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U. S. SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-KSB
[X] Annual report pursuant to Section 13 or 15 (d) of the Securities
Exchange Act of 1934 For fiscal year ended DECEMBER 31, 1998
[ ] Transition report under Section 13 or 15 (d) of the Exchange Act
For the transition period from ______________ to _______________
Commission file number 333-07914
CITIZENS EFFINGHAM BANCSHARES, INC.
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(Exact Name of Small Business Issuer as Specified in Its Charter)
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GEORGIA 58-2357619
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(State or Other Jurisdiction of (I.R.S. Employer
Incorporation or Organization) Identification No.)
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802 SOUTH LAUREL STREET
POST OFFICE BOX 379
SPRINGFIELD, GA 31329
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(Address of Principal Executive Offices)
(912) 754-0754
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(Issuer's Telephone Number, Including Area Code)
Securities registered pursuant to Section 12(b) of the Act: NONE
Securities registered pursuant to Section 12(g) of the Act: NONE
Check whether the issuer: (1) filed all reports required to be filed by Section
13 or 15(d) of the Exchange Act during the past 12 months (or for such shorter
period that the registrant was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days.
Yes X No
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Check if there is no disclosure of delinquent fliers in response to Item 405 of
Regulation S-B is not contained in this form, and no disclosure will be
contained, to the best of registrant's knowledge, in definitive proxy or a
information statements incorporated by reference in Part III of this Form 10-KSB
or any amendment to this Form 10-KSB { X }
State issuer's revenues for its most fiscal year: $487,769
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 stock was
sold, or the average bid and asked prices of such common equity, as of a
specified date within the past 60 days: $3,718,000 AS OF MARCH 31, 1999
APPLICABLE ONLY TO CORPORATE REGISTRANTS
State the number of shares outstanding of each of the issuer's
classes of common equity, as of the latest practicable date: COMMON STOCK $1 PAR
VALUE, 512,000 SHARES OUTSTANDING AT MARCH 23, 1999
DOCUMENTS INCORPORATED BY REFERENCE: NONE
Transitional Small Business Disclosure Format (check one):
Yes No X
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CITIZENS EFFINGHAM BANCSHARES, INC.
AND SUBSIDIARY
TABLE OF CONTENTS
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Page
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PART I .................................................................................................3
Item 1. Description of Business..........................................................................3
ITEM 2. DESCRIPTION OF PROPERTIES.......................................................................10
ITEM 3. LEGAL PROCEEDINGS...............................................................................10
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.............................................10
PART II ................................................................................................11
ITEM 5. MARKET FOR REGISTRANTS COMMON EQUITY AND RELATED STOCKHOLDER MATTERS............................11
ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS...........13
ITEM 7. FINANCIAL STATEMENTS............................................................................16
ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE............17
PART III ................................................................................................18
ITEM 9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS; COMPLIANCE WITH SECTION 16(a)
OF THE EXCHANGE ACT.............................................................................18
ITEM 10. EXECUTIVE COMPENSATION..........................................................................19
ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT..................................19
ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS..................................................21
ITEM 13. EXHIBITS, LISTS AND REPORTS ON FORM 8-K.........................................................22
SIGNATURES ................................................................................................23
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PART I
ITEM 1. DESCRIPTION OF BUSINESS
The Company
Citizens Effingham Bancshares, Inc. (the "Company") was incorporated as a
Georgia corporation on April 7, 1997, for the purpose of acquiring all of the
issued and outstanding shares of common stock of Citizens Bank of Effingham (the
"Bank"). The Bank is the only subsidiary of the Company.
The purpose for creating a holding company structure was to facilitate the
Bank's ability to serve its customers' requirements for financial services. The
holding company structure also provides flexibility for expansion of the
Company's banking business through the possible acquisition of other financial
institutions and the provision for additional banking-related services that a
traditional commercial bank cannot provide under present law.
Any additional future non-banking activities to be conducted by the Company may
include financial and other activities permitted by law, and such activities
could be conducted by subsidiary corporations that have not yet been organized.
Commencement of non-banking operations by the Company or by its subsidiaries, if
they are organized, will be contingent upon the appropriate regulatory
authority.
The Company's main office is located at 802 South Laurel Street, Springfield,
Georgia. The Company opened a branch in November 1998 located at 600 South
Columbia Avenue in Rincon, Georgia.
The Bank
General
The Bank began operations on September 8, 1998, as Citizens Bank of Effingham,
and operates as a state chartered bank in Springfield and Rincon, Georgia. At
December 31, 1998, the Company owned 100% of the outstanding stock of the Bank.
The Bank provides a variety of financial services to individuals and small
businesses through its offices in Springfield and Rincon, Georgia. The Bank's
primary deposit products are savings and term certificate accounts and its
primary lending products are residential and commercial mortgage loans.
Philosophy
The philosophy of the Bank's management is to emphasize prompt and responsive
personal service to residents of Springfield and Rincon, Georgia, as well as to
other communities in Effingham County, in order to attract customers and acquire
market share controlled by other financial institutions in the Bank's market
area. Management believes that the Bank offers residents of Effingham County the
benefits associated with a locally-owned and managed community bank. The Bank's
employees and directors are active members in the Effingham community. The
continued community involvement of the Bank's employees and directors provides
them with an opportunity to promote the Bank and its products and services.
Market Area
In June 1997, the population of the city of Springfield was 1,393 and Rincon's
population was 4,092. The population of Effingham County in 1997 was 34,361. The
average income per household of Effingham County for June 1997 was estimated to
be $38,714. During the past decade, Effingham County's
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population has grown by 40 percent and is expected to continue growing through
the next century. The labor force as of 1994 in Effingham County was 37,151 and
the labor force reported for the Effingham County area in 1994 was 171,111.
Effingham County is located about 29 miles north of Savannah near the coast of
Georgia. This close proximity to Savannah allows industries in Effingham County
to enjoy high-capacity utility service and to benefit from favorable corporate
taxes. Effingham County has recently opened a new industrial park located on
Highway 21 between Springfield and Rincon. This industrial park offers 660 acres
for development. The county has also experienced small business development
through the opening of two new banks, six new physician's offices, several
professional services, and additional nationally recognized retail stores and
restaurants.
Loan Portfolio
The Bank was established to support Effingham County and surrounding areas. The
Bank aggressively seeks creditworthy loans within a limited geographic area. The
Bank's primary commercial lending function is to make consumer loans to
individuals and commercial loans to small and medium-sized businesses and
professional concerns. In addition, the Bank makes real estate-related loans,
including construction loans for residential and commercial properties, and
primary and secondary mortgage loans for the acquisition or improvement of
personal residences.
The Bank's legal lending limits are 15% of its statutory capital base for
unsecured loans and 25% of its statutory capital base for secured loans. The
Bank's statutory capital base is determined by the sum of its common stock,
paid-in capital, appropriated retained earnings, and capital debt, or the amount
of net assets of the Bank, whichever is the lower amount. Accordingly, the
Bank's initial legal lending limits are approximately $637,500 for unsecured
loans and approximately $1,062,500 for secured loans. While the Bank generally
employs more conservative lending limits, the Board of Directors has discretion
to lend up to the legal lending limits as described above.
Consumer Loans. The Bank makes consumer loans, consisting primarily of
installment loans to individuals for personal, family and household purposes,
including loans for automobiles, home improvements and investments. Risks
associated with consumer loans include, but are not limited to, fraud,
deteriorated or non-existing collateral, general economic downturn and customer
financial problems.
Commercial Loans. The Bank's commercial lending is directed principally toward
small- to medium-sized businesses whose demand for funds falls within the Bank's
legal lending limits. This category of loans includes loans made to individuals,
partnership or corporate borrowers that are obtained for a variety of business
purposes. Risks associated with these loans can be significant and include, but
are not limited to, fraud, bankruptcy, economic downturn, deteriorated or
non-existing collateral and changes in interest rates.
Real Estate Loans. The Bank makes and holds real estate loans, consisting
primarily of single-family residential construction loans for one-to-four unit
family structures. The Bank requires a first lien position on the land
associated with the construction project and offers these loans to professional
building contractors and homeowners. Loan disbursements require on-site
inspections to assure the project is on budget and that the loan proceeds are
being used for the construction project and not being diverted to another
project. The loan-to-value ratios for such loans are predominantly 80% of the
lower of the as-built appraised value or project cost, and a maximum of 90% if
the loan is amortized. Loans for construction can present a high degree of risk
to the lender, depending upon, among other things, whether
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the builder can sell the home to a buyer, whether the buyer can obtain permanent
financing, whether the transaction produces income in the interim and the nature
of changing economic conditions.
Deposits
The Bank offers core deposits including checking accounts, money market
accounts, a variety of certificates of deposit, and IRA accounts. The Bank
employs an aggressive marketing plan in the overall service area, a broad
product line, and competitive services as its primary means to attract deposits.
The primary sources of deposits are residents of, and businesses and their
employees located in, Effingham County, obtained through personal solicitation
by the Bank's officers and directors, direct mail solicitations and
advertisements published in the local media. The Bank generates deposits by
offering a broad array of competitively priced deposit services, including
demand deposits, regular savings accounts, money market deposits (transaction
and investment), certificates of deposit, retirement accounts, and other deposit
or funds transfer services that may be permitted by law or regulation and that
may be offered to remain competitive in the market.
Asset and Liability Management
The Bank manages its assets and liabilities to provide an optimum and stable net
interest margin, a profitable after-tax return on assets and return on equity,
and adequate liquidity. These management functions are conducted within the
framework of the Bank's written loan and investment policies. The Bank attempts
to maintain a balanced position between rate sensitive assets and rate sensitive
liabilities. Specifically, it charts assets and liabilities on a matrix by
maturity, effective duration, and interest adjustment period, and endeavors to
manage any gaps in maturity ranges.
Employees
The Company has one employee, who is also an employee of the Bank. At December
31, 1998 the Bank had eleven full-time employees at the Springfield office and
five full-time employees and one part-time employee at the Rincon office. The
Bank employed sixteen full-time equivalent employees. The Company and the Bank
consider the relationship with their employees to be excellent.
Competition
Effingham County has offices of three other commercial banks. NationsBank has
one office in Springfield and one in Rincon. First National Bank of Effingham
has one office in Springfield and two offices in Rincon. Ameribank has one
office in Rincon. Effingham County also has one credit union, Fort Stewart
Georgia Federal Credit Union, located in Rincon.
Supervision and Regulation
The following discussion sets forth the material elements of the regulatory
framework applicable to banks and bank holding companies and provides certain
specific information related to the Company.
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General
The Company is a bank holding company registered with the Board of Governors of
the Federal Reserve System (the "Federal Reserve") under the Bank Holding
Company Act of 1956, as amended (the "BHC Act"). As such, the Company and, if
applicable, its non-bank subsidiaries are subject to the supervision,
examination, and reporting requirements of the BHC Act and the regulations of
the Federal Reserve.
The BHC Act requires that every bank holding company obtain the prior approval
of the Federal Reserve before: (a) it may acquire direct or indirect ownership
or control of any voting shares of any bank if, after such acquisition, the bank
holding company will directly or indirectly own or control more than 5% of the
voting shares of the bank; (b) it or any of its subsidiaries, other than a bank,
may acquire all or substantially all of the assets of any bank; or (c) it may
merge or consolidate with any other bank holding company.
The BHC Act further provides that the Federal Reserve may not approve any
transaction that would result in a monopoly or would be in furtherance of any
combination or conspiracy to monopolize or attempt to monopolize the business of
banking in any section of the United States, or the effect of which may be
substantially to lessen competition or to tend to create a monopoly in any
section of the country, or that in any other manner would restrain trade, unless
the anti competitive effects of the proposed transaction are clearly outweighed
by the public interest in meeting the convenience and needs of the community to
be served. The Federal Reserve is also required to consider the financial and
managerial resources and future prospects of the bank holding companies and
banks concerned and the convenience and needs of the community to be served.
The interstate banking provisions of the Riegle-Neal Interstate Banking and
Branching Efficiency Act of 1994 (the "Interstate Banking Act"), which became
effective on September 29, 1995, repealed the prior statutory restrictions on
interstate acquisitions of banks by bank holding companies. As a result, the
Company, and any other bank holding company located in Georgia, may now acquire
a bank located in any other state. Additionally, any bank holding company
located outside Georgia may lawfully acquire a Georgia-based bank, regardless of
state law to the contrary. Any such acquisition is subject to certain
deposit-percentage, aging requirements, and other restrictions. The Interstate
Banking Act also generally provides that, as of June 1, 1997, national and
state-chartered banks may branch interstate through acquisitions of banks in
other states. By adopting legislation prior to that date, a state had the
ability either to "opt in" and accelerate the date after which interstate
branching is permissible or "opt out" and prohibit interstate branching
altogether.
In response to the Interstate Banking Act, the Georgia General Assembly adopted
the Georgia Interstate Banking Act, which was effective on July 1, 1995. The
Georgia Interstate Banking Act provides that (a) interstate acquisitions by
institutions located in Georgia will be permitted in states that also allow
national interstate acquisitions and (b) interstate acquisitions of institutions
located in Georgia will be permitted by institutions in states that allow
national interstate acquisitions.
Additionally, on January 26, 1996, the Georgia General Assembly adopted the
Georgia Interstate Branching Act which permits Georgia-based banks and bank
holding companies owning or acquiring banks outside of Georgia and all
non-Georgia banks and bank holding companies owning or acquiring banks in
Georgia to merge any lawfully acquired bank into an interstate branch network.
The Georgia Interstate Branching Act also allows banks to establish de novo
branches on a limited basis as of July 1, 1996. As of July 1, 1998, the number
of de novo branches that may be established is no longer be limited.
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The BHC Act generally prohibits the Company from engaging in activities other
than banking or managing or controlling banks or other permissible subsidiaries
and from acquiring or retaining direct or indirect control of any company
engaged in any activities other than those activities determined by the Federal
Reserve to be so closely related to banking or managing or controlling banks as
to be a proper incident thereto. In determining whether a particular activity is
permissible, the Federal Reserve considers whether the performance of such an
activity reasonably can be expected to produce benefits to the public, such as
greater convenience, increased competition, or gains inefficiency, that outweigh
possible adverse effects, such as undue concentration of resources, decreased or
unfair competition, conflicts of interest, or unsound banking practices. For
example, the Federal Reserve has determined the following to be permissible
activities of bank holding companies: factoring accounts receivable, acquiring
or servicing loans, leasing personal property, conducting discount securities
brokerage activities, performing certain data processing services, acting as
agent or broker in selling credit life insurance and certain other types of
insurance in connection with credit transactions, and performing certain
insurance underwriting activities. The BHC Act does not place territorial
limitations on permissible non-banking activities of bank holding companies.
Despite prior approval, the Federal Reserve has the power to order a holding
company or its subsidiaries to terminate any activity or to terminate its
ownership or control of any subsidiary when it has reasonable cause to believe
that continuation of such activity or such ownership or control constitutes a
serious risk to the financial safety, soundness, or stability of any bank
subsidiary of that bank holding company.
The bank subsidiary of the Company is a member of the Federal Deposit Insurance
Corporation (the "FDIC"), and as such, its deposits are insured by the FDIC to
the maximum extent provided by law. Such subsidiary is also subject to numerous
state and federal statutes and regulations that affect its business, activities,
and operations, and it is supervised and examined by one or more state or
federal bank regulatory agencies.
The FDIC and the Georgia Department of Banking and Finance (the "Georgia
Department") regularly examine the operations of the Bank and have authority to
approve or disapprove mergers, consolidations, the establishment of branches,
and similar corporate actions.
The FDIC and the Georgia Department also have the power to prevent the
continuance or development of unsafe or unsound banking practices or other
violations of law.
Payments of Dividends
The Company is a legal entity separate and distinct from its banking subsidiary.
The principal sources of cash flow of the Company, including cash flow to pay
dividends to its shareholders, are dividends by the Bank. There are statutory
and regulatory limitations on the payment of dividends by the Bank to the
Company as well as by the Company to its shareholders.
If, in the opinion of the federal banking regulator, a depository institution
under its jurisdiction is engaged in or is about to engage in an unsafe or
unsound practice (which, depending on the financial condition of the depository
institution, could include the payment of dividends), such authority may
require, after notice and hearing, that such institution cease and desist from
such practice. The federal banking agencies have indicated that paying dividends
that deplete a depository institution's capital base to an inadequate level
would be an unsafe and unsound banking practice. Under the Federal Deposit
Insurance Corporation Improvement Act of 1991 ("FDICIA"), a depository
institution may not pay any dividend if payment would cause it to become
undercapitalized or if it already is undercapitalized. See "Prompt Corrective
Action." Moreover, the federal agencies have issued policy statements that
provide that bank
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holding companies and insured banks should generally only pay dividends out of
current operating earnings.
At January 1, 1999, under dividend restrictions imposed under federal and state
laws, and the conditions included in the Georgia Department's approval of the
Bank's charter application, the Bank could not declare dividends to the Company.
The payment of dividends by the Company and the Bank may also be affected or
limited by other factors, such as the requirement to maintain adequate capital
above regulatory guidelines.
Capital Adequacy
The Company and the Bank are required to comply with the capital adequacy
standards established by the Federal Reserve in the case of the Company and the
FDIC in the case of the Bank. The Federal Reserve has established two basic
measures of capital adequacy for bank holding companies, a risk-based measure
and a leverage measure. A bank holding company must satisfy all applicable
capital standards to be considered in compliance.
The risk-based capital standards are designed to make regulatory capital
requirements more sensitive to differences in risk profiles among banks and bank
holding companies, to account for off-balance-sheet exposure, and to minimize
disincentives for holding liquid assets. Assets and off-balance-sheet items are
assigned to broad risk categories, each with appropriate weights. The resulting
capital ratios represent capital as a percentage of total risk-weighted assets
and off-balance-sheet items.
The minimum guideline for the ratio of total capital to risk-weighted assets is
8%. At least one-half of total capital must comprise common stock, minority
interests in the equity accounts of consolidated subsidiaries, noncumulative
perpetual preferred stock, and a limited amount of cumulative perpetual
preferred stock, less goodwill and certain other intangible assets. This portion
of total capital is referred to as Tier 1 Capital. The remainder may consist of
subordinated debt, other preferred stock, and a limited amount of loan loss
reserves and is referred to as Tier 2 Capital. At December 31, 1998, the
Company's consolidated ratio of total capital to risk-weighted assets was 14.5%
and its consolidated ratio of Tier 1 capital to risk-weighted assets was 13.1%.
In addition, the Federal Reserve has established minimum leverage ratio
guidelines for bank holding companies. These guidelines provide for a minimum
ratio of Tier 1 Capital to average assets, less goodwill and certain other
intangible assets, of 3% for bank holding companies that meet the specified
criteria including having the highest regulatory rating. All other bank holding
companies generally are required to maintain a leverage ratio of at least 3%,
plus an additional cushion of 100 to 200 basis points. The Company's leverage
ratio at December 31, 1998 was 8.4%. The guidelines also provide that bank
holding companies experiencing internal growth, or making acquisitions will be
expected to maintain strong capital positions substantially above the minimum
supervisory levels without significant reliance on intangible assets.
Furthermore, the Federal Reserve has indicated that it will consider a bank
holding company's Tier 1 Capital leverage ratio, after deducting all
intangibles, and other indicators of capital strength in evaluating proposals
for expansion or new activities.
The Bank is subject to risk-based and leverage capital requirements adopted by
the FDIC, which are substantially similar to those adopted by the Federal
Reserve for bank holding companies.
Failure to meet capital guidelines could subject a bank to a variety of
enforcement remedies, including the issuance of a capital directive, the
termination of deposit insurance by the FDIC, a prohibition on the taking of
brokered deposits, and certain other restrictions on its business. As described
below, substantial
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additional restrictions can be imposed on FDIC-insured depository institutions
that fail to meet applicable capital requirements. See "--Prompt Corrective
Action."
Support of Subsidiary Institutions
Under Federal Reserve policy, the Company is expected to act as a source of
financial strength for, and to commit resources to support, the Bank. This
support may be required at times when, without this Federal Reserve policy, the
Company might not be inclined to provide it. In addition, any capital loans by a
bank holding company to its subsidiary bank will be repaid only after its
deposits and certain other indebtedness are repaid in full. In the event of a
bank holding company's bankruptcy, any commitment by the bank holding company to
a federal bank regulatory agency to maintain the capital of a banking subsidiary
will be assumed by the bankruptcy trustee and entitled to a priority of payment.
Prompt Corrective Action
The Federal Deposit Insurance Corporation Improvement Act of 1991 established a
system of prompt corrective action to resolve the problems of undercapitalized
institutions. Under this system, the federal banking regulators have established
five capital categories (well capitalized, adequately capitalized,
undercapitalized, significantly undercapitalized and critically
undercapitalized), and are required to take certain mandatory supervisory
actions, and are authorized to take other discretionary actions, relating to
institutions in the three undercapitalized categories. The severity of the
action depends upon the capital category in which the institution is placed.
Generally, subject to a narrow exception, the banking regulator must appoint a
receiver or conservator for an institution that is critically undercapitalized.
The federal banking agencies have specified by regulation the relevant capital
level for each category.
An institution that is categorized as undercapitalized, significantly
undercapitalized, or critically undercapitalized is required to submit an
acceptable capital restoration plan to its appropriate federal banking agency. A
bank holding company must guarantee that a subsidiary depository institution
meets its capital restoration plan, subject to certain limitations. The
controlling holding company's obligation to fund a capital restoration plan is
limited to the lesser of 5% of an undercapitalized subsidiary's assets or the
amount required to meet regulatory capital requirements. An undercapitalized
institution is also generally prohibited from increasing its average total
assets, making acquisitions, establishing any branches, or engaging in any new
line of business, except under an accepted capital restoration plan or with FDIC
approval. In addition, the appropriate federal banking agency may treat an
undercapitalized institution in the same manner as it treats a significantly
undercapitalized institution, if it determines that those actions are necessary.
At December 31, 1998, the Bank was well capitalized.
FDIC Insurance Assessments
The FDIC has adopted a risk-based assessment system for insured depository
institutions that takes into account the risks attributable to different
categories and concentrations of assets and liabilities. The system assigns an
institution to one of three capital categories: (1) well capitalized; (2)
adequately capitalized; and (3) undercapitalized. These three categories are
substantially similar to the prompt corrective action categories described
above, with the "undercapitalized" category including institutions that are
undercapitalized, significantly undercapitalized, and critically
undercapitalized for prompt corrective action purposes. The FDIC also assigns an
institution to one of three supervisory subgroups within each capital group. The
supervisory subgroup to which an institution is assigned is based on a
supervisory evaluation that the institution's primary federal regulator provides
to the FDIC and information that the FDIC determines to be relevant to the
institution's financial condition and the risk
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posed to the deposit insurance funds. The FDIC determines an institution's
insurance assessment rate based on the institution's capital category and
supervisory category. Under the risk-based assessment system, there are nine
combinations of capital groups and supervisory subgroups to which different
assessment rates are applied. Assessments range from 0 to 27 cents per $100 of
deposits, depending on the institution's capital group and supervisory subgroup.
Effective January 1, 1997, the FDIC imposed assessments to help repay the $780
million in annual interest payments on the $8 billion of Financing Corporation
bonds issued in the late 1980s as part of the government rescue of the thrift
industry. The FDIC will assess banks at a rate of 1.3 cents per $100 of deposits
until December 31, 1999. Thereafter, it will add approximately 2.4 cents per
$100 of deposits to each assessment.
The FDIC may terminate an institution's deposit insurance if it finds that the
institution has engaged in unsafe and unsound practices, is in an unsafe or
unsound condition to continue operations, or has violated any applicable law,
regulation, rule, order or condition imposed by the FDIC.
Proposed Legislation and Regulatory Action
New regulations and statutes are regularly proposed that contain wide-ranging
proposals for altering the structures, regulations and competitive relationships
of the nation's financial institutions. We cannot predict whether or in what
form any proposed regulation or statute will be adopted or the extent to which
our business may be affected by any new regulation or statute.
ITEM 2. DESCRIPTION OF PROPERTIES
The Bank owns the property on which its main office is located in Springfield,
Georgia at 802 South Laurel Street on approximately 1.29 acres of land. The
two-story brick building contains approximately 4,962 square feet, with an
attached drive-up canopy of approximately 1,883 square feet. The building has
five teller stations, and one ATM station. The facility contains operations
space and a board room on the upper level, with significant room for expansion.
The Bank opened a branch in Rincon, Georgia at 600 South Columbia Avenue in
October 1998. This one-story brick building contains approximately 3,757 square
feet, with an attached drive-up canopy of approximately 1,883 square feet. The
Rincon office is located on approximately 1.57 acres of land. The building has
four teller stations and one ATM station.
ITEM 3. LEGAL PROCEEDINGS
There are no material pending legal proceedings to which the Company is a party
or of which any of its properties are subject; nor are there material
proceedings known to the Company to be contemplated by any governmental
authority; nor are there material proceedings known to the Company, pending or
contemplated, in which any director, officer or affiliate or any principal
security holder of the Company or any associate of any of the foregoing, is a
party or has an interest adverse to the Company.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
The Company did not submit any matters to a vote of its shareholders during the
fourth quarter of its last fiscal year.
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PART II
ITEM 5. MARKET FOR REGISTRANTS COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
(a) There is currently no market for the shares of common stock and it is
not likely that an active trading market will develop for the shares in the
future. There are no present plans for the Company's common stock to be traded
on any stock exchange or over-the-counter market. As a result, investors who
need or wish to dispose of all or part of their shares may be unable to do so
except in private, directly negotiated sales.
There have been no unregistered sales of the Company's securities since the
Company's incorporation in April 1997.
(b) The following information is required by Item 701(f) of Regulation S-B.
(1) The effective date of the Company's Registration
Statement was January 9, 1998 (Registration No. 333-07914).
(2) The offering commenced on or about January 14, 1998.
(3) Not applicable.
(4) (i) The offering terminated on March 13, 1998.
(ii) There were no managing underwriters.
(iii) The title of the class of security registered was common
stock, $1.00 par value per share.
(iv) The amount registered and sold was 512,000 shares. The
aggregate price of the offering amount registered and sold
was $5,120,000.
(v) For the period beginning January 14, 1998 and ended March
13, 1998, the amount of expense incurred by the Company in
connection with the issuance and distribution of the common
stock for underwriting discounts, commissions, finders'
fees, and expenses to or for underwriters was $0. During
the same period, the amount of expense incurred for the
Company's account in connection with the issuance and
distribution of the common stock was approximately $11,761.
(a) None of the expenses of the offering was a direct
or indirect payment to directors or officers of
the issuer or their associates, or to persons
owning 10% or more of the common stock, or to
affiliates of the issuer.
(b) All of such expenses were direct or indirect payments
to others.
(vi) The net offering proceeds to the Company after deducting
the total expenses described above were $5,108,239.
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(vii) During the period beginning January 14, 1998 and ended March
13, 1998, the amount of net offering proceeds to the issuer
that were used in the ways specified below follows:
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Amount: Description
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$ 60,794 Construction of building and facilities
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$ 6,602 Purchase and installation of machinery and equipment
-----------------------
$ -- Purchases of real estate
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$ -- Acquisition of other businesses.
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$ -- Repayment of indebtedness.
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-- Working capital.
------------------------
$ -- Temporary investments.
-----------------------
</TABLE>
(a) None of the foregoing payments were direct or
indirect payments to directors, officers, their
associates, to persons owning 10% or more of the
common stock, or to affiliates of the issuer.
(b) All of the foregoing payments were to others.
(viii) The use of proceeds described above does not represent a
material change in the use of proceeds described in the
prospectus.
<PAGE> 13
ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
INTRODUCTION
On March 13, 1998, the Company concluded its offering having sold 512,000 shares
of common stock at $10.00 per share. The offering provided the Company with
$5,120,000 in capital. Operations from April 3, 1997 through September 7, 1998
related primarily to organizing the Company and pre-opening expenditures to open
the Bank. On September 8, 1998, the Bank opened for business to serve the
Effingham County area as a commercial bank.
FINANCIAL CONDITION
GENERAL
As of December 31, 1998, the Company had total assets of $20,324,622. Total
deposits had grown to $15,752,457 and total loans had grown to $12,727,815. The
Bank had overnight investments at December 31, 1998 of $4,240,000.
As of December 31, 1998, the Bank's loan to deposit ratio was 80.9%. As of
December 31, 1998, management's long-term target for the loan to deposit ratio
of at least 75% had been achieved. The interest rates that the Bank pays on
interest bearing deposits and the service charge rates for deposit services are
comparable to local market rates. Management is making a concerted effort to
develop quality loan business in the local market and to manage the deposit
growth consistent with expected loan demand.
The deposit mix at December 31, 1998 was as follows: $2,026,091 (13.3% of total
deposits) in non-interest bearing demand deposits; $5,486,232 (34.8% of total
deposits) in interest checking accounts; $200,156 (1.3% of total deposits) in
savings accounts; and $8,039,978 (51.0% of total deposits) in time deposits. As
the Bank continues to grow, management expects the deposit mix to become more
heavily weighted towards the higher costing time deposits, thus increasing the
average cost of funds and reducing the Bank's net interest margin.
CAPITAL
The Company had a total accumulated deficit of $613,414 as of December 31, 1998.
During 1998, the Company incurred a net loss of $520,322 compared to a net loss
of $93,092 through December 31, 1997. The third and fourth quarter of 1998
reflected 109 days of banking operations with full-time employees in the
Springfield and Rincon bank site, whereas costs through December 31, 1997 were
associated with early stage development of the Company when it had no earning
assets.
LIQUIDITY
Overnight interest bearing deposits (federal funds sold) with other banks were
$4,240,000. The current investment portfolio strategy is primarily to provide
liquidity for funding loans and initial operating expenditures and secondarily
for earnings enhancement.
The Bank has established a Federal Funds Purchase line of credit with its
correspondent bank, which totals $1,200,000. This line is unsecured and is
designed to provide the Bank with short-term liquidity.
<PAGE> 14
During its early months of operation the Company will limit investments to
highly liquid overnight investments in correspondent banks. For the foreseeable
future, the Bank will consider its investment portfolio primarily as a source
for liquidity and secondarily as a source for earnings.
PLAN OF OPERATIONS
GENERAL
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 noninterest income and to control noninterest expense. Since interest
rates are determined by market forces and economic conditions beyond the control
of the Company, its ability to generate interest income depends upon obtaining
an adequate spread between the rate earned on earning assets and the rate paid
on interest-bearing liabilities. Thus, a key performance measure for net
interest income is the interest margin or net yield, which is taxable-equivalent
net interest income divided by average earning assets.
Management does not expect the Company to make a quarterly profit until the
first quarter of 2000, while it establishes its position in the local market and
builds its banking services infrastructure. Management continues to believe that
the local market presents good opportunities for business development to support
a growing and profitable community bank. Despite the anticipated losses in the
first years of operations, the Company expects earnings from loans and
investments and other banking services as well as steady deposit growth to
provide sufficient liquidity for both the short and long term. The Company
intends to manage its loan growth so that deposit flows will provide funding for
all loans as well as cash reserves for working capital and short to intermediate
term, liquid investments.
INTEREST INCOME/INTEREST EXPENSE
Net interest income in 1998 was $317,692. In the 1997, the Company only incurred
interest expense of $6,129 from a line of credit guaranteed by the Company's
organizers. The working capital line of credit was paid off in September 1998.
Total interest income in 1998 was $478,192 ($165,937 earned in the third quarter
and the rest in the fourth quarter). Total interest expense on interest bearing
deposits and the line of credit was $160,500 for 1998.
Loan interest income ($242,607) and deposit interest expenses ($143,762) in 1998
were not incurred until the Bank opened on September 8, 1998.
ASSET QUALITY
The allowance for loan losses as of December 31, 1998 was $195,000. Since the
Bank's loan portfolio is only three months old, the Bank has no historical data
about loan losses on its portfolio on which to base projections for future
losses. Current loan quality analysis does not indicate potential loan losses.
Until more substantial evidence about potential loan losses is developed,
management believes the Bank should establish an allowance for loan losses that
will approximate 1.5% of total loans. At December 31, 1998, the allowance for
loan loss was 1.53% of total loans.
Management takes a number of factors into consideration when determining the
additions to be made to the loan loss allowance. As a new institution, the Bank
does not yet have a sufficient history of portfolio performance on which to base
additions. Accordingly, additions to the allowance are primarily based on
maintaining a ratio of the allowance for loan losses to total loans in a range
of 1.00% to 1.50%. This is based on national peer group ratios and Georgia
ratios, which reflect average ratios of 0.99% (national peer) and 1.50%
(Georgia). Under this methodology, charge-offs will increase the amount of
additions to the allowance and recoveries will reduce additions.
<PAGE> 15
As the Bank matures, the additions to the loan loss allowance will be based more
on historical performance, the detailed loan review and allowance adequacy
evaluations.
NON-INTEREST INCOME
Non-interest income in 1998 was $9,577. This consists of service charges on
deposit accounts and miscellaneous service fees. This income should grow with
the growth in the Bank's demand deposit account base.
NON-INTEREST EXPENSE
Non-interest expense, in 1998 was $652,591 compared to $86,962 in 1997. Salaries
and benefits increased substantially when the Bank commenced operations in
September 1998 with 15 employees compared to only one employee in 1997.
Occupancy costs increased in 1998 with the Company operating in rented office
space until the permanent bank building was completed. Other operating expenses
increased from $14,592 in 1997 to $176,756 in 1998. The 1998 expenses included
many expenses that were not necessary in 1997, such as data processing and
business development.
In 1997 premises and equipment (net of depreciation) were $399,909 and consisted
primarily of land and construction expenses for the Springfield office. In 1998
premises and equipment (net of depreciation) was $1,971,213 and consisted
primarily of construction of both offices, land and furniture and fixtures
acquired.
INTEREST RATE SENSITIVITY
The objective of interest rate sensitivity management is to minimize the effect
of interest rate changes on net interest margin while maintaining net interest
income at acceptable levels. The Company attempts to accomplish this objective
by structuring the balance sheet so that repricing opportunities exist for both
assets and liabilities in roughly equivalent amounts at approximately the same
time intervals. Imbalances in these repricing opportunities at any time
constitute interest rate sensitivity. An indicator of interest rate sensitivity
is the difference between interest rate sensitive assets and interest rate
sensitive liabilities. This difference is known as the interest rate sensitivity
gap.
<PAGE> 16
The Bank's interest rate sensitivity position at December 31, 1998 is set forth
in the table below:
<TABLE>
<CAPTION>
0-90 91-365 Over 1 Year Over
Days Days thru 5 Years 5 Years
---- ---- ------------ -------
<S> <C> <C> <C> <C>
INTEREST RATE SENSITIVE ASSETS:
Loans $1,263,282 $4,264,172 $7,042,903 $ 508,740
Securities -- -- -- --
Federal Funds Sold 4,240,000 -- -- --
---------- ---------- ---------- -----------
Total Interest Rate Sensitive Assets $5,503,282 $4,264,172 $7,042,903 $ 508,740
---------- ---------- ---------- -----------
INTEREST RATE SENSITIVE LIABILITIES:
Interest Bearing Demand Deposits $ -- $ -- $ -- $ 1,864,987
Savings and Money Market Deposits 200,156 -- -- 3,621,245
Time Deposits 535,170 4,033,366 3,471,442 --
Other Borrowings -- -- -- --
---------- ---------- ---------- -----------
Total Interest Rate Sensitive Liabilities $ 735,326 $4,033,366 $3,471,442 $ 5,486,232
---------- ---------- ---------- -----------
Interest Rate Sensitivity GAP $4,767,956 $ 230,806 $3,571,461 $(4,977,492)
---------- ---------- ---------- -----------
Cumulative Interest Rate Sensitivity GAP $4,767,956 $4,998,762 $8,570,223 $ 3,592,731
---------- ---------- ---------- -----------
Cumulative GAP as a % of total assets at December 31, 1998 23.46% 24.59% 42.17% 17.68%
---------- ---------- ---------- -----------
</TABLE>
The interest rate sensitivity table presumes that all loans and securities will
perform according to their contractual maturities when, in many cases, actual
loan terms are much shorter that the original terms and securities are subject
to early redemption. In addition, the table does not necessarily indicate the
impact of general interest rate movements on net interest margin since the
repricing of various categories of assets and liabilities is subject to
competitive pressures and customer needs. The Bank monitors and adjusts its
exposure to interest rate risks within specific policy guidelines based on its
view of current and expected market conditions.
It is the policy of the Bank to include savings and NOW accounts in the over
five year repricing period in calculating cumulative gap. This methodology is
based on the Bank's experience that these deposits represent "core" deposits of
the Bank and the repricing of these deposits does not move with the same
magnitude as general market rates. The Bank's rates for these deposits are
consistently in the mid-range for the market area and this has not had an
adverse effect on the Bank's ability to maintain these deposit accounts. The
Bank believes that placing these deposits in an earlier repricing period would
force the Bank to inappropriately shorten its asset maturities to obtain the
targeted gap range. This would leave the Bank exposed to falling interest rates
and unnecessarily reduce its net interest margin.
YEAR 2000 COMPLIANCE ISSUES
The Company utilizes and depends on data processing systems and software to
conduct its business. The approach of Year 2000 presents a problem because many
older computers were programmed to use two digits rather than four to define
the applicable year. Computer programs that have date-sensitive software may
recognize a date using "00" as the year 1900 rather than the year 2000, or
perhaps not be able to comprehend the date at all. Computer systems may compute
payment, interest delinquency or other figures important to the operations of
the Company based on the wrong date. This could result in internal
<PAGE> 17
systems failure or miscalculation, and also creates risk for the Company from
third parties with whom the Company deals on financial transactions.
THE COMPANY'S STATE OF READINESS
The Company and the Bank do not use proprietary computer hardware or software.
The Company has no hardware or software dependencies other than through the
Bank; therefore, all further corporate references in this section will be to the
Bank. Prior to opening for business in September 1998, the Bank adopted a
proposed Year 2000 plan to make the Bank Year 2000 ready. In connection with
opening the main office in September 1998 and the Rincon office in November
1998, management tried to insure that any purchases of hardware, software, forms
and other items were Year 2000 ready.
The Bank has defined the Year 2000 problem and has established a Year 2000
Committee. The Year 2000 Committee has developed a Policy Directive and
established an overall strategy and initial project plan. The Year 2000
Committee holds weekly meetings and reports to the Board of Directors on a
monthly basis on the progress of the Year 2000 plan.
Through a third party vendor, Compunet, Inc., the Bank has identified Year 2000
vulnerable hardware and software and has conducted the initial testing on its
personal computers. In addition, all forms have been reviewed to determine if
they are Year 2000 ready and form changes are being made as necessary.
The Bank prepared a Year 2000 budget and presented the budget to the Board of
Directors, which the Board of Directors approved on March 12, 1999. Management
realizes that amendments to the budget may be necessary if undetermined costs
arise from unforeseen circumstances.
EMPLOYEE AND CUSTOMER AWARENESS
The Bank believes it is extremely important to communicate information to
employees and customers about the Year 2000 issue. The Bank has conducted
employee awareness training designed to provide information about the Bank's
efforts to ensure that the Bank will have a problem-free transition into the
next century.
The Bank continues its communication efforts through statement stuffers, phone
calls and direct contact to provide information and assistance to customers to
minimize the risk of problems with the Year 2000. In addition, the Bank will
continue to provide training to employees to discuss the Bank's Year 2000
readiness and ways the employees can assist customers in becoming more
knowledgeable about the Year 2000.
Additionally, management has implemented Year 2000 Credit Risk Procedures to
identify any potential risks that may exist in the Bank's significant commercial
loan relationships. Management's current plans are to help the Bank's customers
understand the risks involved, to share the Bank's strategies and to encourage
those customers to satisfy their compliance requirements on time lines that are
consistent with those of the Bank. The Bank's credit review processes have also
been modified to address this risk.
THE RISKS OF THE COMPANY'S YEAR 2000 ISSUES
There can be no assurance that all hardware and software that the Bank will use,
or that the Bank's customers, vendors and utility companies will use, will be
Year 2000 compliant. The Bank's customers, vendors and utility companies may be
negatively affected by the Year 2000 and any difficulties incurred by them in
solving Year 2000 issues could negatively affect their ability to perform their
agreements with the Bank. The failure of the Bank's computer systems or other
applications could have a material adverse effect on the Company's results of
operations and financial condition.
<PAGE> 18
The most reasonably likely worst case Year 2000 scenario for the Bank appears to
be one in which electrical service or phone service were disrupted to the
community for an extended period of time. The most likely source of potential
problems currently appears to be with the utility companies, with electrical
service being the most critical of the utilities. The Bank can not operate its
systems without a continuous supply of electricity. The Bank recently requested
information from its utility companies regarding their Year 2000 readiness.
THE COMPANY'S CONTINGENCY PLANS
The Bank had completed its Year 2000 Contingency/Business Resumption Plan (the
"Contingency Plan") and presented it to the Board of Directors for approval on
April 9, 1999. The Contingency Plan is designed to achieve a level of emergency
preparedness that is broad in its scope, encompassing the risk of loss or
business disruption resulting from unexpected events ranging from equipment
failure to natural disasters. The Contingency Plan provides alternative measures
in providing continued services to our customers and identifies methods to
utilize in providing such services. The focus of the Contingency Plan is to give
direction to employees in each area of the Bank on how to perform their duties
during 1999 in the event of possible disruption to normal operations resulting
from Year 2000 issues as well as other possible disruptions. A particular
emphasis of the Contingency Plan is to educate and inform employees and
customers about Year 2000 readiness.
The foregoing are forward-looking statements reflecting management's current
assessment and estimates with respect to the Bank's Year 2000 compliance efforts
and the impact of Year 2000 issues on the Bank's business and operations.
Various factors could cause actual plans and results to differ materially from
those contemplated by such assessments, estimates and forward-looking
statements, many of which are beyond the control of the Bank. Some of these
factors include, but are not limited to representations by the Bank's vendors
and counterparties, technological advances, economic considerations and consumer
perceptions. The Bank's Year 2000 compliance program is an ongoing process
involving continued evaluation and may be subject to change in response to new
developments.
<PAGE> 19
ITEM 7. FINANCIAL STATEMENTS
CITIZENS EFFINGHAM BANCSHARES, INC. AND SUBSIDIARY
CONSOLIDATED FINANCIAL STATEMENTS AND SUPPLEMENTARY INFORMATION
YEAR ENDED DECEMBER 31, 1998 AND
PERIOD OF APRIL 3, 1997 (DATE OF INCEPTION) TO DECEMBER 31,1997
- --------------------------------------------------------------------------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
----
<S> <C>
INDEPENDENT AUDITORS' REPORT.................................................................. 1
FINANCIAL STATEMENTS:
Consolidated Balance Sheets................................................................. 2
Consolidated Statements of Changes in Shareholders' Equity.................................. 3
Consolidated Statements of Income........................................................... 4
Consolidated Statements of Cash Flows....................................................... 5
Notes to Consolidated Financial Statements.................................................. 6
</TABLE>
<PAGE> 20
INDEPENDENT AUDITORS' REPORT
Board of Directors
Citizens Effingham Bancshares, Inc. and Subsidiary
We have audited the accompanying consolidated balance sheets of Citizens
Effingham Bancshares, Inc. and Subsidiary as of December 31, 1998 and 1997, and
the related statements of income, changes in shareholders' equity, and cash
flows for the year ended December 31, 1998 and for the period of April 3, 1997
(Date of Inception) to December 31,1997. These financial statements are the
responsibility of the Bank'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 Citizens Effingham
Bancshares, Inc. and Subsidiary at December 31, 1998 and 1997, and the results
of its operations and its cash flows for the year ended December 31, 1998 and
the period of April 3, 1997 (Date of Inception) to December 31, 1997, in
conformity with generally accepted accounting principles.
January 6, 1999
Dublin, Georgia
<PAGE> 21
CITIZENS EFFINGHAM BANCSHARES, INC. AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
As of
December 31,
1998 1997
----------- --------
<S> <C> <C>
Assets
Cash and due from banks $ 1,283,185 $ 3,158
Federal funds sold 4,240,000 --
----------- --------
Total cash and cash equivalents 5,523,185 3,158
----------- --------
Loans, net of unearned income 12,922,815 --
Less - allowance for loan losses (195,000) --
----------- --------
Loans, net 12,727,815 --
----------- --------
Bank premises and equipment, net 1,971,213 399,909
Other assets 102,409 38,980
----------- --------
TOTAL ASSETS $20,324,622 $442,047
=========== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
Deposits:
Non-interest bearing $ 2,026,091 $ --
Interest-bearing 13,726,366 --
----------- --------
Total deposits 15,752,457 --
Short-term notes payable -- 532,500
Accrued expenses and other liabilities 65,579 2,639
----------- --------
Total liabilities 15,818,036 535,139
----------- --------
Commitments and contingencies
Shareholders' Equity:
Common stock, $1 par value, authorized 20,000,000 shares, issued
and outstanding 512,000 shares 512,000 --
Paid-in capital surplus 4,608,000 --
Accumulated deficit (392,769) --
Deficit accumulated during development stage (220,645) (93,092)
----------- --------
Total shareholders' equity 4,506,586 (93,092)
----------- --------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $20,324,622 $442,047
=========== ========
</TABLE>
See Accompanying Notes to Consolidated Financial Statements
<PAGE> 22
CITIZENS EFFINGHAM BANCSHARES, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Deficit
Additional accumulated
Common Paid-in during Accumulated
Stock Capital development stage deficit Total
----- ------- ----------------- ------- -----
<S> <C> <C> <C> <C> <C>
BALANCE, DECEMBER 31, 1996 $ -- $ -- $ -- $ -- $ --
----------
Comprehensive income:
Net loss -- -- (93,092) -- (93,092)
Valuation allowance adjustment on
securities available for sale -- -- -- -- --
----------
Total comprehensive income (93,092)
----------
Initial issuance of stock -- -- -- -- --
--------- ---------- --------- --------- ----------
BALANCE, DECEMBER 31, 1997 $ -- $ -- $ (93,092) $ -- $ (93,092)
----------
Comprehensive income:
Net loss -- -- (127,553) (392,769) (520,322)
Valuation allowance adjustment on
securities available for sale -- -- -- -- --
----------
Total comprehensive income (520,322)
----------
Initial issuance of stock 512,000 4,608,000 -- -- 5,120,000
--------- ---------- --------- --------- ----------
BALANCE, DECEMBER 31, 1998 $ 512,000 $4,608,000 $(220,645) $(392,769) $4,506,586
========= ========== ========= ========= ==========
</TABLE>
See Accompanying Notes to Consolidated Financial Statements
<PAGE> 23
CITIZENS EFFINGHAM BANCSHARES, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF INCOME
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Year Ended Period Ended
December 31, December 31,
1998 1997
--------- ------------
<S> <C> <C>
INTEREST AND DIVIDEND INCOME:
Interest and fees on loans $ 242,607 $ --
Income on federal funds sold 103,354 --
Other interest 132,231 --
--------- --------
Total interest income 478,192 --
--------- --------
INTEREST EXPENSE:
Deposits 143,762 --
Long-term debt 16,738 6,129
--------- --------
Total interest expense 160,500 6,129
--------- --------
Net interest income before loan losses 317,692 (6,129)
Less - provision for loan losses 195,000 --
--------- --------
Net interest income after provision for loan losses 122,692 (6,129)
--------- --------
NONINTEREST INCOME:
Service charges on deposit accounts 8,661 --
Other income 916 --
--------- --------
Total noninterest income 9,577 --
--------- --------
NONINTEREST EXPENSES:
Salaries 311,695 63,333
Employee benefits 18,887 4,197
Net occupancy expenses 21,386 10,970
Equipment rental and depreciation of equipment 47,389 --
Organization expenses 76,478 --
Other expenses 176,756 8,463
--------- --------
Total noninterest expense 652,591 86,963
--------- --------
LOSS BEFORE INCOME TAXES (520,322) (93,092)
Less - provision for income taxes -- --
--------- --------
NET LOSS $(520,322) $(93,092)
========= ========
EARNINGS (LOSS) PER SHARE:
Basic $ (1.02) $ --
========= ========
Diluted $ (1.02) $ --
========= ========
</TABLE>
See Accompanying Notes to Consolidated Financial Statements
<PAGE> 24
CITIZENS EFFINGHAM BANCSHARES, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Year Ended Period Ended
December 31, December 31,
1998 1997
------------ -------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $ (520,322) (93,092)
Adjustments to reconcile net loss to net cash used in
operating activities:
Provision for loan losses 195,000 --
Depreciation 35,019 --
Changes in accrued income and other assets (63,428) --
Changes in accrued expenses and other liabilities 62,939 2,639
------------ -------
Net cash used in operating activities (290,792) (90,453)
------------ -------
CASH FLOWS FROM INVESTING ACTIVITIES:
Net change in loans made to customers (12,922,815) --
Property and equipment expenditures (1,606,323) --
Capital expenditures -- (399,909)
Organizaton costs -- (38,980)
------------ -------
Net cash used in investing activities (14,529,138) (438,889)
------------ -------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net increase in deposits 15,752,457 --
Proceeds from stock issuance 5,120,000 --
Payments on short-term borrowings (532,500) --
Proceeds from issuance of debt -- 532,500
------------ -------
Net cash provided by financing activities 20,339,957 532,500
------------ -------
NET INCREASE IN CASH AND CASH EQUIVALENTS 5,520,027 3,158
CASH AND CASH EQUIVALENTS, BEGINNING OF YEAR 3,158 --
------------ -------
CASH AND CASH EQUIVALENTS, END OF YEAR $ 5,523,185 $ 3,158
============ =========
</TABLE>
See Accompanying Notes to Consolidated Financial Statements
<PAGE> 25
CITIZENS EFFINGHAM BANCSHARES, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEAR ENDED DECEMBER 31, 1998 AND PERIOD OF APRIL 3, 1997 (INCEPTION) TO DECEMBER
31, 1997
- --------------------------------------------------------------------------------
A. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
1. BASIS OF PRESENTATION AND CONSOLIDATION - The consolidated financial
statements include the accounts of Citizens Effingham Bancshares, Inc.
(the "Company") and its wholly owned subsidiary, Citizens Bank of
Effingham (the "Bank"). All significant intercompany balances and
transactions have been eliminated in consolidation.
2. REPORTING ENTITY - The Company is a bank holding company with one bank
subsidiary. At December 31, 1998, the Company owned 100% of the
outstanding stock of the Bank. The Bank began operations in September
1998, as Citizens Bank of Effingham, and operates as a state chartered
bank in Springfield and Rincon, Georgia. The Bank provides a variety of
financial services to individuals and small businesses through its
office in South Georgia. Its primary deposit products are checking,
savings and term certificate accounts and its primary lending products
are residential and commercial mortgage loans.
3. SECURITIES - The classification of securities is determined at the date
of purchase. Gains or losses on the sale of securities are recognized
on a specific identification basis.
Securities available for sale, primarily debt securities, are recorded
at fair value with unrealized gains or losses (net of tax effect)
excluded from earnings and reported in other comprehensive income.
Securities available for sale will be used as a part of the Bank's
interest rate risk management strategy and may be sold in response to
changes in interest rates, changes in prepayment risk, and other
factors.
Held to maturity securities, primarily debt securities, are stated at
cost, net of the amortization of premium and the accretion of discount.
The Bank intends and has the ability to hold such securities on a
long-term basis or until maturity.
Mortgage-backed securities represent participating interests in pools
of long-term first mortgage loans originated and serviced by issuers of
the securities. Mortgage-backed securities are carried at unpaid
principal balances, adjusted for unamortized premiums and unearned
discounts.
The market value of securities is generally based on quoted market
prices. If a quoted market price is not available, market value is
estimated using quoted market prices for similar securities.
Premiums and discounts are recognized in interest income using the
interest method over the period to maturity.
As of December 31, 1998, the Bank did not own any investment
securities.
4. LOANS AND INTEREST INCOME - Loans are stated at the amount of unpaid
principal, reduced by net deferred loan fees, unearned discounts, and a
valuation allowance for possible loan losses. Interest on simple
interest installment loans and other loans is calculated by using the
simple interest method on daily balances of the principal amount
outstanding. The accrual of interest on impaired loans is discontinued
when, in management's opinion, the borrower may be unable to meet
payments as they become due. When interest accrual is discontinued, all
unpaid accrued interest is reversed. Interest income is subsequently
recognized only to the extent cash payments are received.
5. ALLOWANCE FOR LOAN LOSSES - The allowance for loan losses is available
to absorb losses inherent in the credit extension process. The entire
allowance is available to absorb losses related to the loan and lease
portfolio and other extensions of credit, including off-balance sheet
credit exposures. Credit exposures deemed to be uncollectible are
charged against the allowance for loan losses. Recoveries of previously
charged-off amounts are credited to the allowance for loan losses.
Additions to the allowance for credit losses are made by charges to the
provision for credit losses.
<PAGE> 26
CITIZENS EFFINGHAM BANCSHARES, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEAR ENDED DECEMBER 31, 1998 AND PERIOD OF APRIL 3, 1997 (INCEPTION) TO DECEMBER
31, 1997
- --------------------------------------------------------------------------------
The allowance for loan losses is maintained at a level which, in
management's judgement, is adequate to absorb credit losses inherent in
the loan portfolio. The amount of the allowance is based on
management's evaluation of the collectibility of the loan portfolio,
including the nature of the portfolio, credit concentrations, trends in
historical loss experience, specific impaired loans, economic
conditions, and other risks inherent in the portfolio including the
effects of Year 2000. Since the Bank's loan portfolio is only three
months old, the Bank has no historical data about loan losses on its
portfolio on which to base projections for future losses. Current loan
quality analysis does not indicate potential loan losses. Until more
substantial evidence about potential loan losses is developed,
management believes the Bank should establish an allowance for loan
losses that will approximate 1.5% of total loans. At December 31, 1998,
the allowance for loan loss was 1.53% of total loans.
Allowances for impaired loans are generally determined based on
collateral values or the present value of estimated cash flows.
Although management uses available information to recognize losses on
loans, because of uncertainties associated with local economic
conditions, collateral values, and future cash flows on impaired loans,
it is reasonably possible that a material change could occur in the
allowance for loan losses in the near term. However, the amount of the
change that is reasonably possible cannot be estimated.
A loan is considered impaired when, based on current information and
events, it is probable that a creditor will not be able to collect the
scheduled payments of principal or interest when due according to the
contractual terms of the loan agreement. Factors considered by
management in determining impairment include payment status, collateral
value, and the probability of collecting scheduled principal and
interest payments when due. Loans that experience insignificant payment
delays and payment shortfalls generally are not classified as impaired.
Management determines the significance of payment delays and payment
shortfalls on a case-by-case basis, taking into consideration all of
the circumstances surrounding the loan and the borrower, including the
length of the delay, the reasons for the delay, the borrower's prior
payment record, and the amount of the shortfall in relation to the
principal and interest owed. Impairment is measured on a loan by loan
basis by either the present value of expected future cash flows
discounted at the loan's effective interest rate, the loan's obtainable
market price, or the fair value of the collateral if the loan is
collateral dependent. Substantially all of the Bank's loans which have
been identified as impaired have been measured by the fair value of
existing collateral.
Large groups of smaller balance homogenous loans are collectively
evaluated for impairment. Accordingly, the Company does not separately
identify individual consumer loans for impairment disclosures.
6. PREMISES AND EQUIPMENT - Premises and equipment are stated at cost,
less accumulated depreciation. Depreciation is charged to operating
expenses over the estimated useful lives of the assets and is computed
on the straight-line method. Costs of major additions and improvements
are capitalized. Expenditures for maintenance and repairs are charged
to operations as incurred. Gains or losses from disposition of property
are reflected in operations and the asset account is reduced.
7. OTHER REAL ESTATE OWNED - Other real estate owned, acquired principally
through foreclosure, is stated at the lower of cost or net realizable
value. Loan losses incurred in the acquisition of these properties are
charged against the allowance for possible loan losses at the time of
foreclosure. Subsequent write-downs of other real estate owned are
charged against the current period's expense.
8. INCOME TAXES - In 1998, the Bank adopted Statement of Financial
Accounting Standards No. 109, "Accounting for Income Taxes," which
requires recognition of deferred tax liabilities and assets for the
expected future tax consequences of events that have been included in
the financial statements or tax returns. Under this method, deferred
tax liabilities and assets are determined based on the difference
between the financial statement and tax
<PAGE> 27
CITIZENS EFFINGHAM BANCSHARES, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEAR ENDED DECEMBER 31, 1998 AND PERIOD OF APRIL 3, 1997 (INCEPTION) TO DECEMBER
31, 1997
- --------------------------------------------------------------------------------
bases of assets and liabilities using enacted tax rates in effect for
the year in which the differences are expected to reverse.
The Company and the Bank file a consolidated income tax return. The
Bank computes its income tax expense as if it filed an individual
return except that it does not get any portion of the surtax
allocation. Any benefits or disadvantages of the consolidation are
absorbed by the Company. The Bank pays its allocation of federal income
taxes to the Company or receives payment from the Company to the extent
that tax benefits are realized.
9. CASH AND CASH EQUIVALENTS - For purposes of reporting cash flows, cash
and cash equivalents include cash on hand, amounts due from banks,
highly liquid debt instruments purchased with an original maturity of
three months or less, and federal funds sold. Generally, federal funds
are purchased and sold for one-day periods. Interest bearing deposits
in other banks with original maturities of less than three months are
included.
10. USE OF ESTIMATES - 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 disclosure of contingent assets
and liabilities at the date of the financial statements and the
reported amounts of revenues and expenses during the reporting period.
Actual results could differ from those estimates.
The determination of the adequacy of the allowance for loan losses is
based on estimates that are particularly susceptible to significant
changes in the economic environment and market conditions. In
connection with the determination of the estimated losses on loans,
management obtains independent appraisals for significant collateral.
The Bank's loans are generally secured by specific items of collateral
including real property, consumer assets, and business assets. Although
the subsidiary has a diversified loan portfolio, a substantial portion
of its debtors' ability to honor their contracts is dependent on local
economic conditions.
While management uses available information to recognize losses on
loans, further reductions in the carrying amounts of loans may be
necessary based on changes in local economic conditions. In addition,
regulatory agencies, as an integral part of their examination process,
periodically review the estimated losses on loans. Such agencies may
require the Bank to recognize additional losses based on their
judgments about information available to them at the time of their
examination. Because of these factors, it is reasonably possible that
the estimated losses on loans may change materially in the near term.
However, the amount of the change that is reasonably possible cannot be
estimated.
11. ADVERTISING COSTS - It is the policy of the Bank to expense advertising
costs as they are incurred. The Bank does not engage in any
direct-response, advertising and accordingly has no advertising costs
reported as assets on its balance sheet. Amounts charged to advertising
expense for the year ended December 31, 1998 were $10,770.
12. EARNINGS (LOSS) PER COMMON SHARE - Basic earnings (loss) per share
represents income or loss available to common shareholders divided by
the weighted-average number of common shares outstanding during the
period. Diluted earnings or loss per share reflects additional common
shares that would have been outstanding if dilutive potential common
shares had been issued, as well as any adjustment to income that would
result from the assumed conversion.
<PAGE> 28
CITIZENS EFFINGHAM BANCSHARES, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEAR ENDED DECEMBER 31, 1998 AND PERIOD OF APRIL 3, 1997 (INCEPTION) TO DECEMBER
31, 1997
- --------------------------------------------------------------------------------
Earnings (loss) per common share have been computed based on the
following:
<TABLE>
<CAPTION>
Year Ended
December 31,
1998
-----------
<S> <C>
Net loss $(520,322)
Less: Preferred stock dividends --
---------
Net loss applicable to common stock $(520,322)
=========
Weighted average number of common shares outstanding 512,000
Effect of dilutive options, warrants, etc --
---------
Weighted average number of common shares outstanding
used to calculate diluted earnings per common share 512,000
=========
</TABLE>
B. LOANS
The following is a summary of the loan portfolio by principal
categories at December 31, 1998 and 1997:
<TABLE>
<CAPTION>
1998 1997
------------ --------
<S> <C> <C>
Mortgage loans on real estate:
Residential 1-4 family $ 2,173,147 $ --
Construction 1,143,825 --
------------ --------
Total mortgage loans on real estate 3,316,972 --
------------ --------
Commercial loans 7,676,222 --
------------ --------
Other loans-
Personal 1,929,621 --
------------ --------
Subtotal 12,922,815 --
Less:
Allowance for loan losses (195,000) --
------------ --------
Loans, net $ 12,727,815 $ --
============ ========
</TABLE>
Overdrafts included in loans were $2,263 and $ -0- at December 31, 1998
and 1997, respectively.
<PAGE> 29
CITIZENS EFFINGHAM BANCSHARES, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEAR ENDED DECEMBER 31, 1998 AND PERIOD OF APRIL 3, 1997 (INCEPTION) TO DECEMBER
31, 1997
- --------------------------------------------------------------------------------
C. ALLOWANCE FOR LOAN LOSSES
A summary of changes in allowance for loan losses of the Bank for the
year ended December 31, 1998 and 1997 is as follows:
<TABLE>
<CAPTION>
1998 1997
-------- --------
<S> <C> <C>
Beginning Balance $ -- $ --
Add - Provision for possible loan losses 195,000 --
-------- --------
Subtotal 195,000 --
-------- --------
Less:
Loans charged off -- --
Recoveries on loans previously charged off -- --
-------- --------
Net loans charged off -- --
-------- --------
Balance, end of year $195,000 $ --
======== ========
</TABLE>
D. BANK PREMISES AND EQUIPMENT
The following is a summary of asset classifications and depreciable
lives for the Bank at December 31, 1998 and 1997:
<TABLE>
<CAPTION>
Useful Lives
(Years) 1998 1997
------------ ---------- ---------
<S> <C> <C> <C>
Land $ 340,666 $ 340,666
Banking house and improvements 8 - 40 1,164,418 -
Equipment, furniture, and fixtures 5 - 10 501,148 4,500
Construction in progress - 54,743
---------- ---------
Total 2,006,232 399,909
Less - accumulated depreciation (35,019) -
---------- ---------
Bank premises and equipment, net $1,971,213 $ 399,909
========== =========
</TABLE>
Depreciation included in operating expenses amounted to $35,019 and $
-0- in 1998 and 1997, respectively.
Pursuant to the terms of noncancelable lease agreements in effect at
December 31, 1998, pertaining to banking premises and equipment, future
minimum rent commitments under various operating leases are as follows:
<PAGE> 30
CITIZENS EFFINGHAM BANCSHARES, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEAR ENDED DECEMBER 31, 1998 AND PERIOD OF APRIL 3, 1997 (INCEPTION) TO DECEMBER
31, 1997
- --------------------------------------------------------------------------------
<TABLE>
<S> <C>
1999 $ 3,274
2000 3,602
2001 3,961
2002 4,357
2003 4,793
Thereafter 11,001
--------
Total future minimum rent commitments $ 30,988
========
</TABLE>
The leases contain options to extend for periods from four to seven
years. Total rent expense for the year ended December 31, 1998 amounted
to $9,000.
E. DEPOSITS
The aggregate amount of time deposits exceeding $100,000 at December
31, 1998 and 1997 was $3,236,195 and $ -0-, respectively, and the Bank
had liabilities in NOW accounts of $1,006,020 and $ -0- at December 31,
1998 and 1997, respectively.
At December 31, 1998, the scheduled maturities of time deposits are as
follows:
<TABLE>
<S> <C>
1999 $ 4,568,536
2000 2,127,104
2001 676,462
2002 60,000
2003 607,876
2004 and thereafter -
------------
Total time deposits $ 8,039,978
============
</TABLE>
F. SHORT-TERM BORROWINGS
The Company had a line of credit with The Savannah Bank, N. A. for a
total of $750,000 with interest at the prime rate as established by The
Savannah Bank, N. A. At various times during the year, the subsidiary
was advanced funds against this line as of December 31, 1998 and 1997
the balance was $-0- and $532,000, respectively.
The Bank had a line of credit for federal funds purchased of $1,200,000
with a correspondent institution as of December 31, 1998. The Bank had
not drawn from this line of credit during the year ended December 31,
1998.
G. PROVISION FOR INCOME TAXES
The provision for income taxes for the year ended December 31, 1998 and
1997 was computed as follows:
<TABLE>
<CAPTION>
1998 1997
------- --------
<S> <C> <C>
Current tax expense $ - $ -
Deferred tax expense (benefit) - -
----- ------
Net provision for income taxes $ - $ -
===== ======
</TABLE>
<PAGE> 31
CITIZENS EFFINGHAM BANCSHARES, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEAR ENDED DECEMBER 31, 1998 AND PERIOD OF APRIL 3, 1997 (INCEPTION) TO DECEMBER
31, 1997
- --------------------------------------------------------------------------------
As of December 31, 1998, the Company has a net operating loss of
approximately $333,770 for tax purposes, which will begin to expire in the
year 2013. The Company has a deferred tax asset of approximately $206,970
and a corresponding valuation account of $206,970 resulting in a record net
deferred tax asset of $-0-.
Deferred income taxes are reflected for certain timing differences between
book and taxable income and will be reduced in future years as these timing
differences reverse. The reasons for the difference between the actual tax
expense and tax computed at the federal income tax rate are as follows:
<TABLE>
<CAPTION>
1998 1997
--------- -------
<S> <C> <C>
Tax on pretax income at statutory rate $(176,909) $ --
Effect of unrealized net operating loss carryovers 113,482 --
Non-deductible social club dues 1,042 --
Other permanent tax differences 62,385 --
Total $ -- $ --
--------- -------
Net effective tax rate 0.0% 0.0%
========= =======
</TABLE>
The sources and tax effects of temporary differences that give rise to
significant portions of deferred income tax assets and liabilities are
as follows:
<TABLE>
<CAPTION>
1998 1997
--------- -------
<S> <C> <C>
Deferred Income Tax Asset :
Provision for loan losses, net $ 62,691 $ --
Organization costs 53,809 --
NOL carryover 113,482 --
--------- -------
Total deferred income tax assets 229,982 --
--------- -------
Deferred Income Tax Liabilities -
Depreciation 23,012 --
--------- -------
Net deferred tax asset 206,970 --
Less - valuation reserve (206,970) --
--------- -------
Recorded net deferred tax asset $ - $ --
========= =======
</TABLE>
H. YEAR 2000 COMPLIANCE ISSUES
The Bank is in the process of evaluating the potential effects of the
Year 2000 problem on its operating and environmental systems. This
potential problem exists due to many older computers having been
programmed to recognize only the last two digits of a year i.e., "98"
is for the year 1998. Accordingly, with the new millenium approaching,
these computers will potentially recognize the year 2000 - "00" - as
the year 1900, or just not be able to comprehend the date, thus,
potentially affecting the accuracy of, or ability to, process any date
sensitive functions.
The Bank has adopted a plan for bringing its systems into compliance so
that the potential problems should not occur.
<PAGE> 32
I. LIMITATION ON DIVIDENDS
CITIZENS EFFINGHAM BANCSHARES, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEAR ENDED DECEMBER 31, 1998 AND PERIOD OF APRIL 3, 1997 (INCEPTION) TO DECEMBER
31, 1997
- --------------------------------------------------------------------------------
The Board of Directors of any state-chartered bank in Georgia may
declare and pay cash dividends on its outstanding capital stock without
any request for approval of the Bank's regulatory agency if the
following conditions are met:
1) Total classified assets at the most recent examination of the
bank do not exceed eighty (80) percent of equity capital.
2) The aggregate amount of dividends declared in the calendar
year does not exceed fifty (50) percent of the prior year's
net income.
3) The ratio of equity capital to adjusted total assets shall not
be less than six (6) percent.
As of December 31, 1998, the Bank could not pay dividends to the
Company. Dividends paid by the Bank are the primary source of funds
available to the Company. In addition to the above requirements, new
banks are generally prevented from paying dividends until they are
cumulatively profitable.
J. FINANCIAL INSTRUMENTS
The Bank is a party to financial instruments with off-balance-sheet
risk in the normal course of business to meet the financing needs of
its customers. These financial instruments include commitments to
extend credit and standby letters of credit. Those instruments involve,
to varying degrees, elements of credit risk and interest rate risk in
excess of the amount recognized in the balance sheet. The contract or
notional amounts of those instruments reflect the extent of involvement
the Bank has in those particular financial instruments.
The Bank'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
notional amount of those instruments. The Bank uses the same credit
policies in making commitments and conditional obligations as it does
for on-balance-sheet instruments.
The Bank does require collateral or other security to support financial
instruments with credit risk.
<TABLE>
<CAPTION>
Contract Amount
---------------
<S> <C>
Financial instruments whose contract amounts represent credit risk:
Commitments to extend credit $2,708,000
Standby letters of credit -
----------
Total $2,708,000
==========
</TABLE>
Commitments to extend credit are agreements to lend to a customer as
long as there is no violation of any condition established in the
contract. Commitments generally have fixed expiration dates or other
termination clauses and may require payment of a fee. Since many of the
commitments are expected to expire without being drawn upon, the total
commitment amounts do not necessarily represent future cash
requirements. The Bank evaluates each customer's creditworthiness on a
case-by-case basis. The amount of collateral obtained if deemed
necessary by the Bank upon extension of credit is based on management's
credit evaluation. Collateral held varies but may include accounts
receivable, inventory, property, plant and equipment, and
income-producing commercial properties.
Standby letters of credit are conditional commitments issued by the
Bank to guarantee the performance of a customer to a third party. Those
guarantees are primarily issued to support public and private borrowing
arrangements, including commercial paper, bond financing, and similar
transactions. All letters of credit are due within one year of the
original
<PAGE> 33
CITIZENS EFFINGHAM BANCSHARES, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEAR ENDED DECEMBER 31, 1998 AND PERIOD OF APRIL 3, 1997 (INCEPTION) TO DECEMBER
31, 1997
- --------------------------------------------------------------------------------
commitment date. The credit risk involved in issuing letters of credit
is essentially the same as that involved in extending loan facilities
to customers.
K. COMMITMENTS AND CONTINGENCIES
In the ordinary course of business, the Company has various outstanding
commitments and contingent liabilities that are not reflected in the
accompanying consolidated financial statements. None of these
expenditures are in any way related to complying for the Year 2000.
L. RELATED PARTY TRANSACTIONS
In the ordinary course of business, the Bank has direct and indirect
loans outstanding to or for the benefit of certain executive officers
and directors. These loans were made on substantially the same terms as
those prevailing, at the time made, for comparable loans to other
persons and did not involve more than the normal risk of collectibility
or present other unfavorable features. The following is a summary of
activity during 1998 with respect to such loans to these individuals:
<TABLE>
<S> <C>
Balances at December 31, 1997 $ --
New loans 964,000
Repayments --
--------
Balances at December 31, 1998 $964,000
========
</TABLE>
The Bank also had deposits from these related parties of approximately
$1,044,539 at December 31, 1998.
M. DISCLOSURES RELATING TO STATEMENTS OF CASH FLOWS
Interest and Income Taxes - Cash paid during the years for interest and
income taxes was as follows:
<TABLE>
<CAPTION>
Period of April 3,
1997 (Date of
Inception) to
December 31, 1998 December 31, 1997
----------------- ------------------
<S> <C> <C>
Interest on deposits $ 100,355 $ 4,497
========== =========
Income taxes, net $ - $ -
========== =========
</TABLE>
N. CREDIT RISK CONCENTRATION
The Bank grants agribusiness, commercial, and residential loans to its
customers. Although the Bank has a diversified loan portfolio, a
substantial portion of its debtors' ability to honor their contracts is
dependent on the area's economic stability. The primary trade area for
the Bank is generally that area within fifty miles in each direction of
the Bank.
The distribution of commitments to extend credit approximates the
distribution of loans outstanding. Commercial and standby letters of
credit were granted primarily to commercial borrowers. The Bank, as a
matter of policy, does not extend credit in excess of the legal lending
limit to any single borrower or group of related borrowers.
<PAGE> 34
CITIZENS EFFINGHAM BANCSHARES, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEAR ENDED DECEMBER 31, 1998 AND PERIOD OF APRIL 3, 1997 (INCEPTION) TO DECEMBER
31, 1997
- --------------------------------------------------------------------------------
The Bank maintains its cash balances in various financial institutions.
Accounts at each institution are secured by the Federal Deposit
Insurance Corporation up to $100,000. Uninsured balances aggregate to
$500,197 at December 31, 1998.
O. FAIR VALUES OF FINANCIAL INSTRUMENTS
SFAS No. 107, Disclosures about Fair Value of Financial Instruments
requires disclosure of fair value information about financial
instruments, whether or not recognized on the face of the balance
sheets, for which it is practicable to estimate that value. The
assumptions used in the estimation of the fair value of Bank's
financial instruments are detailed below. Where quoted prices are not
available, fair values are based on estimates using discounted cash
flows and other valuation techniques. The use of discounted cash flows
can be significantly affected by the assumptions used, including the
discount rate and estimates of future cash flows. The following
disclosures should not be considered as representative of the
liquidation value of the Bank, but rather a good-faith estimate of the
increase or decrease in value of financial instruments held by the Bank
since purchase, origination, or issuance.
Cash and Short-Term Investments - For cash, due from banks, federal
funds sold and interest-bearing deposits with other banks, the carrying
amount is a reasonable estimate of fair value.
Investment Securities Held to Maturity and Securities Available for
Sale - Fair values for investment securities are based on quoted market
prices.
Loans and Mortgage Loans Held for Sale - The fair value of fixed rate
loans is estimated by discounting the future cash flows using the
current rates at which similar loans would be made to borrowers with
similar credit ratings. For variable rate loans, the carrying amount is
a reasonable estimated of fair value.
Deposit Liabilities - The fair value of demand deposits, savings
accounts and certain money market deposits is the amount payable on
demand at the reporting date. The fair value of fixed maturity
certificates of deposit is estimated by discounting the future cash
flows using the rates currently offered for deposits of similar
remaining maturities.
Federal Funds Purchased - The carrying value of federal funds purchased
approximates their fair value.
FHLB Advances - The fair value of the Bank's fixed rate borrowings are
estimated using discounted cash flows, based on Bank's current
incremental borrowing rates for similar types of borrowing
arrangements.
Long-Term Debt and Convertible Subordinated Debentures - Rates
currently available to the Bank for debt with similar terms and
remaining maturities are used to estimate fair value of existing debt.
Commitments to Extend Credit, Standby Letters of Credit and Financial
Guarantees Written - Because commitments to extend credit and standby
letters of credit are made using variable rates, the contract value is
a reasonable estimate of fair value.
Limitations - Fair value estimates are made at a specific point in
time, based on relevant market information and information about the
financial instrument. These estimates do not reflect any premium or
discount that could result from offering for sale at one time the
Bank's entire holdings of a particular financial instrument. Because no
market exists for a significant portion of the Bank's financial
instruments, fair value estimates are based on many judgments. These
estimates are subjective in nature and involve uncertainties and
matters of significant judgement and therefore cannot be determined
with precision. Changes in assumptions could significantly affect the
estimates.
<PAGE> 35
CITIZENS EFFINGHAM BANCSHARES, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEAR ENDED DECEMBER 31, 1998 AND PERIOD OF APRIL 3, 1997 (INCEPTION) TO DECEMBER
31, 1997
- --------------------------------------------------------------------------------
Fair value estimates are based on existing on and off-balance sheet
financial instruments without attempting to estimate the value of
anticipated future business and the value of assets and liabilities
that are not considered financial instruments. Significant assets and
liabilities that are not considered financial instruments include the
mortgage banking operation, brokerage network, deferred income taxes,
premises and equipment and goodwill. In addition, the tax ramifications
related to the realization of the unrealized gains and losses can have
a significant effect on fair value estimates and have not been
considered in the estimates.
The carrying amount and estimated fair values of the Bank's financial
instruments at December 31, 1998 are as follows:
P. OPERATING EXPENSES
Components of other operating expenses greater than 1% of total
interest income and other income for the period ended December 31, 1998
is:
<TABLE>
<CAPTION>
1998 1997
----------------------------- ------------------------
Carrying Estimated Fair Carrying Estimated Fair
Amount Value Amount Value
----------- -------------- -------- --------------
<S> <C> <C> <C> <C>
ASSETS:
Cash and short-term investments $ 5,523,185 $ 5,523,185 $3,158 $3,158
Loans 12,922,815 12,937,219 -- --
LIABILITY-
Deposits 15,752,457 15,769,498 -- --
UNRECOGNIZED FINANCIAL INSTRUMENTS:
Commitments to extend credit 2,708,000 2,708,000 -- --
</TABLE>
Q. REGULATORY MATTERS
The Bank is subject to various regulatory capital requirements
administered by the federal banking agencies. Failure to meet minimum
capital requirements can initiate certain mandatory and possibly
additional discretionary actions by regulators that, if undertaken,
could have a direct material effect on the Bank's financial statements.
Under capital
<PAGE> 36
CITIZENS EFFINGHAM BANCSHARES, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEAR ENDED DECEMBER 31, 1998 AND PERIOD OF APRIL 3, 1997 (INCEPTION) TO DECEMBER
31, 1997
- --------------------------------------------------------------------------------
adequacy guidelines and the regulatory framework for prompt corrective
action, the Bank must meet specific capital guidelines that involve
quantitative measures of the Bank's assets, liabilities, and certain
off-balance-sheet items as calculated under regulatory accounting
practices. The Bank's capital amounts and classification are also
subject to qualitative judgments by the regulators about components,
risk weightings, and other factors.
Quantitative measures established by regulation to ensure capital
adequacy require the Bank to maintain minimum amounts and ratios (set
forth in the table below) of total risk-based and Tier I capital (as
defined in the regulations) to risk-weighted assets (as defined), and
of Tier I capital (as defined) to average assets (as defined).
Management believes, as of December 31, 1998, the Bank meets all
capital adequacy requirements to which it is subject. As of December
31, 1998, the most recent notification from the State Department of
Banking and Finance 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, and
Tier I leverage ratios as set forth in the table. There are no
conditions or events since that notification that management believes
have changed the institution's category.
The Bank's actual capital amounts and ratios are also presented in the
Table.
<TABLE>
<CAPTION>
To Be Well Capitalized
For Capital Under Prompt Corrective
Actual Adequacy Purposes Action Provisions
----------------- ----------------- -----------------------
Amount Ratio Amount Ratio Amount Ratio
------- ------ ------- ------ -------- ---------
<S> <C> <C> <C> <C> <C> <C>
AS OF DECEMBER 31, 1998:
Total Risk-Based Capital To
Risk-Weighted Assets 4,638,000 14.5% 1,220,000 > 8.0% 1,525,000 > 10.0%
- -
Tier I Capital To
Risk-Weighted Assets 4,443,000 13.1% 610,000 > 4.0% 9,148,000 > 6.0%
- -
Tier I Capital To
Average Assets 4,443,000 8.4% 669,000 > 4.0% 837,000 > 5.0%
- -
</TABLE>
<PAGE> 37
CITIZENS EFFINGHAM BANCSHARES, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEAR ENDED DECEMBER 31, 1998 AND PERIOD OF APRIL 3, 1997 (INCEPTION) TO DECEMBER
31, 1997
- --------------------------------------------------------------------------------
R. CONDENSED FINANCIAL STATEMENTS (PARENT COMPANY ONLY)
Condensed parent company financial information on Citizens Effingham
Bancshares, Inc. at December 31, 1998 is as follows:
<TABLE>
<CAPTION>
As of
BALANCE SHEETS December 31,
1998
------------
<S> <C>
ASSETS:
Cash in subsidiary $ 63,234
Investment in subsidiary, at equity in underlying net assets 4,443,352
Bank premises and equipment, net --
Accrued income and other assets --
------------
Total Assets $ 4,506,586
============
LIABILITIES:
Other borrowed funds $ --
Accrued expenses and other liabilities --
------------
Total Liabilities --
------------
SHAREHOLDERS' EQUITY:
Common stock, $1 par value; authorized 20,000,000 shares,
outstanding 512,000 shares 512,000
Additional paid-in surplus 4,608,000
Accumulated deficit (613,414)
Accumulated other comprehensive income --
------------
Total shareholders' equity 4,506,586
------------
Total Liabilities and Shareholders' Equity $ 4,506,586
============
</TABLE>
<PAGE> 38
CITIZENS EFFINGHAM BANCSHARES, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEAR ENDED DECEMBER 31, 1998 AND PERIOD OF APRIL 3, 1997 (INCEPTION) TO DECEMBER
31, 1997
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Year Ended
STATEMENTS OF INCOME AND RETAINED EARNINGS December 31,
1998
-----------
<S> <C>
REVENUES:
Dividend from subsidiary $ --
---------
EXPENSES:
Interest --
Organization expense 48,480
Salaries --
Other 8,286
---------
Total expenses 56,766
---------
LOSS BEFORE TAXES AND EQUITY INCOME OF SUBSIDIARY (56,766)
Add - Benefit of income taxes --
---------
LOSS BEFORE EQUITY INCOME OF SUBSIDIARY (56,766)
Equity in undistributed income of subsidiary (463,556)
---------
NET INCOME (520,322)
ACCUMULATED DEFICIT BEGINNING (93,092)
---------
ACCUMULATED DEFICIT ENDING $(613,414)
=========
</TABLE>
<PAGE> 39
CITIZENS EFFINGHAM BANCSHARES, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEAR ENDED DECEMBER 31, 1998 AND PERIOD OF APRIL 3, 1997 (INCEPTION) TO DECEMBER
31, 1997
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
For the Year Ended
STATEMENTS OF CASH FLOWS December 31,
1998
-------------------
<S> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ (520,322)
Adjustments to reconcile net income to net cash provided by operating activities:
Equity in undistributed income of subsidiary 463,556
Net change in operating assets and liabilities:
Accrued expenses and other liabilities --
-----------
Net cash used in operating activities (56,766)
-----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures --
Organization costs --
-----------
Net cash used in investing activities --
-----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from stock issuance 5,120,000
Initial capital injection to bank subsidiary (5,000,000)
Proceeds from issuance of debt --
-----------
Net cash provided by investing activities 120,000
-----------
NET INCREASE IN CASH AND CASH EQUIVALENTS 63,234
CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR --
-----------
CASH AND CASH EQUIVALENTS AT END OF YEAR $ 63,234
===========
</TABLE>
<PAGE> 40
ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
<PAGE> 41
PART III
ITEM 9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS;
COMPLIANCE WITH SECTION 16(A) OF THE EXCHANGE ACT
DIRECTORS
The following table sets forth for each director of the Company (1) the person's
name, (2) his or her age at December 31, 1998, and (3) his or her positions with
the Company other than as a director and his or her other business experience
for the past five years. All persons listed below have been directors of the
Company since its incorporation in April 1997.
<TABLE>
<CAPTION>
NAME (AGE) BUSINESS EXPERIENCE
---------- -------------------
<S> <C>
Harry H. Shearouse* (52) President, Chief Executive Officer of the Company
and President of the Bank
Jon G. Burns (46) Owner and Operator of B&S Feed and Farm Supply
Charles E. Hartzog (62) Retired Banker
Philip M. Heidt (50) Owner of Heidt Real Estate Services, Inc., which
operates Century 21/Heidt Realty
W. Harvey Kieffer (56) Owner and Operator of Kieffer Carter Construction, Inc.
C. Murray Kight (66) Real Estate Developer
Thomas C. Strickland, Jr. (56) Owner and Operator of Strickland Funeral Home, Inc.
and Real Estate Developer
Mariben M. Thompson (58) Real Estate and Diversified Investor
Thomas O. Triplett, Sr. (63) Retired Banker and Former Legislator
J. Terrell Webb (68) Retired Pharmacist
H. Mitchell Weitman (52) Owner and Operator of Weitman Pharmacy, Inc.
Wendel H. Wilson (54) Certified Public Accountant, Managing Partner of
Wilson & Kessler, C.P.A.
</TABLE>
- --------------------
* Mr. Shearouse served as Vice President of First National Bank of
Effingham from 1992 until 1997. Mr. Shearouse is also an executive
officer of the Company.
The Company is not subject to filings required by Section 16 of the Securities
and Exchange Act of 1934, as amended (the "Exchange Act"). The Company is filing
this Annual Report on Form 10-KSB pursuant to Section 15(d) of the Exchange Act.
<PAGE> 42
ITEM 10. EXECUTIVE COMPENSATION
EXECUTIVE COMPENSATION
SUMMARY COMPENSATION TABLE
The following table presents the total compensation of the Company paid during
fiscal years 1998 and 1997 (since the Company's inception in April 1997) to its
chief executive officer. No executive officer of the Company earned over
$100,000 in salary and bonus during fiscal years 1998 and 1997.
<TABLE>
<CAPTION>
Annual Compensation Long-Term Compensation
------------------------------------------------ ---------------------------------------------
Awards Payouts
---------------------------------------------
Other Restricted All
Annual Stock Options/ LTIP Other
Salary Bonus Compensation Awards SARs Payouts Compensation
Name and Position Year ($) ($) ($) ($) (#) ($) ($)
- ----------------- ---- --- --- --- --- --- --- ---
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Harry H. Shearouse, 1998 88,333 -- -- -- -- -- --
President and Chief
Executive Officer 1997* 63,333 -- -- -- -- -- --
</TABLE>
- --------------------
* From the Company's inception in April 1997.
COMPENSATION OF DIRECTORS AND OFFICERS
Effective February 12, 1997, the Company entered into an employment agreement
with Mr. Shearouse. Under the terms of the employment agreement, Mr. Shearouse
received a starting salary of $80,000 per year until the Company satisfied the
conditions for releasing offering funds from the escrow account. After the
Company broke escrow, Mr. Shearouse began receiving a salary of $90,000 per
year. The term of the employment agreement is two years.
Officers and directors of the Company will not be separately compensated for
their services to the Company until the Company earns a cumulative profit.
Directors of the Bank will not be compensated for their services as directors
until the Bank earns a cumulative profit.
OPTION GRANTS IN FISCAL YEAR 1998
The Company did not grant any options in fiscal year 1998.
ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth the number of shares of the Company's common
stock beneficially owned as of March 23, 1999, by each director of the Company
and all executive officers and directors as a group. The information shown below
is based upon information furnished to the Company by the named persons. Unless
otherwise indicated, each person is the record owner and has sole voting and
investment power with respect to his or her shares.
<PAGE> 43
Information relating to beneficial ownership of the Company is based upon
"beneficial ownership" concepts set forth in rules promulgated under the
Securities Exchange Act of 1934, as amended. Under such rules a person is deemed
to be a "beneficial owner" of a security if that person has or shares "voting
power," which includes the power to vote or to direct the voting of such
security, or "investment power," which includes the power to dispose or to
direct the disposition of such security. Under the rules, more than one person
may be deemed to be a beneficial owner of the same securities. A person is also
deemed to be a beneficial owner of any security as to which that person has the
right to acquire beneficial ownership within sixty (60) days from the record
date.
<TABLE>
<CAPTION>
NUMBER PERCENT
NAME AND ADDRESS OF SHARES OF CLASS
- ---------------- --------- --------
<S> <C> <C>
(A) DIRECTORS
Jon G. Burns
5829 Clyo Kildare Road
Newington, GA 30446 20,000(1) 3.91%
Charles E. Hartzog
P. O. Box 433
Springfield, GA 31329 12,500 2.44%
Philip M. Heidt
2954 Springfield Egypt Road
Springfield, GA 31329 8,350(2) 1.63%
W. Harvey Kieffer
308 Merion Road
Rincon, GA 31326 7,500 1.46%
C. Murray Kight
P. O. Box 323
Springfield, GA 31329 20,000 3.91%
Harry H. Shearouse (3)
610 Stillwell Road
Springfield, GA 31329 10,000 1.95%
Thomas C. Strickland, Jr
P. O. Box 295
Springfield, GA 31329 16,850(4) 3.29%
Mariben M. Thompson
P. O. Box 129
Guyton, GA 31312 5,000 0.98%
Thomas O. Triplett, Sr
400 Lake Tomacheechee Drive
Rincon, GA 31326 5,000 0.98%
J. Terrell Webb
904 North Ash Street
Springfield, GA 31329 20,000 3.91%
</TABLE>
<PAGE> 44
<TABLE>
<CAPTION>
NUMBER PERCENT
NAME AND ADDRESS OF SHARES OF CLASS
- ---------------- --------- --------
<S> <C> <C>
H. Mitchell Weitman
P. O. Box 188
Springfield, GA 31329 5,000 0.98%
Wendel H. Wilson
930 Old Dixie Highway
Springfield, GA 31329 10,000 1.95%
(B) ALL DIRECTORS AND
EXECUTIVE OFFICERS, AS A GROUP
(12 PERSONS) 140,200 27.38%
</TABLE>
- -------------------------
(1) Consists of (i) 15,000 shares owned directly by Mr. Burns and (ii)
5,000 shares owned by Mr. Burns' children as to which beneficial
ownership is shared.
(2) Consists of (i) 7,500 shares owned directly by Mr. Heidt and (ii) 850
shares held by Mr. Heidt's spouse as to which beneficial ownership is
shared.
(3) Mr. Shearouse is the only executive officer of the Company.
(4) Consists of (i) 3,850 shares owned directly by Mr. Strickland, (ii)
6,950 shares held in an IRA account for the benefit of Mr. Strickland,
(iii) 1,050 shares held in a profit sharing plan for the benefit of Mr.
Strickland, (iv) 1,300 shares held by Mr. Strickland's spouse as to
which beneficial ownership is shared, (v) 270 shares held in an IRA
account for the benefit of Mr. Strickland's spouse as to which
beneficial ownership is shared and (vi) 3,430 shares held in a profit
sharing plan for the benefit of Mr. Strickland's spouse as to which
beneficial ownership is shared.
ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The Company and the Bank have banking and other business transactions in the
ordinary course of business with directors and officers of the Company and the
Bank, including members of their families or corporations, partnerships or other
organizations in which such directors and officers have a controlling interest.
Such transactions are on substantially the same terms (including price, or
interest rate and collateral) as those prevailing at the time for comparable
transactions with unrelated parties, and any banking transactions do not involve
more than the normal risk of collectibility or present other unfavorable
features to the Company and the Bank, and are on terms no less favorable than
could be obtained from an unaffiliated third party and are approved by a
majority of the directors, including a majority of the disinterested directors.
On August 7, 1997, Century 21 Heidt Realty, a Georgia General Partnership,
comprised of directors Philip M. Heidt, W. Harvey Kieffer, C. Murray Kight and
Thomas C. Strickland, Jr., entered into a contract with the Citizens Effingham
Partnership (the predecessor to the Company) to sell the parcel of land upon
which the Rincon branch is located. Two independent appraisals of the parcel,
one by Coastal Area Appraisal Services dated June 23, 1997 and the other by
Johnnie Ganem Realty & Appraisal Co. dated July 18, 1997, each valued the parcel
at $225,000, the price for which the land was sold. Century 21 Heidt Realty made
no real estate commission on the sale.
<PAGE> 45
ITEM 13. EXHIBITS, LISTS AND REPORTS ON FORM 8-K
(a) Exhibits
<TABLE>
<CAPTION>
Exhibit
Number Exhibit
------ -------
<S> <C>
3.1 Articles of Incorporation.(1)
3.2 Bylaws.(1)
4.1 Instruments Defining the Rights of Security Holders. See
Articles of Incorporation at Exhibit 3.1 hereto and Bylaws at
Exhibit 3.2 hereto.
10.1 Lot/Land Purchase and Sale Agreement, dated as of July 8,
1997, between Citizens Effingham Partnership (predecessor to
the Company) and 21 Center Partnership.(1)
10.2 Land Sales Contract, dated June 25, 1997, among Citizens
Effingham Partnership (predecessor to the Company), Robert L.
Wiggins, Jr., Ira Keith Wiggins and W. H. Johnson. (1)
10.3* Employment Agreement, dated as of February 12, 1997 among the
organizers of the Company and Harry H. Shearouse.(2)
21.1 Subsidiaries of Citizens Effingham Bancshares, Inc.
24.1 Power of Attorney (appears on the signature pages to this
Annual Report on Form 10-KSB).
27.1 Financial Data Schedule. (for SEC use only).
</TABLE>
- --------------------
* Compensatory plan or arrangement.
(1) Incorporated herein by reference to Exhibit 10.1 to the
Company's Registration Statement, as amended, on Form S-1,
Registration No. 333-07914, filed November 17, 1997.
(2) Incorporated herein by reference to Exhibit 10.5 to the
Company's Registration Statement, as amended, on Form S-1,
Registration No. 333-07914, filed November 17, 1997.
(b) Reports on Form 8-K filed in the fourth quarter of 1997: None.
SUPPLEMENTAL INFORMATION TO BE FURNISHED WITH REPORTS FILED PURSUANT TO SECTION
15(D) OF THE EXCHANGE ACT BY NON-REPORTING ISSUERS.
The Company completed its initial offering of its common stock
on March 13, 1998 pursuant to its Registration Statement on Form S-1,
Registration No. 333-14355. The Company intends to hold its annual meeting of
shareholders on May 11, 1999. The Company will file its Proxy Statement and
Annual Report to Shareholders with the Securities and Exchange Commission on or
before the date such items are mailed to shareholders.
<PAGE> 46
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this Report to be signed on
its behalf by the undersigned, thereunto duly authorized.
CITIZENS EFFINGHAM BANCSHARES, INC.
By: /s/ Harry H. Shearouse
-----------------------------------------
Harry H. Shearouse
President, Chairman of the Board,
Treasurer and Director
Date: April 14, 1999
---------------------------------------
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS, that each person whose signature
appears on the signature page to this Report constitutes and appoints Harry H.
Shearouse and Carolyn Williamson, and each of them, his or her true and lawful
attorneys-in-fact and agents, with full power of substitution and
resubstitution, for him and in his name, place, and stead, in any and all
capacities, to sign any and all amendments to this Report, and to file the same,
with all exhibits hereto, and other documents in connection herewith with the
Securities and Exchange Commission, granting unto said attorneys-in-fact and
agents and each of them, full power and authority to do and perform each and
every act and thing requisite and necessary to be done in and about the
premises, as fully to all intents and purposes as he might or could do in
person, hereby ratifying and confirming all that said attorneys-in-fact and
agents or any of them, or their or his substitute or substitutes, may lawfully
do or cause to be done by virtue hereof.
<PAGE> 47
Pursuant to the requirements of the Securities Exchange Act of 1934,
this Report has been signed below by the following persons on behalf of the
Registrant and in the capacities and on the dates indicated.
<TABLE>
<CAPTION>
Signature Title Date
--------- ----- ----
<S> <C> <C>
/s/ Harry H. Shearouse President, Chairman of the April 14, 1999
- --------------------------------------------- Board, Treasurer and Director
Harry H. Shearouse (Principal Executive Officer)
/s/ Carolyn B. Williamson Chief Financial Officer April 14, 1999
- --------------------------------------------- (Principal Financial and
Carolyn B. Williamson Accounting Officer)
/s/ Jon G. Burns Director April 14, 1999
- ---------------------------------------------
Jon G. Burns
/s/ Charles E. Hartzog Director April 14, 1999
- ---------------------------------------------
Charles E. Hartzog
/s/ Philip M. Heidt Director April 14, 1999
- ---------------------------------------------
Philip M. Heidt
/s/ W. Harvey Kieffer Director April 14, 1999
- ---------------------------------------------
W. Harvey Kieffer
/s/ C. Murray Kight Director April 14, 1999
- ---------------------------------------------
C. Murray Kight
/s/ Thomas C. Strickland, Jr. Director April 14, 1999
- ---------------------------------------------
Thomas C. Strickland, Jr.
/s/ Mariben M. Thompson Director April 14, 1999
- ---------------------------------------------
Mariben M. Thompson
/s/ Thomas O. Triplett, Sr. Director April 14, 1999
- ---------------------------------------------
Thomas O. Triplett, Sr.
/s/ J. Terrell Webb Director April 14, 1999
- ---------------------------------------------
J. Terrell Webb
</TABLE>
<PAGE> 48
<TABLE>
<S> <C> <C>
/s/ H. Mitchell Weitman Director April 14, 1999
- ---------------------------------------------
H. Mitchell Weitman
/s/ Wendel H. Wilson Director April 14, 1999
- ---------------------------------------------
Wendel H. Wilson
</TABLE>
<PAGE> 49
EXHIBIT INDEX
<TABLE>
<CAPTION>
Exhibit
Number Exhibit
- ------ -------
<S> <C>
3.1 Articles of Incorporation. (1)
3.2 Bylaws. (1)
4.1 Instruments Defining the Rights of Security Holders. See Articles of
Incorporation at Exhibit 3.1 hereto and Bylaws at Exhibit 3.2 hereto.
10.1 Lot/Land Purchase and Sale Agreement, dated as of July 8, 1997, between
citizens Effingham Partnership (predecessor to the Company) and 21
Center Partnership.(1)
10.2 Land Sales Contract, dated June 25, 1997, among Citizens Effingham
Partnership (predecessor to the Company), Robert L. Wiggins, Jr., Ira
Keith Wiggins and W. H. Johnson.(1)
10.3* Employment Agreement, dated as of February 12, 1997 among the
organizers of the Company and Harry H. Shearouse. (2)
21.1 Subsidiaries of Citizens Effingham Bancshares, Inc.
24.1 Power of Attorney (appears on the signature pages to this Annual Report
on Form 10-KSB).
27.1 Financial Data Schedule. (for SEC use only).
</TABLE>
- --------------------
* Compensatory plan or arrangement.
(1) Incorporated herein by reference to Exhibit 10.1 to the Company's
Registration Statement, as amended, on Form S-1, Registration No.
333-07914, filed November 17, 1997.
(2) Incorporated herein by reference to Exhibit 10.5 to the Company's
Registration Statement, as amended, on Form S-1, Registration No.
333-07914, filed November 17, 1997.
<PAGE> 1
EXHIBIT 21.1
SUBSIDIARIES OF CITIZENS EFFINGHAM BANCSHARES, INC.
Citizens Bank of Effingham, a state bank organized under the laws of
the State of Georgia
<TABLE> <S> <C>
<ARTICLE> 9
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> DEC-31-1998
<CASH> 1,283,185
<INT-BEARING-DEPOSITS> 0
<FED-FUNDS-SOLD> 4,240,000
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 0
<INVESTMENTS-CARRYING> 0
<INVESTMENTS-MARKET> 0
<LOANS> 12,922,815
<ALLOWANCE> (195,000)
<TOTAL-ASSETS> 20,324,622
<DEPOSITS> 15,752,457
<SHORT-TERM> 0
<LIABILITIES-OTHER> 65,579
<LONG-TERM> 0
0
0
<COMMON> 512,000
<OTHER-SE> 3,994,586
<TOTAL-LIABILITIES-AND-EQUITY> 20,324,622
<INTEREST-LOAN> 242,607
<INTEREST-INVEST> 0
<INTEREST-OTHER> 235,585
<INTEREST-TOTAL> 478,192
<INTEREST-DEPOSIT> 143,762
<INTEREST-EXPENSE> 160,500
<INTEREST-INCOME-NET> 317,692
<LOAN-LOSSES> 195,000
<SECURITIES-GAINS> 0
<EXPENSE-OTHER> 652,591
<INCOME-PRETAX> (520,322)
<INCOME-PRE-EXTRAORDINARY> (520,322)
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (520,322)
<EPS-PRIMARY> (1.02)
<EPS-DILUTED> (1.02)
<YIELD-ACTUAL> 83.4
<LOANS-NON> 0
<LOANS-PAST> 0
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 0
<CHARGE-OFFS> 0
<RECOVERIES> 0
<ALLOWANCE-CLOSE> 195,000
<ALLOWANCE-DOMESTIC> 195,000
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 0
</TABLE>
