decreased $166,835 or 17.04% to $812,070 in 1997 from $978,905 in 1996. This
decrease is due to a one time assessment by the FDIC during 1996 based on the
thrift deposits the Bank had. This assessment totaled $167,056 and was reflected
in the third quarter earnings report of 1996.
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 $83,965,872 in
1997 compared to $73,446,044 in 1996, an increase of $10,519,828 or 14.32%. At
December 31, 1997, total loans, net of deferred loan fees, were $85,248,271
compared to $81,915,981 at the end of 1996.
The following table shows the comparison of the loan portfolio by
category at the dates indicated.
26
<PAGE> 24
<TABLE>
<CAPTION>
COMPOSITION OF LOAN PORTFOLIO
Types of Loans 1997 1996
------------- -------------
<S> <C> <C>
Commercial $ 15,855,022 $ 17,340,052
Real estate - commercial 24,454,646 25,713,790
Real estate - individual 18,152,167 12,898,096
Real estate - construction 21,296,534 19,505,888
Installment & single payment ind. 5,675,875 5,255,715
Credit Cards -0- 1,375,249
Other 16,991 28,799
------------- -------------
Total loans 85,451,235 82,117,589
Net deferred loan fees/cost (202,964) (201,608)
------------- -------------
Total net loans $ 85,248,271 $ 81,915,981
============= =============
</TABLE>
The principal component of the Company's loan portfolio is real estate
loans. At year end 1997, loans secured by real estate totalled $63,903,347, or
74.78% of the portfolio. Commercial real estate made up $24,454,646 of the
portfolio and represents the principal component of the Bank's loan portfolio.
This category of loans decreased $1,259,144, or 4.90%, from 1996 due to
relationships moving to capital markets which offer a competitive interest rate,
terms and conditions for the commercial borrowers. Individual real estate loans
showed the largest increase for the one year period. Individual real estate
loans include first liens and junior liens of family residences increased
$5,254,071 or 40.74% during the period ending December 31, 1997, up from
$12,898,071 at December 31, 1996. Nonresidential mortgage loans, which include
commercial loans, single family construction, and other loans secured by
multi-family properties and farmland, increased $305,616, to $37,151,556 at
December 31, 1997, from $36,845,940 at year end 1996. 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 $966,897, or 14.52%, to $5,692,866 in 1997,
from $6,659,763 in 1996. This is due to the sale of the credit card portfolio in
January of 1997, totalling $1,375,249. This portfolio did not perform as
expected over the past years and management did not foresee any increase in its
performance. Settlement for this transaction occurred on January 31, 1997, based
on that day's balances. The sale of the portfolio
27
<PAGE> 25
resulted 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, 1997 (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 $ 8,345 $ 6,117 $ 1,393 $ 15,855
Real estate (commercial) 5,469 9,029 9,957 24,455
Real estate (industrial) 3,562 8,701 5,889 18,152
Real estate (construction) 19,481 1,648 167 21,296
Installment 1,033 4,201 442 5,676
Credit Card -0- -0- -0- -0-
Other 17 -0- -0- 17
---------- ---------- ---------- ----------
Total $ 37,907 $ 29,696 $ 17,848 $ 85,451
========== ========== ========== ==========
</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, 1997 (in thousands) :
<TABLE>
<S> <C>
Loans due after 1 year with
predetermined interest rates.................... $ 26,924
Loans due after 1 year with $ 20,620
floating interest rates........................
</TABLE>
INVESTMENT PORTFOLIO. Investment securities comprised approximately 20.76% and
13.89% of the Bank's assets on December 31, 1997 and 1996, respectively. The
Bank invests primarily in obligations of the United States or obligations
guaranteed as to principal and interest by the United States and other taxable
and tax exempt securities. During 1996 and 1997, the Bank purchased primarily
securities issued by U.S. Government Agencies and Treasuries
28
<PAGE> 26
with maturities of three years or less. This will be the investing philosophy of
management during 1998 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. At December
31, 1997, the Bank had $25,053,659 in investment securities available-for-sale
and $1,660,034 in securities held-to-maturity. The net unrealized loss on
available for-sale-securities, net of deferred income taxes of $12,452, was
$24,172 on December 31, 1997.
The carrying value and estimated market value of investment securities held to
maturity are as follows at December 31:
<TABLE>
<CAPTION>
1997
----------------------------------------------------------------
Carrying Unrealized Unrealized Market
Value Gains Losses Value
----------- ---------- ---------- -----------
<S> <C> <C> <C> <C>
States and political
subdivisions $ 1,660,034 $ 30,583 $ 806 $ 1,689,811
<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>
The amortized cost and estimated market value of investment securities available
for sale are as follows at December 31:
29
<PAGE> 27
<TABLE>
<CAPTION>
1997
-------------------------------------------------------------------
Amortized Unrealized Unrealized Market
Cost Gains Losses Value
------------- ---------- ---------- ------------
<S> <C> <C> <C> <C>
U.S. Treasury Securities $ 1,004,669 $ 4,237 $ -0- $ 1,008,906
U.S. Government
Agencies and
Corporations 17,775,443 9,698 20,174 17,764,967
Mortgage-backed
securities 4,096,992 12,231 71,663 4,037,560
States & Political
Subdivisions 2,213,180 30,176 1,129 2,242,226
------------ ----------- ------------- -------------
Total $ 25,090,284 $ 56,342 $ 92,967 $ 25,053,659
============ =========== ============= =============
<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
securities 4,975,955 2,189 191,358 4,786,786
--------------- ---------- ------------- ------------
Total $ 13,354,404 $ 6,001 $ 215,145 $ 13,145,260
=============== ========== ============= ============
</TABLE>
The Bank also had other investments of $575,500 at December 31, 1997 consisting
of stock in the Federal Home Loan Bank of Atlanta and Eagle Bank Stock. At
December 31, 1996, other investments of $273,200 consisted of stock in the
Federal Home Loan Bank of Atlanta.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, 1997,
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.
30
<PAGE> 28
<TABLE>
<CAPTION>
Investment Securities Investment Securities
Available-for-Sale Held-to-Maturity
--------------------------- ----------------------------------
Amortized Market Amortized Market Net
Cost Value Cost Value Yield
----------- ----------- ---------- ---------- -----
<S> <C> <C> <C> <C> <C>
Due in one year or
less $ 9,046,701 $ 9,044,449 $ -0- $ -0- 5.80%
Due after one year
through five
years 5,484,253 5,495,051 884,540 895,550 5.72%
Due after five
years through
ten years 7,525,119 7,538,634 515,505 524,084 6.60%
Due after ten years 3,034,211 2,975,525 259,989 270,177 6.22%
----------- ----------- ---------- ---------- -----
Total $25,090,284 $25,053,659 $1,660,034 $1,689,811 5.96%
=========== =========== ========== ========== =====
</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, 1997. 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. $ 500,209 $ 504,459 $ -0- $ -0-
U.S. Government Agencies
& Corp. 7,701,648 3,344,980 6,728,816 -0-
Mortgage Backed 669,694 530,030 430,819 2,466,449
States & Political
subdivisions 175,150 1,989,324 880,989 827,751
----------- ----------- ----------- -----------
Total $ 9,046,701 $ 6,368,793 $ 8,040,624 $ 3,294,200
=========== =========== =========== ===========
</TABLE>
SHORT-TERM INVESTMENTS. Short-term investments, which consist primarily
of federal funds sold and interest bearing deposits with other banks, averaged
$6,393,961 in 1997, compared to $4,109,465 in 1996. At December 31, 1997,
short-term investments totaled $9,597,286. 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.
31
<PAGE> 29
<TABLE>
<CAPTION>
1997 Rate 1996 Rate
----------- ---- ----------- ----
<S> <C> <C> <C> <C>
(1) Non-interest Bearing
Demand Deposits $23,103,245 0.00% $16,135,113 0.00%
(2) Interest Bearing Demand
Deposits 23,522,722 2.95% 21,929,897 3.09%
(3) Savings Deposits 6,127,326 2.31% 5,963,929 2.42%
(4) Time Deposits 57,206,047 5.94% 46,138,495 6.18%
</TABLE>
At December 31, 1997, the Bank had $14,240,690 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>
<C> <C>
3 months or less $ 3,359,151
3 months to 6 months 1,138,798
6 months to 12 months 1,408,513
12 months & over 8,334,228
-------------
Total $ 14,240,690
=============
</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, 1997, was $10,731,410, or
8.16% of total assets. The increase of $1,566,694 from 1996 was primarily
attributable to the retention of earnings for 1996 and the decrease in the
market value reserve for 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, 1997:
<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% 8.4% 6.0% 10.5% 10.0% 11.7%
</TABLE>
32
<PAGE> 30
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 $6,359,886 during the year ended December 31, 1997 and was
$9,550,000 at December 31, 1997; averaged $3,929,727 during the year ended
December 31, 1996, and was $1,860,000 at December 31, 1996. 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). 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, 1997, the Bank had $16,661,425 in unfunded loan
commitments. There were $106,178 included in the above number that represents
credit card related commitments, such as overdraft protection, $11,002,973 in
unfunded commercial real estate construction and land development loans,
$3,809,259 in commercial loan commitments and $1,743,015 in home equity lines of
credit commitments. 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
33
<PAGE> 31
be collateralized by real estate mortgage loans. There were no advances under
these lines during 1997 or 1996.
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
34
<PAGE> 32
adoption of SFAS 121 did not have a significant impact on the financial
condition or results of operations of the Company.
EARNING PER COMMON SHARE. Effective January 1, 1997, the Company
adopted Statement of Financial Accounting Standards No. 128 (SFAS 128),
"Earnings per Share." This statement is effective for financial statements
issued for periods ending after December 15, 1997. This statement supercedes
Accounting Principles Board Opinion No. 15 (APB 15), "Earnings per Share," and
simplifies earnings per share computations by replacing primary earnings per
share with basic earnings per share, which shows no effects from dilutive
securities. Entities with complex capital structures have to show diluted
earnings per share, which is similar to the fully diluted earnings per share
computation under APS 15.
Basic earnings per common share has been computed based on the weighted
average number of common equivalent shares outstanding during the period. Stock
options, are considered to be common stock equivalents for purposes of
calculating diluted earnings per common share.
DISCLOSURE OF INFORMATION ABOUT CAPITAL STRUCTURE. Effective January 1,
1997, the Company adopted Statement of Financial Accounting Standards No. 129
(SFAS 129), "Disclosure of Information About Capital Structure." This statement
is effective for financial statements issued for periods ending after December
15, 1997. This statement consolidates existing disclosure requirements on
capital structure. The adoption of SFAS 129 did not have a significant impact on
the financial condition of operations of the Company.
PENDING ACCOUNTING PRONOUNCEMENTS
The Financial Accounting Standards Board has issued Statement of
Financial Accounting Standards No. 130, "Reporting Comprehensive Income." SFAS
130 is effective January 1, 1998. Under SFAS 130, a company will begin showing
changes in assets and liabilities in a new comprehensive income statement or
alternative presentation, as opposed to showing some of the items as
transactions in shareholders' equity accounts. Upon adoption, all comparative
annual and interim financial statements will present a comprehensive income
statement disclosure for all years presented. The adoption of SFAS 130 is not
expected to have a significant impact on the financial condition or results of
operations of the Company.
The Financial Accounting Standards Board has issued Statement of
Financial Accounting Standards No. 131 (SFAS 131), "Disclosure About Segments of
an Enterprise and Related Information." SFAS 131 is effective January 1, 1998,
and requires disclosure of certain financial information by segments of a
company's business. The adoption of SFAS 131 is not expected to have a
significant impact on the financial condition or results of operations of the
Company.
35
<PAGE> 33
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."
QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK
All financial institutions have financial instruments which are subject
to market risk comprised of interest rate risk, foreign currency exchange rate
risk, commodity price risk and other relevant market risks, such as equity price
risks. The Company has assessed its market risk as predominately interest rate
risk.
The following interest rate sensitivity analysis information as of
December 31, 1997, was developed using simulation analysis of the bank's
sensitivity to changes in net interest income under varying assumptions for
changes in market interest rates. Specifically, the model derives expected
interest income and interest expense resulting from an immediate and parallel
shift in the yield curve in the amount shown.
These rate changes are matched with known repricing intervals and
assumptions for new growth net of expected prepayments. The assumptions are
based primarily on experience in the Bank's market under varying rate
environments. The imbedded options that the Bank's loan customers possess, to
refinance, are not considered significant for purposes of this analysis given
the large majority of adjustable rate loans in the portfolio.
This analysis intentionally exaggerates interest sensitivity. For the
sake of simplicity and comparability, an immediate change in rates is assumed.
However, any significant change in actual market rates would be phased in over
probably an extended period of time. This phase in would reduce the net interest
income effects for any absolute change in rates.
36
<PAGE> 34
Further, current market conditions do not appear favorable for
substantial changes in base interest rates. The target Federal Funds rate has
been 5.50% since March of 1997 and even small changes in monetary policy appear
not to be imminent.
The bank attempts to retain interest rate neutrality by generating
mostly adjustable rate loans and managing the securities and Fed Funds positions
to offset the repricing characteristics of the deposit liabilities. See further
discussion of interest rate sensitivity in the discussion of Asset/Liability
management.
<TABLE>
<CAPTION>
Interest Rates Decrease Interest Rates Interest Rate Increase
200 BP 100BP Remain Constant Budget 100 BP 200 BP
------ ----- ---------------------- ------ -------
<S> <C> <C> <C> <C> <C> <C>
1998 Interest Income $ 9,563 $ 10,366 $ 11,169 $ 11,912 $ 12,655
1998 Interest Expense 4,037 4,393 4,749 5,137 5,525
---------- --------- ----------- ----------- ---------
Net Interest Income 5,526 5,973 6,420 6,775 7,130
Change in net income
after tax vs. budget (572) (286) 227 454
</TABLE>
37
<PAGE> 35
------------------------------------------------------------------
FIRST COMMUNITY BANKING SERVICES, INC.
AND SUBSIDIARY
PEACHTREE CITY, GEORGIA
CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1997, 1996 AND 1995
------------------------------------------------------------------
<PAGE> 36
CONTENTS
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Page
----
<S> <C>
Independent Auditors' Report................................................1
Consolidated Balance Sheets.................................................2
Consolidated Statements of Income...........................................4
Consolidated Statements of Changes in Stockholders' Equity..................6
Consolidated Statements of Cash Flows.......................................7
Notes to Consolidated Financial Statements..................................9
</TABLE>
<PAGE> 37
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, 1997 and
1996, and the related consolidated statements of income, changes in
stockholders' equity and cash flows for each of the three years ended December
31, 1997. 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, 1997
and 1996, and the results of their operations and their cash flows for each of
the three years in the period ended December 31, 1997, in conformity with
generally accepted accounting principles.
The accompanying consolidated financial statements as of and for the year
ended December 31, 1997, have been prepared assuming First Community Banking
Services, Inc. and subsidiary will continue in existence in their current
corporate structure and the bank subsidiary will retain its charter. As
discussed in Note B, on February 12, 1998, First Community Banking Services,
Inc. entered into a definitive agreement to be merged into a regional bank.
These consolidated financial statements do not include any adjustments that
might result from First Community Banking Services, Inc. being merged into or
acquired by another entity.
BRICKER & MELTON, P.A.
March 12, 1998
Duluth, Georgia
<PAGE> 38
FIRST COMMUNITY BANKING SERVICES, INC.
AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
December 31,
----------------------------------
1997 1996
------------- --------------
ASSETS
<S> <C> <C>
Cash and due from banks (Note C) $ 5,269,173 $ 5,317,785
Federal funds sold 9,550,000 1,860,000
Interest-bearing deposits in other financial institutions 47,286 25,088
Investment securities held to maturity (market value of
$1,689,811 and $1,665,963, respectively) (Note D) 1,660,034 1,659,519
Investment securities available for sale (Note D) 25,053,659 13,145,260
Other investments (Note D) 575,500 273,200
Loans, net of deferred loan fees (Notes E and K) 85,248,271 81,915,981
Less: Allowance for loan losses (Note E) 1,704,318 1,214,173
------------- -------------
Loans, net 83,543,953 80,701,808
Premises and equipment, net (Note F) 3,165,026 3,352,404
Other real estate 502,185 399,199
Accrued interest receivable 1,280,200 885,625
Intangible assets, net of accumulated amortization of
$426,609 and $539,226, respectively 223,391 470,774
Other assets (Note I) 597,415 463,027
------------- -------------
TOTAL ASSETS $ 131,467,822 $ 108,553,689
============= =============
LIABILITIES AND STOCKHOLDERS' EQUITY
LIABILITIES Deposits (Notes H and O):
Noninterest-bearing demand $ 27,894,729 $ 17,122,818
Interest-bearing demand and money market 29,136,108 19,229,218
Savings 5,920,380 5,666,954
Time deposits of $100,000 or more 14,240,690 15,290,467
Other time deposits 41,841,970 40,834,909
------------- -------------
Total Deposits 119,033,877 98,144,366
Accrued interest payable 1,429,043 941,468
Other liabilities (Note I) 273,492 303,139
------------- -------------
TOTAL LIABILITIES 120,736,412 99,388,973
------------- -------------
</TABLE>
(Continued)
The accompanying notes are an integral part of these consolidated financial
statements.
Page 2
<PAGE> 39
FIRST COMMUNITY BANKING SERVICES, INC.
AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS, (Continued)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
December 31,
----------------------------------
1997 1996
-------------- -------------
<S> <C> <C>
STOCKHOLDERS' EQUITY (Notes L and M)
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, 1,369,012 and 1,286,124 shares
issued and outstanding (NOTE R) 1,369,012 1,286,124
Treasury stock at cost, 620 shares (8,386) --
Surplus 6,332,802 5,453,839
Retained earnings 3,062,154 2,562,787
Market valuation reserve on investment securities
available for sale (Note D) (24,172) (138,034)
------------- -------------
TOTAL STOCKHOLDERS' EQUITY 10,731,410 9,164,716
------------- -------------
Commitments and contingent liabilities (Note N)
TOTAL LIABILITIES AND
STOCKHOLDERS' EQUITY $ 131,467,822 $ 108,553,689
============= =============
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
Page 3
<PAGE> 40
FIRST COMMUNITY BANKING SERVICES, INC.
AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF INCOME
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
For the years ended December 31,
-------------------------------------------------
1997 1996 1995
------------ ------------ ------------
<S> <C> <C> <C>
INTEREST INCOME
Loans, including fees $ 8,945,541 $ 8,202,657 $ 5,999,755
Investment securities:
U.S. Treasury securities 79,656 133,473 87,499
U.S. Government agencies and corporations 1,068,205 705,175 732,659
States and political subdivisions 123,603 79,048 85,707
Other investments 22,799 19,460 3,340
Federal funds sold 355,421 220,072 265,766
Interest-bearing deposits in other financial
institutions 1,870 8,740 11,935
------------ ------------ ------------
TOTAL INTEREST INCOME 10,597,095 9,368,625 7,186,661
------------ ------------ ------------
INTEREST EXPENSE
Interest-bearing demand and money market 694,902 678,718 651,957
Savings 141,488 144,098 125,551
Time deposits of $100,000 or more 849,732 912,059 632,954
Other time deposits 2,547,726 1,939,439 1,366,384
Federal funds purchased and securities sold under
agreements to repurchase 20,243 12,116 12,525
------------ ------------ ------------
TOTAL INTEREST EXPENSE 4,254,091 3,686,430 2,789,371
------------ ------------ ------------
NET INTEREST INCOME 6,343,004 5,682,195 4,397,290
PROVISION FOR LOAN LOSSES (Note E) 620,000 856,312 335,000
------------ ------------ ------------
NET INTEREST INCOME AFTER
PROVISION FOR LOAN LOSSES 5,723,004 4,825,883 4,062,290
------------ ------------ ------------
OTHER INCOME
Service charges on deposit accounts 527,404 503,621 418,162
Investment securities gains (losses), net (Note D) (8,316) 142 32
Gains on sales of SBA loans 60,994 71,825 57,690
Loss on sale of credit card portfolio (72,970) -- --
Loss on sale of other real estate owned (5,905) -- --
Loss on sale of fixed assets (20,265) -- --
Other income 68,856 69,384 60,732
------------ ------------ ------------
TOTAL OTHER INCOME 549,798 644,972 536,616
------------ ------------ ------------
</TABLE>
(Continued)
The accompanying notes are an integral part of these consolidated financial
statements.
Page 4
<PAGE> 41
FIRST COMMUNITY BANKING SERVICES, INC.
AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF INCOME, (Continued)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
For the years ended December 31,
-------------------------------------------------
1997 1996 1995
------------ ------------- -------------
<S> <C> <C> <C>
OTHER EXPENSE
Salaries and wages $ 1,650,192 $ 1,395,694 $ 1,210,974
Employee benefits (Note J) 232,370 225,227 172,103
Net occupancy expense 208,230 181,831 198,565
Furniture, fixtures and equipment expense 247,032 210,138 174,519
Professional and outside services 484,602 427,219 361,460
Amortization of intangible assets 174,519 97,857 97,857
Other expense (Note P) 812,070 978,905 799,706
------------ ------------ ------------
TOTAL OTHER EXPENSE 3,809,015 3,516,871 3,015,184
------------ ------------ ------------
INCOME BEFORE INCOME TAX
EXPENSE 2,463,787 1,953,984 1,583,722
INCOME TAX EXPENSE (Note I) 896,207 699,573 561,475
------------ ------------ ------------
NET INCOME $ 1,567,580 $ 1,254,411 $ 1,022,247
============ ============ ============
BASIC EARNINGS PER COMMON SHARE
(Note A) $ 1.15 $ .92 $ .75
============ ============ ============
DILUTED EARNINGS PER COMMON SHARE
(Note A) $ 1.08 $ .87 $ .73
============ ============ ============
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
Page 5
<PAGE> 42
FIRST COMMUNITY BANKING SERVICES, INC.
AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
For the years ended December 31, 1997, 1996 and 1995
-------------------------------------------------------------------------------------------
Treasury Retained Market
Common Stock at Earnings Valuation
Stock Cost Surplus (Deficit) Reserve Total
------------- ----------- ----------- ----------- ----------- ------------
<S> <C> <C> <C> <C> <C> <C>
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 30,622 -- 535,885 (566,507) -- --
percent
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
Net income -- -- -- 1,567,580 -- 1,567,580
Cash dividends declared - $.30 per
share -- -- -- (193,818) -- (193,818)
Purchase of treasury stock -- (8,386) -- -- -- (8,386)
Stock dividends declared - 5 32,385 -- 842,010 (874,395) -- --
percent
Proceeds from exercise of stock
options 9,059 -- 78,397 -- -- 87,456
Market valuation adjustment -- -- -- -- 113,862 113,862
------------ ------------ ------------ ------------ ------------ ------------
BALANCE AT DECEMBER 31, 1997 684,506 (8,386) 7,017,308 3,062,154 (24,172) 10,731,410
Two-for-one stock split subsequent
to December 31, 1997 (Note R) 684,506 -- (684,506) -- -- --
------------ ------------ ------------ ------------ ------------ ------------
BALANCE AT DECEMBER 31, 1997,
AFTER RETROACTIVE RESTATEMENT
FOR STOCK SPLIT $ 1,369,012 $ (8,386) $ 6,332,802 $ 3,062,154 $ (24,172) $ 10,731,410
============ ============ ============ ============ ============ ============
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
Page 6
<PAGE> 43
FIRST COMMUNITY BANKING SERVICES, INC.
AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
For the years ended December 31,
--------------------------------------------------
1997 1996 1995
------------ ----------- ------------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net income $ 1,567,580 $ 1,254,411 $ 1,022,247
Adjustments to reconcile net income to net cash
provided by operating activities:
Net accretion of investments (7,898) (12,425) (34,487)
Amortization and write down of intangible
assets 174,519 97,857 97,857
Depreciation of premises and equipment 226,223 216,060 189,228
Provision for loan losses 620,000 856,312 335,000
Deferred income tax provision (benefit) (251,946) (132,179) 59,456
Deferred net loan fees 1,356 132,968 82,026
Investment securities gains, net (8,316) (142) (32)
Gains on sales of SBA loans (60,994) (71,825) (57,690)
Loss on sale of loans -- 160 --
Loss on sale of credit card portfolio 72,970 -- --
Loss on sale of other real estate owned 5,905 -- --
Loss on sale of fixed assets 20,265 -- --
Increase in interest receivable (394,575) (184,854) (150,098)
Increase (decrease) in interest payable 487,575 (227,945) 803,360
(Increase) decrease in other assets 58,900 116,729 (90,557)
Increase (decrease) in other liabilities (29,647) 113,589 72,258
------------ ------------ ------------
NET CASH PROVIDED BY
OPERATING ACTIVITIES 2,481,917 2,158,716 2,328,568
------------ ------------ ------------
CASH FLOWS FROM INVESTING ACTIVITIES
Net (increase) decrease in interest-bearing deposits
in other financial institutions (22,198) 169,912 199,000
Maturities of investment securities held to maturity -- 200,000 --
Purchases of investment securities available for sale (21,660,622) (15,840,688) (3,695,725)
Purchases of other investments (302,300) (22,200) (251,000)
Sales of investment securities available for sale 6,922,630 9,612,343 --
Maturities of investment securities available for sale 3,017,812 3,923,293 5,971,482
Proceeds from sales of SBA loans 800,775 2,262,441 1,015,625
Proceeds from sales of loans -- 3,767,646 --
Loans originated or acquired, net of principal
repayments (6,071,573) (21,233,730) (26,532,829)
</TABLE>
(Continued)
The accompanying notes are an integral part of these consolidated financial
statements.
Page 7
<PAGE> 44
FIRST COMMUNITY BANKING SERVICES, INC.
AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS, (Continued)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
For the years ended December 31,
---------------------------------------------------
1997 1996 1995
------------ ------------ -------------
<S> <C> <C> <C>
CASH FLOWS FROM INVESTING ACTIVITIES,
(Continued)
Proceeds from sale of credit card portfolio (Note A) $ 1,366,000 $ -- $ --
Purchases of premises and equipment (59,810) (302,060) (102,365)
Sales of premises and equipment 700 -- --
Sales of other real estate 393,294 107,266 424,295
------------ ------------ ------------
NET CASH USED BY INVESTING
ACTIVITIES (15,615,292) (17,355,777) (22,971,517)
------------ ------------ ------------
CASH FLOWS FROM FINANCING ACTIVITIES
Net decrease in federal funds purchased and
securities sold under agreements to repurchase -- (1,161) (1,036,703)
Net increase in demand, money market and savings
accounts 20,932,227 1,071,077 7,096,301
Time deposits accepted, net of repayments (42,716) 15,636,413 17,753,553
Proceeds from exercise of stock options and
warrants 87,456 -- 60,000
Cash dividends paid (193,818) (183,732) (152,360)
Purchase of treasury stock (8,386) -- --
------------ ------------ ------------
NET CASH PROVIDED BY
FINANCING ACTIVITIES 20,774,763 16,522,597 23,720,791
------------ ------------ ------------
NET INCREASE IN CASH AND CASH
EQUIVALENTS 7,641,388 1,325,536 3,077,842
CASH AND CASH EQUIVALENTS AT
BEGINNING OF YEAR 7,177,785 5,852,249 2,774,407
------------ ------------ ------------
CASH AND CASH EQUIVALENTS AT END OF
YEAR $ 14,819,173 $ 7,177,785 $ 5,852,249
============ ============ ============
SUPPLEMENTAL DISCLOSURES OF CASH
PAID:
Interest $ 3,766,516 $ 3,914,375 $ 1,986,011
============ ============ ============
Income taxes $ 1,175,000 $ 751,000 $ 508,650
============ ============ ============
SUPPLEMENTAL DISCLOSURES OF
NONCASH FINANCING AND INVESTING
ACTIVITIES:
Acquisition of real estate in settlement of loans $ 502,185 $ 437,534 $ --
============ ============ ============
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
Page 8
<PAGE> 45
FIRST COMMUNITY BANKING SERVICES, INC.
AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
- --------------------------------------------------------------------------------
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 full-service 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 consolidated financial statements have been prepared in conformity with
generally accepted accounting principles. In preparing the consolidated
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.
Interest-bearing deposits are reported at cost. Interest income is recognized
based on the simple interest method for principal amounts outstanding.
Page 9
<PAGE> 46
FIRST COMMUNITY BANKING SERVICES, INC.
AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
- --------------------------------------------------------------------------------
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.
On January 30, 1997, the Company sold its credit card portfolio to a third
party. Total proceeds from this sale were approximately $1,366,000, which
resulted in a loss of $72,970 due to a write-off of unamortized purchase
premium.
In 1996, the Company sold its Thacker and Loucks loan portfolio. Total
proceeds from this sale were $3,767,646 which resulted in a loss of $160. During
1997, the Company received an underwriting premium rebate of $67,000 due to the
low level of loss the Company experienced with this portfolio.
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.
Page 10
<PAGE> 47
FIRST COMMUNITY BANKING SERVICES, INC.
AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
- --------------------------------------------------------------------------------
NOTE A--SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, (Continued)
ALLOWANCE FOR LOAN LOSSES
The allowance for loan losses is established through a provision for loan
losses charged to expense. The allowance represents an amount which, in
management's judgment, will be adequate to absorb probable losses on existing
loans that may become uncollectible. Management's judgment in determining the
adequacy of the allowance is based on evaluations of the collectibility of loans
and takes into consideration such factors as changes in the nature and volume of
the loan portfolio, current economic conditions that may affect the borrower's
ability to pay, overall portfolio quality and review of specific problem loans.
Periodic revisions are made to the allowance when circumstances which
necessitate such revisions become known. Recognized losses are charged to the
allowance for loan losses, while subsequent recoveries are added to the
allowance.
Management, considering current information and events regarding the
borrowers' ability to repay their obligations, considers a loan to be impaired
when it is probable that the Bank will be unable to collect all amounts due
according to the contractual terms of the loan. When a loan is considered to be
impaired, the amount of the impairment is measured based on the present value of
expected future cash flows discounted at the note's effective interest rate.
Impairment losses are included in the allowance for loan losses through a charge
to the provision. Cash receipts on impaired loans are applied to reduce the
principal amount of such loans until the principal has been recovered and are
recognized as interest income, thereafter.
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 at December 31, 1997, include amounts for goodwill and
deposit assumption premium. Intangible assets at December 31, 1996, include
amounts for goodwill, deposit assumption premium and premium for purchased
credit card loans. During 1997, the Company evaluated the useful life of the
deposit assumption premium and made a one-time adjustment of $123,811 to reduce
the intangible assets' useful life to nine years using the straight-line method.
Goodwill and the deposit assumption premium were being amortized over 14 years,
the estimated average life of the deposit base acquired at the date of
inception. The premium for credit card loans was being amortized on the
straight-line basis over seven years, the estimated life of the portfolio.
Page 11
<PAGE> 48
FIRST COMMUNITY BANKING SERVICES, INC.
AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
- --------------------------------------------------------------------------------
NOTE A--SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, (Continued)
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.
STOCK DIVIDENDS AND SPLITS
On March 21, 1996, the Board of Directors of the Company declared a 5 percent
stock dividend distributable on May 15, 1996, to shareholders of record on April
24, 1996. The stock dividend resulted in 30,622 additional shares of common
stock being issued. On October 4, 1997, the Board of Directors of the Company
declared a 5 percent stock dividend distributable on November 4, 1997, to
shareholders of record on October 14, 1997. The stock dividend resulted in
32,385 additional shares of common stock being issued. On January 15, 1998, the
Board of Directors of the Company declared a two-for-one stock split
distributable on February 20, 1998 (See Note R). All references in the
consolidated financial statements to number of share per share amounts and
market prices of the Company's common stock have been retroactively restated to
reflect the increased number of shares outstanding as if the stock dividends and
splits occurred on January 1, 1995.
EARNINGS PER COMMON SHARE
Effective January 1, 1997, the Company adopted Statement of Financial
Accounting Standards No. 128 (SFAS 128), "Earnings Per Share." This statement is
effective for financial statements issued for periods ending after December 15,
1997. This statement supersedes Accounting Principles Board Opinion No. 15 (APB
15), "Earnings Per Share," and simplifies earnings per share computations by
replacing primary earnings per share with basic earnings per share, which shows
no effects from dilutive securities. Entities with complex capital structures
have to show diluted earnings per share, which is similar to the fully diluted
earnings per share computation under APB 15.
Basic earnings per common share has been computed based on the weighted
average number of common equivalent shares outstanding during the period. Stock
options, as described in Note M, are considered to be common stock equivalents
for purposes of calculating diluted earnings per common share. The common stock
splits have been treated retroactively as occurring on January 1, 1995, for
earnings per share computation purposes.
Page 12
<PAGE> 49
FIRST COMMUNITY BANKING SERVICES, INC.
AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
- --------------------------------------------------------------------------------
NOTE A--SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, (Continued)
The reconciliation of basic earnings per share to diluted earnings per share
is as follows:
<TABLE>
<CAPTION>
Net Common Per Share
Earnings Shares Amount
------------ ------------ -----------
<S> <C> <C> <C>
For the year ended December 31, 1997:
Basic earnings per common share $1,567,580 1,363,557 $1.15
Effect of dilutive stock options -- 81,347 (.07)
---------- --------- -----
Diluted earnings per common share $1,567,580 1,444,904 $1.08
For the year ended December 31, 1996:
Basic earnings per common share $1,254,411 1,359,953 $ .92
Effect of dilutive stock options -- 80,986 (.05)
---------- --------- -----
Diluted earnings per common share $1,254,411 1,440,939 $ .87
For the year ended December 31, 1995:
Basic earnings per common share $1,022,247 1,357,453 $ .75
Effect of dilutive stock options -- 34,276 (.02)
---------- --------- -----
Diluted earnings per common share $1,022,247 1,391,729 $ .73
</TABLE>
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.
Page 13
<PAGE> 50
FIRST COMMUNITY BANKING SERVICES, INC.
AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
- --------------------------------------------------------------------------------
NOTE A--SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, (Continued)
OFF-BALANCE-SHEET FINANCIAL INSTRUMENTS
In the normal course of business, the Bank originates financial instruments
with off-balance-sheet risk to meet the financing needs of its customers. These
financial instruments include commitments to extend credit and standby letters
of credit. These commitments involve varying degrees of risk in excess of the
amounts recognized in the balance sheet. Commitments to extend credit represent
legally binding agreements to lend to a customer with fixed expiration dates or
other termination clauses. Since many commitments expire without being funded,
total commitment amounts do not necessarily represent future liquidity
requirements. The amount of collateral obtained is based on management's credit
evaluation of the customer. Collateral held varies but may include accounts
receivable; inventory; and property, plant and equipment. Standby letters of
credit are conditional commitments issued by the Bank guaranteeing the
performance of a customer to a third party.
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 inherent in the loan, or by using the current rates at which
similar loans would be made to borrowers with similar credit ratings and for the
same remaining maturities.
Deposits--The fair value of deposits with no stated maturity, such as demand,
NOW and money market, and savings accounts, is equal to the amount payable on
demand at year-end. The fair value of certificates of deposit is based on the
discounted value of contractual cash flows using the rates currently offered for
deposits of similar remaining maturities.
Short-term borrowings--The carrying amount of federal funds purchased and
other short-term borrowings maturing within 30 days approximates fair value.
Accrued interest--The carrying amount of accrued interest receivable and
payable approximates fair value.
Page 14
<PAGE> 51
FIRST COMMUNITY BANKING SERVICES, INC.
AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
- --------------------------------------------------------------------------------
NOTE A--SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, (Continued)
Off-balance-sheet instruments--The fair value of commitments to extend credit
to fund commercial, consumer, real estate-construction and real estate-mortgage
loans and to fund standby letters of credit is equal to the amount of
commitments outstanding at December 31, 1997. This is based on the fact that the
Company generally does not offer lending commitments or standby letters of
credit to its customers for long periods, and therefore, the underlying rates of
the commitments approximate market rates.
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.
RECLASSIFICATIONS
Certain reclassifications have been made in the 1996 and 1995 financial
statements to conform with the 1997 presentation.
NEW ACCOUNTING PRONOUNCEMENTS
ACCOUNTING FOR TRANSFERS AND SERVICING OF FINANCIAL ASSETS AND
EXTINGUISHMENTS OF LIABILITIES Effective January 1, 1997, the Company adopted
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 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 did not have a significant impact on the financial
condition or results of operations of the Company.
DISCLOSURE OF INFORMATION ABOUT CAPITAL STRUCTURE Effective January 1, 1997,
the Company adopted Statement of Financial Accounting Standards No. 129 (SFAS
129), "Disclosure of Information About Capital Structure." This statement is
effective for financial statements issued for periods ending after December
15, 1997. This statement consolidates existing disclosure requirements on
capital structure. The adoption of SFAS 129 did not have a significant impact
on the financial condition or results of operations of the Company.
Page 15
<PAGE> 52
FIRST COMMUNITY BANKING SERVICES, INC.
AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
- --------------------------------------------------------------------------------
NOTE A--SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, (Continued)
PENDING ACCOUNTING PRONOUNCEMENTS
The Financial Accounting Standards Board has issued Statement of Financial
Accounting Standards No. 130 (SFAS 130), "Reporting Comprehensive Income." SFAS
130 is effective January 1, 1998. Under SFAS 130, a company will begin showing
changes in assets and liabilities in a new comprehensive income statement or
alternative presentation, as opposed to showing some of the items as
transactions in shareholders' equity accounts. Upon adoption, all comparative
annual and interim financial statements will present a comprehensive income
statement disclosure for all years presented. The adoption of SFAS 130 is not
expected to have a significant impact on the financial condition or results of
operations of the Company.
The Financial Accounting Standards Board has issued Statement of Financial
Accounting Standards No. 131 (SFAS 131), "Disclosures About Segments of an
Enterprise and Related Information." SFAS 131 is effective January 1, 1998, and
requires disclosure of certain financial information by segments of a company's
business. The adoption of SFAS 131 is not expected to have a significant impact
on the financial condition or results of operations of the Company.
NOTE B--MERGER
On February 12, 1998, the Company and Regions Financial Corporation (Regions)
executed a definitive agreement (Agreement) to merge the two companies, whereby
Regions would acquire all of the issued and outstanding shares of common stock
of the Company in exchange for Regions common stock. The Agreement provides for
an exchange of .625 shares of Regions common stock for each outstanding share of
the Company's common stock. The merger will be accounted for as a pooling of
interest under generally accepted accounting principles. The merger is subject
to regulatory and shareholder approval and is expected to be consummated in the
third quarter of 1998.
These consolidated financial statements have been prepared on the basis of
the Company retaining its present corporate structure and ownership and the Bank
retaining its charter. No adjustments have been made to reflect the tax
consequences of the Company being acquired, including the recapture of tax loan
loss reserves, penalties for cancellation of existing contracts with vendors,
and commissions or fees payable to the investment banker or other parties; the
effects of any changes in accounting policies, principles or practices of the
acquiror which differ from that of the Company; or any other expenses of the
acquisition which were not actual liabilities as of December 31, 1997.
NOTE C--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, 1997 and 1996 was approximately $1,003,000
and $720,000, respectively. The Bank maintained cash balances which were
adequate to meet this requirement.
Page 16
<PAGE> 53
FIRST COMMUNITY BANKING SERVICES, INC.
AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
- --------------------------------------------------------------------------------
NOTE D--INVESTMENT SECURITIES
The amortized cost and estimated market value of investment securities held
to maturity are as follows at December 31:
<TABLE>
<CAPTION>
1997
-----------------------------------------------------------------
Amortized Unrealized Unrealized Market
Cost Gains Losses Value
------------ ------------ ------------ ---------
<S> <C> <C> <C> <C>
States and political subdivisions $1,660,034 $ 30,583 $ 806 $1,689,811
========== ========== ========== ==========
</TABLE>
<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
========== ========== ========== ==========
</TABLE>
The amortized cost and estimated market value of investment securities
available for sale are as follows at December 31:
<TABLE>
<CAPTION>
1997
-------------------------------------------------------------------
Amortized Unrealized Unrealized Market
Cost Gains Losses Value
------------- ------------ ------------ -------------
<S> <C> <C> <C> <C>
U.S. Treasury securities $1,004,669 $ 4,237 $ -- $ 1,008,906
U.S. Government agencies and
corporations 17,775,443 9,698 20,174 17,764,967
States and political subdivisions 2,213,180 30,176 1,130 2,242,226
Mortgage-backed securities 4,096,992 12,231 71,663 4,037,560
----------- ---------- ---------- -----------
$25,090,284 $ 56,342 $ 92,967 $25,053,659
=========== ========== ========== ===========
</TABLE>
<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
=========== ========== ========== ===========
</TABLE>
Page 17
<PAGE> 54
FIRST COMMUNITY BANKING SERVICES, INC.
AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
- --------------------------------------------------------------------------------
NOTE D--INVESTMENT SECURITIES, (Continued)
Other investments at December 31, 1997 and 1996 consists of stock in the
Federal Home Loan Bank of Atlanta. Other investments at December 31, 1997 also
consist of Eagle Bank stock.
The net unrealized loss on available for sale securities at December 31, 1997
and 1996, net of the related deferred taxes of $12,452 and $71,110, is $24,172
and $138,034, respectively, and is included as a separate component of
stockholders' equity.
The US government agencies and corporations and the mortgage-backed
investment securities classified as available for sale at December 31, 1997,
with a market value of approximately $21,803,000, 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 $4,216,000 of these securities are derivative securities. These
securities have stated maturities ranging from 1998 through 2023 and have a
current weighted average net yield of 6.13 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, 1997, 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 $ -- $ -- $ 9,046,701 $ 9,044,449
Due after one year through five years 884,540 895,550 5,484,253 5,495,051
Due after five years through ten years 515,505 524,084 7,525,119 7,538,634
Due after ten years 259,989 270,177 3,034,211 2,975,525
---------- ---------- ----------- -----------
$1,660,034 $1,689,811 $25,090,284 $25,053,659
========== ========== =========== ===========
</TABLE>
Proceeds from sales of investment securities available for sale during 1997
and 1996 were $6,922,630 and $9,612,201, respectively, with gross gains of
$13,144 and $27,287 and gross losses of $21,861 and $27,458 realized on those
sales. There were no sales of investment securities in 1995. Maturities and
principal repayments of investment securities available for sale during 1997,
1996 and 1995 were $417,812, $3,923,293 and $5,971,418, respectively, with gross
gains of $1,226, $660 and $32 and gross losses of $825, $347 and $0 realized on
those transactions.
Page 18
<PAGE> 55
FIRST COMMUNITY BANKING SERVICES, INC.
AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
- --------------------------------------------------------------------------------
NOTE D--INVESTMENT SECURITIES, (Continued)
Investment securities with amortized costs of approximately $600,000 and
$600,000 and market values of approximately $598,691 and $599,544 at December
31, 1997 and 1996, 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, 1997, the Bank has no outstanding off-balance-sheet
derivative financial instruments such as swaps, options, futures or forward
contracts.
NOTE E--LOANS
Major classifications of loans are as follows at December 31:
<TABLE>
<CAPTION>
1997 1996
------------ ------------
<S> <C> <C>
Commercial, financial and agricultural $ 15,855,022 $ 17,340,052
Real estate--commercial 24,454,646 25,713,790
Real estate--individual 18,152,167 12,898,096
Real estate--construction 21,296,534 19,505,888
Installment and single payment individual 5,675,875 5,255,715
Credit cards -- 1,375,249
Other 16,991 28,799
------------ ------------
Total loans 85,451,235 82,117,589
Net deferred loan fees (202,964) (201,608)
------------ ------------
Loans, net of deferred loan fees $ 85,248,271 $ 81,915,981
============ ============
</TABLE>
Substantially all loans are made to borrowers in the Bank's primary market
area of Fayette, Coweta and Fulton counties. At December 31, 1997 and 1996, the
Bank had approximately $64,000,000 and $58,000,000, respectively, of its
portfolio secured by real estate.
Nonaccrual and restructured loans totaled $509,038 and $318,767 at December
31, 1997 and 1996, respectively. If such loans had been on a full-accrual basis,
interest income would have been approximately $38,000 and $19,000 higher in 1997
and 1996, respectively. Interest income recognized on these loans totaled
approximately $59,000 and $250, respectively.
At December 31, 1997 and 1996, the Bank has approximately $508,000 and
$966,000 in loans which are impaired under SFAS 114. During 1997 and 1996, the
average balance outstanding on these loans was approximately $644,000 and
$1,087,000. In 1996, the Bank charged off approximately $325,000 of impaired
loans, leaving approximately $150,000 in the allowance for loan loss related to
loans impaired at December 31, 1996. During 1997, the Bank charged off
approximately $304,000 of impaired loans which were considered impaired in 1996.
The allowance for loan loss related to loans impaired at December 31, 1997, is
approximately $51,000.
Page 19
<PAGE> 56
FIRST COMMUNITY BANKING SERVICES, INC.
AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
- --------------------------------------------------------------------------------
NOTE E--LOANS, (Continued)
The following is a summary of transactions in the allowance for loan losses
for the years ended December 31:
<TABLE>
<CAPTION>
1997 1996 1995
----------- ----------- -----------
<S> <C> <C> <C>
Balance, beginning of year $ 1,214,173 $ 918,036 $ 715,230
Provision charged to expense 620,000 856,312 335,000
Loans charged off (414,590) (583,332) (170,909)
Recoveries of loans previously charged off 284,735 23,157 38,715
----------- ----------- -----------
Balance, end of year $ 1,704,318 $ 1,214,173 $ 918,036
=========== =========== ===========
</TABLE>
Included in loans charged off for 1997 and 1996 were approximately $304,000
and $325,000 of impaired loans from 1996.
NOTE F--PREMISES AND EQUIPMENT
Premises and equipment are comprised of the following at December 31:
<TABLE>
<CAPTION>
1997 1996
----------- -----------
<S> <C> <C>
Land $ 900,187 $ 900,187
Buildings 2,084,546 2,054,685
Furniture, fixtures and equipment 1,330,617 1,373,301
----------- -----------
4,315,350 4,328,173
Less: Accumulated depreciation (1,150,324) (975,769)
----------- -----------
Premises and equipment, net $ 3,165,026 $ 3,352,404
=========== ===========
</TABLE>
The charge to operating expense for depreciation totaled $226,223, $216,060
and $189,228 in 1997, 1996 and 1995, respectively.
Page 20
<PAGE> 57
FIRST COMMUNITY BANKING SERVICES, INC.
AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
- --------------------------------------------------------------------------------
NOTE G--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, 1997. There were no amounts outstanding
under these lines at December 31, 1996. The maximum and daily average amounts of
federal funds purchased during 1997 and 1996 were approximately $3,000,000 and
$342,000, respectively, for 1997 and $4,840,000 and $268,000, respectively, for
1996. 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 1997 and
1996 was 5.93 and 4.52 percent, respectively.
The Bank has established a $12,000,000 repurchase agreement with a
correspondent bank. Advances under this agreement will be collateralized by the
Bank's investment securities held by the correspondent bank. Management may
select the securities to sell under agreements to repurchase. At December 31,
1997, the Bank had no outstanding securities sold under agreements to
repurchase. The maximum and daily average amounts of securities sold under
agreements to repurchase during 1997 were approximately $3,000,000 and $53,000,
respectively, and the average interest rate paid was 5.78 percent. There were no
advances under this agreement during 1996.
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 1997 or
1996.
NOTE H--TIME DEPOSITS
At December 31, 1997, the scheduled maturities of time deposits of $100,000
or more and other time deposits are as follows:
<TABLE>
<S> <C>
1998 $39,073,344
1999 and 2000 16,218,875
2001 and thereafter 790,441
-----------
$56,082,660
===========
</TABLE>
Page 21
<PAGE> 58
FIRST COMMUNITY BANKING SERVICES, INC.
AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
- --------------------------------------------------------------------------------
NOTE I--INCOME TAXES
The following are the components of income tax expense as provided for the
years ended December 31:
<TABLE>
<CAPTION>
1997 1996 1995
----------- ----------- -----------
<S> <C> <C> <C>
Current income tax provision:
Federal $ 1,020,268 $ 748,799 $ 466,188
State 127,885 82,953 35,831
Deferred income tax provision (benefit) (251,946) (132,179) 59,456
----------- ----------- -----------
$ 896,207 $ 699,573 $ 561,475
=========== =========== ===========
</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>
1997 1996 1995
----------- ----------- -----------
<S> <C> <C> <C>
Pretax income $ 2,463,787 $ 1,953,984 $ 1,583,722
=========== =========== ===========
Income taxes computed at Federal statutory tax rate $ 837,688 $ 664,355 $ 538,465
Increase (decrease) resulting from:
Tax-exempt interest income (33,116) (26,876) (29,079)
State income taxes 79,340 49,938 22,230
Other, net 12,295 12,156 29,859
----------- ----------- -----------
$ 896,207 $ 699,573 $ 561,475
=========== =========== ===========
</TABLE>
Page 22
<PAGE> 59
FIRST COMMUNITY BANKING SERVICES, INC.
AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
- --------------------------------------------------------------------------------
NOTE I--INCOME TAXES, (Continued)
The following summarizes the tax effects of temporary differences which
comprise the net deferred tax assets at December 31:
<TABLE>
<CAPTION>
1997 1996
--------- ---------
<S> <C> <C>
Deferred income tax assets:
Allowance for loan losses $ 498,094 $ 311,515
Other real estate owned 24,004 9,794
Deferred loan fees 77,045 99,724
Unrealized loss on investment securities available for sale 12,452 71,110
Nonaccrual interest 30,130 97
Capital losses 15,405 23,083
--------- ---------
Total deferred income tax assets 657,130 515,323
--------- ---------
Deferred income tax liabilities:
Accumulated depreciation (127,280) (127,857)
Intangible assets (23,282) (74,186)
--------- ---------
Total deferred income tax liabilities (150,562) (202,043)
--------- ---------
Net deferred income tax asset $ 506,568 $ 313,280
========= =========
</TABLE>
NOTE J--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 $46,320 in
1997, $34,526 in 1996 and $16,920 in 1995.
NOTE K--RELATED PARTY TRANSACTIONS
As of December 31, 1997 and 1996, the Bank had direct and indirect loans
which aggregated $1,042,359 and $2,299,706, respectively, outstanding to or for
the benefit of certain of the Bank's officers, directors, and their related
interests. During 1997, $68,958 of such loans were made and repayments totaled
$1,326,305. 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.
Page 23
<PAGE> 60
FIRST COMMUNITY BANKING SERVICES, INC.
AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
- --------------------------------------------------------------------------------
NOTE K--RELATED PARTY TRANSACTIONS, (Continued)
As discussed in Note O, the Bank had a concentration of deposits with two
customers in 1997 and three customers and their related entities in 1996. Of
these amounts, approximately $6,715,900 and $9,046,000 were from certain bank
directors and their related interests at December 31, 1997 and 1996,
respectively. These deposits were made in conformity with normal banking terms
and rates prevailing at the time of origination.
NOTE L--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 tables) 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, 1997, 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
tables.
<TABLE>
<CAPTION>
1997
----------------------------------------------------------------------------
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) $>= 6,053,455 >= 5.0% $ 4,842,764 4.0% $ 10,205,032 8.4%
Tier 1 Capital (to Risk Weighted Assets) $>= 5,851,311 >= 6.0% $ 3,900,874 4.0% $ 10,205,032 10.5%
Total Capital (to Risk Weighted Assets) $>= 9,752,186 >= 10.0% $ 7,801,748 8.0% $ 11,424,056 11.7%
</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>
Page 24
<PAGE> 61
FIRST COMMUNITY BANKING SERVICES, INC.
AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
- --------------------------------------------------------------------------------
NOTE L--STOCKHOLDERS' EQUITY, (Continued)
Management believes, as of December 31, 1997, that the Bank meets all capital
requirements to which it is subject.
The Parent Company's primary source of funds is the receipt of dividends from
the Bank. Banking regulations limit the amount of dividends that may be paid
without prior approval of the Bank's regulatory agency. At December 31, 1997,
total stockholder's equity of the Bank was $10,428,424 of which approximately
$802,000 will be available for dividends in 1998 without prior approval or
violation of regulatory capital requirements.
Shares of preferred stock may be issued from time to time in one or more
series, as may be established by resolution of the Board of Directors of the
Company. Each resolution shall include the number of shares issued, distinctive
designation or title, voting powers, preferences, special rights and
restrictions as determined by the Board. The Board is also further authorized to
increase or decrease the number of shares of any series subsequent to the
issuance of shares of that series.
NOTE M--STOCK-BASED COMPENSATION
The Company granted a total of 33,075 common stock options to a former
executive. The options were granted at the rate of 6,615 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 $4.54 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>
1997 1996
----------------------- -----------------------
Weighted Weighted
Average Average
Exercise Exercise
Shares Price Shares Price
-------- -------- -------- ----------
<S> <C> <C> <C> <C>
Outstanding, beginning of year 17,640 $4.54 17,640 $ 4.54
Granted during year -- -- -- --
Exercised during year (12,914) 4.54 -- --
Expired during year -- -- -- --
Forfeited during year (316) -- -- --
------- ----- ------ ------
Outstanding, end of year 4,410 $4.54 17,640 $ 4.54
======= ===== ====== ======
Options exercisable at year-end 4,410 17,640
======= ======
</TABLE>
Page 25
<PAGE> 62
FIRST COMMUNITY BANKING SERVICES, INC.
AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
- --------------------------------------------------------------------------------
NOTE M--STOCK-BASED COMPENSATION, (Continued)
During 1995, the Company's stockholders approved a stock option plan which
allows for a total of 216,090 options to be granted to directors and executive
officers. In 1995, a total of 141,120 shares were granted to directors with an
exercise price of $5.13 per share. The options vest over a four-year period and
expire in 2004. An additional 36,603 shares were granted in 1995 to executive
officers with an exercise price of $5.56 per share. These options also vest over
a five-year period and expire in 2005. During 1996, the Company granted 38,852
shares to executive officers with an exercise price of $9.52 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:
<TABLE>
<CAPTION>
1997 1996
------------------------- ------------------------
Weighted Weighted
Average Average
Exercise Exercise
Shares Price Shares Price
---------- ---------- --------- -----------
<S> <C> <C> <C> <C>
Outstanding, beginning of year 213,927 $ 6.00 175,077 $5.21
Granted during year -- -- 38,850 9.52
Exercised during year (5,204) 5.13 -- --
Forfeited during year (150) -- -- --
Expired during year -- -- -- --
--------- ------ -------- -----
Outstanding, end of year 208,573 $ 6.02 213,927 $6.00
========= ====== ======== =====
Options exercisable at year-end 121,838 77,351
========= ========
Weighted average fair value of options granted
during the year $ 4.13
========
</TABLE>
The following tables summarize information about the Company's two fixed
stock option plans at December 31:
<TABLE>
<CAPTION>
1997
------------------------------------------------------------------------------------------------------------------------
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, 1997 Life Price December 31,1997 Price
--------------- ---------------------- ------------- ----------- ---------------------- ----------
<S> <C> <C> <C> <C> <C>
$ 4.54 - 5.56 174,133 6.01 $5.20 118,478 $5.16
9.52 38,850 9.80 9.52 7,770 9.52
------- ---- ----- ------- -----
212,983 6.70 $5.99 126,248 $5.43
======= ==== ===== ======= =====
</TABLE>
Page 26
<PAGE> 63
FIRST COMMUNITY BANKING SERVICES, INC.
AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
- --------------------------------------------------------------------------------
NOTE M--STOCK-BASED COMPENSATION, (Continued)
<TABLE>
<CAPTION>
1996
------------------------------------------------------------------------------------------------------------------------
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>
$ 4.54 - 5.56 192,717 6.70 $5.15 94,991 $5.05
9.52 38,850 10.00 9.52 -- --
------- ----- ----- ------ -----
231,567 7.30 $5.88 94,991 $5.05
======= ===== ===== ====== =====
</TABLE>
At December 31, 1997, 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 1997 or 1996.
Had compensation cost for the Company's stock-based compensation plans been
determined based 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 common share would have been reduced to the pro forma amounts
indicated as follows:
<TABLE>
<CAPTION>
For the years
ended December 31,
------------------------
1997 1996
---------- ---------
<S> <C> <C>
Net income
As reported $1,567,580 $1,254,411
Pro forma 1,478,036 1,164,867
Basic earnings per common share
As reported $ 1.15 $ .92
Pro forma 1.08 .86
Diluted earnings per common share
As reported $ 1.09 $ .88
Pro forma 1.02 .81
</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: dividend yield of 1.5 percent, expected
volatility of 38 percent, risk-free interest rate of 6.5 percent, and expected
life of ten years.
Page 27
<PAGE> 64
FIRST COMMUNITY BANKING SERVICES, INC.
AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
- --------------------------------------------------------------------------------
NOTE M--STOCK-BASED COMPENSATION, (Continued)
As discussed in Note B, no adjustments for the anticipated merger of the
Company with a regional bank have been made in these consolidated financial
statements. Consequently, the contractual vesting period for the stock options
has been used for these computations.
NOTE N--COMMITMENTS AND CONTINGENCIES
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, 1997 and 1996, total commitments to extend credit were
approximately $16,661,000 and 15,771,000, respectively, in unfunded loan
commitments and $0 and $6,074,000, respectively, in available credit card
advances. The Bank's experience has been that approximately 60 percent of loan
commitments are drawn upon by customers.
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, 1997 and 1996, commitments
under standby letters of credit aggregated approximately $228,000 and 70,000,
respectively. In 1997 and 1996, the Bank was not required to perform on any
standby letters of credit.
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.
Page 28
<PAGE> 65
FIRST COMMUNITY BANKING SERVICES, INC.
AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
- --------------------------------------------------------------------------------
NOTE N--COMMITMENTS AND CONTINGENCIES, (Continued)
The Company has employment contracts with five of its executive officers.
Such agreements provide for minimum salary levels, adjustable solely at the
discretion of the Board of Directors, in the event a change in ownership occurs.
The term of the employment agreements would be 24 months for four of these
officers and 36 months for one of these officers. If such a change of ownership
had occurred on December 31, 1997, the commitment for future salary payments
would have been $1,044,520.
NOTE O--DEPOSIT CONCENTRATIONS
At December 31, 1997 and 1996, the Bank had deposits of approximately
$17,928,000 from two customers and their related entities and $13,021,000 from
three customers and their related entities, respectively. (See Note K.)
NOTE P--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>
1997 1996 1995
--------- ---------- ----------
<S> <C> <C> <C>
FDIC assessment $ 7,609 $240,303 $113,654
Director fees 122,500 106,900 84,600
</TABLE>
Page 29
<PAGE> 66
FIRST COMMUNITY BANKING SERVICES, INC.
AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
- --------------------------------------------------------------------------------
NOTE Q--FAIR VALUES OF FINANCIAL INSTRUMENTS
The estimated fair values of the Company's financial instruments are as
follows at December 31:
<TABLE>
<CAPTION>
1997 1996
----------------------------- ------------------------------
Carrying Estimated Carrying Estimated
Value Fair Value Value Fair Value
----------- ------------ ----------- -----------
<S> <C> <C> <C> <C>
Financial assets:
Cash and cash equivalents $14,819,173 $14,819,173 $ 7,177,785 $ 7,177,785
Interest-bearing deposits 47,286 47,286 25,088 25,088
Investment securities held to
maturity 1,660,034 1,689,811 1,659,519 1,665,963
Investment securities available for
sale 25,053,659 25,053,659 13,145,260 13,145,260
Other investments 575,500 575,500 273,200 273,200
Loans 85,248,271 85,141,000 81,915,981 81,989,000
Accrued interest receivable 1,280,200 1,280,200 885,625 885,625
Financial liabilities:
Noncontractual deposits $62,951,217 $62,951,217 $42,018,990 $42,018,990
Contractual deposits 56,082,660 56,350,000 56,125,376 56,424,000
Short-term borrowings -- -- -- --
Accrued interest payable 1,429,043 1,429,043 941,468 941,468
Off-balance-sheet instruments:
Undisbursed credit lines $16,661,000 $15,771,000
Available credit card advances -- 6,074,000
Standby letters of credit 228,000 70,000
</TABLE>
NOTE R--SUBSEQUENT EVENT
On January 15, 1998, the Board of Directors of the Company declared a
two-for-one stock split distributable on February 20, 1998, to shareholders of
record January 30, 1998. This will result in 684,506 additional shares being
issued. All references in the consolidated financial statements to numbers of
shares, per share amounts, and market prices of the Company's common stock have
been retroactively restated to reflect the increased number of shares
outstanding as if the two-for-one stock split occurred January 1, 1995.
Page 30
<PAGE> 67
FIRST COMMUNITY BANKING SERVICES, INC.
AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
- --------------------------------------------------------------------------------
NOTE S--CONDENSED FINANCIAL INFORMATION OF FIRST COMMUNITY BANKING SERVICES,
INC.
CONDENSED BALANCE SHEETS
(Parent Only)
<TABLE>
<CAPTION>
December 31,
--------------------------------
1997 1996
------------ ------------
<S> <C> <C>
ASSETS
Cash on deposit with subsidiary $ 81,891 $ 17,291
Investment in subsidiary 10,404,252 9,149,867
Other investment 250,000 --
------------ ------------
TOTAL ASSETS $ 10,736,143 $ 9,167,158
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
LIABILITIES
Accounts payable $ 4,733 $ 2,442
------------ ------------
TOTAL LIABILITIES 4,733 2,442
------------ ------------
STOCKHOLDERS' EQUITY
Common stock 1,369,012 1,286,124
Treasury stock (8,386) --
Surplus 6,332,802 5,453,839
Retained earnings 3,062,154 2,562,787
Market valuation reserve
on investment securities
available for sale (24,172) (138,034)
------------ ------------
TOTAL STOCKHOLDERS' EQUITY 10,731,410 9,164,716
------------ ------------
TOTAL LIABILITIES AND
STOCKHOLDERS' EQUITY $ 10,736,143 $ 9,167,158
============ ============
</TABLE>
Page 31
<PAGE> 68
FIRST COMMUNITY BANKING SERVICES, INC.
AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
- --------------------------------------------------------------------------------
NOTE S--CONDENSED FINANCIAL INFORMATION OF FIRST COMMUNITY BANKING SERVICES,
INC., (Continued)
CONDENSED STATEMENTS OF INCOME
(Parent Only)
<TABLE>
<CAPTION>
For the years ended December 31,
-------------------------------------------------
1997 1996 1995
----------- ----------- -----------
<S> <C> <C> <C>
OPERATING INCOME
Dividends from subsidiary $ 463,819 $ 183,732 $ 20,000
Other income 441 562 651
----------- ----------- -----------
TOTAL OPERATING INCOME 464,260 184,294 20,651
----------- ----------- -----------
OPERATING EXPENSE
Other expense 56,145 56,903 115,462
----------- ----------- -----------
TOTAL OPERATING EXPENSE 56,145 56,903 115,462
----------- ----------- -----------
INCOME (LOSS) BEFORE INCOME TAX
BENEFIT AND EQUITY IN
UNDISTRIBUTED EARNINGS OF
SUBSIDIARY 408,115 127,391 (94,811)
INCOME TAX BENEFIT 18,940 18,841 39,036
----------- ----------- -----------
INCOME (LOSS) BEFORE EQUITY IN
UNDISTRIBUTED EARNINGS OF
SUBSIDIARY 427,055 146,232 (55,775)
EQUITY IN UNDISTRIBUTED EARNINGS OF
SUBSIDIARY 1,140,525 1,108,179 1,078,022
----------- ----------- -----------
NET INCOME $ 1,567,580 $ 1,254,411 $ 1,022,247
=========== =========== ===========
</TABLE>
Page 32
<PAGE> 69
FIRST COMMUNITY BANKING SERVICES, INC.
AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
- --------------------------------------------------------------------------------
NOTE S--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,
---------------------------------------------------
1997 1996 1995
----------- ----------- -----------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING
ACTIVITIES
Net income $ 1,567,580 $ 1,254,411 $ 1,022,247
Equity in undistributed earnings of subsidiary (1,140,525) (1,108,179) (1,078,022)
Increase (decrease) in other assets -- 39,036 (21,673)
Increase (decrease) in other liabilities 2,293 180 (1,164)
----------- ----------- -----------
NET CASH PROVIDED (USED) BY
OPERATING ACTIVITIES 429,348 185,448 (78,612)
----------- ----------- -----------
CASH FLOWS FROM INVESTING
ACTIVITIES
Purchase of other investment (250,000) -- --
----------- ----------- -----------
NET CASH USED BY INVESTING
ACTIVITIES (250,000) -- --
----------- ----------- -----------
CASH FLOWS FROM FINANCING
ACTIVITIES
Proceeds from exercise of stock options and
warrants 87,456 -- 60,000
Dividends paid (193,818) (183,732) (152,360)
Purchase of treasury stock (8,386) -- --
----------- ----------- -----------
NET CASH USED BY FINANCING
ACTIVITIES (114,748) (183,732) (92,360)
----------- ----------- -----------
NET INCREASE (DECREASE) IN CASH 64,600 1,716 (170,972)
CASH, BEGINNING OF YEAR 17,291 15,575 186,547
----------- ----------- -----------
CASH, END OF YEAR $ 81,891 $ 17,291 $ 15,575
=========== =========== ===========
</TABLE>
Page 33
<PAGE> 70
ITEM 9. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
DIRECTORS AND EXECUTIVE OFFICERS OF THE COMPANY AND THE BANK
The following table sets forth the name of each director and executive
officer of the Company his or her age and positions held, and a brief
description of his or her principal occupation and business experience for the
preceding five years. Except as otherwise indicated below, each of the directors
has been a director of the Company and the Bank since their formation in 1988.
<TABLE>
<CAPTION>
NAME AND AGE POSITION PRINCIPAL OCCUPATION
- ------------ -------- --------------------
<S> <C> <C>
Arlie C. Aukerman Class II Director Mr. Aukerman is the
(76) owner and Chairman
of the Board of A.C.
Aukerman Company, a
highway construction
company based in
Hampton, Georgia.
Mr. Aukerman has
been a director of
the Bank since 1988
and of the Company
since 1995. He was
also a director of
the Company from
1988 to 1994.
Robert W. Bertelsbeck Class I Director Mr. Bertelsbeck was
(55) the General Manager
of NCR Corporation's
Worldwide Service
Parts Center in
Peachtree City,
Georgia, from 1979
until 1993. He is
currently the
Logistics Manager
for Fritz Companies,
Inc. in Atlanta,
Georgia.
Joseph S. Black Class I Director Mr. Black is the
(50) President of
Peachtree City
Development
Corporation and has
served in that role
since 1991. From
1986 until 1991, Mr.
Black served as the
Executive Vice
President and
General Manager of
Peachtree City
Development
Corporation.
Gary M. Bremer Director of the Bank Mr. Bremer is
(59) Chairman of Simione
Central Holdings,
Inc. in Atlanta,
Georgia. From
1977-1996, Mr.
Bremer was Founder,
Chairman, CEO and
President of Central
Health Holding
Company in Atlanta.
Prior to this, he
was Controller for
John J. Harte &
Associates in
Atlanta, Georgia.
Rick A. Duncan Senior Vice President/Senior Mr. Duncan joined
(45) Lender of the Bank the Bank in 1995 as
Senior Vice
President/Senior
Lender, coming to us
from Tara State
Bank. Prior to Tara
State Bank, Mr.
Duncan was with C&S
Bank. He has been in
banking for 23
years.
Kerstin M. Gasko Class I Director Mrs. Gasko owns and
(54) operates The Classy
Rose Florist in
Peachtree City,
Georgia since April
1998. From 1983
until April 1998,
she managed Eazy
</TABLE>
38
<PAGE> 71
<TABLE>
<S> <C> <C>
Street Fashions, a
ladies apparel shop
in Peachtree City,
Georgia.
Robert C. Gasko Class I Director; Chairman Mr. Gasko was a
(67) of Board of Directors of Captain with
the Company and the Bank Northeast Airlines,
Inc. from 1958 until
1972 when that
company merged with
Delta Air Lines,
Inc. From 1972 until
his retirement in
1990, Mr. Gasko was
employed by Delta
Air Lines as a
Senior Captain
flying international
routes between
Atlanta and various
european cities.
Malcolm R. Godwin Executive Vice President of Mr. Godwin joined
(42) the Bank the Bank during 1995
as Executive Vice
President. From 1989
to 1995, he was with
Peachtree National
Bank, last serving
as Senior Vice
President/Senior
Lending Officer.
From 1981 to 1989 he
was with First
Atlanta/Wachovia
Bank. He began his
banking career with
the Comptroller of
the Currency in
1977. Mr. Godwin
became a Director of
Fayette County Bank
in 1997.
Mukut Gupta Class I Director Mr. Gupta is
(57) currently the
President of
Jefferson
Consultants in
Peachtree City,
Georgia. Prior to
working for
Jefferson
Consultants, Mr.
Gupta served as the
President of Georgia
Utilities Company,
the President of
M.G. Engineering &
Construction Co.,
General Manager of
Kajima International
and Senior Vice
President of Garden
Cities Corporation.
Mr. Gupta is a
licensed Civil
Engineer in Georgia,
Alabama and Florida.
G. Webb Howell Class I Director Mr. Howell has
(44) operated a State
Farm Insurance
Agency in Peachtree
City, Georgia since
1974 and is
currently with State
Farm in Marietta,
Georgia.
Mark A. Jungers Class II Director Mr. Jungers has been
(45) a Sales
Representative for
BIMECO, Inc., a
medical products
distributor based in
Largo, Florida,
since 1979. Mr.
Jungers is currently
the General Hospital
Sales Manager for
BIMECO.
</TABLE>
39
<PAGE> 72
<TABLE>
<S> <C> <C>
Mark B. Kearsley Senior Vice President and Mr. Kearsley has
(36) Chief Financial Officer of served as the Chief
the Company and the Bank Financial Officer of
the Company and the
Bank since 1989. Mr.
Kearsley also served
as Vice President of
the Company and the
Bank from 1989 until
March of 1994 when
he became Senior
Vice President. Mr.
Kearsley was
previously employed
as the Operations
Officer at the Bank
of Troup County in
LaGrange, Georgia,
where he started his
banking career in
1984.
John E. Molis Class II Director Mr. Molis has been
(55) employed as a
consultant to the
airline industry
since 1990. He was
Executive Vice
President of Field
Aircraft in
Peachtree City,
Georgia from 1989 to
1990. He has worked
in the airline
industry since 1972
with Scheduled
Skyways, Inc.,
Southern Airline,
and as the Senior
Vice President -
Maintenance and
Engineering for
Northwest Airlines
from 1985 to 1988.
Mr. Molis is an FAA
certified commercial
pilot.
Richard A. Parlontieri Class II Director Mr. Parlontieri is
(52) currently the
President of
Habersham Resources
Management. He
previously owned
Main Street Custom
Homes, Inc. From
1990 to 1992, Mr.
Parlontieri served
as the President and
Chief Executive
Officer of MSK
Development Co.,
Inc., the developer
of a Fayette County
golf course
community.
Richard A. Rodriguez Senior Vice President/Senior Mr. Rodriguez joined
(35) Credit Officer of the Bank the Bank in 1993 as
Vice President. In
1994, he was
promoted to Senior
Vice
President/Senior
Credit Officer.
Prior to coming to
Fayette County Bank,
he was with Tara
State Bank for 2
years as a lending
officer, and
previous to that he
worked at Fulton
Federal Savings in
Atlanta in various
positions.
Donnie H. Russell Class III Director Since 1967, Mr.
(54) Russell has been the
owner and President
of Parham
Industries, a mobile
home company located
in Jonesboro,
Georgia.
</TABLE>
40
<PAGE> 73
<TABLE>
<S> <C> <C>
Fred B. Sheats Class III Director Mr. Sheats has
(73) practiced accounting
and law as a
certified public
accountant and an
attorney in Atlanta,
Georgia for over
thirty-five years.
He is presently
practicing both
professions on a
limited basis while
maintaining other
business interests.
Mr. Sheats became a
director of the
Company and the Bank
in 1992.
Ira P. Shepherd, III President and Chief Executive Mr. Shepherd joined
(50) Officer of the Company and the the Bank in 1989
Bank; Class II Director serving as Senior
Vice President of
Lending. He became
the President and
Chief Executive
Officer of the
Company and the Bank
in April 1994. From
1986 to 1989, he was
Vice President of
Lending for
Peachtree National
Bank, and from 1976
to 1986 he was Vice
President-
Commercial Lending
at First National
Bank of Newnan. Mr.
Shepherd has been a
director of the Bank
since 1994 and a
director of the
Company since 1995.
H. Geoffrey Slade, Sr. Class III Director Mr. Slade is an
(50) attorney who has
practiced law in
Fayetteville,
Georgia since 1973.
Enrico A. Stanziale Class III Director Mr. Stanziale has
(57) served as the
Chairman of the
Board of both the
Company and the Bank
since their
respective
inceptions in 1988.
Upon the resignation
of the Company's
President in 1994,
he served as the
acting Chief
Executive Officer of
the Company on a
temporary basis.
From 1984 to 1992,
he served as
President of
Advanced Materials,
an equipment design
firm specializing in
electroplating.
John R. Torretto Class III Director From 1976 until his
(62) retirement in 1997,
Mr. Torretto served
as a sales engineer
with Periphonics
Corporation, a
computer
manufacturer based
in Long Island, New
York. Prior to his
employment with
Periphonics
Corporation, Mr.
Torretto worked in
the banking
industry.
</TABLE>
41
<PAGE> 74
COMPLIANCE WITH BENEFICIAL OWNERSHIP REPORTING RULES
Section 16(a) of the Securities Exchange Act of 1934 requires the
Company's directors and executive officers, and persons who own more than 10% of
a registered class of the Company's equity securities to file with the SEC,
within certain specified time periods, reports of ownership and changes in
ownership. Such officers, directors, and shareholders are required by SEC
regulations to furnish the Company with copies of all such reports that they
file.
To the Company's knowledge, based solely upon a review of copies of
such reports furnished to the Company and representations that no other reports
were required with respect to the year ended December 31, 1997, all persons
subject to the reporting requirements of Section 16(a) filed the required
reports on a timely basis with respect to 1997.
ITEM 10. COMPENSATION OF DIRECTORS AND EXECUTIVE OFFICERS
SUMMARY OF CASH AND CERTAIN OTHER COMPENSATION
The following table sets forth for the fiscal years ended December 31,
1995, 1996, and 1997 the cash compensation paid or accrued by the Company and
the Bank, as well as certain other compensation paid or accrued for those years,
for services in all capacities to the chief executive officer of the Company and
the Bank and each of the other executive officers whose total compensation,
including salary and bonus, for the fiscal year ended December 31, 1997, was in
excess of $100,000 (the "Named Executive Officers").
42
<PAGE> 75
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
Long Term
Compensation
Annual Compensation Awards/
----------------------------------------- ----------------
Name and Other Securities
Principal Annual Underlying
Position Year Salary ($) Bonus ($) Compensation Options (#)(2)
---------- ---- ---------- --------- ------------ --------------
<S> <C> <C> <C> <C> <C>
Ira P. Shepherd, III - 1997 $117,530 $59,023 $3,200(1) -0-
President and Chief
Executive Officer 1996 113,214 36,410 2,800(1) 9,450
1995 90,000 29,000 1,250(1) 8,820
Malcolm R. Godwin 1997 91,980 28,698 3,600(3) -0-
Executive V.P. 1996 89,230 17,520 3,600(3) 7,350
1995 49,808 10,250 -0- 5,954
Rick A. Duncan 1997 83,010 31,702 3,600(3) -0-
Sr. VP/Sr Lending Officer 1996 79,423 15,110 3,600(3) 7,350
1995 45,000 9,309 -0- 5,954
Mark B. Kearsley 1997 83,010 30,217 3,600(3) -0-
Sr. VP/CFO 1996 79,308 15,110 3,600(3) 7,350
1995 72,179 11,984 -0- 7,277
</TABLE>
(1) This amount represents directors' fees.
(2) These options were granted under the Company's 1994 Stock Option Plan
(the "1994 Stock Option Plan").
(3) This amount represents mileage compensation.
The following table sets forth information concerning the exercise of
options during the fiscal year ended December 31, 1997, and unexercised options
held as of December 31, 1997, by the Named Executive Officers.
No options were granted to the Named Executive Officers in 1997.
43
<PAGE> 76
AGGREGATED OPTION EXERCISES IN LAST FISCAL YEAR
AND FISCAL YEAR-END OPTION VALUES
<TABLE>
<CAPTION>
Number of
Securities
Underlying Value of Unexercised
Unexercised In-the-Money
Options at Options at
Fiscal Year End Fiscal Year End(1)
(#) ($)
Shares Acquired Exercisable/ Exercisable/
Name On Exercise (#) Value Realized ($) Unexercisable Unexercisable
---- --------------- ------------------ ------------- -------------
<S> <C> <C> <C> <C>
Ira P. Shepherd, III -0- $-0- 12,033/15,057 $80,305/120,677
Mark Kearsley -0- -0- 4,381/10,246 37,726/78,560
Malcolm R. Godwin -0- -0- 3,851/9,452 32,458/70,668
Rick A. Duncan -0- -0- 3,851/9,452 32,458/70,668
</TABLE>
(1) Based on $15.50 per share, the last reported sales price of the Common
Stock prior to December 31, 1997, on the Nasdaq SmallCap Market. Mr.
Shepherd has options to acquire 8,820 shares of Common Stock at $5.56
per share, of which 3,528 are currently exercisable, options to acquire
8,820 shares of Common Stock at $5.13 per share, of which 6,615 are
currently exercisable, and options to acquire 9,450 shares of Common
Stock at $9.52 per share, of which 1,890 are currently exercisable.
COMPENSATION OF DIRECTORS
In 1997, each director received $400 for each Bank or Company board
meeting attended and $100 for each committee meeting attended.
EMPLOYMENT AGREEMENTS
In February 1996, the Bank entered into employment agreements with a
number of its executive officers, including its President and Chief Executive
Officer, Mr. Shepherd. Mr. Shepherd and the Bank entered into an Employment
Agreement pursuant to which Mr. Shepherd serves as the President and Chief
Executive Officer of the Bank. The agreement provides for a salary of $120,000
per annum. Mr. Shepherd is also eligible to receive a cash bonus in an amount
determined by the Board of Directors (with Mr. Shepherd abstaining). The
agreement provides that the amount of the bonus will be based on such intangible
criteria as the Board shall establish. Additionally, the Bank will provide Mr.
Shepherd with all life insurance, dental and health insurance, disability
insurance, retirement benefits, and such other benefits or plans as are
generally afforded other personnel of the Bank. The Bank also pays certain club
dues and travel, automobile, and business expenses for Mr. Shepherd. The
agreement provides for an initial term of three years, which may be extended at
the end of the term for additional three year periods.
The agreement provides that, if the Bank terminates Mr. Shepherd's
employment other than for cause or as a result of his death or disability, the
Bank shall pay to Mr. Shepherd severance compensation in an amount equal to 100%
of his then current monthly base salary each month for a period ending on the
earlier of the date which is six months from the date of termination or the date
his total monthly compensation from his new position equals his monthly base
salary under this Agreement at the date of termination. If and to the extent
that Mr. Shepherd's compensation in his new employment position is less than his
current base salary from the Bank, then Mr. Shepherd shall be entitled to a
supplement payable monthly in an amount equal to the difference between Mr.
Shepherd's
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<PAGE> 77
monthly base salary under the agreement at the date of termination of employment
and his total monthly compensation in his new position. The Bank shall also pay
Mr. Shepherd his pro rata share of any bonus earned as of the date of his
termination by achievement of the goals determined by the Board of Directors.
After a change in control (as defined in the agreement), Mr. Shepherd may
terminate his employment for any reason upon delivery of notice to the Bank
within a 90-day period beginning on the 30th day after the change in control or
within a 90-day period beginning on the one year anniversary of the occurrence
of the change in control, and (i) the Bank shall pay Mr. Shepherd any sums due
him as base salary and/or reimbursement of expenses through the date of such
termination plus a pro rata share of any bonus if otherwise payable with respect
to the fiscal year during such termination which was earned as of the date of
termination as a result of the Bank achieving the goals determined by the Board
of Directors; (ii) the Bank shall pay Mr. Shepherd one lump sum payment in an
amount equal to three times Mr. Shepherd's then current annual base salary; and
(iii) the restrictions on any outstanding incentive awards (including stock
options) granted to Mr. Shepherd under any incentive plan or arrangement shall
lapse and such incentive award shall become 100% vested, all stock options and
stock appreciation rights granted to Mr. Shepherd shall become immediately
exercisable and shall become 100% vested, and all stock options granted to Mr.
Shepherd shall become 100% vested.
In addition, the agreement provides that following termination of his
employment with the Bank and for a period of time thereafter (which will be two
years if Mr. Shepherd is terminated for cause), Mr. Shepherd may not (i) be
employed in the banking business as a director, officer at the vice-president
level or higher, or organizer or promoter of, or provide executive management
services to, any financial institution within a ten mile radius of the Bank's
offices, (ii) solicit major customers of the Bank for the purpose of providing
financial services, or (iii) solicit employees of the Bank for employment.
The Company granted incentive stock options to acquire 8,820 shares as
adjusted for the stock dividend paid in 1996 and 1997 and a 100% stock dividend
in January 1998 to Mr. Shepherd in 1995. These options are exercisable at $5.13
per share, the fair market value on the date of grant, and vest at the rate of
1764 of such shares on August 17, 1996, 1997, 1998, 1999, and 2000,
respectively, and must be exercised on or before August 17, 2005. The Company in
1996 also granted incentive options to acquire 9450 shares (as adjusted to
reflect the 5% stock dividend in 1997 and the 100% stock dividend in 1998).
These options are exercisable at 9.52 per share, the fair market value on the
date of grant, and vest at the rate of 1890 of such shares October 17, 1998,
1999, 2000 and 2001 respectively and must be exercised on or before October 17,
2006.
ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth the number and percentage of outstanding
shares of Common Stock beneficially owned at April 30, 1998, by (a) each Named
Executive Officer of the Company, (b) each director and nominee of the Company,
(c) all executive officers and directors of the Company as a group, and (d) each
person or entity known to the Company to own more than 5% of the outstanding
Common Stock. Except as noted below, the address of each beneficial owner is the
address of the main offices of the Company.
<TABLE>
<CAPTION>
AMOUNT AND NATURE
OF BENEFICIAL PERCENT OF
NAME OF BENEFICIAL OWNER OWNERSHIP(1) COMMON STOCK(2)
- ------------------------ ------------ ------------
<S> <C> <C>
Directors and Executive Officers:
Arlie C. Aukerman 51,899(3) 3.8%
Robert W. Bertelsbeck 13,229(3) *
Joseph S. Black 20,513(3) 1.5%
Gary Bremer 13,400 *
</TABLE>
45
<PAGE> 78
<TABLE>
<CAPTION>
AMOUNT AND NATURE
OF BENEFICIAL PERCENT OF
NAME OF BENEFICIAL OWNER OWNERSHIP(1) COMMON STOCK(2)
- ------------------------ ------------ ------------
<S> <C> <C>
Kerstin M. Gasko 46,852(3)(4) 3.4%
Robert C. Gasko 44,826(3)(5) 3.3%
Mukut Gupta 24,249(3) 1.8%
G. Webb Howell 23,243(3) 1.7%
Mark A. Jungers 23,887(3) 1.8%
John E. Molis 26,353(3) 1.9%
Richard A. Parlontieri 9,099(3) *
Donnie H. Russell 29,709(3) 2.2%
Fred B. Sheats 31,995(3) 2.3%
Ira P. Shepherd, III 20,675(3)6) 1.5%
H. Geoffrey Slade, Sr. 12,123(7) *
Enrico A. Stanziale 72,707(8) 5.3%
John R. Torretto 18,297(3) 1.3%
Rick A. Duncan 4,583(9) *
Malcolm R. Godwin 24,347(9) 1.8%
Mark B. Kearsley 9,883(10) *
Richard A. Rodriguez 4,009(9) *
Executive officers and directors
as a group (17 persons)(11) 499,481(12) 36.48%
</TABLE>
* An asterisk indicates beneficial ownership of 1% or less.
(1) Information relating to beneficial ownership of Common Stock is based
upon "beneficial ownership" concepts set forth in rules of the SEC
under Section 13(d) of the Securities Exchange Act of 1934. Under these
rules a person is deemed to be a "beneficial owner" of a security if
that person has or shares "voting power," which includes the power to
vote or direct the voting of such security, or "investment power,"
which includes the power to dispose or to direct the disposition of
such security. A person is also deemed to be a beneficial owner of any
security of which that person has the right to acquire beneficial
ownership within sixty days. Under the rules, more than one person may
be deemed to be a beneficial owner of the same securities, and a person
may be deemed to be a beneficial owner of securities as to which he has
no beneficial interest. For instance, beneficial ownership includes
spouses, minor children and other relatives residing in the same
household, and trusts, partnerships, corporations or deferred
compensation plans which are affiliated with the principal.
(2) Percentage is determined on the basis of 1,369,012 shares of Common
Stock issued and outstanding (which takes into account a 100% stock
dividend paid by the Company on January 30, 1998) plus shares subject
to options or warrants held by the named individual for whom the
percentage is calculated which are
46
<PAGE> 79
exercisable within the next sixty days as if outstanding, but treating
shares subject to warrants or options held by others as not
outstanding.
(3) Includes 6,615 shares subject to stock options exercisable within 60
days granted pursuant to the 1994 Stock Option Plan.
(4) Includes 31,596 shares owned jointly with Robert C. Gasko, Mrs. Gasko's
husband, in which she shares voting and investing power, and 104 shares
owned by her son in which she shares voting and investing power with
her husband. Also includes 6,615 shares pursuant to currently
exercisable options held by Mrs. Gasko's husband.
(5) Includes 31,596 shares owned jointly with Kerstin M. Gasko, Mr. Gasko's
wife, in which he shares voting and investing power, 1,922 shares owned
by Mr. Gasko's wife in which he shares voting and investing power, and
104 shares owned by his son in which he shares voting and investing
power with his wife. Also includes 6,615 shares pursuant to currently
exercisable options held by Mr. Gasko's wife.
(6) Includes an additional 5,418 shares subject to currently exercisable
stock options.
(7) Includes 3,465 shares subject to stock options exercisable within 60
days granted pursuant to the 1994 Stock Option Plan.
(8) Includes 4,411 shares subject to stock options exercisable within 60
days granted pursuant to the 1994 Stock Option Plan.
(9) Includes 3,851 shares subject to currently exercisable stock options.
(10) Includes 4,381 shares subject to currently exercisable stock options.
(11) Includes twenty-one directors of the Company all listed above.
(12) Includes 121,838 shares subject to stock options held by executive
officers or directors which are exercisable within 60 days granted
pursuant to the 1994 Stock Option Plan.
ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Certain of the officers and directors of the Company and the Bank and
principal shareholders of the Company, and affiliates of such persons, have,
from time to time, engaged in banking transactions with the Bank and are
expected to continue such relationships in the future. Management believes that
all loans or other extensions of credit made by the Bank to such individuals
were made in the ordinary course of business on substantially the same terms,
including interest rates and collateral, as those prevailing at the time for
comparable transactions with other persons, and did not involve more than the
normal risk of collectibility or present other unfavorable features. There are
no family or other relationships between any of the directors or executive
officers of the Company or the Bank, with the exception of Robert C. Gasko and
Kerstin M. Gasko who are husband and wife.
47
<PAGE> 80
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 7.
2. Financial Statement Schedules
All other financial statements or schedules have been omitted since the
required information is included in the consolidated financial
statements or notes thereto or is not applicable or required.
3. Exhibits
<TABLE>
<CAPTION>
Exhibit
Number Description
------ -----------
<S> <C>
3.1* Articles of Incorporation
3.2* Bylaws
10.5*** Settlement Agreement and Release with Fayette County
Bancshares, Inc. and Terry L. Miller as of October 21, 1994.
10.6*** Fayette County Bancshares, Inc. Stock Option Plan
10.7**** Purchase Agreement-Credit Card Accounts dated January 23,
1997 between Fayette County Bank and Carolina First
10.8***** Employment agreement between Fayette County
Bank and Rick A. Duncan dated February 21, 1996.
10.9***** Employment agreement between Fayette County
Bank and Malcolm R. Godwin dated February 21, 1996.
10.10***** Employment agreement between Fayette County
Bank and Ira P. Shepherd dated February 21, 1996.
10.11***** Employment agreement between Fayette County
Bank and Mark B. Kearsley dated February 21, 1996.
10.12***** Employment agreement between Fayette County
Bank and Richard A. Rodriguez dated February 21, 1996.
21.1** Subsidiaries of the Company
24***** Power of Attorney (contained on the Signature Page)
27***** Financial Data Schedule
</TABLE>
* Previously filed as exhibits to the Company's Registration Statement on
Form S-18 (Registration No. 33-6658-A) and incorporated herein by
reference.
48
<PAGE> 81
** 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.
**** Previously filed as exhibits to the Company's Annual Report on Form
10-KSB for the year ended December 31, 1996.
***** Previously filed as exhibits to the Company's Annual Report on Form
10-KSB for the year ended December 31, 1997.
(b) Reports on Form 8-K
No Form 8-K was filed by the Company in the fourth quarter, 1997.
However, the Company did file a Form 8-K on March 2, 1998 announcing a
merger agreement between First Community Banking Services, Inc. and
Regions Financial Corporation.
49
<PAGE> 82
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 May 8,
1998.
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
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 May 8, 1998.
Signature Title
/s/ * Director
- -------------------------
Robert W. Bertelsbeck
/s/ * Director
- -------------------------
Joseph S. Black
/s/ * Director
- -------------------------
Robert C. Gasko
50
<PAGE> 83
<TABLE>
<S> <C>
/s/ * Director
- -------------------------
Kerstin M. Gasko
/s/ * Director
- -------------------------
Mukut Gupta
/s/ * Director
- -------------------------
G. Webb Howell
/s/ * Director
- -------------------------
Mark A. Jungers
/s/ * Director
- -------------------------
John E. Molis
/s/ * Director
- -------------------------
Richard A. Parlontieri
/s/ * Director
- -------------------------
Donnie H. Russell
/s/ * Director
- -------------------------
Fred B. Sheats
/s/ * Director
- -------------------------
H. Geoffrey Slade, Sr.
/s/ * Director
- -------------------------
Enrico A. Stanziale
/s/ * Director
- -------------------------
John R. Torretto
*As Attorney In Fact
/s/ Mark B. Kearsley /s/ Ira P. Shepherd
- ------------------------- ---------------------------
Mark B. Kearsley Ira P. Shepherd
Principal Financial and Principal Executive Officer
Accounting Officer
</TABLE>
51
