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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-KSB
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[X] Annual Report under Section 13 or 15(d) of the Securities Exchange Act of
1934 for the fiscal year ended December 31, 1998
Commission file number: 333-10909
FORSYTH BANCSHARES, INC.
(Exact name of registrant as specified in its charter)
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Georgia 58-2231953
(Name of Small Business Issuer in its Charter) (I.R.S. Employer Identification No.)
501 Tri-County Plaza, Highways 9 and 20, Cumming, Georgia 30040
(address of principal executive office) (Zip Code)
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(Issuer's telephone number, including area code): (770) 886-9500
Securities registered under Section 12(b) of the Act:
Title of Each Class Name of Each Exchange on Which Registered
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None None
Securities registered under Section 12(g) of the Act:
Common Stock, No 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 Securities Exchange Act of 1934 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
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Check if there is no disclosure of delinquent filers in response to Item
405 of Regulation S-B contained in this form, and no disclosure will be
contained, to the best of registrant's knowledge, in definitive proxy or
information statements incorporated by reference in Part III of this Form
10-KSB or any amendment to this Form 10-KSB. [X]
State the issuer's revenues for its most recent fiscal year: $3,925,777.
State the aggregate market value of the voting and non-voting common equity
held by non-affiliates computed by reference to the price at which the common
equity was sold, or the average bid and asked price of such common equity, as
of a specified date within the past 60 days: As of March 15, 1999, the
aggregate market value of voting stock of the Registrant held by non-affiliates
of the Registrant based solely on the initial public offering price, was
approximately $8,000,000.
State the number of shares outstanding of each of the issuer's classes of
common equity, as of the latest practicable date: As of March 15, 1999, there
were 800,000 shares of the Registrant's common stock outstanding.
Documents Incorporated by Reference:
- - Portions of the Annual Report to Shareholders for the fiscal year ended
December 31, 1998 are incorporated by reference into Parts I and II.
- - Portions of the definitive proxy statement for the Annual Meeting of
Shareholders to be held on May 18, 1999 are incorporated by reference
into Part III.
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SPECIAL CAUTIONARY NOTICE
REGARDING FORWARD LOOKING STATEMENTS
Certain of the statements made herein under the caption "Management's
Discussion and Analysis of Results of Operations and Financial Condition" and
elsewhere in this Annual Report are forward-looking statements for purposes of
the Securities Act of 1933, as amended (the "Securities Act") and the Securities
Exchange Act of 1934, as amended (the" Exchange Act"), and as such may involve
known and unknown risks, uncertainties and other factors which may cause the
actual results, performance or achievements of Forsyth Bancshares, Inc. (the
"Company") to be materially different from future results, performance or
achievements expressed or implied by such forward-looking statements. Such
forward looking statements include statements using the words such as "may,"
"will," "anticipate," "should," "would," "believe," "contemplate," "expect,"
"estimate," "continue," "may," "intend" or other similar words and expressions
of the future. Our actual results may differ significantly from the results we
discuss in these forward-looking statements.
These forward-looking statements involve risks and uncertainties and
may not be realized due to a variety of factors, including, without limitation:
the effects of future economic conditions; governmental monetary and fiscal
policies, as well as legislative and regulatory changes; the risks of changes
in interest rates on the level and composition of deposits, loan demand, and
the values of loan collateral, securities, and other interest-sensitive assets
and liabilities; interest rate risks; the effects of competition from other
commercial banks, thrifts, mortgage banking firms, consumer finance companies,
credit unions, securities brokerage firms, insurance companies, money market
and other mutual funds and other financial institutions operating in the
Company's market area and elsewhere, including institutions operating,
regionally, nationally and internationally, together with such competitors
offering banking products and services by mail, telephone, computer and the
Internet; the possible effects of the Year 2000 problem on the Company,
including such problems at the Company's vendors, counter-parties and
customers; and the failure of assumptions underlying the establishment of
reserves for possible loan losses. All written or oral forward-looking
statements attributable to the Company are expressly qualified in their
entirety by these Cautionary Statements.
PART I
ITEM 1. BUSINESS
General
The Company is a Georgia corporation that is a bank holding company
registered with the Board of Governors of the Federal Reserve System (the
"Federal Reserve Board") under the Bank Holding Company Act of 1956, as amended
(the "BHCA") and with the Department of Banking and Finance of the State of
Georgia (the "DBF") under the Georgia Financial Institutions Code (the
"Financial Institutions Code"). The Company had total consolidated assets of
$59.8 million, total deposits of $51.4 million and total stockholders equity of
$8.0 million at December 31, 1998. Through its wholly-owned subsidiary, The
Citizens Bank of Forsyth County (the "Bank"), the Company operates a commercial
banking business in Forsyth County, Georgia.
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The Bank is community oriented and focuses primarily on offering real
estate, commercial and consumer loans and various deposit and other services to
individuals, small to medium-sized businesses and professionals primarily in
Cumming, Georgia and the surrounding area, including Forsyth County (the
"Forsyth County Area"). The Bank is the only locally owned and managed
commercial bank operating in the Forsyth County Area. The Company management
team is comprised of several banking professionals with many years of
experience in Georgia with this and other banking organizations. The Bank
competes against the larger regional and super-regional banks operating in its
market by emphasizing the stability and accessibility of its management,
management's long-term familiarity with the market, immediate local decision
making and the pride of local ownership.
The Company was incorporated as a Georgia corporation on February 14,
1996, primarily to own and control all of the capital stock of the Bank. The
Company currently engages in no business other than owning and managing the
Bank. The Bank received final regulatory approval on January 30, 1997 from the
DBF and the Federal Deposit Insurance Corporation (the "FDIC") to begin
business on February 3, 1997. The Company received final approval to acquire
the capital stock of the Bank from the DBF on October 15, 1996 and from the
Federal Reserve Bank of Atlanta (the "Federal Reserve"), as delegate of the
Federal Reserve Board on November 25, 1996. The Bank commenced operations on
February 3, 1997 as a commercial bank engaging in a general commercial and
retail banking business.
The organizers of the Company and the Bank (the "Organizers") chose a
holding company structure under which the Company acquired all of the capital
stock of the Bank because, in the judgment of management, the holding company
structure provides flexibility that would not otherwise be available. The
holding company structure can assist the Bank in maintaining its required
capital ratios because, subject to compliance with Federal Reserve Board debt
guidelines, the Company may borrow money and contribute the proceeds to the
Bank as primary capital. Moreover, a holding company may engage in certain
non-banking activities that the Federal Reserve Board has deemed to be closely
related to banking. See "-- Supervision and Regulation." Although the Company
has no present intention of engaging in any of these activities, if
circumstances should lead the Company's management to believe that there is a
need for these services in the Bank's market area and that such activities
could be profitably conducted, management of the Company would have the
flexibility of commencing these activities upon filing a notice or application
with the Federal Reserve.
Marketing Focus
Most of the banks in the Forsyth County Area are now local branches of
large regional banks. Although size gives the larger banks certain advantages
in competing for business from large corporations, including higher lending
limits and the ability to offer services in other areas of Georgia and the
Forsyth County Area, management believes that there is a void in the community
banking market in the Forsyth County Area and that the Bank can successfully
fill this void. As a result, the Company generally does not attempt to compete
for the banking relationships of large corporations, but concentrates its
efforts on small to medium-sized businesses and on individuals.
The Bank's current plan is to advertise aggressively, using a wide
range of media to target market segments and emphasize the Company's local
ownership, community bank nature and ability to provide more personalized
service than its competition. Management, as long-time
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residents and business people in the Forsyth County Area, has determined the
credit needs of the area through personal experience and communications with
their business colleagues. Management believes that the area will react
favorably to the Bank's emphasis on service to small businesses, professional
concerns and individuals. However, no assurances in this respect can be given.
Location and Service Area
The Bank is a general commercial and retail banking business,
emphasizing the needs of small to medium-sized businesses, professional
concerns and individuals, primarily in Cumming, Georgia and the surrounding
area, including Forsyth County. The principal executive offices and telephone
number of both the Company and the Bank are located at 501 Tri-County Plaza,
Highways 9 and 20, Cumming, Georgia 30040, (770) 886-9500.
The Bank's primary service area is Forsyth County, Georgia, which is
located in North Georgia. Forsyth County was named the nation's fastest growing
county in a recent report issued by the U.S. Census Bureau. The estimated total
population of Forsyth County grew from 44,083 in 1990 to 86,130 in 1998, a
growth rate of 95.4%. During the same period of time, the population growth rate
for all of Georgia was 18.0%. In 1997, the average estimated effective buying
income per household in Forsyth County was $64,000 and the estimated
unemployment rate was 2.6%. The only major city in the county is Cumming,
Georgia, which may be reached via major highways including Georgia Highways 9,
20, 141, 306, 369 and 400.
The principal components of the economy of Forsyth County are
wholesale and retail trade, manufacturing, services and construction
industries. According to the Cumming/Forsyth County Chamber of Commerce, the
largest employers in the county include Tyson Foods, Inc., Siemans Industrial
Automation and Scientific Games, Inc. Dozens of manufacturing industries
operate in Forsyth County and industrial and business developments may expand
and establish additional facilities in Forsyth County.
Deposits
The Bank offers a full range of deposit services that are typically
available in most banks and savings and loan associations, including checking
accounts, NOW accounts, savings accounts and other time deposits of various
types, ranging from daily money market accounts to longer-term certificates of
deposit. The transaction accounts and time certificates are tailored to the
Bank's principal market area at rates competitive to those offered in the
Forsyth County Area. In addition, the Bank offers certain retirement account
services, such as Individual Retirement Accounts ("IRAs"). All deposit accounts
are insured by the FDIC up to the maximum amount allowed by law (generally,
$100,000 per depositor, subject to aggregation rules). The Bank solicits these
accounts from individuals, businesses, associations, organizations and
governmental authorities. As of December 31, 1998, the Bank's deposits were
allocated among certain categories as follows: 9.97% demand deposits, 23.19%
NOW accounts, and 66.84% time and savings deposits.
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Lending Activities
General. The Bank emphasizes a range of lending services, including
real estate, commercial and consumer loans, to small to medium-sized
businesses, professional concerns and individuals that are located in or
conduct a substantial portion of their business in the Bank's market area. As
of December 31, 1998, the Bank's loans were allocated as follows: 48% real
estate loans, 31% commercial loans and 21% consumer loans.
Credit Risk. There are certain risks inherent in making all loans. A
principal economic risk inherent in making loans is the creditworthiness of the
borrower. Other risks inherent in making loans include risks with respect to
the period of time over which loans may be repaid, risks resulting from changes
in economic and industry conditions, risks inherent in dealing with individual
borrowers and, in the case of a collateralized loan, risks resulting from
uncertainties as to the future value of the collateral. Management will
maintain an allowance for loan losses based on, among other things, an
evaluation of economic conditions and regular reviews of delinquencies and loan
portfolio quality. Based upon such factors, management makes various
assumptions and judgments about the ultimate collectability of the loan
portfolio and provides an allowance for potential loan losses based upon a
percentage of the outstanding balances and for specific loans when their
ultimate collectability is considered questionable. Certain specific risks with
regard to each category of loans are described under the separate subheading
for each type of loan below.
Real Estate Loans. A primary component of the Bank's loan portfolio is
loans secured by first or second mortgages on real estate. These loans
generally consist of commercial real estate loans, construction and development
loans and residential real estate loans (but exclude home equity loans, which
are classified as consumer loans). With the exception of residential real
estate loans, loan terms generally are limited to five years or less, although
payments may be structured on a longer amortization basis. Interest rates may
be fixed or adjustable, and are more likely fixed in the case of shorter term
loans. The Bank generally charges an origination fee. Management will attempt
to reduce credit risk in the commercial real estate portfolio by emphasizing
loans on owner-occupied office and retail buildings where the loan-to-value
ratio, established by independent appraisals, does not exceed 80%. The Bank's
policy is for the loan-to-value ratio for (i) first and second mortgage loans
and (ii) construction loans not to exceed 80%. In addition, the Bank may
require personal guarantees of the principal owners of the property backed with
a review by the Bank of the personal financial statements of the principal
owners. The principal economic risk associated with each category of
anticipated loans, including real estate loans, is the creditworthiness of the
Bank's borrowers. The risks associated with real estate loans vary with many
economic factors, including employment levels and fluctuations in the value of
real estate. The Bank competes for real estate loans with a number of bank
competitors which are well-established in the Forsyth County Area. Most of
these competitors have substantially greater resources and lending limits than
the Bank. As a result, the Bank may have to charge lower interest rates to
attract borrowers. See "--Competition." The Bank may also originate loans for
sale into the secondary market. The Bank intends to limit interest rate risk
and credit risk on these loans by locking the interest rate for each loan with
the secondary investor and receiving the investor's underwriting approval prior
to originating the loan.
Commercial Loans. The Bank makes loans for commercial purposes in
various lines of businesses. Commercial loans include both secured and
unsecured loans for working capital
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(including inventory and receivables), business expansion (including
acquisition of real estate and improvements) and purchases of equipment and
machinery. Equipment loans are typically made for a term of five years or less
at fixed or variable rates, with the loan fully amortized over the term and
secured by the financed equipment and with a loan-to-value ratio of 80% or
less. Working capital loans typically have terms not exceeding one year and
will usually be secured by accounts receivable, inventory or personal
guarantees of the principals of the business. For loans secured by accounts
receivable or inventory, principal is typically repaid as the assets securing
the loan are converted into cash, and in other cases principal will typically
be due at maturity. The principal economic risk associated with each category
of anticipated loans, including commercial loans, is the creditworthiness of
the Bank's borrowers. The risks associated with commercial loans vary with many
economic factors, including the economy in the Forsyth County Area. The
well-established banks in the Forsyth County Area will make proportionately
more loans to medium to large-sized businesses than the Bank. Many of the
Bank's current and future commercial loans are and will likely be made to small
to medium-sized businesses which may be less able to withstand competitive,
economic and financial conditions than larger borrowers.
Consumer Loans. The Bank makes a variety of loans to individuals for
personal and household purposes, including secured and unsecured installment
and term loans, home equity loans and lines of credit and revolving lines of
credit such as credit cards. These loans typically carry balances of less than
$25,000 and, in the case of non-revolving loans, are amortized over a period
not exceeding 48 months or are 90-day term loans, in each case bearing interest
at a fixed rate. The revolving loans typically bear interest at a fixed rate
and require monthly payments of interest and a portion of the principal
balance. The underwriting criteria for home equity loans and lines of credit
generally are the same as applied by the Bank when making a first mortgage
loan, as described above, and home equity lines of credit typically expire 10
years or less after origination. As with the other categories of loans, the
principal economic risk associated with consumer loans is the creditworthiness
of the Bank's borrowers, and the principal competitors for consumer loans are
the established banks in the Forsyth County Area.
Loan Approval and Review. The Bank's loan approval policies provide
for various levels of officer lending authority. When the amount of aggregate
loans to a single borrower exceeds that individual officer's lending authority,
the loan request is considered and approved by an officer with a higher lending
limit or the officers' loan committee. The Bank has established officers'
lending limits, and any loan in excess of this lending limit must be approved
by the loan committee. The Bank will not make any loans to any director,
officer or employee of the Bank unless the loan is approved by the Bank's Board
of Directors, or a committee thereof, and is made on terms not more favorable
to such person than would be available to a person not affiliated with the
Bank.
Lending Limit. Under the Financial Institutions Code, the Bank is
limited in the amount it can loan to a single borrower (including the
borrower's related interests) by the amount of the Bank's statutory capital
base. The limit is 15% of the statutory capital base unless each loan in excess
of the 15% is approved by the Bank's Board of Directors, or a committee
thereof, and unless the entire amount of the loan is secured by good collateral
or other ample security. In no event, however, may the aggregate amount loaned
to any borrower exceed 25% of the Bank's statutory capital base, subject to
certain exceptions relating to the type and adequacy of the collateral for such
loan. These limits will increase and decrease as the Bank's statutory capital
base increases and decreases. The Bank does not have any internal policy
restrictions concerning
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loans to one borrower other than the limits imposed by the Financial
Institutions Code and those relating to loans to affiliates. See "--Supervision
and Regulation -- The Bank -- Transactions With Affiliates and Insiders." Unless
the Bank is able to sell participations in its loans to other financial
institutions, the Bank will not be able to meet all the lending needs of loan
customers requiring aggregate extensions of credit above these limits.
Other Banking Services
Other bank services provided by the Bank include safe deposit boxes,
travelers checks, direct deposits of payroll and social security checks and
automatic drafts for various accounts. The Bank is associated with a shared
network of automated teller machines that may be used by Bank customers
throughout Georgia and other regions. The Bank does not currently and does not
plan to exercise trust powers during its initial years of operation. The Bank
may in the future offer a full-service trust department, but cannot do so
without the prior approval of the DBF.
Competition
The banking business is highly competitive. The Bank competes as a
financial intermediary with other commercial banks, savings and loan
associations, mortgage banking firms, consumer finance companies, credit
unions, securities brokerage firms, insurance companies, money market mutual
funds and other financial institutions operating in the Forsyth County Area and
elsewhere. As of December 31, 1998, there were 11 commercial banks, with 25
commercial bank branches and one credit union operating in Forsyth County. A
number of these competitors are well-established in the Forsyth County Area.
Most of these institutions have substantially greater resources and lending
limits than the Bank and offer certain services, such as extensive and
established branch networks and trust services, that the Bank either does not
currently nor expect to provide. In addition, non-depository institution
competitors are generally not subject to the extensive regulations applicable
to the Company and the Bank. Recent federal legislation permits commercial
banks to establish operations nationwide, further increasing competition from
out-of-state financial institutions. Furthermore, recently enacted Georgia
legislation greatly diminishes the historical legal restrictions on
establishing branch banks across county lines in Georgia, thus creating further
opportunities for other financial institutions to compete with the Bank. As of
July 1, 1998, banks may establish branch banks statewide without limitation. In
addition, on-line computer banking via the Internet or otherwise may also
become an increasing source of competition for community financial institutions
such as the Bank. As a result of these competitive factors, the Bank may from
time to time be required to pay higher rates of interest to attract deposits.
Management believes that the Bank will be able to compete effectively with
these institutions in the Bank's proposed markets, but no assurances can be
given in this regard.
Forsyth County is a rapidly growing market area. Currently, the Bank
is the only locally owned and operated bank in Forsyth County. Management
believes that this enhances the Bank's ability to maintain strong local support
and to continue its growth.
Supervision and Regulation
The Company and the Bank are subject to state and federal banking laws
and regulations which impose specific requirements or restrictions on and
provide for general regulatory oversight with respect to virtually all aspects
of operations. These laws and regulations are generally
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intended to protect depositors, not shareholders. To the extent that the
following summary describes statutory or regulatory provisions, it is qualified
in its entirety by reference to the particular statutory and regulatory
provisions. Any change in applicable laws or regulations may have a material
effect on the business and prospects of the Company. Beginning with the
enactment of the Financial Institutions Reform, Recovery and Enforcement Act of
1989 ("FIRREA") and following with the Federal Deposit Insurance Corporation
Improvement Act (the "FDICIA"), which was enacted in 1991, numerous additional
regulatory requirements have been placed on the banking industry, and
additional changes have been proposed. The operations of the Company and the
Bank may be affected by legislative changes and the policies of various
regulatory authorities. The Company is unable to predict the nature or the
extent of the effect on its business and earnings that fiscal or monetary
policies, economic control, or new federal or state legislation may have in the
future.
The Company
General. Because it owns the outstanding capital stock of the Bank,
the Company is a bank holding company within the meaning of the BHCA and the
Financial Institutions Code. The activities of the Company will also be
affected by the Glass-Steagall Act of 1933 (the "Glass-Steagall Act").
The BHCA. Under the BHCA, the Company is subject to periodic
examination by the Federal Reserve and will be required to file periodic
reports of its operations and such additional information as the Federal
Reserve may require. The Company's and the Bank's activities are limited to
banking, managing or controlling banks; furnishing services to or performing
services for its subsidiaries and engaging in other activities that the Federal
Reserve determines to be so closely related to banking, managing or controlling
banks as to be a proper incident thereto.
Investments, Control and Activities. With certain limited exceptions,
the BHCA requires every bank holding company to obtain the prior approval of
the Federal Reserve before: (i) acquiring substantially all the assets of any
bank; (ii) acquiring direct or indirect ownership or control of any voting
shares of any bank if after such acquisition it would own or control more than
5% of the voting shares of such bank (unless it already owns or controls the
majority of such shares); or (iii) merging or consolidating with another bank
holding company.
In addition, and subject to certain exceptions, the BHCA and the
Change in Bank Control Act, together with regulations thereunder, require
Federal Reserve approval (or, depending on the circumstances, no notice of
disapproval) prior to any person or company acquiring "control" of a bank
holding company, such as the Company. Control is conclusively presumed to exist
if an individual or company acquires 25% or more of any class of voting
securities of the bank holding company. Control is rebuttably presumed to exist
if a person acquires 10% or more, but less than 25%, of any class of voting
securities and either the Company has registered securities under Section 12 of
the Securities Exchange Act of 1934, as amended (the "Exchange Act") or no
other person will own a greater percentage of that class of voting securities
immediately after the transaction. The regulations provide a procedure for
challenge of the rebuttable control presumption.
Under the BHCA, a bank holding company is generally prohibited from
engaging in, or acquiring direct or indirect control of, more than 5% of the
voting shares of any company
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engaged in non-banking activities, unless the Federal Reserve Board, by order
or regulation, has found those activities to be so closely related to banking
or managing or controlling banks as to be a proper incident thereto. Some of
the activities that the Federal Reserve Board has determined by regulation to
be proper incidents to the business of a bank holding company include making or
servicing loans and certain types of leases, engaging in securities brokerage
and limited insurance activities, performing certain data processing services,
acting in certain circumstances as a fiduciary or investment or financial
adviser, owning savings associations and making investments in certain
corporations or projects designed primarily to promote community welfare.
The Federal Reserve Board will impose certain capital requirements on
the Company under the BHCA, including a minimum leverage ratio and a minimum
ratio of "qualifying" capital to risk-weighted assets. These requirements are
described below under "-- Capital Regulations." Subject to its capital
requirements and certain other restrictions, the Company may be able to borrow
money to make a capital contribution to the Bank, and such loans may be repaid
from dividends paid from the Bank to the Company (although the ability of the
Bank to pay dividends will be subject to regulatory restrictions as described
below in "-- The Bank -- Dividends"). The Company may also be able to raise
capital for contribution to the Bank by issuing securities, subject to
compliance with federal and state securities laws.
Source of Strength. In accordance with Federal Reserve Board policy,
the Company is expected to act as a source of financial strength to the Bank
and to commit resources to support the Bank in circumstances in which the
Company might not otherwise do so. Under the BHCA, the Federal Reserve Board
may require a bank holding company to terminate any activity or relinquish
control of a non-bank subsidiary (other than a non-bank subsidiary of a bank)
upon the Federal Reserve Board's determination that such activity or control
constitutes a serious risk to the financial soundness or stability of any
subsidiary depository institution of the bank holding company. Further, federal
bank regulatory authorities have additional discretion to require a bank
holding company to divest itself of any bank or non-bank subsidiary if the
agency determines that divestiture may aid the depository institution's
financial condition.
The Financial Institutions Code. All Georgia bank holding companies
must register with the DBF under the Financial Institutions Code. A registered
bank holding company must provide the DBF with information with respect to the
financial condition, operations, management and inter-company relationships of
the holding company and its subsidiaries. The DBF may also require such other
information as is necessary to keep itself informed about whether the
provisions of Georgia law and the regulations and orders issued thereunder by
the DBF have been complied with, and the DBF may make examinations of any bank
holding company and its subsidiaries.
Under the Financial Institutions Code, it is unlawful without the
prior approval of the DBF: (i) for any bank holding company to acquire direct
or indirect ownership or control of more than 5% of the voting shares of the
bank; (ii) for any bank holding company or subsidiary thereof, other than a
bank, to acquire all or substantially all of the assets of a bank; or (iii) for
any bank holding company to merge or consolidate with any other bank holding
company. It is also unlawful for any bank holding company to acquire direct or
indirect ownership or control of more than 5% of the voting shares of any bank
unless such bank has been in existence and continuously operating or
incorporated as a bank for a period of five years or more prior to the date of
application to the DBF for approval of such acquisition. In addition, in any
such acquisition by an
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existing bank holding company, the initial banking subsidiary of such bank
holding company must have been incorporated for not less than two years before
the holding company can acquire another bank.
The Financial Institutions Code and applicable provisions of federal
law allow interstate banking by permitting bank holding companies to acquire
Georgia banking organizations so long as the Georgia-based banks to be acquired
have been in existence and continuously operated as banks for five years or
more. Georgia bank holding companies are likewise permitted to acquire banking
organizations in other states, subject to similar aging requirements. Effective
June 1, 1997, banks located in substantially all states may merge or
consolidate with Georgia-based banks that satisfy the five-year age
requirement. Following such mergers or consolidations, the resulting bank may
expand in each state where its predecessors were located, subject to the
branching laws of that particular state. Those acquisitions and transactions
are generally subject to federal and Georgia approval as described above. See
"-- The Bank -- Branching."
Glass-Steagall Act. The Company will also be restricted in its
activities by the provisions of the Glass-Steagall Act, which will prohibit the
Company from owning subsidiaries that are engaged principally in the issue,
flotation, underwriting, public sale or distribution of securities. The
interpretation, scope and application of the provisions of the Glass-Steagall
Act currently are being considered and reviewed by regulators and legislators,
and the interpretation and application of those provisions have been challenged
in the federal courts.
The Bank
General. The Bank is a state-chartered non-member bank organized under
the laws of the State of Georgia and subject to examination by the DBF.
Deposits in the Bank are insured by the FDIC up to a maximum amount (generally
$100,000 per depositor, subject to aggregation rules). The DBF and the FDIC
regulate or monitor virtually all areas of the Bank's operations, including
security devices and procedures, adequacy of capitalization and loss reserves,
loans, investments, borrowings, deposits, mergers, issuances of securities,
payment of dividends, interest rates payable on deposits, interest rates or
fees chargeable on loans, establishment of branches, corporate reorganizations,
maintenance of books and records and adequacy of staff training to carry on
safe lending and deposit gathering practices. The DBF and FDIC require the Bank
to maintain certain capital ratios and impose limitations on the Bank's
aggregate investment in real estate, bank premises, furniture and fixtures. The
Bank is also required by the DBF and FDIC to prepare quarterly reports on the
Bank's financial condition and to conduct an annual audit of its financial
affairs in compliance with minimum standards and procedures prescribed by the
DBF and FDIC.
All insured institutions must undergo regular on site examinations by
their appropriate banking agency. The DBF assesses the cost of examinations of
insured depository institutions and any affiliates against each institution or
affiliate as it deems necessary or appropriate. Insured institutions are
required to submit annual reports to the FDIC and the appropriate agency (and
state supervisor when applicable). FDICIA also directs the FDIC to develop with
other appropriate agencies a method for insured depository institutions to
provide supplemental disclosure of the estimated fair market value of assets
and liabilities, to the extent feasible and practicable, in any balance sheet,
financial statement, report of condition or any other report of any insured
depository institution. FDICIA also requires the federal banking regulatory
agencies
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to prescribe, by regulation, standards for all insured depository institutions
and depository institution holding companies relating, among other things, to:
(i) internal controls, information systems and audit systems; (ii) loan
documentation; (iii) credit underwriting; (iv) interest rate risk exposure; and
(v) asset quality.
State non-member banks and their holding companies which have been
chartered or registered or have undergone a change in control within the past
two years or which have been deemed by the DBF or the Federal Reserve Board,
respectively, to be troubled institutions must give the DBF or the Federal
Reserve Board, respectively, 30 days prior notice of the appointment of any
senior executive officer or director. Within the 30-day period, the DBF or the
Federal Reserve Board, as the case may be, may approve or disapprove any such
appointment. This two-year period has expired for the Company and the Bank, and
neither has been notified that it is in a troubled condition.
Deposit Insurance. The FDIC establishes rates for the payment of
premiums by federally insured banks and thrifts for deposit insurance. A
separate Bank Insurance Fund ("BIF") and Savings Association Insurance Fund
("SAIF") are maintained for commercial banks and thrifts, respectively, with
insurance premiums from the industry used to offset losses from insurance
payouts when banks and thrifts fail. Insurance premiums are established on the
basis of risk, where the institutions posing the highest risk of failure pay
higher premiums than those posing a lower risk of failure. These rates range
from zero to twenty-seven basis points. In recent years, the amount of the
deposit insurance premiums have been substantially reduced. As a result of the
enactment of the Federal Deposit Insurance Funds Act of 1996 on September 30,
1996, commercial banks are now required to pay part of the interest on the
Financing Corporation's ("FICO") bonds issued to deal with the savings and loan
crisis of the late 1980s. As a result, commercial bank deposits are now also
subject to assessment by FICO upon the approval by the FDIC Board ("FICO
Assessment") of such assessment. Beginning in 1997 and until the earlier of
December 31, 1999 or the date on which the last saving association ceases to
exist, the assessment rate FICO imposes on a commercial bank must be at a rate
equal to one-fifth the assessment rate applicable to deposits assessable by the
SAIF. The Bank's FICO Assessment for 1998 was $4,608, and the Bank believes it
will be at least approximately $7,000 for 1999. Increases in deposit insurance
premiums will increase the Bank's cost of funds, and there can be no assurance
that deposit insurance premiums will not increase in the future.
Transactions With Affiliates and Insiders. The Bank is subject to the
provisions of Section 23A of the Federal Reserve Act, which place limits on the
amount of loans or extensions of credit to, or investments in or certain other
transactions with, affiliates and on the amount of advances to third parties
collateralized by the securities or obligations of affiliates. The aggregate of
all covered transactions is limited in amount, as to any one affiliate, to 10%
of a bank's capital and surplus and, as to all affiliates combined, to 20% of a
bank's capital and surplus. Furthermore, within the foregoing limitations as to
amount, each covered transaction must meet specified collateral requirements.
Compliance is also required with certain provisions designed to avoid the
taking of low quality assets from affiliates.
The Bank is also subject to the provisions of Section 23B of the
Federal Reserve Act which, among other things, prohibit an institution from
engaging in certain transactions with certain affiliates unless the
transactions are on terms substantially the same, or at least as favorable to
such institution or its subsidiaries as those prevailing at the time for
comparable transactions
10
<PAGE> 12
with non-affiliated companies. The Bank is subject to certain restrictions on
extensions of credit to executive officers, directors, certain principal
shareholders and their related interests. Such extensions of credit: (i) must
be made on substantially the same terms, including interest rates and
collateral, as those prevailing at the time for comparable transactions with
third parties; and (ii) must not involve more than the normal risk of repayment
or present other unfavorable features.
Dividends. The principal source of the Company's cash revenues will
come from dividends received from the Bank. Under the Financial Institutions
Code, cash dividends on the Bank's common stock may be declared and paid only
out of its retained earnings, and dividends may not be declared at any time at
which the Bank's paid-in capital and appropriated retained earnings do not, in
combination, equal at least 20% of its capital stock account. In addition, the
DBF's current rules and regulations require prior DBF approval before cash
dividends may be declared and paid if: (i) the Bank's ratio of equity capital
to adjusted total assets is less than 6%; (ii) the aggregate amount of
dividends declared or anticipated to be declared in that calendar year exceeds
50% of the Bank's net profits, after taxes but before dividends, for the
previous calendar year; or (iii) the percentage of the Bank's assets classified
as adverse as to repayment or recovery by the DBF at the most recent
examination of the Bank exceeds 80% of the Bank's equity capital as reflected
at such examination. In addition, the Federal Reserve Board has stated that
bank holding companies should refrain from or limit dividend increases or
reduce or eliminate dividends under circumstances in which the bank holding
company fails to meet minimum capital requirements or in which its earnings are
impaired. Current federal law would prohibit, except under certain
circumstances and with prior regulatory approval, an insured depository
institution, such as the Bank from paying dividends or making any other capital
distribution if, after making the payment or distribution, the institution
would be considered "undercapitalized," as the term is defined in the
applicable regulations.
Branching. The Bank currently operates only from its main office.
However, the Bank anticipates establishing a branch office in the Forsyth
County community known as Midway. Recently, Georgia legislation greatly
diminished the historical legal restrictions on establishing branch banks
across county lines in Georgia. Under Georgia law as of July 1, 1998, banks may
establish branch banks statewide without limitation. In addition, the Company,
with prior regulatory approval, is permitted to acquire interests in and
operate banks throughout the state provided such banks have been in existence
for five years, and under current Georgia law any bank acquired by the Company
could be merged into the Bank and its offices could then be operated as
branches of the Bank. The Bank has plans currently to open one branch office in
1999 and, depending upon profitability and community needs, additional branches
may be considered in the future.
Community Reinvestment Act. The Community Reinvestment Act requires
that, in connection with examinations of financial institutions within their
respective jurisdictions, the Federal Reserve, the FDIC and the DBF shall
evaluate the record of the financial institutions in meeting the credit needs
of their local communities, including low and moderate income neighborhoods,
consistent with the safe and sound operation of those institutions. These
factors are also considered in evaluating mergers, acquisitions and
applications to open a branch or facility.
Other Regulations. Interest and certain other charges collected or
contracted for by the Bank are subject to state usury laws and certain federal
laws concerning interest rates. The
11
<PAGE> 13
Bank's loan operations are also subject to certain federal laws applicable to
credit transactions, such as: (i) the federal Truth-In-Lending Act, governing
disclosures of credit terms to consumer borrowers; (ii) the Home Mortgage
Disclosure Act of 1975, requiring financial institutions to provide information
to enable the public and public officials to determine whether a financial
institution will be fulfilling its obligation to help meet the housing needs of
the community it serves; (iii) the Equal Credit Opportunity Act, prohibiting
discrimination on the basis of race, creed or other prohibited factors in
extending credit; (iv) the Fair Credit Reporting Act of 1978, governing the use
and provision of information to credit reporting agencies; (v) the Fair Debt
Collection Act, governing the manner in which consumer debts may be collected
by collection agencies; and (vi) the rules and regulations of the various
federal agencies charged with the responsibility of implementing such federal
laws. The deposit operations of the Bank also are subject to the Right to
Financial Privacy Act, which imposes a duty to maintain confidentiality of
consumer financial records and prescribes procedures for complying with
administrative subpoenas of financial records, and the Electronic Funds
Transfer Act and Regulation E issued by the Federal Reserve Board to implement
that act, which governs automatic deposits to and withdrawals from deposit
accounts and customers' rights and liabilities arising from the use of
automated teller machines and other electronic banking services.
Capital Regulations
The federal bank regulatory authorities have adopted risk-based
capital guidelines for banks and bank holding companies that are designed to
make regulatory capital requirements more sensitive to differences in risk
profiles among banks and bank holding companies and account for off-balance
sheet items. The guidelines are minimums, and the federal regulators have noted
that banks and bank holding companies contemplating significant expansion
programs should not allow expansion to diminish their capital ratios and should
maintain ratios in excess of the minimums. Neither the Company nor the Bank has
received any notice indicating that either entity will be subject to higher
capital requirements. The current guidelines require all bank holding companies
and federally-regulated banks to maintain a minimum risk-based total capital
ratio equal to 8%, of which at least 4% must be Tier 1 capital. Tier 1 capital
includes common stockholders' equity, qualifying perpetual preferred stock and
minority interests in equity accounts of consolidated subsidiaries, but
excludes goodwill and most other intangibles and excludes the allowance for
loan and lease losses. Tier 2 capital includes the excess of any preferred
stock not included in Tier 1 capital, mandatory convertible securities, hybrid
capital instruments, subordinated debt and intermediate term-preferred stock
and general reserves for loan and lease losses up to 1.25% of risk-weighted
assets.
Under these guidelines, Bank's and bank holding companies' assets are
given risk-weights of 0%, 20%, 50% or 100%. In addition, certain off-balance
sheet items are given credit conversion factors to convert them to asset
equivalent amounts to which an appropriate risk-weight will apply. These
computations result in the total risk-weighted assets. Most loans are assigned
to the 100% risk category, except for first mortgage loans fully secured by
residential property and, under certain circumstances, residential construction
loans, both of which carry a 50% rating. Most investment securities are
assigned to the 20% category, except for municipal or state revenue bonds,
which have a 50% rating and direct obligations of or obligations guaranteed by
the United States Treasury or United States government agencies, which have a
0% rating.
12
<PAGE> 14
The federal bank regulatory authorities have also implemented a
leverage ratio, which is equal to Tier 1 capital as a percentage of average
total assets less intangibles, to be used as a supplement to the risk-based
guidelines. The principal objective of the leverage ratio is to place a
constraint on the maximum degree to which a bank holding company may leverage
its equity capital base. The minimum required leverage ratio for top-rated
institutions is 3%, but most institutions are required to maintain an
additional cushion of at least 100 to 200 basis points.
FDICIA established a capital-based regulatory scheme designed to
promote early intervention for troubled banks which requires the FDIC to choose
the least expensive resolution of bank failures. This capital-based regulatory
framework contains five categories of compliance with regulatory capital
requirements, including "well-capitalized," "adequately capitalized,"
"undercapitalized," "significantly undercapitalized" and "critically
undercapitalized." To qualify as a "well-capitalized" institution, a bank must
have a leverage ratio of no less than 5%, a Tier 1 risk-based ratio of no less
than 6% and a total risk-based capital ratio of no less than 10%, and the bank
must not be under any order or directive from the appropriate regulatory agency
to meet and maintain a specific capital level. The Bank currently qualifies as
"well-capitalized."
Under the FDICIA regulations, the applicable agency can treat an
institution as if it were in the next lower category if the agency determines
(after notice and an opportunity for hearing) that the institution is in an
unsafe or unsound condition or is engaging in an unsafe or unsound practice.
The degree of regulatory scrutiny of a financial institution will increase, and
the permissible activities of the institution will decrease, as it moves
downward through the capital categories. Institutions that fall into one of the
three undercapitalized categories may be required to: (i) submit a capital
restoration plan; (ii) raise additional capital; (iii) restrict their growth,
deposit interest rates, and other activities; (iv) improve their management;
(v) eliminate management fees; or (vi) divest themselves of all or a part of
their operations. Bank holding companies controlling financial institutions can
be called upon to boost the institutions' capital and to partially guarantee
the institutions' performance under their capital restoration plans.
These capital guidelines can affect the Company in several ways. As
noted, the Bank currently qualifies as "well capitalized." However, rapid
growth, poor loan portfolio performance or poor earnings performance or a
combination of these factors, could change the Company's capital position in a
relatively short period of time, making an additional capital infusion
necessary.
The FDIC has adopted supplements to the capital standards to address
market risk in larger organizations. The federal banking regulators continue to
refine the capital standards. It is uncertain what effect such modifications,
when and if implemented, would have on the Company and the Bank.
Failure to meet these capital requirements would mean that a bank
would be required to develop and file a plan with its primary federal banking
regulator describing the means and a schedule for achieving the minimum capital
requirements. In addition, such a bank would generally not receive regulatory
approval of any application that requires the consideration of capital
adequacy, such as a branch or merger application, unless the bank could
demonstrate a reasonable plan to meet the capital requirement within a
reasonable period of time.
13
<PAGE> 15
The DBF requires the Bank to maintain a ratio (the "Primary Capital
Ratio") of total capital (which is essentially Tier 1 capital plus the
allowance for loan losses) to total assets (defined as balance sheet assets
plus the allowance for loan losses) of at least 6%. In addition, the Bank
expects that, in accordance with DBF policy and prior practice, the Bank will
be required to maintain a Primary Capital Ratio of 8% during its first three
years of operation.
Enforcement Powers
FIRREA expanded and increased civil and criminal penalties available
for use by the federal regulatory agencies against depository institutions and
certain "institution-affiliated parties" (primarily including management,
employees and agents of a financial institution and independent contractors
such as attorneys, accountants and others, who participate in the conduct of
the financial institution's affairs). These practices can include the failure
of an institution to timely file required reports or the filing of false or
misleading information or the submission of inaccurate reports. Civil penalties
may be as high as $1,000,000 a day for such violations. Criminal penalties for
some financial institution crimes have been increased to 20 years. In addition,
regulators are provided with greater flexibility to commence enforcement
actions against institutions and institution-affiliated parties. Possible
enforcement actions include the termination of deposit insurance. Furthermore,
FIRREA expanded the appropriate banking agencies' power to issue
cease-and-desist orders that may, among other things, require affirmative
action to correct any harm resulting from a violation or practice, including
restitution, reimbursement, indemnifications or guarantees against loss. A
financial institution may also be ordered to restrict its growth, dispose of
certain assets, rescind agreements or contracts, or take other actions as
determined by the ordering agency to be appropriate.
Future Legislative Developments
Other legislative and regulatory proposals regarding changes in
banking, and the regulation of banks, thrifts and other financial institutions
and bank and bank holding company powers are being considered by the executive
branch of the Federal government, Congress and various state governments,
including Georgia. Among other items under consideration are the possible
combination of the BIF and SAIF, changes in or repeal of the Glass-Steagall Act
which separates commercial banking from investment banking, changes in the BHC
Act to broaden the powers of "financial services" companies to own and control
depository institutions and engage in activities not closely related to
banking, and liberalization on the ability of banking organizations to
underwrite or sell insurance. Certain of these proposals, if adopted, could
significantly change the regulation of banks and the financial services
industry. It cannot be predicted whether any of these proposals will be
adopted, and, if adopted, how these proposals will affect the Company and the
Bank.
Effect of Governmental Monetary Policies
The earnings of the Bank will be affected by domestic economic
conditions and the monetary and fiscal policies of the United States government
and its agencies. The Federal Reserve Board's monetary policies have had, and
will likely continue to have, an important impact on the operating results of
commercial banks through its power to implement national monetary policy in
order, among other things, to curb inflation or combat a recession. The
monetary policies of the Federal Reserve Board have major effects upon the
levels of bank loans,
14
<PAGE> 16
investments and deposits through its open market operations in United States
government securities and through its regulation of the discount rate on
borrowings of member banks and the reserve requirements against member bank
deposits. It is not possible to predict the nature or impact of future changes
in monetary and fiscal policies.
Employees
The Bank had 13 full-time and no part-time employees at December 31,
1998. The Company does not have any employees other than its officers.
ITEM 2. PROPERTIES
The site of the Bank's principal facility is located at 501 Tri-County
Plaza, Highways 9 and 20, Cumming, Georgia 30040. The Company leases its
principal facility consisting of approximately 6,000 square feet under a
Sublease Agreement, as amended, with NationsBank, N.A. (South), the initial
term of which expires August 31, 2000. The base annual rent under the sublease
was $69,525 in 1998 and will be $71,611 and $73,759 in years 1999 and 2000,
respectively. During 1997, the Company completed all initial necessary building
renovations and leasehold improvements, at a cost of approximately $118,000.
The main office facilities include a teller line, customer service area,
offices for the Bank's lenders and officers, a vault with safe deposit boxes,
drive-in teller lanes, and a drive-up automated teller machine.
In addition to the Bank's principal facility, the Company plans to
construct a branch facility and lease the facility to the Bank. The site of the
Bank's proposed branch facility is located at the corner of Highway 9 and
Campground Road, Cumming, Georgia 30041, which is in the Forsyth County
community of Midway. The Company purchased the site consisting of approximately
3.87 acres in October of 1998 for a purchase price of $607,892. While the site
currently consists of only a vacant lot, the Company plans to build a branch
office with facilities similar to those of the main office. The Company also
anticipates the purchase of a modular unit to be used as a temporary branch
office until the construction is completed.
ITEM 3. LEGAL PROCEEDINGS
There are no pending legal matters.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matter was submitted to a vote of security holders by solicitation
of proxies or otherwise during the fourth quarter of the Company's fiscal year
ended December 31, 1998.
15
<PAGE> 17
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
Information required by this item is set forth under the heading
"Market for the Company's Common Stock and Related Shareholder Matters" on page
23 in the Annual Report to Shareholders for the year ended December 31, 1998,
and is incorporated herein by reference.
ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND
FINANCIAL CONDITION OF FORSYTH BANCSHARES, INC.
Information required by this item is set forth under the heading
"Management's Discussion and Analysis of Results of Operations and Financial
Condition" on pages 3 through 22 in the Annual Report to Shareholders for the
year ended December 31, 1998, and is incorporated herein by reference.
ITEM 7. FINANCIAL STATEMENTS
Information required by this item is set forth in the Consolidated
Financial Statements and Notes to Consolidated Financial Statements on pages 25
through 49 and in the "Independent Auditor's Report" on page 24 in the Annual
Report to Shareholders for the year ended December 31, 1998, and is
incorporated herein by reference.
ITEM 8. CHANGES AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL
DISCLOSURE
The firm of Porter Keadle Moore, LLP acted as the Company's
independent auditors for the fiscal year ended December 31, 1997. On March 17,
1998, the Company's Board of Directors retained Mauldin & Jenkins, LLC as the
Company's independent public accountants and replaced the Company's former
auditors, Porter Keadle Moore, LLP. There were no disagreements with the former
auditors on any matter of accounting principles or practices, financial
statement disclosure or auditing scope or procedure with respect to the
Company's financial statements for the fiscal year ended December 31, 1997 or
up through the time of replacement. Prior to retaining Mauldin & Jenkins, LLC,
the Company had not consulted with them regarding accounting principles. The
Company changed its independent public accountants for general business and
pricing reasons and to separate the functions of the Company's internal auditor
and the Company's independent public accountants, which were both being
performed by Porter Keadle Moore, LLP. Since March 17, 1998, Mauldin & Jenkins,
LLC has acted as the Company's independent public accountants and J. M. Thomas
& Associates, CPA has acted as the Company's internal auditor.
16
<PAGE> 18
PART III
ITEM 9. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
Information required by this item is set forth under the heading
"Information Regarding Nominees and Continuing Directors" and under the heading
"Section 16(a) Beneficial Ownership Reporting Compliance" of the definitive
proxy statement for the Company's Annual Meeting to be held on May 18, 1999,
and is incorporated herein by reference.
ITEM 10. EXECUTIVE COMPENSATION
Information required by this item is set forth under the heading
"Director Compensation" and under the heading "Executive Compensation" of the
definitive proxy statement for the Company's Annual Meeting to be held on May
18, 1999, and is incorporated herein by reference.
ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
Information required by this item is set forth under the heading
"Information Regarding Nominees and Continuing Directors" and under the heading
"Common Stock Ownership of Certain Beneficial Owners" of the definitive proxy
statement for the Company's Annual Meeting to be held on May 18, 1999, and is
incorporated herein by reference.
ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Information required by this item is set forth under the heading
"Certain Transactions and Business Relationships" of the definitive proxy
statement for the Company's Annual Meeting to be held on May 18, 1999, and is
incorporated herein by reference.
ITEM 13. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a) The following documents are filed as part of this report:
(a)(1) Financial Statements
The following financial statements of the Company and the independent
auditor's report thereon are included in the Company's 1998 Annual Report to
Shareholders and are incorporated by reference in Item 7 hereof:
Consolidated Balance Sheets as of December 31, 1998 and 1997.
Consolidated Statements of Operations for the years ended December 31, 1998 and
1997.
Consolidated Statements of Comprehensive Income (Loss) for the years ended
December 31, 1998 and 1997.
17
<PAGE> 19
Consolidated Statements of Stockholders' Equity for the years ended December
31, 1998 and 1997.
Consolidated Statements of Cash Flows for the years ended December 31, 1998 and
1997.
Notes to Consolidated Financial Statements.
(a)(2) EXHIBITS
3.1 Articles of Incorporation.(1)
3.2 Bylaws.(1)
4.1 Specimen Stock Certificate.(1)
10.1 Sublease Agreement by and among the Company, the Bank and NationsBank,
N.A. (South), dated February 9, 1996.(1)
10.2 First Amendment to Sublease Agreement by and among the Company, the
Bank and NationsBank, N.A. (South), dated February 16, 1996.(1)
10.3 Second Amendment to Sublease Agreement by and among the Company, the
Bank and NationsBank, N.A. (South), dated May 10, 1996.(1)
10.5 Employment Agreement by and between the Company and David H. Denton,
dated June 28, 1996.(1)
13.1 The following sections of the 1998 Annual Report to Shareholders:
- Market for the Company's Common Stock and Related Shareholder
Matters.
- Management's Discussion and Analysis of Results of Operations and
Financial Condition.
- Independent Auditor's Report.
- Consolidated Financial Statements and Notes to the Consolidated
Financial Statements.
16.1 Letter on Change in Certifying Accountant.
21.1 Subsidiaries of the Company.
27.1 Financial Data Schedule (for SEC use only).
- ------------------------
(1) Incorporated by reference to exhibits of the same number in the
Company's Registration Statement on Form S-1 (File No. 333-10909).
(b) NO REPORTS ON FORM 8-K WERE FILED DURING THE LAST QUARTER OF THE
PERIOD COVERED BY THIS REPORT.
18
<PAGE> 20
SIGNATURES
In accordance with Section 13 or 15(d) of the Exchange Act, the
registrant caused this report to be signed on its behalf by the undersigned,
thereunto duly authorized, as of March 26, 1999.
Forsyth Bancshares, Inc.
By: /s/ David H. Denton
-------------------------------------
David H. Denton
President and Chief Executive Officer
In accordance with the Exchange Act, this report has been signed below
by the following persons on behalf of the registrant in the capacities and on
the dates indicated.
<TABLE>
<CAPTION>
Signature Title Date
--------- ----- ----
<S> <C> <C>
/s/ Catherine M. Amos Director March 26, 1999
------------------------------------
Catherine M. Amos
/s/ Jeffrey S. Bagley Vice Chairman of the Board March 26, 1999
------------------------------------
Jeffrey S. Bagley
/s/ Danny M. Bennett Director March 26, 1999
------------------------------------
Danny M. Bennett
/s/ Michael P. Bennett Director March 26, 1999
------------------------------------
Michael P. Bennett
/s/ Bryan L. Bettis Director March 26, 1999
------------------------------------
Bryan L. Bettis
/s/ Talmadge W. Bolton Director March 26, 1999
------------------------------------
Talmadge W. Bolton
/s/ Thomas L. Bower III Director March 26, 1999
------------------------------------
Thomas L. Bower III
/s/ Charles R. Castleberry Director March 26, 1999
------------------------------------
Charles R. Castleberry
/s/ David H. Denton President, Chief Executive Officer and March 26, 1999
------------------------------------ Director
David H. Denton
/s/ Holly R. Hunt Vice-President, Secretary March 26, 1999
------------------------------------ and Treasurer
Holly R. Hunt
</TABLE>
19
<PAGE> 21
<TABLE>
<S> <C> <C>
/s/ Charles D. Ingram Director March 26, 1999
------------------------------------
Charles D. Ingram
/s/ Herbert A. Lang, Jr. Director March 26, 1999
------------------------------------
Herbert A. Lang, Jr.
/s/ John P. McGruder Director March 26, 1999
------------------------------------
John P. McGruder
/s/ James J. Myers Chairman of the Board March 26, 1999
------------------------------------
James J. Myers
/s/ Danny L. Reid Director March 26, 1999
------------------------------------
Danny L. Reid
/s/ Charles R. Smith Director March 26, 1999
------------------------------------
Charles R. Smith
/s/ Wyatt L. Willingham Director March 26, 1999
------------------------------------
Wyatt L. Willingham
/s/ Jerry M. Wood Director March 26, 1999
------------------------------------
Jerry M. Wood
</TABLE>
20
<PAGE> 22
SUPPLEMENTAL INFORMATION TO BE FURNISHED WITH REPORTS FILED
PURSUANT TO SECTION 15(D) OF THE SECURITIES ACT OF 1933, AS AMENDED,
(THE "ACT") BY REGISTRANTS WHICH HAVE NOT REGISTERED SECURITIES
PURSUANT TO SECTION 12 OF THE ACT
Subsequent to the filing of this Annual Report on Form 10-KSB, the
Company will distribute to its securities holders an Annual Report to
Shareholders and Proxy Statement in connection with its 1999 Annual Meeting of
Shareholders. The Company will furnish four copies of such materials to the
Commission when such materials are sent to the shareholders.
21
<PAGE> 23
EXHIBIT INDEX
<TABLE>
<CAPTION>
ITEM DESCRIPTION
---- -----------
<S> <C>
3.1 Articles of Incorporation.(1)
3.2 Bylaws.(1)
4.1 Specimen Stock Certificate.(1)
10.1 Sublease Agreement by and among the Company, the Bank and
NationsBank, N.A. (South), dated February 9, 1996.(1)
10.2 First Amendment to Sublease Agreement by and among the
Company, the Bank and NationsBank, N.A. (South), dated
February 16, 1996.(1)
10.3 Second Amendment to Sublease Agreement by and among the
Company, the Bank and NationsBank, N.A. (South), dated
May 10, 1996.(1)
10.5 Employment Agreement by and between the Company and David
H. Denton, dated June 28, 1996.(1)
13.1 The following sections of the 1998 Annual Report to
Shareholders:
- Market for the Company's Common Stock and Related
Shareholder Matters.
- Management's Discussion and Analysis of Results of
Operations and Financial Condition.
- Independent Auditor's Report.
- Consolidated Financial Statements and Notes to
Consolidated Financial Statements
16.1 Letter on Change in Certifying Accountant.
21.1 Subsidiaries of the Company.
27.1 Financial Data Schedule (for SEC use only)
</TABLE>
- ----------------------------
(1) Incorporated by reference to exhibits of the same number in the
Company's Registration Statement on Form S-1 (File No. 333-10909).
<PAGE> 1
EXHIBIT 13.1
1998 ANNUAL REPORT TO SHAREHOLDERS
Market for the Company's Common Stock and Related Shareholder Matters.
Management's Discussion and Analysis of Results of Operations and Financial
Condition.
Independent Auditor's Report.
Consolidated Financial Statements and Notes to Consolidated Financial
Statements
<PAGE> 2
MARKET FOR THE COMPANY'S COMMON STOCK AND
RELATED SHAREHOLDER MATTERS
There is currently no market for the Company's shares of Common Stock
and it is not likely that an active trading market will develop for the shares
in the future. There are no present plans for the Company's Common Stock to be
traded on any stock exchange or over-the-counter market. As of December 31,
1998, there were approximately 639 holders of record of the Company's Common
Stock and 800,000 shares of Common Stock issued and outstanding.
No cash dividends have been paid to date on the Company's Common
Stock, and it is anticipated that earnings will be retained for the foreseeable
future to support the Company's rapid growth and expansion. The Company
currently has no source of income other than dividends and other payments
received from the Bank. The amount of dividends that may be paid by the Bank to
the Company depends on the Bank's earnings and capital position and is limited
by federal and state law, regulation and policies.
23
<PAGE> 3
MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS
AND FINANCIAL CONDITION
The purpose of this discussion is to focus on significant changes in
the financial condition and results of operations of the Company during the
past two years. The discussion and analysis is intended to supplement and
highlight information contained in the accompanying consolidated financial
statements and related notes to the consolidated financial statements and the
selected financial data presented elsewhere herein.
Overview
The year 1998 marked the first full year of banking operations for the
Company. The Company commenced banking operations on February 3, 1997. The
Company's 1998 results were highlighted by significant loan and deposit growth
that would be expected for a de novo bank and net income of $475,000. This
growth should provide a base for future increased profitability and a full
recovery of the Company's accumulated deficit.
Financial Condition at December 31, 1998 and 1997
Following is a summary of the Company's balance sheets for the periods
indicated:
<TABLE>
<CAPTION>
December 31,
1998 1997
(Dollars in Thousands)
<S> <C> <C>
Cash and due from banks $ 1,326 $ 1,787
Federal funds sold 8,180 2,010
Securities 21,460 14,731
Loans, net 27,175 18,565
Premises and equipment 943 429
Other assets 673 533
---------- --------
$ 59,757 $ 38,055
========== ========
Total deposits $ 51,412 $ 30,346
Other liabilities 334 198
Stockholders' equity 8,011 7,511
---------- --------
$ 59,757 $ 38,055
========== ========
</TABLE>
Financial Condition at December 31, 1998 and 1997
As of December 31, 1998, the Company had total assets of $59.8
million, an increase of 57% as compared to December 31, 1997. The completion of
the Company's stock offering in 1997, which raised net proceeds of
approximately $7.96 million, has provided a strong capital base to support this
growth. Total interest-earning assets were $56.8 million at December 31, 1998
or 95.08% of total assets as compared to $35.3 million or 92.78% at December
31, 1997. The Company's primary interest-earning assets at December 31, 1998
were loans, which made up
3
<PAGE> 4
47.83% of total interest-earning assets as compared to 52.58% at December 31,
1997. The Company's loan to deposit ratio was 53.56% as compared to 61.95% at
December 31, 1997. Deposit growth of $21.1 million has been used to fund loan
growth of $8.6 million and to increase the investment portfolio by $6.7
million.
The Company's investment portfolio, consisting of primarily U.S.
Agency securities and mortgage-backed securities, amounted to $21.5 million at
December 31, 1998. Unrealized gains on securities amounted to $115,000 at
December 31, 1998. No securities have been identified for sale in future
periods which would require a charge to operations due to their being sold
below market value.
The Company has 48% of its loan portfolio collateralized by real
estate located in the Company's primary market area of Forsyth County and
surrounding counties. The Company's real estate mortgage and construction
portfolio consists of loans collateralized by one- to four-family residential
properties (47%), construction loans to build one- to four-family residential
properties (33%), and nonresidential properties consisting primarily of small
business commercial properties (20%). The Company generally requires that loans
collateralized by real estate not exceed 80% of the collateral value.
The Company's remaining 52% of its loan portfolio consists of
commercial, consumer, and other loans. The Company requires collateral
commensurate with the repayment ability and creditworthiness of the borrower.
The specific economic and credit risks associated with the Company's
loan portfolio, especially the real estate portfolio, include, but are not
limited to, a general downturn in the economy which could affect unemployment
rates in the Company's market area, general real estate market deterioration,
interest rate fluctuations, deteriorated or non-existing collateral, title
defects, inaccurate appraisals, financial deterioration of borrowers, fraud, and
any violation of banking protection laws. The risks associated with commercial
loans vary with many economic factors, including the economy in the Forsyth
County area. The well-established banks in Forsyth County and the surrounding
area will make proportionately more loans to medium to large-sized businesses
than the Bank. Many of the Bank's current and future commercial loans are and
will likely be made to small to medium-sized businesses which may be less able
to withstand competitive, economic and financial conditions than larger
borrowers. Construction lending can also present other specific risks to the
lender such as whether developers can find builders to buy lots for home
construction, whether the builders can obtain financing for the construction,
whether the builders can sell the home to a buyer, and whether the buyer can
obtain permanent financing. The risks associated with real estate loans vary
with many economic factors, including employment levels and fluctuations in the
value of real estate. The Bank competes for real estate loans with a number of
bank competitors which are well-established in the Bank's market area. Most of
these competitors have substantially greater resources and lending limits than
the Bank. Currently, real estate values and employment trends in the Company's
market area are stable with no indications of a significant downturn in the
general economy. As with the other categories of loans, the principal economic
risk associated with consumer loans is the creditworthiness of the Bank's
borrowers, and the principal competitors for consumer loans are the established
banks. Additionally, the Company has risk associated with its loan portfolio as
it relates to the Year 2000 issue. (See "Year 2000 Disclosures.")
4
<PAGE> 5
The Company attempts to reduce these economic and credit risks not
only by adherence to loan to value guidelines, but also by investigating the
creditworthiness of the borrower and monitoring the borrower's financial
position. Also, the Company establishes and periodically reviews its lending
policies and procedures. State banking regulations limit exposure by
prohibiting secured loan relationships that exceed 25% of the Bank's statutory
capital and unsecured loan relationships that exceed 15% of the Bank's
statutory capital.
Liquidity and Capital Resources
The purpose of liquidity management is to ensure that there are
sufficient cash flows to satisfy demands for credit, deposit withdrawals, and
other needs of the Company. Traditional sources of liquidity include asset
maturities and growth in core deposits. A company may achieve its desired
liquidity objectives from the management of assets and liabilities and through
funds provided by operations. Funds invested in short-term marketable
instruments and the continuous maturing of other earning assets are sources of
liquidity from the asset perspective. The liability base provides sources of
liquidity through deposit growth, the maturity structure of liabilities, and
accessibility to market sources of funds.
Scheduled loan payments are a relatively stable source of funds, but
loan payoffs and deposit flows fluctuate significantly, being influenced by
interest rates and general economic conditions and competition. The Company
attempts to price its deposits to meet its asset/liability objectives
consistent with local market conditions.
The liquidity and capital resources of the Bank are monitored on a
periodic basis by State and Federal regulatory authorities. As determined under
guidelines established by those regulatory authorities and internal policy, the
Bank's liquidity was considered satisfactory.
At December 31, 1998, the Company had loan commitments outstanding of
$6.9 million. Because these commitments generally have fixed expiration dates
and many will expire without being drawn upon, the total commitment amounts do
not necessarily represent future cash requirements. If needed, the Bank has the
ability on a short-term basis to borrow and purchase Federal funds from other
financial institutions. At December 31, 1998, the Bank has arrangements with
two commercial banks for short-term advances of $2,150,000.
At December 31, 1998, the Company's and the Bank's capital ratios were
considered adequate based on regulatory minimum capital requirements. The
Company's stockholders' equity increased due to net income in 1998 of $475,000.
The Company's stockholders' equity also increased due to an increase in the
fair value of securities available-for-sale, net of tax, in the amount of
$25,000. For regulatory purposes, the net unrealized gains on securities
available-for-sale are excluded in the computation of the capital ratios.
In the future, the primary source of funds available to the Company
will be the payment of dividends by its subsidiary Bank. Banking regulations
limit the amount of the dividends that may be paid without prior approval of
the Bank's regulatory agency. Currently, no dividends can be paid by the Bank
to the Company without regulatory approval.
The minimum capital requirements to be considered well capitalized
under prompt corrective action provisions and the actual capital ratios for the
Company and the Bank as of December 31, 1998 are as follows:
5
<PAGE> 6
<TABLE>
<CAPTION>
Actual
Regulatory
Company Bank Requirements
------- ---- ------------
<S> <C> <C> <C>
Leverage capital ratio 14.16% 11.76% 5.00%
Risk-based capital ratios:
Core capital 24.87 20.66 6.00
Total capital 26.00 21.78 10.00
</TABLE>
At December 31, 1998, the Company had no material commitments for
capital expenditures. However, the Company has purchased a parcel of land to be
used for future branch expansion.
These ratios will decline as asset growth continues, but will still
remain in excess of the regulatory minimum requirements.
Management believes that its liquidity and capital resources are
adequate and will meet its foreseeable short and long-term needs. Management
anticipates that it will have sufficient funds available to meet current loan
commitments and to fund or refinance, on a timely basis, its other material
commitments and liabilities.
Except for expected continued growth common to a de novo bank, and
uncertainties related to the Year 2000 issue (see "Year 2000 Disclosure"),
management is not aware of any other known trends, events or uncertainties that
will have or that are reasonably likely to have a material effect on its
liquidity, capital resources or operations. Management is also not aware of any
current recommendations by the regulatory authorities which, if they were
implemented, would have such an effect.
Effects of Inflation
The impact of inflation on banks differs from its impact on
non-financial institutions. Banks, as financial intermediaries, have assets
which are primarily monetary in nature and which tend to fluctuate in concert
with inflation. A bank can reduce the impact of inflation if it can manage its
rate sensitivity gap. This gap represents the difference between rate sensitive
assets and rate sensitive liabilities. The Company, through its asset-liability
committee, attempts to structure the assets and liabilities and manage the rate
sensitivity gap, thereby seeking to minimize the potential effects of
inflation. For information on the management of the Company's interest rate
sensitive assets and liabilities, see the "Asset/Liability Management" section.
6
<PAGE> 7
Results of Operations For The Years Ended December 31, 1998 and 1997
Following is a summary of the Company's operations for the periods indicated.
<TABLE>
<CAPTION>
Years Ended December 31,
1998 1997
(Dollars in Thousands)
<S> <C> <C>
Interest income $ 3,821 $ 1,910
Interest expense 1,891 861
Net interest income 1,930 1,049
Provision for loan losses 128 235
Other income 105 50
Other expenses 1,432 1,186
Pretax income (loss) 475 (322)
--------- --------
Income taxes -- --
--------- --------
Net income (loss) 475 (322)
========= ========
</TABLE>
The Company commenced its operations on February 3, 1997. Prior to the
commencement, the Company was engaged in activities involving the formation of
the Company, selling its common stock, and obtaining necessary approvals. The
Company incurred operating losses totaling $178,000 during its organizational
period in 1996.
The Company incurred total organizational and stock issue costs of
$149,000, of which $109,000 was capitalized to be amortized over a period of
sixty months (see "Non-interest Expense"), and $40,000 was recorded as a
reduction in capital surplus. The Company incurred additional operating losses
of $322,000 in 1997.
Net Interest Income
The Company's results of operations are determined by its ability to
effectively manage interest income and expense, to minimize loan and investment
losses, to generate non-interest income, and to control operating expenses.
Since interest rates are determined by market forces and economic conditions
beyond the control of the Company, the Company's ability to generate net
interest income is dependent upon its ability to obtain an adequate net
interest spread between the rate paid on interest-bearing liabilities and the
rate earned on interest-earning assets.
The net yield on average interest-earning assets was 4.16% in 1998 as
compared to 4.31% in 1997. Average loans increased by $16.4 million which
accounted for the majority of a $22.1
7
<PAGE> 8
million increase in total average interest-earning assets. Average
interest-bearing liabilities increased by $20.1 million with average
interest-bearing demand and time deposits accounting for the vast majority of
this increase. The rate earned on average interest-earning assets increased to
8.23% in 1998 from 7.85% in 1997. The rate paid on average interest-bearing
liabilities was 5.20% in 1998 and 5.29% in 1997.
Provision for Loan Losses
The provision for loan losses was $128,000 in 1998 as compared to
$235,000 in 1997. The amount provided was due primarily to the growth of the
portfolio. Based upon management's evaluation of the loan portfolio, management
believes the reserve for loan losses to be adequate to absorb possible losses
on existing loans that may become uncollectible. This evaluation considers past
due and classified loans, underlying collateral values, and current economic
conditions which may affect the borrower's ability to repay. As of December 31,
1998, and 1997, the Company has no nonperforming loans or assets. The allowance
for loan losses as a percentage of total loans at December 31, 1998 and 1997
was 1.31% and 1.25%, respectively.
Other Income
Other operating income consists of service charges on deposit accounts
and other miscellaneous revenues and fees. Other operating income was $105,000
in 1998 as compared to $50,000 in 1997. The increases are due to the Company
being open for the entire year and increased deposit growth.
Non-interest Expense
Other operating expense for 1998 consists of salaries and employee
benefits ($673,000), equipment and occupancy expenses ($255,000), and other
operating expenses ($416,000). The increases over 1997 ($93,000 for salaries
and employee benefits, $31,000 for equipment and occupancy, and $34,000 for
other operating expenses) are due primarily to the Company being open for the
entire year and overall growth. The Company also adopted SOP 98-5 which
required the write-off of $89,000 of organization costs.
Income Tax
The Company had no income tax expense due to accumulated deficits of
$25,000 and $500,000 at December 31, 1998 and 1997, respectively.
Asset/Liability Management
It is the Company's objective to manage assets and liabilities to
provide a satisfactory, consistent level of profitability within the framework
of established cash, loan, investment, borrowing, and capital policies. Certain
officers are charged with the responsibility for monitoring policies and
procedures that are designed to ensure acceptable composition of the
asset/liability mix. It is the overall philosophy of management to support
asset growth primarily through growth of core deposits of all categories made
by local individuals, partnerships, and corporations.
The Company's asset/liability mix is monitored on a regular basis with
a report reflecting the interest rate-sensitive assets and interest
rate-sensitive liabilities being prepared and presented
8
<PAGE> 9
to the Board of Directors of the Bank on a monthly basis. The objective of this
policy is to monitor interest rate-sensitive assets and liabilities so as to
minimize the impact of substantial movements in interest rates on earnings. An
asset or liability is considered to be interest rate-sensitive if it will
reprice or mature within the time period analyzed, usually one year or less.
The interest rate-sensitivity gap is the difference between the
interest-earning assets and interest-bearing liabilities scheduled to mature or
reprice within such time period. A gap is considered positive when the amount
of interest rate-sensitive assets exceeds the amount of interest rate-sensitive
liabilities. A gap is considered negative when the amount of interest
rate-sensitive liabilities exceeds the interest rate-sensitive assets. During a
period of rising interest rates, a negative gap would tend to adversely affect
net interest income, while a positive gap would tend to result in an increase
in net interest income. Conversely, during a period of falling interest rates,
a negative gap would tend to result in an increase in net interest income,
while a positive gap would tend to adversely affect net interest income. If the
Company's assets and liabilities were equally flexible and moved concurrently,
the impact of any increase or decrease in interest rates on net interest income
would be minimal.
A simple interest rate "gap" analysis by itself may not be an accurate
indicator of how net interest income will be affected by changes in interest
rates. Accordingly, the Company also evaluates how the repayment of particular
assets and liabilities is impacted by changes in interest rates. Income
associated with interest-earning assets and costs associated with
interest-bearing liabilities may not be affected uniformly by changes in
interest rates. In addition, the magnitude and duration of changes in interest
rates may have a significant impact on net interest income. For example,
although certain assets and liabilities may have similar maturities or periods
of repricing, they may react in different degrees to changes in market interest
rates. Interest rates on certain types of assets and liabilities fluctuate in
advance of changes in general market rates, while interest rates on other types
may lag behind changes in general market rates. In addition, certain assets,
such as adjustable rate mortgage loans, have features (generally referred to as
"interest rate caps and floors") which limit changes in interest rates.
Prepayment and early withdrawal levels also could deviate significantly from
those assumed in calculating the interest rate gap. The ability of many
borrowers to service their debts also may decrease during periods of rising
interest rates.
Changes in interest rates also affect the Company's liquidity
position. The Company currently prices deposits in response to market rates and
it is management's intention to continue this policy. If deposits are not
priced in response to market rates, a loss of deposits could occur which would
negatively affect the Company's liquidity position.
At December 31, 1998, the Company's cumulative one year interest
rate-sensitivity gap ratio was 58%. The Company's targeted ratio is 80% to 120%
in this time horizon. This indicates that the Company's interest-bearing
liabilities will reprice during this period at a rate faster than the Company's
interest-earning assets. The Company is currently not within its targeted
parameters due primarily to 92% of certificates of deposit repricing within a
one year time frame as opposed to 35% of loans and securities repricing within
a one year time frame. The Company believes that competitive market rates are
being paid for certificates of deposit, and as long as the rates remain
competitive, liquidity and earnings should not be materially adversely
affected.
9
<PAGE> 10
The following table sets forth the distribution of the repricing of
the Company's interest-earning assets and interest-bearing liabilities as of
December 31, 1998, the interest rate-sensitivity gap, the cumulative interest
rate-sensitivity gap, the interest rate-sensitivity gap ratio and the
cumulative interest rate-sensitivity gap ratio. The table also sets forth the
time periods in which earning assets and liabilities will mature or may reprice
in accordance with their contractual terms. However, the table does not
necessarily indicate the impact of general interest rate movements on the net
interest margin since the repricing of various categories of assets and
liabilities is subject to competitive pressures and the needs of the Company's
customers. In addition, various assets and liabilities indicated as repricing
within the same period may in fact, reprice at different times within such
period and at different rates.
<TABLE>
<CAPTION>
After After
Three One
Months Year but
Within But Within After
Three Within Five Five
Months One Year Years Years Total
(Dollars in thousands)
<S> <C> <C> <C> <C> <C>
Interest-earning assets:
Federal funds sold $ 8,180 $ -- $ -- $ -- $ 8,180
Securities 502 -- 11,493 9,465 21,460
Loans 12,077 4,582 10,678 198 27,535
------- --------- --------- ------- --------
20,759 4,582 22,171 9,663 57,175
------- --------- --------- ------- --------
Interest-bearing liabilities:
Interest-bearing demand
deposits 11,923 -- -- -- 11,923
Savings 603 -- -- -- 603
Certificates, less than
$100,000 3,281 12,463 1,920 -- 17,664
Certificates, $100,000
and over 4,733 10,714 648 -- 16,095
------- --------- --------- ------- --------
20,540 23,177 2,568 -- 46,285
------- --------- --------- ------- --------
Interest rate sensitivity
gap $ 219 $ (18,595) $ 19,603 $ 9,663 $ 10,890
======= ========= ========= ======== ========
Cumulative interest rate
sensitivity gap $ 219 $ (18,376) $ 1,227 $ 10,890
======= ========= ========= ========
Interest rate sensitivity
gap ratio 1.01 .20 8.63 --
======= ========= ========= ========
Cumulative interest rate
sensitivity gap ratio 1.01 .58 1.03 1.24
======= ========= ========= ========
</TABLE>
10
<PAGE> 11
Year 2000 Disclosures
As the Year 2000 rapidly approaches, the Company recognizes that not
all systems are prepared for the next millennium. Information systems will
undergo a date transition that will present some major challenges to the
information technology industry. No country, government, business, or person is
immune from the potential effects of Year 2000 problems. Many programs and
systems will not operate correctly unless they are reprogrammed to accommodate
the new century.
For a bank, Year 2000 problems could have a material adverse effect if
interest accruals for loans and deposits are not calculated properly. A system
crash could result in a disruption of business which in turn could cause the
bank to lose a significant portion of its customer base, either of which could
result in material adverse consequences for the Company.
At the Company, preparation for Year 2000 challenges is a top
priority. The Company has chosen to address the Year 2000 problems by forming a
project team consisting of select personnel. The project manager is the chief
financial officer, who reports to the Executive Committee and Board. The
project team has been charged with the responsibility of assessing the problem,
overseeing corrective action, as well as testing the Year 2000 readiness of all
equipment, software, and applications after upgrades have been made. The Bank's
senior management continue to oversee the extensive Year 2000 project. The
project is well underway to minimize any disruption in service to customers and
to preserve customer confidence in us. The Company has committed the people and
the resources we believe are necessary to prepare for the millennium change.
The Company has distinguished between critical and non critical
systems. Mission-critical systems have priority attention. These systems are:
core processing system, both hardware and software, teller processing system
and items processing. Automated new accounts and loan document preparation
software, ATM processing, local area network and personal computers have been
designated as mission-necessary and have also been given appropriate attention.
As of December 31, 1998, all personal computers and the local area network have
been tested and certified by an outside firm to be Year 2000 compliant. The
Company upgraded to a new core processing system and an outside service
provider which was installed on January 22, 1999. Proxy testing for this system
is currently in process.
Since the Company relies on other outside vendors for many services
such as electricity, phone service, water, gas, bond accounting, accounts
payable, and other related forms, correspondence has been sent to each of these
vendors requesting information regarding their Year 2000 readiness.
Correspondence is in the process of being obtained and evaluated.
Due to the critical nature of the core processing system, the Company
is in the process of developing new contingency plans to accommodate new
systems recently installed and has adopted the contingency plan of the outside
provider. Contingency plans are also in revision to accommodate disruption of
service due to power outage, natural disasters and Year 2000 issues and are
expected to be in place by June 30, 1999.
After the assessment phase, the Board of Directors approved a budget
of $125,000 to address the Year 2000 issues, consisting mainly of new hardware
and software systems. This
11
<PAGE> 12
budget is subject to continuous review and amendment. Management does not
expect the cost of remediation to vary significantly from the present budget.
It is the goal of the Company to make sure that customers are
protected from any Year 2000 problems and to provide customers with accurate
and timely information about the Year 2000 problem as well as its progress
towards compliance. The Company has provided numerous informational brochures
and letters to its customers. This will be a continued concentration throughout
1999.
Loan customers could also experience business interruptions which
could affect their ability to repay debts owed to the Company resulting in
adverse bank performance. Action has been taken by the Company's senior lending
officer to evaluate the current commercial relationships and is continuing with
the assessment of each new commercial relationship. Management and the Board of
the Company realize that due to many factors, consumers may withdraw extra
amounts of money which could result in a liquidity issue for the Company. The
liquidity policy of the Company is being revised to accommodate this issue.
This will be closely monitored throughout 1999, with extra emphasis placed
during the fourth quarter.
The Company presently believes that, with modifications to its
computer systems and conversions to new systems, the Year 2000 issue will not
pose significant operational problems for the Company or have a material
adverse effect on future operating results. However, absolute assurance cannot
be given that; (1) the modifications and conversions will remedy all
deficiencies, (2) failure of any of the Company's systems will not have a
material impact on operations, or (3) failure of any other companies' systems
with whom the Company conducts business will not have a material impact on
operations.
The foregoing are forward-looking statements reflecting management's
current assessment and estimates with respect to the Company's Year 2000
compliance efforts and the impact of Year 2000 issues on the Company's business
and operations. Various factors could cause actual plans and results to differ
materially from those contemplated by such assessments, estimates and
forward-looking statements, many of which are beyond the control of the
Company. Some of these factors include, but are not limited to, representations
by the Company's vendors and counterparties, technological advances, economic
considerations, and consumer perceptions. The Company's Year 2000 compliance
program is an ongoing process involving continual evaluation and may be subject
to change in response to new developments.
12
<PAGE> 13
SELECTED FINANCIAL INFORMATION AND STATISTICAL DATA
The tables and schedules on the following pages set forth certain
significant financial information and statistical data with respect to: the
distribution of assets, liabilities and stockholders' equity of the Company,
the interest rates experienced by the Company; the investment portfolio of the
Company; the loan portfolio of the Company, including types of loans,
maturities, and sensitivities of loans to changes in interest rates and
information on nonperforming loans; summary of the loan loss experience and
reserves for loan losses of the Company; types of deposits of the Company and
the return on equity and assets for the Company.
13
<PAGE> 14
DISTRIBUTION OF ASSETS, LIABILITIES, AND
STOCKHOLDERS' EQUITY:
INTEREST RATES AND INTEREST DIFFERENTIALS
Average Balances
The condensed average balance sheet for the period indicated is presented
below.(1)
<TABLE>
<CAPTION>
Years Ended
December 31,
1998 1997
(Dollars in Thousands)
ASSETS
<S> <C> <C>
Cash and due from banks $ 1,112 $ 272
Taxable securities 18,353 8,402
Securities valuation account 80 9
Federal funds sold 2,558 6,855
Loans(2) 25,518 9,074
Reserve for loan losses (314) (88)
Other assets 1,190 1,080
------------ ----------
$ 48,497 $ 25,604
============ ==========
Total interest-earning assets $ 46,429 $ 24,331
============ ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
Deposits:
Noninterest-bearing demand $ 4,149 $ 3,601
Interest-bearing demand 9,734 5,286
Savings 458 271
Time 26,162 10,686
------------ ----------
Total deposits $ 40,503 $ 19,844
Other borrowings -- 47
Other liabilities 255 26
Total liabilities 40,758 19,917
------------ ----------
Stockholders' equity 7,739 5,687
------------ ----------
$ 48,497 $ 25,604
============ ==========
Total interest-bearing liabilities $ 36,354 $ 16,290
============ ==========
</TABLE>
(1) For each category, average balances were determined using the daily
average balances during the year.
(2) There were no nonaccrual loans included in average loans for 1998 or 1997.
14
<PAGE> 15
Interest Income and Interest Expense
The following tables set forth the amount of the Company's interest
income and interest expense for each category of interest-earning assets and
interest-bearing liabilities and the average interest rate for total
interest-earning assets and total interest-bearing liabilities, net interest
spread and net yield on average interest-earning assets. These rates do not
include the time period prior to the commencement of its banking operations.
<TABLE>
<CAPTION>
Years Ended December 31,
1998 1997
Average Average
Interest Rate Interest Rate
(Dollars in Thousands)
<S> <C> <C> <C> <C>
INTEREST INCOME:
Interest and fees on loans(1) $ 2,545 9.97% $ 974 10.73%
Interest on taxable securities 1,140 6.21 528 6.28
Interest on Federal funds sold 136 5.32 408 5.95
-------- ---------
Total interest income $ 3,821 8.23 $ 1,910 7.85
-------- ---------
INTEREST EXPENSE:
Interest on interest-bearing
demand deposits $ 322 3.31 $ 205 3.88
Interest on savings deposits 12 2.66 7 2.58
Interest on time deposits 1,557 5.95 642 6.01
Interest on other borrowings - - 7 14.89
-------- ---------
Total interest expense 1,891 5.20 861 5.29
-------- ---------
NET INTEREST INCOME $ 1,930 $ 1,049
======== =========
Net interest spread 3.03% 2.56%
==== ====
Net yield on average interest-earning assets 4.16% 4.31%
==== ====
</TABLE>
(1) Interest and fees on loans includes $150,000 and $109,000 of loan fee
income for the years ended December 31, 1998 and 1997, respectively.
There was no interest income recognized on nonaccrual loans during
1998 or 1997.
15
<PAGE> 16
Rate and Volume Analysis
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
year indicated. For each category of interest-earning assets and
interest-bearing liabilities, information is provided on changes attributable
to (1) change in volume (change in volume multiplied by old rate); (2) change
in rate (change in rate multiplied by old volume); and (3) a combination of
change in rate and change in volume. The changes in interest income and
interest expense attributable to both volume and rate have been allocated
proportionately on a consistent basis to the change due to volume and the
change due to rate.
<TABLE>
<CAPTION>
Year Ended December 31,
1998 vs. 1997
Changes Due To:
Increase
Rate Volume (Decrease)
(Dollars in Thousands)
<S> <C> <C> <C>
Increase (decrease) in:
Income from interest-earning assets:
Interest and fees on loans $ (73) $ 1,644 $ 1,571
Interest on taxable securities (6) 618 612
Interest on Federal funds sold (39) (233) (272)
----------- --------- -----------
Total interest income (118) 2,029 1,911
----------- --------- -----------
Expense from interest-bearing liabilities:
Interest on interest-bearing
demand deposits (34) 151 117
Interest on savings deposits - 5 5
Interest on time deposits (6) 921 915
Interest on other borrowings - (7) (7)
----------- --------- -----------
Total interest expense (40) 1,070 1,030
----------- --------- -----------
Net interest income $ (78) $ 959 $ 881
=========== ========= ===========
</TABLE>
16
<PAGE> 17
INVESTMENT PORTFOLIO
Types of Investments
The carrying amounts of securities at the dates indicated are
summarized as follows:
<TABLE>
<CAPTION>
December 31,
1998 1997
(Dollars in Thousands)
<S> <C> <C>
U.S. Government agencies $ 18,066 $ 13,760
State and municipal securities 268 --
Mortgage-backed securities 3,126 971
--------- --------
$ 21,460 $ 14,731
========= ========
</TABLE>
Maturities
The amounts of securities in each category as of December 31, 1998
are shown in the following table according to contractual maturity
classifications (1) one year or less, (2) after one year through five years,
(3) after five years through ten years and (4) after ten years.
<TABLE>
<CAPTION>
After one year After five years
One year or less through five years through ten years
Amount Yield(1) Amount Yield(1) Amount Yield(1)
<S> <C> <C> <C> <C> <C> <C>
U.S. Government agencies $ 502 6.35% $ 11,179 5.90% $ 6,385 5.94%
State and municipal securities -- -- -- -- -- --
Mortgage-backed securities -- -- -- -- 313 6.41
------- ---------- ----------
$ 502 6.35 $ 11,179 5.90 $ 6,698 5.96
======= ========== ==========
<CAPTION>
After ten years Total
Amount Yield(1) Amount Yield(1)
<S> <C> <C> <C> <C>
U.S. Government agencies $ -- -- % $ 18,066 5.93%
State and municipal 268 4.20 268 4.20
Mortgage-backed securities 2,813 5.74 3,126 5.81
----------- ----------
$ 3,081 5.61 $ 21,460 5.89
=========== ==========
</TABLE>
(1) Yields were computed using coupon interest, adding discount accretion or
subtracting premium amortization, as appropriate, on a ratable basis
over the life of each security. The weighted average yield for each
maturity range was computed using the carrying value of each security in
that range.
17
<PAGE> 18
LOAN PORTFOLIO
Types of Loans
The amount of loans outstanding at the indicated dates are shown in
the following table according to the type of loan.
<TABLE>
<CAPTION>
December 31,
1998 1997
(Dollars in Thousands)
<S> <C> <C>
Commercial $ 8,590 $ 3,558
Real estate-construction 4,330 4,538
Real estate-mortgage 8,886 6,957
Consumer installment loans and other 5,729 3,747
-------------- ------------
27,535 18,800
Less allowance for loan losses (360) (235)
-------------- ------------
Net loans $ 27,175 $ 18,565
============== ============
</TABLE>
Maturities and Sensitivities of Loans to Changes in Interest Rates
Total loans as of December 31, 1998 are shown in the following table
according to contractual maturity classifications (1) one year or less, (2)
after one year through five years, and (3) after five years.
The disclosure of loans by the required categories, commercial and
financial and real estate construction, is not available and would involve
undue burden and expense to the Company. In making this determination, the
Company has considered the estimated cost to compile the required information
and its current electronic data processing capability.
<TABLE>
<CAPTION>
(Dollars in Thousands)
<S> <C>
Maturity:
One year or less $ 13,826
After one year through five years 13,395
After five years 314
--------------
$ 27,535
==============
</TABLE>
The following table summarizes loans at December 31, 1998 with the
due dates after one year which have predetermined and floating or adjustable
interest rates.
<TABLE>
<CAPTION>
(Dollars in Thousands)
<S> <C>
Predetermined interest rates $ 10,875
Floating or adjustable interest rates 2,834
--------------
$ 13,709
==============
</TABLE>
18
<PAGE> 19
Risk Elements
Information with respect to nonaccrual, past due, and restructured
loans at December 31, 1998 and 1997 is as follows:
<TABLE>
<CAPTION>
December 31,
1998 1997
(Dollars in Thousands)
<S> <C> <C>
Nonaccrual loans $ 0 $ 0
Loans contractually past due ninety
days or more as to interest or
principal payments and still accruing 0 0
Restructured loans 0 0
Loans, now current about which there are
serious doubts as to the ability of the
borrower to comply with loan repayment terms 0 0
Interest income that would have been recorded
on nonaccrual and restructured loans under
original terms 0 0
Interest income that was recorded on
nonaccrual and restructured loans 0 0
</TABLE>
It is the policy of the Bank to discontinue the accrual of interest
income when, in the opinion of management, collection of such interest becomes
doubtful. This status is accorded such interest when (1) there is a significant
deterioration in the financial condition of the borrower and full repayment of
principal and interest is not expected and (2) the principal or interest is
more than ninety days past due, unless the loan is both well-secured and in the
process of collection.
Loans classified for regulatory purposes as loss, doubtful,
substandard, or special mention that have not been included in the table above
do not represent or result from trends or uncertainties which management
reasonably expects will materially impact future operating results, liquidity,
or capital resources. These classified loans do not represent material credits
about which management is aware of any information which causes management to
have serious doubts as to the ability of such borrowers to comply with the loan
repayment terms.
19
<PAGE> 20
SUMMARY OF LOAN LOSS EXPERIENCE
The following table summarizes average loan balances for the year
determined using the daily average balances during the period of banking
operations; changes in the allowance for loan losses arising from loans charged
off and recoveries on loans previously charged off; additions to the allowance
which have been charged to operating expense; and the ratio of net charge-offs
during the period to average loans.
<TABLE>
<CAPTION>
Years Ended December 31,
1998 1997
(Dollars in Thousands)
<S> <C> <C>
Average amount of loans outstanding $ 25,518 $ 9,074
========= =======
Balance of allowance for loan losses
at beginning of period $ 235 $ --
--------- -------
Loans charged off
Commercial and financial -- --
Installment 7 --
--------- -------
7 --
--------- -------
Loans recovered
Commercial and financial -- --
Real estate mortgage -- --
Installment 4 --
--------- -------
4 --
--------- -------
Net charge-offs 3 --
--------- -------
Additions to allowance charged to operating
expense during period 128 235
--------- -------
Balance of allowance for loan losses
at end of period $ 360 $ 235
========= =======
Ratio of net loans charged off during the
period to average loans outstanding 0.01% 0.00%
========= =======
</TABLE>
20
<PAGE> 21
Allowance for Loan Losses
The allowance for loan losses is maintained at a level that is
estimated by management to be sufficient to adequately cover all known and
inherent risks in the loan portfolio. Management's evaluation of the loan
portfolio includes a periodic review of loan loss experience, current economic
conditions which may affect the borrower's ability to pay and the underlying
collateral value of the loans among other factors.
As of December 31, 1998 and 1997, management had made no allocations
of its allowance for loan losses to specific categories of loans. Based on
management's best estimate, the allocation of the allowance for loan losses to
types of loans, as of the indicated dates, is as follows:
<TABLE>
<CAPTION>
December 31, 1998 December 31, 1997
Percent of loans in Percent of loans in
each category each category
Amount to total loans Amount to total loans
(Dollars in Thousands)
<S> <C> <C> <C> <C>
Commercial $ 108 31.19% $ 71 18.93%
Real estate - construction 54 15.73 35 24.14
Real estate - mortgage 162 32.27 106 37.00
Consumer installment
loans and other 36 20.81 23 19.93
----------- ------ ----------- ------
$ 360 100.00% $ 235 100.00%
=========== ====== =========== ======
</TABLE>
21
<PAGE> 22
DEPOSITS
Average amount of deposits and average rates paid thereon, classified
as to noninterest-bearing demand deposits, interest-bearing demand deposits,
savings deposits, and time deposits, for the periods of banking operations is
presented below.(1)
<TABLE>
<CAPTION>
Years Ended December 31,
1998 1997
Average Average
Amount Rate Amount Rate
(Dollars in Thousands)
<S> <C> <C> <C> <C>
Noninterest-bearing demand deposits $ 4,149 -- % $ 3,601 -- %
Interest-bearing demand deposits 9,734 3.31 5,286 3.88
Savings deposits 458 2.66 271 2.58
Time deposits 26,162 5.95 10,686 6.01
-------- -------
$ 40,503 $19,844
======== =======
</TABLE>
- ---------------------
(1) Average balances were determined using the daily average balances during
the year.
The amounts of time certificates of deposit issued in amounts of
$100,000 or more as of December 31, 1998 are shown below by category, which is
based on time remaining until maturity of (1) three months or less, (2) over
three through six months, (3) over six through twelve months, and (4) over
twelve months.
<TABLE>
<CAPTION>
(Dollars in Thousands)
<S> <C>
Three months or less $ 4,733
Over three months through six months 4,672
Over six through twelve months 6,042
Over twelve months 648
-------
Total $16,095
=======
</TABLE>
RETURN ON ASSETS AND STOCKHOLDERS' EQUITY
The following rate of return information for the years indicated is
presented below.
<TABLE>
<CAPTION>
Years Ended December 31,
1998 1997
<S> <C> <C>
Return on assets (1) 0.98% (1.26)%
Return on equity (2) 6.13 (5.66)
Dividend payout ratio (3) - -
Equity to assets ratio (4) 15.96 22.21
</TABLE>
- ---------------------
(1) Net income (loss) divided by average total assets.
(2) Net income (loss) divided by average equity.
(3) Dividends declared per share of common stock divided by net income (loss)
per share.
(4) Average common equity divided by average total assets.
22
<PAGE> 23
INDEPENDENT AUDITOR'S REPORT
- -------------------------------------------------------------------------------
To the Board of Directors
Forsyth Bancshares, Inc. and Subsidiary
Cumming, Georgia
We have audited the accompanying consolidated balance sheet of Forsyth
Bancshares, Inc. and subsidiary as of December 31, 1998, and the related
statements of operations, comprehensive income (loss), stockholders' equity,
and cash flows for the year then ended. 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 audit. The financial
statements of the Company for the year ended December 31, 1997 were audited by
other auditors whose report, dated February 3, 1998, expressed an unqualified
opinion on those statements.
We conducted our audit 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 audit provides a reasonable basis
for our opinion.
In our opinion, the 1998 financial statements referred to above
present fairly, in all material respects, the financial position of Forsyth
Bancshares, Inc. and subsidiary as of December 31, 1998, and the results of
their operations and their cash flows for the year then ended, in conformity
with generally accepted accounting principles.
As described in Note 1 to the consolidated financial statements, the
Company changed its method of accounting for organization costs.
/s/ MAULDIN & JENKINS, LLC
Atlanta, Georgia
March 23, 1999
24
<PAGE> 24
(PKM LOGO)
Porter Keadle Moore, LLP
------------------------
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
To the Board of Directors
Forsyth Bancshares, Inc.
We have audited the accompanying balance sheet of Forsyth Bancshares, Inc. and
subsidiary (the "Company") as of December 17, 1997, and the related statements
of operations, changes in shareholders' equity and cash flows for the year then
ended. 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 audit.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audits 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 audit provides a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Forsyth Bancshares, Inc. and
subsidiary as of December 31, 1997 and the results of their operations and
their cash flows for the year then ended in conformity with generally accepted
accounting principles.
/s/ Porter Keadle Moore, LLP
PORTER KEADLE MOORE, LLP
Atlanta, Georgia
February 3, 1998
Certified Public Accountants
- --------------------------------------------------------------------------------
Suite 1800 - 235 Peachtree Street NE - Atlanta, Georgia 30303 -
Phone 404-588-420-0 - Fax 404-588-4222
<PAGE> 25
FORSYTH BANCSHARES, INC.
AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 1998 AND 1997
- -------------------------------------------------------------------------------
<TABLE>
<CAPTION>
ASSETS 1998 1997
--------------------- ---------------------
<S> <C> <C>
Cash and due from banks $ 1,326,028 $ 1,786,751
Federal funds sold 8,180,000 2,010,000
Securities available-for-sale 19,850,223 10,769,935
Securities held-to-maturity, at cost (fair value of $1,625,358
and $3,988,007) 1,609,806 3,961,417
Loans 27,535,516 18,799,894
Less allowance for loan losses 360,052 235,000
--------------------- ---------------------
Loans, net 27,175,464 18,564,894
Premises and equipment 943,207 429,096
Other assets 672,968 532,804
--------------------- ---------------------
TOTAL ASSETS $ 59,757,696 $ 38,054,897
===================== =====================
LIABILITIES AND STOCKHOLDERS' EQUITY
Deposits
Noninterest-bearing demand $ 5,127,899 $ 2,640,686
Interest-bearing demand 11,922,927 8,766,978
Savings 602,876 325,508
Time, $100,000 and over 16,095,235 9,687,497
Other time 17,663,507 8,924,928
--------------------- ---------------------
Total deposits 51,412,444 30,345,597
Other liabilities 334,348 198,157
--------------------- ---------------------
TOTAL LIABILITIES 51,746,792 30,543,754
--------------------- ---------------------
Commitments and contingent liabilities
Stockholders' equity
Common stock, no par value; 10,000,000 shares
authorized; 800,000 issued and outstanding 7,960,341 7,960,341
Accumulated deficit -25,497 -500,190
Accumulated other comprehensive income 76,060 50,992
--------------------- ---------------------
TOTAL STOCKHOLDERS' EQUITY 8,010,904 7,511,143
--------------------- ---------------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 59,757,696 $ 38,054,897
===================== =====================
</TABLE>
SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
25
<PAGE> 26
FORSYTH BANCSHARES, INC.
AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF OPERATIONS
YEARS ENDED DECEMBER 31, 1998 AND 1997
- -------------------------------------------------------------------------------
<TABLE>
<CAPTION>
1998 1997
-------------------- --------------------
<S> <C> <C>
INTEREST INCOME
Loans $ 2,544,637 $ 973,537
Taxable securities 1,140,389 527,999
Federal funds sold 136,164 408,363
------------------- -------------------
TOTAL INTEREST INCOME 3,821,190 1,909,899
------------------- -------------------
INTEREST EXPENSE
Deposits 1,890,802 854,227
Other borrowings 0 6,992
------------------- -------------------
TOTAL INTEREST EXPENSE 1,890,802 861,219
------------------- -------------------
NET INTEREST INCOME 1,930,388 1,048,680
PROVISION FOR LOAN LOSSES 127,748 235,000
------------------- -------------------
NET INTEREST INCOME AFTER PROVISION FOR LOAN LOSSES 1,802,640 813,680
------------------- -------------------
OTHER INCOME
Service charges on deposit accounts 70,529 34,043
Other operating income 21,173 16,049
Net realized gains on sales of securities available-for-sale 12,885 0
------------------- -------------------
TOTAL OTHER INCOME 104,587 50,092
------------------- -------------------
OTHER EXPENSES
Salaries and employee benefits 672,845 579,552
Equipment and occupancy expenses 255,055 224,352
Other operating expenses 415,829 381,688
------------------- -------------------
TOTAL OTHER EXPENSES 1,343,729 1,185,592
------------------- -------------------
INCOME (LOSS) BEFORE INCOME TAXES AND CUMULATIVE EFFECT OF A
CHANGE IN ACCOUNTING PRINCIPLE 563,498 -321,820
INCOME TAX EXPENSE 0 0
------------------- -------------------
INCOME (LOSS) BEFORE CUMULATIVE EFFECT OF A
CHANGE IN ACCOUNTING PRINCIPLE 563,498 -321,820
CUMULATIVE EFFECT OF A CHANGE IN ACCOUNTING PRINCIPLE -88,805 0
------------------- -------------------
NET INCOME (LOSS) $ 474,693 $ -321,820
=================== ===================
EARNINGS (LOSSES) PER COMMON
SHARE BEFORE CUMULATIVE EFFECT OF A
CHANGE IN ACCOUNTING PRINCIPLE $ 0.70 $ -0.40
CUMULATIVE EFFECT OF A CHANGE IN ACCOUNTING PRINCIPLE -0.11 -
------------------- -------------------
EARNINGS (LOSSES) PER COMMON SHARE $ 0.59 $ -0.40
=================== ===================
</TABLE>
SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
26
<PAGE> 27
FORSYTH BANCSHARES, INC.
AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
YEARS ENDED DECEMBER 31, 1998 AND 1997
- -------------------------------------------------------------------------------
<TABLE>
<CAPTION>
1998 1997
------------------- -------------------
<S> <C> <C>
NET INCOME (LOSS) $ 474,693 $ -321,820
------------------- -------------------
OTHER COMPREHENSIVE INCOME:
Unrealized gains on securities available-for-sale:
Unrealized holding gains arising during period,
net of tax of $43,563 and $--, respectively 33,572 50,992
Reclassification adjustment for gains realized
in net income, net of tax of $4,381 and $ -- ,
respectively -8,504 -
------------------- -------------------
OTHER COMPREHENSIVE INCOME 25,068 50,992
------------------- -------------------
COMPREHENSIVE INCOME (LOSS) $ 499,761 $ -270,828
=================== ===================
</TABLE>
SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
27
<PAGE> 28
FORSYTH BANCSHARES, INC.
AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT)
YEARS ENDED DECEMBER 31, 1998 AND 1997
- -------------------------------------------------------------------------------
<TABLE>
<CAPTION>
COMMON STOCK ACCUMULATED
--------------------------- OTHER TOTAL
AT AMOUNT ACCUMULATED COMPREHENSIVE STOCKHOLDERS'
SHARES PAID-IN DEFICIT INCOME EQUITY (DEFICIT)
---------- ------------- ----------- -------------- ---------------
<S> <C> <C> <C> <C> <C>
BALANCE, DECEMBER 31, 1996 5 $ 50 $ -178,370 $ 0 $ -178,320
Net (loss) 0 0 -321,820 0 -321,820
Redemption of organization shares -5 -50 0 0 -50
Issuance of 800,000 shares of no par common
stock, net of offering costs 800,000 7,960,341 0 0 7,960,341
Other comprehensive income 0 0 0 50,992 50,992
---------- ------------ ----------- ------------ ---------------
BALANCE, DECEMBER 31, 1997 800,000 7,960,341 -500,190 50,992 7,511,143
Net income 0 0 474,693 0 474,693
Other comprehensive income 0 0 0 25,068 25,068
---------- ------------ ----------- ------------- ---------------
BALANCE, DECEMBER 31, 1998 800,000 $ 7,960,341 $ -25,497 $ 76,060 $ 8,010,904
========== ============ =========== ============= ===============
</TABLE>
SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
28
<PAGE> 29
FORSYTH BANCSHARES, INC.
AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31, 1998 AND 1997
- -------------------------------------------------------------------------------
<TABLE>
<CAPTION>
1998 1997
----------------------- -----------------------
<S> <C> <C>
OPERATING ACTIVITIES
Net income (loss) $ 474,693 $ -321,820
Adjustments to reconcile net income (loss) to net cash
provided by (used in) operating activities:
Depreciation 107,453 88,040
Write-off/amortization of organization costs 88,805 20,448
Provision for loan losses 127,748 235,000
Deferred income taxes -129,777 0
Gain on sales of securities available-for-sale -12,885 0
Increase in interest receivable -123,392 -438,062
Increase in interest payable 148,103 114,302
Other operating activities -26,894 64,254
----------------------- -----------------------
Net cash provided by (used in) operating activities 653,854 -237,838
----------------------- -----------------------
INVESTING ACTIVITIES
Purchases of securities available-for-sale -15,214,920 -11,220,686
Proceeds from maturities of securities available-for-sale 4,198,212 501,002
Proceeds from sales of securities available-for-sale 2,013,555 0
Purchases of securities held-to-maturity 0 -5,244,697
Proceeds from maturities of securities held-to-maturity 2,351,611 1,282,714
Net increase in Federal funds sold -6,170,000 -2,010,000
Net increase in loans -8,738,318 -18,799,894
Purchase of premises and equipment -621,564 -213,731
----------------------- -----------------------
Net cash used in investing activities -22,181,424 -35,705,292
----------------------- -----------------------
FINANCING ACTIVITIES
Net increase in deposits 21,066,847 30,345,597
Repayment of other borrowings 0 -615,000
Proceeds from sale of common stock, net of offering costs 0 7,960,341
Redemption of organization shares 0 -50
----------------------- -----------------------
Net cash provided by financing activities 21,066,847 37,690,888
----------------------- -----------------------
Net increase (decrease) in cash and due from banks -460,723 1,747,758
Cash and due from banks at beginning of year 1,786,751 38,993
----------------------- -----------------------
Cash and due from banks at end of year $ 1,326,028 $ 1,786,751
======================= =======================
</TABLE>
29
<PAGE> 30
FORSYTH BANCSHARES, INC.
AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31, 1998 AND 1997
- -------------------------------------------------------------------------------
<TABLE>
<CAPTION>
1998 1997
---------------------- ----------------------
<S> <C> <C>
SUPPLEMENTAL DISCLOSURES
Cash paid for:
Interest $ 1,742,699 $ 753,690
Income taxes $ 132,000 $ 0
NONCASH TRANSACTIONS
Unrealized gains on securities available-for-sale $ -64,250 $ -50,992
</TABLE>
SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
30
<PAGE> 31
FORSYTH BANCSHARES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- -------------------------------------------------------------------------------
NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Nature of Business
Forsyth Bancshares, Inc. (the "Company") is a bank holding
company whose business is conducted by its wholly-owned
subsidiary, The Citizens Bank of Forsyth County, (the
"Bank"). The Bank is a commercial bank located in Cumming,
Forsyth County, Georgia. The Bank provides a full range of
banking services in its primary market area of Forsyth
County and surrounding counties.
Basis of Presentation
The consolidated financial statements include the accounts
of the Company and its subsidiary. Significant
intercompany transactions and accounts are eliminated in
consolidation.
The preparation of financial statements in conformity with
generally accepted accounting principles requires
management to make estimates and assumptions that affect
the reported amounts of assets and liabilities and
disclosures of contingent assets and liabilities at the
date of the consolidated financial statements and the
reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those
estimates.
Cash and Due from Banks
Cash on hand, cash items in process of collection, and
amounts due from banks are included in cash and due from
banks.
The Company maintains amounts due from banks which, at
times, may exceed Federally insured limits. The Company
has not experienced any losses in such accounts.
Securities
Securities are classified based on management's intention
on the date of purchase. Securities which management has
the intent and ability to hold to maturity are classified
as held-to-maturity and reported at amortized cost. All
other securities are classified as available-for-sale and
carried at fair value with net unrealized gains and losses
included in stockholders' equity, net of tax.
Interest and dividends on securities, including
amortization of premiums and accretion of discounts, are
included in interest income. Realized gains and losses
from the sales of securities are determined using the
specific identification method.
31
<PAGE> 32
FORSYTH BANCSHARES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- -------------------------------------------------------------------------------
NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
LOANS
Loans are carried at their principal amounts outstanding
less the allowance for loan losses. Interest income on
loans is credited to income based on the principal amount
outstanding.
Loan origination fees and certain direct costs of most
loans are recognized at the time the loan is recorded.
Because net loan origination fees and costs are not
material, the results of operations are not materially
different than the results which would be obtained by
accounting for loan fees and costs in accordance with
generally accepted accounting principles.
The allowance for loan losses is maintained at a level
that management believes to be adequate to absorb
potential losses in the loan portfolio. Management's
determination of the adequacy of the allowance is based on
an evaluation of the portfolio, past loan loss experience,
current economic conditions, volume, growth, composition
of the loan portfolio, and other risks inherent in the
portfolio. This evaluation is inherently subjective as it
requires material estimates that are susceptible to
significant change including the amounts and timing of
future cash flows expected to be received on impaired
loans. In addition, regulatory agencies, as an integral
part of their examination process, periodically review the
Company's allowance for loan losses, and may require the
Company to record additions to the allowance based on
their judgment about information available to them at the
time of their examinations.
The accrual of interest on loans is discontinued when, in
management's opinion, the borrower may be unable to meet
payments as they become due. Interest income is
subsequently recognized only to the extent cash payments
are received.
A loan is considered to be impaired when it is probable
the Company will be unable to collect all principal and
interest payments due in accordance with the terms of the
loan agreement. Individually identified impaired loans are
measured based on the present value of payments expected
to be received, using the contractual loan rate as the
discount rate. Alternatively, measurement may be based on
observable market prices or, for loans that are solely
dependent on the collateral for repayment, measurement may
be based on the fair value of the collateral. If the
recorded investment in the impaired loan exceeds the
measure of fair value, a valuation allowance is
established as a component of the allowance for loan
losses. Changes to the valuation allowance are recorded as
a component of the provision for loan losses.
32
<PAGE> 33
FORSYTH BANCSHARES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- -------------------------------------------------------------------------------
NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
PREMISES AND EQUIPMENT
Premises and equipment are stated at cost less accumulated
depreciation. Depreciation is computed principally by the
straight-line method over the estimated useful lives of
the assets.
INCOME TAXES
Income tax expense consists of current and deferred taxes.
Current income tax provisions approximate taxes to be paid
or refunded for the applicable year. Deferred income tax
assets and liabilities are determined using the balance
sheet method. Under this method, the net deferred tax
asset or liability is determined based on the tax effects
of the differences between the book and tax bases of the
various balance sheet assets and liabilities and gives
current recognition to changes in tax rates and laws.
Recognition of deferred tax balance sheet amounts is based
on management's belief that it is more likely than not
that the tax benefit associated with certain temporary
differences, tax operating loss carryforwards and tax
credits will be realized. A valuation allowance is
recorded for those deferred tax items for which it is more
likely than not that realization will not occur in the
near term.
The Company and the Bank file a consolidated income tax
return. Each entity provides for income taxes based on its
contribution to income taxes (benefits) of the
consolidated group.
EARNINGS (LOSSES) PER COMMON SHARE
Earnings (losses) per common share are computed by
dividing net income by the weighted-average number of
shares of common stock outstanding.
CUMULATIVE EFFECT OF A CHANGE IN ACCOUNTING PRINCIPLE
In April of 1998, the Accounting Standards Executive
Committee issued Statement of Position ("SOP") 98-5,
"Reporting on the Costs of Start Up Activities". SOP 98-5
requires that costs of start-up activities and
organization costs be expensed as incurred. SOP 98-5
becomes effective for financial statements for fiscal
years beginning after December 15, 1998. However, early
adoption is encouraged for fiscal years in which financial
statements have not been issued. During 1998, the Company
wrote off $88,805 of unamortized organization costs upon
adoption of SOP 98-5. Prior to the adoption of SOP 98-5,
the Company was amortizing these costs over a five year
period.
33
<PAGE> 34
FORSYTH BANCSHARES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- -------------------------------------------------------------------------------
NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
COMPREHENSIVE INCOME
In 1998, the Company adopted Statement of Financial
Standards ("SFAS") No. 130, "Reporting Comprehensive
Income". This statement establishes standards for
reporting and display of comprehensive income and its
components in the financial statements. This statement
requires that all items that are required to be recognized
under accounting standards as components of comprehensive
income be reported in a financial statement that is
displayed in equal prominence with the other financial
statements. The Company has elected to report
comprehensive income in a separate financial statement
titled "Consolidated Statements of Comprehensive Income
(Loss)". SFAS No. 130 describes comprehensive income as
the total of all components of comprehensive income
including net income. This statement uses other
comprehensive income to refer to revenues, expenses, gains
and losses that under generally accepted accounting
principles are included in comprehensive income but
excluded from net income. Currently, the Company's other
comprehensive income consists of items previously reported
directly in equity under SFAS No. 115, "Accounting for
Certain Investments in Debt and Equity Securities". As
required by SFAS No. 130, the financial statements for the
prior year have been reclassified to reflect application
of the provisions of this statement. The adoption of this
statement did not affect the Company's financial position,
results of operations or cash flows.
STATEMENT OF CASH FLOWS
In prior years, the Company included cash and due from
banks and Federal funds sold in its definition of cash and
cash equivalents for purposes of reporting the
consolidated statement of cash flows. During the year
ended December 31, 1998, the Company changed its
definition of cash and cash equivalents to include only
cash and due from banks. The 1997 consolidated statement
of cash flows has been restated to conform to this new
definition. Also, certain items in the cash flows from the
operating activities section of the consolidated statement
of cash flows for 1997 have been reclassified to conform
to the classifications adopted for 1998. These
reclassifications had no effect on total cash flows from
operating activities for 1997.
RECENT ACCOUNTING PRONOUNCEMENTS
In June 1998, the Financial Accounting Standards Board
issued SFAS No. 133, "Accounting for Derivative
Instruments and Hedging Activities". This statement is
required to be adopted for fiscal years beginning after
June 15, 1999. However, the statement permits early
adoption as of the beginning of any fiscal quarter after
its issuance. The Company expects to adopt this statement
effective January 1, 2000. SFAS No. 133 requires the
Company to recognize all derivatives as either assets or
liabilities in the balance sheet at fair value.
34
<PAGE> 35
FORSYTH BANCSHARES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- -------------------------------------------------------------------------------
NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
For derivatives that are not designated as hedges, the
gain or loss must be recognized in earnings in the period
of change. For derivatives that are designated as hedges,
changes in the fair value of the hedged assets,
liabilities, or firm commitments must be recognized in
earnings or recognized in other comprehensive income until
the hedged item is recognized in earnings, depending on
the nature of the hedge. The ineffective portion of a
derivative's change in fair value must be recognized in
earnings immediately. Management has not yet determined
what effect the adoption of SFAS No. 133 will have on the
Company's earnings or financial position.
NOTE 2. SECURITIES
The amortized cost and fair value of securities are
summarized as follows:
<TABLE>
<CAPTION>
Gross Gross
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
-------------- ------------- -------------- ---------------
<S> <C> <C> <C> <C>
SECURITIES AVAILABLE-FOR-SALE
DECEMBER 31, 1998:
U. S. GOVERNMENT AND AGENCY
SECURITIES $ 16,941,184 $ 150,890 $ (24,609) $ 17,067,465
STATE AND MUNICIPAL SECURITIES 275,000 - (7,312) 267,688
MORTGAGE-BACKED SECURITIES 2,518,797 3,077 (6,804) 2,515,070
--------------- ------------- ------------- ---------------
$ 19,734,981 $ 153,967 $ (38,725) $ 19,850,223
=============== ============= ============= ===============
DECEMBER 31, 1997:
U. S. Government and agency
Securities $ 10,718,943 $ 50,992 $ - $ 10,769,935
=============== ============= ============== ===============
SECURITIES HELD-TO-MATURITY
DECEMBER 31, 1998:
U. S. GOVERNMENT AND AGENCY
SECURITIES $ 999,029 $ 8,421 $ - $ 1,007,450
MORTGAGE-BACKED SECURITIES 610,777 7,131 - 617,908
--------------- ------------- ------------- ---------------
$ 1,609,806 $ 15,552 $ - $ 1,625,358
=============== ============= ============= ===============
DECEMBER 31, 1997:
U. S. Government and agency
Securities $ 2,990,045 $ 22,670 $ - $ 3,012,715
Mortgage-backed securities 971,372 3,920 - 975,292
--------------- ------------- ------------- ---------------
$ 3,961,417 $ 26,590 $ - $ 3,988,007
=============== ============= ============= ===============
</TABLE>
35
<PAGE> 36
FORSYTH BANCSHARES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- -------------------------------------------------------------------------------
NOTE 2. SECURITIES (Continued)
The amortized cost and fair value of securities as of
December 31, 1998 by contractual maturity are shown below.
Maturities may differ from contractual maturities of
mortgage-backed securities because the mortgages underlying
the securities may be called or prepaid with or without
penalty. Therefore, these securities are not included in the
maturity categories in the following summary.
<TABLE>
<CAPTION>
Securities Available-for-Sale Securities Held-to-Maturity
----------------------------------- ----------------------------------
Amortized Fair Amortized Fair
Cost Value Cost Value
---------------- ---------------- ---------------- ----------------
<S> <C> <C> <C> <C>
Due in one year or less $ 499,756 $ 502,030 $ - $ -
Due from one year to five years 10,077,879 10,180,545 999,029 1,007,450
Due from five years to ten years 6,363,549 6,384,890 - -
Due after ten years 275,000 267,688 - -
Mortgage-backed securities 2,518,797 2,515,070 610,777 617,908
--------------- --------------- --------------- ---------------
$ 19,734,981 $ 19,850,223 $ 1,609,806 $ 1,625,358
=============== =============== =============== ===============
<CAPTION>
Securities with a carrying value of $1,119,000 at December
31, 1998 were pledged to secure public deposits and for other
purposes.
Gross gains and losses on sales of securities
available-for-sale consist of the following:
December 31,
----------------------------------
1998 1997
--------------- ---------------
<S> <C> <C>
Gross gains $ 12,885 $ -
Gross losses - -
-------------- --------------
Net realized gains $ 12,885 $ -
============== ==============
</TABLE>
36
<PAGE> 37
FORSYTH BANCSHARES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- -------------------------------------------------------------------------------
NOTE 3. LOANS AND ALLOWANCE FOR LOAN LOSSES
The composition of loans is summarized as follows:
<TABLE>
<CAPTION>
December 31,
---------------------------------------
1998 1997
------------------ -----------------
<S> <C> <C>
Commercial, financial, and agricultural $ 8,590,000 $ 3,558,625
Real estate - construction 4,330,000 4,538,123
Real estate - mortgage 8,886,000 6,956,526
Consumer installment and other 5,729,516 3,746,620
------------------ -----------------
27,535,516 18,799,894
Allowance for loan losses (360,052) (235,000)
------------------ -----------------
Loans, net $ 27,175,464 $ 18,564,894
================== =================
<CAPTION>
Changes in the allowance for loan losses are as follows:
December 31,
---------------------------------------
1998 1997
----------------- ----------------
<S> <C> <C>
Balance, beginning of year $ 235,000 $ -
Provision for loan losses 127,748 235,000
Loans charged off (6,571) -
Recoveries of loans previously charged
off 3,875 -
----------------- ----------------
Balance, end of year $ 360,052 $ 235,000
================= ================
</TABLE>
Management has identified no material amounts of loans
considered to be impaired as defined by SFAS No. 114,
"Accounting by Creditors for Impairment of a Loan" as of
December 31, 1998 or 1997.
The Company has granted loans to certain directors, executive
officers, and their related entities. The interest rates on
these loans were substantially the same as rates prevailing
at the time of the transaction and repayment terms are
customary for the type of loan involved. Changes in related
party loans for the year ended December 31, 1998 are as
follows:
<TABLE>
<S> <C>
Balance, beginning of year $ 3,125,311
Advances 2,708,028
Repayments (3,906,851)
Transactions due to change in related parties (133,854)
-----------------
Balance, end of year $ 1,792,634
=================
</TABLE>
37
<PAGE> 38
FORSYTH BANCSHARES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- -------------------------------------------------------------------------------
NOTE 4. PREMISES AND EQUIPMENT
Premises and equipment are summarized as follows:
<TABLE>
<CAPTION>
December 31,
------------------------------------
1998 1997
---------------- ----------------
<S> <C> <C>
Land $ 607,892 $ -
Equipment 418,165 404,493
Leasehold improvements 112,643 112,643
---------------- ----------------
1,138,700 517,136
Accumulated depreciation (195,493) (88,040)
---------------- ----------------
$ 943,207 $ 429,096
================ ================
</TABLE>
NOTE 5. DEPOSITS
At December 31, 1998, scheduled maturities of time deposits
are as follows:
<TABLE>
<CAPTION>
<S> <C>
1999 $ 31,190,268
2000 1,540,955
2001 484,021
2002 333,350
2003 210,148
-------------------
$ 33,758,742
===================
</TABLE>
At December 31, 1998 and 1997, the Company had related party
deposits of $4,832,000 and $3,105,000, respectively.
NOTE 6. INCOME TAXES
Income tax expense for the year ended December 31, 1998
consists of the following:
<TABLE>
<CAPTION>
<S> <C>
Current $ 129,777
Deferred (129,777)
----------------
Income tax expense $ -
================
</TABLE>
38
<PAGE> 39
FORSYTH BANCSHARES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- -------------------------------------------------------------------------------
NOTE 6. INCOME TAXES (Continued)
The Company's income tax expense differs from the amounts
computed by applying the Federal income tax statutory rates
to income before income taxes. A reconciliation of the
differences for the year ended December 31, 1998 is as
follows:
<TABLE>
<CAPTION>
Amount Percent
--------------- ---------
<S> <C> <C>
Income taxes at statutory rate $ 161,396 34 %
Change in valuation allowance (212,280) (45)
Change in rate assumptions 49,540 11
Other items, net 1,344 -
-------------- ---------
Income tax expense $ - - %
============== =========
</TABLE>
At December 31, 1997, the Company had Federal and state net
operating loss carryforwards of approximately $116,000 and
$260,641, respectively. No income tax expense or benefit was
recorded for the year ended December 31, 1997 due to this
loss carryforward.
The components of deferred income taxes are as follows:
<TABLE>
<CAPTION>
December 31,
--------------------------------
1998 1997
------------- ---------------
<S> <C> <C>
Deferred tax assets:
Loan loss reserves $ 70,158 $ 74,765
Depreciation 4,255 9,661
Preopening and organization costs 59,752 79,649
Operating loss carryforwards - 54,423
Other 1,907 77
------------- ---------------
136,072 218,575
Valuation allowance (6,295) (199,708)
------------- ---------------
129,777 18,867
------------- ---------------
Deferred tax liabilities; securities
available-for-sale 39,182 18,867
------------- ---------------
Net deferred tax assets $ 90,595 $ -
============= ===============
</TABLE>
39
<PAGE> 40
FORSYTH BANCSHARES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- -------------------------------------------------------------------------------
NOTE 7. COMMITMENTS AND CONTINGENT LIABILITIES
In the normal course of business, the Company has entered
into off-balance-sheet financial instruments which are not
reflected in the financial statements. These financial
instruments include commitments to extend credit and standby
letters of credit. Such financial instruments are included in
the financial statements when funds are disbursed or the
instruments become payable. These instruments involve, to
varying degrees, elements of credit risk in excess of the
amount recognized in the balance sheet.
The Company's exposure to credit loss in the event of
nonperformance by the other party to the financial instrument
for commitments to extend credit and standby letters of
credit is represented by the contractual amount of those
instruments. A summary of the Company's commitments is as
follows:
<TABLE>
<CAPTION>
December 31,
------------------------------------------
1998 1997
------------------- -------------------
<S> <C> <C>
Commitments to extend credit $ 6,771,000 $ 4,259,000
Standby letters of credit 106,000 -
------------------- -------------------
$ 6,877,000 $ 4,259,000
=================== ===================
</TABLE>
Commitments to extend credit generally have fixed expiration
dates or other termination clauses and may require payment of
a fee. Since many of the commitments are expected to expire
without being drawn upon, the total commitment amounts do not
necessarily represent future cash requirements. The credit
risk involved in issuing these financial instruments is
essentially the same as that involved in extending loans to
customers. The Company evaluates each customer's
creditworthiness on a case-by-case basis. The amount of
collateral obtained, if deemed necessary by the Company upon
extension of credit, is based on management's credit
evaluation of the customer. Collateral held varies but may
include real estate and improvements, crops, marketable
securities, accounts receivable, inventory, equipment, and
personal property.
Standby letters of credit are conditional commitments issued
by the Company to guarantee the performance of a customer to
a third party. Those guarantees are primarily issued to
support public and private borrowing arrangements. The credit
risk involved in issuing letters of credit is essentially the
same as that involved in extending loans to customers.
Collateral held varies as specified above and is required in
instances which the Company deems necessary.
40
<PAGE> 41
FORSYTH BANCSHARES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- -------------------------------------------------------------------------------
NOTE 7. COMMITMENTS AND CONTINGENT LIABILITIES (Continued)
In the normal course of business, the Company is involved in
various legal proceedings. In the opinion of management of
the Company, any liability resulting from such proceedings
would not have a material effect on the Company's financial
statements.
The Company leases its main office facility under a
noncancelable operating lease agreement which expires on
August 31, 2000, with options to renew for three successive
periods of four to five years each. The lease requires the
payment of normal maintenance utilities and insurance on the
property. The Company also leases various other equipment.
The total minimum rental commitment at December 31, 1998 is
due as follows:
<TABLE>
<CAPTION>
<S> <C>
During the year ending December 31:
1999 $ 73,528
2000 49,173
--------------
$ 122,701
==============
</TABLE>
The total rental expense for the years ended December 31,
1998 and 1997 was $75,232 and $73,087, respectively.
Year 2000 Disclosures
The Year 2000 issue is the result of computer programs being
written using two digits rather than four to define the
applicable year. Systems that do not properly recognize the
year "2000" could generate erroneous data or cause systems to
fail. The Company is heavily dependent on computer processing
and telecommunication systems in the daily conduct of
business activities. In addition, the Company must rely on
intermediaries, vendors and customers to appropriately modify
their systems in order that all may continue normal
operations and operate without significant disruptions. The
Company has conducted a review of its computer systems to
identify the systems that could be affected by the Year 2000
issue. The Company presently believes that, with
modifications to its computer systems and conversions to new
systems, the Year 2000 issue will not pose significant
operational problems for the Company or have a material
adverse effect on future operating results. However, absolute
assurance cannot be given that; (1) the modifications and
conversions will remedy all deficiencies, (2) failure of any
of the Company's systems will not have a material impact on
operations, or (3) failure of any other companies' systems
with whom the Company conducts business will not have a
material impact on operations.
41
<PAGE> 42
FORSYTH BANCSHARES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- -------------------------------------------------------------------------------
NOTE 8. CONCENTRATIONS OF CREDIT
The Company originates primarily commercial, residential, and
consumer loans to customers in Forsyth County and surrounding
counties. The ability of the majority of the Company's
customers to honor their contractual loan obligations is
dependent on the economy in these areas.
Forty-eight percent of the Company's loan portfolio is
concentrated in loans secured by real estate, of which a
substantial portion is secured by real estate in the
Company's primary market area. Accordingly, the ultimate
collectibility of the loan portfolio is susceptible to
changes in market conditions in the Company's primary market
area. The other significant concentrations of credit by type
of loan are set forth in Note 3.
The Company, as a matter of policy, does not generally extend
credit to any single borrower or group of related borrowers
in excess of 25% of statutory capital, or approximately
$1,625,000.
NOTE 9. REGULATORY MATTERS
The Bank is subject to certain restrictions on the amount of
dividends that may be declared without prior regulatory
approval. At December 31, 1998, approximately $90,000 of
retained earnings were available for dividend declaration
without 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, the
Company and Bank must meet specific capital guidelines that
involve quantitative measures of the assets, liabilities, and
certain off-balance sheet items as calculated under
regulatory accounting practices. The Company and Bank 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 I capital to
risk-weighted assets and of Tier I capital to average assets.
Management believes, as of December 31, 1998, the Company and
the Bank meet all capital adequacy requirements to which they
are subject.
42
<PAGE> 43
FORSYTH BANCSHARES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- -------------------------------------------------------------------------------
NOTE 9. Regulatory Matters (Continued)
As of December 31, 1998, the most recent notification from
the FDIC 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 I risk-based, and Tier I
leverage ratios as set forth in the following table. There
are no conditions or events since that notification that
management believes have changed the Bank's category.
The Company and Bank's actual capital amounts and ratios are
presented in the following table:
<TABLE>
<CAPTION>
TO BE WELL
FOR CAPITAL CAPITALIZED UNDER
ADEQUACY PROMPT CORRECTIVE
ACTUAL PURPOSES ACTION PROVISIONS
---------------------------- ------------------------ -------------------------
AMOUNT RATIO AMOUNT RATIO AMOUNT RATIO
--------------- ----------- --------------- ------- --------------- --------
(DOLLARS IN THOUSANDS)
--------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
AS OF DECEMBER 31, 1998:
TOTAL CAPITAL
(TO RISK WEIGHTED ASSETS):
CONSOLIDATED $ 8,295 26.00% $ 2,553 8% $ N/A N/A
BANK $ 6,950 21.78% $ 2,553 8% $ 3,191 10%
TIER I CAPITAL
(TO RISK WEIGHTED ASSETS):
CONSOLIDATED $ 7,935 24.87% $ 1,277 4% $ N/A N/A
BANK $ 6,590 20.66% $ 1,277 4% $ 1,915 6%
TIER I CAPITAL
(TO AVERAGE ASSETS):
CONSOLIDATED $ 7,935 14.16% $ 2,243 4% $ N/A N/A
BANK $ 6,590 11.76% $ 2,243 4% $ 2,803 5%
</TABLE>
43
<PAGE> 44
FORSYTH BANCSHARES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- -------------------------------------------------------------------------------
NOTE 9. REGULATORY MATTERS (CONTINUED)
<TABLE>
<CAPTION>
TO BE WELL
FOR CAPITAL CAPITALIZED UNDER
ADEQUACY PROMPT CORRECTIVE
ACTUAL PURPOSES ACTION PROVISIONS
---------------------------- ------------------------ -------------------------
AMOUNT RATIO AMOUNT RATIO AMOUNT RATIO
--------------- ----------- --------------- ------- --------------- --------
(DOLLARS IN THOUSANDS)
--------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
As of December 31, 1997:
Total Capital
(to risk Weighted Assets):
Consolidated $ 7,721 44.20% $ 1,399 8% $ N/A N/A
Bank $ 6,341 36.30% $ 1,399 8% $ 1,749 10%
Tier I Capital
(to Risk Weighted Assets):
Consolidated $ 7,480 42.80% $ 700 4% $ N/A N/A
Bank $ 6,122 35.00% $ 700 4% $ 1,049 6%
Tier I Capital
(to Average Assets):
CONSOLIDATED $ 7,480 20.90% $ 1,434 4% $ N/A N/A
Bank $ 6,122 17.10% $ 1,434 4% $ 1,793 5%
</TABLE>
NOTE 10. FAIR VALUE OF FINANCIAL INSTRUMENTS
The following methods and assumptions were used by the
Company in estimating its fair value disclosures for
financial instruments. In cases where quoted market prices
are not available, fair values are based on estimates using
discounted cash flow models. Those models are significantly
affected by the assumptions used, including the discount
rates and estimates of future cash flows. In that regard, the
derived fair value estimates cannot be substantiated by
comparison to independent markets and, in many cases, could
not be realized in immediate settlement of the instrument.
The use of different methodologies may have a material effect
on the estimated fair value amounts. Also, the fair value
estimates presented herein are based on pertinent information
available to management as of December 31, 1998 and 1997.
Such amounts have not been revalued for purposes of these
financial statements since those dates and, therefore,
current estimates of fair value may differ significantly from
the amounts presented herein.
Cash, Due From Banks, and Federal Funds Sold:
The carrying amounts of cash, due from banks, and Federal
funds sold approximate their fair value.
44
<PAGE> 45
FORSYTH BANCSHARES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- -------------------------------------------------------------------------------
NOTE 10. FAIR VALUE OF FINANCIAL INSTRUMENTS (Continued)
AVAILABLE-FOR-SALE AND HELD-TO-MATURITY SECURITIES:
Fair values for securities are based on available quoted
market prices.
LOANS:
For variable-rate loans that reprice frequently and have
no significant change in credit risk, fair values are
based on carrying values. For other loans, the fair values
are estimated using discounted cash flow models, using
current market interest rates offered for loans with
similar terms to borrowers of similar credit quality. Fair
values for impaired loans are estimated using discounted
cash flow models or based on the fair value of the
underlying collateral.
DEPOSITS:
The carrying amounts of demand deposits, savings deposits,
and variable-rate certificates of deposit approximate
their fair values. Fair values for fixed-rate certificates
of deposit are estimated using discounted cash flow
models, using current market interest rates offered on
certificates with similar remaining maturities.
ACCRUED INTEREST:
The carrying amounts of accrued interest approximate their
fair values.
OFF-BALANCE SHEET INSTRUMENTS:
Fair values of the Company's off-balance sheet financial
instruments are based on fees charged to enter into
similar agreements. However, commitments to extend credit
and standby letters of credit do not represent a
significant value to the Company until such commitments
are funded. The Company has determined that these
instruments do not have a distinguishable fair value and
no fair value has been assigned.
45
<PAGE> 46
FORSYTH BANCSHARES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- -------------------------------------------------------------------------------
NOTE 10. FAIR VALUE OF FINANCIAL INSTRUMENTS (Continued)
The carrying amount and estimated fair values of the Company's
financial instruments are as follows:
<TABLE>
<CAPTION>
December 31, 1998
---------------------------------
Carrying Fair
Amount Value
--------------- ---------------
<S> <C> <C>
Financial assets:
Cash, due from banks, and Federal funds sold $ 9,506,028 $ 9,506,028
Securities available-for-sale 19,850,223 19,850,223
Securities held-to-maturity 1,609,806 1,625,358
Loans 27,175,464 27,851,726
Accrued interest receivable 561,454 561,454
Financial liabilities:
Deposits 51,412,444 51,683,150
Accrued interest payable 262,405 262,405
</TABLE>
NOTE 11. SUPPLEMENTAL FINANCIAL DATA
Components of other operating expenses in excess of 1% of revenue are
as follows:
<TABLE>
<CAPTION>
December 31,
--------------------------------------
1998 1997
----------------- -----------------
<S> <C> <C>
Professional fees $ 80,835 $ 63,293
Data processing 80,799 52,092
Insurance 31,037 35,322
</TABLE>
46
<PAGE> 47
FORSYTH BANCSHARES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- -------------------------------------------------------------------------------
NOTE 12. PARENT COMPANY FINANCIAL INFORMATION
The following information presents the condensed balance
sheets, statements of operations, and cash flows of Forsyth
Bancshares, Inc. as of and for the years ended December 31,
1998 and 1997:
<TABLE>
<CAPTION>
CONDENSED BALANCE SHEETS
1998 1997
---------------- ----------------
<S> <C> <C>
Assets
Cash $ 687,421 $ 1,305,588
Investment in subsidiary 6,666,295 6,179,860
Land 607,892 -
Other assets 50,082 30,695
---------------- ----------------
Total assets $ 8,011,690 $ 7,516,143
================ ================
Liabilities, other $ 786 $ 5,000
Stockholders' equity 8,010,904 7,511,143
----------------- ----------------
Total liabilities and stockholders' equity $ 8,011,690 $ 7,516,143
================= ================
</TABLE>
47
<PAGE> 48
FORSYTH BANCSHARES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- -------------------------------------------------------------------------------
NOTE 12. PARENT COMPANY FINANCIAL INFORMATION (Continued)
<TABLE>
<CAPTION>
CONDENSED STATEMENTS OF OPERATIONS
1998 1997
---------------- ----------------
<S> <C> <C>
INTEREST INCOME $ 35,417 $ 16,370
---------------- ----------------
EXPENSE:
INTEREST - 6,993
OTHER 72,171 25,933
---------------- ----------------
72,171 32,926
---------------- ----------------
(LOSS) BEFORE INCOME TAX BENEFITS
AND EQUITY IN UNDISTRIBUTED INCOME
(LOSS) OF SUBSIDIARY (36,754) (16,556)
INCOME TAX BENEFITS 50,082 -
---------------- ----------------
INCOME (LOSS) BEFORE EQUITY IN UNDISTRIBUTED
INCOME (LOSS) OF SUBSIDIARY 13,328 (16,556)
EQUITY IN UNDISTRIBUTED INCOME (LOSS) OF SUBSIDIARY 461,365 (305,264)
---------------- ----------------
NET INCOME (LOSS) $ 474,693 $ (321,820)
================ ================
</TABLE>
48
<PAGE> 49
FORSYTH BANCSHARES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- -------------------------------------------------------------------------------
NOTE 12. PARENT COMPANY FINANCIAL INFORMATION (Continued)
<TABLE>
<CAPTION>
CONDENSED STATEMENTS OF CASH FLOWS
1998 1997
---------------- ----------------
<S> <C> <C>
OPERATING ACTIVITIES
Net income (loss) $ 474,693 $ (321,820)
Adjustments to reconcile net income (loss) to net
cash provided by (used in) operating activities:
Undistributed (income) loss of subsidiary (461,365) 305,264
Write-off/amortization of organization costs 30,695 7,664
Other operating activities (54,298) 60,923
---------------- ----------------
Net cash provided by (used in) operating (10,275) 52,031
activities
---------------- ----------------
INVESTING ACTIVITIES
Purchase of land (607,892) -
Investment in subsidiary - (6,434,132)
Change in premises and equipment - 303,405
---------------- ----------------
Net cash used in investing activities (607,892) (6,130,727)
---------------- ----------------
FINANCING ACTIVITIES
Repayment of other borrowings - (615,000)
Proceeds from sale of common stock, net of offering costs - 7,960,341
Redemption of organization shares - (50)
---------------- ----------------
Net cash provided by financing activities - 7,345,291
---------------- ----------------
Net increase (decrease) in cash (618,167) 1,266,595
Cash at beginning of year 1,305,588 38,993
---------------- ----------------
Cash at end of year $ 687,421 $ 1,305,588
================ ================
</TABLE>
49
<PAGE> 1
EXHIBIT 16.1
July 23, 1998
Securities and Exchange Commission
Washington, DC 20549
RE: Forsyth Bancshares, Inc.
File No. 333-10909
Ladies and Gentlemen:
We were previously principal accountants for Forsyth Bancshares, Inc. and, under
the date of February 3, 1998, we reported on the consolidated financial
statements of Forsyth Bancshares, Inc. and subsidiary as of and for the years
ended December 31, 1997 and 1996. On March 17, 1998 our appointment as principal
accountants was terminated. We have read Forsyth Bancshares, Inc.'s statements
included under item 8 of its Form 10-KSB dated March 31, 1999 and we agree with
such statements, except that we are not in a position to agree or disagree with
Forsyth Bancshares, Inc.'s statements under item 4(a)(iii) and the statements
under item 4(b)(i) regarding new independent accountants.
Very truly yours,
/s/ Porter Keadle Moore, LLP
PORTER KEADLE MOORE, LLP
<PAGE> 1
EXHIBIT 21.1
SUBSIDIARIES OF THE REGISTRANT
The Citizens Bank of Forsyth County
<TABLE> <S> <C>
<ARTICLE> 9
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> DEC-31-1998
<CASH> 1,326,028
<INT-BEARING-DEPOSITS> 0
<FED-FUNDS-SOLD> 8,180,000
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 19,850,223
<INVESTMENTS-CARRYING> 1,609,806
<INVESTMENTS-MARKET> 1,625,358
<LOANS> 27,535,561
<ALLOWANCE> 360,052
<TOTAL-ASSETS> 59,757,696
<DEPOSITS> 51,412,444
<SHORT-TERM> 0
<LIABILITIES-OTHER> 334,348
<LONG-TERM> 0
7,960,341
0
<COMMON> 0
<OTHER-SE> 50,563
<TOTAL-LIABILITIES-AND-EQUITY> 59,757,696
<INTEREST-LOAN> 2,544,637
<INTEREST-INVEST> 1,140,389
<INTEREST-OTHER> 136,164
<INTEREST-TOTAL> 3,821,190
<INTEREST-DEPOSIT> 1,890,802
<INTEREST-EXPENSE> 1,890,802
<INTEREST-INCOME-NET> 1,930,388
<LOAN-LOSSES> 127,748
<SECURITIES-GAINS> 12,885
<EXPENSE-OTHER> 1,343,729
<INCOME-PRETAX> 563,498
<INCOME-PRE-EXTRAORDINARY> 563,498
<EXTRAORDINARY> 0
<CHANGES> (88,805)
<NET-INCOME> 474,693
<EPS-PRIMARY> 0.59
<EPS-DILUTED> 0.59
<YIELD-ACTUAL> 4.31
<LOANS-NON> 0
<LOANS-PAST> 0
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 235,000
<CHARGE-OFFS> 7,000
<RECOVERIES> 4,000
<ALLOWANCE-CLOSE> 360,000
<ALLOWANCE-DOMESTIC> 360,000
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 0
</TABLE>
