<PAGE>
U. S. Securities and Exchange Commission
Washington, D.C. 20549
FORM 10-KSB
[X] ANNUAL REPORT UNDER SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 1998
[ ] TRANSITION REPORT UNDER SECTION 13 or 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from ____________ to ____________
Commission file number 0-19030
COMMUNITY TRUST FINANCIAL SERVICES CORPORATION
(Name of small business issuer in its charter)
Georgia 58-1856582
(State of incorporation) (I.R.S. Employer
Identification No.)
3844 Atlanta Highway, Hiram, Georgia 30141
(Address of principal executive offices)(Zip Code)
(770) 445-1014
(Issuer's telephone number including area code)
--------------------------
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, $2.50 par value
(Title of Class)
---------------------------
Check whether the issuer (1) filed all reports required to be filed by Section
13 or 15(d) of the Exchange Act during the past 12 months (or for such shorter
period that the registrant was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days. Yes X No
--- ---
Check if there is no disclosure of delinquent filers in response to Item 405 of
Regulation S-B is not contained in this form, and no disclosure will be
contained, to the best of the registrant's knowledge, in definitive proxy or
information statements incorporated by reference in Part III of this Form 10-KSB
or any amendment to this Form 10-KSB. [ ]
Revenues for the Registrant's fiscal year ended December 31, 1998, total
$10,376,130.
The aggregate market value of the Registrant's outstanding Common Stock held by
nonaffiliates of the Registrant on March 18, 1999 was $18,066,227. There were
1,148,278 shares of Common Stock outstanding as of March 18, 1999.
DOCUMENTS INCORPORATED BY REFERENCE
-----------------------------------
Portions of the Company's 1998 Annual Report to Stockholders are incorporated by
reference in Part II hereof, and portions of the Company's Proxy Statement for
the 1999 Annual Meeting of Stockholders to be held on April 21, 1999 are
incorporated by reference in Part III hereof.
<PAGE>
Transitional Small Business Disclosure Format (check one): Yes ; No X
--- ---
COMMUNITY TRUST FINANCIAL SERVICES CORPORATION
Annual Report on Form 10-KSB
For the Fiscal Year Ended December 31, 1998
Table of Contents
-----------------
Item Page
Number Number
- ------ ------
Part I
1. Description of Business......................... 2
2. Description of Property......................... 31
3. Legal Proceedings............................... 32
4. Submission of Matters to a Vote of
Security Holders................................ 32
Part II
5. Market for Common Equity and
Related Stockholder Matters..................... 32
6. Management's Discussion and Analysis
or Plan of Operation............................ 32
7. Financial Statements............................ 32
8. Changes in and Disagreements with Accountants on
Accounting and Financial Disclosure............. 33
Part III
9. Directors, Executive Officers, Promoters
and Control Persons; Compliance with
Section 16(a) of the Exchange Act............... 33
10. Executive Compensation.......................... 33
11. Security Ownership of Certain Beneficial Owners
and Management.................................. 34
12. Certain Relationships and Related Transactions.. 34
13. Exhibits and Reports on Form 8-K................ 34
Signatures...................................... 36
Index of Exhibits............................... 38
<PAGE>
PART I
------
ITEM 1. DESCRIPTION OF BUSINESS
- --------------------------------
Overview
- --------
The Company
Community Trust Financial Services Corporation (the Company) was
incorporated under the laws of the State of Georgia at the direction of
Community Trust Bank (the Bank) for the purpose of becoming a bank holding
company for the Bank. On February 22, 1991, following the receipt of all
requisite corporate and regulatory approvals, the Bank became a wholly-owned
subsidiary of the Company, and the shareholders of the Bank became shareholders
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, articles of incorporation 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, sales of its
investment securities, and borrowings from the Federal Home Loan Bank of Atlanta
(the Federal Home Loan Bank). The principal sources of income for the Bank are
interest and fees collected on loans, fees collected on deposit accounts and
interest and dividends collected on other investments. The principal expenses
of the Bank are interest paid on deposits, employee compensation and benefits,
office expenses and other overhead expenses. Management of the Bank currently
anticipates that the Bank will open a full service office in Cobb County,
Georgia in the third quarter of 1999, in addition to the full service branch in
Cobb called Butler Crossing which opened January 1999.
Other Subsidiaries
In addition to the Bank, the Company has invested in three non-bank
subsidiaries: Community Loan Company (CLC); Cash Transactions, LLC (CashTrans);
and Metroplex Appraisals, Inc.
2
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(Metroplex). These subsidiaries historically have not had, and, during 1999, are
not expected to have, a significant effect on the financial condition or results
of operations of the Company.
In 1995, the Company established CLC as a non-bank subsidiary for the
purpose of engaging in the consumer finance business. Until December 31, 1998,
CLC was structured as a joint venture with the Company as majority owner of 75%
of CLC's outstanding capital stock. The remaining 25% of CLC's outstanding
capital stock was owned by an individual who serves as President of CLC. On
December 31, 1998, the Company purchased the 25% minority interest in CLC for
$8,574. CLC became a wholly-owned subsidiary of the Company in order to better
support CLC's expansion into new markets. 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. CLC acquired a consumer finance office located in Gainesville,
Georgia, on April 1, 1998, and has acquired two additional offices in Dalton,
Georgia, and Flowery Branch, Georgia, respectively in February and March 1999.
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 an individual who serves as Chairman of CashTrans. CashTrans is engaged
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. As of February 1999, CashTrans has
diversified its business into selling the same types of machines to retail
establishments, if the retailer so desires. While CashTrans remains focused on
placing its machines in space which is strategically located to encourage
transactions, CashTrans will sell machines, thereby earning income on the sales
and on future maintenance of the machines. CashTrans engages in this business
in Georgia, Florida, South Carolina, Alabama, and Tennessee.
In 1992, the Company established Metroplex as a non-bank subsidiary for the
purpose of performing appraisals of residential and commercial properties 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.
Business of the Company
- -----------------------
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
3
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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, 1998 and 1997, the Company's
weighted average rate earned on all interest-earning assets was 9.59% and 9.58%,
respectively, and the Company's weighted average rate paid on all interest-
bearing liabilities for the same years was 4.41% and 4.40%, respectively. The
Company's interest rate spread for the years ended December 31, 1998 and 1997
therefore was 5.18% for both years, and its net interest income for such years
was $5,508,099 and $4,719,701, respectively. For the year ended December 31,
1998, the Company's comprehensive income consisted of $1,259,896 in net earnings
and $162,140 in other comprehensive income, which is composed of changes in the
unrealized gain on securities available for sale, net of tax. For the year
ended December 31, 1997, the Company's comprehensive income consisted of
$1,038,807 in net earnings and $149,365 in other comprehensive income, which is
composed of changes in the unrealized gain on securities available for sale, net
of tax. The Company's net earnings per share (based on the weighted average
number of shares outstanding during the year) increased from $1.24 for 1997 to
$1.31 for 1998, and its net earnings per share, assuming dilution (which assumes
the effects of potential common shares outstanding during the period), increased
from $1.18 for 1997 to $1.26 for 1998.
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,
-----------------------
1998 1997 1996
------ ------ ------
<S> <C> <C> <C>
Net Interest Margin (Net interest
income divided by average interest-
earning assets)................................... 6.00% 5.93% 5.89%
Return on Average Assets
(Net earnings divided by average
total assets)..................................... 1.28% 1.19% 1.39%
Return on Average Equity
(Net earnings divided by
average equity)................................... 12.50% 14.44% 16.65%
Equity-to-Assets (Average equity
divided by average total assets).................. 10.23% 8.27% 8.32%
Loans to Deposits (Average
loans divided by average
daily deposits)................................... 79.07% 67.75% 65.94%
Dividend Payout Ratio (Dividends
declared by the Company divided by net earnings).. 16.71% 20.20% 19.77%
</TABLE>
4
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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.
<TABLE>
<CAPTION>
Years Ended December 31,
--------------------------------------------------------------------------------------------------
1998 1997 1996
------------------------------- ------------------------------- ----------------------------------
Interest Average Interest Average Interest Average
Average Income/ Yield/ Average Income/ Yield/ Average Income/ Yield/
Balance Expense(1) Rate Balance Expense(1) Rate Balance Expense(1) Rate
------------------------------- -------------------------------- ------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
ASSETS
Interest-earning assets:
Loans(1)(2).................. $64,255,136 $7,266,861 11.31% $52,395,119 $6,075,240 11.60% $46,043,727 $5,462,059 11.86%
Investment securities
Taxable................... 16,254,707 975,526 6.00% 18,771,145 1,114,266 5.94% 18,508,042 1,051,039 5.68%
Tax-exempt(3)............. 6,735,782 311,313 4.62% 4,051,859 197,710 4.88% 2,404,861 114,474 4.76%
Federal funds sold........... 4,491,945 243,472 5.42% 4,395,506 243,198 5.53% 4,163,525 221,396 5.32%
----------- ---------- ----- ----------- ---------- ----- ----------- ---------- -----
Total interest-earning assets.. $91,737,570 $8,797,172 9.59% $79,613,629 $7,630,414 9.58% $71,120,155 $6,848,968 9.63%
Cash and other assets.......... 6,727,872 7,360,685 6,533,382
----------- ----------- -----------
Total assets.............. $98,465,442 $86,974,314 $77,653,537
=========== =========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Interest-bearing liabilities:
Deposits
NOW accounts................ $10,978,936 $ 182,956 1.67% $ 9,058,370 $ 165,008 1.82% $ 8,728,202 $ 194,491 2.23%
Money market accounts....... 8,128,145 225,244 2.77% 8,170,372 232,547 2.85% 7,747,518 216,441 2.79%
Savings deposits............ 12,909,289 371,969 2.88% 13,017,166 391,036 3.00% 12,200,662 375,845 3.08%
Time deposits, $100,000
and over................. 15,380,897 932,577 6.06% 13,584,221 817,029 6.01% 11,321,593 663,640 5.86%
Time deposits, other........ 22,803,962 1,312,184 5.75% 21,879,936 1,276,223 5.83% 19,834,342 1,173,908 5.92%
---------- --------- ----- ---------- --------- ----- ---------- --------- -----
Total interest-bearing
deposits................. $70,201,229 $3,024,930 4.31% $65,710,065 $2,881,843 4.39% $59,832,317 $2,624,325 4.39%
Federal funds purchased........ 58,384 2,825 4.84% 16,932 671 3.96% 23,607 1,334 5.65%
Federal Home Loan Bank
advances.................... 3,502,706 195,614 5.58% -0- -0- -0- -0- -0- -0-
Other borrowings............... 808,473 65,704 8.13% 369,549 28,199 7.63% 466,327 35,957 7.71%
----------- ---------- ----- ----------- ---------- ----- ----------- ---------- -----
Total interest-bearing
liabilities................. $74,570,792 $3,289,073 4.41% $66,096,546 $2,910,713 4.40% $60,322,251 $2,661,616 4.41%
Other liabilities:
Demand deposits.............. $11,919,139 $11,626,615 $ 9,991,772
Accrued interest payable and
other liabilities........... 1,899,503 2,058,989 985,766
----------- ----------- -----------
Total other liabilities... 13,818,642 13,685,604 10,977,538
Total liabilities...... $88,389,434 $79,782,150 $71,299,789
Stockholders' equity........... 10,076,008 7,192,164 6,353,748
Total liabilities
and stockholders' equity... $98,465,442 $86,974,314 $77,653,537
=========== =========== ===========
Net interest income............ $5,508,099 $4,719,701 $4,187,352
========== ========== ==========
Net interest spread............ 5.18% 5.18% 5.22%
Net interest margin............ 6.00% 5.93% 5.89%
- ----------------------------
</TABLE>
(1) Interest income on loans includes amortization of deferred loan fees and
other discounts of $920,413, $811,805, and $763,558, for the fiscal years ended
December 31, 1998, 1997, and 1996, 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.
5
<PAGE>
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.
<TABLE>
<CAPTION>
Year Ended December 31, Year Ended December 31,
1998 Compared to 1997 1997 Compared to 1996
-------------------------------------- --------------------------------
<S> <C> <C> <C> <C> <C> <C>
Rate/ Net Rate/ Net
Volume Yield Change Volume Yield Change
---------- --------- ---------- -------- --------- --------
Interest income:
Loans (1)(2)...................... $1,344,621 $(153,000) $1,191,621 $738,838 $ (125,657) $613,181
Investment securities (3)......... 9,573 (34,710) (25,137) 108,945 37,518 146,463
Federal funds sold................ 5,279 (5,005) 274 12,625 9,177 21,802
---------- --------- ---------- -------- --------- --------
Total interest income............ 1,359,473 (192,715) 1,166,758 860,408 (78,962) 781,446
Interest expense:
NOW accounts...................... 32,859 (14,911) 17,948 7,127 (36,610) (29,483)
Money market accounts............. (1,197) (6,106) (7,303) 11,978 4,128 16,106
Savings deposits.................. (3,218) (15,849) (19,067) 24,697 (9,506) 15,191
Time deposits, $100,000 and over.. 108,886 6,662 115,548 135,688 17,701 153,389
Time deposits, other.............. 53,346 (17,384) 35,962 119,531 (17,217) 102,314
---------- --------- ---------- -------- --------- --------
Total deposits.................... 190,676 (47,588) 143,088 299,021 (41,504) 257,517
Other borrowings.................. 222,714 12,558 235,272 (7,739) (681) (8,420)
---------- --------- ---------- -------- --------- --------
Total interest expense......... 413,390 (35,030) 378,360 291,282 (42,185) 249,097
---------- --------- ---------- -------- --------- --------
Net interest income.............. $ 946,082 $(157,684) $ 788,398 $569,126 $(36,777) $532,
========= ========= ========= ======== ========= ========
</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.
6
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The following table sets forth the repricing of the Company's interest-
earning assets and interest-bearing liabilities as of December 31, 1998. The
time periods in the table represent the period, following December 31, 1998,
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
------ ------ ------- ------ ------ -----
(Dollar amounts in thousands)
<S> <C> <C> <C> <C> <C> <C>
Interest Sensitive Assets
- -------------------------
Fed Funds Sold........................ $ 2,990 -0- -0- -0- -0- $ 2,990
Investment Securities
Taxable (1)........................ 721 1,639 1,870 5,002 5,014 14,246
Tax-exempt (1)..................... -0- -0- 212 2,314 5,596 8,122
Loans
Fixed rate......................... 4,258 1,934 2,147 269 -0- 8,608
Adjustable rate.................... 34,234 1,394 1,437 1,148 -0- 38,213
Scheduled payments................. 1,946 2,403 4,677 18,305 288 27,619
------- ------- ------- ------- ------- -------
Total Interest-Sensitive Assets....... $44,149 $ 7,370 $10,343 $27,038 $10,898 $99,798
======= ======= ======= ======= ======= =======
Interest Sensitive Liabilities
- ------------------------------
NOW................................... $11,495 -0- -0- -0- -0- $11,495
Money Market.......................... 9,702 -0- -0- -0- -0- 9,702
Savings............................... 15,325 -0- -0- -0- -0- 15,325
Time Deposits......................... 6,057 4,354 5,759 7,068 -0- 23,238
Time, in excess of $100,000........... 3,718 3,612 5,091 3,292 -0- 15,713
Other interest-bearing liabilities.... -0- -0- -0- 5,500 -0- 5,500
------- ------- ------- ------- ------- -------
Total Interest Sensitive Liabilities.. $46,297 $ 7,966 $10,850 $15,860 $ -0- $80,973
======= ======= ======= ======= ======= =======
Interest Sensitivity Gap.............. (2,148) (596) (507) 11,178 10,898 18,825
Cumulative Gap........................ (2,148) (2,744) (3,251) 7,927 18,825
Ratio of cumulative gap to total
interest sensitive assets.......... (2.15)% (2.75)% (3.26)% 7.94% 18.86%
</TABLE>
- -----------
(1) All investment securities are shown at the carrying value.
Lending Activities
- ------------------
7
<PAGE>
General
At December 31, 1998, the Company's net loan portfolio constituted
approximately 68.36% of the Company's total assets. The following table sets
forth the composition of the Company's loan portfolio at the indicated dates.
At December 31,
--------------------------------------------
1998 1997
--------------------- ---------------------
Amount Percent Amount Percent
----------- -------- ----------- --------
Commercial, financial,
and agricultural................. $10,156,937 13.64% $ 7,765,358 13.58%
Real estate - construction....... 12,631,488 16.97% 8,308,349 14.53%
Real estate - mortgage........... 40,378,680 54.24% 30,833,493 53.91%
Consumer loans................... 11,273,056 15.15% 10,281,657 17.98%
----------- ------ ----------- ------
Total loans...................... 74,440,161 100.00% 57,188,857 100.00%
Less: Allowance for loan losses.. 935,234 829,232
------- -------
Total loans, net................. $73,504,927 $56,359,625
=========== ===========
The following table sets forth the scheduled maturities of the loans for
selected categories in the Company's loan portfolio as of December 31, 1998
based on their contractual terms to maturity. Loans unpaid at maturity are
renegotiated based on current market rates and terms.
<TABLE>
<CAPTION>
Rate Structure for Loans
Loans Maturing Maturing Over One Year
------------------------------------------------- ---------------------------
Floating
Less Than One to Five More than Predetermined or Adjustable
One Year Years Five Years Total Interest Rate Rate
----------- ----------- ---------- ----------- ------------- -------------
<S> <C> <C> <C> <C> <C> <C>
Commercial, financial
and agricultural.... $ 3,049,000 $5,466,250 $1,641,687 $10,156,937 $3,347,080 $3,760,857
Real estate
construction........ 11,748,983 732,505 150,000 12,631,488 160,051 722,454
----------- ----------- ---------- ----------- ------------- -------------
Total................. $14,797,983 $6,198,755 $1,791,687 $22,788,425 $3,507,131 $4,483,311
=========== =========== ========== =========== ============= =============
</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),
8
<PAGE>
totaled $10,156,937 or 13.64% of the Company's gross loan portfolio at December
31, 1998. All commercial loans are held in the Bank's loan portfolio, other than
one loan in the amount of $738,800 from the Company to an unconsolidated
subsidiary. 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.
Real Estate - Construction Loans
$12,631,488 or 16.97% of the Company's gross loans outstanding at December
31, 1998 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
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.
9
<PAGE>
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, 1998, real estate - mortgage loans totaled $40,378,680 or
54.24% of the Company's gross 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, $14,371,015 or 19.31% of the Company's gross 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 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, 1998, the remainder of the Company's real estate loans
totaled $26,007,665 or 34.94% of the Company's gross loan portfolio. These
loans 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, 1998, consumer loans totaled $11,273,056 or 15.15% of the
Company's gross loan portfolio. $9,335,750 or 82.81% of these loans are held in
the Bank's loan portfolio, with the remainder held in CLC's loan portfolio.
10
<PAGE>
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.
At December 31, 1998, consumer loans held in CLC's loan portfolio totaled
$1,937,306 or 2.60% of the Company's gross 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, 1998, credit card loans totaled $1,201,279, or 1.61% 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. Loans are originated by loan officers who operate from
the Bank's offices in Paulding and Cobb Counties. 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 additional offices in Cobb County in 1999. Management
expects to have lenders who will originate loans from the Cobb locations.
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 credit worthiness of the borrower and the value of any collateral
involved.
11
<PAGE>
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 $100,000. All other
loan officers have the authority to approve secured loans of up to $50,000.
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 $250,000. The Loan
Committee of the Board of Directors, comprised of the President and five non-
employee Directors, must approve all loans over $250,000, and all lending
relationships where a borrower's aggregate indebtedness to the Bank exceeds
$250,000.
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.
CLC originates loans primarily in Cherokee, Polk, Walker, Hall, and
Whitfield Counties, which are all located in northwest Georgia. Loans are
originated by lenders who operate from CLC's offices in the Georgia cities of
Rockmart, Rossville, Woodstock, Gainesville, Dalton, and Flowery Branch. These
lenders actively solicit loan applications from existing customers. CLC also
originates loans through a conditional sales contract program with retailers.
CLC may 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 1% 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, 1998, the Bank recognized
origination, commitment and other loan fees totaling $628,683, which equaled
11.41% of the Company's net interest income for such year. For the years ended
December 31, 1997 and 1996, the Bank recognized origination, commitment and
other loan fees totaling $575,498 and $651,219, respectively, which equaled
12.19% and 15.55%, respectively, of the Company's net interest income for such
years.
12
<PAGE>
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, 1998, CLC recognized loan fees totaling $291,730,
which equaled 5.30% of the Company's net interest income for such year. 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.
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 of 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 monthly by the Bank's senior lending officers and 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.
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
13
<PAGE>
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 two restructured loans as of December 31, 1998,
which totaled $85,787. 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 write-downs 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 $244,183 of its real estate owned due to loan foreclosures during the
year ended December 31, 1998. The book value of real estate owned that was sold
by the Bank during the year ended December 31, 1998 totaled $227,733. As of
December 31, 1998, there was $47,750 in 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 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
$104,132 as of December 31, 1998, as compared to $97,196 as of December 31,
1997.
14
<PAGE>
The following table sets forth information regarding the Company's delinquent
and non-performing assets as of the dates indicated.
At December 31,
--------------------
1998 1997
--------- ---------
Accruing loans which are contractually
past due 90 days or more.................. $176,997 $177,787
Ratio of delinquent but accruing loans to:
Total loans........................... 0.24% 0.31%
Total assets.......................... 0.16% 0.19%
Non-performing assets:
Nonaccruing loans........................... $555,429 $392,335
Real estate acquired through foreclosure.... 47,750 -0-
Property acquired through repossession...... 9,665 1,500
-------- --------
Total................................. $612,844 $393,835
======== ========
Ratio of non-performing assets to:
Total loans and real estate acquired
through foreclosure and repossessions.... 0.82% 0.69%
Total assets................................ 0.57% 0.43%
The Bank recorded interest income on the nonaccruing loans listed above for
the fiscal year ended December 31, 1998 of $28,974. The gross interest income
that would have been recorded during the fiscal year ended December 31, 1998 if
the nonaccruing loans listed above had been current in accordance with their
original terms would have been $50,089.
Allowance for Loan Losses
The allowance for 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 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 in the range of 1.00% to 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 to income in
response to changes in the outstanding loan balance and changes in the asset
quality ratings. 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. Additionally, in 1998 the Bank began a special allowance based
on risks associated with Year 2000. As of December 31, 1998 management was not
aware of any specific loan problems which necessitated a specific loan loss
allowance. 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
15
<PAGE>
for loan losses as of December 31, 1998 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 bimonthly basis to review its adequacy in covering any future
losses that may be sustained by CLC.
The following table summarizes the Company's loan loss experience for the
periods indicated.
<TABLE>
<CAPTION>
Years Ended December 31,
------------------------
1998 1997
-------- --------
<S> <C> <C>
Allowance for possible loan losses,
beginning of the period........................................... $829,232 $713,518
Charge-offs for the period:
Commercial, financial, and agricultural.......................... 14,385 7,459
Real estate - construction....................................... -0- -0-
Real estate - mortgage........................................... -0- 752
Consumer......................................................... 253,766 137,614
-------- --------
Total charge-offs................................................ 268,151 145,825
-------- --------
Recoveries for the period:
Commercial, financial, and agricultural.......................... $ 5,290 $ 8,734
Real estate - construction....................................... -0- -0-
Real estate - mortgage........................................... 201 787
Consumer......................................................... 32,419 47,748
-------- --------
Total recoveries................................................. 37,910 57,269
-------- --------
Net charge-offs for the period..................................... 230,241 88,556
-------- --------
Provision for loan losses charged to earnings...................... 336,243 204,270
-------- --------
Allowance for possible loan losses,
end of the period................................................ $935,234 $829,232
======== ========
Ratio of allowance for loan losses to
total average loans outstanding.................................. 1.46% 1.58%
Ratio of net charge-offs during
the period to average loans
outstanding during the period.................................... 0.36% 0.17%
</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 loss as discussed above. All other
loans
16
<PAGE>
are assigned a rating that consists of five categories ranging from excellent to
"special mention". The total amount of loans in each of these five loan rating
categories is weighted by a factor of 0.50% that management believes reasonably
reflects losses that can be anticipated with respect to loans in each of these
categories. Loans in the substandard, doubtful, or loss categories are weighted
by factors of 1%, 15%, and 50%, respectively. Based on these weightings, the
Bank's management establishes an allowance for loan losses that is reviewed by
its Board of Directors each month. Additionally, management takes into
consideration other factors such as the amount of loans committed but unfunded,
changes in the economy, and issues such as Year 2000, in order to establish an
allowance for loan losses.
The following table sets forth the Company's allocation of the allowance
for loan losses as of December 31, 1998, and 1997.
<TABLE>
<CAPTION>
At December 31, 1998 At December 31, 1997
------------------------------ ----------------------------
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.. $ 88,876 13.64% $ 76,141 13.58%
Real estate - construction............... 103,594 16.97% 40,045 14.53%
Real estate - mortgage................... 415,618 54.24% 221,962 53.91%
Consumer................................. 127,200 15.15% 124,424 17.98%
Unallocated.............................. 199,946 N/A 366,660 N/A
-------- ------ -------- ------
Total............................... $935,234 100.00% $829,232 100.00%
======== ====== ======== ======
</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 $1,286,839 or
12.40% of total interest and other income for the year ended December 31, 1998,
as compared to $1,555,174, or 17.60%, respectively, as of December 31, 1997.
The Company's investment portfolio totaled $22,368,036 or 20.80% of total assets
at December 31, 1998, as compared to $23,322,111, or 25.38%, respectively, as of
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.
At December 31,
----------------------------
1998 1997
----------- -----------
U.S. Government and agency
obligations............................... $14,245,887 $17,826,801
Other bonds, notes, debentures
and securities............................ 919,400 301,100
States & political subdivisions tax-exempt.. 7,202,749 5,194,210
----------- -----------
Total.................................... $22,368,036 $23,322,111
=========== ===========
17
<PAGE>
The following table sets forth the carrying value of the Bank's investments
at December 31, 1998, the weighted average yields on the Bank's investments at
December 31, 1998 and the periods to maturity of the Bank's investments from
December 31, 1998.
<TABLE>
<CAPTION>
Periods to Maturity from December 31, 1998
----------------------------------------------------------------------------------------------
1 year or less 1 - 5 years 5 - 10 years Over 10 years
---------------------- -------------------- -------------------- -------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Weighted Weighted Weighted Weighted
Average Average Average Average
Amount Yield (1) Amount Yield (1) Amount Yield (1) Amount Yield (1)
------ --------- ------ --------- ------ --------- ------ ---------
U. S. Government
agencies.................... $ 984,422 5.32% $4,115,561 6.04% $2,563,852 6.46% $ 212,808 6.15%
U. S. Treasuries............. 2,523,750 6.19% 514,531 7.13% -0- -0- -0- -0-
U. S. Government agencies -
mortgage-backed............. 99,905 5.19% 372,047 5.64% 179,077 5.22% 2,679,934 6.18%
Tax-exempt
municipal bonds............. 211,894 6.64% 2,315,457 6.84% 1,828,355 6.77% 2,847,043 8.35%
Other bonds, notes, de-
bentures, and securities.... 919,400 5.44% -0- -0- -0- -0- -0- -0-
---------- ----- ---------- ----- --------- ----- --------- -----
Total....................... $4,739,371 5.85% $7,317,596 6.34% $4,571,284 6.53% $5,739,785 7.22%
========== ========== ========== ==========
</TABLE>
- -----------------------
(1)The weighted average yields on tax-exempt securities have been computed on a
tax-equivalent basis.
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, proceeds from sales of loan participations and investment
securities, and other borrowings. 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. In 1998, the Company received funds through the Bank's
borrowing relationship as a member of the Federal Home Loan Bank of Atlanta, and
through the Company's issuance of common stock in the Offering. The Company
sold 294,118 shares of common stock at a price of $17.00 per share. Net
proceeds of the Offering were $4,821,662. The Bank received $5,500,000 in
proceeds from notes payable to the Federal Home Loan Bank during 1998.
Additionally, in 1997, the Company established a $2,500,000 revolving credit
facility with The Bankers Bank, Atlanta, Georgia. As of December 31, 1998, the
Company had no borrowings outstanding under this facility.
18
<PAGE>
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 and Cobb Counties 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. Management plans to
allow transactions via the Bank's website by second quarter, thereby creating an
Internet branch. The Bank has partnered with a vendor which will provide
customers with a bill paying service and the ability to conduct funds transfers
via a secure Internet connection. Management intends to limit potential
depositors by geographic location and other criteria, in order to protect the
Bank against potential losses associated with fraud.
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.
The following table sets forth the maturity distribution of time deposits
of $100,000 or more at December 31, 1998.
Time Deposits
$100,000 or more
----------------
3 months or less................. $ 3,718,193
Over 3 months through 6 months... 3,611,906
Over 6 months through 12 months.. 5,090,863
Over 12 months................... 3,291,853
-----------
Total outstanding............... $15,712,815
===========
Borrowings
The Bank has available two term federal funds lines of credit with
correspondent banks, in the amounts of $3,300,000 and $1,000,000, respectively.
The maximum amount borrowed under these fed funds lines during 1998 was
$2,000,000. 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. As a member of the
Federal Home Loan Bank of Atlanta, the Bank has $5,500,000 outstanding in notes
payable through that relationship as of December 31, 1998, which was the maximum
amount borrowed during 1998. This credit facility with The Federal Home Loan
Bank is secured by 1-4 family loans, and interest rates on borrowings are
competitive with time deposits of like maturities. The amount of credit
available from the Federal Home Loan Bank fluctuates based on criteria set by
that institution. Additionally, the Company has a $2,500,000 revolving credit
facility with The Bankers Bank, Atlanta, Georgia, which is intended to enhance
the Company's liquidity. As of December 31, 1998, the Company had no borrowings
outstanding under this facility, and $1,600,000 was the maximum amount
outstanding during 1998. 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.
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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
full-service ATMs and 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 Sagemark Consulting.
Competition
- -----------
Based on total assets of $104,571,626 as of December 31, 1998, the Bank is
presently one of the smaller financial institutions with offices in Paulding and
Cobb Counties. The Bank faces strong competition for deposits and loans from
numerous other financial institutions, some of which are community banks that
expanded their services from adjacent counties into Paulding County. Larger
financial institutions have greater resources and lending limits than the Bank,
and typically have more branch offices. A federal credit union owned by the
employees of a local public utility company also has 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.
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 1980s, 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.
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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. 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 since effective July 1,
1998, Georgia now permits unrestricted state-wide branching.
Employees
- ---------
As of December 31, 1998, the Bank had 58 full-time and 17 part-time
employees, Metroplex had two full-time employees and one part-time employee, CLC
had eleven full-time and one part-time employees, CashTrans had eight full-time
employees and two part-time employees, and the Company had five full-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 bank holding company, the Company is subject to regulation by the
Board of Governors of the Federal Reserve System (the Federal Reserve) pursuant
to the Bank Holding Company Act of 1956, as amended (BHCA) and by the Georgia
Department pursuant to the Financial Institutions Code of Georgia (FICG). The
Company also is required to file certain reports with, and otherwise comply with
the rules and regulations of, the Securities and Exchange Commission (the
Commission) under federal securities laws.
The Bank is a state bank and is subject to the supervision of, and is
regularly examined by, the Georgia Department. In addition, the Bank's deposit
accounts are insured up to applicable limits by the bank insurance fund of the
Federal Deposit Insurance Corporation (the FDIC) and the Bank, therefore, is
subject to regulation by the FDIC.
To the extent that the following information describes statutory and
regulatory provisions, it is qualified in its entirety by reference to the
particular statutory and regulatory provisions. Any change in applicable laws
or regulations may have a material effect on the business and prospects of the
Company and the Bank.
Regulation of the Company
General. As the bank holding company for the Bank, the Company is subject
to the supervision and regulation by the Federal Reserve and the Georgia
Department. As a bank holding company, the Company is required to file with the
Federal Reserve an annual report and such additional information as the Federal
Reserve may require pursuant to the BHCA. The Company also files an annual
registration with the Georgia Department pursuant to FICG. The Federal Reserve
and the Georgia Department also may make examinations of the Company and each of
its subsidiaries.
Regulatory Capital Requirements. The Federal Reserve and the FDIC have
issued substantially similar risk-based and leverage capital guidelines
applicable to United States banking organizations. In addition, those
regulatory agencies may from time to time require that a banking organization
maintain
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capital above the minimum levels, whether because of its financial condition or
actual or anticipated growth. The Federal Reserve's risk-based guidelines define
a two-tier capital framework. Tier 1 capital consists of common and qualifying
preferred shareholders' 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, 1998 were 17.34% and 18.54% respectively.
The leverage ratio is determined by dividing Tier 1 capital by adjusted
average total assets. Although the stated minimum ratio is 3%, all but the most
highly rated bank holding companies are required by the Federal Reserve to
maintain a minimum leverage ratio of 4% to 5%. The Georgia Department requires
a minimum Tier 1 capital to adjusted total assets ratio of 4%. The Company's
leverage ratio at December 31, 1998 was 12.72%.
If the capital of a bank holding company falls below minimum required
levels, the bank holding company may be denied approval to acquire or establish
additional banks or non-bank businesses. According to Federal Reserve policy,
bank holding companies are expected to act as a source of financial strength to
a subsidiary bank and to commit resources to support such subsidiary. This
support may be required at times when a bank holding company may not be able to
provide such support.
Change of Control and Permissible Activities. Bank holding companies are
required by the BHCA to obtain approval from the Federal Reserve prior to
acquiring, directly or indirectly, ownership or control of more than 5% of the
outstanding shares of any class of voting stock of any bank or bank holding
company.
The BHCA also prohibits bank holding companies, with certain exceptions,
from acquiring more than 5% of the voting shares of any company that is not a
bank, and from engaging in any business other than banking or managing or
controlling banks or other permissible subsidiaries. The Federal Reserve is
authorized to approve, among other things, the ownership of shares by a bank
holding company in any company the activities of which the Federal Reserve has
determined to be so closely related to banking or to managing or controlling
banks as to be a proper incident thereto. Additionally, the Federal Reserve, by
regulation, has deemed certain nonbanking activities to be permissible
activities and has exempted such activities from the prior approval
requirements, although notice to and review by the Federal Reserve of such
activities would be necessary before the Company could engage de novo in such
activities. The Federal Reserve is empowered to differentiate between
activities that are initiated de novo by a bank holding company or a subsidiary
and activities commenced by acquisition of a going concern.
Additionally, the Federal Change in Bank Control Act requires 60 days'
prior written notice to the appropriate federal bank regulatory agency before
any person may acquire "control" of a bank or bank holding company. The
appropriate federal bank regulatory agency with respect to acquisitions of
control of a state non-member bank, such as the Bank, is the FDIC, and the
appropriate federal bank regulatory agency with respect to acquisitions of
control of a bank holding company, such as the Company, is the Federal Reserve.
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Under existing Federal Reserve regulations, "control" is presumed to exist
where the acquiring party (which includes a group "acting in concert") (a) owns,
controls, or holds with power to vote 25% or more of any class of voting
securities of the institution, or (b) owns, controls, or holds with power to
vote 10% or more of any class of voting securities of the institution, if (i)
the institution has registered securities under Section 12 of the Securities
Exchange Act of 1934, or (ii) no other person will own a greater percentage of
that class of voting securities immediately following the transaction.
Supervisory and Enforcement Powers. The Federal Reserve has been granted
enforcement powers over bank holding companies and non-banking subsidiaries to
forestall activities that represent unsafe or unsound practices or constitute
violations of law. These powers may be exercised through the issuance of cease-
and-desist orders or other actions. The Federal Reserve also is empowered to
assess civil money penalties against companies or individuals who violate the
BHCA or orders or regulations thereunder, to order termination of non-banking
activities of non-banking subsidiaries of bank holding companies and to order
termination of ownership and control of a non-banking subsidiary by a bank
holding company. Certain violations may also result in criminal penalties.
Restrictions on Transactions with Affiliates. The Company, Metroplex,
CashTrans and CLC are "affiliates" of the Bank under the Federal Reserve Act,
which imposes certain restrictions on (i) loans by the Bank to the Company, (ii)
investments in the stock or securities of the Company by the Bank, (iii) the
Bank's accepting the stock or securities of one of its affiliates from a
borrower as collateral for loans and (iv) the purchase of assets from the
Company by Bank. Further, under the BHCA, a bank holding company and its
subsidiaries are prohibited from engaging in certain tie-in arrangements in
connection with any grant of credit, lease or sale of property or furnishing of
services.
Miscellaneous. Most bank holding companies are required to give the
Federal Reserve prior written notice of any purchase or redemption of their
outstanding equity securities if the gross consideration for the purchase or
redemption, when combined with the net consideration paid for all such purchases
or redemptions during the preceding 12 months, is equal to 10% or more of the
bank holding company's consolidated net worth. The Federal Reserve may
disapprove such a purchase or redemption if it determines that the proposal
constitutes an unsafe or unsound practice, would violate any law, regulation,
Federal Reserve order or directive or any condition imposed by, or written
agreement with, the Federal Reserve. The prior notice requirement does not
apply to certain "well-capitalized" bank holding companies that meet specified
criteria.
In November 1985, the Federal Reserve adopted its Policy Statement on Cash
Dividends Not Fully Covered by Earnings. The Policy Statement sets forth
various guidelines that the Federal Reserve believes that a bank holding company
should follow in establishing its dividend policy. In general, the Federal
Reserve stated that bank holding companies should not pay dividends except out
of current earnings and unless the prospective rate of earnings retention by the
holding company appears consistent with its capital needs, asset quality and
overall financial condition.
Georgia Law. The Company also is a bank holding company within the meaning
of the FICG, which provides without limitation that, without the prior approval
of the Georgia Department, it is unlawful (i) for any action to be taken that
causes a company to become a bank holding company, (ii) for any bank holding
company to acquire direct or indirect ownership or control of more than 5% of
the voting shares of any bank, (iii) for any bank holding company or subsidiary
thereof, other than a bank, to acquire all or substantially all of the assets of
a bank, (iv) for any action to be taken that causes a bank to become a
subsidiary of a bank holding company or (v) for any bank holding company to
merge or
23
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consolidate with any other bank holding company. It also is unlawful for any
company to acquire direct or indirect ownership or control of more than 5% of
the voting shares of any bank in Georgia unless such bank has been in existence
and continuously operating as a bank for a period of five years or more prior to
the date of application to the Georgia Department for approval of such
acquisition. One bank holding companies, such as the Company, are prohibited
from acquiring another bank until their initial bank subsidiary has been
incorporated for a period of at least two years.
Regulation of the Bank
General. The Bank is a commercial bank chartered under the laws of the
State of Georgia and its deposit accounts are insured up to applicable limits by
the Bank Insurance Fund (BIF) of the FDIC. The Bank is subject to the
regulation, examination and supervision of the Georgia Department and the FDIC.
Both the Georgia Department and the FDIC issue regulations and require the
filing of reports describing the activities and financial condition of the banks
under their jurisdiction. Each agency conducts periodic examinations to test
compliance with various regulatory requirements and generally supervises the
operation of such banks. This supervision and regulation are intended primarily
for the protection of depositors. As an FDIC-insured, state-chartered bank, the
Bank may not enter into certain transactions unless applicable regulatory tests
are met or it obtains the prior approval of the regulatory agencies. For
instance, the approval of the Georgia Department and the FDIC are required prior
to any merger or consolidation or the establishment of an office at which
banking business is conducted. The Bank also is regulated in certain respects
by the Federal Reserve.
Georgia Law. The Bank derives its lending and investment authority
primarily from the applicable provisions of the FICG and the rules and
regulations promulgated thereunder by the Georgia Department. Under these laws
and regulations, commercial banks, including the Bank, may invest in real estate
mortgages, commercial and consumer loans, certain types of securities, including
certain corporate debt and equity securities, asset backed securities, and
obligations of federal, state and local governments and agencies, and certain
other assets. A Georgia chartered bank's lending powers generally are subject
to certain restrictions, including limits on amounts loaned to one borrower.
Additionally, the exercise by an FDIC insured commercial bank of the lending and
investment powers of a commercial bank under the FICG may be limited by FDIC
regulations.
Georgia commercial banks may, with the approval of the Georgia Department,
merge or consolidate with another bank, trust company or other corporation as
long as the resulting institution is a bank or trust company engaged only in the
business of a bank or trust company. Additionally, a bank may sell, lease,
exchange or otherwise dispose of all or substantially all of its property and
assets with the approval of the Georgia Department.
The FICG prohibits the payment of dividends by a state chartered bank if
such bank is insolvent or would thereby be rendered insolvent, if such dividend
is contrary to restrictions contained in the bank's articles of incorporation,
if the dividend would be paid from other than retained earnings or if the bank
does not have the required amount of paid-in capital and appropriated retained
earnings. In addition, pursuant to regulations adopted by the Georgia
Department, a Georgia-chartered bank must have the approval of the Georgia
Department to pay cash dividends, unless at the time of such payment (i) the
total classified assets at the most recent examination of the bank do not exceed
80% of the bank's equity capital and reserves as reflected by such examination;
(ii) the aggregate amount of dividends declared or anticipated to be declared in
the calendar year does not exceed 50% of the net profits, after taxes but before
dividends, of the bank for the previous calendar year; and (iii) the ratio of
the bank's equity capital,
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<PAGE>
as defined, to adjusted total assets, as defined, is not less than 6%.
Under FICG, the Georgia Department may issue orders to a Georgia chartered
bank to submit to an investigation by the Georgia Department, to discontinue
unauthorized or unsafe practices or to keep prescribed books and accounts. If
the Georgia Department finds that any director or officer of any banking
organization has violated any law or duly enacted regulation, or has continued
unauthorized or unsafe practices in conducting the business of the banking
organization after being notified by the Georgia Department to discontinue such
practices, or has been indicted for any crime involving moral turpitude or
breach of trust, or has filed for bankruptcy protection from creditors, the
Georgia Department may remove such director or officer from office. No director
or officer of the Bank has been found by the Georgia Department to have engaged
in, or has been investigated by the Georgia Department with respect to, any of
such activities.
Insurance of Accounts
Deposits of the Bank are insured by the FDIC to a maximum of $100,000 for
each insured depositor through the Bank Insurance Fund. As an insurer, the FDIC
issues regulations, conducts examinations and generally supervises the
operations of its insured institutions (institutions insured by the FDIC
hereinafter are referred to as "insured institutions"). Any insured institution
which does not operate in accordance with or conform to FDIC regulations,
policies and directives may be sanctioned for non-compliance. For example,
proceedings may be instituted against an insured institution if the institution
or any director, officer or employee thereof engages in unsafe and unsound
practices, is operating in an unsafe or unsound condition, or has violated any
applicable law, regulation, rule, order or condition imposed by the FDIC. If
insurance of accounts is terminated by the FDIC, the deposits in the institution
will continue to be insured by the FDIC for a period of two years following the
date of termination. The FDIC requires an annual audit by independent
accountants and also periodically makes its own examinations of insured
institutions. The FDIC may revalue assets of an institution, based upon
appraisals, and require establishment of specific reserves in amounts equal to
the difference between such reevaluation and the book value of the assets.
The FDIC has adopted a risk-related deposit insurance system. Under the
risk-related insurance regulations, each insured depository institution is
assigned to one of three risk classifications: "well capitalized," "adequately
capitalized," or "under capitalized." Within each risk classification, there
are three subgroups. Each insured depository institution is assigned to one of
these subgroups within its risk classification based upon supervisory
evaluations submitted to the FDIC by the institution's primary federal
regulator. Depending upon a BIF member's risk classification and subgroup,
applicable regulations provide that its deposit insurance premium may be as low
as .04% of insured deposits or as high as .31% of insured deposits. The Bank
has been notified that, based on its risk classification and supervisory
subgroup, its BIF assessment rate is zero percent of insured deposits for the
period from January 1, to June 30, 1999. This is the most favorable assessment
rate applicable to any insured institution. However, the Deposit Insurance
Funds Act of 1996 (DIFA) requires that a Financing Corporation (FICO) assessment
be paid by the Bank in 1999. The annual FICO assessment rate for banks is
presently .01198% of deposits. The Bank paid $9,590 in assessments, which was
the minimum set by the FDIC for that period, during the year ended December 31,
1998.
The FDIC has issued risk-based and leverage capital guidelines similar to
that issued by the
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Federal Reserve and discussed above. At December 31, 1998, the Bank had Tier 1
capital of $9,872,495, or 9.64% of total average assets.
Certain provisions of the Federal Reserve Act, made applicable to the Bank
by Section 18(j) of the Federal Deposit Insurance Act (12 U.S.C. (S)1828(j)) and
administered with respect to the Bank by the FDIC, establish standards for the
terms of, limit the amount of and establish collateral requirements with respect
to any loans or extensions of credit to, and investments in, affiliates by the
Bank as well as set arms-length criteria for such transactions and for certain
other transactions (including payment by the Bank for services) between the Bank
and its affiliates. In addition, related provisions of the Federal Reserve Act
and the Federal Reserve regulations (also administered with respect to the Bank
by the FDIC) limit the amounts of, and establish required procedures and credit
standards with respect to, loans and other extensions of credit to officers,
directors and principal shareholders of the Bank and to related interests of
such persons.
The FDIC may impose sanctions on any insured bank that does not operate in
accordance with FDIC regulations, policies and directives. Proceedings may be
instituted against any insured bank or any director, officer or employee of the
bank that is believed by the FDIC to be engaged in unsafe or unsound practices,
including violation of applicable laws and regulations. The FDIC may revalue
assets of an institution, based upon appraisals, and may require the
establishment of specific reserves in amounts equal to the difference between
such revaluation and the book value of the assets. The FDIC also is empowered
to assess civil penalties against companies or individuals who violate certain
federal statutes, orders or regulations. In addition, the FDIC has the
authority to terminate insurance of accounts, after notice and hearing, upon a
finding by the FDIC that the insured institution is or has engaged in any unsafe
or unsound practice that has not been corrected, or is in an unsafe or unsound
condition to continue operations or has violated any applicable law, regulation,
rule or order of, or condition imposed by, the FDIC. The Bank does not know of
any past or current practice, condition or violation that might lead to
termination of its deposit insurance or to any proceeding by the FDIC against
the Bank or any of its directors, officers or employees.
Federal Reserve. Although the Bank is not a member of the Federal Reserve
System, it is subject to Federal Reserve regulations that require it to maintain
reserves against its transaction accounts (primarily checking accounts).
Because reserves generally must be maintained in cash or in non-interest bearing
accounts, the effect of the reserve requirements is to increase the Bank's cost
of funds. The Federal Reserve regulations currently require that average daily
reserves be maintained against transaction accounts in the amount of 3% of the
aggregate of such net transaction accounts up to $46.5 million, plus 10% of the
total in excess of $46.5 million.
Prompt Corrective Action. The Federal Deposit Insurance Act (FDIA), among
other things, requires the federal regulatory agencies to take "prompt
corrective action" if a depository institution does not meet minimum capital
requirements. The FDIA establishes five capital tiers: "well capitalized;"
"adequately capitalized;" "undercapitalized;" "significantly undercapitalized;"
and "critically undercapitalized." A depository institution's capital tier will
depend upon how its capital levels compare to various relevant capital measures
and certain other factors, as established by regulation.
The federal bank regulatory agencies have adopted regulations establishing
relevant capital measures and relevant capital levels applicable to FDIC-insured
banks. The relevant capital measures are the total capital ratio, tier 1
capital ratio and the leverage ratio. Under the regulations, a FDIC-insured
bank will be:
26
<PAGE>
"well capitalized" if it has a total capital ratio of 10% or greater,
a tier 1 capital ratio of 6% or greater and a leverage ratio of 5% or
greater and is not subject to any order or written directive by the
appropriate regulatory authority to meet and maintain a specific
capital level for any capital measure;
"adequately capitalized" if it has a total capital ratio of 8% or
greater, a tier 1 capital ratio of 4% or greater and a leverage ratio
of 4% or greater (3% in certain circumstances) and is not "well
capitalized;"
"under capitalized" if it has a total capital ratio of less than 8%, a
tier 1 capital ratio of less than 4% or a leverage ratio of less than
4% (3% in certain circumstances);
"significantly undercapitalized" if it has a total capital ratio of
less than 6%, a tier 1 capital ratio of less than 3% or a leverage
ratio of less than 3%; and
"critically undercapitalized" if its tangible equity is equal to or
less than 2% of average quarterly tangible assets.
An institution may be downgraded to, or deemed to be in, a capital category
that is lower than is indicated by its capital ratios if it is determined to be
in an unsafe or unsound condition or if it receives an unsatisfactory
examination rating with respect to certain matters. As of December 31, 1998,
the Company and the Bank each had capital levels that qualify each as being
"well capitalized" under such regulations.
The FDIA generally prohibits a FDIC-insured bank from making any capital
distribution (including payment of a dividend) or paying any management fee to
its holding company if the bank would thereafter be "undercapitalized."
"Undercapitalized" banks are subject to growth limitations and are required to
submit a capital restoration plan. The federal regulators may not accept a
capital plan without determining, among other things, that the plan is based on
realistic assumptions and is likely to succeed in restoring the bank's capital.
In addition, for a capital restoration plan to be acceptable, the bank's parent
holding company must guarantee that the institution will comply with such
capital restoration plan. The aggregate liability of the parent holding company
is limited to the lesser of: (i) an amount equal to 5% of the bank's total
assets at the time it became "undercapitalized;" and (ii) the amount which is
necessary (or would have been necessary) to bring the institution into
compliance with all capital standards applicable with respect to such
institution as of the time it fails to comply with the plan. If a bank fails to
submit an acceptable plan, it is treated as if it is "significantly
undercapitalized."
"Significantly undercapitalized" insured banks may be subject to a number
of requirements and restrictions, including orders to sell sufficient voting
stock to become "adequately capitalized," requirements to reduce total assets,
and cessation of receipt of deposits from correspondent banks. "Critically
undercapitalized" institutions are subject to the appointment of a receiver or
conservator. A bank that is not "well capitalized" is subject to certain
limitations relating to so-called "brokered" deposits.
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Other Legislation
In September 1994, the federal Riegle-Neal Interstate Banking and Branching
Efficiency Act was enacted. The Act allows bank holding companies, beginning
one year following enactment of the legislation, to acquire existing banks
across state lines, regardless of state statutes. Beginning in June 1997, banks
were permitted to consolidate interstate subsidiaries into branches and merge
with a bank across state lines to the extent that the applicable states had not
"opted out of interstate branching" prior to the effectiveness of the branching
provisions. The Act also permits de novo branching to the extent that a
particular state opts into the de novo branching provisions. The Act provides a
concentration limitation with a nationwide limitation of 10% of total deposits
of insured depository institutions in the United States and 30% of total
deposits of insured depository institutions in a specific state.
The Riegle Community Development and Regulatory Improvement Act of 1994
also was enacted in September 1994, and provides for the creation of a community
development financial institutions fund to promote economic revitalization in
community development. Banks and savings institutions are allowed to
participate in such community development banks. The Act also contains
provisions designed to enhance small business capital formation and to enhance
disclosure with regard to high cost mortgages for the protection of consumers.
The Act also contains more than 50 regulatory relief provisions that apply to
banks and savings institutions including the coordination of examinations by
various federal agencies, coordination of frequency and types of reports
financial institutions are required to file and reduction of examinations for
well-capitalized institutions.
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
eliminated all branching restrictions, thereby permitting unrestricted state-
wide branching, effective July 1, 1998.
Regulation of CLC
As a consumer finance company, CLC is subject to regulation by the
Commissioner of Insurance of the State of Georgia, also known as the Georgia
Industrial Loan Commissioner (the Commissioner), pursuant to the Georgia
Industrial Loan Act (the GILA). CLC is required to file certain reports and
such additional information as the Commissioner may require pursuant to the
GILA, and is subject to periodic examinations of its books, accounts, and
records by the Commissioner's duly authorized representatives. Each office of
CLC is licensed by the Commissioner separately, and, if CLC wishes to move an
office within a county, written notice must be given to the Commissioner
supplying facts and circumstances showing how the removal to a new location will
promote the convenience and advantage of that community. Licenses must be
renewed on an annual basis. CLC may loan any sum of money not to exceed $3,000
for a period not to exceed 36 months and 15 days and may charge, contract for,
collect, and receive interest and fees on said loans, pursuant to the GILA.
As a subsidiary of the Company, CLC also is subject to examination by the
Federal Reserve pursuant to the BHCA and by the Georgia Department pursuant to
the FICG. The Federal Reserve and the Georgia Department also may make
examinations of CLC.
ITEM 2. DESCRIPTION OF PROPERTY
- --------------------------------
28
<PAGE>
The Company and the Bank operate from a main office and five branch offices
in Paulding and Cobb Counties in Georgia. The main office, built in 1988 and
located at 3844 Atlanta Highway in Hiram, Georgia, contains approximately 16,000
square feet. The Bank owns the land and the building at this location. The
Company pays rent for the use the premises, equipment and furniture of the Bank.
Metroplex and CashTrans lease office space in Dallas, Georgia. CLC leases
office space in the Georgia cities of Woodstock, Rockmart, and Rossville,
Gainesville, Dalton, and Flowery Branch.
The Bank opened a full service branch office at 100 Hardee Street, Dallas,
Paulding County, Georgia in June 1991. The Bank leases the land and owns the
building at this location, which contains approximately 1,150 square feet and
includes three teller stations and two drive-in window teller stations. The
lease on this property has been extended until June 2000. In December 1991, the
Bank also opened a full service office located in the Kroger grocery store of
the Paulding Commons Shopping Center, 4215 Jimmy Lee Smith Parkway in Hiram,
Georgia. The Bank leases its office space in the grocery store and owns the
furniture, fixtures and equipment used in the Bank office. In January 1996, the
Bank opened a full service office at 105 Brownsville Road, Powder Springs,
Georgia which is located in the Brownsville Crossing Shopping Center. The Bank
leases its office space in the shopping center and owns the furniture, fixtures,
and equipment used in the Bank office. In April 1998, the Company entered into
a lease for the Bank's limited services facility at Barrett Court in Kennesaw,
Georgia which is located in the Town Center area of Cobb County. In January
1999, the Bank opened a full service office at 3161 Cobb Parkway, Suite 100,
Kennesaw, Georgia which is located in the Butler Crossing Shopping Center. The
Bank leases its office space in the shopping center and owns the furniture,
fixtures, and equipment used in the Bank office.
At December 31, 1998, the cost of office properties and equipment (less
allowances for depreciation and amortization) owned by the Company was
$2,237,830. Data processing services are provided by an outside service bureau.
The Company believes that its facilities are adequate and suitable for the
Company's current business and its anticipated business for the foreseeable
future.
The Company is unaware of any potential environmental liability that it may
incur in connection with any properties or other assets owned by it.
None of the properties owned by the Company or the Bank is subject to
encumbrances.
ITEM 3. LEGAL PROCEEDINGS
- --------------------------
There are no material legal proceedings to which the Company or the Bank is
a party or to which any of their properties is subject. The Bank and CLC are
periodically involved as a plaintiff or defendant in various legal actions in
the ordinary course of its business.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
- ------------------------------------------------------------
No matters were submitted to a vote of shareholders of the Company during
the fourth quarter of the Company's fiscal year ended December 31, 1998.
29
<PAGE>
PART II
-------
ITEM 5. MARKET FOR THE COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
- --------------------------------------------------------------------
Information relating to the market for, holders of and dividends paid on
the Company's Common Stock is set forth under the caption "Selected Annual
Consolidated Financial Data" in the Company's 1998 Annual Report to
Stockholders. Such information is incorporated herein by reference.
The Company's ability to pay dividends is dependent on dividends paid by
the Bank, if any. Additionally, Georgia law imposes certain restrictions on the
payment of cash dividends by the Bank. See "Item 1. Business - Supervision and
Regulation."
ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION
- ------------------------------------------------------------------
Selected consolidated financial data for the Company for each of the five
fiscal years ending December 31, 1998, 1997, 1996, 1995, and 1994 are set forth
under the caption "Selected Annual Consolidated Financial Data" in the Company's
1998 Annual Report to Stockholders. Such information is incorporated herein by
reference. A discussion of the Company's financial condition and results of
operations at and for the dates and periods covered by the consolidated
financial statements of the Company is set forth in the Company's 1998 Annual
Report to Stockholders under the caption "Management's Discussion and Analysis
of Financial Condition and Results of Operations." Such discussion is
incorporated herein by reference.
ITEM 7. FINANCIAL STATEMENTS
- -----------------------------
The following consolidated financial statements of the Company, together
with the Report of Independent Certified Public Accountants thereon, which are
set forth in the Company's 1998 Annual Report to Stockholders, are incorporated
herein by reference:
Consolidated Balance Sheets as of December 31, 1998 and 1997
Consolidated Statements of Earnings for the years ended
December 31, 1998, 1997 and 1996
Consolidated Statements of Comprehensive Income for the years ended
December 31, 1998, 1997 and 1996
Consolidated Statements of Changes in Stockholders' Equity for
the years ended December 31, 1998, 1997 and 1996
Consolidated Statements of Cash Flows for the years ended
December 31, 1998, 1997 and 1996
Notes to Consolidated Financial Statements
30
<PAGE>
ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
- ------------------------------------------------------------------------
FINANCIAL DISCLOSURE
- --------------------
Neither the Company nor the Bank had any change in accountants or
disagreements with accountants on accounting and financial disclosure during the
two most recent fiscal years or subsequently.
PART III
--------
ITEM 9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS;
- ----------------------------------------------------------------------
COMPLIANCE WITH SECTION 16(a) OF THE EXCHANGE ACT
- -------------------------------------------------
Information relating to the Directors of the Company is set forth under the
caption "Proposal 1 - Election of Directors" on pages 4 through 8 of the Proxy
Statement for the Company's 1999 Annual Meeting of Shareholders (1999 Proxy
Statement). Such information is incorporated herein by reference. Information
relating to the executive officers of the Company is set forth under the caption
"Proposal 1 - Election of Directors - Officers" on page 9 of the 1999 Proxy
Statement. To the knowledge of the Company, each person who, at any time during
the year ended December 31, 1998, was a Director, Executive Officer, or
beneficial owner of more than ten percent of the Company's Common Stock filed,
on a timely basis, all reports required to be filed by them, during such year,
pursuant to Section 16(a) of the Securities Exchange Act of 1934.
ITEM 10. EXECUTIVE COMPENSATION
- --------------------------------
Information relating to executive compensation is set forth under the
caption "Proposal 1 - Election of Directors - Compensation of Directors" on page
9 of the 1999 Proxy Statement and under the caption "Proposal 1 - Election of
Directors - Executive Compensation" on pages 9 through 11 of the 1999 Proxy
Statement and under the caption "Proposal 1 - Election of Directors -
Transactions with Management" on page 11 of the 1999 Proxy Statement. Such
information is incorporated herein by reference.
ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
- ------------------------------------------------------------------------
Information regarding ownership of the Company's $2.50 par value Common
Stock by certain persons is set forth under the captions "Voting - Principal
Stockholders" on page 2 of the 1999 Proxy Statement and "Proposal 1 - Election
of Directors Nominees" on pages 4 through 8 of the 1999 Proxy Statement. Such
information is incorporated herein by reference.
ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
- --------------------------------------------------------
Information regarding certain transactions between the Company and
Directors, executive officers and certain shareholders, and their affiliates, is
set forth under the caption "Proposal 1 - Election of Directors - Transactions
with Management" on page 11 of the 1999 Proxy Statement. Such information is
incorporated herein by reference.
ITEM 13. EXHIBITS AND REPORTS ON FORM 8-K
- ------------------------------------------
31
<PAGE>
(a) Exhibits
The following exhibits are filed as a part of or incorporated by reference
in this report:
Exhibit No. Description
----------- -----------
3.1* Articles of Incorporation of the Company
3.2 Bylaws of the Company
(filed as Exhibit 3.2 to the Company's Annual Report on Form 10-
KSB for the year ended December 31, 1997)
4. The rights of security holders are defined in the Articles of
Incorporation and Bylaws provided in exhibit 3.1 and 3.2,
respectively.
10.1* 1988 Stock Option Plan and related specimen copy of option
10.2 1993 Employee Stock Option Plan
(Filed as Exhibit 10.2 to the Company's Annual Report on Form 10-
K for the year ended December 31, 1992)
10.3 1993 Directors Stock Option Plan
(Filed as Exhibit 10.3 to the Company's Annual Report on Form 10-
K for the year ended December 31, 1992)
10.5 Lease dated June 9, 1989 by and between First Baptist Church of
Dallas, Georgia and the Bank relating to lease of real property
(Filed as Exhibit 10.5 to the Company's Annual Report on Form 10-
k for the year ended December 31, 1992, as amended by lease
extension agreement dated and filed as Exhibit 10.8 to the
Company's Annual Report on Form 10-KSB for the
year ended December 31, 1996)
10.6 License and Equipment Purchase Agreement dated as of July 27,
1991 by and between Bank South, National Association and
Community Trust Bank relating to branch in Paulding Commons
Kroger store (Filed as Exhibit 10.6 to the Company's Annual
Report on Form 10-K for the year ended December 31, 1992)
10.7 Lease dated May 25, 1995 by and between Brock Investments, Inc.,
of Hiram, Georgia and the Bank relating to lease of real property
(Filed as Exhibit 10.7 to the Company's Annual Report on Form 10-
K for the year ended December 31, 1995)
10.9 Loan and Stock Pledge Agreement dated November 14, 1998, between
the Company and The Bankers Bank (Filed as Exhibit 2 to the
Company's Current Report on Form 8-K dated November 14, 1997)
32
<PAGE>
10.10 Employment Agreement dated January 1, 1998, between the Company
and Ronnie Austin
13.+ 1998 Annual Report**
21.+ Subsidiaries
27.+ Financial Data Schedule (electronic filing only)
__________
*Incorporated herein by reference to the exhibit of the same number in the
Company's Registration Statement on Form S-4, as amended (No. 33-37601).
** Certain sections of the Company's 1998 Annual Report, as indicated in this
report, are incorporated herein by reference. Other than as noted herein, the
Company's 1998 Annual Report is furnished to the Commission solely for its
information and is not deemed to be "filed" with the Commission or subject to
the liabilities of Section 18 of the Securities Exchange Act of 1934.
+ Filed herewith.
(b) Reports on Form 8-K
No report on Form 8-K was filed by the Company with the Commission
during the quarter ended December 31, 1998.
33
<PAGE>
SIGNATURES
In accordance with Section 13 or 15(d) of the Securities Exchange Act of
1934, the Registrant has caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
COMMUNITY TRUST FINANCIAL SERVICES CORPORATION
(Registrant)
Date: March 24, 1999 By: /s/Ronnie L. Austin
--------------------
Ronnie L. Austin
President and Chief Executive Officer
By: /s/Angel J. Byrd
----------------
Angel J. Byrd
Comptroller
(principal accounting officer)
In accordance with the Securities Exchange Act of 1934, this report has
been signed below by the following persons on behalf of the Registrant and in
the capacities indicated on March 24, 1999.
Signature Title
--------- -----
/s/W. A. Foster III Chairman of the Board
- -------------------
W. A. Foster III
/s/Ronnie L. Austin President, Chief Executive Officer and
- -------------------
Ronnie L. Austin Director (principal executive officer)
/s/George Berry Director
- ---------------
George Berry
/s/R. Alan Bullock Director
- ------------------
R. Alan Bullock
34
<PAGE>
/s/Bobbie P. Cooper Director
- -------------------
Bobbie P. Cooper
/s/J. Calvin Earwood Director
- --------------------
J. Calvin Earwood
/s/Tommie R. Graham Director
- -------------------
Tommie R. Graham
/s/John C. Helms Director
- ----------------
John C. Helms
35
<PAGE>
INDEX OF EXHIBITS
-----------------
Exhibit No. Description Page No.
- ----------- ----------- --------
3.1* Articles of Incorporation of the Company
3.2 Bylaws of the Company
4. The rights of security holders are defined in the Articles of
Incorporation and Bylaws provided in exhibit 3.1 and 3.2,
respectively.
10.1* 1988 Stock Option Plan and related specimen copy of option
10.2 1993 Employee Stock Option Plan
(Filed as Exhibit 10.2 to the Company's Annual Report
on Form 10-K for the year ended December 31, 1992)
10.3 1993 Directors Stock Option Plan
(Filed as Exhibit 10.3 to the Company's Annual Report
on Form 10-K for the year ended December 31, 1992)
10.5 Lease dated June 9, 1989 by and between First Baptist Church of
Dallas, Georgia and the Bank relating to lease of real property
(Filed as Exhibit 10.5 to the Company's Annual Report on Form 10-
K for the year ended December 31, 1992, as amended by lease
extension agreement dated and filed as Exhibit 10.8 to the
Company's Annual Report on Form 10-KSB for the
year ended December 31, 1996)
10.6 License and Equipment Purchase Agreement dated as of July 27,
1991 by and between Bank South, National Association and
Community Trust Bank relating to branch in Paulding Commons
Kroger store (Filed as Exhibit 10.6 to the Company's Annual
Report on Form 10-K for the year ended December 31, 1992)
10.7 Lease dated May 25, 1995 by and between Brock Investments, Inc.,
of Hiram, Georgia and the Bank relating to lease of real property
(Filed as Exhibit 10.7 to the Company's Annual Report on Form 10-
K for the year ended December 31, 1995)
10.9 Loan and Stock Pledge Agreement dated November 14, 1997, between
the Company and The Bankers Bank (Filed as Exhibit 2 to the
Company's Current Report on Form 8-K dated November 14, 1997)
10.10 Employment Agreement dated January 1, 1998, between the Company
and Ronnie Austin
13.+ 1998 Annual Report**
36
<PAGE>
21.+ Subsidiaries
27.+ Financial Data Schedule (electronic filing only)
__________
*Incorporated herein by reference to the exhibit of the same number in the
Company's Registration Statement on Form S-4, as amended (No. 33-37601).
** Certain sections of the Company's 1998 Annual Report, as indicated in this
report, are incorporated herein by reference. Other than as noted herein, the
Company's 1998 Annual Report is furnished to the Commission solely for its
information and is not deemed to be "filed" with the Commission or subject to
the liabilities of Section 18 of the Securities Exchange Act of 1934.
+ Filed herewith.
37
<PAGE>
EXHIBIT 13
SELECTED ANNUAL CONSOLIDATED FINANCIAL DATA
The selected annual consolidated financial data set forth below under the
headings "Balance Sheet Data" and "Statement of Earnings Data" are derived from
the audited consolidated financial statements of the Company and its
subsidiaries. The information below should be read in conjunction with the
audited financial statements and related notes and "Management's Discussion and
Analysis of Financial Condition and Results of Operations " set forth elsewhere
herein.
<TABLE>
<CAPTION>
1998 1997 1996 1995 1994
----------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C>
BALANCE SHEET DATA
Total assets 107,528,272 91,904,781 85,203,618 68,230,620 62,835,550
Loans net 73,504,927 56,359,625 48,712,195 38,314,857 34,477,171
Deposits 86,906,529 81,981,103 76,897,761 61,235,289 57,289,105
Stockholders equity 13,971,203 7,869,832 6,877,876 6,031,906 4,943,152
STATEMENT OF EARNINGS DATA
Net interest income 5,508,099 4,719,701 4,187,352 3,395,024 2,873,926
Provision for loan losses 336,243 204,270 197,841 186,645 243,000
Noninterest income 1,578,958 1,203,961 1,151,183 838,882 816,385
Noninterest expense 4,985,623 4,236,313 3,575,171 2,764,321 2,477,119
Net earnings 1,259,896 1,038,807 1,057,884 885,407 677,367
Basic earnings per share 1.31 1.24 1.26 1.06 .81
Diluted earnings per share 1.26 1.18 1.23 1.04 .80
ASSET QUALITY RATIOS
Nonperforming assets to total assets 0.57% 0.43% 0.04% 0.40% 0.37%
Net chargeoffs to average loans 0.35% 0.17% 0.15% 0.13% 0.53%
Allowance for loan losses
to total loans 1.26% 1.45% 1.44% 1.50% 1.27%
Allowance for loan losses
to nonperforming assets 152.61% 210.55% 2146.76% 213.12% 189.18%
KEY PERFORMANCE RATIOS
Return on average assets 1.28% 1.19% 1.39% 1.37% 1.14%
Return on average equity 12.50% 14.44% 16.65% 17.01% 13.86%
Net interest margin 6.00% 5.93% 5.89% 5.66% 5.29%
Net interest spread 5.18% 5.17% 5.23% 4.98% 4.86%
Average equity to
average assets 10.23% 8.27% 8.32% 8.06% 8.25%
Noninterest expense to
average assets 5.06% 4.88% 4.67% 4.29% 4.18%
Efficiency ratio /(1)/ 70.35% 71.52% 66.97% 65.29% 67.12%
Dividends per share .25 .25 .25 .25 .20
</TABLE>
(1) The efficiency ratio is calculated by dividing non interest expense by the
sum of net interest income and non interest income.
Common Stock Information
The Company has just completed the registration process to be listed on the OTC
(Over The Counter) Bulletin Board with the help of Knox Wall, a division of
Morgan Keegan & Company, Inc. (Morgan Keegan). Morgan Keegan will act as a
market maker for the Company's Common Stock which is being traded under the
symbol CTFV. There was no established trading market for the Company's Common
Stock in 1998. During the year ended December 31, 1998, the Company believes
that the trading prices of the Company's Common Stock have ranged between $15.00
and $17.13 per share.
The Company paid cash dividends on its Common Stock of $.25 per share to
stockholders of record as of March 9, 1998, and the Company has declared a
dividend of $.25 per share payable to stockholders of record as of March 19,
1999. The payment of dividends by the Company, however, is at the discretion of
the Board of Directors and is effectively limited by the Company's regulators.
The Company had 814 shareholders of record as of March 9, 1999.
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
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 Community Trust Financial Services
Corporation (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, Community Trust
Bank (the Bank), Metroplex Appraisals, Inc. (Metroplex), and Community Loan
Company (CLC). The Company owns a 49% interest in CashTransactions, LLC
(CashTrans) which 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, 1998, the Company had consolidated total assets of $107,528,272
as compared to $91,904,781 at December 31, 1997. Stockholders' equity increased
approximately 77.53% to $13,971,203 or $12.17 per share at December 31, 1998, as
compared to stockholders' equity of $7,869,832 or $9.35 per share at December
31, 1997. Stockholders' equity increased primarily as a result of a public
offering (the Offering) in August 1998 whereby the Company sold 294,118 shares
of common stock at a price of $17.00 per share. Net proceeds to the Company
from the Offering, after payment of placement agent commissions and deducting
the expenses of the Offering, were $4,821,662. Additionally, stockholders'
equity increased in 1998 due to comprehensive income of $1,422,036. For the
year ended December 31, 1998, the Company's comprehensive income consisted of
$1,259,896 in net earnings and $162,140 in other comprehensive income, which is
composed of changes in the unrealized gain on securities available for sale, net
of tax. The Company's net interest income for the year ended December 31, 1998,
increased approximately 16.70% or $788,398 from its net interest income for the
year ended December 31, 1997. The Company's net earnings increased 21.28% from
$1,038,807 for the year ended December 31, 1997 to $1,259,896 for the year ended
December 31, 1998, while its basic earnings per share (based on the weighted
average number of shares outstanding during the year) increased from $1.24 to
$1.31. This increase in earnings growth compared to growth in net interest
income was attributable primarily to a 31.15% increase in noninterest income
that resulted largely from (i) the Bank's collection of $78,361 in mortgage
origination fees related to its mortgage division which was formed in 1998, (ii)
an increase of $60,785 in appraisal fees collected by Metroplex, (iii) $46,499
in gains collected by the Bank in 1998 on sales of securities, as compared to
$3,219 in losses incurred by the Bank in 1997 on sales of securities, and (iv) a
$46,531 decrease in the Company's equity in the loss of its unconsolidated
subsidiary, CashTrans.
For the year ended December 31, 1998, the Bank recorded net earnings of
$1,380,763, an increase of 16.96% or $200,245 from the year ended December 31,
1997. For the year ended December 31, 1998, CLC recorded net earnings of
$42,268. For the year ended December 31, 1998, CashTrans experienced a loss of
approximately $131,866 due primarily to costs associated with the acquisition
and installation of 168 automated teller machines in 1998
<PAGE>
throughout Georgia, Florida, South Carolina, Alabama and Tennessee. Under the
equity method of accounting, 49% of this loss, or $64,614, is reflected in the
Company's noninterest income for the year ended December 31, 1998.
Management generally is pleased with the Company's results for 1998. While it
is true that the Company's results of operations for 1998 were adversely
affected by CashTrans' losses, these losses were consistent with management's
expectations due to the subsidiary's swift growth during its "start-up" phase.
Meanwhile, the Bank has continued to experience consistent earnings growth and
CLC and Metroplex performed well in 1998.
The Company's results of operations are primarily dependent upon the Bank's
results of operations. The Bank represents 97.25% and 89.25%, respectively, of
the Company's total assets and total revenues at December 31, 1998. 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 Company 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 noninterest income and expenses, the provision for loan losses and income tax
expense. Noninterest income consists primarily of service charges on deposits
and gains or losses on the sale of investment securities. Noninterest 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. Until
December 31, 1998, CLC was owned 75% by the Company and 25% by an individual who
is employed as the President of CLC. On December 31, 1998, the Company
purchased the 25% minority interest in CLC for $8,574. CLC became a wholly-
owned subsidiary of the Company in order to better support CLC's expansion into
new markets. In 1998, CLC conducted its operations from four offices located in
Gainesville, Rockmart, Rossville and Woodstock, Georgia, respectively. Since
December 31, 1998, CLC has expanded operations through the acquisitions of two
offices located in Dalton and Flowery Branch, Georgia, respectively. CLC
represents 2.08% and 6.60%, respectively, of the Company's total assets and
total revenues at December 31, 1998, as compared to 1.42% and 5.72%,
respectively, of the Company's total assets and total revenues at December 31,
1997. Although CLC experienced a modest income of $42,268 for 1998, CLC
increased its loans approximately 36.60% or $519,081. The fact that CLC has
expanded operations quickly since its establishment in September 1995, through
the acquisition of four existing consumer finance businesses by year end 1998,
has adversely affected its profitability. Each office has been purchased
through debt financing with the Company, and CLC incurs a cost of intangible
assets (i.e., goodwill) upon each purchase of an existing office. CLC incurred
interest expense of $163,487 on its debt to the Company in 1998, and CLC
experienced cost of $41,104 for the year due to amortization of goodwill
associated with the four offices purchased
<PAGE>
prior to December 31, 1998. Goodwill is typically paid in the consumer finance
industry when purchasing the assets of an existing office, if the office's
license issued by the Commissioner of Insurance of the State of Georgia pursuant
to the Georgia Industrial Loan Act is transferred with those assets. A loan
license has been transferred in association with each of CLC's purchases of
existing offices. The operations of CLC were funded principally through a
revolving line of credit arrangement with the Company in 1998. At December 31,
1998, $2,005,050 was outstanding under this credit facility. In February 1999,
the Company chose to invest $2,500,000 in capital in CLC for the purpose of
retiring this line of credit arrangement with the Company. While CLC does not
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. As of
February 1999, CashTrans has diversified its business into selling the same
types of machines to retail establishments, if the retailer so desires. While
CashTrans remains focused on placing its machines in space which is
strategically located to encourage transactions, CashTrans will sell machines,
thereby earning income on the sales and on future maintenance of the machines.
CashTrans represents 0.51% and 4.46%, respectively, of the Company's total
assets and total revenues at December 31, 1998, as compared to 0.46% and 1.31%,
respectively, of the Company's total assets and total revenues at December 31,
1997. CashTrans' loss for 1998 was attributable primarily to costs associated
with the placement by CashTrans of 168 automated teller machines in service
during the year 1998. Management expects that CashTrans will require anywhere
from twelve to eighteen months to recover its investment in an individual
machine from service charges generated from 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 1998 are not
unusual for start-up ventures. 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, 1998, $738,800 was
outstanding under this facility. 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 of JRH
Diversified, Inc. Because CashTrans was initially capitalized with only
$100,000, $49,000 of which represented the Company's investment, the cumulative
loss of $358,693 experienced by CashTrans made it insolvent at the end of 1998.
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
<PAGE>
contributions. Management believes that CashTrans' cash flow is more than
adequate to service the loans that have been granted 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 and
commercial properties located in Paulding, Bartow, Polk, Harralson, Floyd, and
Cobb counties, Georgia. Metroplex represents 0.05% and 1.86%, respectively, of
the Company's total assets and total revenues at December 31, 1998, as compared
to .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, 1998, were approximately $28,396. 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 OPERATION
YEAR ENDED DECEMBER 31, 1998 COMPARED TO YEAR ENDED DECEMBER 31, 1997
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 16.70% to $5,508,099
for the year ended December 31, 1998, as compared to $4,719,701 for the year
ended December 31, 1997. Interest income increased approximately 15.29% to
$8,797,172 for 1998, as compared to $7,630,414 for 1997, due primarily to an
approximate 22.64% increase in the average loan portfolio for 1998 as compared
to 1997. Interest expense increased approximately 13.00% to $3,289,073 for
1998, as compared to $2,910,713 for 1997, due primarily to an approximate 12.82%
increase in the average amount of interest-bearing deposits and liabilities of
the Company.
The Company's average earning assets for the year ended December 31, 1998 were
$91,737,570, having a weighted average yield of 9.59%, resulting in a net
interest margin of 6.00% for 1998. This compares to average earning assets for
the year ended December 31, 1997 of $79,613,629, having a weighted average yield
of 9.58%, resulting in a net interest margin of 5.93% for 1997. The slight
increase in net interest margin is attributable primarily to the 15.23% increase
in the Company's average earning assets, as compared to the 12.82% 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 1998.
<PAGE>
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 $612,844, or 0.57% of total assets as of
December 31, 1998, as compared to $393,835, or 0.43% of total assets as of
December 31, 1997. The increase in non-performing assets from 1997 to 1998 was
attributable primarily to an increase in the Bank's loans placed on non-accrual
status. The Bank's loans place on non-accrual status included two loans to one
borrower which were secured by real estate. Since December 31, 1998, the
property has been foreclosed, and management does not anticipate a loss on the
sale of this real estate. At December 31, 1998, the Company had $176,997 in
accruing loans which were contractually past due ninety days as compared to
$177,787 at December 31, 1997.
The Georgia Department of Banking and Finance (the 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 1998, the Company sustained
$230,241 in net loan losses as compared to $88,556 in net losses in 1997.
Although the Bank's net loan losses increased to $152,484 as of December 31,
1998, as compared to $79,601 as of December 31, 1997, management considers the
level of loan losses to be acceptable based on industry comparisons, since the
Bank has achieved exceptionally low levels of net loan losses in recent years.
CLC's net loan losses increased to $77,757 as of December 31, 1998, as compared
to $8,955 as of December 31, 1997, primarily due to changes in management's
policy regarding treatment of past due loans. The Company's provision for loan
losses was $336,243 for the year ended December 31, 1998, as compared to
$204,270 for the year ended December 31, 1997. The Company's loan loss
allowance was $935,234, or 1.26% of outstanding loans, as of December 31, 1998.
No material loss is anticipated on non-accrual or restructured loans, therefore
no specific reserves or writedowns were considered necessary by management as of
December 31, 1998.
NONINTEREST INCOME
Total noninterest income, consisting of service charges on deposits, appraisal
fees, credit life insurance commissions, securities gains, loss in CashTrans and
other miscellaneous income, increased approximately 31.15% to $1,578,958 for the
year ended December 31, 1998, as compared to total noninterest income of
$1,203,961 for the year ended December 31, 1997. The increase in noninterest
income resulted primarily from (i) the Bank's collection of $78,361 in mortgage
origination fees related to its mortgage division which was formed in 1998, (ii)
an increase of $60,785 in appraisal fees collected by Metroplex, (iii) $46,499
in gains collected by the Bank in 1998 on sales of securities, as compared to
$3,219 in losses incurred by the Bank in 1997 on sales of securities, (iv) a
$46,531 decrease in the Company's equity in the loss of its unconsolidated
subsidiary, CashTrans, and (v) an increase of $44,444 in insurance commissions
collected.
<PAGE>
NONINTEREST EXPENSES
Noninterest expenses, consisting of salaries and employee benefits, occupancy
and other miscellaneous expenses, increased approximately 17.69% to $4,985,623
for 1998, as compared to $4,236,313 for 1997. This increase is attributable
primarily to an increase in salaries and employee benefits caused by the
Company's need for additional human resources due to the growing customer base
of the Bank and CLC, as well as routine salary increases. Occupancy expense
increased by approximately $65,405, or 10.05%, for the year ended December 31,
1998, as compared to the same period in 1997, primarily due to increases in rent
expense and telephone expense associated with the Bank's addition of a loan
production office and a full service branch in Cobb County. Other operating
expense increased by approximately $236,539, or 17.71%, for the year ended
December 31, 1998, as compared to the same period in 1997, primarily due to
increased loan and collection expense, consulting fees, and data processing fees
incurred by the Bank.
INCOME TAX EXPENSE
Total income tax expense for the year ended December 31, 1998 was $505,295 as
compared to $444,272 for the year ended December 31, 1997. The effective tax
rate decreased from 30.0% to 28.6% at December 31, 1998 as compared to December
31, 1997. This decrease was due primarily to a 47.5% increase in tax-exempt
interest income earned by the Bank and to lower state income tax.
RESULTS OF OPERATION
YEAR ENDED DECEMBER 31, 1997 COMPARED TO YEAR ENDED DECEMBER 31, 1996
Net Earnings
The Company's net earnings for 1997 were $1,038,807, an approximate 1.80%
decrease from net earnings of $1,057,884 for 1996. The decrease in earnings
growth compared to the Company's growth in net interest income was attributed
primarily to a 19.09% increase in noninterest 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
noninterest 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.
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
<PAGE>
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. 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 compared 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 was 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
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 $177,787 in accruing
loans which were contractually past due ninety days as compared to $136,648 at
December 31, 1996.
The 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.
NONINTEREST INCOME
Total noninterest 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 noninterest 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.
<PAGE>
NONINTEREST EXPENSES
Noninterest expenses, consisting of salaries and employee benefits, occupancy
and other miscellaneous expenses, increased approximately 18.49% to $4,236,313
for 1997, as compared to $3,575,171 for 1996. This increase was 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 $208,938, or 18.54%, 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.
INCOME TAX EXPENSES
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.
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. Additionally, in 1998, the Company
received funds through the Bank's borrowing relationship as a member of the
Federal Home Loan Bank of Atlanta, and through the Company's issuance of common
stock in the Offering. The Company sold 294,118 shares of common stock at a
price of $17.00 per share. Net proceeds of the Offering were $4,821,662. In
1998, the Bank established a credit facility with The Federal Home Loan Bank,
which is secured by 1-4 family loans. The Bank received $5,500,000 in proceeds
from notes payable to the Federal Home Loan Bank during 1998. In 1998, the
Company received $4,925,426 in net increases of demand, savings, and time
deposits and $11,477,284 from maturities and sales of securities.
Uses of funds in 1998 included $210,502 paid in dividends to Company
shareholders of record as of March 9, 1998, and $381,161 in additions to
premises and equipment. The net change in the Company's loans was an increase
of $17,702,926 for 1998, and $9,609,839 in securities were purchased in 1998.
Increases in the Bank's core deposits are expected to be the major source of
funds provided during 1999. Management believes that deposit growth will
continue at a moderate pace due to the Bank's expansion of its branch network
into Cobb County, which is adjacent to Paulding County. The Bank opened its
first full-service branch in Cobb County at Butler Crossing and plans are
underway to open a second full-service branch in that county during the third
quarter of 1999. Additionally,
<PAGE>
management plans to allow transactions via the Bank's website by second quarter,
thereby creating an Internet branch. The Bank has partnered with a vendor which
will provide customers with a bill paying service and the ability to conduct
funds transfers via a secure Internet connection. Management intends to limit
potential depositors by geographic location and other criteria, in order to
protect the Bank against potential losses associated with fraud.
The Company is subject to regulatory capital requirements imposed by the
Department and by the Board of Governors of the Federal Reserve System. 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, 1998, was 14.43%, and its ratio of Tier 1 capital to risk
weighted assets was 13.21%. Under applicable federal regulations and
interpretations thereof, the Company's ratio of total capital to risk weighted
assets at December 31, 1998, was 18.54%, and its ratio of Tier 1 capital to risk
weighted assets was 17.34%. 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 9.64% as of
December 31, 1998. The Company also substantially exceeds its Tier 1 leverage
ratio requirement with a Tier 1 leverage ratio of 12.72% as of December 31,
1998. 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, 1998, the Bank's liquidity ratio (defined as net cash, short-
term assets, and marketable assets divided by net deposits and short-term
liabilities) was 25.57%, as compared to 29.65% at December 31, 1997. The Bank
maintains two lines of credit to borrow fed funds that total $3,000,000 in order
to enhance liquidity. At December 31, 1998, the Bank had no borrowed funds on
either of these lines of credit. 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 fluctuates based
on criteria set by that institution. As of December 31, 1998, the Bank had
$5,500,000 in borrowings outstanding under this facility, and approximately
$200,000 remained available to be borrowed. Additionally, the Company has a
$2,500,000 revolving credit facility with The Bankers Bank, Atlanta, Georgia,
which is intended to enhance the Company's liquidity. As of December 31, 1998,
the Company had no borrowed funds outstanding under this facility.
<PAGE>
YEAR 2000
The Company has a Year 2000 plan in place. This plan is necessary because many
existing computer programs use only two digits, rather than four 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 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. This plan is in
accordance with applicable guidelines and regulations of the Federal Financial
Institutions Examination Council as adopted by the Department and the Federal
Deposit Insurance Corporation. 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. A committee of the Board of Directors reviews
management's progress in execution of its plan. All levels of the Company's
management and its Board of Directors are aware of the issues presented by the
Year 2000 century change and the serious effects it could have on the Company
and its customers. 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. The
plan includes steps to be taken by the Company to (i) identify, assess,
evaluate, test, and validate its own date sensitive systems, (ii) amend its loan
underwriting policies to include assessments, as appropriate, regarding Year
2000 readiness by commercial loan applicants, (iii) offer education to business
customers regarding Year 2000 issues in their own businesses, and (iv) inform
the Company's customers as to the Company's Year 2000 compliance process.
Management believes that, to date, the goals of the plan have been met, and the
testing phase is in process. The Company has tested the systems it has
identified as "critical" to conducting its businesses, and has found those
systems to be ready for the Year 2000. The Bank, its third-party data
processor, and its correspondent bank, participated in testing of the Bank's
core processing system, and the correspondent's system, with the Federal Reserve
Bank of Atlanta, to ensure that communications between those entities concerning
transaction processing will not be affected by any dates that have been
determined to be Year 2000 sensitive. The Bank has conducted its testing with
close regulatory supervision by state and federal agencies. Additionally, the
Bank has engaged the services of a firm to provide independent review concerning
its preparation for Year 2000, and such review should be completed by first
quarter 1999. Customer awareness training has been provided to the Bank's
employees, which will equip them to respond to customer inquiries about the
Bank's Year 2000 readiness. The Company estimates that its total costs of Year
2000 compliance will be $70,000 to $105,000. Costs incurred in 1998 were
approximately $36,800, of which $9,000 has been capitalized, and $27,800 has
been charged to expense. Management estimates that, in 1999, an additional
$13,000 will be capitalized, and $35,500 will be charged to operations expense.
Management does not anticipate that the implementation of the Company's Year
2000 plan will materially impact future operating results.
<PAGE>
Contingency plans are being developed to mitigate the potential effects of a
disruption in normal business operations. Contingency planning includes
developing alternative solutions should a vendor not become compliant, as well
as plans for the resumption of business if, despite the Company's best efforts,
a business operation disruption occurs. Management intends to test contingency
planning during the second quarter of 1999. The Year 2000 risks arising from
relationships with borrowers and depositors are under review by management.
Appropriate risk controls are being put in place to manage and mitigate Year
2000 customer risks, and contingency plans are being developed to address these
risks.
Management does not believe that Year 2000 will have a significant impact on the
Company. However, there can be no assurances that the Company's Year 2000 plans
will be able to successfully address each of the ways in which the Year 2000
problem may impact the Company, since 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.
FORWARD-LOOKING STATEMENT
Some of the foregoing statements are forward-looking statements which reflect
significant assumptions and subjective judgements believed by management to be
reasonable as of the date of this report. They do not constitute a forecast or
prediction of actual results, and actual performance and financial results may
differ materially from those anticipated due to a variety of factors, including
but not limited to (i) increased competition with other financial institutions,
(ii) lack of sustained growth in the local economy, (iii) rapid fluctuations in
interest rates, and (iv) changes in the legislative and regulatory environment.
The foregoing statements should not be construed as exhaustive and the Company
disclaims any obligation to subsequently update or revise any forward-looking
statements after the date of this report.
<PAGE>
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
To the Board of Directors and Stockholders
Community Trust Financial Services Corporation
We have audited the accompanying consolidated balance sheets of Community Trust
Financial Services Corporation and subsidiaries as of December 31, 1998 and
1997, and the related consolidated statements of earnings, comprehensive income,
changes in stockholders' equity and cash flows for each of the three years in
the period ended December 31, 1998. 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, 1998 and
1997, and the results of their operations and their cash flows for each of the
three years in the period ended December 31, 1998, in conformity with generally
accepted accounting principles.
/s/ Porter Keadle Moore, LLP
Atlanta, Georgia
February 5, 1999
<PAGE>
COMMUNITY TRUST FINANCIAL SERVICES CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 1998 AND 1997
<TABLE>
<CAPTION>
Assets
------
1998 1997
------------- ----------
<S> <C> <C>
Cash and due from banks, including reserve
requirements of $668,000 and $578,000 $ 4,578,071 4,022,304
Federal funds sold 2,990,000 4,510,000
------------ ----------
Cash and cash equivalents 7,568,071 8,532,304
Securities available for sale 21,448,636 23,021,011
Other investments 919,400 301,100
Loans, net 73,504,927 56,359,625
Premises and equipment 2,237,830 2,141,654
Accrued interest receivable and other assets 1,849,408 1,549,087
------------ ----------
$107,528,272 91,904,781
============ ==========
Liabilities and Stockholders' Equity
------------------------------------
Deposits:
Demand $ 11,433,411 12,105,179
Interest-bearing demand 21,197,354 18,644,247
Savings 15,324,527 14,808,283
Time 23,238,422 21,589,280
Time, in excess of $100,000 15,712,815 14,834,114
------------ ----------
Total deposits 86,906,529 81,981,103
Accrued interest payable and other liabilities 1,150,540 1,253,846
Other borrowings 5,500,000 800,000
------------ ----------
Total liabilities 93,557,069 84,034,949
------------ ----------
Commitments
Stockholders' equity:
Common stock, par value $2.50, authorized 5,000,000
shares, issued and outstanding 1,148,078 and 841,324 shares 2,870,195 2,103,310
Additional paid-in capital 6,232,554 2,109,602
Retained earnings 4,561,383 3,511,989
Accumulated other comprehensive income, net of tax 307,071 144,931
------------ ----------
Total stockholders' equity 13,971,203 7,869,832
------------ ----------
$107,528,272 91,904,781
============ ==========
</TABLE>
See accompanying notes to consolidated financial statements.
<PAGE>
COMMUNITY TRUST FINANCIAL SERVICES CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF EARNINGS
FOR THE YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996
<TABLE>
<CAPTION>
1998 1997 1996
------------ ---------- ----------
<S> <C> <C> <C>
Interest income:
Interest and fees on loans $7,266,861 6,075,240 5,462,059
Interest on federal funds sold 243,472 243,198 221,396
Interest and dividends on investment securities:
U.S. Treasuries 266,019 448,588 164,666
U.S. Government agencies and mortgage backed 671,141 642,578 873,567
State, county and municipal 311,313 197,710 114,474
Other 38,366 23,100 12,806
---------- --------- ---------
Total interest income 8,797,172 7,630,414 6,848,968
---------- --------- ---------
Interest expense:
Interest on deposits:
Demand 408,200 397,555 410,932
Savings 371,969 391,036 375,845
Time 1,312,184 1,276,222 1,173,908
Time in excess of $100,000 932,577 817,029 663,640
Other interest 264,143 28,871 37,291
---------- --------- ---------
Total interest expense 3,289,073 2,910,713 2,661,616
---------- --------- ---------
Net interest income 5,508,099 4,719,701 4,187,352
Provision for loan losses 336,243 204,270 197,841
---------- --------- ---------
Net interest income after provision for loan losses 5,171,856 4,515,431 3,989,511
---------- --------- ---------
Noninterest income:
Service charges on deposit accounts 940,261 932,593 829,701
Appraisal fees 157,737 96,952 88,565
Insurance commissions 291,839 247,395 185,185
Gain (loss) on sales of securities available for sale 46,499 (3,219) (9,851)
Equity in loss of unconsolidated subsidiary (64,614) (111,145) -
Miscellaneous 207,236 41,385 57,583
---------- --------- ---------
Total noninterest income 1,578,958 1,203,961 1,151,183
---------- --------- ---------
Noninterest expense:
Salaries and employee benefits 2,696,748 2,249,382 1,902,662
Occupancy 716,493 651,088 545,604
Other operating 1,572,382 1,335,843 1,126,905
---------- --------- ---------
Total noninterest expense 4,985,623 4,236,313 3,575,171
---------- --------- ---------
Earnings before income taxes 1,765,191 1,483,079 1,565,523
Income taxes 505,295 444,272 507,639
---------- --------- ---------
Net earnings $1,259,896 1,038,807 1,057,884
========== ========= =========
Net earnings per share $ 1.31 1.24 1.26
========== ========= =========
Net earnings per share - assuming dilution $ 1.26 1.18 1.23
========== ========= =========
</TABLE>
See accompanying notes to consolidated financial statements.
<PAGE>
COMMUNITY TRUST FINANCIAL SERVICES CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
FOR THE YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996
<TABLE>
<CAPTION>
1998 1997 1996
---------- ---------- ----------
<S> <C> <C> <C>
Net earnings $1,259,896 1,038,807 1,057,884
Other comprehensive income, net of tax:
Unrealized gain (loss) on securities available for sale 308,015 237,692 (38,174)
Income tax effect on gain (loss) 117,046 90,323 (14,506)
---------- --------- ---------
Unrealized gain (loss) arising during the year, net 190,969 147,369 (23,668)
---------- --------- ---------
Less: Reclassification adjustment for gain (loss)
included in net earnings 46,499 (3,219) (9,851)
Income tax effect on reclassification adjustments 17,670 (1,223) (3,743)
---------- --------- ---------
Reclassification adjustment for gain (loss)
included in net earnings, net 28,829 (1,996) (6,108)
---------- --------- ---------
Other comprehensive income 162,140 149,365 (17,560)
---------- --------- ---------
Comprehensive income $1,422,036 1,188,172 1,040,324
========== ========= =========
</TABLE>
See accompanying notes to consolidated financial statements.
<PAGE>
COMMUNITY TRUST FINANCIAL SERVICES CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
FOR THE YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996
<TABLE>
<CAPTION>
Accumulated
Other
Common Stock Additional Comprehensive
------------- Paid-In Retained Income (Loss),
Shares Amount Capital Earnings Net of Tax Total
------------- ------------ ---------- ----------- --------------- -----------
<S> <C> <C> <C> <C> <C> <C>
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 ($7.00 per share) (1,000) (2,500) (2,500) (2,000) - (7,000)
Change in accumulated
other comprehensive
income (loss), net of tax - - - - (17,560) (17,560)
------------ ----------- --------- --------- -------------- ----------
Balance, December 31, 1996 839,164 2,097,910 2,101,401 2,682,999 (4,434) 6,877,876
Net earnings - - - 1,038,807 - 1,038,807
Cash dividends declared
($.25 per share) - - - (209,817) - (209,817)
Exercise of stock options 2,160 5,400 8,201 - - 13,601
Change in accumulated
other comprehensive
income (loss), 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
Net earnings - - - 1,259,896 - 1,259,896
Cash dividends declared
($.25 per share) - - - (210,502) - (210,502)
Net proceeds from issuance of
common stock 294,118 735,295 4,086,367 - - 4,821,662
Exercise of stock options 12,636 31,590 36,585 - - 68,175
Change in accumulated
other comprehensive
income (loss), net of tax - - - - 162,140 162,140
------------ ----------- --------- --------- -------------- ----------
Balance, December 31, 1998 1,148,078 $2,870,195 6,232,554 4,561,383 307,071 13,971,203
============ =========== ========= ========= ============== ==========
</TABLE>
See accompanying notes to consolidated financial statements.
<PAGE>
COMMUNITY TRUST FINANCIAL SERVICES CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996
<TABLE>
<CAPTION>
1998 1997 1996
------------- ----------- ------------
<S> <C> <C> <C>
Cash flows from operating activities:
Net earnings $ 1,259,896 1,038,807 1,057,884
Adjustments to reconcile net earnings
to net cash provided by operating activities:
Depreciation, amortization and accretion 413,461 359,789 258,390
Provision for loan losses 336,243 204,270 197,841
Provision for deferred income taxes (19,182) (67,537) (34,885)
Equity in loss of unconsolidated subsidiary 64,614 111,145 -
Loss (gain) on sales of securities available for sale (46,499) 3,219 9,851
Gain on sale of other real estate (22,797) - (1,337)
Change in:
Interest receivable (188,792) (144,020) (39,440)
Other assets (324,119) (111,493) (594,100)
Interest payable 83,321 64,397 216,603
Other liabilities (186,627) (238,532) 247,953
------------ ---------- -----------
Net cash provided by operating activities 1,369,519 1,220,045 1,318,760
------------ ---------- -----------
Cash flows from investing activities:
Proceeds from sales of securities available for sale 5,451,852 1,990,000 3,111,819
Proceeds from calls and maturities of securities
available for sale 6,025,432 4,197,038 7,927,426
Purchases of securities available for sale (9,609,839) (6,538,282) (12,851,633)
Purchases of other investments (618,300) (46,100) -
Net increase in loans (17,702,926) (7,851,700) (10,595,179)
Purchases of premises and equipment (381,161) (107,987) (354,465)
Improvements to other real estate (54,101) - -
Proceeds from sale of other real estate 250,530 - 98,795
Investment in unconsolidated subsidiary - (49,000) -
------------ ---------- -----------
Net cash used by investing activities (16,638,513) (8,406,031) (12,663,237)
------------ ---------- -----------
Cash flows from financing activities:
Net change in deposits 4,925,426 5,083,342 15,662,472
Proceeds from FHLB advances 5,500,000 - -
Net change in other borrowings (800,000) 800,000 -
Net proceeds from issuance of common stock 4,821,662 - -
Retirement of common stock - - (7,000)
Proceeds from exercise of stock options 68,175 13,601 21,771
Cash dividends paid (210,502) (209,817) (209,125)
------------ ---------- -----------
Net cash provided by financing activities 14,304,761 5,687,126 15,468,118
------------ ---------- -----------
Net change in cash and cash equivalents (964,233) (1,498,860) 4,123,641
Cash and cash equivalents at beginning of year 8,532,304 10,031,164 5,907,523
------------ ---------- -----------
Cash and cash equivalents at end of year $ 7,568,071 8,532,304 10,031,164
============ ========== ===========
Supplemental disclosures of cash flow information:
Cash paid during the year for:
Interest $ 3,205,752 2,846,316 2,445,013
Income taxes $ 542,000 500,000 690,000
Noncash investing and financing activities:
Change in accumulated other comprehensive income, net of tax $ 162,140 149,365 (17,560)
Transfers of loans to other real estate $ 221,381 - -
</TABLE>
See accompanying notes to consolidated financial statements.
<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, 1998
and 1997 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"). On December 31, 1998, the
Company purchased the 25% minority interest in CLC for $8,574. All
significant intercompany accounts and transactions have been eliminated in
consolidation. Certain 1997 and 1996 amounts have been reclassified to
conform to the 1998 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. CLC was
incorporated for the purpose of acquiring and operating existing consumer
finance companies under the direction of the Company. The operations of CLC,
located in the Georgia cities of Rockmart, Rossville, Gainesville 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 totalling approximately
$1,128,000 and $853,000 at December 31, 1998 and 1997, respectively. 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, 1998 and 1997, the
Company has classified all securities as available for sale.
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. 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.
<PAGE>
COMMUNITY TRUST FINANCIAL SERVICES CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, CONTINUED
Investment Securities, continued
---------------------
A decline in the market value of any available for sale 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 are included in earnings and
are derived using the specific identification method for determining the
cost of securities sold.
Other Investments
-----------------
Other investments include FHLB stock and other 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 the principal amount outstanding,
net of unearned interest and the allowance for loan losses. Interest on
substantially all loans is calculated 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. This review is supplemented by
an independent external loan review performed on an annual basis.
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 and CLC to recognize additions to
the allowance based on their judgments of information available to them at
the time of their examination.
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
<PAGE>
COMMUNITY TRUST FINANCIAL SERVICES CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, CONTINUED
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
----------------------
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. The reconciliation of the amounts used in the computation of both
"net earnings per share" and "net earnings per share - assuming dilution"
for the years ended December 31, 1998, 1997 and 1996 are as follows:
<TABLE>
<CAPTION>
Net Common Per Share
FOR THE YEAR ENDED DECEMBER 31, 1998 Earnings Shares Amount
----------- --------- ---------
<S> <C> <C> <C>
Net earnings per share $1,259,896 963,348 $1.31
=========
Effect of dilutive securities:
Stock options - 39,956
----------- ---------
Net earnings per share - assuming dilution $1,259,896 1,003,304 $1.26
=========== ========= =========
Net Common Per Share
FOR THE YEAR ENDED DECEMBER 31, 1997 Earnings Shares Amount
----------- --------- ---------
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
=========== ========= =========
Net Common Per Share
FOR THE YEAR ENDED DECEMBER 31, 1996 Earnings Shares Amount
----------- --------- ---------
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
=========== ========= =========
</TABLE>
<PAGE>
COMMUNITY TRUST FINANCIAL SERVICES CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, CONTINUED
Comprehensive Income
--------------------
In 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards ("SFAS") No. 130, "Reporting Comprehensive
Income." SFAS No. 130 established standards for the reporting and display of
comprehensive income and its components in the financial statements.
Recent Accounting Pronouncements
--------------------------------
In 1998, the Financial Accounting Standards Board issued SFAS No. 133,
"Accounting for Derivative Instruments and Hedging Activities." SFAS No. 133
establishes accounting and reporting standards for hedging derivatives and
for derivative instruments including derivative instruments embedded in
other contracts. It requires the fair value recognition of derivatives as
assets or liabilities in the financial statements. SFAS No. 133 is effective
for all fiscal quarters of fiscal years beginning after June 15, 1999, and
initial application of the statement must be made as of the beginning of the
quarter. The Company believes the adoption of SFAS No. 133 will not have a
material impact on its financial position, results of operations or
liquidity.
(2) INVESTMENT SECURITIES
Securities available for sale at December 31, 1998 and 1997 are summarized
as follows:
<TABLE>
<CAPTION>
December 31, 1998
----------------------------------------------------------
Gross Gross Estimated
Amortized Unrealized Unrealized Fair
Cost Gains Lossess Value
---- ----- ------- -----
<S> <C> <C> <C> <C>
U S. Treasuries $ 3,005,299 32,982 - 3,038,281
U S. Government agencies 7,704,090 172,553 - 7,876,643
Mortgage-backed securities 3,323,605 15,497 8,139 3,330,963
State, county and municipal 6,920,736 282,013 - 7,202,749
------------ ---------- --------- ----------
Total $20,953,730 503,045 8,139 21,448,636
============ ========== ========= ==========
</TABLE>
<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>
<PAGE>
COMMUNITY TRUST FINANCIAL SERVICES CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
(2) INVESTMENT SECURITIES, CONTINUED
The amortized cost and estimated fair value of securities available for
sale at December 31, 1998, 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 $ 3,698,899 3,720,066
Due from one to five years 6,783,118 6,945,549
Due from five to ten years 4,274,755 4,392,207
Due after ten years 2,873,353 3,059,851
Mortgage-backed securities 3,323,605 3,330,963
----------- ----------
$20,953,730 21,448,636
=========== ==========
</TABLE>
Proceeds from sales of securities available for sale during 1998, 1997 and
1996 were $5,451,852, $1,990,000 and $3,111,819. Gross gains of $46,499 were
realized on 1998 sales. Gross losses of $3,219 and $9,851 were realized on
1997 and 1996 sales, respectively.
Investment securities with a carrying value of approximately $13,305,000 and
$15,712,000 as of December 31, 1998 and 1997, respectively, were pledged to
secure public deposits as required by law or for other purposes.
(3) LOANS
Major classifications of loans at December 31, 1998 and 1997 are summarized
as follows:
<TABLE>
<CAPTION>
1998 1997
------------ ----------
<S> <C> <C>
Commercial, financial and agricultural $10,156,937 7,765,358
Real estate - construction 12,631,488 8,308,349
Real estate - mortgage 40,378,680 30,833,493
Consumer 11,273,056 10,281,657
----------- ----------
Total loans 74,440,161 57,188,857
Less allowance for loan losses 935,234 829,232
----------- ----------
Loans, net $73,504,927 56,359,625
=========== ==========
</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.
Changes in the allowance for loan losses are summarized as follows:
<TABLE>
<CAPTION>
1998 1997 1996
---------- --------- --------
<S> <C> <C> <C>
Balance at beginning of year $ 829,232 713,518 583,306
Amounts charged off (268,151) (145,825) (90,263)
Recoveries on amounts previously charged off 37,910 57,269 22,634
Provision charged to operating expenses 336,243 204,270 197,841
--------- -------- -------
Balance at end of year $ 935,234 829,232 713,518
========= ======== =======
</TABLE>
<PAGE>
COMMUNITY TRUST FINANCIAL SERVICES CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
(4) PREMISES AND EQUIPMENT
Premises and equipment at December 31, 1998 and 1997 are summarized as
follows:
<TABLE>
<CAPTION>
1998 1997
---------- ---------
<S> <C> <C>
Land $ 375,403 375,403
Land improvements 67,254 67,254
Buildings and improvements 1,749,374 1,700,061
Furniture and equipment 2,037,384 1,718,463
---------- ---------
4,229,415 3,861,181
Less accumulated depreciation 1,991,585 1,719,527
---------- ---------
$2,237,830 2,141,654
========== =========
</TABLE>
Depreciation expense was approximately $283,000, $257,000 and $222,000 for
the years ended December 31, 1998, 1997 and 1996, respectively.
(5) TIME DEPOSITS
At December 31, 1998, the scheduled maturities of time deposits are as
follows:
1999 $28,591,737
2000 4,532,824
2001 3,309,261
2002 1,410,007
2003 and thereafter 1,107,408
-----------
$38,951,237
===========
(6) OTHER BORROWINGS
In November 1997, the Company obtained a $2,500,000 line of credit with
another financial institution. The debt was 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 loan agreement contained covenants relating
to the level of the allowance for loan losses, payments of dividends,
regulatory capital adequacy and return on average assets. At December 31,
1997, the Company had $800,000 outstanding under this line of credit. The
Company has no amounts outstanding at December 31, 1998.
The Bank has an agreement with the Federal Home Loan Bank ("FHLB") to
provide the Bank credit facilities. FHLB advances are collateralized by FHLB
stock and 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 had no borrowings from the FHLB outstanding as of December 31, 1997.
The Bank has two advances outstanding at December 31, 1998 amounting to
$2,500,000 and $3,000,000, respectively. Interest is payable quarterly at
fixed interest rates of 5.55% and 5.51%, respectively. The advances mature
in March 2008 and June 2008, respectively.
<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, 1998 are as follows:
1999 $126,057
2000 108,143
2001 69,472
2002 68,575
2003 54,400
Thereafter 120,000
--------
$546,647
========
Rental expense for each of the three years in the period ended December 31,
1998 totalled approximately $116,000, $83,000 and $77,000, 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 to support financial instruments
with credit risk.
<TABLE>
<CAPTION>
Approximate
Contract Amount
----------------------
1998 1997
----------- ---------
<S> <C> <C>
Financial instruments whose contract
amounts represent credit risk:
Commitments to extend credit $17,827,000 9,258,000
Standby letters of credit and
financial guarantees written $ 844,000 666,000
</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 creditworthiness on a case-by-case basis. The amount of
collateral obtained, if deemed necessary by the Bank, upon extension of
credit is based on management's credit evaluation. 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.
(8) STOCKHOLDERS' EQUITY
In August 1998, the Company completed a public offering of 294,118 shares of
common stock at a price of $17.00 per share. The net proceeds of this
offering of $4,821,662 (after deducting issuance costs of $178,344) were
used to repay indebtedness of the Company, contribute capital to the Bank,
and fund loans to the non-bank subsidiaries.
<PAGE>
COMMUNITY TRUST FINANCIAL SERVICES CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
(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 $690,000 during 1999 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 to risk-weighted assets and of Tier 1 capital to
average assets (all as defined). Management believes, as of December 31,
1998, the Company and the Bank meet all capital adequacy requirements to
which they are subject.
As of December 31, 1998, the most recent notification from 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's
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> <C>
As of December 31, 1998:
Total Capital
(to Risk Weighted Assets)
Consolidated $14,361,000 18.6% $6,194,000 8.0% N/A N/A
Bank $10,780,000 14.4% $5,978,000 8.0% $7,472,000 10.0%
Tier 1 Capital
(to Risk Weighted Assets)
Consolidated $13,422,000 17.3% $3,097,000 4.0% N/A N/A
Bank $ 9,872,000 13.2% $2,989,000 4.0% $4,483,000 6.0%
Tier 1 Capital
(to Average Assets)
Consolidated $13,422,000 12.7% $4,222,000 4.0% N/A N/A
Bank $ 9,872,000 9.6% $4,098,000 4.0% $5,123,000 5.0%
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%
</TABLE>
<PAGE>
COMMUNITY TRUST FINANCIAL SERVICES CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
(10) EMPLOYEE AND DIRECTOR BENEFIT PROGRAMS
The Company 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.
Both plans are accounted for under Accounting Principles Board Opinion No.
25 and related intepretations. No compensation expense has been recognized
related to these plans. Had compensation cost been determined based upon
the fair value of the options at the grant dates, the Company's net
earnings and net earnings per share would have been reduced to the proforma
amounts indicated below.
<TABLE>
<CAPTION>
1998 1997 1996
---------- --------- ---------
<S> <C> <C> <C> <C>
Net earnings As reported $1,259,896 1,038,807 1,057,884
Proforma $1,098,626 997,794 1,035,856
Net earnings per share As reported $ 1.31 1.24 1.26
Proforma $ 1.14 1.19 1.23
Net earnings per share - assuming dilution As reported $ 1.26 1.18 1.23
Proforma $ 1.10 1.13 1.20
</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 1998, 1997 and 1996, respectively: dividend
yield of 2%, risk free interest rate of 5%, 6% and 6%, respectively, and an
expected life of 10 years. For disclosure purposes, the Company immediately
recognized the expense associated with the option grants assuming that all
awards will vest.
A summary of activity in these stock option plans is presented below:
<TABLE>
<CAPTION>
1998 1997 1996
-------------------- -------------------- --------------------
Weighted Weighted Weighted
Average Averaged 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 103,444 $ 8.85 90,604 $ 7.68 84,900 $ 7.14
Granted during the year 61,000 $16.96 15,000 $15.53 10,269 $11.57
Cancelled during the year (3,334) $12.46 - - (900) $ 7.88
Exercised during the year (13,940) $ 7.08 (2,160) $ 6.30 (3,665) $ 5.94
------- ------- ------
Outstanding, end of year 147,170 $12.30 103,444 $ 8.85 90,604 $ 7.68
======= ======= ======
Number of shares exercisable 74,791 76,931 63,827
======= ======= ======
</TABLE>
The weighted average grant-date fair value of options granted in 1998, 1997
and 1996 was $4.45, $4.41 and $3.46, respectively. For the employee and
director stock options, options outstanding at December 31, 1998 are
exercisable at option prices ranging from $5.78 to $17.00 as presented in
the table above. The options have a weighted average remaining contractual
life of approximately 8 years.
The Company also had an incentive stock option plan which expired on April
18, 1998. The remaining 696 shares outstanding under this plan were
exercised at $5.00 per share during 1998. No shares were granted or
exercised during 1997 and 1996.
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 1998, 1997 and 1996 was approximately $41,000, $27,000 and
$20,000, respectively.
<PAGE>
COMMUNITY TRUST FINANCIAL SERVICES CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
(11) INCOME TAXES
The components of income tax expense for the years ended December 31, 1998,
1997 and 1996 are as follows:
<TABLE>
<CAPTION>
1998 1997 1996
---------- -------- --------
<S> <C> <C> <C>
Current $524,477 511,809 542,524
Deferred (19,182) (67,537) (34,885)
-------- ------- -------
$505,295 444,272 507,639
======== ======= =======
</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 is as follows:
<TABLE>
<CAPTION>
1998 1997 1996
---------- -------- --------
<S> <C> <C> <C>
Pretax income at statutory rates $ 600,165 504,247 532,278
Add (deduct):
Tax-exempt interest income (112,657) (76,374) (49,700)
Non-deductible interest expense 13,528 9,760 5,646
State taxes, net of federal effect 4,517 12,737 22,973
Other (258) (6,098) (3,558)
--------- ------- -------
$ 505,295 444,272 507,639
========= ======= =======
</TABLE>
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>
1998 1997
--------- -------
<S> <C> <C>
Deferred tax assets:
Allowance for loan losses $283,131 246,150
Other 4,064 4,881
-------- -------
Gross deferred tax assets 287,195 251,031
-------- -------
Deferred tax liabilities:
Basis difference of investment in unconsolidated subsidiary 27,390 -
Premises and equipment 46,144 56,552
Unrealized gain on securities available for sale 187,835 88,628
-------- -------
Gross deferred tax liabilities 261,369 145,180
-------- -------
Net deferred tax asset $ 25,826 105,851
======== =======
</TABLE>
<PAGE>
COMMUNITY TRUST FINANCIAL SERVICES CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
(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 subsidiary 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 1998:
Beginning balance $ 1,140,000
Loans advanced 1,648,000
Repayments (1,254,000)
-----------
Ending balance $ 1,534,000
===========
The aggregate amount of deposits of directors and executive officers and
their affiliates amounted to approximately $2,637,000 and $2,461,000 at
December 31, 1998 and 1997.
(13) SUPPLEMENTAL FINANCIAL DATA
Components of other operating expenses in excess of 1% of total interest
income and noninterest income for the years ended December 31, 1998, 1997
and 1996 are as follows:
<TABLE>
<CAPTION>
1998 1997 1996
--------- ------- -------
<S> <C> <C> <C>
Printing and supplies $112,554 108,040 94,354
Data processing $154,021 126,087 128,702
Directors fees $104,300 98,250 81,950
Advertising $107,283 125,702 63,191
</TABLE>
<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, 1998 and 1997
<TABLE>
<CAPTION>
Assets
------
1998 1997
----------- ---------
<S> <C> <C>
Cash $ 752,612 26,017
Investment in subsidiaries 10,145,026 6,379,530
Loans to subsidiaries 2,743,850 2,071,348
Other assets 367,899 192,937
----------- ---------
$14,009,387 8,669,832
=========== =========
Liabilities and Stockholders' Equity
------------------------------------
Other liabilities $ 38,184 -
Note payable - 800,000
Stockholders' equity 13,971,203 7,869,832
----------- ---------
$14,009,387 8,669,832
=========== =========
</TABLE>
Statements of Earnings
For the Years Ended December 31, 1998, 1997 and 1996
<TABLE>
<CAPTION>
1998 1997 1996
----------- ---------- ----------
<S> <C> <C> <C>
Interest income $ 222,042 104,672 51,239
Dividends from Bank 250,000 250,000 1,311,354
Dividends from Metroplex - - 25,000
Management fees 193,673 - -
Other operating expenses (588,169) (202,099) (81,774)
---------- --------- ---------
Earnings before income tax benefit and equity
in undistributed earnings of subsidiaries 77,546 152,573 1,305,819
Income tax benefit 56,104 89,510 9,282
---------- --------- ---------
Earnings before equity in undistributed
earnings of subsidiaries 133,650 242,083 1,315,101
Dividends paid in excess of earnings of subsidiaries - - (257,217)
Equity in undistributed earnings of subsidiaries 1,126,246 796,724 -
---------- --------- ---------
Net earnings $1,259,896 1,038,807 1,057,884
========== ========= =========
</TABLE>
<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, 1998, 1997 and 1996
<TABLE>
<CAPTION>
1998 1997 1996
------------ ----------- ----------
<S> <C> <C> <C>
Cash flows from operating activities:
Net earnings $ 1,259,896 1,038,807 1,057,884
Adjustments to reconcile net earnings to
net cash provided by operating activities:
Equity in undistributed earnings of subsidiaries (1,126,246) (796,724) 257,217
Amortization - - 4,743
Other (120,510) (74,668) (170,093)
----------- ---------- ---------
Net cash provided by operating activities 13,140 167,415 1,149,751
----------- ---------- ---------
Cash flows from investing activities:
Purchases of premises and equipment (16,268) - -
Investment in CashTrans - (49,000) -
Capital contribution to the Bank (2,468,536) - -
Investment in CLC (8,574) - -
Change in loans to subsidiaries (672,502) (981,584) (839,764)
----------- ---------- ---------
Net cash used by investing activities (3,165,880) (1,030,584) (839,764)
----------- ---------- ---------
Cash flows from financing activities:
Change in note payable (800,000) 800,000 -
Cash dividends paid (210,502) (209,817) (209,125)
Net proceeds from issuance of common stock 4,821,662 - -
Proceeds from exercise of stock options 68,175 13,601 21,771
Retirement of common stock - - (7,000)
----------- ---------- ---------
Net cash provided (used) by financing activities 3,879,335 603,784 (194,354)
----------- ---------- ---------
Net change in cash 726,595 (259,385) 115,633
Cash at beginning of the year 26,017 285,402 169,769
----------- ---------- ---------
Cash at end of the year $ 752,612 26,017 285,402
=========== ========== =========
Noncash investing and financing activities:
Change in accumulated other comprehensive
income of Bank, net of tax $ 162,140 149,365 (17,560)
</TABLE>
<PAGE>
COMMUNITY TRUST FINANCIAL SERVICES CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
(15) FAIR VALUE OF FINANCIAL INSTRUMENTS
The Company is required to disclose fair value information about financial
instruments, whether or not recognized on the face of the balance sheet,
for which it is practicable to estimate that value. The assumptions used in
the estimation of the fair value of the Company's financial instruments are
detailed below. Where quoted prices are not available, fair values are
based on estimates using discounted cash flows and other valuation
techniques. The use of discounted cash flows can be significantly affected
by the assumptions used, including the discount rate and estimates of
future cash flows. The following disclosures should not be considered a
surrogate of the liquidation value of the Company, but rather a good-faith
estimate of the increase or decrease in the value of financial instruments
held by the Company since purchase, origination or issuance.
Cash and Cash Equivalents
-------------------------
For cash, due from banks and federal funds sold, the carrying amount is a
reasonable estimate of fair value.
Securities Available for Sale
-----------------------------
Fair values for securities available for sale are based on quoted market
prices.
Other Investments
-----------------
The carrying amount of other investments approximates fair value.
Loans
-----
The fair value of fixed rate loans is estimated by discounting the future
cash flows using the current rates at which similar loans would be made
to borrowers with similar credit ratings. For variable rate loans, the
carrying amount is a reasonable estimate of fair value.
Deposits
--------
The fair value of demand deposits, savings accounts and money market
deposits is the amount payable on demand at the reporting date. The fair
value of fixed maturity certificates of deposit is estimated by
discounting the future cash flows using the rates currently offered for
deposits of similar remaining maturities.
Other Borrowings
----------------
The fair value of fixed rate borrowings are estimated using discounted
cash flows, based on the current incremental borrowing rates for similar
types of borrowing arrangements.
Commitments to Extend Credit and Standby Letters of Credit
----------------------------------------------------------
Because commitments to extend credit and standby letters of credit are
made using variable rates and/or for relatively short commitment periods,
the contract value is a reasonable estimate of fair value.
Limitations
-----------
Fair value estimates are made at a specific point in time, based on
relevant market information and information about the financial
instrument. These estimates do not reflect any premium or discount that
could result from offering for sale at one time the Company's entire
holdings of a particular financial instrument. Because no market exists
for a significant portion of the Company's financial instruments, fair
value estimates are based on many judgments. These estimates are
subjective in nature and involve uncertainties and matters of significant
judgment and therefore cannot be determined with precision. Changes in
assumptions could significantly affect the estimates.
Fair value estimates are based on existing on and off-balance sheet
financial instruments without attempting to estimate the value of
anticipated future business and the value of assets and liabilities that
are not considered financial instruments. Significant assets and
liabilities that are not considered financial instruments include
deferred income taxes and premises and equipment. In addition, the tax
ramifications related to the realization of the unrealized gains and
losses can have a significant effect on fair value estimates and have not
been considered in the estimates.
<PAGE>
COMMUNITY TRUST FINANCIAL SERVICES CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
(15) FAIR VALUE OF FINANCIAL INSTRUMENTS, CONTINUED
The carrying amount and estimated fair values of the Company's financial
instruments as of December 31, 1998 are as follows:
<TABLE>
<CAPTION>
1998
-----------------------
Carrying Estimated
Amount Fair Value
----------- ----------
<S> <C> <C>
Assets:
Cash and cash equivalents $ 7,568,071 7,568,071
Securities available for sale $21,448,636 21,448,636
Other investments $ 919,400 919,400
Loans, net $73,504,927 73,942,734
Liabilities:
Deposits $86,906,529 87,468,795
Other borrowings $ 5,500,000 5,501,784
Unrecognized financial instruments:
Commitments to extend credit $17,827,000 17,827,000
Standby letters of credit $ 844,000 844,000
</TABLE>
<PAGE>
EXHIBIT 21- SUBSIDIARIES
COMMUNITY TRUST FINANCIAL SERVICES CORPORATION
Name* Jurisdiction of Incorporation
- ----- -----------------------------
Community Trust Bank Georgia
Metroplex Appraisals, Inc. Georgia
Community Loan Company Georgia
Cash Transactions, LLC Georgia
____________________________
* The legal name of the subsidiary is the name under which the subsidiary does
business.
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 9
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> DEC-31-1998
<CASH> 4,578,071
<INT-BEARING-DEPOSITS> 0
<FED-FUNDS-SOLD> 2,990,000
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 21,448,636
<INVESTMENTS-CARRYING> 21,448,636
<INVESTMENTS-MARKET> 21,448,636
<LOANS> 74,440,161
<ALLOWANCE> 935,234
<TOTAL-ASSETS> 107,528,272
<DEPOSITS> 86,906,529
<SHORT-TERM> 0
<LIABILITIES-OTHER> 1,150,540
<LONG-TERM> 5,500,000
0
0
<COMMON> 2,870,195
<OTHER-SE> 11,101,008
<TOTAL-LIABILITIES-AND-EQUITY> 107,528,272
<INTEREST-LOAN> 7,266,861
<INTEREST-INVEST> 1,286,839
<INTEREST-OTHER> 243,472
<INTEREST-TOTAL> 8,797,172
<INTEREST-DEPOSIT> 3,024,930
<INTEREST-EXPENSE> 3,289,073
<INTEREST-INCOME-NET> 5,508,099
<LOAN-LOSSES> 336,243
<SECURITIES-GAINS> 46,499
<EXPENSE-OTHER> 4,985,623
<INCOME-PRETAX> 1,765,191
<INCOME-PRE-EXTRAORDINARY> 1,259,896
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 1,259,896
<EPS-PRIMARY> 1.31
<EPS-DILUTED> 1.26
<YIELD-ACTUAL> 6.00
<LOANS-NON> 555,429
<LOANS-PAST> 176,997
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 2,052,469
<ALLOWANCE-OPEN> 829,232
<CHARGE-OFFS> 268,151
<RECOVERIES> 37,910
<ALLOWANCE-CLOSE> 935,234
<ALLOWANCE-DOMESTIC> 935,234
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 199,946
</TABLE>
