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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
__________________________
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, 1999
Commission file number: 333-10909
FORSYTH BANCSHARES, INC.
(Exact name of registrant as specified in its charter)
Georgia 58-2231953
(Name of Small Business (I.R.S. Employer
Issuer in its Charter) Identification No.)
501 Tri-County Plaza, Highways 9 and 20, Cumming, Georgia 30040
(address of principal executive office) (Zip Code)
(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
--- ---
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: $4,795,072.
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, 2000, 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, 2000, 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, 1999 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 16, 2000 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 Financial Condition and Results of Operations" and
elsewhere in the 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," "intend" or other similar words and expressions of
the future. The Company's actual results may differ significantly from the
results discussed 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; 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
$66.2 million, total deposits of $58.0 million and total stockholders equity of
$7.7 million at December 31, 1999. 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's 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. In addition, in 1999 Congress enacted major changes in the regulation
of financial services activities, which in the future could allow the Company
to provide non-banking financial services. See "--The Company--The
Gramm-Leach-Bliley Act of 1999."
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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 than 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 continue to
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 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 continue to 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 Georgia's fastest growing,
and the nation's second 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 94,588 in 1999, a growth rate of 114.5%. In 1999, the average
estimated effective buying income per household in Forsyth County was $77,303
and the estimated unemployment rate was less than 2%. 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.
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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, 1999, the Bank's deposits were
allocated among certain categories as follows: 10.64% demand deposits, 11.46%
NOW accounts, 77.9% time and savings deposits.
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, 1999, the Bank's loans were allocated as follows: 61% real estate loans,
20% commercial and 19% consumer and other 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 attempts to
reduce credit risk in the commercial real estate portfolio by
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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
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 that 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 (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
are usually 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 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
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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 officer's loan committee. The Bank has established officer 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 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, 1999, there were 13 commercial banks, with 30 commercial bank
branches and one credit union operating in Forsyth County. A number of
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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 that impose specific requirements or restrictions on and provide for
general regulatory oversight with respect to virtually all aspects of their
operations. These laws and regulations are generally intended to protect
depositors, not shareholders. To the extent that the following summary
describes statutory or regulatory provisions, it is qualified in its entirety by
reference to the particular statutory and regulatory provisions. Any change in
applicable laws or regulations may have a material effect on the business and
prospects of the Company. Beginning with the enactment of the Financial
Institutions Reform, Recovery and Enforcement Act of 1989 ("FIRREA") and
following with the 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. During 1999, the activities of the Company were
also restricted by the Glass-Steagall Act of 1933 (the "Glass-Steagall Act"),
which is discussed below. However, on November 12, 1999,
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the provisions of the Glass-Steagall Act that restricted the Company's
activities were repealed by Public Law No. 106-102, the Gramm-Leach-Bliley Act
of 1999 (the "GLB Act"). The GLB Act replaced the prior restrictions with a
regulatory regime intended to facilitate affiliations among banking, securities,
insurance and other financial services firms. Most of these changes became
effective 120 days after enactment. See "--The Gramm-Leach-Bliley Act of 1999."
The BHCA. Under the BHCA, the Company is subject to periodic examination
by the Federal Reserve and is required to file periodic reports of its
operations and such additional information as the Federal Reserve may require.
The Company's and the Bank's activities are currently 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. However, as previously noted, changes in the
law enacted in 1999 may permit the Company to expand its authorized financial
services activities in the future. See "--The Gramm-Leach-Bliley Act of 1999."
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 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 challenging the rebuttable control presumption.
Subject to the changes made by the GLB Act, the BHCA generally prohibits a
bank holding company from engaging in, or acquiring direct or indirect control
of, more than 5% of the voting shares of any company 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.
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The Company is a legal entity separate and distinct from the Bank.
However, various legal restrictions that affect the Bank's lending activities
are also applicable to the Company. In particular, the Company is also subject
to Sections 23A and 23B of the Federal Reserve Act in dealing with affiliates
and insiders. See "--The Bank--Transactions With Affiliates and Insiders."
The Federal Reserve Board imposes 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 is subject to regulatory restrictions. See "--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.
The Gramm-Leach-Bliley Act of 1999. Congress enacted the GLB Act into law
on November 12, 1999, subject to certain delayed effective dates as noted
throughout this discussion. The scope of the new legislation, and its impact
upon governmental regulation of financial services, is sweeping. Popularly
known as "financial services modernization," this legislation repeals certain
provisions of the Glass-Steagall Act that restricted the financial services
activities of depository institutions and holding companies, and otherwise
facilitates affiliation among banks, securities firms and insurance companies.
The new legislation also affects various other bank regulatory matters including
privacy protection provisions for customers of financial institutions, the
Federal Home Loan Bank system's modernization, automatic teller machines and The
Community Reinvestment Act of 1977 (the "CRA"). See "--The Bank--Community
Reinvestment Act" and "--Legislative and Regulatory Changes."
The GLB Act seeks to achieve "financial services modernization"
principally by amending the BHCA to permit a bank holding company to engage in
various financial activities through a new type of bank holding company,
referred to as a financial holding company ("FHC"). Under the GLB Act, FHC's
are given the authority to engage in financial services activities in which
other bank holding companies may not engage, and to affiliate with companies
that are engaged in such financial services activities. Generally, the
authorized activities of a FHC include activities that are: (i) "financial in
nature;" (ii) "incidental" to an activity that is financial in nature; or (iii)
"complementary" to a financial activity and do not pose a substantial risk to
the safety and soundness of depository institutions or the financial system in
general.
The Federal Reserve and the Secretary of the Treasury are authorized to
determine which activities meet these standards. However, the GLB Act
specifically lists certain activities as being financial in nature. Some of
these activities are: lending, exchanging, transferring, investing for others
or safeguarding money or securities; insuring, guaranteeing or indemnifying
against loss, harm, damage, illness, disability or death, or providing and
issuing annuities, and acting as principal, agent or broker for these purposes
in any state; providing financial,
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investment or economic advice; issuing or selling interests in pools of assets
that a bank could hold directly; underwriting, dealing in or making markets in
securities; engaging in any activity that the Federal Reserve had determined as
of the enactment date of the GLB Act to be related closely to banking; and
engaging within the United States in any activity that a bank holding company
could engage in outside of the United States, if the Federal Reserve found as of
the enactment date of the GLB Act that the activity was usual in connection with
banking or other financial operations internationally.
The GLB Act also adopts the concept of "functional regulation" with respect
to the activities of FHC subsidiaries. For example, the GLB Act reaffirms the
McCarran-Ferguson Act, recognizing the primacy and legal authority of the states
to regulate insurance activity. Accordingly, insurance activities of a FHC's
insurance subsidiary will principally be subject to "functional regulation" by
state insurance regulators. The GLB Act preserves the role of the Federal
Reserve Board as the "umbrella" supervisor for bank holding companies, but
limits the Board's authority to examine non-bank subsidiaries that are subject
to "functional regulation."
Not all bank holding companies may become FHC's. A bank holding company
must meet the following three requirements before becoming a FHC: (i) all of
the bank holding company's depository institution subsidiaries must be "well
capitalized;" (ii) all of the bank holding company's depository institution
subsidiaries must be "well managed;" and (iii) the bank holding company must
file a declaration with the Federal Reserve of its election to become a FHC,
including a certification that its depository institution subsidiaries meet the
prior two criteria.
With only a few exceptions, in order to exercise the powers granted under
the GLB Act, a FHC or depository institution also must meet the requirements of
the CRA. If any depository institution, depository institution affiliate or
depository institution subsidiary of a FHC did not receive a CRA rating of at
least a "satisfactory record of meeting community credit needs" in its most
recent CRA examination, the regulatory agencies are directed to prevent the
depository institution or FHC from exercising the new powers authorized by the
GLB Act, either directly or through a subsidiary. The Company received a
"satisfactory rating" in its most recent CRA examination.
The Company does not believe that the GLB Act will negatively affect the
operations of the Company or the Bank. However, to the extent that the
legislation permits banks, securities firms and insurance companies to
affiliate, the financial services industry may experience further consolidation.
This could result in a growing number of larger, diversified financial companies
that offer a wider variety of financial services than the Company currently
offers. This could in turn result in increased competition within the Company's
market area. However, the GLB Act also provides opportunities for the Company
to expand and diversify its activities to meet such competition. See
"--Legislative and Regulatory Changes."
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
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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 remain informed as to 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.
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. Prior to the effective date of the GLB Act, the
Company was subject to certain provisions of the Glass-Steagall Act, which
prohibited the Company from being affiliated, through either ownership or
interlocking directors, officers or employees, with firms "engaged principally"
in securities activities. As explained above, the GLB Act repeals these
provisions and amends the BHCA to permit such activities by a bank holding
company that qualifies as a FHC. See "--The Gramm-Leach-Bliley Act of 1999."
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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 reorganiza-tions, 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 the
appropriate bank regulatory 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 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.
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. Pursuant to the Federal Deposit Insurance Funds
Act of 1996, commercial banks are also 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 a special assessment on BIF assessable deposits by FICO upon the
approval by the FDIC Board ("FICO Assessment") of such assessment. Until the
earlier of December 31, 1999 or the merger of BIF and SAIF, 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
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FICO Assessment for 1999 was $5,923, and management believes that it will be at
least approximately $7,500 for 2000. 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 affiliates unless the transactions are on terms
substantially the same, or at least as favorable to such institution or its
subsidiaries as those prevailing at the time for comparable transactions with
non-affiliated companies. The Bank is subject to certain restrictions on
extensions of credit to executive officers, directors, certain principal
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
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payment or distribution, the institution would be considered "undercapitalized,"
as the term is defined in the applicable regulations.
Branching. In previous years the Bank operated only from its main office
in Cumming, Georgia. The Bank has recently established a temporary 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 opened one branch office (the
temporary Midway branch) and, depending upon profitability and community needs,
additional branches may be considered in the future.
Community Reinvestment Act. The Company and the Bank are subject to the
provisions of the CRA and the federal banking agencies' regulations thereunder.
Under the CRA, all banks and thrifts have a continuing and affirmative
obligation, consistent with safe and sound operation to help meet the credit
needs for their entire communities, including low and moderate income
neighborhoods. The CRA requires a depository institution's primary federal
regulator, in connection with its examination of the institution, to assess the
institution's record in assessing and meeting the credit needs of the community
served by that institution, including low and moderate income neighborhoods.
The regulatory agency's assessment of the institution's record is made available
to the public. Further, such assessment is required of any institution that has
applied to: (i) charter a national bank; (ii) obtain deposit insurance coverage
for a newly-chartered institution; (iii) establish a new branch office that
accepts deposits; (iv) relocate an office; (v) merge or consolidate with, or
acquire the assets or assume the liabilities of, a federally regulated financial
institution; or (vi) expand other activities, including engaging in financial
services activities authorized by the GLB Act. In the case of a bank holding
company applying for approval to acquire a bank or other bank holding company,
or to become a FHC, the Federal Reserve will assess the records of each
subsidiary depository institution of the applicant bank holding company, and
such records may be the basis for denying the application. The Company
received a "satisfactory rating" in its most recent CRA examination.
The GLB Act makes various changes to the CRA. Among other changes, all CRA
related agreements with non-governmental third parties must be disclosed and
annual CRA reports must be made to a bank's primary federal regulator. A bank
holding company will not be permitted to become a FHC, and no new activities
authorized under the GLB Act may be commenced by a holding company or by a bank
through a financial subsidiary, if any of its bank subsidiaries received less
than a "satisfactory" rating in its latest CRA examination.
The GLB Act provides smaller financial institutions with some relief under
the CRA. Institutions with assets of not more than $250 million will be subject
to CRA examinations: (i) not more than once every 60 months if the institution
receives a rating of "outstanding," and (ii) not more than once every 48 months
if the institution receives a rating of "satisfactory."
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Other Regulations. Interest and certain other charges collected or
contracted for by the Bank are subject to state usury laws and certain federal
laws concerning interest rates. The Bank's loan operations are also subject to
certain federal laws applicable to credit transactions, such as: (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
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50% rating. Most investment securities are assigned to the 20% category, except
for municipal or state revenue bonds, which have a 50% rating and direct
obligations of or obligations guaranteed by the United States Treasury or United
States government agencies, which have a 0% rating.
The federal bank regulatory authorities have also implemented a leverage
ratio, which is 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,
deposits, 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.
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
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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.
The DBF requires the Bank to maintain a capital ratio, as defined in the
DBF's regulations (the "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, under the operating conditions fixed by the DBF at the time its
charter was approved, the Bank was required to maintain a Capital Ratio of at
least 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.
LEGISLATIVE AND REGULATORY CHANGES
The regulatory changes enacted by the GLB Act present new opportunities for
the Company to engage in securities, insurance and financial activities should
it elect to become a FHC. The Company does not have any plans to engage in such
activities under active review or consideration. However, the Company may
consider such activities in the future if management determines that such
activities are in the Company's best interest, and are financially and
operationally feasible.
The GLB Act also requires banks and their affiliated companies to adopt and
disclose policies regarding the sharing with third parties of personal
information that is obtained from their customers. At the time of establishing
a customer relationship, and not less frequently than annually during the
relationship, every financial institution must provide a clear and conspicuous
disclosure of its policies and practices regarding the disclosure and protection
of nonpublic personal information. Financial institutions are prohibited from
disclosing such information to a non-affiliated third party if the customer
"opts out," or directs that such information not be
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disclosed. The new privacy rules are to be enforced by the applicable
regulatory agency, and the GLB Act directs the regulators to issue written
regulations within six months of its enactment date (November 12, 1999). These
rules must be implemented by financial institutions within six months of the
issuance of the regulations, unless the regulators specify a later effective
date.
The GLB Act also amended the Electronic Funds Transfer Act to require ATM
operators who impose a fee for use of an ATM by a customer to post a notice on
the machine that a fee will be charged, as well as a notice on the screen that a
fee will be charged and the amount of that fee. These provisions of the GLB Act
became effective on its enactment date (November 12, 1999).
Other legislative and regulatory proposals regarding changes in banking,
and the regulation of banks, bank holding companies and other financial
institutions powers are being considered by the Federal regulatory agencies,
Congress and various state governments, including Georgia. The FDIC changed,
effective April 1, 2000, its deposit insurance assessments to more timely
reflect changes in risks, and is engaged in a comprehensive review of its
insurance premiums and how to better measure and price deposit insurance in
light of an insured bank's size and risk. 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. The monetary policies of the Federal Reserve Board have major
effects upon the levels of bank loans, 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 17 full-time and one part-time employees at December 31, 1999.
In January 2000 the Bank expanded its staff by adding an additional seven
full-time employees for the Midway Branch. 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
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sublease was $69,525 in 1998, $71,611 in 1999 and will be $73,759 in 2000.
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 has constructed a
temporary branch facility that it leases to the Bank. The site of the Bank's
temporary branch facility is located at 5140 Highway 9, Alpharetta, Georgia,
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 temporary branch currently consists of only a
modular unit, the Company plans to build a permanent branch office with
facilities similar to those of the main office. The Company anticipates that
the modular unit will continue to be used as a temporary branch office until the
construction of the permanent facility is completed. The Company has not yet
entered into any contractual agreement for such construction.
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, 1999.
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 48 in
the Annual Report to Shareholders for the year ended December 31, 1999, and is
incorporated herein by reference.
ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS OF FORSYTH BANCSHARES, INC.
Information required by this item is set forth under the heading
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" on pages 3 through 20 in the Annual Report to Shareholders for the
year ended December 31, 1999 and is incorporated herein by reference.
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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 22
through 47 and in the "Independent Auditor's Report" on page 21 in the Annual
Report to Shareholders for the year ended December 31, 1999, 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.
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 16, 2000, 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 16, 2000, and
is incorporated herein by reference.
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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 16, 2000, 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 16, 2000, 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
auditors' report thereon are included in the Company's 1999 Annual Report to
Shareholders and are incorporated by reference in Item 7 hereof:
Consolidated Balance Sheets as of December 31, 1999 and 1998.
Consolidated Statements of Income for the years ended December 31, 1999 and
1998.
Consolidated Statements of Comprehensive Income (Loss) for the years ended
December 31, 1999 and 1998.
Consolidated Statements of Stockholders' Equity for the years ended December 31,
1999 and 1998.
Consolidated Statements of Cash Flows for the years ended December 31, 1999 and
1998.
Notes to Consolidated Financial Statements.
<TABLE>
<CAPTION>
(a)(2) EXHIBITS
<S> <C>
3.1. Articles of Incorporation.(1)
3.2. Bylaws.(1)
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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 1999 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.
21.1. Subsidiaries of the Company.
27.1. Financial Data Schedule.
_____________________
<FN>
(1) Incorporated by reference to exhibits of the same number in the Company's
Registration Statement on Form S-1 (File No. 333-10909).
</TABLE>
(b) NO REPORTS ON FORM 8-K WERE FILED DURING THE LAST QUARTER OF THE
PERIOD COVERED BY THIS REPORT.
23
<PAGE>
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.
FORSYTH BANCSHARES, INC.
By: /s/ Timothy M. Perry
------------------------------------------
Timothy M. Perry
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 28, 2000
- ---------------------------
Catherine M. Amos
/s/ Jeffrey S. Bagley Vice Chairman of the Board March 28, 2000
- ---------------------------
Jeffrey S. Bagley
/s/ Danny M. Bennett Director March 28, 2000
- ---------------------------
Danny M. Bennett
/s/ Michael P. Bennett Director March 28, 2000
- ---------------------------
Michael P. Bennett
/s/ Bryan L. Bettis Director March 28, 2000
- ---------------------------
Bryan L. Bettis
/s/ Talmadge W. Bolton Director March 28, 2000
- ---------------------------
Talmadge W. Bolton
/s/ Thomas L. Bower III Director March 28, 2000
- ---------------------------
Thomas L. Bower III
/s/ Charles R. Castleberry Director March 28, 2000
- ---------------------------
Charles R. Castleberry
/s/ Timothy M. Perry President, Chief Executive Officer March 28, 2000
- --------------------------- and Director
Timothy M. Perry
24
<PAGE>
/s/ Holly R. Hunt Chief Financial Officer March 28, 2000
- ---------------------------
Holly R. Hunt
/s/ Charles D. Ingram Director March 28, 2000
- ---------------------------
Charles D. Ingram
/s/ Herbert A. Lang, Jr. Director March 28, 2000
- ---------------------------
Herbert A. Lang, Jr.
/s/ John P. McGruder Director March 28, 2000
- ---------------------------
John P. McGruder
/s/ James J. Myers Chairman of the Board March 28, 2000
- ---------------------------
James J. Myers
/s/ Danny L. Reid Director March 28, 2000
- ---------------------------
Danny L. Reid
/s/ Charles R. Smith Director March 28, 2000
- ---------------------------
Charles R. Smith
/s/ Wyatt L. Willingham Director March 28, 2000
- ---------------------------
Wyatt L. Willingham
/s/ Jerry M. Wood Director March 28, 2000
- ---------------------------
Jerry M. Wood
</TABLE>
25
<PAGE>
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 2000 Annual Meeting of Shareholders. The
Company will furnish four copies of such materials to the Commission when such
materials are sent to the shareholders.
26
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT INDEX
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 1999 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
21.1. Subsidiaries of the Company.
27.1. Financial Data Schedule.
<FN>
- -------------------------
(1) Incorporated by reference to exhibits of the same number in the Company's
Registration Statement on Form S-1 (File No. 333-10909).
</TABLE>
27
<PAGE>
EXHIBIT 13.1
1999 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
28
<PAGE>
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 of over-the-counter market. As of December 31,
1999, there were approximately 622 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.
29
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following is a discussion of the financial condition of Forsyth
Bancshares, Inc. (the "Company") and its bank subsidiary, The Citizens Bank of
Forsyth County (the "Bank") at December 31, 1999 and 1998 and the results of
operations for the years then ended. The purpose of this discussion is to focus
on information about the Company's financial condition and results of operations
that is not otherwise apparent from the audited consolidated financial
statements. Reference should be made to those statements and the selected
financial data presented elsewhere in this report for an understanding of the
following discussion and analysis.
Forward-Looking Statements
The Company may from time to time make written or oral forward-looking
statements, including statements contained in the Company's filings with the
Securities and Exchange Commission and its reports to stockholders. Statements
made in the Annual Report, other than those concerning historical information,
should be considered forward-looking and subject to various risks and
uncertainties. Such forward-looking statements are made based upon management's
belief as well as assumptions made by, and information currently available to,
management pursuant to "safe harbor" provisions of the Private Securities
Litigation Reform Act of 1995. The Company's actual results may differ
materially from the results anticipated in forward-looking statements due to a
variety of factors, including governmental monetary and fiscal policies, deposit
levels, loan demand, loan collateral values, securities portfolio values,
interest rate risk management, the effects of competition in the banking
business from other commercial banks, thrifts, mortgage banking firms, consumer
finance companies, credit unions, securities brokerage firms, insurance
companies, money market funds and other financial institutions operating in the
Company's market area and elsewhere, including institutions operating through
the Internet, changes in governmental regulation relating to the banking
industry, including regulations relating to branching and acquisitions, failure
of assumptions underlying the establishment of reserves for loan losses,
including the value of collateral underlying delinquent loans and other factors.
The Company cautions that such factors are not exclusive. The Company does not
undertake to update any forward-looking statement that may be made from time to
time by, or on behalf of, the Company.
Overview
The Company's 1999 results were highlighted by the complete recovery of its
accumulated deficit and an increase of pretax earnings before the cumulative
effect of a change in accounting principle of 24%. Overall, stockholders'
equity has decreased due to net income of $485,000 being offset by other
comprehensive losses related to the Company's available-for-sale security
portfolio of $789,000. The Company is preparing for future loan and deposit
growth with the opening of a new branch in its primary market area of Forsyth
county in early 2000.
3
<PAGE>
Financial Condition at December 31, 1999 and 1998
Following is a summary of the Company's balance sheets for the years
indicated:
<TABLE>
<CAPTION>
December 31, Percentage
1999 1998 Increase
(Dollars in Thousands) (Decrease)
<S> <C> <C> <C>
Cash and due from banks $ 1,959 $ 1,326 47.74%
Federal funds sold 2,060 8,180 (74.82)
Securities 21,843 21,460 1.78
Loans, net 38,072 27,175 40.10
Premises and equipment 1,051 943 11.33
Other assets 1,224 673 81.87
-------------- -----------
$ 66,209 $ 59,757 10.80
============== ===========
Total deposits $ 58,040 $ 51,412 12.89
Other liabilities 462 334 37.91
Stockholders' equity 7,707 8,011 (3.79)
-------------- -----------
$ 66,209 $ 59,757 10.80
============== ===========
</TABLE>
Financial Condition at December 31, 1999 and 1998
As of December 31, 1999, the Company had total assets of $66.2 million, an
increase of 10.8% as compared to December 31, 1998. Total interest-earning
assets were $61.9 million at December 31, 1999 or 93.61% of total assets as
compared to 95.08% at December 31, 1998. The Company's primary interest-earning
assets at December 31, 1999 were loans, which made up 61.43% of total
interest-earning assets as compared to 47.83% at December 31, 1998. The
Company's loan to deposit ratio was 66.43% as compared to 53.56% at December 31,
1998. Deposit growth of $6.6 million and decreased Federal funds sold of $6.1
million have been used to fund loan growth of $11.0 million and to increase the
investment portfolio by $1.5 million.
The Company's investment portfolio, consisting of primarily U.S. Agency
securities and mortgage-backed securities, amounted to $21.8 million at December
31, 1999. Unrealized losses on securities amounted to $1.1 million at December
31, 1999. As of December 31, 1999 management had not specifically identified
any securities for sale in future periods which, if so designated, would require
a charge to operations if the market value would not be reasonably expected to
recover prior to the time of sale.
The Company has 61% 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
(43%), construction loans to build one- to four-family residential properties
(23%), and nonresidential properties consisting primarily of small business
commercial properties (34%). The Company generally requires that loans
collateralized by real estate not exceed 80% of the collateral value.
4
<PAGE>
The Company's remaining 39% 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. 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. 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.
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, 1999, the Company had loan commitments outstanding of $6.1
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, 1999, the Bank has arrangements with
two commercial banks for short-term advances of $2,150,000.
5
<PAGE>
At December 31, 1999, 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 1999 of $485,000.
The Company's stockholders' equity decreased due to a decrease in the fair value
of securities available-for-sale, net of tax, in the amount of $789,000. For
regulatory purposes, the net unrealized losses 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, approximately $257,000 of 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, 1999 are as follows:
<TABLE>
<CAPTION>
Actual
----------------------------------
Regulatory
Company Bank Requirements
----------- ------ -------------
<S> <C> <C> <C>
Leverage capital ratio 12.87% 11.00% 5.00%
Risk-based capital ratios:
Core capital 19.48 16.76 6.00
Total capital 20.60 17.90 10.00
</TABLE>
At December 31, 1999, the Company had $207,000 of commitments for capital
expenditures to complete its branch.
These ratios may decline as asset growth continues, but, as earnings
improve to support the growth, should 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, 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
6
<PAGE>
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.
Results of Operations For The Years Ended December 31, 1999 and 1998
Following is a summary of the Company's operations for the periods
indicated.
<TABLE>
<CAPTION>
Years Ended
December 31, Percentage
1999 1998 Increase
(Dollars in Thousands) (Decrease)
<S> <C> <C> <C>
Interest income $ 4,666 $3,821 22.11%
Interest expense 2,213 1,891 17.03
Net interest income 2,453 1,930 27.10
Provision for loan losses 171 128 33.59
Other income 129 105 22.86
Other expenses 1,711 1,432 19.40
Pretax income 700 475 47.68
Income taxes 215 - -
Net income 485 475 2.32
</TABLE>
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 4.08% in 1999 as
compared to 4.16% in 1998. Average loans increased by $7.2 million which
accounted for the majority of a $13.7 million increase in total average
interest-earning assets. Average interest-bearing liabilities increased by
$11.4 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 decreased to 7.77% in 1999 from 8.23% in 1998. The rate
paid on average interest-bearing liabilities decreased to 4.64% in 1999 from
5.20% in 1998.
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
7
<PAGE>
accounted for the majority of a $22.1 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 $171,000 in 1999 as compared to $128,000
in 1998. The amounts provided are 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, 1999, the
Company has nonperforming loans and assets of $23,000 as compared to none at
December 31, 1998. The allowance for loan losses as a percentage of total loans
at December 31, 1999 and 1998 was 1.25% and 1.31%, respectively.
Other Income
Other operating income consists of service charges on deposit accounts and
other miscellaneous revenues and fees. Other operating income was $129,000 in
1999 as compared to $105,000 in 1998. The increase of $24,000 is due primarily
to increased service charges on deposit accounts related to the Company's
deposit growth.
Other operating income was $105,000 in 1998 as compared to $50,000 in 1997.
The increase is due to the Company being open for the entire year in 1998 and
deposit growth.
Non-interest Expense
Other operating expense for 1999 consists of salaries and employee benefits
($830,000), equipment and occupancy expenses ($281,000), and other operating
expenses ($600,000). The increases over 1998 ($157,000 for salaries and
employee benefits, $26,000 for equipment and occupancy, and $184,000 for other
operating expenses) are due primarily to the overall growth of the Bank.
Specifically, the Company's other operating expenses were higher in 1999 due in
part to increased professional fees of $114,000 and data processing fees of
$74,000.
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 year 1999 marked the first time in which income tax provisions were
required. The Company's statutory tax rate of 34% was reduced to 31% by
nontaxable interest income. The Company had no income tax expense due to
accumulated deficits of $25,000 at December 31, 1998.
8
<PAGE>
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 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, 1999, the Company's cumulative one year interest
rate-sensitivity gap ratio was 50%. 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 93% of certificates of deposit repricing within a
9
<PAGE>
one year time frame as opposed to 38% of loans and securities repricing within a
one year time frame. It is management's belief that competitive market rates
are being paid for certificates of deposit, and as long as the rates remain
competitive, liquidity, while not assured, should not be materially adversely
affected. However, due to the long-term nature of the Company's
interest-earning assets and the short-term nature of the interest-bearing
liabilities, the Company's earnings could be negatively impacted in a rising
interest rate environment. The Company intends to obtain Federal Home Loan Bank
borrowings to assist in offsetting the current imbalance.
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, 1999, 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
<S> <C> <C> <C> <C> <C>
(Dollars in Thousands)
Interest-earning assets:
Federal funds sold $ 2,060 $ -- $ -- $ -- $ 2,060
Securities -- -- 10,432 11,411 21,843
Loans 16,486 6,175 15,199 694 38,554
--------- ---------- -------- ------- -------
18,546 6,175 25,631 12,105 62,457
--------- ---------- -------- ------- -------
Interest-bearing liabilities:
Interest-bearing demand
deposits 14,359 -- -- -- 14,359
Savings 756 -- -- -- 756
Time deposits, less than
$100,000 3,749 14,377 1,751 -- 19,877
Time deposits, $100,000
and over 2,499 13,611 733 -- 16,843
--------- ---------- -------- ------- -------
21,363 27,988 2,484 -- 51,835
--------- ---------- -------- ------- -------
Interest rate sensitivity
gap $ (2,817) $ (21,813) $23,147 $12,105 $10,622
========= ========== ======== ======= =======
Cumulative interest rate
sensitivity gap $ (2,817) $ (24,630) $(1,483) $10,622
========= ========== ======== =======
Interest rate sensitivity
gap ratio .87 .22 10.32 --
========= ========== ======== =======
Cumulative interest rate
sensitivity gap ratio .87 .50 .97 1.20
========= ========== ======== =======
</TABLE>
10
<PAGE>
YEAR 2000 DISCLOSURES
Based on a review of the Company's business since January 1, 2000, the
Company has not experienced any material effects of the Year 2000 problem.
Although the Company has not been informed of any material risks associated with
the Year 2000 problem from third parties, there can be no assurance that the
Company will not be impacted in the future. The Company will continuously
monitor its business applications and maintain contact with its third party
vendors and key business partners to resolve any Year 2000 problems that may
arise in the future. The costs incurred by the Company to address Year 2000
issues were approximately $79,000.
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.
11
<PAGE>
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,
1999 1998
<S> <C> <C>
(Dollars in Thousands)
ASSETS
Nontaxable securities $1,552 $-
Cash and due from banks 1,477 1,112
Taxable securities 22,598 18,353
Securities valuation account (421) 80
Federal funds sold 3,208 2,558
Loans (2) 32,729 25,518
Reserve for loan losses (407) (314)
Other assets 1,902 1,190
-------- --------
$62,638 $48,497
======== ========
Total interest-earning assets $60,087 $46,429
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Deposits:
Noninterest-bearing demand $6,486 $4,149
Interest-bearing demand 12,930 9,734
Savings 732 458
Time 34,071 26,162
-------- --------
Total deposits $54,219 $40,503
Other liabilities 575 255
-------- --------
Total liabilities 54,794 40,758
-------- --------
Stockholders' equity 7,844 7,739
-------- --------
$62,638 $48,497
======== ========
Total interest-bearing liabilities $47,733 $36,354
======== ========
<FN>
(1) For each category, average balances were determined using the daily
average balances during the year.
(2) Nonaccrual loans of $25,000 were included in average loans for
1999. There were no nonaccrual loans included in average loans for 1998.
</TABLE>
12
<PAGE>
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.
<TABLE>
<CAPTION>
Years Ended December 31,
1999 1998
Average Average
Interest Rate Interest Rate
(Dollars in Thousands)
<S> <C> <C> <C> <C>
INTEREST INCOME:
Interest and fees on loans (1) $ 3,145 9.61% $ 2,545 9.97%
Interest on taxable securities 1,298 5.75 1,140 6.21
Interest on nontaxable securities (2) 66 4.21 - -
Interest on Federal funds sold 157 4.90 136 5.32
---------- ---------
Total interest income $ 4,666 7.77 $ 3,821 8.23
---------- ---------
INTEREST EXPENSE:
Interest on interest-bearing
demand deposits $ 346 2.68 $ 322 3.31
Interest on savings deposits 18 2.51 12 2.66
Interest on time deposits 1,849 5.43 1,557 5.95
---------- ---------
Total interest expense 2,213 4.64 1,891 5.20
---------- ---------
NET INTEREST INCOME $ 2,453 $1,930
========== =======
Net interest spread 3.13% 3.03%
======== ======
Net yield on average interest-earning assets 4.08% 4.16%
======== ======
<FN>
(1) Interest and fees on loans includes $243,000 and $150,000 of loan fee
income for the years ended December 31, 1999 and 1998, respectively. There was no
interest income recognized on nonaccrual loans during 1999 or 1998.
(2) Average rates on nontaxable securities have not been presented on a tax
equivalent basis.
</TABLE>
13
<PAGE>
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,
1999 vs. 1998
Changes Due To:
Increase
Rate Volume (Decrease)
(Dollars in Thousands)
Increase (decrease) in:
Income from interest-earning assets:
<S> <C> <C> <C>
Interest and fees on loans $ (96) $ 696 $ 600
Interest on taxable securities (91) 249 158
Interest on nontaxable securities - 66 66
Interest on Federal funds sold (11) 32 21
-------- ----------- -------
Total interest income (198) 1,043 845
-------- ----------- -------
Expense from interest-bearing liabilities:
Interest on interest-bearing
demand deposits (69) 93 24
Interest on savings deposits (1) 7 6
Interest on time deposits (146) 438 292
-------- ----------- -------
Total interest expense (216) 538 322
-------- ----------- -------
Net interest income $ 18 $ 505 $ 523
======== =========== =======
</TABLE>
14
<PAGE>
INVESTMENT PORTFOLIO
TYPES OF INVESTMENTS
The carrying amounts of securities at the dates indicated are summarized as
follows:
<TABLE>
<CAPTION>
December 31,
1999 1998
(Dollars in Thousands)
<S> <C> <C>
U.S. Government agencies $ 16,000 $18,066
State and municipal securities 1,651 268
Mortgage-backed securities 4,192 3,126
------------- -------
$ 21,843 $21,460
============= =======
</TABLE>
MATURITIES
The amounts of securities in each category as of December 31, 1999 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 $ -- --% $ 9,999 6.03% $ 6,001 6.54%
State and municipal securities -- -- -- -- 371 3.98
Mortgage-backed securities -- -- 433 6.36 1,261 5.51
------- ------- -------
$ -- -- $10,432 6.04 $ 7,633 6.25
======= ======= =======
</TABLE>
<TABLE>
<CAPTION>
After ten years Total
Amount Yield (1) Amount Yield (1)
<S> <C> <C> <C> <C>
U.S. Government agencies $ -- -- % $16,000 6.22%
State and municipal 1,280 4.46 1,651 4.35
Mortgage-backed securities 2,498 5.06 4,192 5.33
---------- -------
$ 3,778 4.86 $21,843 5.91
========== =======
<FN>
(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.
</TABLE>
15
<PAGE>
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,
1999 1998
(Dollars in Thousands)
<S> <C> <C>
Commercial $ 7,520 $ 8,590
Real estate-construction 5,419 4,330
Real estate-mortgage 18,276 8,886
Consumer installment loans and other 7,339 5,729
-------------- --------
38,554 27,535
Less allowance for loan losses (482) (360)
-------------- --------
Net loans $ 38,072 $27,175
============== ========
</TABLE>
MATURITIES AND SENSITIVITIES OF LOANS TO CHANGES IN INTEREST RATES
Total loans as of December 31, 1999 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.
(Dollars in Thousands)
Maturity:
One year or less $ 23,701
After one year through five years 14,649
After five years 204
--------
$ 38,554
======
The following table summarizes loans at December 31, 1999 with the due
dates after one year which have predetermined and floating or adjustable
interest rates.
(Dollars in Thousands)
Predetermined interest rates $ 13,585
Floating or adjustable interest rates 1,268
-------
$ 14,853
======
16
<PAGE>
RISK ELEMENTS
Information with respect to nonaccrual, past due, and restructured loans at
December 31, 1999 and 1998 is as follows:
<TABLE>
<CAPTION>
December 31,
1999 1998
(Dollars in Thousands)
<S> <C> <C>
Nonaccrual loans $ 23 $ 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 2 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.
17
<PAGE>
SUMMARY OF LOAN LOSS EXPERIENCE
The following table summarizes average loan balances for the year
determined using the daily average balances during the year; 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 year to average
loans.
<TABLE>
<CAPTION>
Years Ended December 31,
1999 1998
(Dollars in Thousands)
<S> <C> <C>
Average amount of loans outstanding $ 32,729 $ 25,518
========== =========
Balance of allowance for loan losses
at beginning of year $ 360 $ 235
---------- ---------
Loans charged off
Commercial and financial 50 --
Real estate mortgage -- --
Real estate mortgage -- --
Installment 1 7
---------- ---------
51 7
---------- ---------
Loans recovered
Commercial and financial -- --
Real estate mortgage -- --
Installment 2 4
---------- ---------
2 4
---------- ---------
Net charge-offs 49 3
---------- ---------
Additions to allowance charged to operating
expense during year 171 128
---------- ---------
Balance of allowance for loan losses
at end of year $ 482 $ 360
========== =========
Ratio of net loans charged off during the
year to average loans outstanding 0.15% 0.01%
========== =========
</TABLE>
18
<PAGE>
ALLOWANCE FOR LOAN LOSSES
The allowance for loan losses is maintained at a level that is deemed
appropriate by management 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.
As of December 31, 1999 and 1998, 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, 1999 December 31, 1998
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 $ 145 19.51% $ 108 31.19%
Real estate - construction 72 14.05 54 15.73
Real estate - mortgage 217 47.40 162 32.27
Consumer installment
loans and other 48 19.04 36 20.81
------- --------------- ------- ---------------
$ 482 100.00% $ 360 100.00%
======= =============== ======= ===============
</TABLE>
19
<PAGE>
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,
1999 1998
Amount Percent Amount Percent
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C>
Noninterest-bearing demand deposits $ 6,486 -- % $ 4,149 -- %
Interest-bearing demand deposits 12,930 2.68 9,734 3.31
Savings deposits 732 2.51 458 2.66
Time deposits 34,071 5.43 26,162 5.95
------- --------
$54,219 $ 40,503
======= ========
<FN>
(1) Average balances were determined using the daily average
balances during the year.
</TABLE>
The amounts of time certificates of deposit issued in amounts of $100,000
or more as of December 31, 1999 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.
(Dollars in Thousands)
Three months or less $ 2,499
Over three months through six months 5,817
Over six through twelve months 7,794
Over twelve months 733
--------
Total $ 16,843
======
RETURN ON ASSETS AND STOCKHOLDERS' EQUITY
The following rate of return information for the years indicated is presented
below.
Years Ended December 31,
1999 1998
Return on assets (1) 0.77% 0.98%
Return on equity (2) 6.19 6.13
Dividend payout ratio (3) - -
Equity to assets ratio (4) 12.52 15.96
(1) Net income divided by average total assets.
(2) Net income divided by average equity.
(3) Dividends declared per share of common stock divided by net income per
share.
(4) Average common equity divided by average total assets.
20
<PAGE>
INDEPENDENT AUDITOR'S REPORT
- --------------------------------------------------------------------------------
TO THE BOARD OF DIRECTORS
FORSYTH BANCSHARES, INC. AND SUBSIDIARY
CUMMING, GEORGIA
We have audited the accompanying consolidated balance sheets of FORSYTH
BANCSHARES, INC. AND SUBSIDIARY as of December 31, 1999 and 1998, and the
related statements of income, comprehensive income (loss), stockholders' equity,
and cash flows for the years 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 audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of Forsyth Bancshares, Inc. and
subsidiary as of December 31, 1999 and 1998, and the results of their operations
and their cash flows for the years then ended, in conformity with generally
accepted accounting principles.
/s/ MAULDIN & JENKINS, LLC
Atlanta, Georgia
February 10, 2000
21
<PAGE>
<TABLE>
<CAPTION>
FORSYTH BANCSHARES, INC.
AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 1999 AND 1998
ASSETS 1999 1998
------------------- -------------------
<S> <C> <C>
Cash and due from banks $ 1,958,658 $ 1,326,028
Federal funds sold 2,060,000 8,180,000
Securities available-for-sale 20,910,159 19,850,223
Securities held-to-maturity, at cost (fair value of $922,840
and $1,625,358) 932,579 1,609,806
Loans 38,554,138 27,535,516
Less allowance for loan losses 481,930 360,052
------------------- -------------------
Loans, net 38,072,208 27,175,464
Premises and equipment 1,051,136 943,207
Other assets 1,224,000 672,968
------------------- -------------------
TOTAL ASSETS $ 66,208,740 $ 59,757,696
=================== ===================
LIABILITIES AND STOCKHOLDERS' EQUITY
Deposits
Noninterest-bearing demand $ 6,214,719 $ 5,127,899
Interest-bearing demand 14,358,555 11,922,927
Savings 746,213 602,876
Time, $100,000 and over 16,843,202 16,095,235
Other time 19,877,410 17,663,507
------------------- -------------------
Total deposits 58,040,099 51,412,444
Other liabilities 461,554 334,348
------------------- -------------------
TOTAL LIABILITIES 58,501,653 51,746,792
=================== -------------------
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
Retained earnings (deficit) 459,735 (25,497)
Accumulated other comprehensive income (loss) (712,989) 76,060
------------------- -------------------
TOTAL STOCKHOLDERS' EQUITY 7,707,087 8,010,904
------------------- -------------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 66,208,740 $ 59,757,696
=================== ===================
</TABLE>
See Notes to Consolidated Financial Statements.
22
<PAGE>
<TABLE>
<CAPTION>
FORSYTH BANCSHARES, INC.
AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF INCOME
YEARS ENDED DECEMBER 31, 1999 AND 1998
- --------------------------------------------------------------------------------------------------------------------
1999 1998
----------------------- ------------------------
<S> <C> <C>
INTEREST INCOME
Loans $ 3,145,196 $ 2,544,637
Taxable securities 1,298,263 1,140,389
Nontaxable securities 65,405 -
Federal funds sold 157,297 136,164
----------------------- ------------------------
TOTAL INTEREST INCOME 4,666,161 3,821,190
----------------------- ------------------------
INTEREST EXPENSE ON DEPOSITS 2,213,029 1,890,802
----------------------- ------------------------
NET INTEREST INCOME 2,453,132 1,930,388
PROVISION FOR LOAN LOSSES 170,818 127,748
----------------------- ------------------------
NET INTEREST INCOME AFTER PROVISION FOR LOAN LOSSES 2,282,314 1,802,640
----------------------- ------------------------
OTHER INCOME
Service charges on deposit accounts 103,566 70,529
Other operating income 18,256 21,173
Net realized gains on sales of securities available-for-sale 7,089 12,885
----------------------- ------------------------
TOTAL OTHER INCOME 128,911 104,587
----------------------- ------------------------
OTHER EXPENSES
Salaries and employee benefits 830,537 672,845
Equipment and occupancy expenses 281,020 255,055
Other operating expenses 600,104 415,829
----------------------- ------------------------
TOTAL OTHER EXPENSES 1,711,661 1,343,729
----------------------- ------------------------
INCOME BEFORE INCOME TAXES AND CUMULATIVE
EFFECT OF A CHANGE IN ACCOUNTING PRINCIPLE 699,564 563,498
INCOME TAX EXPENSE 214,332 -
----------------------- ------------------------
INCOME BEFORE CUMULATIVE EFFECT OF A
CHANGE IN ACCOUNTING PRINCIPLE 485,232 563,498
CUMULATIVE EFFECT OF A CHANGE IN ACCOUNTING PRINCIPLE - (88,805)
----------------------- ------------------------
NET INCOME $ 485,232 $ 474,693
======================= ========================
EARNINGS PER COMMON SHARE BEFORE CUMULATIVE EFFECT
OF A CHANGE IN ACCOUNTING PRINCIPLE $ 0.61 $ 0.70
CUMULATIVE EFFECT OF A CHANGE IN ACCOUNTING PRINCIPLE - (0.11)
EARNINGS PER COMMON SHARE 0.61 0.59
======================= ========================
</TABLE>
SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
23
<PAGE>
<TABLE>
<CAPTION>
FORSYTH BANCSHARES, INC.
AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
YEARS ENDED DECEMBER 31, 1999 AND 1998
- --------------------------------------------------------------------------------------------------------------------
1999 1998
------------------------ --------------------
NET INCOME $ 485,232 $ 474,693
------------------------ --------------------
<S> <C> <C>
OTHER COMPREHENSIVE INCOME (LOSS):
Unrealized gains (losses) on securities available-for-sale:
Unrealized holding gains (losses) arising during period,
net of tax (benefits) of $(404,070) and $43,563,
respectively (784,370) 33,572
Reclassification adjustment for gains realized
in net income, net of tax of $2,410 and $4,381,
respectively (4,679) (8,504)
------------------------ --------------------
OTHER COMPREHENSIVE INCOME (LOSS) (789,049) 25,068
------------------------ --------------------
COMPREHENSIVE INCOME (LOSS) $ (303,817) $ 499,761
------------------------ --------------------
</TABLE>
SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
24
<PAGE>
<TABLE>
<CAPTION>
FORSYTH BANCSHARES, INC.
AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
YEARS ENDED DECEMBER 31, 1999 AND 1998
- ----------------------------------------------------------------------------------------------------------------------
Commonstock ACCUMULATED
----------------------- Other Total
At Amount Retained Earnings Comprehensive Stockholders'
Shares Paid-In (Deficit) Income (Loss) Equity
----------- ---------- ------------------- --------------- ---------------
<S> <C> <C> <C> <C> <C>
Balance, December 31, 1997 800,000 $7,960,341 $ (500,190) $ 50,992 $ 7,511,143
Net Income - - 474,693 - 474,693
Other Comprehensive Income - - - 25,068 25,068
----------- ---------- ------------------- --------------- ---------------
Balance, December 31, 1998 800,000 7,960,341 (25,497) 76,060 8,010,904
Net Income - - 485,232 - 485,232
Other Comprehensive Loss - - - (789,049) (789,049)
----------- ---------- ------------------- --------------- ---------------
Balance, December 31, 1999 800,000 $7,960,341 $ 459,735 $ (712,989) $ 7,707,087
=========== ========== =================== =============== ===============
</TABLE>
SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
25
<PAGE>
<TABLE>
<CAPTION>
FORSYTH BANCSHARES, INC.
AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31, 1999 AND 1998
- ---------------------------------------------------------------------------------------------
1999 1998
----------- -------------
<S> <C> <C>
OPERATING ACTIVITIES
Net income $ 485,232 $ 474,693
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation 124,833 107,453
Write-off/amortization of organization costs - 88,805
Provision for loan losses 170,818 127,748
Deferred income taxes (40,891) (129,777)
Gain on sale of securities available-for-sale (7,089) (12,885)
Increase in interest receivable (98,181) (123,392)
Increase (decrease) in interest payable (32,992) 148,103
Other operating activities 154,718 (26,894)
----------- -------------
Net cash provided by operating activities 756,448 653,854
----------- -------------
INVESTING ACTIVITIES
Purchases of securities available-for-sale (11,747,136) (15,214,920)
Proceeds from maturities of securities available-for-sale 7,239,072 4,198,212
Proceeds from sales of securities available-for-sale 2,259,688 2,013,555
Proceeds from maturities of securities held-to-maturity 677,227 2,351,611
Net (increase) decrease in Federal funds sold 6,120,000 (6,170,000)
Net increase in loans (11,067,562) (8,738,318)
Purchase of premises and equipment (232,762) (621,564)
----------- -------------
Net cash used in investing activities (6,751,473) (22,181,424)
----------- -------------
FINANCING ACTIVITIES
Net increase in deposits 6,627,655 21,066,847
----------- -------------
Net cash provided by financing activities 6,627,655 21,066,847
----------- -------------
Net increase (decrease) in cash and due from banks 632,630 (460,723)
----------- -------------
Cash and due from banks at beginning of year 1,326,028 1,786,751
----------- -------------
Cash and due from banks at end of year $ 1,958,658 $ 1,326,028
=========== ==============
</TABLE>
26
<PAGE>
<TABLE>
<CAPTION>
FORSYTH BANCSHARES, INC.
AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31, 1999 AND 1998
- ------------------------------------------------------------------------------------------
1999 1998
---------- -----------
<S> <C> <C>
SUPPLEMENTAL DISCLOSURES
Cash paid for:
Interest $2,246,021 $1,742,699
Income taxes $ 128,000 $ 132,000
NONCASH TRANSACTIONS
Unrealized (gains) losses on securities available-for-sale $1,195,529 $ (64,250)
</TABLE>
SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
27
<PAGE>
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 as of the balance sheet date and the reported
amounts of revenues and expenses during the reporting period. Actual results
could differ from those estimates. Material estimates that are particularly
susceptible to significant change in the near term relate to the determination
of the allowance for loan losses and deferred tax assets.
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.
28
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
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 recorded at amortized cost. All
other securities are classified as available-for-sale and recorded at fair value
with net unrealized gains and losses reported in other comprehensive income
(loss), 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.
LOANS
Loans are reported at their outstanding principal balances less the allowance
for loan losses. Interest income is accrued based on the principal balance
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. Loan losses
are charged against the allowance when management believes the uncollectibility
of a loan is confirmed. Subsequent recoveries are credited to the allowance.
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.
29
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
LOANS (CONTINUED)
A loan is impaired when it is probable the Company will be unable to collect all
principal and interest payments due in accordance with the contractual 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.
PREMISES AND EQUIPMENT
Land is carried at cost. Premises and equipment are carried 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 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.
30
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
EARNINGS PER COMMON SHARE
Earnings per common share are computed by dividing net income by the
weighted-average number of shares of common stock outstanding. The
weighted-average shares of common stock outstanding was 800,000 for 1999 and
1998.
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 became effective for financial statements for
fiscal years beginning after December 15, 1998. Early adoption was encouraged
for fiscal years in which financial statements had 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.
COMPREHENSIVE INCOME
Statement of Financial Accounting Standards ("SFAS") No. 130, ("Reporting
Comprehensive Income"), describes comprehensive income as the total of all
components of comprehensive income, including net income. Other comprehensive
income refers 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 unrealized gains and losses on available-for-sale securities.
31
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
RECENT ACCOUNTING PRONOUNCEMENTS
In June 1998, the Financial Accounting Standards Board issued SFAS No. 133,
"Accounting for Derivative Instruments and Hedging Activities". The effective
date of this statement has been deferred by SFAS No. 137 until fiscal years
beginning after June 15, 2000. 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, 2001. SFAS No. 133 requires the
Company to recognize all derivatives as either assets or liabilities in the
balance sheet at fair value. 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.
There are no other recent accounting pronouncements that have had, or are
expected to have, a material effect on the Company's financial statements.
32
<PAGE>
<TABLE>
<CAPTION>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------------------------------
NOTE 2. SECURITIES
The amortized cost and fair value of securities are summarized as follows:
GROSS GROSS
AMORTIZED UNREALIZED UNREALIZED FAIR
COST GAINS LOSSES VALUE
------------------- ----------- ------------ -----------
<S> <C> <C> <C> <C>
SECURITIES AVAILABLE-FOR-SALE
DECEMBER 31, 1999:
U. S. GOVERNMENT AND AGENCY
SECURITIES $ 16,184,104 $ - $ (683,822) $15,500,282
STATE AND MUNICIPAL SECURITIES 1,851,280 - (200,168) 1,651,112
MORTGAGE-BACKED SECURITIES 3,955,062 - (196,297) 3,758,765
------------------- ----------- ------------ -----------
$ 21,990,446 $ - $(1,080,287) $20,910,159
=================== =========== ============ ===========
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
- =================== =========== ============ ===========
SECURITIES HELD-TO-MATURITY
DECEMBER 31, 1999:
U. S. GOVERNMENT AND AGENCY
SECURITIES $ 499,965 $ - $ (4,565) $ 495,400
MORTGAGE-BACKED SECURITIES 432,614 - (5,174) 427,440
------------------- ----------- ------------ -----------
$ 932,579 $ - $ (9,739) $ 922,840
- =================== =========== ============ ===========
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
- =================== =========== ============ ===========
</TABLE>
33
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
NOTE 2. SECURITIES (CONTINUED)
The amortized cost and fair value of securities as of December 31, 1999 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 SECURITIES
AVAILABLE-FOR-SALE HELD-TO-MATURITY
------------------------ --------------------
AMORTIZED FAIR AMORTIZED FAIR
COST VALUE COST VALUE
----------- ----------- ---------- --------
<S> <C> <C> <C> <C>
Due from one year to five
years $ 9,834,468 $ 9,498,954 $ 499,965 $495,400
Due from five years to ten
years 6,744,350 6,372,825 - -
Due after ten years 1,456,566 1,279,615 - -
Mortgage-backed securities 3,955,062 3,758,765 432,614 427,440
----------- ----------- ---------- --------
$21,990,446 $20,910,159 $ 932,579 $922,840
=========== =========== ========== ========
</TABLE>
<TABLE>
<CAPTION>
Securities with a carrying value of $2,922,000 and $1,119,000 at December 31,
1999 and 1998, respectively, 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:
YEARS ENDED DECEMBER 31,
--------------------------
1999 1998
----------- -------
<S> <C> <C>
Gross gains $ 7,253 $12,885
Gross losses (164) -
Net realized gains $ 7,089 $12,885
---------- -------
</TABLE>
34
<PAGE>
<TABLE>
<CAPTION>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- ----------------------------------------------------------------------------------
NOTE 3. LOANS AND ALLOWANCE FOR LOAN LOSSES
The composition of loans is summarized as follows:
DECEMBER 31,
----------------------------
1999 1998
-------------- ------------
<S> <C> <C>
Commercial, financial, and agricultural $ 7,520,000 $ 8,590,000
Real estate - construction 5,419,000 4,330,000
Real estate - mortgage 18,276,000 8,886,000
Consumer installment and other 7,339,138 5,729,516
38,554,138 27,535,516
-------------- ------------
Allowance for loan losses (481,930) (360,052)
Loans, net $ 38,072,208 $27,175,464
============== ============
</TABLE>
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
--------------------
1999 1998
--------- ---------
<S> <C> <C>
BALANCE, BEGINNING OF YEAR $360,052 $235,000
Provision for loan losses 170,818 127,748
Loans charged off (51,193) (6,571)
Recoveries of loans previously charged off 2,253 3,875
--------- ---------
BALANCE, END OF YEAR $481,930 $360,052
========= =========
</TABLE>
The total recorded investment in impaired loans was $23,457 and $-- at December
31, 1999 and 1998, respectively. There were no impaired loans that had related
allowances determined in accordance with SFAS No. 114, ("Accounting by Creditors
for Impairment of a Loan") at December 31, 1999 and 1998. The average recorded
investment in impaired loans for 1999 and 1998 was $25,268 and $--. Interest
income recognized for cash payments received on impaired loans was not material
for the years ended December 31, 1999 and 1998.
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, 1999 are as follows:
<TABLE>
<CAPTION>
<S> <C>
BALANCE, BEGINNING OF YEAR $ 1,792,634
Advances 5,981,565
Repayments (4,342,432)
Transactions due to change in related parties (7,751)
------------
BALANCE, END OF YEAR $ 3,424,016
------------
</TABLE>
35
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
NOTE 4. PREMISES AND EQUIPMENT
Premises and equipment are summarized as follows:
<TABLE>
<CAPTION>
DECEMBER 31,
-----------------------
1999 1998
---------- -----------
<S> <C> <C>
Land $ 607,892 $ 607,892
Equipment 482,069 418,165
Leasehold improvements 119,592 112,643
Construction and equipment installation in progress,
estimated cost to complete $207,000 161,909 -
1,371,462 1,138,700
---------- -----------
Accumulated depreciation (320,326) (195,493)
$ 1,051,136 $ 943,207
---------- -----------
</TABLE>
<TABLE>
<CAPTION>
NOTE 5. DEPOSITS
The scheduled maturities of time deposits at December 31, 1999 are as follows:
<S> <C>
2000 $34,238,842
2001 1,933,161
2002 336,623
2003 186,986
2004 25,000
-----------
36,720,612
===========
</TABLE>
The Company had related party deposits of $3,478,000 and $4,832,000 at December
31, 1999 and 1998, respectively.
NOTE 6. INCOME TAXES
Income tax expense consists of the following:
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
------------------------
1999 1998
--------- ---------
<S> <C> <C>
Current $255,223 129,777
Deferred (34,596) 82,503
Change in valuation allowance (6,295) (212,280)
--------- ---------
Income tax expense $214,332 -
========= =========
</TABLE>
36
<PAGE>
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 is as follows:
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
----------------------------------------
1999 1998
------------------- -------------------
AMOUNT PERCENT AMOUNT PERCENT
--------- -------- ---------- --------
<S> <C> <C> <C> <C>
Income taxes at statutory rate $237,852 34% $ 161,396 34%
Change in valuation allowance (6,295) (1) (212,280) (45)
Change in rate assumptions - - 49,540 11
Nontaxable interest (22,481) (3) - -
Other items, net 5,256 1 1,344 -
Income tax expense $214,332 31% $ - -%
--------- -------- ---------- ---------
</TABLE>
<TABLE>
<CAPTION>
The components of deferred income taxes are as follows:
DECEMBER 31,
------------------------
1999 1998
------------- ---------
<S> <C> <C>
Deferred tax assets:
Loan loss reserves $ 118,191 $ 70,158
Depreciation 11,259 4,255
Preopening and organization costs 38,975 59,752
Securities available-for-sale 367,298 -
Other 2,243 1,907
------------- ---------
537,966 136,072
------------- ---------
Valuation allowance - (6,295)
537,966 129,777
------------- ---------
Deferred tax liabilities; securities available-for-sale - 39,182
------------- ---------
Net deferred tax assets $ 537,966 $ 90,595
============= =========
</TABLE>
37
<PAGE>
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,
-------------------------
1999 1998
------------- ----------
<S> <C> <C>
Commitments to extend credit $ 6,115,000 $6,771,000
Standby letters of credit 75,000 106,000
------------- ----------
$ 6,190,000 $6,877,000
============= ==========
</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, 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.
38
<PAGE>
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, 1999 is due as follows:
During the year ending December 31:
2000 $ 49,173
============
The total rental expense for the years ended December 31, 1999 and 1998 was
$73,507 and $75,232, respectively.
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.
Sixty-one 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.
39
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
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, 1999,
approximately $257,000 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 capital amounts and classification are
also subject to qualitative judgments by the regulators about components, risk
weightings, and other factors. Prompt corrective provisions are not applicable
to bank holding companies.
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, 1999, the Company and the Bank
met all capital adequacy requirements to which they are subject.
As of December 31, 1999, the most recent notification from the Federal Deposit
Insurance Corporation categorized the Bank as well capitalized under the
regulatory framework for prompt corrective action. To be categorized as well
capitalized, the Bank must maintain minimum total risk-based, Tier 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.
40
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
NOTE 9. REGULATORY MATTERS (CONTINUED)
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, 1999:
TOTAL CAPITAL TO RISK WEIGHTED
ASSETS:
CONSOLIDATED $ 8,902 20.60% $ 3,458 8% $ N/A N/A
BANK $ 7,588 17.90% $ 3,392 8% $4,240 10%
TIER I CAPITAL TO RISK WEIGHTED
ASSETS:
CONSOLIDATED $ 8,420 19.48% $ 1,729 4% $ N/A N/A
BANK $ 7,106 16.76% $ 1,696 4% $2,544 6%
TIER I CAPITAL TO AVERAGE ASSETS:
CONSOLIDATED $ 8,420 12.87% $ 2,617 4% $ N/A N/A
BANK $ 7,106 11.00% $ 2,584 4% $3,230 5%
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>
41
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
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, 1999 and 1998. 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.
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.
42
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
NOTE 10. FAIR VALUE OF FINANCIAL INSTRUMENTS (CONTINUED)
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.
43
<PAGE>
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, 1999 DECEMBER 31, 1998
------------------------ ------------------------
CARRYING FAIR CARRYING FAIR
AMOUNT VALUE AMOUNT VALUE
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Financial assets:
Cash, due from banks, and
Federal funds sold $ 4,018,658 $ 4,018,658 $ 9,506,028 $ 9,506,028
Securities available-for-sale 20,910,159 20,910,159 19,850,223 19,850,223
Securities held-to-maturity 932,579 922,840 1,609,806 1,625,358
Loans 38,072,208 38,135,379 27,175,464 27,851,726
Accrued interest receivable 659,635 659,635 561,454 561,454
Financial liabilities:
Deposits $58,040,099 $57,894,421 $51,412,444 $51,683,150
Accrued interest payable 229,413 229,413 262,405 262,405
</TABLE>
NOTE 11. SUPPLEMENTAL FINANCIAL DATA
Components of other operating expenses in excess of 1% of revenue are as
follows:
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
-------------------------
1999 1998
--------- --------
<S> <C> <C>
Professional fees $ 211,386 $97,772
Data processing 154,866 80,799
</TABLE>
44
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
NOTE 12. PARENT COMPANY FINANCIAL INFORMATION
The following information presents the condensed balance sheets, statements
of income, and cash flows of Forsyth Bancshares, Inc. as of and for the years
ended December 31, 1999 and 1998:
<TABLE>
<CAPTION>
CONDENSED BALANCE SHEETS
1999 1998
--------- -----------
<S> <C> <C>
ASSETS
Cash $ 494,075 $ 687,421
Investment in subsidiary 6,393,053 6,666,295
Premises and equipment 769,801 607,892
Other assets 50,158 50,082
--------- -----------
TOTAL ASSETS $7,707,087 $8,011,690
========= ==========
LIABILITIES, OTHER $ - $ 786
STOCKHOLDERS' EQUITY 7,707,087 8,010,904
--------- -----------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $7,707,087 $8,011,690
========= ==========
</TABLE>
45
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------
NOTE 12. PARENT COMPANY FINANCIAL INFORMATION (CONTINUED)
<TABLE>
<CAPTION>
CONDENSED STATEMENTS OF INCOME
1999 1998
-------- -------
<S> <C> <C>
INTEREST INCOME $ 21,273 $ 35,417
-------- -------
EXPENSE, OTHER 77,140 72,171
-------- -------
(LOSS) BEFORE INCOME TAX BENEFITS
AND EQUITY IN UNDISTRIBUTED INCOME
OF SUBSIDIARY (55,867) (36,754)
INCOME TAX BENEFITS 25,290 50,082
-------- -------
INCOME (LOSS) BEFORE EQUITY IN UNDISTRIBUTED
INCOME OF SUBSIDIARY (30,577) 13,328
EQUITY IN UNDISTRIBUTED INCOME OF SUBSIDIARY 515,809 461,365
-------- -------
NET INCOME $485,232 $474,693
======== =======
</TABLE>
46
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- ---------------------------------------------------------------------
NOTE 12. PARENT COMPANY FINANCIAL INFORMATION (CONTINUED)
<TABLE>
<CAPTION>
CONDENSED STATEMENTS OF CASH FLOWS
1999 1998
----------- ------------
<S> <C> <C>
OPERATING ACTIVITIES
Net income $ 485,232 $ 474,693
Adjustments to reconcile net income to net
cash used in operating activities:
Undistributed income of subsidiary (515,809) (461,365)
Write-off of organization costs - 30,695
Other operating activities (860) (54,298)
----------- ------------
NET CASH USED IN OPERATING ACTIVITIES (31,437) (10,275)
INVESTING ACTIVITIES
Purchase of premises and equipment (161,909) (607,892)
----------- ------------
NET CASH USED IN INVESTING ACTIVITIES (161,909) (607,892)
----------- ------------
Net decrease in cash (193,346) (618,167)
Cash at beginning of year 687,421 1,305,588
----------- ------------
Cash at end of year $ 494,075 $ 687,421
=========== ============
</TABLE>
47
<PAGE>
EXHIBIT 21.1
SUBSIDIARIES OF THE REGISTRANT
The Citizens Bank of Forsyth County
<PAGE>
<TABLE> <S> <C>
<ARTICLE> 9
<MULTIPLIER> 1
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> DEC-31-1999
<CASH> 1958658
<INT-BEARING-DEPOSITS> 0
<FED-FUNDS-SOLD> 2060000
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 20910159
<INVESTMENTS-CARRYING> 932579
<INVESTMENTS-MARKET> 922840
<LOANS> 38554138
<ALLOWANCE> 481930
<TOTAL-ASSETS> 66208740
<DEPOSITS> 58040099
<SHORT-TERM> 0
<LIABILITIES-OTHER> 461554
<LONG-TERM> 0
0
0
<COMMON> 7960341
<OTHER-SE> (253254)
<TOTAL-LIABILITIES-AND-EQUITY> 66208740
<INTEREST-LOAN> 3145196
<INTEREST-INVEST> 1363668
<INTEREST-OTHER> 157297
<INTEREST-TOTAL> 4666161
<INTEREST-DEPOSIT> 2213029
<INTEREST-EXPENSE> 2213029
<INTEREST-INCOME-NET> 2453132
<LOAN-LOSSES> 170818
<SECURITIES-GAINS> 7089
<EXPENSE-OTHER> 1711661
<INCOME-PRETAX> 699564
<INCOME-PRE-EXTRAORDINARY> 485232
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 485232
<EPS-BASIC> .61
<EPS-DILUTED> .61
<YIELD-ACTUAL> 4.08
<LOANS-NON> 23000
<LOANS-PAST> 0
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 360000
<CHARGE-OFFS> 51000
<RECOVERIES> 2000
<ALLOWANCE-CLOSE> 482000
<ALLOWANCE-DOMESTIC> 482000
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 0
</TABLE>
