<PAGE>
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON APRIL 6, 1998
REGISTRATION NO. __________________
================================================================================
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON D.C. 20549
-----------------------
FORM S-2
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
-----------------------
COMMUNITY TRUST FINANCIAL SERVICES CORPORATION
(Exact name of registrant as specified in its charter)
GEORGIA 58-1856582
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
-------------------------------------
3844 ATLANTA HIGHWAY
HIRAM, GEORGIA 30141
(770) 445-1014
(Address, including zip code, and telephone number,
including area code, of registrant's principal executive offices)
-------------------------------------
RONNIE L. AUSTIN
President
Community Trust Financial Services Corporation
3844 Atlanta Highway
Hiram, Georgia 30141
(770) 445-1014
(Name, address, including zip code, and telephone number, including area code,
of agent for service)
-------------------------------------
Copies to:
PAUL R. SHLANTA, ESQ. THOMAS O. POWELL, ESQ.
Rowe, Foltz & Martin, P.C. Troutman Sanders LLP
Five Piedmont Center 600 Peachtree Street, N.E.
Suite 750 Suite 5200
Atlanta, Georgia 30305 Atlanta, Georgia 30308-2216
(404) 231-9397 (404) 885-3294
-------------------------------------
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC:
As soon as practicable after the effective date of this Registration Statement.
-------------------------------------
If any of the securities being registered on this Form are to be
offered on a delayed or continuous basis pursuant to Rule 415 under the
Securities Act of 1933, check the following box. [_]
If the registrant elects to deliver its latest annual report to
security holders, or a complete and legal facsimile thereof, pursuant to Item
11(a)(1) of this Form, check the following box. [_]
<PAGE>
If this Form is filed to register additional securities for an
offering pursuant to Rule 462(b) under the Securities Act, check the
following box and list the Securities Act registration statement number of
the earlier effective registration statement for the same offering. [_]
-------------------------------------
If this Form is a post-effective amendment filed pursuant to Rule
462(c) under the Securities Act, check the following box and list the
Securities Act registration statement number of the earlier effective
registration statement for the same offering. [_]
-------------------------------------
If this Form is a post-effective amendment filed pursuant to Rule
462(d) under the Securities Act, check the following box and list the
Securities Act registration statement number of the earlier effective
registration statement for the same offering. [_]
-------------------------------------
If delivery of the prospectus is expected to be made pursuant to Rule
434, check the following box. [_]
CALCULATION OF REGISTRATION FEE
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------
Proposed
Title of each class Proposed maximum
of securities to be Amount to be maximum offering aggregate offering Amount of
registered registered price per unit/1/ price/1/ registration fee
- ------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Common Stock,
$2.50 par value $5,000,000 $1,475
- ------------------------------------------------------------------------------------------------
</TABLE>
/1/ Estimated solely for the purpose of calculating the registration fee in
accordance with Rule 457(o)
-----------------------------------------------
The Registrant hereby amends this Registration Statement on such date
or dates as may be necessary to delay its effective date until the Registrant
shall file a further amendment which specifically states that this Registration
Statement shall thereafter become effective in accordance with Section 8(a) of
the Securities Act of 1933 or until this Registration Statement shall become
effective on such date as the Commission, acting pursuant to said Section 8(a),
may determine.
<PAGE>
PROSPECTUS
_______ SHARES
COMMUNITY TRUST FINANCIAL SERVICES CORPORATION
[LOGO]
COMMON STOCK
------------
All of the ________ shares of common stock, $2.50 par value per share (the
"Common Stock"), offered hereby (the "Offering") are being sold by Community
Trust Financial Services Corporation (the "Company"). There is no public market
for the Common Stock and no assurance can be given that any public market will
develop in the future. See "Determination of Offering Price" for information
relating to the factors considered in determining the Offering price.
SEE "RISK FACTORS" ON PAGES 7 THROUGH 10 FOR A DISCUSSION OF CERTAIN
INFORMATION THAT SHOULD BE CONSIDERED BY PROSPECTIVE PURCHASERS OF THE COMMON
STOCK OFFERED HEREBY.
-------------------------
THE SECURITIES OFFERED BY THIS PROSPECTUS ARE NOT SAVINGS OR DEPOSIT
ACCOUNTS AND ARE NOT INSURED BY THE FEDERAL DEPOSIT INSURANCE
CORPORATION OR ANY OTHER GOVERNMENTAL AGENCY.
-------------------------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION, NOR HAS
THE SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES
COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF THIS
PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY
IS A CRIMINAL OFFENSE.
<TABLE>
<CAPTION>
============================================================================================
Price to Public Underwriting Discounts and Proceeds to Company (2)(3)
Commissions (1)
<S> <C> <C> <C>
- --------------------------------------------------------------------------------------------
Per Share......... $ $ $
- --------------------------------------------------------------------------------------------
Total Minimum..... $3,000,000 $ $
- --------------------------------------------------------------------------------------------
Total Maximum.... $5,000,000 $ $
============================================================================================
</TABLE>
(1) The Knox Wall Division of Morgan Keegan & Company, Inc. ("Knox Wall" or the
"Underwriter") has been engaged by the Company to solicit from the public on a
best efforts basis offers to purchase the securities described herein. The
Company has agreed to pay Knox Wall a fee equal to 2% of the price of shares
sold by Knox Wall. The amount of underwriting commissions in the above table has
been calculated as if Knox Wall will be compensated for the sale of all but ____
shares of the Common Stock being offered. The ____ shares excluded from the
calculation of underwriting commissions represent shares that management expects
to be subscribed for by Executive Officers and Directors of the Company and for
which Knox Wall will not be entitled to any compensation. See "Plan of
Distribution--Subscriptions from Executive Officers and Directors." However, it
also is expected that a significant portion of the shares to be offered to
persons other than Executive Officers and Directors will be offered by Company
management without the assistance of Knox Wall. Consequently, actual
underwriting commissions may be less than those reflected in the table.
(2) Before deducting estimated expenses of the Offering of approximately
$__________________. Such expenses are estimated as follows: federal
registration fee-- $1,475; state registration fees--$__________________;
transfer agent's fees--$__________________; costs of printing and engraving--
$15,000; legal and accounting fees--$_________________; fees to Morgan Keegan &
Company, Inc. for providing financial advisory services to the Company,
preparing an independent appraisal of the Company and rendering a fairness
opinion to the Company's Board of Directors--$30,000; reimbursement of
Underwriter's expenses--$____________________; escrow agent's fee--$2,000.
(3) Subscription proceeds for the initial _________________ shares subscribed
for in the Offering will be deposited promptly in an escrow account with The
Bankers Bank, Cobb County, Georgia, pending receipt of subscriptions and payment
in full for not less than ___________________ shares and the satisfaction of
certain other conditions. The Offering will be terminated unless, on or before
__________________ ____, 1998, the Company has accepted subscriptions and
payment in full for a minimum of _______ shares. Subscription proceeds received
after acceptance by the Company of subscriptions for the initial
__________________ shares will be paid directly to the Company and will not be
held in escrow. Any interest earned on subscription proceeds will be used by the
Company to offset some of the expenses of the Offering. If the Offering is
terminated due to a failure to satisfy the Offering conditions, all subscription
proceeds, whether or not held in escrow, will be promptly returned to
subscribers together with any interest earned thereon. See "Plan of
Distribution."
---------------------------------------
The shares of Common Stock are offered subject to acceptance of
subscriptions by the Company. The Company reserves the right to accept or
reject subscriptions in whole or in part and to withdraw, cancel or modify the
Offering.
KNOX WALL
DIVISION OF MORGAN KEEGAN & COMPANY, INC.
The date of this Prospectus is ________________________________ _______, 1998
<PAGE>
AVAILABLE INFORMATION
The Company is subject to the informational requirements of the Securities
Exchange Act of 1934 and, in accordance therewith, files reports and other
information with the Securities and Exchange Commission (the "Commission").
Reports and other information filed by the Company may be inspected and copied
at the public reference facilities of the Commission at Room 1024, Judiciary
Plaza, 450 Fifth Street, N.W., Washington, D.C. 20549, and at the following
regional offices of the Commission: Northeast Regional Office, 7 World Trade
Center, Suite 1300, New York, New York 10008; and Midwest Regional Office, 500
West Madison Street, Suite 1400, Chicago, Illinois 60661-2511. Copies of such
material can be obtained by mail from the Public Reference Section of the
Commission, 450 Fifth Street N.W., Washington, D.C. 20549 at prescribed rates.
In addition, the Commission maintains a site on the World Wide Web at
http://www.sec.gov that contains reports, proxy and information statements and
other information regarding registrants, such as the Company, that file
electronically with the Commission.
The Company has filed with the Commission a Registration Statement on Form
S-2 (together with all amendments and exhibits thereto, the "Registration
Statement") under the Securities Act of 1933, as amended (the "Securities Act"),
and the rules promulgated thereunder, with respect to the Common Stock. This
Prospectus, which is part of the Registration Statement, does not contain all of
the information set forth in the Registration Statement and the exhibits and
financial schedules thereto. For further information concerning the Company and
the Common Stock, reference is made to the Registration Statement and the
exhibits and schedules filed therewith, which may be examined without charge at,
or copies obtained upon payment of prescribed fees from, the Commission and its
regional offices at the locations listed above. Any statements contained herein
concerning the provisions of any document are not necessarily complete, and, in
each instance, reference is made to the copy of such document filed as an
exhibit to the Registration Statement or otherwise filed with the Commission.
Each such statement is qualified in its entirety by such reference.
INCORPORATION OF CERTAIN INFORMATION BY REFERENCE
The Company's Annual Report on Form 10-KSB for the fiscal year ended
December 31, 1997, which has heretofore been filed with the Commission (File No.
0-19030), is incorporated herein by reference.
All documents filed by the Company pursuant to Sections 13(a), 13(c), 14 or
15(d) of the Exchange Act subsequent to the date of this Prospectus and prior to
the termination of the Offering of the Common Stock shall be deemed to be
incorporated by reference in this Prospectus and made a part hereof from the
date of the filing of such documents. Any statement contained in a document
incorporated or deemed to be incorporated by reference herein shall be deemed to
be modified or superseded for purposes of this Prospectus to the extent that a
statement contained herein or in any other document subsequently filed with the
Commission which also is deemed to be incorporated by reference herein modifies
or supersedes such statement. Any such statement so modified or superseded
shall not be deemed, except as so modified or superseded, to constitute a part
of this Prospectus.
The Company will provide without charge to each person to whom this
Prospectus is delivered, upon the written or oral request of such person, a copy
of any or all of the documents incorporated by reference herein (not including
the exhibits to such documents, unless such exhibits are specifically
incorporated by reference in such documents. Requests for such copies should be
directed to: Community Trust Financial Services Corporation, 3844 Atlanta
Highway, Hiram, Georgia 30141, Attention: Corporate Secretary; telephone (770)
445-1014.
[TO BE INCLUDED IN PROSPECTUS USED TO OFFER
SECURITIES TO EXISTING SECURITY HOLDERS:
The Company's Board of Directors has chosen to offer the Common Stock to
existing stockholders of the Company prior to offering it to the general public.
The Board's decision was based on its desire to recognize the loyalty and
support the Company has received from its stockholders and to enable existing
stockholders to increase their investment in the Company if they desire to do
so.]
[TO BE INCLUDED IN PROSPECTUS USED TO REOFFER SECURITIES
TO THE PUBLIC AFTER THE COMPANY'S EXISTING SECURITY
HOLDERS HAVE HAD AN OPPORTUNITY TO SUBSCRIBE:
From __________________________ ________, 1998, through
___________________________ ____________, 1998, existing stockholders of the
Company were afforded the exclusive right to subscribe for shares of Common
Stock. During this period, existing stockholders subscribed for a total of
______________ shares of Common Stock. As a result, up to _______________
shares of Common Stock are available to be subscribed for by the public at a
price of $_____________ per share, the same price offered to existing
stockholders.]
2
<PAGE>
PROSPECTUS SUMMARY
The following summary is qualified in its entirety by, and should be
read in conjunction with,the more detailed information and financial data,
including the Consolidated Financial Statements (including the notes
thereto) appearing elsewhere, or incorporated by reference, in the
Prospectus.
THE COMPANY
The Company was incorporated under the laws of the State of Georgia in
1988 at the direction of management of Community Trust Bank (the "Bank")
for the purpose of becoming a bank holding company for the Bank. In 1991,
following the receipt of all requisite corporate and regulatory approvals,
the Bank became a wholly-owned subsidiary of the Company and the
stockholders of the Bank became stockholders of the Company, with the same
proportional interests in the Company as they previously held in the Bank
(the "Reorganization"). Following the Reorganization, the Bank has
continued its business operations as a Georgia-chartered commercial bank
under the same name, charter and bylaws.
The primary activity of the Company currently is, and is expected to
remain for the foreseeable future, the ownership and operation of the Bank.
As a bank holding company, the Company is intended to facilitate the Bank's
ability to serve its customers' requirements for financial services. The
holding company structure also provides flexibility for expansion through
the possible acquisition of other financial institutions and the provision
of additional banking-related services, as well as certain non-banking
services, which a traditional commercial bank may not provide under present
laws. The holding company structure also affords additional flexibility in
terms of capital formation and financing opportunities.
The Bank's business consists primarily of attracting deposits from the
general public and, with these and other funds, originating real estate
loans, consumer loans, business loans and residential and commercial
construction loans. Funds not invested in the loan portfolio are invested
by the Bank primarily in U.S. Government and agency obligations and
obligations of various states and their political subdivisions. In addition
to deposits, sources of funds for the Bank's loans and other investments
include amortization and prepayment of loans, sales of loans or
participations in loans and sales of its investment securities. The
principal sources of income for the Bank are interest and fees collected on
loans, fees collected on deposits and interest and dividends collected on
other investments. The principal expenses of the Bank are interest paid on
deposits, employee compensation and benefits, occupancy expenses and other
overhead expenses.
In addition to the Bank, the Company has invested in three other
businesses. Community Loan Company ("CLC") is a non-bank subsidiary in
which the Company owns 75% of the outstanding capital stock. CLC is
engaged in the consumer finance business with offices in Woodstock,
Rockmart, Rossville and Gainesville, Georgia. Cash Transactions, L.L.C.
3
<PAGE>
("CashTrans") is a limited liability company in which the Company owns a
49% interest. CashTrans provides retail establishments (primarily
convenience stores) with automated teller machines that are owned by
CashTrans and that dispense cash or cash equivalents. CashTrans is
currently engaged in this business in Georgia, Florida, South Carolina and
Alabama. Metroplex Appraisals, Inc. ("Metroplex") is a wholly-owned non-
bank subsidiary of the Company that performs appraisals of real and
personal property for the Bank as well as for other entities, such as
financial institutions, mortgage companies and insurance companies.
The Company's principal executive offices are located at 3844 Atlanta
Highway, Hiram, Georgia 30141, and its telephone number is (770) 445-1014.
COMPANY GROWTH STRATEGY
The Company's objective is to establish itself as the major
independent financial institution in Paulding County, Georgia and to expand
its operations into those counties contiguous to Paulding County. Further,
the Company desires to be the preferred provider of a wide range of
financial services in those markets.
Although the Company is focused on providing traditional banking
services, changes in Georgia law will permit statewide branch banking
effective July 1, 1998. The Bank does not currently intend to expand
throughout Georgia but management anticipates that the Bank will seek to
expand in an area within a 50-mile radius of its headquarters in Hiram,
Georgia. Within this area, management believes that the Bank may establish
traditional and non-traditional branches such as convenience branches,
drive-in branches or storefront facilities as its business expands.
Management also intends for the Bank to establish loan production offices
in high growth areas. The Company may seek to expand its operations by
offering additional financial services either through the establishment of
such services on a de novo basis, the acquisition of existing businesses
providing such services or the establishment of strategic alliances with
other financial service providers.
The Company's finance company subsidiary, CLC, will seek to expand
into high growth North Georgia communities. The Company also expects to
increase the number of locations served by its affiliate, CashTrans.
CashTrans has installed automated teller machines in approximately 350
locations in Georgia, Florida, South Carolina and Alabama since it
commenced operations in May, 1997.
The Company believes its growth strategy will enhance shareholder
value by, among other things, diversifying its customer base, revenue
stream, loan portfolio and funding sources in a region that is experiencing
significant growth. Through the Bank, the Company intends to provide its
customers with the breadth of products of a regional bank while retaining
the local appeal and level of service of a community bank.
4
<PAGE>
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THE OFFERING
<TABLE>
<S> <C>
Common Stock to be Offered by the Company ................ Minimum: _______________ shares
Maximum: _______________ shares
Common Stock Outstanding After the Offering (1):
If Minimum Sold ............................... _____________________________ shares
If Maximum Sold ............................... _____________________________ shares
Use of Proceeds ......................................... Repayment of indebtedness, contributions to the capital of the
Bank and loans to CLC and CashTrans. The amount contributed to
the Bank and loaned to CLC and CashTrans will vary depending on
the results of the Offering. See "Use of Proceeds."
Conditions to Offering .................................. The Offering will be terminated and all subscription funds will
be returned promptly to subscribers unless, on or before
___________________, 1998, the Company has accepted
subscriptions and payment in full for a minimum of ______ shares.
Any subscription proceeds accepted after receipt and acceptance
of subscription proceeds for ____________ shares but before
termination of the Offering will not be deposited in escrow but
will be available for immediate use by the Company. See "Plan of
Distribution."
Plan of Distribution.................................... The Common Stock will be offered first to existing stockholders of
the Company. To the extent that shares of Common Stock remain
available for purchase after satisfaction of all orders received
from existing stockholders, the general public will be given the
opportunity to subscribe for shares. No person or entity (together
with associates and persons acting in concert) may purchase more
than ___________ shares of Common Stock in the Offering. No
subscriber may subscribe for less than 100 shares. See "Plan of
Distribution."
Subscriptions from Executive Officers
and Directors......................................... Management anticipates that Executive Officers and Directors of
the Company will subscribe for a total of ______ shares in the
Offering.
</TABLE>
- ------------------------
(1) Does not include 105,144 shares of Common Stock subject to options that have
been granted by the Company but not yet exercised.
RISK FACTORS
There are certain risks involved in an investment in the Common Stock.
Accordingly, in evaluating an investment in the Common Stock offered hereby,
prospective investors should carefully consider the information discussed under
"Risk Factors" beginning on page 7, as well as other information contained in or
incorporated by reference into this Prospectus, prior to making an investment
decision.
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5
<PAGE>
- --------------------------------------------------------------------------------
SELECTED CONSOLIDATED FINANCIAL DATA
The following selected consolidated financial data of the Company are
qualified by reference to and should be read in conjunction with "Management's
Discussion and Analysis of Financial Condition and Results of Operations" and
the Company's Consolidated Financial Statements and Notes thereto included
elsewhere, or incorporated by reference, in this Prospectus. The selected
financial data presented below as of the years ended December 31, 1993 through
1997 and for each of the fiscal years in the five-year period ended December 31,
1997 have been derived from the Company's consolidated financial statements
which have been audited by Porter Keadle Moore LLP.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-----------------------
1997 1996 1995 1994 1993
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
BALANCE SHEET DATA
Total assets $91,904,781 $85,203,618 $68,230,620 $62,835,550 $63,825,313
Loans (1) 56,359,625 48,712,195 38,314,857 34,477,171 29,647,200
Deposits 81,981,103 76,897,761 61,235,289 57,289,105 58,560,335
Stockholders' equity (2) 7,869,832 6,877,876 6,031,906 4,943,152 4,824,210
STATEMENT OF EARNINGS DATA
Net interest income $ 4,719,701 $ 4,187,352 $ 3,395,024 $ 2,873,926 $ 2,487,816
Provision for loan losses 204,270 197,841 186,645 243,000 218,061
Other income 1,203,961 1,151,183 838,882 816,385 811,034
Other expense 4,244,061 3,563,813 2,768,056 2,477,119 2,322,022
Net earnings 1,038,807 1,057,884 885,407 677,367 532,333
Basic earnings per share (3) 1.24 1.26 1.06 .81 .64
Diluted earnings per share (3) 1.18 1.23 1.04 .80 .64
ASSET QUALITY RATIOS
Nonperforming assets to
total assets 0.43% 0.04% 0.40% 0.37% 0.53%
Net chargeoffs to average loans 0.17% 0.15% 0.13% 0.53% 0.63%
Allowance for loan losses
to total loans 1.45% 1.44% 1.50% 1.27% 1.25%
Allowance for loan losses to
nonperforming assets 210.55% 2146.76% 231.12% 189.18% 110.57%
KEY PERFORMANCE RATIOS
Return on average assets 1.19% 1.39% 1.37% 1.14% 0.96%
Return on average equity 14.44% 16.65% 17.01% 13.86% 11.91%
Net interest margin 5.93% 5.89% 5.66% 5.29% 4.90%
Net interest spread 5.17% 5.23% 4.98% 4.86% 4.49%
Average equity to average
assets 8.27% 8.32% 8.06% 8.25% 8.04%
Other expense to average
assets
Efficiency ratio (4) 71.65% 66.76% 65.38% 67.12% 70.39%
Dividends per share $ .25 $ .25 $ .25 $ .20 $ .10
</TABLE>
- ----------------------
(1) Net of unearned interest and the allowance for loan losses.
(2) Information from 1994 forward includes net unrealized gain (loss) on
securities available for sale, net of tax.
(3) All years presented are adjusted for the implementation of SFAS 128.
(4) The efficiency ratio is calculated by dividing other expense by the sum
of net interest income and other income.
- --------------------------------------------------------------------------------
6
<PAGE>
RISK FACTORS
There are certain risks involved in an investment in the Common Stock.
Accordingly, in evaluating an investment in the Common Stock offered hereby,
prospective investors should carefully consider the following risk factors, as
well as other information contained in or incorporated by reference into this
Prospectus, prior to making an investment decision.
ECONOMIC CONDITIONS
The success of the Bank and, therefore, the Company depends to a certain
extent upon economic and political conditions, both local and national, as well
as governmental monetary policies. Conditions such as inflation, recession,
unemployment, high interest rates, short money supply and other factors beyond
the control of the Company and the Bank may adversely affect the Bank's deposit
levels and loan demand and, therefore, the earnings of the Bank and the Company.
Additionally, the Bank's deposit gathering and lending activities are
concentrated in Paulding County, Georgia. As a result, an adverse change in
economic conditions in Paulding County could have a material adverse effect on
the financial condition of the Bank and the Company.
ADEQUACY OF ALLOWANCE FOR LOAN LOSSES
In originating loans, there is a substantial likelihood that credit losses
will be experienced. The risk of loss varies with, among other things, general
economic conditions, the type of loan being made, the creditworthiness of the
borrower over the term of the loan and, in the case of a collateralized loan,
the quality of the collateral for the loan. Management maintains an allowance
for loan losses based on, among other things, historical experience, an
evaluation of economic conditions, and regular reviews of delinquencies and loan
portfolio quality. Based upon such factors, management makes various
assumptions and judgments about the ultimate collectibility of the loan
portfolio and provides an allowance for potential loan losses based upon a
percentage of the outstanding balances and for specific loans when their
ultimate collectibility is considered questionable. Because certain lending
activities involve greater risks, the percentage applied to specific loan types
may vary.
The Company actively manages its nonperforming loans in an effort to
minimize credit losses and monitors its asset quality to maintain an adequate
loan loss allowance. Although management believes that its allowance for loan
losses is adequate, there can be no assurance that the allowance will prove
sufficient to cover future loan losses. Further, although management uses
current information to make determinations with respect to the allowance for
loan losses, future adjustments may be necessary if economic conditions differ
substantially from the assumptions used or adverse developments arise with
respect to the Company's nonperforming or performing loans. Material additions
to the Company's allowance for loan losses would result in a decrease of the
Company's net earnings and, possibly, its capital and could result in its
inability to pay dividends, among other adverse consequences. See "Business--
Lending Activities--Problem Loans and Allowance for Loan Losses--Allowance for
Loan Losses."
7
<PAGE>
CREDIT RISK
The greatest risk facing lenders generally is credit risk, that is, the
risk of losing principal and interest due to a borrower's failure to perform
according to the terms of the loan agreement. In addition, because a
substantial portion of the Company's loan portfolio consists of real estate
loans, construction loans and acquisition and development loans, any conditions
adversely affecting local real estate markets, could have a significant adverse
effect on the Company's level of nonperforming loans and/or on the value of the
collateral securing a substantial portion of the Company's loan portfolio.
DEPENDENCE ON KEY PERSONNEL
The continued success of the Company is dependent to a large extent upon
the services of Ronnie L. Austin, President of the Company. Even though Mr.
Austin has an employment agreement with the Company through December 31, 2002,
if the services of Mr. Austin were to become unavailable for any reason, the
operations of the Company could be adversely affected. The successful
development of the Company's business will depend, in part, on its ability to
attract and retain qualified officers and employees, including a successor to
Mr. Austin.
COMPETITION
The banking industry is highly competitive. In the conduct of certain
aspects of its banking business, the Bank encounters strong competition from
other commercial banks, savings institutions, credit unions, mortgage banking
firms, consumer finance companies, securities brokerage firms, insurance
companies, money market mutual funds and other financial institutions. Many of
these competitors have substantially greater resources and lending limits than
the Bank and offer certain services, such as extensive and established branch
networks, trust services and international banking services, that the Bank does
not provide.
NO ASSURANCE AS TO SUCCESS OF NON-BANKING BUSINESSES
A significant portion of the net proceeds from the Offering will be loaned
by the Company to CLC and CashTrans. While management believes that CLC's and
CashTrans' respective businesses represent significant growth opportunities for
the Company (see "Management's Discussion and Analysis of Financial Condition
and Results of Operation--Overview"), there can be no assurance that these
businesses will be successful.
ABSENCE OF TRADING MARKET
There currently is no market for shares of the Company's Common Stock and
no assurance can be given that any trading market will develop for such shares
in the future. There are no present plans for the Company's Common Stock to be
traded on any stock exchange or in the over-the-counter market. As a result,
investors who may need or wish to dispose of all or part of their shares of
Common Stock may be unable to do so except in privately negotiated sales.
8
<PAGE>
DILUTION
Purchasers of shares of Common Stock in the Offering will suffer immediate
dilution. If the minimum ______ shares are sold, purchasers in the Offering
will suffer dilution of $______ in the net tangible book value per share of
Common Stock from the $ _____ Offering price. If the maximum _____ shares are
sold, purchasers will suffer dilution of $ ______ in the net tangible book value
per share. See "Dilution."
ASSET/LIABILITY MANAGEMENT
The Company's profitability is largely dependent upon its net interest
income, which is the difference between its interest income on interest-earning
assets and its interest expense on interest-bearing liabilities.
The Asset/Liability Management Committee of the Bank meets quarterly in an
attempt to manage the Bank's interest rate risk. In addition, the Bank seeks to
originate short-term and variable rate loans and to match, to the extent
practicable, the average maturities of the Bank's interest-bearing liabilities
to those of its interest-earning assets. However, there can be no assurance
that the Company's asset/liability strategy will be successful. See "Business--
General."
DIVIDEND POLICY
Although the Company has paid dividends annually since 1992, payment of
dividends by the Company is subject to legal and regulatory restrictions.
Payment of dividends by the Company is largely dependent on the Bank's earnings,
capital requirements and financial condition and on other factors considered
relevant by the Company's Board of Directors. See "Dividends and Dividend
Policy."
SUPERVISION AND REGULATION
The Company and the Bank operate in a highly regulated environment and are
subject to supervision by several governmental regulatory agencies, including
the Board of Governors of the Federal Reserve System (the "Federal Reserve"),
the Georgia Department of Banking and Finance (the "Georgia Department"), the
Federal Deposit Insurance Corporation (the "FDIC") and the Commission. Laws and
regulations currently applicable to the Company and the Bank may be changed at
any time, and there is no assurance that such changes will not adversely affect
the business of the Company and the Bank.
YEAR 2000
The Company has a Year 2000 plan in place. This plan is necessary because
many computer programs use only two digits, rather than four digits, to identify
a year. Such programs may recognize a date using "00" as the year 1900 rather
than the year 2000. Such a misinterpretation of the year could result in system
failures or miscalculations causing disruptions of operations. In
9
<PAGE>
addition to evaluating Year 2000 issues relative to their own systems, companies
also must assess the ability of third parties upon whom they rely to function on
January 1, 2000 and thereafter. The testing phase of the Company's Year 2000
plan has begun and management believes that, to date, all of the goals of the
Company's Year 2000 plan have been met.
In 1996, the Emerging Issues Task Force of the Financial Accounting
Standards Board reached a consensus (EITF Issue No. 96-14) that internal and
external costs specifically associated with modifying internal-use computer
software for the year 2000 should be charged to expense as incurred. Based on
the findings generated to date by the Company's Year 2000 plan, management does
not anticipate either a significant amount of incremental expense or a
disruption in service associated with the year 2000 and its impact on the
Company's systems. However, while management does not believe that Year 2000
will have a significant impact on the Company, there can be no assurance that
the Company's Year 2000 plan will be able to successfully address each of the
ways in which the Year 2000 problem may impact the Company. Additionally, the
Company has limited ability to monitor or influence the Year 2000 preparedness
of its customers, borrowers, vendors and others upon whom it relies in
transacting business.
EFFECT OF CERTAIN ANTI-TAKEOVER PROVISIONS
The Company's Bylaws and the federal and state banking laws under which the
Company operates contain certain provisions which could delay or impede the
removal of incumbent Directors and could make more difficult a merger, tender
offer or proxy contest involving the Company, even if such a transaction would
be beneficial to the interests of Company stockholders, or could discourage a
third party from attempting to acquire control of the Company. In particular,
the classification of the Company's Board of Directors and banking laws and
regulations which require prior regulatory approval with respect to a change in
control of the Company could have the effect of delaying or preventing a change
in control of the Company. See "Description of Capital Stock--Existing Anti-
takeover Provisions."
FORWARD-LOOKING STATEMENTS
Certain of the matters discussed under the captions "Prospectus Summary,"
"Risk Factors," "The Company," "Management's Discussion and Analysis of
Financial Condition and Results of Operations," "Business" and elsewhere in this
Prospectus may constitute "forward-looking" statements for purposes of the
Securities Act and the Securities Exchange Act of 1934, as amended (the
"Exchange Act"), and as such may involve known and unknown risks, uncertainties
and other factors that may cause the actual results, performance or achievements
of the Company to be materially different from the future results, performance
or achievements expressed or implied by such forward-looking statements.
Important factors that could cause the actual results, performance or
achievements of the Company to differ materially from the Company's expectations
are disclosed in this Prospectus ("Cautionary Statements"), including, without
limitation, those statements included under "Risk Factors" and otherwise herein.
All written and oral forward-looking statements attributable to the Company are
expressly qualified in their entirety by the Cautionary Statements.
10
<PAGE>
THE COMPANY
The Company was incorporated under the laws of the State of Georgia in 1988
at the direction of management of the Bank for the purpose of becoming a bank
holding company for the Bank. In 1991, as a result of the Reorganization, the
Bank became a wholly-owned subsidiary of the Company and the stockholders of the
Bank became stockholders of the Company, with the same proportional interests in
the Company as they previously held in the Bank. Following the Reorganization,
the Bank has continued its business operations as a Georgia-chartered commercial
bank under the same name, charter and bylaws.
The primary activity of the Company currently is, and is expected to remain
for the foreseeable future, the ownership and operation of the Bank. As a bank
holding company, the Company is intended to facilitate the Bank's ability to
serve its customers' requirements for financial services. The holding company
structure also provides flexibility for expansion through the possible
acquisition of other financial institutions and the provision of additional
banking-related services, as well as certain non-banking services, which a
traditional commercial bank may not provide under present laws. The holding
company structure also affords additional flexibility in terms of capital
formation and financing opportunities.
While the Company may seek in the future to acquire additional banks or
bank holding companies or to engage in other activities appropriate for bank
holding companies under appropriate circumstances as permitted by law, the
Company currently has no plans, understandings or agreements concerning any
other activities other than as described below. The results of operations and
financial condition of the Company for the foreseeable future, therefore, will
be determined primarily by the results of operations and financial condition of
the Bank.
THE BANK
The Bank's business consists primarily of attracting deposits from the
general public and, with these and other funds, originating real estate loans,
consumer loans, business loans and residential and commercial construction
loans. Funds not invested in the loan portfolio are invested by the Bank
primarily in U.S. Government and agency obligations and obligations of various
states and their political subdivisions. In addition to deposits, sources of
funds for the Bank's loans and other investments include amortization and
prepayment of loans, sales of loans or participations in loans and sales of its
investment securities. The principal sources of income for the Bank are
interest and fees collected on loans, fees collected on deposits and interest
and dividends collected on other investments. The principal expenses of the
Bank are interest paid on deposits, employee compensation and benefits,
occupancy expenses and other overhead expenses. Management of the Bank
anticipates that the Bank will open a loan production office in Cobb County,
Georgia in the second quarter of 1998. While management expects that the opening
of this office will enhance the Bank's ability to originate loans, management
does not believe that the opening of the loan production office will have a
material effect on the Bank or the Company.
11
<PAGE>
OTHER SUBSIDIARIES
In addition to the Bank, the Company has invested in three non-bank
subsidiaries, CLC, CashTrans and Metroplex. These subsidiaries historically
have not had and, during 1998, are not expected to have, a significant effect on
the financial condition or results of operations of the Company. However, if
this Offering is successful, the Company intends to lend a significant amount of
the net proceeds of the Offering to CLC and to CashTrans. See "Use of
Proceeds." Management believes that the businesses conducted by CLC and
CashTrans represent significant growth opportunities for the Company as well as
opportunities for the Company to diversify its lines of business. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations--Overview."
In 1995, the Company established CLC as a non-bank subsidiary for the
purpose of engaging in the consumer finance business. The Company owns 75% of
CLC's outstanding capital stock. The remaining 25% of CLC's outstanding capital
stock is owned by the President of CLC. CLC's first office began operations in
September 1995, in Woodstock, Georgia, and CLC acquired two consumer finance
offices on April 1, 1996, in Rockmart, Georgia and Rossville, Georgia,
respectively. On April 1, 1998, CLC acquired a consumer finance office located
in Gainesville, Georgia.
In 1997, the Company participated in the establishment of CashTrans.
CashTrans is a limited liability company that is owned 49% by the Company and
51% by a corporation controlled by the Chairman of CashTrans. CashTrans
provides retail establishments (primarily convenience stores) with automated
teller machines that are owned by CashTrans and that dispense cash or cash
equivalents. CashTrans engages in this business in Georgia, Florida, South
Carolina and Alabama.
In 1992, the Company established Metroplex as a wholly-owned non-bank
subsidiary for the purpose of performing appraisals of real and personal
property for the Bank as well as other entities, such as financial institutions,
mortgage companies and insurance companies. Metroplex is located in Dallas,
Georgia. Since Metroplex represents less than 5% of the Company's consolidated
assets and consolidated net earnings, the financial condition and results of
operations of the Company are not significantly affected by the operations of
Metroplex.
GROWTH STRATEGY
The Company's objective is to establish itself as the major independent
financial institution in Paulding County, Georgia and to expand its operations
into those counties contiguous to Paulding County. Further, the Company desires
to be the preferred provider of a wide range of financial services in those
markets.
Although the Company is focused on providing traditional banking services,
changes in Georgia law will permit statewide branch banking effective July 1,
1998. The Bank does not currently intend to expand throughout Georgia but
management anticipates that the Bank will seek to expand in an area within a 50-
mile radius of its headquarters in Hiram, Georgia. Within this area,
12
<PAGE>
the Bank may establish traditional and non-traditional branches such as
convenience branches, drive-in branches or storefront facilities as its business
expands. Management also intends for the Bank to establish loan production
offices in high growth areas. The Company may seek to expand its operations by
offering additional financial services either through the establishment of such
services on a de novo basis, the acquisition of existing businesses providing
such services or the establishment of strategic alliances with other financial
service providers.
The Company's finance company subsidiary, CLC, will seek to expand into
high growth North Georgia communities. The Company also expects to increase the
number of locations served by its affiliate, CashTrans. CashTrans has installed
automated teller machines in approximately 350 locations in Georgia, Florida,
South Carolina and Alabama since it commenced operations in May, 1997.
The Company believes its growth strategy will enhance shareholder value by,
among other things, diversifying its customer base, revenue stream, loan
portfolio and funding sources in a region that is experiencing significant
growth. Through the Bank, the Company intends to provide its customers with the
breadth of products of a regional bank while retaining the local appeal and
level of service of a community bank.
USE OF PROCEEDS
Upon satisfaction of all of the conditions discussed in "Plan of
Distribution--Conditions to the Offering and Release of Funds," all subscription
funds held in escrow will be released and will become capital of the Company.
The net proceeds to the Company from the sale of the Common Stock offered hereby
are estimated to be a minimum of $____________ and a maximum of $_____________
(assuming an Offering price of $____________ per share), after deducting
estimated underwriting commissions and estimated expenses of the Offering. The
Company will use the first approximately $ ______________ of the net proceeds to
repay certain indebtedness of the Company. The remaining proceeds will be
contributed by the Company to the Bank, CLC and CashTrans as follows. If only
the minimum number of shares is sold in the Offering, the Company expects to:
(i) contribute approximately $ ________________ (or 80% of the net proceeds
remaining after repayment of Company indebtedness) to the capital of the Bank;
(ii) loan approximately $ _______________ (or 10% of the net proceeds remaining
after repayment of Company indebtedness) to CLC; and (iii) loan approximately $
_____________ (or 10% of the net proceeds remaining after repayment of Company
indebtedness) to CashTrans. If the maximum number of shares is sold in the
Offering, the Company expects to: (i) contribute approximately $ _____________
(or 60% of the net proceeds remaining after repayment of Company indebtedness)
to the capital of the Bank; (ii) loan approximately $ ______________ (or 20% of
the net proceeds remaining after repayment of Company indebtedness) to CLC; and
(iii) loan approximately $ ______________ (or 20% of the net proceeds remaining
after repayment of Company indebtedness) to CashTrans. All loans made by the
Company to CLC and CashTrans will be made by the Company on substantially the
same terms, including interest rates and collateral, as those prevailing at the
time for comparable transactions between lenders and businesses like CLC and
CashTrans. Management does not believe that any such loans will involve more
than normal risk
13
<PAGE>
of collectibility or present other unfavorable features.
The indebtedness to be discharged by the Company with the proceeds of the
Offering was incurred by the Company pursuant to a $2,500,000 credit facility
extended to the Company by The Bankers Bank, a Georgia banking corporation.
Amounts outstanding under The Bankers Bank credit facility bear interest at a
floating rate equal to (i) the "prime rate" of interest as published in The Wall
Street Journal, Eastern Edition, less (ii) 50 basis points. The Company may
borrow sums under this credit facility until November 14, 1999. Commencing
December 1, 1999, and continuing on December 1 of each succeeding calendar year,
the outstanding principal amount is due and payable in nine consecutive annual
installments, with a tenth and final installment due on November 14, 2008.
Interest is payable quarterly in arrears on the first day of each calendar
quarter until the outstanding principal amount is paid in full. Outstanding
amounts may be prepaid, in whole or in part, without penalty. All amounts
outstanding under this credit facility were borrowed by the Company within the
last twelve months and were used for the following purposes: $500,000 was used
by the Company to fund loans to CashTrans; $913,457 was used by the Company to
fund loans to CLC; and $6,543 was used by the Company for general corporate
purposes.
If subscriptions for the minimum ____ shares are accepted by the Company on
or before __________ ___, 1998, any interest income earned on subscription
proceeds will be used by the Company to offset expenses of the Offering.
Interest income is estimated to be $ ___________ assuming the gross proceeds
from the minimum offering are invested for a two month period at an interest
rate of ________% per year. If subscriptions for the minimum ____ shares are
not accepted by the Company on or before __________ __, 1998, all subscription
funds will be returned promptly to subscribers together with any interest earned
thereon.
DETERMINATION OF OFFERING PRICE
There is no established market for the Common Stock. The Offering price of
the Common Stock has been determined by the Board of Directors of the Company
based upon a number of factors including an independent appraisal prepared by
Morgan Keegan & Company, Inc. The independent appraisal determined the fair
market value of the Company's Common Stock on a minority interest basis. Among
other factors considered by the Board of Directors in determining the Offering
price, were the history of and the prospects for the industry in which the
Company competes, an assessment of the Company's management, the prospects of
the Company and an assessment of the Company's results of operations and its
capital structure.
DILUTION
The net tangible book value of the Company at December 31, 1997, was
$7,604,635, or $9.04 per outstanding share of Common Stock. After giving effect
to the Offering and the receipt of the net proceeds therefrom (after deduction
of underwriting commissions and estimated offering expenses), the pro forma net
tangible book value as of December 31, 1997, would be approximately $ ______ or
$ ______ per then-outstanding share if only the minimum _____ shares are sold in
the
14
<PAGE>
Offering, and $ _________ or $ ______ per then-outstanding share if the maximum
_______ shares are sold. This represents an immediate dilution of net tangible
book value to new investors purchasing shares in the Offering. The following
table illustrates the per-share dilution:
<TABLE>
<CAPTION>
If If
Minimum Maximum
Sold Sold
---- ----
<S> <C> <C>
Offering price per share .............................................. $ ______ $ ______
Net tangible book value
per share of Common
Stock as of 12/31/97 ............................. $ 9.04
Increase per share attributable
to new investors ................................ $ ===========
Pro forma net tangible book
value per share of Common
Stock after the Offering (1) ....................................... ______ ______
Dilution per share to new investors (2) ............................... ====== ======
_______________________________
</TABLE>
(1) Net tangible book value per share of Common Stock is determined by dividing
the Company's tangible net worth (tangible assets less liabilities) by the
number of outstanding shares of Common Stock.
(2) Dilution per share to new investors is determined by subtracting pro forma
net tangible book value per share of Common Stock after the Offering from the
Offering price per share.
PLAN OF DISTRIBUTION
GENERAL
The Company is offering for sale a minimum of _________ shares and a
maximum of ________ shares of its Common Stock at a price of $ __________ per
share. The Common Stock will be offered first to existing stockholders of the
Company. To the extent that shares of Common Stock remain available for purchase
after satisfaction of all orders received from existing stockholders, the
general public will be given the opportunity to subscribe for shares. No person
or entity (together with associates and persons acting in concert) may purchase
more than ___________ shares of Common Stock, or fewer than 100 shares of Common
Stock, in the Offering, unless the Company, in its sole discretion, accepts a
subscription for a greater or lesser number of shares, as the case may be.
Subscriptions to purchase shares of Common Stock will be received until
midnight, Hiram, Georgia time, on _________________________ ___________, 1998,
unless all of the shares to be offered are earlier sold or the Offering is
earlier terminated by the Company. See "Conditions to the Offering and Release
of Funds" below. The Company reserves the right to terminate the Offering at any
time. The date the Offering terminates, whether on or before
_________________________ ________, 1998, is referred to herein as the
"Expiration Date."
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<PAGE>
Following acceptance by the Company, subscriptions are binding on
subscribers and may not be revoked by subscribers except with the consent of the
Company. In addition, the Company reserves the right to cancel accepted
subscriptions at any time and for any reason until the proceeds of the Offering
are released from escrow (as discussed in greater detail in "Conditions to the
Offering and Release of Funds" below), and the Company reserves the right to
reject, in whole or in part and in its sole discretion, any subscription. THE
COMPANY MAY, IN ITS SOLE DISCRETION, ALLOCATE SHARES OF COMMON STOCK AMONG
SUBSCRIBERS IN THE EVENT OF AN OVER SUBSCRIPTION FOR THE SHARES TO BE OFFERED IN
THE OFFERING. IN DETERMINING WHICH SUBSCRIPTIONS TO ACCEPT, IN WHOLE OR IN
PART, THE COMPANY MAY TAKE INTO ACCOUNT THE ORDER IN WHICH SUBSCRIPTIONS ARE
RECEIVED, A SUBSCRIBER'S POTENTIAL TO DO BUSINESS WITH, OR TO DIRECT CUSTOMERS
TO, THE BANK OR ANY OTHER SUBSIDIARY OR AFFILIATE OF THE COMPANY, AND THE
COMPANY'S DESIRE TO HAVE A BROAD DISTRIBUTION OF STOCK OWNERSHIP.
With respect to the subscriptions that are partially or totally accepted by
the Company, any interest earned on the accepted funds will be for the account
of the Company. In the event the Company rejects all, or accepts less than all,
of any subscription, the Company will refund promptly without interest the
amount remitted that corresponds to $___________ multiplied by the number of
shares as to which the subscription is not accepted. If the Company accepts a
subscription but in its discretion subsequently elects to cancel all or part of
such subscription, the Company will refund promptly the amount remitted that
corresponds to $___________ multiplied by the number of shares as to which the
subscription is cancelled, together with any interest earned thereon.
The shares of Common Stock are being offered directly to potential
subscribers on a best-efforts basis through certain Directors and Executive
Officers of the Company, none of whom will receive any commissions or other form
of remuneration in connection with the sale of shares. In addition, the Company
has retained Knox Wall to assist with the offering on a best-efforts basis. The
Company has agreed to pay Knox Wall a fee equal to 2% of the price of shares
sold by Knox Wall and has agreed to reimburse Knox Wall for certain expenses
incurred by it. Morgan Keegan & Company, Inc. has provided certain financial
advisory services to the Company in connection with the Offering, including an
independent appraisal of the Common Stock used in connection with the
determination of the Offering price. Morgan Keegan & Company, Inc. will receive
customary fees for these services. The Company and the Bank have agreed to
indemnify Morgan Keegan & Company, Inc. against certain liabilities in
connection with the Offering.
Certificates representing shares of Common Stock, duly authorized and fully
paid, will be issued as soon as practicable after subscription funds are
released to the Company from the subscription escrow account.
CONDITIONS TO THE OFFERING AND RELEASE OF FUNDS
Subscription proceeds accepted by the Company for the first ____________
shares subscribed for in the Offering will be promptly deposited in an escrow
account with The Bankers Bank, Cobb County, Georgia (the "Escrow Agent"), until
the conditions to the Offering have been satisfied or the Offering has been
terminated. The Offering will be terminated, no shares will be issued and no
16
<PAGE>
subscription proceeds will be released from escrow to the Company unless on or
before the Expiration Date, the Company has accepted subscriptions and payment
in full for an aggregate of at least _________ shares. Notwithstanding anything
to the contrary contained herein, any subscription proceeds accepted after the
Company has accepted subscriptions for the initial ___________ shares, but
before this Offering is terminated, will not be deposited in the escrow account
but will be available for immediate use by the Company.
If the above conditions are not satisfied by the Expiration Date or the
Offering is otherwise earlier terminated, accepted subscription agreements will
be of no further force or effect and the full amount of all subscription funds,
together with any earnings thereon, will be returned promptly to subscribers.
The Escrow Agent has not investigated the desirability or advisability of
an investment in shares of Common Stock by prospective investors and has not
approved, endorsed or passed upon the merits of an investment in such shares.
Subscription funds held in escrow will be invested in short-term United States
Treasury securities, banker's acceptances, term federal funds, insured or fully
collateralized certificates of deposit and/or insured money market accounts
(including those of the Escrow Agent) until released from escrow. In no event
will the subscription proceeds held in escrow be invested in instruments that
would mature after the termination of the Offering.
HOW TO SUBSCRIBE
Shares may be subscribed for by mailing or delivering a completed and
executed Subscription Agreement in the form attached hereto as Exhibit A, to the
Company. If mailed, completed and executed Subscription Agreements should be
sent, first class mail postage prepaid, to Community Trust Financial Services
Corporation, P.O. Box 1700, Hiram, Georgia 30141, such that they will be
received by the Company on or prior to the Expiration Date. If delivered by
hand, completed and executed Subscription Agreements should be delivered to the
Company at 3844 Atlanta Highway, Hiram, Georgia, on or prior to the Expiration
Date. Subscribers should retain a copy of the completed Subscription Agreement
for their records. The subscription price is due and payable when the
Subscription Agreement is mailed or delivered to the Company. Payment must be
made in United States dollars by cash or by check, bank draft or money order
drawn to the order of "Community Trust Financial Services Corporation" in the
amount of $ _________ multiplied by the number of shares subscribed for. Any
subscriber who intends to purchase shares through a self directed retirement
plan should contact __________________________ for directions as to how to
subscribe and pay for shares.
SUBSCRIPTIONS FROM EXECUTIVE OFFICERS AND DIRECTORS
Management anticipates that Executive Officers and Directors will subscribe
for a total of _____________ shares in the Offering.
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<PAGE>
DIVIDENDS AND DIVIDEND POLICY
Holders of Common Stock are entitled to receive dividends when, as and if
declared by the Company's Board of Directors out of funds legally available
therefor. The Company has paid dividends, annually, on its Common Stock each
year since 1992. Dividends paid by the Company, on a per share basis, were $0.25
in 1998, $0.25 in 1997, $0.25 in 1996, $0.25 in 1995, $0.20 in 1994, $0.10 in
1993 and $0.05 in 1992.
The Company's policy has historically been to pay a dividend in the first
quarter of each year dependent upon the Company's performance for the prior
year. While the Board of Directors of the Company intends to continue to follow
a policy of paying annual dividends, the Company's ability to pay cash dividends
to its stockholders in the future will depend on a number of factors including
future earnings, the financial condition of the Company and the Bank, the amount
of cash on hand at the Company level, outstanding debt obligations and
limitations, if any, on the payment of dividends that may be contained therein
and on requirements imposed by federal and/or state regulatory authorities. The
Company's ability to pay dividends to its stockholders is largely dependent on
the Bank's ability to pay dividends to the Company. In order to pay dividends
to the Company, the Bank must comply with the requirements of applicable Georgia
law which, among other things, prohibit the payment of dividends except out of a
bank's retained earnings and prohibit the payment of dividends if a bank does
not satisfy certain capital and appropriated retained earnings requirements.
Under Federal Reserve policy, a bank holding company is expected to act as
a source of financial strength to its bank subsidiary and to commit resources to
support the bank. Consistent with this policy, the Federal Reserve has stated
that, as a matter of prudent banking, a bank holding company generally should
not maintain a rate of cash dividends unless the available net earnings of the
bank holding company is sufficient to fully fund the dividends, and the
prospective rate of earnings retention appears to be consistent with the
Company's capital needs, asset quality, and overall financial condition.
Although management believes that the Bank's earnings will be at a level
sufficient to fully fund such dividends, there can be no assurances that any
dividends will be paid in the future.
18
<PAGE>
MARKET FOR COMMON STOCK
Prior to the Offering there has been no established public trading market
for the Common Stock and such a market is not likely to develop in the
foreseeable future. Based upon information made available to the Company by
sellers of Common Stock, the Company believes that the high and low prices at
which shares of Common Stock have been sold during the first and second quarters
of 1998 and during each quarter within the last two fiscal years are as set
forth below. However, management of the Company is not aware of every
transaction involving Common Stock or of the price at which Common Stock is sold
in every transaction of which it is aware. Consequently, shares of Common Stock
may have been sold at prices above or below the prices set forth below during
the periods indicated.
<TABLE>
<CAPTION>
HIGH SALE LOW SALE
PRICE PRICE
----- -----
<S> <C> <C>
1996
First Quarter....................................... $10.00 $10.00
Second Quarter...................................... 10.50 10.00
Third Quarter....................................... 12.00 10.50
Fourth Quarter...................................... 14.00 11.78
1997
First Quarter....................................... 14.50 12.50
Second Quarter...................................... 14.00 14.00
Third Quarter....................................... 20.00 14.00
Fourth Quarter...................................... 16.00 10.00
1998
First Quarter....................................... 15.00 15.00
Second Quarter (through _____)......................
</TABLE>
There were approximately _______________ Company stockholders of record as
of ___________ _________, 1998. This number does not include beneficial owners
holding shares through nominee or "street" name.
19
<PAGE>
CAPITALIZATION
The following table sets forth the capitalization of the Company as of
December 31, 1997, and as adjusted to reflect the receipt of the estimated net
proceeds from the sale by the Company of the minimum __________ shares and
maximum __________ shares of Common Stock offered hereby.
<TABLE>
<CAPTION>
December 31, 1997
-------------------------------------------
As Adjusted
-------------------------
Actual Minimum Maximum
--------------- ----------- -----------
<S> <C> <C> <C>
Total deposits.............................. $81,981,103 $81,981,103 $81,981,103
Total borrowings............................ 800,000
----------- ----------- -----------
Total deposits and borrowings............... 82,781,103 81,981,103 81,981,103
----------- ----------- -----------
Common Stock, $2.50 par value,
5,000,000 shares authorized, 841,324
shares issued and outstanding (_____
shares as adjusted for the minimum
Offering, _____ shares as adjusted for
the maximum Offering).................... 2,103,310
Additional paid-in capital.................. 2,109,612
Retained earnings........................... 3,511,989
Unrealized gain on securities
available for sale, net of tax........... 144,931
----------- ----------- -----------
Total stockholders' equity.................. 7,869,842
----------- ----------- -----------
Total capitalization........................ $90,650,945
=========== =========== ===========
</TABLE>
20
<PAGE>
SELECTED CONSOLIDATED FINANCIAL DATA
The following selected consolidated financial data of the Company are
qualified by reference to and should be read in conjunction with "Management's
Discussion and Analysis of Financial Condition and Results of Operations" and
the Company's Consolidated Financial Statements and Notes thereto included
elsewhere, or incorporated by reference, in this Prospectus. The selected
financial data presented below as of the years ended December 31, 1993 through
1997 and for each of the fiscal years in the five-year period ended December 31,
1997 have been derived from the Company's consolidated financial statements
which have been audited by Porter Keadle Moore LLP.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-----------------------
1997 1996 1995 1994 1993
----------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C>
BALANCE SHEET DATA
Total assets $91,904,781 $85,203,618 $68,230,620 $62,835,550 $63,825,313
Loans (1) 56,359,625 48,712,195 38,314,857 34,477,171 29,647,200
Deposits 81,981,103 76,897,761 61,235,289 57,289,105 58,560,335
Stockholders' equity (2) 7,869,832 6,877,876 6,031,906 4,943,152 4,824,210
STATEMENT OF EARNINGS DATA
Net interest income $ 4,719,701 $ 4,187,352 $ 3,395,024 $ 2,873,926 $ 2,487,816
Provision for loan losses 204,270 197,841 186,645 243,000 218,061
Other income 1,203,961 1,151,183 838,882 816,385 811,034
Other expense 4,244,061 3,563,813 2,768,056 2,477,119 2,322,022
Net earnings 1,038,807 1,057,884 885,407 677,367 532,333
Basic earnings per share (3) 1.24 1.26 1.06 .81 .64
Diluted earnings per share(3) 1.18 1.23 1.04 .80 .64
ASSET QUALITY RATIOS
Nonperforming assets to total assets 0.43% 0.04% 0.40% 0.37% 0.53%
Net chargeoffs to average loans 0.17% 0.15% 0.13% 0.53% 0.63%
Allowance for loan losses to total loans 1.45% 1.44% 1.50% 1.27% 1.25%
Allowance for loan losses to non-
performing assets 210.55% 2146.76% 231.12% 89.18% 110.57%
KEY PERFORMANCE RATIOS
Return on average assets 1.19% 1.39% 1.37% 1.14% 0.96%
Return on average equity 14.44% 16.65% 17.01% 13.86% 11.91%
Net interest margin 5.93% 5.89% 5.66% 5.29% 4.90%
Net interest spread 5.17% 5.23% 4.98% 4.86% 4.49%
Average equity to average assets 8.27% 8.32% 8.06% 8.25% 8.04%
Other expense to average assets
Efficiency ratio (4) 71.65% 66.76% 65.38% 67.12% 70.39%
Dividends per share $ .25 $ .25 $ .25 $ .20 $ .10
- ------------------------
</TABLE>
(1) Net of unearned interest and the allowance for loan losses.
(2) Information from 1994 forward includes net unrealized gain (loss) on
securities available for sale, net of tax.
(3) All years presented are adjusted for the implementation of SFAS 128.
(4) The efficiency ratio is calculated by dividing other expense by the sum of
net interest income and other income.
21
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Management's discussion and analysis is provided to afford potential
investors a clearer understanding of the major elements of the Company's results
of operations, financial condition, liquidity and capital resources. The
following discussion should be read in conjunction with the financial statements
and related notes incorporated by reference, or included elsewhere, herein.
OVERVIEW
Management's discussion and analysis of financial condition and results of
operations analyzes the material changes in the consolidated balance sheets and
statements of earnings presented herein for the Company. The consolidated
financial information herein includes the financial condition and results of
operations, for all periods presented, of the Company and its wholly-owned
subsidiaries, the Bank and Metroplex, and the Company's 75%-owned subsidiary,
CLC. The Company's 49% interest in CashTrans is treated as an unconsolidated
subsidiary for financial reporting purposes, and, accordingly, the Company's
interest is reflected in the consolidated financial statements at its
proportionate share.
At December 31, 1997, the Company had consolidated total assets of
$91,904,781 as compared to $85,203,618 at December 31, 1996. Stockholders'
equity increased approximately 14.42% to $7,869,832 or $9.35 per share at
December 31, 1997, as compared to stockholders' equity of $6,877,876 or $8.20
per share at December 31, 1996. Stockholders' equity increased primarily as a
result of increased net earnings of the Company for the year ended December 31,
1997. Additionally, the Company recorded a change in unrealized gain on
securities available for sale, net of tax, of $149,365 for the year ended
December 31, 1997, resulting in an unrealized gain on securities available for
sale, net of tax, of $144,931 as of December 31, 1997. Although the Company's
net interest income for the year ended December 31, 1997, increased
approximately 12.71% or $532,349 from its net interest income for the year ended
December 31, 1996, the Company's net earnings decreased 1.80% from $1,057,884
for the year ended December 31, 1996, to $1,038,807 for the year ended December
31, 1997, while its basic earnings per share (based on the weighted average
number of shares outstanding during the year) decreased from $1.26 to $1.24.
This decrease in earnings growth compared to growth in net interest income was
attributable primarily to a 19.09% increase in other expenses that resulted
largely from an increase in salary and employee benefits caused by (i) the
Bank's need for additional human resources due to its growing customer base,
(ii) salary and benefit costs of CLC, and (iii) routine salary increases. The
Company's other expenses also increased as a result of increases in advertising
costs incurred by the Bank since new competitors entered its market, and due to
payment of directors' fees being initiated at the Company and CLC levels. Prior
to September 1996, directors of the Company and CLC had served without
compensation.
22
<PAGE>
For the year ended December 31, 1997, the Bank recorded net earnings of
$1,180,518, an increase of 14.34% or $148,081 from the year ended December 31,
1996. For the year ended December 31, 1997, CLC experienced a loss of
approximately $38,964 due primarily to increased overhead costs associated with
two offices acquired in April 1996. Of this loss, $31,215 is reflected in the
Company's consolidated net earnings for the year ended December 31, 1997. For
the year ended December 31, 1997, CashTrans experienced a loss of approximately
$226,827 due primarily to costs associated with the acquisition and installation
of 334 automated teller machines in Georgia, Florida, South Carolina, and
Alabama. Under the equity method of accounting, 49% of this loss, or $111,145,
is reflected in the Company's Other Income for the year ended December 31, 1997.
Management generally is pleased with the Company's results for 1997. While
the Company's results of operations for 1997 were adversely affected by
CashTrans' and CLC's losses, these losses were consistent with management's
expectations. Meanwhile, the Bank has continued to experience consistent
earnings growth.
The Company's results of operations are primarily dependent upon the Bank's
results of operations. The Bank represents 97.50% and 92.45%, respectively, of
the Company's total assets and total revenues at December 31, 1997. The Bank's
business consists primarily of attracting deposits from the general public and,
with these and other funds, originating real estate loans, consumer loans,
business loans and residential and commercial construction loans. Funds not
invested in the loan portfolio are invested by the Bank primarily in U.S.
Government and agency obligations and obligations of various states and their
political subdivisions. The Company's earnings are dependent primarily upon the
Bank's net interest income, which is the difference between the interest income
received from its assets (primarily loans and investment securities) and the
interest expense (or "cost of funds") which it pays on its liabilities
(primarily deposits). The Bank's profitability also is affected by such factors
as other income and expenses, the provision for loan losses and income tax
expense. Other income consists primarily of service charges on deposits and
gains or losses on the sale of investment securities. Other expenses consist of
salaries and employee benefits, occupancy expenses, FDIC deposit insurance
premiums and other operating expenses such as data processing costs, printing,
postage and supplies, and professional fees.
CLC began operations in September 1995, for the purpose of acquiring and
operating consumer finance offices under the direction of the Company. CLC is
owned 75% by the Company and 25% by an individual who is employed as the
President of CLC. At December 31, 1997, CLC conducted its operations from three
offices located in Rockmart, Rossville and Woodstock, Georgia, respectively.
CLC represents 1.42% and 5.72%, respectively, of the Company's total assets and
total revenues at December 31, 1997. Although CLC experienced a loss of $38,964
for 1997, CLC increased its loans approximately 23.29% or $267,919. The fact
that CLC has expanded operations quickly since its establishment in September
1995, through the acquisition of existing consumer finance businesses has
adversely affected its profitability. Each of the acquisitions caused CLC to
incur a cost of intangible assets (i.e., goodwill). The amortization of this
---
cost has reduced CLC's net earnings and, therefore, has had an adverse impact on
CLC's profitability. The operations of CLC are funded principally through a
revolving line of credit arrangement with the Company. At December 31, 1997,
$1,571,348 was outstanding under this credit facility. In February, 1998, the
23
<PAGE>
Company and CLC agreed to increase the maximum amount of credit available under
this facility from $1.9 million to $2.75 million. This credit facility is
evidenced by a demand promissory note that is payable by CLC at any time without
penalty. Principal amounts repaid by CLC may be reborrowed. Outstanding
advances under this note bear interest at a floating rate equal to the "prime"
rate of interest as published from time to time in The Wall Street Journal.
Interest is due and payable annually on the first business day of January of
each year. Amounts outstanding under this credit facility are secured by
essentially all of CLC's assets, including its notes receivable. Because CLC
was initially capitalized with only $500, $375 of which represented the
Company's investment, the $38,964 loss experienced by CLC in 1997 made it
insolvent at the end of 1997. The relatively small initial capitalization of
CLC reflects the Company's desire to fund CLC's operations with debt financing
rather than equity contributions. Management believes that CLC's cash flow is
adequate to service the loans that have been made, and that may be made in the
future, by the Company to CLC. While CLC does not currently, and in 1998, is
not expected to, have a significant impact on the consolidated results of
operations of the Company, management believes that CLC represents a prudent,
and ultimately profitable, means of diversifying the Company's business lines
and that CLC represents a significant long-term growth opportunity for the
Company.
CashTrans was formed in May, 1997, as a joint venture between the Company
and JRH Diversified, Inc. to engage in the business of providing retail
establishments (primarily convenience stores) with automated teller machines
that are owned by CashTrans and that dispense cash or cash equivalents.
CashTrans represents 0.46% and 1.31%, respectively, of the Company's total
assets and total revenues at December 31, 1997. CashTrans' loss for 1997 was
attributable primarily to the placement by CashTrans of 334 automated teller
machines in service from its formation in May, 1997, through the remainder of
the year. This represented approximately 67% more machines placed in service
during this period than management had anticipated. Management expects that
CashTrans will require from twelve to eighteen months to recover its investment
in an individual machine from income in the form of service charges paid as a
result of transactions processed through that machine. The average recovery
period is expected to be approximately fifteen months. Management believes that
the costs incurred by CashTrans in 1997 are customary for start-up ventures like
CashTrans and that such costs were influenced by a larger demand for CashTrans'
products than had been anticipated by management. Management believes that the
losses generated by CashTrans' initial investment in automated teller machines
are short-term in nature and that, in the longer term, this investment will
contribute to CashTrans' profitability.
The operations of CashTrans are funded principally through a credit
facility with the Company. At December 31, 1997, $500,000 was outstanding under
this facility. In February, 1998, the Company and CashTrans agreed to increase
the maximum amount of credit available under this facility from $500,000 to
$750,000. Under this credit facility, CashTrans may borrow up to $750,000.
Until the earlier of (i) the date on which total borrowings equal $750,000 or
(ii) December 31, 2000 (the Conversion Date), interest only is due and payable
on the last business day of each year. Interest accrues at a floating rate
equal to the "prime" rate of interest as published from time to time in The Wall
Street Journal plus 1%. On the Conversion Date, the outstanding principal
balance becomes due and payable, monthly, over a period of 36 consecutive
months. Amounts outstanding under this credit facility are personally
guaranteed by James R. Henderson, the principal
24
<PAGE>
of JRH Diversified, Inc. Because CashTrans was initially capitalized with only
$100,000, $49,000 of which represented the Company's investment, the $226,827
loss experienced by CashTrans in 1997 made it insolvent at the end of 1997. The
relatively small initial capitalization of CashTrans reflects the desire of the
Company and JRH Diversified, Inc. to fund CashTrans' operations with debt
financing rather than equity contributions. Management believes that CashTrans'
cash flow is adequate to service the loans that have been made, and that may be
made in the future, by the Company to CashTrans. Management believes that
CashTrans represents a prudent, and ultimately profitable, investment for the
Company as well as a significant long-term growth opportunity for the Company.
Metroplex, a wholly-owned subsidiary of the Company, was formed in 1992 as
an appraisal service company. Metroplex performs appraisals of residential
properties located in Paulding, Bartow, Polk, Harralson, Floyd, and Cobb
counties, Georgia. Metroplex represents 0.02% and 1.13%, respectively, of the
Company's total assets and total revenues at December 31, 1997. Net earnings of
Metroplex for the year ended December 31, 1997, were approximately $6,574.
Metroplex does not have a significant impact on the consolidated results of
operations of the Company and management does not anticipate that its impact
will be significant in future periods. Management believes that Metroplex
represents a desirable activity for the Company to be engaged in because, among
other things, Metroplex requires the commitment by the Company of relatively
modest resources and enables the Bank to receive reliable appraisals in
connection with residential real estate loans originated by the Bank.
RESULTS OF OPERATIONS
Year Ended December 31, 1997 Compared to Year Ended December 31, 1996
- ---------------------------------------------------------------------
Net Interest Income
Net interest income is a function of (1) the difference between rates of
interest earned on interest-earning assets and rates of interest paid on
interest-bearing liabilities (the "interest rate spread") and (2) the relative
amounts of interest-earning assets and interest-bearing liabilities. When
interest-earning assets approximate or exceed interest-bearing liabilities, any
positive interest rate spread will generate net interest income.
The Company's net interest income increased approximately 12.71% to
$4,719,701 for the year ended December 31, 1997, as compared to $4,187,352 for
the year ended December 31, 1996. Interest income increased approximately 11.41%
to $7,630,414 for 1997, as compared to $6,848,968 for 1996, due primarily to an
approximate 13.79% increase in the average loan portfolio for 1997 as compared
to 1996. Interest expense increased approximately 9.36% to $2,910,713 for 1997,
as compared to $2,661,616 for 1996, due primarily to an approximate 9.57%
increase in the average amount of interest-bearing deposits and liabilities of
the Company.
25
<PAGE>
At December 31, 1997, the Company held $2,070,710, or 8.99%, of its
securities portfolio in mortgage-backed securities which are available for sale.
These mortgage-backed securities are subject to being prepaid in part or in
whole. Because a premium was paid for purchase of some of these securities, an
accelerated payback can decrease earnings through faster amortization of the
premium. Mortgage-backed securities also may be subject to a slow-down in
prepayments, especially in a rising rate environment. This type of risk, called
extension risk, is not significant since the majority of the mortgage-backed
securities owned by the Company are either variable rate securities or have
maturities of five years or less. Management monitors the pre-payment risk and
extension risk associated with the Company's investments in mortgage-backed
securities in order to maintain an overall acceptable level of risk.
The Company's average earning assets for the year ended December 31, 1997,
were $79,613,629, having a weighted average yield of 9.58%, resulting in a net
interest margin of 5.93% for 1997. This compares to average earning assets for
the year ended December 31, 1996, of $71,120,155, having a weighted average
yield of 9.63%, resulting in a net interest margin of 5.89% for 1996. The
slight increase in net interest margin is attributable primarily to the 11.94%
increase in the Company's average earning assets, as compared to the 9.57%
increase in the Company's average interest-bearing liabilities. The larger
increase in the amount of the Company's interest-earning assets as compared to
its interest-bearing liabilities caused a positive effect on the Company's net
interest margin in 1997.
Provision for Loan Losses
Although the Company loses some interest income due to non-performing
assets, defined as loans placed on non-accrual status, real estate acquired
through foreclosure, and property acquired through repossession, management
considers the Company's level of non-performing assets to be at an acceptable
level. The Company's non-performing assets totaled $393,835, or 0.43% of total
assets as of December 31, 1997, as compared to $33,237, or 0.04% of total assets
as of December 31, 1996. The increase in non-performing assets from 1996 to
1997 was attributable primarily to an increase in the Company's loans placed on
non-accrual status. At December 31, 1997, the Company had classified loans of
$847,988 or approximately 0.92% of total assets, as compared to $765,529 or
approximately 0.90% of total assets at December 31, 1996.
The Georgia Department, the Bank's primary regulatory authority, requires
the Bank to maintain a loan loss allowance of not less than one percent of all
outstanding loans. This allowance is used to cover future loan losses. During
1997, the Company sustained $88,556 in net loan losses as compared to $67,629 in
net losses in 1996. The increase in net loan losses from 1996 to 1997 was
attributable primarily to an increase in the Bank's net loan losses to $79,601
as of December 31, 1997, as compared to $42,440 as of December 31, 1996. As of
December 31, 1997, the Company's loan loss allowance was $829,232, or 1.45% of
outstanding loans.
26
<PAGE>
Other Income
Total other income, consisting of service charges on deposits, appraisal
fees, credit life insurance commissions, securities gains, loss in CashTrans, an
unconsolidated subsidiary, and other miscellaneous income, increased
approximately 4.58% to $1,203,961 for the year ended December 31, 1997, as
compared to total other income of $1,151,183 for the year ended December 31,
1996, primarily due to increased insurance commissions and service charges and
fees. Insurance commissions increased approximately $62,210, or 33.59%, during
the year ended December 31, 1997, as compared to the same period in 1996
primarily due to income derived from one of its subsidiaries, CLC. Consumer
finance companies typically sell credit life and automobile liability insurance
to many of their customers. Service charges and fee income increased
approximately $102,892, or 12.40%, during the year ended December 31, 1997, as
compared to the same period in 1996, primarily due to an increase in the number
of returned check charges assessed by the Bank on deposit accounts.
Other Expenses
Other expenses, consisting of salaries and employee benefits, occupancy and
other miscellaneous expenses, increased approximately 19.09% to $4,244,061 for
1997, as compared to $3,563,813 for 1996. This increase is attributable
primarily to an increase in salaries and employee benefits caused by (i) the
Bank's need for additional human resources due to the growing customer base of
the Bank, (ii) salary and benefit cost of CLC, and (iii) routine salary
increases. Occupancy expense increased by approximately $105,484, or 19.33%,
for the year ended December 31, 1997, as compared to the same period in 1996,
primarily due to increased depreciation associated with increased furniture and
equipment purchases at the Bank. Other operating expense increased by
approximately $228,044, or 20.44%, for the year ended December 31, 1997, as
compared to the same period in 1996, primarily due to increased advertising
costs incurred by the Bank since new competitors entered its market.
Provision for Income Taxes
Total income tax expense for the year ended December 31, 1997, was $444,272
as compared to $507,639 for the year ended December 31, 1996. The effective tax
rate also decreased from 32% to 30% at December 31, 1997, as compared to
December 31, 1996. This decrease was due primarily to an increase in tax-exempt
interest income earned by the Bank and to lower state income tax.
Year Ended December 31, 1996 Compared to Year Ended December 31, 1995
- ---------------------------------------------------------------------
Net Earnings
The Company's net earnings for 1996 were $1,057,884, an approximate 19.48%
increase from net earnings of $885,407 for 1995. The increase in average
earning assets to $71,120,155 for the year ended December 31, 1996, as compared
to $59,570,527 for the year ended December 31, 1995, was the primary factor in
the growth in the Company's net earnings for 1996.
27
<PAGE>
Net Interest Income
The Company's net interest income increased approximately 23.34% to
$4,187,352 for the year ended December 31, 1996, as compared to $3,395,024 for
the year ended December 31, 1995. Interest income increased approximately 23.11%
to $6,848,968 for 1996, as compared to $5,563,477 for 1995, due primarily to an
approximate 25.60% increase in the average loan portfolio for 1996 as compared
to 1995. Interest expense increased approximately 22.74% to $2,661,616 for
1996, as compared to $2,168,453 for 1995, due primarily to an approximate 19.28%
increase in the average amount of deposits on which the Company pays interest.
The Company's average earning assets for the year ended December 31, 1996,
were $71,120,155, having a weighted average yield of 9.63%, resulting in a net
interest margin of 5.89% for 1996. This compared to average earning assets for
the year ended December 31, 1995 of $59,570,527, having a weighted average yield
of 9.30%, resulting in a net interest margin of 5.66% for 1995. The increase
in net interest margin was attributable primarily to the growth in CLC's loan
portfolio as a percentage of the Company's average earning assets, and the
interest income produced by those assets. For the year ended December 31, 1996,
CLC's average earning assets were $815,042. For the year ended December 31,
1995, CLC's average earning assets were negligible because CLC did not commence
business until September 1, 1995. Loans made by CLC have a higher yield than
those carried in the Bank's loan portfolio.
Provision for Loan Losses
The Company's non-performing assets totaled $33,237, or 0.04% of total
assets as of December 31, 1996, as compared to $273,695, or 0.40% of total
assets as of December 31, 1995. The decrease in non-performing assets from 1995
to 1996 was attributable primarily to a loan which was paid in full by the
customer and to the sale by the Bank of two residential properties held in other
real estate. At December 31, 1996, the Company had classified loans of $765,529
or approximately 0.90% of total assets, as compared to $702,750 or approximately
1.03% of total assets at December 31, 1995.
The Georgia Department, the Bank's primary regulatory authority, requires
the Bank to maintain a loan loss allowance of not less than one percent of all
outstanding loans. This allowance is used to cover future loan losses. During
1996, the Company sustained $67,629 in net loan losses as compared to $47,707 in
net losses in 1995. The increase in net loan losses from 1995 to 1996 was
attributable primarily to the loan losses of CLC, since 1996 was that
subsidiary's first full year of operation. As of December 31, 1996, the
Company's loan loss allowance was $713,518, or 1.44% of outstanding loans.
Other Income
Total other income, consisting of service charges on deposits, appraisal
fees, credit life insurance commissions, securities gains and other
miscellaneous income, increased approximately 37.23% to $1,151,183 for the year
ended December 31, 1996, as compared to total other income of
28
<PAGE>
$838,882 for the year ended December 31, 1995, primarily due to increased
insurance commissions and service charges and fees. Insurance commissions
increased approximately $158,475, or 593.32%, during the year ended December 31,
1996, as compared to the same period in 1995 primarily due to income derived
from the subsidiary CLC. Consumer finance companies typically sell credit life
and automobile liability insurance to many of their customers. Service charges
and fee income increased approximately $96,475, or 13.16%, during the year ended
December 31, 1996, as compared to the same period in 1995, primarily due to a
10.59% increase in the number of the Bank's deposit accounts.
Other Expenses
Other expenses, consisting of salaries and employee benefits, occupancy and
other miscellaneous expenses, increased approximately 28.75% to $3,563,813 for
1996, as compared to $2,768,056 for 1995. This increase was attributable
primarily to an increase in salaries and employee benefits caused by the (i)
Bank's need for additional human resources due to the growing customer base of
the Bank, (ii) salary and benefit cost of CLC, and (iii) routine salary
increases. Occupancy expense increased by approximately $98,107, or 21.92%, for
the year ended December 31, 1996, as compared to the same period in 1995,
primarily due to the addition of the Bank's Brownsville branch and CLC's three
offices.
Provision for Income Taxes
Total federal income tax expense for the year ended December 31, 1996, was
$507,639 as compared to $397,533 for the year ended December 31, 1995. This
increase in federal income tax expense was due primarily to the increase in the
Company's 1996 net earnings.
CAPITAL RESOURCES AND LIQUIDITY
Historically, the principal sources of funds for the Company have been
increases in deposits, repayments of loans, other borrowings and cash received
at maturity, and from sales, of securities. In 1997, the Company received
$5,083,342 in net increases of demand, savings, and time deposits and $6,187,038
from maturities and sales of securities. Additionally, in 1997, the Company
established a $2,500,000 revolving credit facility with The Bankers Bank, Cobb
County, Georgia. The Company borrowed $800,000 pursuant to this credit facility
during 1997. As of April 1, 1998, the Company had $1,420,000 in borrowings
outstanding under this facility. All outstanding borrowings under this facility
are expected to be repaid with the proceeds of this Offering. See "Use of
Proceeds."
Uses of funds in 1997, included $209,817 paid in dividends to Company
shareholders of record as of March 10, 1997, and $107,987 in additions to
premises and equipment. The net change in the Company's loans was an increase of
$7,851,700 for 1997 as compared to 1996, and $6,538,282 in securities were
purchased in 1997.
29
<PAGE>
The proceeds of this Offering together with increases in the Bank's core
deposits are expected to be the major sources of funds provided during 1998.
Management believes that deposit growth will continue at a moderate pace due to
the population growth in Paulding County and the products offered by the Bank
for consumers (including an automated voice-response system that allows
customers to request loans by phone, fixed rate mortgage loans, debit cards,
credit cards and access to the Bank's website on the Internet).
The Company is subject to regulatory capital requirements imposed by the
Georgia Department and by the Federal Reserve. The Department requires bank
holding companies to maintain a minimum ratio of capital to total average assets
of 5%, with certain adjustments, on a consolidated basis. At December 31, 1997,
the Company's ratio of capital to total average assets was 9.55%, using the
Department's guidelines. Under federal law, the Company and the Bank are
required to maintain a ratio of total capital to risk weighted assets of at
least 8.0%, of which at least one-half must be so-called Tier 1 capital. Under
applicable federal regulations and interpretations thereof, the Bank's ratio of
total capital to risk weighted assets at December 31, 1997, was 12.14%, and its
ratio of Tier 1 capital to risk weighted assets was 10.89%. Under applicable
federal regulations and interpretations thereof, the Company's ratio of total
capital to risk weighted assets at December 31, 1997, was 13.75%, and its ratio
of Tier 1 capital to risk weighted assets was 12.49%. Additionally, under
federal law, all but the most highly rated banks and bank holding companies are
required to maintain a minimum ratio of Tier 1 capital to total average assets
(Tier 1 leverage ratio) of 4.0% to 5.0%, including the most highly rated banks
and bank holding companies that are anticipating or experiencing significant
growth. Three percent is the minimum Tier 1 leverage ratio required for the
most highly rated banks and bank holding companies with no plans to expand. The
Bank substantially exceeds its Tier 1 leverage ratio requirement with a Tier 1
leverage ratio of 7.03% as of December 31, 1997. The Company also substantially
exceeds its Tier 1 leverage ratio requirement with a Tier 1 leverage ratio of
8.60% as of December 31, 1997. Through its policy of controlled growth, the
Company intends to maintain capital in excess of the required minimum in order
to support future growth.
Liquidity represents the Company's ability to meet both loan commitments
and deposit withdrawals. Liquidity is monitored monthly by management in order
to ensure compliance with the Bank's policy of maintaining adequate liquidity.
As of December 31, 1997, the Bank's liquidity ratio was 29.65%, as compared to
33.58% at December 31, 1996. The Bank maintains two lines of credit to borrow
fed funds that total $3,000,000 in order to enhance liquidity. The Bank is a
member of the Federal Home Loan Bank of Atlanta and borrowings are also
available through that relationship. The amount of credit available from the
Federal Home Loan Bank of Atlanta fluctuates based on criteria set by that
institution. Additionally, the Company's $2,500,000 credit facility with The
Bankers Bank is intended to enhance the Company's liquidity.
The Company believes that the proceeds of this Offering, together with
funds from the Company's historical sources of funds and funds available under
the Company's credit facilities, will be adequate to fund the Company's needs
for the foreseeable future.
30
<PAGE>
IMPACT OF INFLATION
The consolidated financial statements and related consolidated financial
data contained elsewhere, or incorporated by reference, herein have been
prepared in accordance with generally accepted accounting principles and
practices within the banking industry which require the measurement of financial
position and operating results in terms of historical dollars without
considering the changes in the relative purchasing power of money over time due
to inflation. Unlike most industrial companies, virtually all the assets and
liabilities of a financial institution are monetary in nature. As a result,
interest rates have a more significant impact on a financial institution's
performance than the effects of general levels of inflation.
YEAR 2000
The Company has a Year 2000 plan in place. This plan is necessary since
many existing computer programs use only two digits to identify a year. Such
programs were designed and developed without considering the impact of the
upcoming change in the century. Since many computer applications could fail or
create erroneous results by or at the Year 2000 if these problems are not
corrected, management has implemented a plan to ensure that the Company and each
of its subsidiaries is prepared to continue operations without interruption
through the upcoming change in the century. Year 2000 issues relating to the
Company's businesses, its operations, and its relationships with customers,
suppliers, and other constituents are reviewed by a committee consisting of
management and operations and technical staff. Goals of the Company's plan
include evaluation of systems, prioritization of necessary updates or
replacements, responsibility assignments, and establishment of a timeline for
review, implementation, and testing. Management believes that, to date, the
goals of the plan have been met, and the testing phase has begun. Management
does not believe that Year 2000 will have a significant impact on the Company.
Management does not anticipate that the implementation of the Company's Year
2000 plan will entail any material capital expenditures.
BUSINESS
GENERAL
The Bank's business consists primarily of attracting deposits from the
general public and, with these and other funds, originating real estate loans,
consumer loans, business loans and residential and commercial construction
loans. Funds not invested in the loan portfolio are invested by the Bank
primarily in U.S. Government and agency obligations and obligations of various
states and their political subdivisions. In addition to deposits, sources of
funds for the Bank's loans and other investments include amortization and
prepayment of loans, sales of loans or participations in loans and sales of its
investment securities. The principal sources of income for the Bank are
interest and fees collected on loans, fees collected on deposits and interest
and dividends collected on other investments. The principal expenses of the
Bank are interest paid on deposits, employee compensation and benefits,
occupancy expenses and other overhead expenses.
31
<PAGE>
The Company's earnings depend primarily on the Bank's "net interest
income," which is the difference between the interest income it receives from
its assets (primarily its loans and other investments) and the interest expense
(or "cost of funds") which it pays on its liabilities (primarily its deposits).
Net interest income is a function of (i) the difference between rates of
interest earned on interest-earning assets and rates of interest paid on
interest-bearing liabilities (the "interest rate spread" or "net interest
spread") and (ii) the relative amounts of its interest-earning assets and
interest-bearing liabilities. When interest-earning assets approximate or
exceed interest-bearing liabilities, any positive interest rate spread will
generate net interest income. The Bank adheres to an asset and liability
management strategy which is intended to control the impact of interest rate
fluctuations upon the Company's earnings and to make the yields on the Bank's
loan portfolio and other investments more responsive to its cost of funds, in
part by more closely matching the maturities of its interest-earning assets and
its interest-bearing liabilities, while still maximizing net interest income.
Nevertheless, the Bank is and will continue to be affected by changes in the
levels of interest rates and other factors beyond its control.
Unless specifically noted below, the following information is presented on
a consolidated basis reflecting the Company's performance as a whole. The
Company's results of operations are dependent primarily upon the results of
operations of the Bank but also are affected, although not significantly, by the
operations of CLC, CashTrans and Metroplex. The information hereinafter set
forth as it relates generally to the Company's interest-earning assets, loans
and interest income includes CLC's loans, or interest income attributable to
such loans. However, where such information specifically refers to the Bank or
refers to specific categories of the Company's interest-earning assets other
than consumer loans, it does not include loans held by CLC. Similarly,
references generally to the Company's interest-bearing liabilities, interest
expense, non-interest income and non-interest expense include CLC and Metroplex
unless such references are specifically to the Bank.
For the fiscal years ended December 31, 1997 and 1996, the Company's
weighted average rate earned on all interest-earning assets was 9.58% and 9.63%,
respectively, and the Company's weighted average rate paid on all interest-
bearing liabilities for the same years was 4.40% and 4.41%, respectively. The
Company's interest rate spread for the years ended December 31, 1997 and 1996
therefore was 5.17% and 5.23%, respectively, and its net interest income for
such years was $4,719,701 and $4,187,352, respectively. For fiscal 1997, the
Company recorded net income of $1,038,807 or $1.24 basic earnings per share as
compared with net income of $1,057,884 or $1.26 basic earnings per share for
fiscal 1996. The decrease in net income was due primarily to a 19.09% increase
in other expenses that resulted largely from an increase in salary and employee
benefits. See "Management's Discussion and Analysis of Financial Condition and
Results of Operations--Results of Operations--Year Ended December 31, 1997
Compared to Year Ended December 31,1996."
32
<PAGE>
The table below sets forth certain additional measures of the Company's
performance for the periods indicated. Average balances in the table, as well as
all average balances presented elsewhere in this report, were derived based on
daily balances whenever possible. However, some average balances which require
data from the Company or CLC, as opposed to the Bank, were derived based on
month-end balances since the data processing systems for those entities do not
provide daily average balance information. The use of month-end averages does
not materially alter any information given, and all averages are still
representative of the operations of the Company.
<TABLE>
<CAPTION>
Years Ended December 31,
-----------------------
1997 1996 1995
------ ------ ------
<S> <C> <C> <C>
Net Interest Margin (Net interest
income divided by average interest-
earning assets).................................. 5.93% 5.89% 5.66%
Return on Average Assets
(Net income divided by average
total assets).................................... 1.19% 1.39% 1.37%
Return on Average Equity
(Net income divided by
average equity).................................. 14.44% 16.65% 17.01%
Equity-to-Assets (Average equity
divided by average total assets)................. 8.27% 8.32% 8.06%
Loans to Deposits (Average
loans divided by average
daily deposits).................................. 67.75% 65.94% 62.31%
Dividend Payout Ratio (Dividends
declared by the Company divided by net income)... 20.20% 19.77% 23.58%
</TABLE>
NET INTEREST INCOME
The following table sets forth information with respect to interest income
from average interest-earning assets, expressed both in dollars and yields, and
interest expense on average interest-bearing liabilities, expressed both in
dollars and rates, for the periods indicated. The table includes loan yields
which reflect the amortization of deferred loan origination and commitment fees.
Interest income from investment securities includes the accretion of discounts
and amortization of premiums.
33
<PAGE>
<TABLE>
<CAPTION>
Years Ended December 31,
---------------------------------------------------------------------------------
1997 1996
--------------------------------------- -----------------------------------
Interest Average Interest Average
Average Income/ Yield/ Average Income/ Yield/
Balance Expense(1) Rate Balance Expense(1) Rate
------- ---------- ---- ------- ---------- -------
<S> <C> <C> <C> <C> <C> <C>
ASSETS
Interest-earning assets:
Loans(1)(2).................. $52,395,119 $ 6,075,240 11.60% $46,043,727 $5,462,059 11.86%
Investment securities
Taxable................... 18,771,145 1,114,266 5.94% 18,508,042 1,051,039 5.68%
Tax-exempt(3)............. 4,051,859 197,710 4.88% 2,404,861 114,474 4.76%
Federal funds sold........... 4,395,506 243,198 5.53% 4,163,525 221,396 5.32%
----------- ----------- ------- ----------- ---------- ------
Total interest-earning assets.. $79,613,629 $ 7,630,414 9.58% $71,120,155 $6,848,968 9.63%
Cash and other assets.......... 7,360,685 6,533,382
----------- -----------
Total assets.............. $86,974,314 $77,653,537
=========== ===========
LIABILITIES AND
STOCKHOLDERS' EQUITY
Interest-bearing liabilities:
Deposits
NOW accounts................ $ 9,058,370 $ 165,008 1.82% $ 8,728,202 $ 194,491 2.23%
Money market accounts....... 8,170,372 232,547 2.85% 7,747,518 216,441 2.79%
Savings deposits............ 13,017,166 391,036 3.00% 12,200,662 375,845 3.08%
Time deposits, $100,000
and over................... 13,584,221 817,029 6.01% 11,321,593 663,640 5.86%
Time deposits, other........ 21,879,936 1,276,223 5.83% 19,834,342 1,173,908 5.92%
----------- ----------- ----------- ----------- ---------- -----
Total interest-bearing
deposits................. $65,710,065 $ 2,881,843 4.39% $59,832,317 $2,624,325 4.39%
Other interest-bearing
liabilities................... 340,317 25,281 7.43% 489,934 37,291 7.61%
Long-term debt................. 46,164 3,589 8.00% 0 0 0.00%
----------- ----------- ----------- ----------- ---------- -----
Total interest-bearing
liabilities.............. $66,096,546 $ 2,910,713 4.40% $60,322,251 $2,661,616 4.41%
Other liabilities:
Demand deposits.............. $11,626,615 $ 9,991,772
Accrued interest payable
and other liabilities....... 2,058,989 985,766
----------- -----------
Total other liabilities... 13,685,604 10,977,538
Total liabilities...... $79,782,150 $71,299,789
Stockholders' equity........... 7,192,164 6,353,748
Total liabilities and
stockholders' equity.......$86,974,314 $77,653,537
=========== ===========
FINANCIAL RATIOS
Excess of interest-earning
assets over interest-
bearing liabilities........ $13,517,083 $10,797,904
=========== ===========
Ratio of interest-earning
assets to interest-bearing
liabilities................... 120.45% 117.90%
Net interest income............ $ 4,719,701 $ 4,187,352
=========== ===========
Interest rate spread
(difference between rate
earned on interest-
earning assets and rate
paid on interest-bearing
liabilities).................. 5.18% 5.22%
Net interest margin (net
interest income divided by
average interest-earning
assets)....................... 5.93% 5.89%
<CAPTION>
Years Ended December 31,
---------------------------------------
1995
---------------------------------------
Interest Average
Average Income/ Yield/
Balance Expense(1) Rate
----------- ---------- -----
<S> <C> <C> <C>
ASSETS
Interest-earning assets:
Loans(1)(2).................. $36,660,129 $4,307,281 11.69%
Investment securities
Taxable................... 17,834,704 984,611 5.52%
Tax-exempt(3)............. 1,784,584 79,363 4.45%
Federal funds sold........... 3,291,110 192,222 5.84%
----------- ---------- -----
Total interest-earning assets.. $59,570,527 $5,563,477 9.30%
Cash and other assets.......... 4,983,549
-----------
Total assets.............. $64,554,076
===========
LIABILITIES AND
STOCKHOLDERS' EQUITY
Interest-bearing liabilities:
Deposits
NOW accounts................ $ 6,949,988 $ 179,261 2.58%
Money market accounts....... 7,014,853 216,839 3.09%
Savings deposits............ 12,064,705 436,236 3.62%
Time deposits, $100,000
and over................... 7,698,395 409,190 5.32%
Time deposits, other........ 16,442,425 926,137 5.63%
----------- ---------- -----
Total interest-bearing
deposits................. $50,170,366 $2,167,663 4.32%
Other interest-bearing
liabilities................... 11,507 790 6.87%
Long-term debt................. 0 0 0.00%
----------- ---------- -----
Total interest-bearing
liabilities.............. $50,181,873 $2,168,453 4.32%
Other liabilities:
Demand deposits.............. $ 8,593,281
Accrued interest payable
and other liabilities........ 574,520
-----------
Total other liabilities... 9,167,801
Total liabilities...... $59,349,674
Stockholders' equity........... 5,204,402
Total liabilities and
stockholders' equity.......$64,554,076
===========
FINANCIAL RATIOS
Excess of interest-earning
assets over interest-
bearing liabilities........ $ 9,388,654
===========
Ratio of interest-earning
assets to interest-bearing
liabilities................ 118.71%
Net interest income............ $ 3,395,024
===========
Interest rate spread
(difference between rate
earned on interest-
earning assets and rate
paid on interest-bearing
liabilities).................. 4.98%
Net interest margin (net
interest income divided by
average interest-earning
assets)....................... 5.66%
</TABLE>
-------------------
(1) Interest income on loans includes amortization of deferred loan
fees and other discounts of $811,805, $763,558, and $549,535, for the
fiscal years ended December 31, 1997, 1996, and 1995, respectively.
(2) Nonperforming loans are included in the computation of average
loan balances, and interest income on such loans is recognized on a
cash basis.
(3) The average yield computed on tax-exempt securities is computed
using actual yields rather than tax-equivalent yields.
34
<PAGE>
The following table sets forth information regarding the weighted average
contractual yields earned on the Company's interest-earning assets and the
weighted average interest rates paid on the Company's interest-bearing
liabilities outstanding at December 31, 1997. Investment securities are shown
at the carrying value, which is the fair market value as all securities are held
available for sale.
<TABLE>
<CAPTION>
Average
Amount Yield/Rate
------------- -----------
<S> <C> <C>
Interest-earning assets:
Loans............................................................................ $57,188,857 11.74%
Investment securities
Taxable securities............................................................. 17,826,801 5.67%
Tax-exempt securities.......................................................... 5,194,210 4.73%
Federal funds sold............................................................... 4,510,000 5.45%
-----------
Total interest-earning assets................................................ $84,719,868 9.62%
===========
Interest-bearing liabilities:
Demand deposits.................................................................. $12,105,179 0.00%
NOW accounts..................................................................... 9,710,739 1.72%
Money market accounts............................................................ 8,933,508 2.89%
Savings deposits................................................................. 14,808,283 3.06%
Time deposits.................................................................... 22,230,949 4-6%
14,192,445 6-8%
Total certificates of deposit.................................................... 36,423,394 5.94%
-----------
Total deposits................................................................. 81,981,103 4.33%
Long term debt................................................................... 800,000 8.00%
Other interest-bearing liabilities............................................... 50,000 6.00%
-----------
Total interest-bearing liabilities............................................. $82,781,103 4.35%
===========
</TABLE>
Changes in interest income and interest expense are attributable to three
factors: (i) a change in volume or amount of an asset or liability; (ii) a
change in interest rates; or (iii) a change caused by the combination of changes
in volume and interest rates. The following table describes the extent to which
changes in interest rates and changes in volume of interest-earning assets and
interest-bearing liabilities have affected the Company's interest income and
expense during the periods indicated. For each category of interest-earning
assets and interest-bearing liabilities, information is provided as to changes
attributable to change in volume (change in volume multiplied by old rate) and
change in rates (change in rate multiplied by old volume). The net change
attributable to changes in both volume and rate has been allocated
proportionately to the change due to volume and the change due to rate.
35
<PAGE>
<TABLE>
<CAPTION>
Year Ended December 31, Year Ended December 31,
---------------------------------- --------------------------------------
1997 Compared to 1996 1996 Compared to 1995
---------------------------------- --------------------------------------
Rate/ Net Rate/ Net
Volume Yield Change Volume Yield Change
--------- ---------- --------- ---------- ------------ -----------
<S> <C> <C> <C> <C> <C> <C>
Interest income:
Loans(1)(2)................. $738,838 $(125,657) $613,181 $1,112,767 $ 42,011 $1,154,778
Investment securities(3).... 108,945 37,518 146,463 71,522 30,017 101,539
Federal funds sold.......... 12,625 9,177 21,802 47,543 (18,369) 29,174
-------- --------- -------- ---------- -------- ----------
Total interest income.... 860,408 (78,962) 781,446 1,231,832 53,659 1,285,491
Interest expense:
NOW accounts................ 7,127 (36,610) (29,483) 41,791 (26,561) 15,230
Money market accounts....... 11,978 4,128 16,106 21,513 (21,911) (398)
Savings deposits............ 24,697 (9,506) 15,191 4,864 (65,255) (60,391)
Time deposits, $100,000
and over................. 135,688 17,701 153,389 208,832 45,618 254,450
Time deposits, other........ 119,531 (17,217) 102,314 198,837 48,934 247,771
-------- --------- -------- ---------- -------- ----------
Total deposits........... 299,021 (41,504) 257,517 475,837 (19,175) 456,662
Other interest-bearing
liabilities............. (7,739) (681) (8,420) 36,406 95 36,501
-------- --------- -------- ---------- -------- ----------
Total interest expense.... 291,282 (42,185) 249,097 512,243 (19,080) 493,163
-------- --------- -------- ---------- -------- ----------
Net interest income (expense).. $569,126 $(36,777) $532,349 $ 719,589 $ 72,739 $ 792,328
======== ========= ======== ========== ======== ==========
</TABLE>
___________
(1) Loan amounts include nonaccruing loans.
(2) Interest income includes the portion of loan fees recognized in the
respective periods.
(3) Changes due to rate and volume on investment securities have been computed
using actual yields on tax-exempt securities rather than tax-equivalent yields.
Yields are computed on the carrying value of the securities.
36
<PAGE>
The following table sets forth the repricing of the Company's interest-
earning assets and interest-bearing liabilities as of December 31, 1997. The
time periods in the table represent the period, following December 31, 1997,
during which an asset or liability matures or can be repriced. This interest
sensitivity gap table is designed to monitor the Company's interest rate risk
exposure within the designated time period. In order to control interest rate
risk, management regularly monitors the volume of interest sensitive assets
relative to interest sensitive liabilities over specific time intervals. The
Company's interest rate management policy is to attempt to maintain a relatively
stable net interest margin in periods of interest rate fluctuations. The
Company's policy is to attempt to maintain a ratio of cumulative gap to total
interest sensitive assets of negative 10.00% to positive 10.00% in the time
period of one year or less. The following table reflects that the Company's
interest-earning assets and interest-bearing liabilities which reprice in the
time period of one year or less are closely matched and within the Company's
policy guidelines.
<TABLE>
<CAPTION>
0 to 3 4 to 6 7 to 12 1 to 5 Over 5
Months Months Months Years Years Total
------ ------ ------ ----- ----- -----
<S> <C> <C> <C> <C> <C> <C>
Interest Sensitive Assets
- -------------------------
Fed Funds Sold....................... $ 4,510,000 -0- -0- -0- -0- $ 4,510,000
Investment Securities
Taxable (1)....................... 2,372,207 664,681 1,525,754 12,451,565 812,594 17,826,801
Tax-exempt (1).................... -0- -0- 250,974 1,461,193 3,482,043 5,194,210
Loans (2)
Fixed rate........................ 3,631,835 1,520,843 756,226 211,766 -0- 6,120,670
Adjustable rate................... 25,551,791 1,477,700 707,077 209,052 -0- 27,945,620
Scheduled payments................ 4,343,221 2,276,492 4,170,152 11,801,957 138,410 22,730,232
----------- ---------- ----------- ----------- ----------- -----------
Total Interest-Sensitive Assets...... $40,409,054 $5,939,716 $ 7,410,183 $26,135,533 $ 4,433,047 $84,327,533
=========== ========== =========== =========== =========== ===========
Interest Sensitive Liabilities
- -------------------------------------
NOW.................................. $ 9,710,739 -0- -0- -0- -0- $ 9,710,739
Money Market......................... 8,933,508 -0- -0- -0- -0- 8,933,508
Savings.............................. 14,808,283 -0- -0- -0- -0- 14,808,283
Time Deposits........................ 5,063,813 4,630,932 5,662,517 6,232,018 -0- 21,589,280
Time, in excess of $100,000.......... 4,901,321 1,327,957 2,992,309 5,612,527 -0- 14,834,114
Other interest-bearing liabilities... -0- 50,000 -0- -0- -0- 50,000
Long-term debt....................... 800,000 -0- -0- -0- -0- 800,000
---------- ----------- ----------- ----------- ----------- ----------
Total Interest Sensitive
Liabilities...................... $44,217,664 $6,008,889 $ 8,654,826 $11,844,545 $ -0- $70,725,924
=========== ========== =========== =========== =========== ===========
Interest Sensitivity Gap............. (3,808,610) (69,173) (1,244,643) 14,290,988 4,433,047 13,601,609
Cumulative Gap....................... (3,808,610) (3,877,783) (5,122,426) 9,168,562 13,601,609
Ratio of cumulative gap to total
interest sensitive assets......... (4.52)% (4.60)% (6.07)% 10.87% 16.13%
- -----------
</TABLE>
(1) All investment securities are shown at the carrying value.
(2) Non-performing loans are not included as interest-earning assets.
37
<PAGE>
LENDING ACTIVITIES
General
- -------
At December 31, 1997, the Company's loan portfolio constituted 61.32% of
the Company's total assets. The following table sets forth the composition of
the Company's loan portfolio at the indicated dates.
<TABLE>
<CAPTION>
At December 31,
--------------------------------------------
1997 1996
------------------- -------------------
Amount Percent Amount Percent
------ ------- ------ -------
<S> <C> <C> <C> <C>
Commercial, financial
and agricultural........ $ 7,765,358 13.58% $ 5,840,546 11.82%
Real estate - construction... 8,308,349 14.53% 7,274,577 14.72%
Real estate - mortgage....... 30,833,493 53.91% 26,936,164 54.50%
Consumer loans............... 10,281,657 17.98% 9,374,426 18.96%
----------- -----------
Total loans.................. $57,188,857 100.00% $49,425,713 100.00%
=========== ====== =========== ======
</TABLE>
The following table sets forth certain information as of December 31, 1997
regarding loans in the Company's loan portfolio with fixed interest rates and
with floating or adjustable interest rates. All loans with floating or
adjustable interest rates reprice at least annually based upon changes in a
"prime" interest rate or other specified index.
<TABLE>
<CAPTION>
Fixed-Rate Floating or Adjustable Rate
------------------------- ---------------------------
Percent of Percent of
Amount Portfolio Amount Portfolio
------ ---------- ------ ----------
<S> <C> <C> <C> <C>
Commercial, financial
and agricultural........ $ 5,640,835 9.86% $ 2,124,523 3.71%
Real estate - construction... 1,141,951 2.00% 7,166,398 12.53%
Real estate - mortgage....... 12,631,798 22.09% 18,201,695 31.83%
Consumer..................... 10,243,218 17.91% 38,439 .07%
----------- ----- ----------- -----
Total.................... $29,657,802 51.86% $27,531,055 48.14%
=========== ===== =========== =====
</TABLE>
At December 31, 1997, the total amount of loans due after one year which
had fixed rates of interest was $15,885,673, while the total amount of loans due
after one year with floating or adjustable rates of interest was $16,394,920.
38
<PAGE>
The following table sets forth the scheduled maturities of the loans in the
Company's loan portfolio as of December 31, 1997, based on their contractual
terms to maturity. Overdrafts are reported as due in less than one year. Loans
unpaid at maturity are renegotiated based on current market rates and terms.
<TABLE>
<CAPTION>
Loans Maturing
-------------------------------------------------------
Less Than One to Five More than
One Year Years Five Years Total
----------- ----------- ----------- --------------
<S> <C> <C> <C> <C>
Commercial, financial
and agricultural............ $ 3,522,267 $ 2,492,826 $ 1,750,265 $ 7,765,358
Real estate - construction.... 8,308,349 -0- -0- 8,308,349
Real estate - mortgage........ 8,920,808 8,922,252 12,990,433 30,833,493
Consumer loans................ 4,156,840 6,075,702 49,115 10,281,657
----------- ----------- ----------- -----------
Total..................... $24,908,264 $17,490,780 $14,789,813 $57,188,857
=========== =========== =========== ===========
</TABLE>
Types of Loans
- --------------
Commercial, Financial and Agricultural Loans
Commercial, financial and agricultural loans, hereinafter referred to as
commercial loans (including non-real estate loans for agricultural purposes but
excluding commercial construction loans), totaled $7,765,358 or 13.58% of the
Company's loan portfolio at December 31, 1997. All commercial loans are held
in the Bank's loan portfolio. These loans consist of loans and lines of credit
to individuals, partnerships and corporations for a variety of business
purposes, such as accounts receivable and inventory financing, equipment
financing, business expansion and working capital. The terms of the Bank's
commercial loans generally range from three months to seven years, and the loans
generally carry interest rates which adjust in accordance with changes in the
prime rate. Substantially all of the Bank's commercial loans are secured and
guaranteed by the principals of the business.
Loans secured by marketable equipment are required to be amortized over a
period not to exceed 84 months. Generally, loans secured by current assets such
as inventory or accounts receivable are revolving lines of credit with annual
maturities, however, loans made for permanent working capital and secured by
inventory or accounts receivable are required to be amortized over a period not
to exceed 60 months. Loans secured by chattel mortgages and accounts receivable
may not exceed 80% of their market value. Loans secured by listed stocks,
municipal bonds and mutual funds may not exceed 75% of their market value.
Unsecured short-term loans and lines of credit must meet criteria set by the
Bank's Loan Committee. All loans in excess of $10,000 must be supported by
current financial statements, and such financial statements must be updated
annually. Commercial loans generally entail a greater credit risk than
residential mortgage loans but also provide a higher yield than residential
mortgage loans and add diversity to the loan portfolio.
39
<PAGE>
Real Estate - Construction Loans
Of the Company's loans outstanding at December 31, 1997, $8,308,349 or
14.53% were construction loans and acquisition and development loans. All
construction and acquisition and development loans are held in the Bank's loan
portfolio. The Bank makes residential construction loans to owner-occupants and
to persons building residential properties for resale. The majority of the
Bank's construction loans are made to residential real estate developers for
speculative single-family residential properties. Construction loans are
usually variable rate loans made for terms of six months, but extensions are
permitted if construction has continued satisfactorily and if the loan is
current and other circumstances warrant the extension. Construction loans are
limited to 85% of the appraised value of the lot and the completed value of the
proposed structure. In response to competitive conditions, the Bank permits a
portion of its single family residential construction loans extended to builders
to be made without commitments for "take-out" or permanent financing from third
parties.
Construction financing generally is considered to involve a higher degree
of credit risk than permanent mortgage financing of residential properties, and
this additional risk usually is reflected in higher interest rates. The higher
risk of loss on construction loans is attributable in large part to the fact
that loan funds are estimated and advanced upon the security of the project
under construction, which is of uncertain value prior to the completion of
construction. Moreover, because of the uncertainties inherent in estimating
construction costs, delays arising from labor problems, material shortages and
other unpredictable contingencies, it is relatively difficult to accurately
evaluate the total loan funds required to complete a project and to accurately
evaluate the related loan-to-value ratios. If the estimates of construction
costs and the salability of the property upon completion of the project prove to
be inaccurate, the Bank may be required to advance funds beyond the amount
originally committed to permit completion of the project. If the estimate of
value proves to be inaccurate, the Bank may be confronted, at or prior to the
maturity of the loan, with a project with a value which is insufficient to
assure full repayment.
The Bank's underwriting criteria are designed to evaluate and minimize the
risk of each construction loan. Among other items, the Bank considers evidence
of the availability of permanent financing or a take-out commitment to the
borrower, the financial strength and reputation of the borrower, an independent
appraisal and review of cost estimates, market conditions, and, if applicable,
the amount of the borrower's equity in the project, pre-construction sale or
leasing information and cash flow projections of the borrower.
Real Estate - Mortgage Loans
At December 31, 1997, real estate - mortgage loans totaled $30,833,493 or
53.91% of the Company's loan portfolio. Real estate - mortgage loans include
all loans secured by real estate for purposes other than construction or
acquisition and development and are hereinafter referred to as real estate
loans. All real estate loans are held in the Bank's loan portfolio. Of this
amount, $12,067,065 or 21.10% of the Company's loan portfolio was comprised of
loans secured by one to four family residential properties, including home
equity loans (loans secured by the equity in the
40
<PAGE>
borrower's residence but not necessarily for the purpose of home improvement).
Most of these home equity loans are made at fixed interest rates for terms of
one to three years with balloon payment provisions and amortized over a 10-15
year period. Another product called the "Community Equity Line" is offered by
the Bank which allows consumers to borrow with low closing costs on the equity
in their homes. This product is a variable rate revolving line of credit, having
an outside maturity of 5 years with 1.5% of the average daily balance due
monthly. The Bank's experience indicates that real estate loans normally remain
outstanding for much shorter periods (seven years on average) than their stated
maturity because the borrowers repay the loans in full either upon the sale of
the secured property or upon the refinancing of the original loan.
In the case of owner occupied single family residences, real estate loans
are made for up to 85% of the value of the property securing the loan, based
upon an appraisal if the loan amount is over $25,000. When the loan is secured
by real estate containing a non-owner occupied dwelling of one to four family
units, loans generally are made for up to 80% of the value, based upon an
appraisal if the loan amount is over $25,000. The Bank also requires title
insurance to insure the priority of the property lien on its real estate loans
over $25,000 and requires fire and casualty insurance on all of its loans.
The real estate loans originated by the Bank contain a "due-on-sale" clause
which provides that the Bank may declare the unpaid balance of the loan
immediately due and payable upon the sale of the mortgaged property. Such
clauses are an important means of reducing the average loan life and increasing
the yield on existing fixed-rate real estate loans, and it is the Bank's policy
to enforce due-on-sale clauses.
At December 31, 1997, the remainder of the Company's real estate loans,
$18,766,428 or 32.81% of the Company's loan portfolio, were comprised of non-
farm nonresidential real estate loans (including commercial real estate loans
and loans secured by raw land).
Consumer Loans
At December 31, 1997, consumer loans totaled $10,281,657 or 17.98% of the
Company's loan portfolio. Of these loans, $8,863,432 or 86.21% are held in the
Bank's loan portfolio, with the remainder held in CLC's loan portfolio.
The Bank makes both secured and unsecured consumer loans for a variety of
personal and household purposes. Most of the Bank's consumer loans are
automobile loans, boat loans, property improvement loans and loans to depositors
on the security of their certificates of deposit. These loans are generally
made for terms of up to five years at fixed interest rates. The Bank considers
consumer loans to involve a relatively high credit risk compared to real estate
loans. Consumer loans, therefore, generally yield a relatively high return to
the Bank and provide a relatively short maturity. The Bank believes that the
generally higher yields and the shorter terms available on various types of
consumer loans tend to offset the relatively higher risk associated with such
loans, and contribute to a profitable spread between the Bank's average yield on
earning assets and the Bank's cost of funds.
41
<PAGE>
At December 31, 1997, consumer loans held in CLC's loan portfolio totaled
$1,418,225 or 2.48% of the Company's loan portfolio. CLC, a consumer finance
company, makes loans for up to $3,000 with original maturities of up to three
years under the Georgia Industrial Loan Act ("GILA"). The Company considers
these loans to involve a relatively high credit risk compared to other loans in
the Company's portfolio. These consumer loans generally yield a higher return
to the Company than consumer loans originated by the Bank. The Company believes
that the generally higher yields on CLC's loan portfolio offset the higher risk
associated with such loans and contribute to a profitable spread between the
Company's yield on earning assets and the Company's cost of funds.
In May 1996, the Bank began to issue MasterCard and VISA credit cards to
applicants who meet the Bank's credit standards. The credit approval policy is
similar to that which the Bank uses for any consumer loan customer. As of
December 31, 1997, credit card loans totaled $1,127,266, or 1.97% of the
Company's gross loan portfolio. The Bank considers credit card loans to involve
a relatively high credit risk compared to other types of loans offered by the
Bank, even though management considers its credit approval policy to be
conservative. Credit card loans, therefore, generally yield a relatively high
return to the Bank. The Bank believes that the generally higher yields
available on credit card loans tend to offset the relatively higher risk
associated with such loans, and contribute to a profitable spread between the
Bank's average yield on earning assets and the Bank's cost of funds.
Origination, Purchase and Sale of Loans
- ---------------------------------------
The Bank originates loans primarily in Paulding County, Georgia. The Bank
also originates loans in Cobb, Douglas, and Bartow Counties, each of which is
contiguous to Paulding County. Loans are originated by eight loan officers who
operate from the Bank's offices in Hiram and Dallas, Georgia. These loan
officers actively solicit loan applications from existing customers, local
manufacturers and retailers, builders, real estate developers, real estate
agents and others. The Bank also receives numerous loan applications as a
result of customer referrals and walk-ins to its offices. Management of the Bank
currently anticipates that the Bank will open a loan production office in Cobb
County, Georgia in the second quarter of 1998. Management expects to have one
lender who will originate loans from the Cobb location.
Upon receipt of a loan application and all required supporting information
from a prospective borrower, the Bank obtains a credit report and verifies
specific information relating to the loan applicant's employment, income and
creditworthiness. For significant extensions of credit, a certified appraisal
of the real estate intended to secure the proposed loan is undertaken by an
independent appraiser approved by the Bank. The Bank's loan officers then
analyze the creditworthiness of the borrower and the value of any collateral
involved.
The Bank's loan approval process is intended to be conservative but also
responsive to customer needs. Loans are approved in accordance with the Bank's
written loan policy, which provides for several tiers of approval authority,
based on a borrower's aggregate debt with the Bank. The President, the Executive
Vice President, the Senior Vice-President of Asset Quality, and the Vice-
President have the authority to approve loans of up to $50,000. All other loan
officers have
42
<PAGE>
the authority to approve secured loans of up to $35,000. There is a Loan
Committee comprised of the senior officers of the Bank which must approve any
loan that increases the borrower's aggregate indebtedness above an individual
officer's limit, but that is not more than $100,000. The Loan Committee of the
Board of Directors, comprised of the President and five non-employee Directors,
must approve all loans over $100,000, and all lending relationships where a
borrower's aggregate indebtedness to the Bank exceeds $100,000.
From time to time, the Bank may participate in loans with other financial
institutions by either buying or selling part of a loan. The purchase of a loan
participation allows the Bank to expand its loan portfolio and increase
profitability while still maintaining the high credit standards which are
applied to all extensions of credit made by the Bank. The sale of loan
participations allows the Bank to make larger loans which it otherwise would be
unable to make due to capital or other funding considerations. For 1997 and
1996, the Bank sold loan participations of $4,317,244 and $1,230,200
respectively, and purchased loan participations of $2,104,279 and $400,000,
respectively.
CLC originates loans primarily in Cherokee, Polk, Walker and Hall Counties,
which are all located in north Georgia. Loans are originated by eleven lenders
who operate from CLC's offices in Rockmart, Rossville, Woodstock, and
Gainesville, Georgia. These lenders actively solicit loan applications from
existing customers. CLC also originates loans through a conditional sales
contract program with two retailers at this time. CLC intends to expand the
program with similar arrangements through other retailers. All loans made
through this program must meet CLC's ordinary credit standards. CLC receives
numerous loan applications as a result of customer referrals and walk-ins to its
offices.
Loan Fee Income
- ---------------
In addition to interest earned on loans, the Bank receives origination fees
for making loans, commitment fees for making certain loans, and other fees for
miscellaneous loan-related services. Such fee income varies with the volume of
loans made, prepaid or sold, and the rates of fees vary from time to time
depending on the supply of funds and competitive conditions.
Commitment fees are charged by the Bank to the borrower for certain loans
and are calculated as a percentage of the principal amount of the loan. These
fees normally are deducted from the proceeds of the loan and generally range
from 1/2% to 2% of the principal amount, depending on the type and volume of
loans made and market conditions such as the demand for loans, the availability
of money and general economic conditions.
The Bank also receives miscellaneous fee income from late payment charges,
overdraft fees, property inspection fees, and miscellaneous services related to
its existing loans. For the year ended December 31, 1997, the Bank recognized
origination, commitment and other loan fees totaling $575,498, which equaled
12.19% of the Company's net interest income for such year. For the years ended
December 31, 1996 and 1995, the Bank recognized origination, commitment and
other loan fees totaling $651,219 and $537,630, respectively, which equaled
15.55% and 15.84%, respectively,
43
<PAGE>
of the Company's net interest income for such years.
CLC receives miscellaneous fee income from late payment charges, loan fees,
maintenance fees, and miscellaneous services related to its existing loans. For
the year ended December 31, 1997, CLC recognized loan fees totaling $236,307,
which equaled 5.01% of the Company's net interest income for such year. For the
year ended December 31, 1996, CLC recognized loan fees totaling $186,010, which
equaled 4.44% of the Company's net interest income for such year.
Problem Loans and Allowance for Loan Losses
- -------------------------------------------
Problem Loans
In originating loans, the Company recognizes that credit losses will be
experienced and that the risk of loss will vary with, among other things, the
type of loan being made, the creditworthiness of the borrower over the term of
the loan and, in the case of a secured loan, the guaranty or the security for
the loan. The Company has instituted measures at both the Bank and CLC which
are designed to reduce the risk of, and monitor exposure to, credit losses.
The Bank's loan portfolio is periodically reviewed by the Bank's management
to identify deficiencies and to take corrective actions as necessary. As
discussed below, each of the Bank's loans is assigned a rating in accordance
with the Bank's internal loan rating system and is reviewed monthly to update
its rating in accordance with the performance of the loan. All past due loans
are reviewed weekly by the Bank's senior lending officers and monthly by the
Loan Committee of the Board of Directors, and all loans classified as
substandard or doubtful, as well as any "special mention" loans, are reviewed at
least monthly by the Loan Committee. In addition, all loans to a particular
borrower are reviewed, regardless of classification, each time such borrower
requests a renewal or extension of any loan or requests an additional loan. All
lines of credit are reviewed annually prior to renewal. Such reviews include,
but are not limited to, the ability of the borrower to repay the loan, a re-
assessment of the borrower's financial condition, the value of any collateral
and the estimated potential loss to the Bank, if any.
The Bank's internal problem loan rating system establishes three
classifications for problem assets: substandard, doubtful and loss.
Additionally, in connection with regulatory examinations of the Bank, federal
and state examiners have authority to identify problem assets and, if
appropriate, require the Bank to classify them. Substandard assets have one or
more defined weaknesses and are characterized by the distinct possibility that
the Bank will sustain some loss if the deficiencies are not corrected. Doubtful
assets have the weaknesses of substandard assets with the additional
characteristic that the weaknesses make collection or liquidation in full, on
the basis of currently existing facts, conditions and values, highly
questionable and improbable. An asset classified as loss is considered
uncollectible and of such little value that continuance as an asset of the Bank
is not warranted. Consequently, such assets are charged-off in the month they
are classified as loss. Federal regulations also designate a "special mention"
category, described as assets which do not currently expose the Bank to a
sufficient degree of risk to warrant classification but do possess credit
deficiencies or potential weaknesses deserving management's close attention.
44
<PAGE>
Assets classified as substandard or doubtful require the Bank to establish
general allowances for loan losses. If an asset or portion thereof is
classified as loss, the Bank must either establish specific allowances for loan
losses in the amount of 100% of the portion of the asset classified as loss or
charge off such amount. General loss allowances established to cover possible
losses related to assets classified as substandard or doubtful may be included,
up to certain limits, in determining the Bank's regulatory capital, while
specific valuation allowances for loan losses do not qualify as regulatory
capital.
The Bank's collection procedures provide that when a loan becomes 10 days
delinquent, the borrower is contacted by mail and payment is requested. If the
delinquency continues, subsequent efforts are made to contact and request
payment from the delinquent borrower. Most loan delinquencies are cured within
60 days and no legal action is required. In certain circumstances, the Bank,
for a fee, may modify the loan, grant a limited moratorium on loan payments or
revise the payment schedule to enable the borrower to restructure his or her
financial affairs. The Bank has no restructured loans as of December 31, 1997.
Generally, the Bank stops accruing interest on delinquent loans when payment is
in arrears for 90 days (unless the obligation is both well secured and in the
process of collection) or when collection otherwise becomes doubtful. If the
delinquency exceeds 120 days and is not cured through the Bank's normal
collection procedures or through a restructuring, the Bank will institute
measures to enforce its remedies resulting from the default, including
commencing a foreclosure, repossession or collection action. In certain cases,
the Bank will consider accepting a voluntary conveyance of collateral in lieu of
foreclosure or repossession. Real property acquired by the Bank as a result of
foreclosure or by deed in lieu of foreclosure is classified as "real estate
owned" until it is sold and is carried at the lower of cost (defined as fair
value at foreclosure) or fair value less estimated costs to dispose. Accounting
standards define fair value as the amount that is expected to be received in a
current sale between a willing buyer and seller other than in a forced or
liquidation sale. Fair values at foreclosure are based on appraisals. Losses
arising from the acquisition of foreclosed properties are charged against the
allowance for loan losses. Subsequent writedowns are provided by a charge to
income through losses on other real estate in the period in which the need
arises.
The Bank attempts to sell real estate owned promptly after foreclosure, and
it sold $37,045 of its real estate owned due to loan foreclosures during the
year ended December 31, 1997. The book value of real estate owned that was sold
by the Bank during the year ended December 31, 1997 totaled $37,365. As of
December 31, 1997, there was no real estate owned as a result of foreclosure.
CLC's loan portfolio is periodically reviewed by CLC's management to
identify deficiencies and to take corrective actions as necessary. All past due
loans are reviewed daily by each CLC Office Manager and monthly by CLC's
President. CLC's Board of Directors reviews the total loans considered over 90
days delinquent in their bi-monthly meetings. The Board compares delinquency
rates on an office-by-office basis. CLC's collection procedures provide that
when a loan becomes 5 days delinquent, the borrower is contacted by mail and
payment is requested. If the delinquency continues, subsequent efforts are made
to contact and request payment from the delinquent borrower. Most loan
delinquencies are cured within 90 days and no legal action is required.
Generally, when an account reaches 90 to 120 days with no payment collected in
that time frame, notice will be
45
<PAGE>
mailed to the customer stating that CLC is taking legal action against them
unless the account is brought to a current status within 10 days. If the
customer does not respond within that time frame, CLC typically will file suit
against the parties involved in the local Magistrate Court. Generally, CLC's
policy is to charge off any loan on which CLC has not received a payment in 6
months. Management may determine that a loan is in the process of collection
and, therefore, the past due loan does not have to be charged off. CLC's loans
which are past due 90 days or more total $97,196 as of December 31, 1997, as
compared to $92,202 as of December 31, 1996.
The following table sets forth information regarding the Company's
delinquent and nonperforming assets as of the dates indicated.
<TABLE>
<CAPTION>
At December 31,
---------------------
1997 1996
--------- ---------
<S> <C> <C>
Accruing loans which are contractually
past due 90 days or more:
Commercial, financial and agricultural... -0- -0-
Real estate - construction............... -0- -0-
Real estate - mortgage................... $ 80,381 $ 37,365
Consumer................................. 97,406 99,283
-------- --------
Total.................................. $177,787 $136,648
======== ========
Ratio of delinquent but accruing loans to:
Total loans............................ .31% .28%
Total assets........................... .19% .16%
Nonaccruing loans:
Commercial, financial and agricultural..... $ 37,650 $ 23,850
Real estate - construction................. -0- -0-
Real estate - mortgage..................... 154,313 432
Consumer loans............................. 200,372 5,955
-------- --------
Total.................................. $392,335 $ 30,237
======== ========
Real estate acquired through foreclosure..... $ -0- $ -0-
Property acquired through repossession....... $ 1,500 $ 3,000
Ratio of nonperforming assets to:
Total loans and real estate acquired
through foreclosure and repossessions... .69% .07%
Total assets............................ .43% .04%
</TABLE>
The Bank recorded interest income on the nonaccruing loans listed above for
the fiscal year ended December 31, 1997 of $10,818. The gross interest income
that would have been recorded during the fiscal year ended December 31, 1997 if
the nonaccruing loans listed above had been current in accordance with their
original terms would have been $23,677.
46
<PAGE>
Allowance for Loan Losses
The allowance or reserve for possible loan losses is a means of absorbing
future losses which could be incurred from the current loan portfolio. Both the
Bank and CLC maintain an allowance for possible loan losses, and management
adjusts the general allowances monthly by charges to income in response to
changes to outstanding loan balances.
The Bank maintains a general allowance equal to approximately 1.50% of the
total principal amount of loans outstanding (less the total principal amount of
loans outstanding that are secured by certificates of deposit), and management
adjusts the general allowance monthly by charges or credits to income in
response to changes in the outstanding loan balance. Management also may
establish specific loan loss allowances for specific loans after considering
such factors as past delinquencies on the loan, the value of the underlying
collateral and the size of the loan. The Bank began a special allowance in 1996
equal to 4% of the outstanding balances in its credit card portfolio, in
acknowledgment of the risk related with this type of credit product. As of
December 31, 1997, management was not aware of any specific loan problems which
necessitated a specific loan loss reserve. A loan or portion thereof is charged
off against the general allowance when management has determined that losses on
such loans are probable. Recoveries on any loans charged off in prior fiscal
periods are credited to the allowance. It is the opinion of the Bank's
management that the balance in the general allowance for loan losses as of
December 31, 1997, is adequate to absorb possible losses from loans currently in
the portfolio.
CLC maintains a general allowance for possible loan losses, in addition to
the fact that a majority of the loans in CLC's portfolio are insured in case of
default by the borrower. CLC may be reimbursed for any covered loan balance
which goes into default. CLC's Board of Directors reviews the general allowance
for loan loss on a quarterly basis to review its adequacy in covering any future
losses that may be sustained by CLC.
47
<PAGE>
The following table summarizes the Company's loan loss experience for the
periods indicated.
<TABLE>
<CAPTION>
Years Ended December 31,
--------------------------
1997 1996
----------- -----------
<S> <C> <C>
Average loans.............................................................. $52,395,119 $46,043,727
Allowance for possible loan losses,
beginning of the period................................................ 713,518 583,306
Charge-offs for the period:
Commercial, financial and agricultural................................. 7,459 1,092
Real estate - construction............................................. -0- -0-
Real estate - mortgage................................................. 752 -0-
Consumer............................................................... 137,614 89,171
----------- -----------
Total charge-offs........................................................ $ 145,825 $ 90,263
----------- -----------
Recoveries for the period:
Commercial, financial and agricultural................................. $ 8,734 $ 1,318
Real estate - construction............................................. -0- -0-
Real estate - mortgage................................................. 787 1,613
Consumer............................................................... 47,748 19,703
----------- -----------
Total recoveries......................................................... $ 57,269 $ 22,634
----------- -----------
Net charge-offs for the period........................................ $ 88,556 $ 67,629
----------- -----------
Provision for loan losses.................................................. $ 204,270 $ 197,841
Allowance for possible loan losses,
end of the period........................................................ $ 829,232 $ 713,518
=========== ===========
Ratio of allowance for loan losses to
total average loans outstanding.......................................... 1.58% 1.55%
Ratio of net charge-offs during
the period to average loans
outstanding during the period............................................ .17% .15%
</TABLE>
In addition to the Bank's loan rating system for problem assets described
above (see "Problem Loans," above), the Bank has established a loan rating
system for all categories of loans which assists management and the Board of
Directors in determining the adequacy of the Bank's allowance for loan losses.
Each loan in the Bank's portfolio is assigned a rating which is reviewed by
management periodically to ensure its continued suitability. An exception is
made in the case of (i) monthly installment loans which are grouped together by
delinquency status such as over 10, 30, 60, or 90 days past due and (ii) problem
assets which are rated as substandard, doubtful, or
48
<PAGE>
loss as discussed above. All other loans are assigned a rating of excellent,
good, or moderate. The total amount of loans in each of these loan rating
categories is weighted by a factor that management believes reasonably reflects
losses that can be anticipated with respect to loans in each of these
categories. Based on these weightings, the Bank's management establishes an
allowance for loan losses that is reviewed by its Board of Directors each month.
The following table sets forth the Company's allocation of the allowance
for loan losses as of December 31, 1997 and 1996.
<TABLE>
<CAPTION>
At December 31, 1997 At December 31, 1996
---------------------------- -------------------------------
Percent of loans Percent of loans
in each category in each category
Balance at end of period applicable to: Amount to total loans Amount to total loans
- --------------------------------------- ------ ---------------- ------ --------------
<S> <C> <C> <C> <C>
Commercial, financial and agricultural.... $ 76,141 13.58% $ 72,811 11.82%
Real estate - construction................ 40,045 14.53% 66,193 14.72%
Real estate - mortgage.................... 221,962 53.91% 237,943 54.50%
Consumer.................................. 124,424 17.98% 105,956 18.96%
Unallocated............................... 366,660 N/A 230,615 N/A
-------- ------ -------- ------
Total................................ $829,232 100.00% $713,518 100.00%
======== ======= ======== =======
</TABLE>
INVESTMENT ACTIVITIES
Interest earned on investments in securities, on interest-bearing deposits
in other banks and on federal funds sold provides the second largest source of
revenues for the Company after interest on loans, constituting $1,555,174 or
17.60% of total interest and other income for the year ended December 31, 1997.
The Company's investment portfolio totaled approximately $23,322,111 or 25.38%
of total assets at December 31, 1997. The entire investment portfolio is held
by the Bank. The portfolio is designed to enhance liquidity while providing
acceptable rates of return. Bank policy limits securities investments to
securities having a rating of no less than "BAA" by Moody's Investors Service,
Inc. or "BBB" by Standard and Poor's Corporation.
The following table sets forth the carrying value of the Bank's investments
at the dates indicated. All securities held are available for sale and are
carried at fair market value.
<TABLE>
<CAPTION>
1997 1996
----------- -----------
<S> <C> <C>
U.S. Government and agency
obligations................................ $17,826,801 $19,701,854
Other bonds, notes, debentures
and securities............................. 301,100 255,000
States & political subdivisions tax-exempt... 5,194,210 2,716,836
----------- -----------
Total..................................... $23,322,111 $22,673,690
=========== ===========
</TABLE>
49
<PAGE>
The following table sets forth the fair value of the Bank's investments at
December 31, 1997, the weighted average yields on the Bank's investments at
December 31, 1997, and the periods to maturity of the Bank's investments from
December 31, 1997.
<TABLE>
<CAPTION>
Periods to Maturity from December 31, 1997
--------------------------------------------------------------------------------------------
1 year or less 1 - 5 years 5 - 10 years Over 10 years
-------------------- -------------------- -------------------- --------------------
Weighted Weighted Weighted Weighted
Average Average Average Average
Amount Yield (1) Amount Yield (1) Amount Yield (1) Amount Yield (1)
------ ---------- ------ ---------- ------ ---------- ------ ----------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
U. S. Government
agencies................... $2,886,171 6.06% $ 5,141,983 6.05% $ -0- -0- $ 911,989 3.98%
U. S. Treasuries.............. -0- -0- 6,815,948 6.10% -0- -0- -0- -0-
U. S. Government agencies -
mortgage-backed............ -0- -0- 623,314 4.58% 241,195 5.43% 1,206,201 5.96%
Tax-exempt
municipal bonds............ 250,000 6.45% 1,577,812 7.29% 481,130 7.22% 2,885,268 8.35%
Other bonds, notes, de-
bentures, and securities... 301,100 7.92% -0- -0- -0- -0- -0- -0-
---------- ---- ----------- ---- -------- ---- ---------- ----
Total...................... $3,437,271 6.26% $14,159,057 6.14% $722,325 6.62% $5,003,458 7.06%
========== =========== ======== ==========
</TABLE>
- ---------------
(1) The weighted average yields on tax-exempt securities have been computed on
a tax-equivalent basis.
The following table sets forth, as of December 31, 1997, the aggregate
estimated fair market value, which is the carrying value, of the securities
of issuers in which the aggregate estimated fair market value of the
Company's investment exceeds 10% of the Company's stockholders' equity.
<TABLE>
<CAPTION>
Estimated Aggregate
Fair Market Value
At December 31, 1997
--------------------
<S> <C>
Federal Home Loan Bank................... $3,000,058
Federal National Mortgage Association.... 4,724,458
Federal Home Loan Mortgage Corporation... 1,662,657
Paulding County Municipal Bonds (1)...... 2,403,600
--------------------
</TABLE>
(1) Generally, municipal bonds held by the Company are insured by a
private, third-party insurer for the full amount of principal and interest
due.
50
<PAGE>
SOURCES OF FUNDS
General
- -------
Time, money market, savings and demand deposits are the major source of the
Company's funds for lending and other investment purposes. All deposits are
held by the Bank. In addition, the Company obtains funds from loan principal
repayments and proceeds from sales of loan participations and investment
securities. Loan repayments are a relatively stable source of funds, while
deposit inflows and outflows and sales of loan participations and investment
securities are significantly influenced by prevailing interest rates, economic
conditions and the Company's asset and liability management strategies.
Borrowings may be used on a short-term basis to compensate for reductions in the
availability of other sources of funds or on a longer term basis to support
expanded lending activities and for other general business purposes.
Additionally, in 1997, the Company established a $2,500,000 revolving credit
facility with The Bankers Bank, Cobb County, Georgia. The Company received
$800,000 in proceeds from this note payable during 1997. As of April 1, 1998,
the Company had $1,420,000 in borrowings outstanding under this facility.
Deposits
- --------
The Bank offers several types of deposit accounts, with the principal
differences relating to the minimum balances required, the time period the funds
must remain on deposit and the interest rate. Deposits are obtained primarily
from the Bank's Paulding County market area. The Bank does not advertise for
deposits outside of this area, and as a result an insignificant amount of the
Bank's deposits are from out-of-state sources. The Bank does not solicit funds
from brokers, nor does it rely upon any single person or group of related
persons for a material portion of its deposits.
A principal source of deposits for the Bank consists of short-term money
market and other accounts which are highly responsive to changes in market
interest rates. Accordingly, the Bank, like all financial institutions, is
subject to short-term fluctuations in deposits in response to customer actions
due to changing short-term market interest rates. The ability of the Bank to
attract and maintain deposits and the Bank's cost of funds have been and will
continue to be significantly affected by money market conditions.
51
<PAGE>
The following table sets forth the composition of deposits for the Company,
excluding accrued interest payable, by type of account and weighted average
interest rate for the years ended December 31, 1997, and December 31, 1996.
<TABLE>
<CAPTION>
1997 1996
-------------------------------- ---------------------------------------
Interest Interest
Type of Account Rate Amount Percent Rate Amount Percent
- --------------- ----- ----------- ---------- ---------- ----------- ------------
<S> <C> <C> <C> <C> <C> <C>
Demand deposits....................... -0- $12,105,179 14.77% -0- $ 9,648,648 12.55%
NOW accounts.......................... 1.72% 9,710,739 11.85% 1.89% 8,757,099 11.39%
Money market
deposits............................. 2.89% 8,933,508 10.90% 2.88% 8,454,539 10.99%
Savings deposits...................... 3.06% 14,808,283 18.06% 3.17% 15,546,932 20.22%
Time deposits......................... 5.94% 36,423,394 44.42% 5.91% 34,490,543 44.85%
---- ----------- --------- --------- ----------- -----------
Total deposits.................. 4.33% $81,981,103 100.00% 4.35% $76,897,761 100.00%
==== =========== ========= ========= =========== ===========
</TABLE>
The following table sets forth the amount of time deposits maturing in the
periods indicated at December 31, 1997.
<TABLE>
<CAPTION>
Amount Maturing
---------------------------------------------------------------
Within Within Within After
1 Year 2 Years 3 Years 3 Years Total
------ ------- ------- ------- -----
<S> <C> <C> <C> <C> <C>
4% - 6%............................................... 18,609,085 3,333,216 288,648 -0- $22,230,949
6% - 8%............................................... 5,969,765 2,466,180 2,713,111 3,043,389 $14,192,445
</TABLE>
The following table sets forth the maturity distribution of negotiable time
deposits of $100,000 or more at December 31, 1997.
<TABLE>
<CAPTION>
Time Deposits
$100,000 or more
----------------
<S> <C>
3 months or less.................. $ 4,901,321
Over 3 months through 6 months.... 1,327,596
Over 6 months through 12 months... 2,992,309
Over 12 months.................... 5,612,528
-----------
Total outstanding.............. $14,834,114
</TABLE>
Borrowings
- ----------
The Bank has not borrowed any funds to date, although the Bank has
available two term federal funds lines of credit with correspondent banks, in
the amounts of $2,000,000 and $1,000,000, respectively. In addition, the Bank
has the right to borrow from the Federal Reserve Bank of Atlanta if necessary to
supplement its supply of funds available for lending and to meet deposit
withdrawal requirements. The Bank is a member of the Federal Home Loan Bank of
Atlanta and borrowings are also available through that relationship. The amount
of credit available from the Federal Home Loan Bank of Atlanta fluctuates based
on criteria set by that institution.
52
<PAGE>
Additionally, the Company's $2,500,000 line of credit with The Bankers Bank is
intended to enhance the Company's liquidity. At December 31, 1997, a total of
$800,000 had been drawn and was outstanding under the Company's line of credit
with The Bankers Bank.
RETAIL SERVICES
The Bank provides its customers with a variety of retail banking services.
The Bank is a member of the HONOR(R) and CIRRUS(R) systems of automated teller
machines and point of sale terminals, which provide Bank customers with access
to HONOR(R) and CIRRUS(R) services throughout the world. The Bank maintains
three full-service ATMs and twenty-one Mini-ATM locations throughout its market
area. These Mini-ATMs issue scrip, instead of cash, which may be redeemed by
the customer only at the establishment where the Mini-ATM is located. The Bank
also provides (in addition to the lending and deposit services described above)
a variety of checking accounts, savings programs, night depository services,
safe deposit facilities and credit card plans (MasterCard and VISA).
SECURITIES BROKERAGE AND INSURANCE SERVICES
The Bank makes securities brokerage execution services available to its
customers through PrimeVest Financial Services, Inc. at commissions which are up
to 50% less than standard brokerage commissions. Beginning in January, 1998,
the Bank began affording its customers access to a broad range of insurance and
investment-related services, including insurance needs analysis, retirement and
estate planning alternatives, money management strategies and college tuition
and other savings options. These services are being provided through Robert B.
Maxwell, III, an independent, state-licensed insurance agent. Mr. Maxwell is an
independent contractor affiliated with Massachusetts Mutual Life Insurance
Company.
COMPETITION
Based on total assets of approximately $89,607,990 at December 31, 1997,
the Bank is presently one of the smaller financial institutions with offices in
Paulding County. The Bank faces strong competition for deposits and loans from
five other financial institutions, two of which are community banks that
expanded their services from adjacent Cobb County into Paulding County in 1996.
Two of the larger financial institutions have greater resources and lending
limits than the Bank, and have several branch offices. A federal credit union
owned by the employees of a local public utility company also has opened a
branch in Paulding County. Since credit unions are not subject to income taxes
in the way that commercial banks are taxed, credit unions have an advantage in
offering competitive rates to potential customers. The Bank also competes for
deposits and loans with commercial banks and thrift institutions in metropolitan
Atlanta, some of which are affiliated with large regional financial
institutions. The Bank also faces competition in certain areas of its business
from mortgage banking companies, consumer finance companies, insurance
companies, money market mutual funds and investment banking firms, some of which
are not subject to the same degree of regulation as the Bank.
53
<PAGE>
The Bank competes for deposits principally by offering depositors a variety
of deposit programs with competitive interest rates, quality service and
convenient locations and hours. The Bank competes for loans by offering
competitive interest rates and loan fees, timely processing and quality service.
The Bank believes that its relatively small size permits it to offer more
personalized services than many of its competitors.
The competitive pressures among commercial banks, thrift institutions and
other financial services entities have increased significantly in recent years
and are expected to continue to do so. The establishment of money market
accounts and the elimination of rate controls for interest rates paid on
deposits in the early 1980's, for example, have increased the competition for
deposits and tend to increase the Bank's cost of funds, especially during
periods of high interest rates.
Within Georgia, competition among financial institutions is increasing due
to a number of factors including, but not limited to, the acquisition of
Georgia-based financial institutions by out-of-state financial institutions.
With regard to interstate transactions, recently enacted federal legislation
permits interstate bank acquisitions, without regard to conflicting state laws
which purport to restrict or prohibit such acquisitions. See "Supervision and
Regulation--Other Legislation" below. Additionally, the Financial Institutions
Reform, Recovery and Enforcement Act of 1989 ("FIRREA") amended the federal Bank
Holding Company Act of 1956 (the "BHCA") to permit the acquisition of healthy
savings institutions by bank holding companies. Prior to FIRREA, bank holding
companies could acquire only troubled thrifts. As a result of FIRREA, Georgia-
based thrift institutions may now be acquired by bank holding companies
headquartered in Georgia or out-of-state.
In addition to facing increased competition from out-of-state financial
institutions, Georgia-based financial institutions are now likely to face
increased competition from other Georgia-based banks. The Georgia legislature
enacted legislation which, effective July 1, 1996, allowed Georgia-based banks
to branch into up to three counties in addition to the county in which their
main office is located. This same legislation will eliminate all branching
restrictions, thereby permitting unrestricted state-wide branching, effective
July 1, 1998.
Consolidations of Georgia banking or thrift institutions with out-of-state
institutions could increase the presence in Georgia of out-of-state financial
institutions with substantially greater assets and resources than the Bank.
Additionally, the erosion of state law restrictions on intrastate branching may
result in the opening of branch banks in Paulding County by banks that
previously had been prohibited from doing so. Similarly, federal savings
institutions, with which the Bank competes for loans and deposits, are permitted
to branch statewide. One such institution has recently opened a Paulding County
branch.
54
<PAGE>
EMPLOYEES
As of December 31, 1997, the Bank had 52 full-time and 20 part-time
employees, Metroplex had two full-time employees and one part-time employee, CLC
had nine full-time and one part-time employees and CashTrans had four full-time
employees and three part-time employees. No employees are covered by collective
bargaining agreements, and the Company considers its relationship with its
employees to be excellent.
SUPERVISION AND REGULATION
General
- -------
As a registered bank holding company, the Company is subject to the
supervision of, and to regular inspection by, the Federal Reserve. The Bank is
organized as a Georgia state-chartered bank which is subject to regulation,
supervision and examination by the Georgia Department. The Bank also is subject
to regulation by the FDIC, and other federal regulatory agencies. In addition
to banking laws, regulations and regulatory agencies, the Company and its
subsidiaries are subject to various other laws and regulations and supervision
and examination by other regulatory agencies, all of which directly or
indirectly affect the operations and management of the Company and its ability
to make distributions. The following discussion summarizes certain aspects of
those laws and regulations that affect the Company.
The activities of the Company and those of companies which the Company
controls or in which the Company holds more than 5% of the voting stock are
limited to banking, managing or controlling banks, furnishing services to or
performing services for its subsidiaries or any other activity which the Federal
Reserve determines to be so closely related to banking or managing or
controlling banks as to be a proper incident thereto. In making such
determinations, the Federal Reserve is required to consider whether the
performance of such activities by a bank holding company or its subsidiaries can
reasonably be expected to produce benefits to the public such as greater
convenience, increased competition or gains in efficiency that outweigh possible
adverse effects, such as undue concentration of resources, decreased or unfair
competition, conflicts of interest or unsound banking practices. Generally,
bank holding companies, such as the Company, are required to obtain prior
approval of the Federal Reserve to engage in any new activity or to acquire more
than 5% of any class of voting stock of any company.
Bank holding companies are also required to obtain the prior approval of
the Federal Reserve before acquiring more than 5% of any class of voting stock
of any bank which is not already majority-owned by the bank holding company.
Pursuant to the Riegle-Neal Interstate Banking and Branching Efficiency Act of
1994 (the "Interstate Banking and Branching Act"), bank holding companies became
able to acquire banks in states other than their home state beginning September
29, 1995, without regard to the permissibility of such acquisitions under state
law, but subject to any state requirement that the bank has been organized and
operating for a minimum period of time, not to exceed five years, and the
requirement that the bank holding company, prior to or following the
55
<PAGE>
proposed acquisition, controls no more than 10% of the total amount of deposits
of insured depository institutions in the United States and less than 30% of
such deposits in that state (or such lesser or greater amount set by state law).
The Interstate Banking and Branching Act also authorizes banks to merge
across state lines, thereby creating interstate branches. This provision, which
was effective June 1, 1997, allowed each state, prior to the effective date, the
opportunity to "opt out" of this provision, thereby prohibiting interstate
branching within that state. Georgia did not "opt out" of the interstate
branching provisions.
Proposals to change the laws and regulations governing the banking industry
are frequently introduced in Congress, in the Georgia legislature and before the
various bank regulatory agencies. The likelihood and timing of any such
proposals or bills being enacted and the impact they might have on the Company
and its subsidiaries cannot be determined at this time.
Capital and Operational Requirements
- ------------------------------------
The Federal Reserve and the FDIC have issued substantially similar risk-
based and leverage capital guidelines applicable to bank holding companies and
banks. In addition, those regulatory agencies may from time to time require that
a banking organization maintain capital above the minimum levels, whether
because of its financial condition or actual or anticipated growth. The Federal
Reserve risk-based guidelines define a two-tier capital framework. Tier 1
capital consists of common and qualifying preferred stockholders' equity, less
certain intangibles and other adjustments. Tier 2 capital consists of
subordinated and other qualifying debt, and the allowance for credit losses up
to 1.25% of risk-weighted assets. The sum of Tier 1 and Tier 2 capital less
investments in unconsolidated subsidiaries represents qualifying total capital,
at least 50% of which must consist of Tier 1 capital. Risk-based capital ratios
are calculated by dividing Tier 1 and total capital by risk-weighted assets.
Assets and off-balance sheet exposures are assigned to one of four categories of
risk weights, based primarily on relative credit risk. The minimum Tier 1
capital ratio is 4% and the minimum total capital ratio is 8%. The Company's
Tier 1 and total risk-based capital ratios under these guidelines at December
31, 1997 were 12.49% and 13.75%, respectively.
The leverage ratio is determined by dividing Tier 1 capital by adjusted
average total assets. Although the stated minimum ratio is 3%, most banking
organizations are required to maintain ratios of at least 100 to 200 basis
points above 3%. The Company's leverage ratio at December 31, 1997, was 8.60%.
The Federal Deposit Insurance Corporation Improvement Act of 1991
("FDICIA"), among other things, identifies five capital categories for insured
depository institutions (well capitalized, adequately capitalized,
undercapitalized, significantly undercapitalized and critically
undercapitalized) and requires the respective Federal regulatory agencies to
implement systems for "prompt corrective action" for insured depository
institutions that do not meet minimum capital requirements within such
categories. FDICIA imposes progressively more restrictive constraints on
56
<PAGE>
operations, management and capital distributions, depending on the category in
which an institution is classified. Failure to meet the capital guidelines
could also subject a banking institution to capital raising requirements. An
"undercapitalized" bank must develop a capital restoration plan and its parent
holding company must guarantee that bank's compliance with the plan. The
liability of the parent holding company under any such guarantee is limited to
the lesser of 5% of the bank's assets at the time it became "undercapitalized"
or the amount needed to comply with the plan. Furthermore, in the event of the
bankruptcy of the parent holding company, such guarantee would take priority
over the parent's general unsecured creditors. In addition, FDICIA requires the
various regulatory agencies to prescribe certain non-capital standards for
safety and soundness related generally to operations and management, asset
quality and executive compensation and permits regulatory action against a
financial institution that does not meet such standards.
The various bank regulatory agencies have adopted substantially similar
regulations that define the five capital categories identified by FDICIA, using
the total risk-based capital, Tier 1 risk-based capital and leverage capital
ratios as the relevant capital measures. Such regulations establish various
degrees of corrective action to be taken when an institution is considered
undercapitalized. Under the regulations, a "well capitalized" institution must
have a Tier 1 capital ratio of at least 6%, a total capital ratio of at least
10% and a leverage ratio of at least 5% and not be subject to a capital
directive order. An "adequately capitalized" institution must have a Tier 1
capital ratio of at least 4%, a total capital ratio of at least 8% and a
leverage ratio of at least 4%, or 3% in some cases. Under these guidelines, the
Bank is considered well capitalized.
Banking regulatory agencies have also adopted final regulations which
mandate that regulators take into consideration concentrations of credit risk
and risks from non-traditional activities, as well as an institution's ability
to manage those risks, when determining the adequacy of an institution's
capital. That evaluation will be made as a part of the institution's regular
safety and soundness examination. Banking regulatory agencies also have adopted
final regulations requiring regulators to consider interest rate risk (when the
interest rate sensitivity of an institution's assets does not match the
sensitivity of its liabilities or its off-balance sheet position) in the
determination of a bank's capital adequacy. Concurrently, banking regulatory
agencies have proposed a methodology for evaluating interest rate risk. After
gaining experience with the proposed measurement process, those banking
regulatory agencies intend to propose further regulations to establish an
explicit risk-based capital charge for interest rate risk.
DESCRIPTION OF CAPITAL STOCK
GENERAL
The Company's authorized capital stock consists of 5,000,000 shares of
Common Stock, $2.50 par value per share, of which, prior to this Offering,
842,320 shares were issued and outstanding. An aggregate of 300,000 shares of
Common Stock have been reserved for issuance under the Company's 1993 Stock
Option Plan (the "Employee Plan") and 1993 Directors Stock
57
<PAGE>
Option Plan (the "Directors' Plan"). Options to acquire 111,269 shares have been
granted under these plans and, of these, options to acquire 105,144 shares
remain outstanding and unexercised.
The holders of Common Stock are entitled to receive dividends when, as and
if declared by the Board of Directors and paid by the Company out of funds
legally available therefor and to share ratably in the assets of the Company
available for distribution after the payment of all prior claims in the event of
any liquidation, dissolution or winding-up of the Company. All outstanding
shares of Common Stock are duly authorized and validly issued, fully paid and
nonassessable.
Holders of Common Stock are entitled to one vote per share on all matters
requiring a vote of stockholders. The Common Stock does not have cumulative
voting rights, which means that the holders of more than 50% of the outstanding
shares of Common Stock voting for the election of directors can elect 100% of
the directors standing for election if they choose to do so. In such event, the
holders of the remaining shares of Common Stock will not be able to elect any of
the directors standing for election. Holders of Common Stock do not have
preemptive rights with respect to the issuance of shares of that or any other
class of stock.
LIMITATIONS ON LIABILITY AND INDEMNIFICATION OF OFFICERS AND DIRECTORS
The Company's Articles of Incorporation provide that no Director of the
Company shall be liable to the Company or its stockholders for monetary damages
for breach of duty of care or other duty as a Director, except for liability (i)
for any appropriation, in violation of his duties, of any business opportunity
of the Company, (ii) for acts or omissions not in good faith or which involve
intentional misconduct or a knowing violation of law, (iii) in respect of
certain unlawful dividend payments or stock redemptions or repurchases, or (iv)
for any transaction from which the Director derived an improper personal
benefit. The effect of this provision is to eliminate the rights of the Company
and its stockholders (through stockholders' derivative suits on behalf of the
Company) to recover monetary damages against a Director for breach of fiduciary
duty as a Director (including breaches resulting from grossly negligent
behavior), except in the situations described above.
The Company's Bylaws provide that each person who is or was a Director,
officer, employee or agent of the Company or who is or was serving, at the
request of the Company, as a director, officer, employee or agent of another
corporation, partnership, joint venture, trust or other enterprise shall be
indemnified by the Company to the full extent permitted or authorized by the
present and future laws of the State of Georgia, against any liability, cost,
payment or expense asserted against him or paid or incurred by him in his
capacity as such a director, officer, employee or agent, whether asserted, paid
or incurred during or after his service as such a director, officer, employee or
agent.
Insofar as indemnification for liabilities arising under the Securities Act
may be permitted to Directors, officers and controlling persons of the Company
pursuant to the foregoing or otherwise, the Company has been advised that in the
opinion of the Commission such indemnification is against public policy as
expressed in the Securities Act and is, therefore, unenforceable.
58
<PAGE>
TRANSFER AGENT AND REGISTRAR
Reliance Trust Company, Atlanta, Georgia, is the transfer agent and
registrar of the Common Stock.
SHARES ELIGIBLE FOR FUTURE SALE
Upon completion of the offering, the Company will have outstanding a
minimum of ________ and a maximum of ____________ shares of Common Stock. Of
these shares, all of the shares of Common Stock offered hereby will be freely
tradeable without restriction or further registration under the Securities Act,
except for shares acquired by "affiliates" of the Company (defined in Rule 144
under the Securities Act as a person who directly or indirectly through the use
of one or more intermediaries controls, is controlled by, or is under common
control with, the Company). In addition, approximately 755,379 shares of Common
Stock presently outstanding will be freely tradeable without restriction or
further registration under the Securities Act.
The remaining 86,941 shares of Common Stock presently outstanding are held
by "affiliates" of the Company. Securities held by "affiliates" may be eligible
for sale in the open market in accordance with the provisions of Rule 144 under
the Securities Act.
In general, under Rule 144, a person (or persons whose shares are
aggregated) who has beneficially owned shares for at least one year, including
"affiliates" of the Company, would be entitled to sell within any three-month
period that number of shares that does not exceed the greater of (i) 1% of the
number of shares of Common Stock then outstanding or (ii) the average weekly
trading volume of the Common Stock during the four calendar weeks preceding such
sale. Sales pursuant to Rule 144 are subject to certain manner of sale
provisions, notice requirements and the availability of current public
information about the Company. A person (or persons whose shares are
aggregated) who is not deemed to have been an affiliate of the Company at any
time during the 90 days preceding a sale, and who has beneficially owned the
shares proposed to be sold for at least two years, would be entitled to sell
such shares under Rule 144(k) without regard to the requirements described
above.
Before this offering, there has been no market for the Company's Common
Stock and it is not expected that a public market for the Common Stock will
exist after this offering. Accordingly, Rule 144 may be unavailable for sales
by affiliates. Furthermore, no predictions can be made regarding the effect, if
any, that sales or the availability of the Common Stock for sale will have on
the price of the Common Stock prevailing from time to time. Nevertheless, sales
of substantial amounts of Common Stock could adversely affect the prevailing
price of the Common Stock.
59
<PAGE>
EXISTING ANTI-TAKEOVER PROVISIONS
The Company's Board of Directors is divided into three classes, each of
which is as nearly equal in number as possible. The Directors in each class
hold office for staggered terms of three years each, with the term of office of
one class of Directors expiring each year. At each Annual Meeting of
Stockholders, successors to the class of directors whose term expires at the
Annual Meeting are elected for a three-year term. The effect of the classified
Board of Directors is to make it more difficult for a person, entity or group to
effect a change in control of the Company through the acquisition of a large
block of the Company's voting stock.
The Board of Directors of the Company has the power to amend the Company's
Bylaws. This power can be used by the Board of Directors to, among other things,
increase the size of the Board of Directors. If such an increase is effected
between annual meetings of stockholders, the Board of Directors has the power to
fill the Board vacancies resulting from the increase provided that the persons
appointed by the Board to fill such vacancies may serve only until the next
annual meeting of stockholders. This power could be used by the Board of
Directors to make it more difficult for a person, entity or group to effect a
change in control of the Company through the acquisition of a large block of the
Company's voting stock. During 1997, the Board of Directors used this power to
add one new member to the Company's Board of Directors. This Director will
stand for re-election, for a three-year term, at the Company's 1998 Annual
Meeting.
In 1993, the Company implemented the Employee Plan and the Directors' Plan
and reserved 150,000 shares of Common Stock for issuance pursuant to each plan.
The Employee Plan is administered by a committee of the Board of Directors.
This committee determines the persons to whom options are granted under the
Employee Plan. Under the Directors' Plan, each non-employee Director receives
an option to acquire 1,000 shares of Common Stock on the date he becomes a
Director and on each January 1 thereafter as long as he remains a Director.
Each non-employee Director who was in office when the Directors' Plan was
approved by Company stockholders in 1993 received an option to acquire 1,000
shares on the date of stockholder approval of the plan plus an option to acquire
a number of shares equal to 1,000 multiplied by the number of years such non-
employee Director had served as a Director.
Options granted under both the Employee Plan and the Directors' Plan vest
in three equal installments on each anniversary date following the grant of an
option. Currently there are options to acquire 35,739 shares of Common Stock
outstanding under the Employee Plan. Of these, options to acquire 23,225 shares
are currently vested. Currently there are options to acquire 69,405 shares of
Common Stock outstanding under the Directors' Plan. Of these, options to
acquire 53,405 shares are currently vested.
Despite the vesting provisions described above, both the Employee Plan and
the Directors' Plan provide that upon a "Change in Control" of the Company all
options, whether or not then vested, become immediately exercisable in full.
This provision of both option plans could make it more difficult for a person,
entity or group to effect a change in control of the Company through the
60
<PAGE>
acquisition of a large block of the Company's voting stock. "Change in Control"
is defined in both option plans as: (i) the acquisition by a person, entity or
group of beneficial ownership of 20% or more of the outstanding Common Stock,
but only if such acquisition occurs without approval or ratification of a
majority of the Board of Directors; (ii) any sale, lease, pledge or other
disposition of all or substantially all of the assets of the Company or of any
subsidiary of the Company, but only if such transaction occurs without approval
or ratification of a majority of the Board of Directors; (iii) during any fiscal
year, individuals who at the beginning of such year constitute the Board of
Directors cease for any reason to constitute at least a majority of the Board,
unless the election of each Director who was not a Director at the beginning of
the year was approved in advance by a majority of the Directors in office at the
beginning of the year.
LEGAL MATTERS
The validity of the shares of Common Stock offered hereby will be passed
upon for the Company by Rowe, Foltz & Martin, P.C., Atlanta, Georgia. Certain
legal matters will be passed upon for the Underwriter by Troutman Sanders LLP,
Atlanta, Georgia.
EXPERTS
The audited consolidated balance sheets as of December 31, 1997 and 1996
and the audited consolidated statements of earnings, changes in stockholders'
equity and cash flows for each of the three years in the period ended December
31, 1997, have been included herein or incorporated by reference herein and in
the registration statement in reliance upon the report of Porter Keadle Moore
LLP, independent accountants, given on the authority of that firm as experts in
accounting and auditing.
61
<PAGE>
COMMUNITY TRUST FINANCIAL SERVICES CORPORATION
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Report of Independent Certified Public Accountants...................................... F-2
Consolidated Balance Sheets as of December 31, 1997 and 1996............................ F-3
Consolidated Statements of Earnings for the years ended December 31, 1997, 1996 and
1995................................................................................. F-4
Consolidated Statements of Changes in Stockholders' Equity for the years ended Decem-
ber 31, 1997, 1996 and 1995.......................................................... F-5
Consolidated Statements of Cash Flows for the years ended December 31, 1997, 1996
and 1995............................................................................ F-6
Notes to Consolidated Financial Statements.............................................. F-7
</TABLE>
F-1
<PAGE>
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
To the Board of Directors and Stockholders
Community Trust Financial Services Corporation, Inc.
We have audited the accompanying consolidated balance sheets of Community Trust
Financial Services Corporation and subsidiaries as of December 31, 1997 and
1996, and the related consolidated statements of earnings, changes in
stockholders' equity and cash flows for each of the three years in the period
ended December 31, 1997. These financial statements are the responsibility of
the Company's management. Our responsibility is to express an opinion on these
financial statements based on our 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 financial position of Community Trust
Financial Services Corporation and subsidiaries 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.
/s/ Porter Keadle Moore LLP
Atlanta, Georgia
January 31, 1998
F-2
<PAGE>
COMMUNITY TRUST FINANCIAL SERVICES CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 1997 AND 1996
Assets
------
<TABLE>
<CAPTION>
1997 1996
----------- ----------
<S> <C> <C>
Cash and due from banks, including reserve
requirements of $578,000 and $534,000 $ 4,022,304 3,011,164
Federal funds sold 4,510,000 7,020,000
----------- ----------
Cash and cash equivalents 8,532,304 10,031,164
Securities available for sale 23,021,011 22,418,690
Other investments 301,100 255,000
Loans, net 56,359,625 48,712,195
Premises and equipment 2,141,654 2,296,111
Accrued interest receivable and other assets 1,549,087 1,490,458
----------- ----------
$91,904,781 85,203,618
=========== ==========
</TABLE>
Liabilities and Stockholders' Equity
------------------------------------
<TABLE>
<S> <C> <C>
Deposits:
Demand $12,105,179 9,648,648
Interest-bearing demand 18,644,247 17,211,638
Savings 14,808,283 15,546,932
Time 21,589,280 21,280,978
Time, in excess of $100,000 14,834,114 13,209,565
----------- ----------
Total deposits 81,981,103 76,897,761
Accrued interest payable and other liabilities 1,253,846 1,420,233
Notes payable 800,000 -
----------- ----------
Total liabilities 84,034,949 78,317,994
----------- ----------
Commitments
Minority interest - 7,748
----------- ----------
Stockholders' equity:
Common stock, par value $2.50, authorized 5,000,000
shares, issued and outstanding 841,324 and 839,164 shares 2,103,310 2,097,910
Additional paid-in capital 2,109,602 2,101,401
Retained earnings 3,511,989 2,682,999
Unrealized gain (loss) on securities available for sale, net of tax 144,931 (4,434)
----------- ----------
Total stockholders' equity 7,869,832 6,877,876
----------- ----------
$91,904,781 85,203,618
=========== ==========
</TABLE>
See accompanying notes to consolidated financial statements.
F-3
<PAGE>
COMMUNITY TRUST FINANCIAL SERVICES CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF EARNINGS
FOR THE YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
<TABLE>
<CAPTION>
1997 1996 1995
----------- ---------- ----------
<S> <C> <C> <C>
Interest income:
Interest and fees on loans $6,075,240 5,462,059 4,307,281
Interest on federal funds sold 243,198 221,396 192,222
Interest and dividends on investment securities:
U.S. Treasuries 448,588 164,666 142,771
U.S. Government agencies and mortgage backed 642,578 873,567 837,399
State, county and municipal 197,710 114,474 79,363
Other 23,100 12,806 4,441
---------- --------- ---------
Total interest income 7,630,414 6,848,968 5,563,477
---------- --------- ---------
Interest expense:
Interest on deposits:
Demand 397,555 410,932 396,100
Savings 391,036 375,845 436,236
Time 1,276,222 1,173,908 926,137
Time in excess of $100,000 817,029 663,640 409,190
Other interest 28,871 37,291 790
---------- --------- ---------
Total interest expense 2,910,713 2,661,616 2,168,453
---------- --------- ---------
Net interest income 4,719,701 4,187,352 3,395,024
Provision for loan losses 204,270 197,841 186,645
---------- --------- ---------
Net interest income after provision for loan losses 4,515,431 3,989,511 3,208,379
---------- --------- ---------
Other income:
Service charges on deposit accounts 932,593 829,701 733,226
Appraisal fees 96,952 88,565 77,435
Insurance commissions 247,395 185,185 26,710
Losses on sales of securities available for sale (3,219) (9,851) (19,247)
Equity in loss of CashTrans (111,145) - -
Miscellaneous 41,385 57,583 20,758
---------- --------- ---------
Total other income 1,203,961 1,151,183 838,882
---------- --------- ---------
Other expenses:
Salaries and employee benefits 2,249,382 1,902,662 1,355,069
Occupancy 651,088 545,604 447,497
Other operating 1,343,591 1,115,547 965,490
---------- --------- ---------
Total other expenses 4,244,061 3,563,813 2,768,056
---------- --------- ---------
Earnings before income taxes and minority interest 1,475,331 1,576,881 1,279,205
Income taxes 444,272 507,639 397,533
Minority interest in loss (earnings) of consolidated subsidiary 7,748 (11,358) 3,735
---------- --------- ---------
Net earnings $1,038,807 1,057,884 885,407
========== ========= =========
Net earnings per share $1.24 1.26 1.06
========== ========= =========
Net earnings per share - assuming dilution $1.18 1.23 1.04
========== ========= =========
</TABLE>
See accompanying notes to consolidated financial statements.
F-4
<PAGE>
COMMUNITY TRUST FINANCIAL SERVICES CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
FOR THE YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
<TABLE>
<CAPTION>
Unrealized
Gain (Loss)
On
Securities
Common Stock Additional Available
------------------- Paid-In Retained for Sale,
Shares Amount Capital Earnings Net of Tax Total
------ ------ ------- -------- ---------- -----
<S> <C> <C> <C> <C> <C> <C>
Balance, December 31, 1994 834,999 $2,087,497 2,087,498 1,159,582 (391,425) 4,943,152
Net earnings - - - 885,407 - 885,407
Cash dividends declared
($.25 per share) - - - (208,749) - (208,749)
Exercise of stock options 1,500 3,750 3,795 - - 7,545
Change in unrealized gain
(loss) on securities available
for sale, net of tax - - - - 404,551 404,551
------- ---------- --------- --------- -------- ---------
Balance, December 31, 1995 836,499 2,091,247 2,091,293 1,836,240 13,126 6,031,906
Net earnings - - - 1,057,884 - 1,057,884
Cash dividends declared
($.25 per share) - - - (209,125) - (209,125)
Exercise of stock options 3,665 9,163 12,608 - - 21,771
Purchase and retirement of
stock ($7.00 per share) (1,000) (2,500) (2,500) (2,000) - (7,000)
Change in unrealized gain
(loss) on securities available
for sale, net of tax - - - - (17,560) (17,560)
------- ---------- --------- --------- -------- ---------
Balance, December 31, 1996 839,164 2,097,910 2,101,401 2,682,999 (4,434) 6,877,876
Net earnings - - - 1,038,807 - 1,038,807
Cash dividends declared
($.25 per share) - - - (209,817) - (209,817)
Exercise of stock options 2,160 5,400 8,201 - - 13,601
Change in unrealized gain
(loss) on securities available
for sale, net of tax - - - - 149,365 149,365
------- ---------- --------- --------- -------- ---------
Balance, December 31, 1997 841,324 $2,103,310 2,109,602 3,511,989 144,931 7,869,832
======= ========== ========= ========= ======== =========
</TABLE>
See accompanying notes to consolidated financial statements.
F-5
<PAGE>
COMMUNITY TRUST FINANCIAL SERVICES CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
<TABLE>
<CAPTION>
1997 1996 1995
------------ ------------ -----------
<S> <C> <C> <C>
Cash flows from operating activities:
Net earnings $ 1,038,807 1,057,884 885,407
Adjustments to reconcile net earnings
to net cash provided by operating activities:
Depreciation, amortization and accretion 359,789 258,390 173,268
Provision for loan losses 204,270 197,841 186,645
Provision for deferred income taxes (67,537) (34,885) (64,935)
Equity in loss of CashTrans 111,145 - -
Loss on sales of securities available for sale 3,219 9,851 19,247
Minority interest in earnings (loss) of consolidated subsidiary (7,748) 11,358 (3,735)
Change in:
Interest receivable (144,020) (39,440) (337,010)
Other assets (111,493) (496,642) (96,804)
Interest payable 64,397 216,603 278,620
Other liabilities (230,784) 236,595 81,510
----------- ----------- ----------
Net cash provided by operating activities 1,220,045 1,417,555 1,122,213
----------- ----------- ----------
Cash flows from investing activities:
Proceeds from maturities of securities held to maturity - - 50,000
Proceeds from sales of securities available for sale 1,990,000 3,111,819 3,458,909
Proceeds from calls and maturities of securities
available for sale 4,197,038 7,927,426 3,613,539
Purchase of securities available for sale (6,538,282) (12,851,633) (9,600,664)
Purchases of other investments (46,100) - -
Net increase in loans (7,851,700) (10,595,179) (4,024,331)
Purchases of premises and equipment (107,987) (354,465) (316,275)
Investment in CashTrans (49,000) - -
----------- ----------- ----------
Net cash used by investing activities (8,406,031) (12,762,032) (6,818,822)
----------- ----------- ----------
Cash flows from financing activities:
Net change in deposits 5,083,342 15,662,472 3,946,184
Proceeds from notes payable 800,000 - -
Retirement of common stock - (7,000) -
Proceeds from exercise of stock options 13,601 21,771 7,545
Cash dividends paid (209,817) (209,125) (208,749)
----------- ----------- ----------
Net cash provided by financing activities 5,687,126 15,468,118 3,744,980
----------- ----------- ----------
Net change in cash and cash equivalents (1,498,860) 4,123,641 (1,951,629)
Cash and cash equivalents at beginning of year 10,031,164 5,907,523 7,859,152
----------- ----------- ----------
Cash and cash equivalents at end of year $ 8,532,304 10,031,164 5,907,523
=========== =========== ==========
Supplemental disclosures of cash flow information:
Cash paid during the year for:
Interest $ 2,846,316 2,445,013 1,889,833
Income taxes $ 500,000 690,000 460,000
Noncash investing and financing activities:
Transfers of investment securities, at amortized cost,
to securities available for sale $ - - 1,758,676
Change in unrealized loss on securities available
for sale, net of tax $ 149,365 (17,560) 404,551
</TABLE>
See accompanying notes to consolidated financial statements.
F-6
<PAGE>
COMMUNITY TRUST FINANCIAL SERVICES CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of Presentation and Reclassification
------------------------------------------
The consolidated financial statements for the years ended December 31, 1997
and 1996 include the accounts of Community Trust Financial Services
Corporation (the "Company"), its wholly-owned subsidiaries, Community Trust
Bank (the "Bank") and Metroplex Appraisals, Inc. ("Metroplex"), and a 75%
owned subsidiary, Community Loan Company ("CLC"). All significant
intercompany accounts and transactions have been eliminated in
consolidation. Certain 1996 and 1995 amounts have been reclassified to
conform to the 1997 presentation.
The Company's business is primarily conducted by its subsidiaries. The
Company is subject to regulation under the Bank Holding Company Act of 1956.
The Bank commenced business in 1988 upon receipt of its banking charter from
the State of Georgia Department of Banking and Finance (the "DBF"). The Bank
is primarily regulated by the DBF and the Federal Deposit Insurance
Corporation and undergoes periodic examinations by these regulatory
agencies. The Bank provides a full range of commercial and consumer banking
services principally in Paulding County, Georgia.
Metroplex was formed in 1992 as an appraisal service company working
principally for the Bank.
In September 1995, the Company acquired a 75% interest in CLC through the
purchase of $375 of newly issued shares. CLC was incorporated for the
purpose of acquiring and operating existing consumer finance companies under
the direction of the Company. In February 1996, the Company obtained
approval from the DBF and the Federal Reserve Bank to acquire two additional
consumer finance company offices through CLC. The purchase price related to
these acquisitions was approximately $921,000 and resulted in additional
tangible assets of $775,000, comprised principally of loans. The operations
of CLC, located in the Georgia cities of Rockmart, Rossville and Woodstock,
are funded principally through a line of credit arrangement with the
Company.
In May 1997, the Company entered into a joint venture to establish a nonbank
subsidiary, Cash Transactions, LLC ("CashTrans"), that sells, leases, and
services automated teller machines. The Company owns 49% of the equity of
CashTrans through an initial capital contribution of $49,000. Additionally
the Company and the Bank have loans to CashTrans totaling approximately
$853,000. The joint venture is accounted for using the equity method of
accounting.
The accounting principles followed by the Company and its subsidiaries, and
the methods of applying these principles, conform with generally accepted
accounting principles ("GAAP") and with general practices within the banking
industry. In preparing financial statements, in accordance with GAAP,
management is required to make estimates and assumptions that affect the
reported amounts in the financial statements. Actual results could differ
significantly from those estimates. Material estimates common to the banking
industry that are particularly susceptible to significant change in an
operating cycle of one year include, but are not limited to, the
determination of the allowance for loan losses, the valuation of any real
estate acquired in connection with foreclosures or in satisfaction of loans,
and valuation allowances associated with the realization of deferred tax
assets which are based on future taxable income.
Cash and Cash Equivalents
-------------------------
For purposes of reporting cash flows, cash and cash equivalents include cash
and due from banks and federal funds sold.
Investment Securities
---------------------
The Company classifies its securities in one of three categories: trading,
available for sale, or held to maturity. At December 31, 1997 and 1996, the
Company has classified all securities as available for sale.
F-7
<PAGE>
COMMUNITY TRUST FINANCIAL SERVICES CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, CONTINUED
Investment Securities, continued
---------------------
Securities available for sale consist of all investment securities not
classified as trading securities or securities held to maturity and are
recorded at fair value. Securities held to maturity are recorded at cost,
adjusted for the amortization or accretion of premiums or discounts.
Unrealized holding gains and losses, net of the related tax effect, on
securities available for sale are excluded from earnings and are reported as
a separate component of stockholders' equity until realized.
A decline in the market value of any available for sale or held to maturity
investment below cost that is deemed other than temporary is charged to
earnings and establishes a new cost basis for the security.
Premiums and discounts are amortized or accreted over the life of the
related security as an adjustment to the yield. Realized gains and losses
for securities classified as available for sale and held to maturity are
included in earnings and are derived using the specific identification
method for determining the cost of securities sold.
Other Investments
-----------------
Other investments include equity securities with no readily determinable
fair value. These investment securities are carried at cost.
Loans, Loan Fees and Allowance for Loan Losses
----------------------------------------------
Loans that management has the intent and ability to hold for the foreseeable
future or until maturity are reported at principal amount outstanding, net
of unearned interest and the allowance for loan losses. Interest on
primarily all loans is calculated principally by using the simple interest
method on the daily balance of the principal amount outstanding. Loan fees,
net of certain origination costs, are deferred and are being amortized over
the lives of the respective loans.
A loan is considered impaired when, based on current information and events,
it is probable that all amounts due according to the contractual terms of
the loan agreement will not be collected. Impaired loans are measured based
on the present value of expected future cash flows, discounted at the loan's
effective interest rate, or at the loan's observable market price, or at the
fair value of the collateral of the loan if the loan is collateral
dependent. Interest income from impaired loans is recognized using the cash
basis method of accounting.
As a result of management=s ongoing review of the loan portfolio, loans are
placed on nonaccrual status generally when they are greater than 90 days
past due. Exceptions are allowed for loans greater than 90 days past due
when such loans are well collateralized and in process of collection.
The Bank's provision for loan losses is based upon management's continuing
review and evaluation of the loan portfolio and is intended to create an
allowance adequate to absorb losses on loans outstanding as of the end of
each reporting period. For individually significant loans, management's
review consists of evaluations of the financial strength of the borrowers
and the related collateral. The review of groups of loans, which are
individually insignificant, is based upon delinquency status of the group,
lending policies, and collection experience.
Management believes that the allowance for loan losses is adequate. 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. Such agencies may require the Bank to recognize additions to the
allowance based on their judgements of information available to them at the
time of their examination.
F-8
<PAGE>
COMMUNITY TRUST FINANCIAL SERVICES CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, CONTINUED
Premises and Equipment
----------------------
Premises and equipment are stated at cost less accumulated depreciation.
Depreciation is computed using the straight-line method over the estimated
useful lives of the assets. When assets are retired or otherwise disposed
of, the cost and related accumulated depreciation are removed from the
accounts, and any gain or loss is reflected in income for the period. The
cost of maintenance and repairs is charged to expense as incurred, whereas
significant renewals and improvements are capitalized. The range of
estimated useful lives for premises and equipment are:
Buildings and improvements 20 - 31 years
Furniture and equipment 3 - 10 years
Income Taxes
------------
Deferred tax assets and liabilities are recorded for the future tax
consequences attributable to differences between the financial statement
carrying amounts of existing assets and liabilities and their respective tax
bases. Deferred tax assets and liabilities are measured using enacted tax
rates expected to apply to taxable income in the years in which the assets
and liabilities are expected to be recovered or settled. The effect on
deferred tax assets and liabilities of a change in tax rates is recognized
in income tax expense in the period that includes the enactment date.
In the event the future tax consequences of differences between the
financial reporting bases and the tax bases of the Company's assets and
liabilities results in deferred tax assets, an evaluation of the probability
of being able to realize the future benefits indicated by such asset is
required. A valuation allowance is provided for a portion of the deferred
tax asset when it is more likely than not that some portion or all of the
deferred tax asset will not be realized. In assessing the realizability of
the deferred tax assets, management considers the scheduled reversals of
deferred tax liabilities, projected future taxable income, and tax planning
strategies.
Net Earnings Per Share
----------------------
Statement of Financial Accounting Standard SFAS No. 128 "Earnings Per
Share" became effective for the Company for the year ended December 31,
1997. This new standard specifies the computation, presentation and
disclosure requirements for earnings per share and is designed to simplify
previous earnings per share standards and to make domestic and international
practices more compatible. Net earnings per share is based on the weighted
average number of common shares outstanding during the period while the
effects of potential common shares outstanding during the period are
included in diluted earnings per share. All net earnings per share amounts
have been restated to conform to the provisions of SFAS No. 128.
SFAS No. 128 requires the presentation on the face of the earnings statement
of net earnings per share with and without the dilutive effects of potential
common stock issuances from instruments such as options, convertible
securities and warrants. Additionally, the new statement requires the
reconciliation of the amounts used in the computation of both "net earnings
per share" and "net earnings per share - assuming dilution." Net earnings
per share amounts for the years ended December 31, 1997, 1996 and 1995 are
as follows:
<TABLE>
<CAPTION>
Net Earnings Common Shares Per Share
FOR THE YEAR ENDED DECEMBER 31, 1997 (Numerator) (Denominator) Amount
------------- -------------- ---------
<S> <C> <C> <C>
Net earnings per share $1,038,807 839,633 $1.24
=====
Effect of dilutive securities:
Stock options - 40,181
---------- -------
Net earnings per share - assuming dilution $1,038,807 879,814 $1.18
========== ======= =====
</TABLE>
F-9
<PAGE>
COMMUNITY TRUST FINANCIAL SERVICES CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements, continued
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, CONTINUED
Net Earnings Per Share, continued
----------------------
<TABLE>
<CAPTION>
Net Earnings Common Shares Per Share
FOR THE YEAR ENDED DECEMBER 31, 1996 (Numerator) (Denominator) Amount
------------ ------------- ---------
<S> <C> <C> <C>
Net earnings per share $ 1,057,884 836,541 $ 1.26
=======
Effect of dilutive securities:
Stock options - 26,172
----------- ---------
Net earnings per share - assuming dilution $ 1,057,884 862,713 $ 1.23
=========== ========= =======
Net Earnings Common Shares Per Share
FOR THE YEAR ENDED DECEMBER 31, 1995 (Numerator) (Denominator) Amount
----------- ------------- ---------
Net earnings per share $ 885,407 835,513 $ 1.06
=======
Effect of dilutive securities:
Stock options - 17,406
----------- ---------
Net earnings per share - assuming dilution $ 885,407 852,919 $ 1.04
=========== ========= =======
</TABLE>
Recent Accounting Pronouncements
--------------------------------
In June 1997, the Financial Accounting Standards Board issued State of
Financial Accounting Standards No. 130, "Reporting Comprehensive Income"
("SFAS 130") and Statement of Financial Accounting Standards No. 131,
"Disclosures about Segments of an Enterprises and Related Information" ("SFAS
131"). SFA 130 establishes standards for the reporting and display of
comprehensive income and its components in a full set of general-purpose
financial statements. SFAS 131 specifies the presentation and disclosure of
operating segment information reported in the annual report and interim
reports issued to stockholders. The provisions of both statements are
effective for fiscal years beginning after December 15, 1997. The management
of the Company believes that the adoption of these statements will not have a
material impact on the Company's financial position, results of operations, or
liquidity.
(2) INVESTMENT SECURITIES
Securities available for sale at December 31, 1997 and 1996 are summarized as
follows:
<TABLE>
<CAPTION>
December 31, 1997
---------------------------
Gross Gross Estimated
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
---- ----- ------ -----
<S> <C> <C> <C> <C>
U S. Treasuries $ 6,759,210 57,933 1,195 6,815,948
U S. Government agencies 8,890,080 66,729 16,666 8,940,143
Mortgage-backed
securities 2,080,988 9,245 19,523 2,070,710
State, county and
municipal 5,057,225 136,985 - 5,194,210
----------- ------- ------- ---------------
Total $22,787,503 270,892 37,384 23,021,011
=========== ======= ======= ===============
</TABLE>
F-10
<PAGE>
COMMUNITY TRUST FINANCIAL SERVICES CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
(2) INVESTMENT SECURITIES, CONTINUED
<TABLE>
<CAPTION>
December 31, 1996
-----------------------------------------------
Gross Gross Estimated
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
----------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
U S. Treasuries $ 7,739,666 38,726 8,771 7,769,621
U S. Government agencies 9,500,465 34,391 73,445 9,461,411
Mortgage-backed securities 2,501,897 10,780 41,855 2,470,822
State, county and municipal 2,683,811 39,049 6,024 2,716,836
----------- ------- ------- ----------
Total $22,425,839 122,946 130,095 22,418,690
=========== ======= ======= ==========
</TABLE>
The amortized cost and estimated fair value of securities available for sale
at December 31, 1997, by contractual maturity, are shown below. Expected
maturities will differ from contractual maturities because borrowers have the
right to call or prepay certain obligations with or without call or prepayment
penalties.
<TABLE>
<CAPTION>
Amortized Estimated
Cost Fair Value
----------- ----------
<S> <C> <C>
Due within one year $ 3,135,478 3,136,171
Due from one to five years 13,437,019 13,535,743
Due from five to ten years 479,000 481,130
Due after ten years 3,655,018 3,797,257
Mortgage-backed securities 2,080,988 2,070,710
----------- ----------
$22,787,503 23,021,011
=========== ==========
</TABLE>
Proceeds from sales of securities available for sale during 1997, 1996 and
1995 were $1,990,000, $3,111,819, and $3,458,909. Gross losses of $3,219,
$9,851 and $19,247 were realized on 1997, 1996 and 1995 sales, respectively.
Investment securities with a carrying value of approximately $15,712,000 and
$12,333,000 as of December 31, 1997 and 1996, respectively, were pledged to
secure public deposits as required by law or for other purposes.
(3) LOANS
Major classifications of loans at December 31, 1997 and 1996 are summarized
as follows:
<TABLE>
<CAPTION>
1997 1996
----------- ----------
<S> <C> <C>
Commercial, financial and agricultural $ 7,765,358 5,840,546
Real estate - construction 8,308,349 7,274,577
Real estate - mortgage 30,833,493 26,936,164
Consumer 10,281,657 9,374,426
----------- ----------
Total loans 57,188,857 49,425,713
Less: Allowance for loan losses 829,232 713,518
----------- ----------
Total net loans $56,359,625 48,712,195
=========== ==========
</TABLE>
The Bank grants loans and extensions of credit to individuals and a variety
of firms and corporations located in its trade area, primarily Paulding
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 and is dependent upon the real estate market.
F-11
<PAGE>
COMMUNITY TRUST FINANCIAL SERVICES CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements, continued
(3) LOANS, CONTINUED
Changes in the allowance for loan losses are summarized as follows:
<TABLE>
<CAPTION>
1997 1996 1995
--------- ------- --------
<S> <C> <C> <C>
Balance at beginning of year $ 713,518 583,306 444,368
Amounts charged off (145,825) (90,263) (60,875)
Recoveries on amounts previously charged off 57,269 22,634 13,168
Provision charged to operating expenses 204,270 197,841 186,645
--------- ------- ---------
Balance at end of year $ 829,232 713,518 583,306
========= ======= =========
</TABLE>
(4) PREMISES AND EQUIPMENT
Premises and equipment at December 31, 1997 and 1996 are summarized as
follows:
<TABLE>
<CAPTION>
1997 1996
---------- ---------
<S> <C> <C>
Land $ 375,403 375,403
Land improvements 67,254 67,254
Buildings and improvements 1,700,061 1,693,638
Furniture and equipment 1,718,463 1,621,186
---------- ---------
3,861,181 3,757,481
Less: Accumulated depreciation 1,719,527 1,461,370
---------- ---------
$2,141,654 2,296,111
========== =========
</TABLE>
Depreciation expense was approximately $257,000, $222,000 and $176,000 for
the years ended December 31, 1997, 1996 and 1995, respectively.
(5) TIME DEPOSITS
At December 31, 1997, the scheduled maturities of time deposits are as
follows:
<TABLE>
<CAPTION>
<S> <C>
1998 $24,578,850
1999 5,799,396
2000 3,001,759
2001 1,687,322
2002 and thereafter 1,356,067
-----------
$36,423,394
===========
</TABLE>
(6) NOTES PAYABLE
In November 1997, the Company obtained a $2,500,000 line of credit with
another financial institution. The debt is collateralized by 100% of the
stock of the Bank and calls for interest to be paid quarterly at the prime
rate less 50 basis points. The balance is to be paid in 10 equal annual
installments beginning in December 1999 and maturing in November 2008. The
loan agreement contains covenants relating to the level of the allowance for
loan losses, payments of dividends, regulatory capital adequacy and return
on average assets.
During 1996, the Bank entered into an agreement with the Federal Home Loan
Bank (FHLB) to provide the Bank credit facilities. Any amounts advanced by
the FHLB are secured under a blanket floating lien covered by all of the
Bank=s 1-4 family first mortgage loans. The Bank may draw advances up to 75%
of the outstanding balance of these loans based on the agreement with the
FHLB. The Bank has no borrowings from the FHLB outstanding as of December
31, 1997 and 1996.
F-12
<PAGE>
COMMUNITY TRUST FINANCIAL SERVICES CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
(7) COMMITMENTS
The Company leases certain facilities under operating lease arrangements.
Future minimum lease payments required for all operating leases having a
remaining term in excess of one year at December 31, 1997 are as follows:
<TABLE>
<CAPTION>
<S> <C>
1998 $ 78,355
1999 73,700
2000 55,775
2001 35,000
2002 40,000
Thereafter 160,000
--------
$442,830
========
</TABLE>
Rental expense for each of the three years in the period ended December 31,
1997 totalled approximately $83,000, $77,000 and $58,000, respectively.
The Bank is a 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, standby
letters of credit and financial guarantees. Those instruments involve, to
varying degrees, elements of credit risk in excess of the amount recognized
in the balance sheet. The contract amounts of those 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
other party for commitments to extend credit, standby letters of credit and
financial guarantees written is represented by the contractual amount of
those instruments. The Bank uses the same credit policies in making
commitments and conditional obligations as it does for on-balance-sheet
instruments.
In most cases, the Bank requires collateral or other security to support
financial instruments with credit risk.
<TABLE>
<CAPTION>
Approximate
Contract Amount
---------------------
1997 1996
---------- ---------
<S> <C> <C>
Financial instruments whose contract
amounts represent credit risk:
Commitments to extend credit $9,258,000 7,875,000
Standby letters of credit and
financial guarantees written $ 666,000 608,000
</TABLE>
Commitments to extend credit are agreements to lend to a customer as long as
there is no violation of any condition established in the contract.
Commitments generally have fixed expiration dates or other termination
clauses and may require payment of a fee. Since many of the commitments may
expire without being drawn upon, the total commitment amounts do not
necessarily represent future cash requirements. The Bank evaluates each
customer's credit worthiness 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. Collateral held varies
but may include unimproved and improved real estate, certificates of
deposit, or personal property.
Standby letters of credit and financial guarantees written 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. The Bank holds real estate and assignments of deposit accounts as
collateral supporting those commitments for which collateral is deemed
necessary.
F-13
<PAGE>
COMMUNITY TRUST FINANCIAL SERVICES CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements, continued
(8) STOCKHOLDERS' EQUITY
During 1996, the Company repurchased and retired 1,000 shares of common
stock for $7,000. The excess of the cost of shares acquired over the par
value resulted in a reduction of additional paid-in capital based on the per
share amounts of additional paid-in capital for all shares, with the
difference charged to retained earnings.
(9) REGULATORY MATTERS
Dividends paid by the Bank are the primary source of funds available to the
Company. Banking regulations limit the amount of dividends that may be paid
without prior approval of the regulatory authorities. These restrictions for
the Bank are based on the level of regulatory classified assets, prior
year's earnings, and the ratio of equity capital to total assets. The Bank
may declare dividends of approximately $590,000 during 1998 without prior
regulatory approval.
The Company and the Bank are subject to various regulatory capital
requirements administered by the federal banking agencies. Failure to meet
minimum capital requirements can initiate certain mandatory, and possibly
additional discretionary, actions by regulators that, if undertaken, could
have a direct material effect on the financial statements. Under capital
adequacy guidelines and the regulatory framework for prompt corrective
action, specific capital guidelines that involve quantitative measures of
the assets, liabilities, and certain off-balance-sheet items as calculated
under regulatory accounting practices must be met. The capital amounts and
classification are also subject to qualitative judgments by the regulators
about components, risk weightings, and other factors.
Quantitative measures established by regulation to ensure capital adequacy
require the Company and the Bank to maintain minimum amounts and ratios of
total and Tier 1 capital (as defined in the regulations) to risk-weighted
assets and of Tier 1 capital (as defined) to average assets (as defined).
Management believes, as of December 31, 1997, that the Company and the Bank
meet all capital adequacy requirements to which they are subject.
F-14
<PAGE>
COMMUNITY TRUST FINANCIAL SERVICES CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements, continued
(9) REGULATORY MATTERS, CONTINUED
As of December 31, 1997, the most recent notification from Federal Deposit
Insurance Corporation categorized the Bank as well capitalized under the
regulatory framework for prompt corrective action. To be categorized as well
capitalized the Bank must maintain minimum total risk-based, Tier 1 risk-
based and Tier 1 leverage ratios as set forth in the table. The Company and
the Bank=s actual capital amounts and ratios are also presented below.
<TABLE>
<CAPTION>
To Be Well
Capitalized Under
For Capital Prompt Corrective
Actual Adequacy Purposes Action Provisions
---------- ------------------- -------------------
Amount Ratio Amount Ratio Amount Ratio
---------- ------ ---------- ------ ----------- ------
<S> <C> <C> <C> <C> <C>
As of December 31, 1997:
Total Capital
(to Risk Weighted Assets)
Consolidated $8,214,000 13.8% $4,777,000 8.0% N/A N/A
Bank $6,993,000 12.1% $4,610,000 8.0% $5,762,000 10.0%
Tier 1 Capital
(to Risk Weighted Assets)
Consolidated $7,460,000 12.5% $2,389,000 4.0% N/A N/A
Bank $6,273,000 10.9% $2,305,000 4.0% $3,457,000 6.0%
Tier 1 Capital
(to Average Assets)
Consolidated $7,460,000 8.6% $3,479,000 4.0% N/A N/A
Bank $6,273,000 7.0% $3,569,000 4.0% $4,461,000 5.0%
As of December 31, 1996:
Total Capital
(to Risk Weighted Assets)
Consolidated $7,254,000 12.8% $4,527,000 8.0% N/A N/A
Bank $6,035,000 10.9% $4,430,000 8.0% $5,538,000 10.0%
Tier 1 Capital
(to Risk Weighted Assets)
Consolidated $6,546,000 11.6% $2,263,000 4.0% N/A N/A
Bank $5,343,000 9.7% $2,215,000 4.0% $3,323,000 6.0%
Tier 1 Capital
(to Average Assets)
Consolidated $6,546,000 8.0% $3,291,000 4.0% N/A N/A
Bank $5,343,000 6.4% $3,334,000 4.0% $4,168,000 5.0%
</TABLE>
F-15
<PAGE>
COMMUNITY TRUST FINANCIAL SERVICES CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements, continued
(10) EMPLOYEE AND DIRECTOR BENEFIT PROGRAMS
The Company has an Incentive Stock Option Plan whereby options to purchase up
to 40,000 shares of stock can be granted to employees at the discretion of
the Board of Directors at the fair value at the date of grant. The options
are exercisable within ten years of the grant date, contingent upon the
employment of the optionee for one year from the date of grant.
The following is a summary of transactions for the incentive stock option
plan:
<TABLE>
<CAPTION>
1997 1996 1995
--------- --------- -------
Wtd. Avg. Wtd. Avg. Wtd.Avg.
Option Option Option
Option Price Per Option Price Per Option Price Per
Shares Share Shares Share Shares Share
------ --------- ------ --------- ------- ---------
<S> <C> <C> <C> <C> <C> <C>
Outstanding, beginning of year 696 $5.00 696 $5.00 2,196 $5.02
Exercised during the year - - - (1,500) $5.03
--- ------ ------
Outstanding, end of year 696 $5.00 696 $5.00 696 $5.00
=== ====== ======
</TABLE>
All options are exercisable as of December 31, 1997, 1996 and 1995. All
options expire on April 18, 1998.
The Company also has an employee stock option plan and a director stock
option plan. The plans were adopted for the benefit of directors and key
officers and employees in order that they may purchase Company stock at a
price equal to the fair market value on the date of grant. A total of 300,000
shares were reserved for possible issuance under these plans. The options
vest over a three year period and expire after ten years.
SFAS No. 123, "Accounting for Stock-Based Compensation," became effective
January 1, 1996. This statement encourages, but does not require, entities to
compute the fair value of options at the date of grant and to recognize such
costs as compensation expense. The Company has chosen not to adopt the cost
recognition principles of this statement. No compensation expense has been
recognized in 1997, 1996 or 1995 related to the stock option plan. Had
compensation cost been determined based upon the fair value of the options at
the grant dates consistent with the method of the new statement, the
Company=s net earnings and net earnings per share would have been reduced to
the proforma amounts indicated below.
<TABLE>
<CAPTION>
1997 1996 1995
---------- --------- -------
<S> <C> <C> <C> <C>
Net earnings As reported $1,038,807 1,057,884 885,407
Proforma $ 997,794 1,035,856 867,266
Net earnings per share As reported $ 1.24 1.26 1.06
Proforma $ 1.19 1.23 1.04
Net earnings per share - assuming dilution As reported $ 1.18 1.23 1.04
Proforma $ 1.13 1.20 1.02
</TABLE>
The fair value of each option is estimated on the date of grant using the
minimum value options-pricing model with the following weighted average
assumptions used for grants in 1997, 1996 and 1995 respectively: dividend
yields of 2%, 2% and 3%, respectively; risk free interest rate of 6%; and an
expected life of 10 years.
F-16
<PAGE>
COMMUNITY TRUST FINANCIAL SERVICES CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements, continued
(10) EMPLOYEE AND DIRECTOR BENEFIT PROGRAMS, CONTINUED
A summary of activity in these stock option plans is presented below:
<TABLE>
<CAPTION>
1997 1996 1995
-------- --------- -------
Weighted Weighted Weighted
Average Average Average
Option Option Option
Option Price Option Price Option Price
Shares Per Share Shares Per Share Shares Per Share
-------- --------- ------- --------- ------- ---------
<S> <C> <C> <C> <C> <C> <C>
Outstanding, beginning of year 90,604 $ 7.68 84,900 $ 7.14 75,000 $ 6.64
Granted during the year 15,000 $15.53 10,269 $11.57 14,000 $10.01
Cancelled during the year - (900) $ 7.88 (4,100) $ 7.88
Exercised during the year (2,160) $ 6.30 (3,665) $ 5.94 -
------- ------ ------
Outstanding, end of year 103,444 $ 8.85 90,604 $ 7.68 84,900 $ 7.14
======= ====== ======
Number of shares exercisable 77,363 63,827 45,053
======= ====== ======
</TABLE>
The weighted average grant-date fair value of options granted in 1997, 1996
and 1995 was $4.41, $3.46 and $2.09, respectively. For these employee and
director stock options, options outstanding at December 31, 1997 are
exercisable at option prices ranging from $5.78 to $15.79 as presented in the
table above. Such options have a weighted average remaining contractual life
of approximately 8 years.
The Company has a 401(k) Profit Sharing Plan which is available to
substantially all employees subject to certain service requirements. The
Company's contribution is at the discretion of the Board of Directors and
cannot exceed 6% of the employee's compensation. The contribution by the
Company for 1997, 1996 and 1995 was approximately $26,600, $20,300 and
$21,500, respectively.
<TABLE>
<CAPTION>
<S> <C>
(11) INCOME TAXES
</TABLE>
The components of income tax expense for the years ended December 31, 1997,
1996 and 1995 are as follows:
<TABLE>
<CAPTION>
1997 1996 1995
--------- -------- --------
<S> <C> <C> <C>
Current $511,809 542,524 462,468
Deferred (67,537) (34,885) (38,204)
Change in valuation allowance - - (26,731)
-------- ------- -------
$444,272 507,639 397,533
======== ======= =======
</TABLE>
The differences between the provision for income taxes and the amount
computed by applying the statutory federal income tax rate to earnings before
income taxes and minority interest are as follows:
<TABLE>
<CAPTION>
1997 1996 1995
--------- -------- --------
<S> <C> <C> <C>
Pretax income at statutory rates $501,613 536,140 434,930
Add (deduct):
Tax-exempt interest income (76,374) (49,700) (41,038)
Non-deductible interest expense 9,760 5,646 5,090
State taxes, net of federal effect 12,737 22,973 -
Other (3,464) (7,420) (1,449)
-------- ------- -------
$444,272 507,639 397,533
======== ======= =======
</TABLE>
F-17
<PAGE>
COMMUNITY TRUST FINANCIAL SERVICES CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements, continued
(11) INCOME TAXES, CONTINUED
The following summarizes the sources and expected tax consequences of future
taxable deductions (income) which comprise the net deferred tax asset which
is included as a component of other assets.
<TABLE>
<CAPTION>
1997 1996
---------- --------
<S> <C> <C>
Deferred tax assets:
Net unrealized loss on securities available for sale $ - 2,714
Allowance for loan losses 246,150 188,790
Other 4,881 -
--------- -------
Gross deferred tax assets 251,031 191,504
--------- -------
Deferred tax liabilities:
Premises and equipment (56,552) (61,848)
Net unrealized gain on securities available for sale (88,628) -
--------- -------
Gross deferred tax liabilities (145,180) (61,848)
--------- -------
Net deferred tax asset $ 105,851 129,656
========= =======
</TABLE>
(12) RELATED PARTY TRANSACTIONS
The Company conducts transactions with directors, executive officers
(including companies in which they have beneficial interest) as well as its
unconsolidated subsidiaries in the normal course of business. It is the
policy of the Company that loan transactions with directors, executive
officers and subsidiaries be made on substantially the same terms as those
prevailing at the time for comparable loans to other persons. The following
is a summary of activity for related party loans for 1997:
<TABLE>
<CAPTION>
<S> <C>
Beginning balance $ 265,000
Loans advanced 1,310,000
Repayments (435,000)
----------
Ending balance $1,140,000
==========
</TABLE>
The aggregate amount of deposits of directors and executive officers and
their affiliates amounted to approximately $2,461,000 and $2,089,000 at
December 31, 1997 and 1996.
(13) SUPPLEMENTAL FINANCIAL DATA
Components of other operating expenses in excess of 1% of total interest
income and other income for the years ended December 31, 1997, 1996 and
1995 are as follows:
<TABLE>
<CAPTION>
1997 1996 1995
-------- ------- -------
<S> <C> <C> <C>
Printing and supplies $108,040 94,354 71,332
Data processing $126,087 128,702 123,293
FDIC assessment $ 8,995 2,000 64,146
Directors fees $ 98,250 81,950 73,300
Advertising $125,702 63,191 62,738
</TABLE>
F-18
<PAGE>
COMMUNITY TRUST FINANCIAL SERVICES CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements, continued
(14) COMMUNITY TRUST FINANCIAL SERVICES CORPORATION (PARENT COMPANY ONLY)
FINANCIAL INFORMATION
Balance Sheets
December 31, 1997 and 1996
Assets
------
<TABLE>
<CAPTION>
1997 1996
---------- ---------
<S> <C> <C>
Cash $ 26,017 285,402
Investment in subsidiaries 6,379,530 5,384,441
Loans to subsidiaries 2,071,348 1,089,764
Other assets 192,937 126,451
---------- ---------
$8,669,832 6,886,058
========== =========
</TABLE>
Liabilities and Stockholders' Equity
------------------------------------
<TABLE>
<CAPTION>
<S> <C> <C>
Other liabilities $ - 8,182
Note payable 800,000 -
Stockholders' equity 7,869,832 6,877,876
---------- ---------
$8,669,832 6,886,058
========== =========
</TABLE>
Statements of Earnings
For the Years Ended December 31, 1997, 1996 and 1995
<TABLE>
<CAPTION>
1997 1996 1995
----------- ---------- --------
<S> <C> <C> <C>
Interest income $ 104,672 51,239 -
Dividends from Bank 250,000 1,311,354 499,804
Dividends from Metroplex - 25,000 -
Other operating expenses (202,099) (81,774) (52,079)
---------- --------- -------
Earnings before income tax benefit and equity
in undistributed earnings of subsidiaries 152,573 1,305,819 447,725
Income tax benefit 89,510 9,282 12,567
---------- --------- -------
Earnings before equity in undistributed
earnings of subsidiaries 242,083 1,315,101 460,292
Dividends paid in excess of earnings of subsidiaries - (257,217) -
Equity in undistributed earnings of subsidiaries 796,724 - 425,115
---------- --------- -------
Net earnings $1,038,807 1,057,884 885,407
========== ========= =======
</TABLE>
F-19
<PAGE>
COMMUNITY TRUST FINANCIAL SERVICES CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
(14) COMMUNITY TRUST FINANCIAL SERVICES CORPORATION (PARENT COMPANY ONLY)
FINANCIAL INFORMATION, CONTINUED
Statements of Cash Flows
For the Years Ended December 31, 1997, 1996 and 1995
<TABLE>
<CAPTION>
1997 1996 1995
------------ ---------- ---------
<S> <C> <C> <C>
Cash flows from operating activities:
Net earnings $ 1,038,807 1,057,884 885,407
Adjustments to reconcile net earnings to
net cash provided by operating activities:
Equity in undistributed earnings of subsidiaries (796,724) 257,217 (425,115)
Amortization - 4,743 18,974
Other (74,668) (170,093) (16,668)
----------- --------- --------
Net cash provided by operating activities 167,415 1,149,751 462,598
----------- --------- --------
Cash flows from investing activities:
Investment in CLC - - (375)
Investment in CashTrans (49,000) - -
Loans to subsidiaries (981,584) (839,764) (250,000)
----------- --------- --------
Net cash used by investing activities (1,030,584) (839,764) (250,375)
----------- --------- --------
Cash flows from financing activities:
Proceeds from note payable 800,000 - -
Cash dividends paid (209,817) (209,125) (208,749)
Proceeds from exercise of stock options 13,601 21,771 7,545
Retirement of common stock - (7,000) -
----------- --------- --------
Net cash provided (used) by financing activities 603,784 (194,354) (201,204)
----------- --------- --------
Net change in cash (259,385) 115,633 11,019
Cash at beginning of the year 285,402 169,769 158,750
----------- --------- --------
Cash at end of the year $ 26,017 285,402 169,769
=========== ========= ========
Supplemental disclosure of cash flow information:
Noncash investing and financing activities:
Change in unrealized loss on securities
available for sale, net of tax, of Bank $ 149,365 (17,560) 404,551
</TABLE>
F-20
<PAGE>
EXHIBIT A
SUBSCRIPTION AGREEMENT
THIS SUBSCRIPTION AGREEMENT is made and entered into between Community Trust
Financial Services Corporation, a Georgia corporation (the "Company"), and the
person executing this Agreement as the investor (the "Investor") and sets forth
the terms under which the Investor will subscribe for shares of Common Stock,
par value $2.50 per share (the "Shares") of the Company. The Shares are being
offered pursuant to the terms and conditions of the Company's Prospectus dated
_________________________,1998 (the "Prospectus") which describes the offering
of the Shares (the "Offering").
1. SUBSCRIPTION AMOUNT AND PAYMENT. The Investor hereby subscribes for
the purchase of ____________Shares at a purchase price of $___________ per Share
and is delivering herewith to the Company, in cash or by check, bank draft or
money order payable to or to the order of "Community Trust Financial Services
Corporation," a total of $ _______________ in full payment for the Shares.
Execution of this Agreement by the Investor constitutes a legally binding and
irrevocable offer by the Investor to subscribe for such Shares on the terms and
conditions specified herein and in the Prospectus. The Company shall have the
right to reject such subscription offer, or, by executing a copy of this
Agreement, to accept such offer as to all, or if otherwise indicated by the
Company, less than all, of such Shares. If the Investor's offer is accepted, the
Company will execute a copy of this Agreement and return it to the Investor. The
Company shall have the right to cancel accepted subscription offers at any time
and for any reason until the proceeds of the Offering are released from escrow,
as described in Section 2 below.
2. CONDITIONS PRECEDENT TO OFFERING; ESCROW OF SHARES. There are certain
conditions precedent to the closing of the Offering, as set forth in the
Prospectus under the heading "Plan of Distribution-Conditions to the Offering
and Release of Funds." Subscription proceeds for the initial _________Shares
subscribed for in the Offering will be forwarded by the Company to, and will be
held in escrow by, The Bankers Bank, Cobb County, Georgia ("Escrow Agent") until
all of such conditions precedent are fulfilled. Subscription proceeds received
after acceptance by the Company of subscriptions for the initial _____________
Shares but before the Offering is terminated will not be deposited in the escrow
account but will be available for immediate use by the Company. One of the
conditions precedent to the closing of the Offering is that subscriptions for
Shares representing the minimum offering of _____________ Shares must be
received on or before midnight, Hiram, Georgia time, on
__________________________ _________, 1998. If subscriptions for the minimum
offering of ___________ Shares are not received by such date or if any of the
other conditions precedent to the closing are not satisfied, the Offering will
be terminated and all subscription proceeds received by the Company will be
returned promptly to subscribers together with the net interest earned thereon.
In such event, the Investor's rights under this Agreement (other than the right
to a return of the Investor's subscription funds together with the net interest)
shall terminate. In addition, at such time, the Escrow Agent shall cease to act
as escrow agent. If all conditions precedent are timely satisfied, the Company
may continue to sell Shares until the earlier of _______________________________
_________, 1998 or the date on which a total of _____________Shares have been
sold in the Offering.
3. INVESTOR'S REPRESENTATIONS AND WARRANTIES.
a. The Investor represents and warrants that its subscription for
Shares is based on no information, representations or warranties, whether
written or oral, except as contained in the Prospectus. The Investor
acknowledges that no person is authorized to give any information or to make any
statement not contained in the Prospectus, a copy of which Investor acknowledges
previously has been received, and that any information or statement not
contained therein may not be relied upon as having been authorized by the
Company.
A-1
<PAGE>
The Investor also acknowledges that any written or oral representation or
information which may have been made or provided to the Investor prior to the
date of the Prospectus is superseded by the Prospectus.
b. The Investor represents and warrants that the Investor and/or its
financial advisors have reviewed the Prospectus and this Agreement and are aware
of the risks of an investment in the Shares.
c. The Investor represents and warrants that the undersigned is a bona
fide resident of the state shown in the Investor's address set forth in Exhibit
A hereto and that all of the information regarding the Investor set forth by the
Investor herein (including the information set forth in Exhibits A and B hereto)
is true, accurate and complete. The Investor understands that such information
is being relied upon by the Company in connection with offers and sales of the
Shares under applicable securities laws and otherwise, and the Investor will
notify the Company immediately of any change in any of such information which
occurs prior to the sale of the Shares to the Investor.
d. The Investor, if acting in a representative or fiduciary capacity
for a corporation, partnership, employee retirement benefit plan, or trust, or
as custodian or agent for any person or entity, represents that the Investor has
full authority to enter into this agreement in such capacity and on behalf of
such corporation, partnership, employee retirement benefit plan, trust, person
or entity and understands and acknowledges that the above representations and
warranties shall be deemed to apply to the person or entity in whose name the
Shares are to be registered as well as the Investor.
4. INDEMNIFICATION. The Investor shall indemnify and hold harmless the
Company, its officers, directors and employees, and any professional advisors to
any of the foregoing from and against any and all loss, damage, liability or
expense, including costs and reasonable attorney's fees, to which they may
become subject or which they may incur by reason of or in connection with any
misrepresentation made by the Investor, any breach of any of the Investor's
representations or warranties, or any failure to fulfill any of the Investor's
covenants or agreements, under this Agreement.
5. MISCELLANEOUS
a. This Agreement shall be governed by and construed in accordance
with the laws of the State of Georgia.
b. This Agreement contains the entire agreement between the parties
with respect to the subject matter hereof. The provisions of this Agreement may
not be modified or waived except in writing.
c. This Agreement and the rights, powers and duties set forth herein
shall, except as set forth herein, bind and inure to the benefit of the heirs,
executors, administrators, legal representatives, successors and assigns of the
parties hereto. The Investor may not assign any of the Investor's rights or
interest in and under this Agreement without the prior written consent of the
Company, and any attempted assignment without such consent shall be void and
without effect.
A-2
<PAGE>
IN WITNESS WHEREOF, the Investor has executed this Agreement on the
________ day of ____________, 1998.
INVESTOR:
- ------------------------------ -----------------------------------
Signature* Signature**
- ------------------------------ -----------------------------------
Please type or legibly print Please type or legibly print
exact name and title if exact name and title if
signing for an entity signing for an entity
*When signing in a representative or fiduciary capacity (as attorney, custodian,
executor, trustee, administrator or guardian), please print your full title.
When signing on behalf of a corporation or partnership, please sign in full
corporate or partnership name and print the title of the authorized officer. In
the event the Escrow Agent is required to refund subscription proceeds (and any
income earned thereon) to Subscribers, the Escrow Agent will deliver such funds
to the person or entity designated above, unless different instructions are
clearly indicated herein.
**In the case of subscriptions by two or more persons, each such person must
sign. Unless otherwise indicated in Exhibit A hereto, certificates for
subscriptions made in the name of two or more persons will be issued in the
names of such persons as joint tenants with right of survivorship, and not as
tenants in common.
A-3
<PAGE>
The foregoing offer is hereby accepted by the Company as to _______________
Shares this ____, day of _____________,1998.
COMMUNITY TRUST FINANCIAL SERVICES CORPORATION
By:
-------------------------
Title:
----------------------
RETURN THIS COMPLETED AND EXECUTED SUBSCRIPTION AGREEMENT (INCLUDING EXHIBITS A
AND B HERETO) AND PAYMENT FOR THE SHARES SUBSCRIBED FOR TO:
For Hand Delivery: By Mail:
- ----------------- -------
Community Trust Financial Community Trust Financial Services
Services Corporation Corporation
3844 Atlanta Highway P.O. Box 1700
Hiram, Georgia 30141 Hiram, Georgia 30141
A-4
<PAGE>
EXHIBIT A
---------
SUBSCRIBER INFORMATION
To induce the Company to permit the Investor to subscribe for Shares and to
permit the Company to qualify the sale of Shares under the securities laws of
various states, the Investor makes the following representations and warranties:
1. The Investor is a bona fide resident of the State of
____________________, having his or her principal residence (if an individual)
or its principal place of business (if an entity) in such state, as indicated
below.
a. Principal Residence (if an individual) or Business (if an entity)
Address:
- --------------------------------------------------------------------------------
Street
- --------------------------------------------------------------------------------
City State Zip Code
( )
- --------------------------------------------------------------------------------
Telephone No.
- --------------------------------------------------------------------------------
Contact Person
b. Correspondence Address (address to which certificates, any dividend
payments or other correspondence is to be directed if different from
address in 1.a above)
- --------------------------------------------------------------------------------
Street
- --------------------------------------------------------------------------------
City State Zip Code
( )
- --------------------------------------------------------------------------------
Telephone No.
- --------------------------------------------------------------------------------
Contact Person
2. The Investor's Social Security Number (if an individual) or Tax
Identification Number (if an entity):
- --------------------------------------------------------------------------------
A-5
<PAGE>
3. Certificate Registration Information:
a. Name in which certificate(s) is to be registered:
(1)
________________________________________________
First Name Initial Last Name
(2)
________________________________________________
First Name Initial Last Name
(3)
________________________________________________
Other (Entity)
b. Manner in which title is to be held (please check one):
___________ Corporation _________ As Custodian for
___________ Partnership ___________________
___________ Individual Under Uniform Gift
___________ Tenants in Common to Minors
___________ Community Property Act of the State of
___________ Joint Tenants with ___________________
Right of Survivorship _________ As Trustee for
___________ Individual Retirement ___________________
Account Date of Trust
___________ Keogh Plan ___________________
_________ As Executor
for _______________
_________ Other:
NOTE: IF ACTING IN A REPRESENTATIVE OR FIDUCIARY CAPACITY, THE INFORMATION
REQUESTED ABOVE SHOULD BE PROVIDED FOR BOTH THE INVESTOR AND THE PERSON OR
ENTITY IN WHOSE NAME THE CERTIFICATE(S) WILL BE REGISTERED.
A-6
<PAGE>
EXHIBIT B
---------
SUBSTITUTE FORM W-9
Taxpayer Identification Number ("TIN"):___________________________
Under penalties of perjury, I certify that (1) the number shown on this form
is my correct TIN (or I have applied for a TIN and am waiting for one to be
issued to me), and (2) 1 am not subject to backup withholding because: (a) I am
exempt from backup withholding; or (b) I have not been notified by the Internal
Revenue Service ("IRS") that I am subject to backup withholding as a result of a
failure to report all interest or dividends; or (c) the IRS has notified me that
I am no longer subject to backup withholding.
You must cross out item (2) above if you have been notified by the IRS that
you are currently subject to backup withholding because you have failed to
report all interest and dividends on your tax return. However, if after being
notified by the IRS that you were subject to backup withholding you received
another notification from the IRS that you are no longer subject to backup
withholding, do not cross out item (2).
PLEASE SIGN HERE: PRINT YOUR NAME: ___________________________________
SIGNATURE ___________________________________
DATE: _____________________________, 1998
NOTE: IF ACTING IN A REPRESENTATIVE OR FIDUCIARY CAPACITY, YOU MUST FURNISH THE
INFORMATION PROVIDED IN SUBSTITUTE FORM W-9 BELOW FOR THE PERSON OR ENTITY IN
WHOSE NAME THE CERTIFICATE(S) WILL BE REGISTERED (THE "PROSPECTIVE
SHAREHOLDER").
SUBSTITUTE FORM W-9
Taxpayer Identification Number ("TIN"):___________________________
Under penalties of perjury, I certify that (1) the number shown on this form
is my correct TIN (or I have applied for a TIN and am waiting for one to be
issued to me), and (2) I am not subject to backup withholding because: (a) I am
exempt from backup withholding; or (b) I have not been notified by the Internal
Revenue Service ("IRS") that I am subject to backup withholding as a result of a
failure to report all interest or dividends; or (c) the IRS has notified me that
I am no longer subject to backup withholding.
You must cross out item (2) above if you have been notified by the IRS that
you are currently subject to backup withholding because you have failed to
report all interest and dividends on your tax return. However, if after being
notified by the IRS that you were subject to backup withholding you received
another notification from the IRS that you are no longer subject to backup
withholding, do not cross out item (2).
A-7
<PAGE>
PLEASE SIGN HERE: PRINT NAME OF
PROSPECTIVE
SHAREHOLDER:_____________________________________
PRINT YOUR NAME
AND TITLE OR
CAPACITY:_________________________________________
SIGNATURE_________________________________________
DATE:_____________________________________________, 1998
In order to prevent the application of federal income tax backup
withholding, each Investor/Prospective Shareholder must provide the Escrow Agent
with his correct TIN. An individual's social security number is his TIN. The
TIN should be provided in the space provided in Substitute Form W-9.
Under federal income tax law, any person who is required to furnish his
correct TIN to another person, and who fails to comply with such requirements,
may be subject to a $50 penalty imposed by the IRS. Additionally, any person
who makes a false statement with no reasonable basis that results in no backup
withholding is subject to a $500 penalty imposed by the IRS.
If backup withholding applies, the Escrow Agent is required to withhold 31%
on payments of interest paid to such Investor/Prospective Shareholder. Backup
withholding is not an additional tax and the tax liability of persons subject to
backup withholding will be reduced by the amount of tax withheld. If backup
withholding results in an overpayment of taxes, a refund may be obtained from
the IRS. Certain taxpayers, including all corporations, are not subject to
these backup withholding and reporting requirements.
If the Investor or Prospective Shareholder has not been issued a TIN and has
applied for a TIN or intends to apply for a TIN in the near future, "Applied
For" should be written in the space provided for the TIN on this Substitute Form
W-9 and the form should be signed and dated. In such case, if the Escrow Agent
is not provided with a TIN within 60 days, the Escrow Agent will withhold 31% of
interest payments thereafter made to each Investor or Prospective Shareholder
until a TIN is provided to the Escrow Agent.
A-8
<PAGE>
===============================================================================
NO DEALER, SALESPERSON OR OTHER INDIVIDUAL HAS BEEN AUTHORIZED TO GIVE ANY
INFORMATION OR TO MAKE ANY REPRESENTATIONS NOT CONTAINED IN THIS PROSPECTUS IN
CONNECTION WITH THE OFFERING COVERED BY THIS PROSPECTUS. IF GIVEN OR MADE, SUCH
INFORMATION OR REPRESENTATIONS MUST NOT BE RELIED UPON AS HAVING BEEN AUTHORIZED
BY THE COMPANY OR THE UNDERWRITER. THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFER
TO SELL OR A SOLICITATION OF AN OFFER TO BUY ANY SECURITIES OFFERED HEREBY TO
ANY PERSON TO WHOM IT IS UNLAWFUL TO MAKE SUCH OFFER IN SUCH JURISDICTION.
NEITHER THE DELIVERY OF THIS PROSPECTUS NOR ANY SALE MADE HEREUNDER SHALL, UNDER
ANY CIRCUMSTANCES, CREATE ANY IMPLICATION THAT THERE HAS BEEN NO CHANGE IN THE
AFFAIRS OF THE COMPANY SINCE THE DATE HEREOF.
------------------------------------------
TABLE OF CONTENTS
Page
------
Prospectus Summary................................. 3
Risk Factors....................................... 7
The Company........................................ 11
Use of Proceeds.................................... 13
Determination of Offering Price.................... 14
Dilution........................................... 14
Plan of Distribution............................... 15
Dividends and Dividend Policy...................... 18
Market for Common Stock............................ 19
Capitalization..................................... 20
Selected Consolidated Financial Data............... 21
Management's Discussion and Analysis of Financial
Condition and Results of Operations............ 22
Business........................................... 31
Description of Capital Stock....................... 57
Legal Matters...................................... 61
Experts............................................ 61
Index to Financial Statements...................... F-1
Subscription Agreement............................. A-1
Until ____________________________ __________, 1998, ALL DEALERS EFFECTING
TRANSACTIONS IN THE REGISTERED SECURITIES, WHETHER OR NOT PARTICIPATING IN THIS
DISTRIBUTION, MAY BE REQUIRED TO DELIVER A PROSPECTUS. THIS IS IN ADDITION TO
THE OBLIGATION OF DEALERS TO DELIVER A PROSPECTUS WHEN ACTING AS UNDERWRITERS
AND WITH RESPECT TO THEIR UNSOLD ALLOTMENTS OR SUBSCRIPTIONS.
==============================================================================
==============================================================================
________ SHARES
[LOGO OF COMMUNITY TRUST APPEARS HERE]
COMMUNITY TRUST FINANCIAL SERVICES CORPORATION
COMMON STOCK
($2.50 PAR VALUE)
-------------------------------------------
PROSPECTUS
--------------------------------------------
KNOX WALL
DIVISION OF MORGAN KEEGAN & COMPANY, INC.
___________________ __, 1998
===============================================================================
<PAGE>
EXHIBIT 1
---------
[LETTERHEAD OF KNOX WALL DIVISION OF MORGAN KEEGAN
& COMPANY, INC. APPEARS HERE]
October 16, 1997
Mr. Ronnie L. Austin
President & Chief Executive Officer
Community Trust Bank
1874 Atlanta Highway
Hiram, Georgia
Re: Engagement of Knox Wall Division of Morgan Keegan & Company, Inc.
Dear Mr. Austin:
Knox Wall, Division of Morgan Keegan & Company, Inc. ("Knox Wall") proposes
to serve as Investment Banker to Community Trust Financial Services Corporation
(the "Company").
BACKGROUND
The Board of Directors of the Company is considering raising additional
capital (up to approx. $5 million) by issuing additional common shares of
Community Trust Financial Services Corporation, the holding company for
Community Trust Bank (the "Bank").
The Board of Directors of the Company is considering establishing an
Employee Stock Ownership Plan ("ESOP").
The Board of Directors has requested an autonomous determination of the
fair market value of the Company. The appraisal is for determining the price at
which the ESOP would purchase shares of Company stock and the price at which the
ESOP will engage in transactions in the Company's stock.
The Board of Director's believes and intends for all additional shares to
be purchased by existing shareholders, officers, directors, employees and the
new ESOP. In short, the Board of Directors believes it can sell all additional
shares locally without the assistance of an underwriter.
<PAGE>
The Board of Directors would like to employ an Investment Banker to perform
the following services:
1. Prepare a fully-documented valuation of the Bank prepared on a
minority interest basis in order to provide the Board of Directors
with a range of value for purposes of establishing an offering price.
2. Advise the Company during the offering (i.e. answer any questions
regarding the terms of the transaction (dilution, etc.).).
3. Prepare an autonomous analysis of the proposed share offering on
behalf of the Board and prepare a fairness opinion, indicating the
fairness of the proposed transaction to Community Trust Financial
Services Corporation shareholders.
4. Appraisal of the Company for purposes of establishing the ESOP.
FEE PROPOSAL
Knox Wall will represent the Company as Investment Banker and perform each
of the four
services listed above. Our fee will be as follows:
1. Fully-documented valuation $ 5,500.00
2. Advise the Company during
the offering 17,500.00
3. Fairness opinion 7,000.00
4. Appraisal for ESOP 3,750.00
Each fee quoted above will be due and payable at the completion of the
service performed. If the assignment is terminated prior to the completion of
the report, Knox Wall will bill for services rendered to the date of
termination.
In addition, the Company will be responsible for all out-of-pocket expenses
to include, but not be limited to the following: travel, telephone, report
preparation, computer access and other research charges, fax, courier, and legal
expenses.
Annual appraisals for purposes of the ESOP will be prepared for $3,750 per
year, plus expenses noted above. Annual reappraisals are presented as a
comprehensive, stand-alone document similar to the original appraisal. This fee
estimate is applicable for two years.
<PAGE>
ADDITIONAL SERVICES AND FEES
If for any reason, the Company is unable to sell all the additional shares,
Knox Wall will, subject to Morgan Keegan's normal due diligence and credit
review procedures, do the following:
1. Knox Wall will serve as Placement Agent on a "best efforts" basis
to place with investors any unsold shares.
2. Knox Wall will charge a fee (in addition to those enumerated
above) equal to 2% of the market value of the shares sold by Knox
Wall.
TERMINATION
This engagement letter may be terminated by either party with 30 days
written notice. Knox Wall will be paid for services rendered to that date.
By: Knox Wall Division of Morgan
Keegan & Company, Inc.
/s/ Edmund J. Wall
---------------------------------
Edmund J. Wall
President
This engagement letter agreed to by signature this 18/th/ day of December,
1997.
By: Community Trust Financial
Services Corporation
/s/ Ronnie L. Austin
- --------------------------------------
Ronnie L. Austin
President & Chief Executive Officer
<PAGE>
EXHIBIT 23.2
------------
CONSENT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
We have issued our report dated January 31, 1998, accompanying the consolidated
financial statements of Community Trust Financial Services Corporation, Inc. and
subsidiaries appearing in the 1997 Annual Report of the Company to its
shareholders and accompanying the schedules included in the Annual Report on
Form 10-KSB for the year ended December 31, 1997 which is incorporated by
reference in this Registration Statement and Prospectus. We consent to the
incorporation by reference, and use of, the aforementioned report in the
Registration Statement and Prospectus on Form S-2 and to the use of our name as
it appears under the captions "Prospectus Summary--Selected Consolidated
Financial Data," "Selected Consolidated Financial Data" and "Experts."
/s/ Porter Keadle Moore LLP
Atlanta, Georgia
April 6, 1998
