<PAGE> 1
U. S. SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-KSB
[X] Annual report under Section 13 or 15 (d) of the Securities Exchange
Act of 1934
For the quarterly period ended December 31, 1999
[ ] 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.
-----------------------------------
(Exact Name of Small Business Issuer as Specified in Its Charter)
GEORGIA 58-2357619
- --------------------------- ----------
(State or Other Jurisdiction of (I.R.S. Employer
Incorporation or Organization) Identification No.)
802 South Laurel Street
Post Office Box 379
Springfield, Georgia 31329
--------------------------
(Address of Principal Executive Offices)
(912) 754-0754
--------------
(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 [ ]
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 the registrant's knowledge, in definitive proxy or an
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: $2,887,892
----------
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: $6,144,000 as of March 10, 2000
-------------------------------------
APPLICABLE ONLY TO CORPORATE ISSUERS
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 10, 2000.
- ------------------------------------------------------------------------
DOCUMENTS INCORPORATED BY REFERENCE: NONE
Transitional Small Business Disclosure Format (check one):
Yes [ ] No [X]
-1-
<PAGE> 2
CITIZENS EFFINGHAM BANCSHARES, INC.
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C> <C>
PART I 3
ITEM 1. DESCRIPTION OF BUSINESS 3
ITEM 2. DESCRIPTION OF PROPERTIES 18
ITEM 3. LEGAL PROCEEDINGS 18
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS 18
PART II 18
ITEM 5. MARKET FOR REGISTRANTS COMMON EQUITY AND RELATED
STOCKHOLDERS MATTERS 18
ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATION 19
ITEM 7. FINANCIAL STATEMENTS 23
ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
ACCOUNTING AND FINANCIAL DISCLOSURE 46
PART III 46
ITEM 9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS, AND CONTROL
PERSONS; COMPLIANCE WITH SECTION 16(a) OF THE EXCHANGE ACT 46
ITEM 10. EXECUTIVE COMPENSATION 47
ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT 48
ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS 50
ITEM 13. EXHIBITS, LISTS, AND REPORTS ON FORM 8 - K 50
SIGNATURES 52
</TABLE>
-2-
<PAGE> 3
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. The
Company owns 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
consumer, residential, commercial mortgage loans and small business loans.
Philosophy
The philosophy of the Bank's management is to emphasize prompt and responsive
personal service to residents of 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 population has grown by
40 percent and is expected to continue growing through the next century.
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
-3-
<PAGE> 4
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 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 $750,000 for unsecured
loans and approximately $1,250,000 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,
partnerships 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 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, directors and employees, 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, 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
-4-
<PAGE> 5
The Company has one employee, who is also an employee of the Bank. At December
31, 1999 the Bank had twelve full-time and one part-time employee at the
Springfield office and five full-time employees and one part-time employee at
the Rincon office. The Bank employed eighteen 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. Bank of America
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
Both the Company and the Bank are subject to extensive state and federal banking
regulations that impose restrictions on and provide for general regulatory
oversight of operations. These laws are generally intended to protect depositors
and not shareholders. The following discussion describes the material elements
of the regulatory framework that applies to us.
The Company
Since the Company owns all of the capital stock of the Bank, it is a bank
holding company under the federal Bank Holding Company Act of 1956. As a result,
the Company is primarily subject to the supervision, examination, and reporting
requirements of the Bank Holding Company Act and the regulations of the Federal
Reserve.
Acquisitions of Banks
The Bank Holding Company Act requires every bank holding company to obtain the
Federal Reserve's prior approval before:
- Acquiring direct or indirect ownership or control of any
voting shares of any bank if, after the acquisition, the bank
holding company will directly or indirectly own or control
more than 5% of the bank's voting shares;
- Acquiring all or substantially all of the assets of any bank;
or
- Merging or consolidating with any other bank holding company.
Under the Bank Holding Company Act, an adequately capitalized and adequately
managed bank holding company located in Georgia may purchase a bank located
outside of Georgia. Conversely, an adequately capitalized and adequately managed
bank holding company located outside of Georgia may purchase a bank located
inside Georgia. In each case, however, restrictions may be placed on the
acquisition of a bank which has only been existence for a limited amount of time
or an acquisition which may result in specified concentrations of deposits.
Change in Bank Control
Subject to various exceptions, the Bank Holding Company Act and the Change in
Bank Control Act, together with related regulations, require Federal Reserve
approval prior to any person or company acquiring "control" of a bank holding
company. Control is conclusively presumed to exist if an individual or company
acquires 25% or more of any class of voting securities of the bank holding
company. Control is rebuttably presumed to exist if a person or a company
acquires 10% or more, but less than 25%, of any class of voting securities and
either the bank holding company has registered securities under Section 12 of
the Securities Act of 1934, or no other person owns a greater percentage of that
class of voting securities immediately after the transaction.
Permitted Activities
-5-
<PAGE> 6
Under the Bank Holding Company Act, a bank holding company, which has not
qualified or elected to become a financial holding company is generally
prohibited from engaging in or acquiring direct or indirect control of more than
5% of the voting shares of any company engaged in nonbanking activities unless
prior to the enactment of the Gramm-Leach-Bliley Act the Federal Reserve found
those activities to be so closely related to banking as to be a proper incident
to the business of a banking. Activities that the Federal Reserve has found to
be so closely related to banking to be a proper incident to the business of
banking include:
- factoring accounts receivable,
- acquiring or servicing loans,
- leasing personal property,
- conducting discount securities brokerage activities,
- performing selected data processing services,
- acting as agent or broker in selling credit life insurance and
other types of insurance in connection with credit
transactions, and
- performing selected insurance underwriting
activities.
Despite prior approval, the Federal Reserve may order a bank holding company or
its subsidiaries to terminate any of these activities or to terminate its
ownership or control of any subsidiary when it has reasonable cause to believe
that the bank holding company's continued ownership, activity or control
constitutes a serious risk to the financial safety, soundness, or stability of
any of its bank subsidiaries.
On November 12, 1999 President Clinton signed the Gramm-Leach-Bliley Act, which
amends the Bank Holding Company Act and greatly expand the activities in which
bank holding companies and affiliates of banks are permitted to engage. The
Gramm-Leach-Bliley Act eliminates many federal and state law barriers to
affiliations among banks and securities firms, insurance companies, and other
financial service providers. The provisions of the Gramm-Leach-Bliley Act
relating to permitted activities of bank holding companies and affiliates of
banks became effective on March 11, 2000.
Generally, if the Company qualifies and elects to become a financial holding
company, it may engage in activities that are financial in nature or incidental
or complementary to a financial activity. Activities that the Gramm-Leach-Bliley
Act expressly lists as financial in nature include insurance activities,
providing financial, investment and advisory services, underwriting securities
and limited merchant banking activities.
To qualify to become a financial holding company, the Bank and any other
depository institution subsidiary of the Company must be well capitalized and
well managed and must have a Community Reinvestment Act rating of at least
satisfactory. Additionally, the Company must file an election with the Federal
Reserve to become a financial holding company and must provide the Federal
Reserve with 30 days written notice prior to engaging in a permitted financial
activity. Although we are eligible to elect to become a financial holding
company, we currently have no plans to make such an election.
Support of Subsidiary Institutions
Under Federal Reserve policy, bank holding companies are expected to act as a
source of financial strength for, and to commit resources to support, their
depository institution subsidiaries. This support may be required at times when,
without this Federal Reserve policy, the bank holding company might not be
inclined to provide it. In addition, any capital loans by a bank holding company
to a bank will be repaid only after its deposits and 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.
The Bank
The Bank is a commercial bank charted under the laws of the State of Georgia.
Accordingly, the FDIC and the Georgia Department of Banking and Finance
regularly examine the operations of the Bank and have the authority to approve
or disapprove mergers, the establishment of branches, and similar corporate
actions. Both regulatory agencies also have the power to prevent the continuance
or development of unsafe or unsound banking practices or other violations of
law. Additionally, the Bank's deposits are insured by the FDIC to the maximum
extent provided by law. The Bank is also
-6-
<PAGE> 7
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.
Prompt Corrective Action
The Federal Deposit Insurance Corporation Improvement Act of 1991 establishes a
system of prompt corrective action to resolve the problems of undercapitalized
financial institutions. Under this system, federal banking regulators have
established five capital categories, well capitalized, adequately capitalized,
undercapitalized, significantly undercapitalized and critically
undercapitalized, in which all institutions are placed. The federal banking
agencies have also specified by regulation the relevant capital levels for each
of the other categories. At December 31, 1999, we qualified for the
well-capitalized category.
Federal banking regulators are required to take some mandatory supervisory
actions and are authorized to take other discretionary actions with respect 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.
An institution in any of the undercapitalized categories 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 up 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. The Federal Reserve
regulations also establish procedures for downgrading an institution to a lower
capital category based on supervisory factors other than capital.
FDIC Insurance Assessments
The FDIC has adopted a risk-based assessment system for determining an insured
depository institutions' insurance assessment rate. The system that takes into
account the risks attributable to different categories and concentrations of
assets and liabilities. An institution is placed into 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. The FDIC also assigns an
institution to one of three supervisory subgroups 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 posed to the deposit insurance funds.
Assessments range from 0 to 27 cents per $100 of deposits, depending on the
institution's capital group and supervisory subgroup. In addition, the FDIC
imposes assessments to help pay off the $780 million in annual interest payments
on the $8 billion Financing Corporation bonds issued in the late 1980s as part
of the government rescue of the thrift industry. This assessment rate is
adjusted quarterly and ranged from 1.16 cents to 1.22 cents per $100 of deposits
in 1999.
The FDIC may terminate its insurance of deposits 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.
Community Reinvestment Act
The Community Reinvestment Act requires the appropriate federal regulator, in
connection with their examinations of financial institutions within their
jurisdiction, to evaluate the record of each financial institution in meeting
the credit needs of its local community, including low and moderate-income
neighborhoods. The appropriate federal regulator considers these factors in
evaluating mergers, acquisitions, and applications to open a branch or facility.
Failure to adequately meet these criteria could impose additional requirements
and limitations on the Bank. Under the Gramm-Leach-Bliley Act, banks with
aggregate assets of not more than $250 million are subject to a Community
Reinvestment Act examination only once every 60 months if the bank receives an
outstanding rating, once every 48 months if it receives a satisfactory rating
and as needed if the rating is less than satisfactory. Additionally, under the
Gramm-Leach-Bliley Act, banks are required to publicly disclose the terms of
various Community Reinvestment Act-related agreements.
-7-
<PAGE> 8
Other Regulations
Interest and other charges collected or contracted for by the Bank are subject
to state usury laws and federal laws concerning interest rates. The Bank's loan
operations are also subject to federal laws applicable to credit transactions,
such as:
- The federal Truth-In-Lending Act, governing disclosures of
credit terms to consumer borrowers;
- The Home Mortgage Disclosure Act of 1975, requiring financial
institutions to provide information to enable the public and
public officials to determine whether a financial institution
is fulfilling its obligation to help meet the housing needs of
the community it serves;
- The Equal Credit Opportunity Act, prohibiting discrimination
on the basis of race, creed or other prohibited factors in
extending credit;
- The Fair Credit Reporting Act of 1978, governing the use and
provision of information to credit reporting agencies;
- The Fair Debt Collection Act, governing the manner in which
consumer debts may be collected by collection agencies; and
- The rules and regulations of the various federal agencies
charged with the responsibility of implementing these federal
laws.
The deposit operations of the Bank are subject to:
- The Right to Financial Privacy Act, which imposes a duty to
maintain confidentiality of consumer financial records and
prescribes procedures for complying with administrative
subpoenas of financial records; and
- The Electronic Funds Transfer Act and Regulation E issued by
the Federal Reserve to implement that act, which governs
automatic deposits to and withdrawals from deposit accounts
and customers' rights and liabilities arising from the use of
automated teller machines and other electronic banking
services.
Capital 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
FDIC and Georgia Department of Banking and Finance, in the case of the Bank. The
Federal Reserve has established a risk-based and a leverage measure of capital
adequacy for bank holding companies that is substantially similar to that
adopted by the FDIC for banks under its jurisdiction.
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,
such as letters of credit and unfunded loan commitments, are assigned to broad
risk categories, each with appropriate risk 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%. Total capital consists of two components, Tier 1 Capital and Tier 2 Capital.
Tier 1 Capital generally consist of common shareholders' equity, minority
interests in the equity accounts of consolidated subsidiaries, qualifying
noncumulative perpetual preferred stock, and a limited amount of qualifying
cumulative perpetual preferred stock, less goodwill and other specified
intangible assets. Tier 1 Capital must equal at least 4% of risk-weighted
assets. Tier 2 Capital generally consist of subordinated debt, other preferred
stock and hybrid capital and a limited amount of loan loss reserves. The total
amount of Tier 2 Capital is limited to 100% of Tier 1 Capital. At December 31,
1999, our bank ratio of total capital to risk-weighted assets was 14.5% and our
bank ratio of Tier 1 Capital to risk-weighted assets was 13.3%.
-8-
<PAGE> 9
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 other specified
intangible assets, of 3% for bank holding companies that meet certain specified
criteria, including having the highest regulatory rating and implementing the
Federal Reserve's risk-based capital measure for market risk. All other bank
holding companies generally are required to maintain a leverage ratio of at
least 4%. At December 31, 1999, our bank leverage ratio was 11.9%. 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. The Federal Reserve considers the leverage ratio and other
indicators of capital strength in evaluating proposals for expansion or new
activities.
The Bank and the Company are also both subject to other capital guidelines
issued by the Georgia Department of Banking and Finance and the Federal Reserve,
respectively, which provide for minimum ratios of total capital to total assets.
Failure to meet capital guidelines could subject a bank or bank holding company
to a variety of enforcement remedies, including 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 additional restrictions can be imposed on FDIC-insured
depository institutions that fail to meet applicable capital requirements. See
"--Prompt Corrective Action."
Payment of Dividends
The Company is a legal entity separate and distinct from the Bank. The principal
source of the Company's cash flow, including cash flow to pay dividends to its
shareholders, is dividends that the Bank pays to it. Statutory and regulatory
limitations apply to the Bank's payment of dividends to the Company as well as
to the Company's payment of dividends to its shareholders.
If, in the opinion of the federal banking regulator, the Bank were engaged in or
about to engage in an unsafe or unsound practice, the federal banking regulator
could require, after notice and a hearing, that it cease and desist from its
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, a depository institution may not pay any
dividend if payment would cause it to become undercapitalized or if it already
is undercapitalized. Moreover, the federal agencies have issued policy
statements that provide that bank holding companies and insured banks should
generally only pay dividends out of current operating earnings. See "--Prompt
Corrective Action" below.
The Georgia Department of Banking and Finance also regulates the Bank's dividend
payments and must approve dividend payments that would exceed 50% of the Bank's
net income for the prior year. Our payment of dividends may also be affected or
limited by other factors, such as the requirement to maintain adequate capital
above regulatory guidelines.
As of December 31, 1999, 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, the Bank is prevented from
paying dividends until they are cumulatively profitable.
Restrictions on Transactions with Affiliates
The Company and the Bank are subject to the provisions of Section 23A of the
Federal Reserve Act. Section 23A places limits on the amount of:
- loans or extensions of credit to affiliates;
- investment in affiliates;
- the purchase of assets from affiliates, except for real and
personal property exempted by the Federal Reserve;
-9-
<PAGE> 10
- loans or extensions of credit to third parties collateralized
by the securities or obligations of affiliates; and
- any guarantee, acceptance or letter of credit issued on behalf
of an affiliate.
The aggregate of all of the above transactions is limited in amount, as to any
one affiliate, to 10% of a bank's capital and surplus and, as to all affiliates
combined, to 20% of a bank's capital and surplus. In addition to the limitation
on the amount of these transactions, each of the above transactions must also
meet specified collateral requirements. The Company must also comply with
certain provisions designed to avoid the taking of low-quality assets.
The Company and the Bank are also subject to the provisions of Section 23B of
the Federal Reserve Act which, among other things, prohibits an institution from
engaging in the above transactions with affiliates unless the transactions are
on terms substantially the same, or at least as favorable to the institution or
its subsidiaries, as those prevailing at the time for comparable transactions
with nonaffiliated companies.
The Bank is also subject to restrictions on extensions of credit to its
executive officers, directors, certain principal shareholders and their related
interests. These extensions of credit (1) must be made on substantially the same
terms, including interest rates and collateral, as those prevailing at the time
for comparable transactions with third parties, and (2) must not involve more
than the normal risk of repayment or present other unfavorable features.
Privacy
The Gramm-Leach-Bliley Act also contains provisions regarding consumer privacy.
These provisions require financial institutions to disclose their policy for
collecting and protecting confidential information. Customers generally may
prevent financial institutions from sharing personal financial information with
nonaffiliated third parties except for third parties that market the
institutions' own products and services. Additionally, financial institutions
generally may not disclose consumer account numbers to any nonaffiliated third
party for use in telemarketing, direct mail marketing or other marketing through
electronic mail to the consumer.
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.
Effect of Governmental Monetary Polices
Our earnings are affected by domestic economic conditions and the monetary and
fiscal policies of the United States government and its agencies. The Federal
Reserve Bank's monetary policies have had, and are likely to continue to have,
an important impact on the operating results of commercial banks through its
power to implement national monetary policy in order, among other things, to
curb inflation or combat a recession. The monetary policies of the Federal
Reserve Board have major effects upon the levels of bank loans, investments and
deposits through its open market operating in United States government
securities and through its regulation of the discount rate on borrowings of
member banks and the reserve requirements against member bank deposits. It is
not possible to predict the nature or impact of future changes in monetary and
fiscal policies.
Statistical Information
I. Distribution of Assets, Liabilities, and Stockholder's Equity; Interest Rates
and Interest Differential
The following table reflects the tax-equivalent yields of interest earning
assets and interest bearing liabilities:
-10-
<PAGE> 11
<TABLE>
<CAPTION>
1999 1998
------------------------------------- ------------------------------------
Interest Tax Interest Tax
Average Income/ Equivalent Average Income/ Equivalent
Balance Expense Yield Balance Expense Yield
-------- -------- ---------- -------- ------- ----------
<S> <C> <C> <C> <C> <C> <C>
(Dollars in Thousands)
Interest-earning assets:
Interest-earning deposits and fed funds sold $ 3,529 $ 173 4.90% $ 7,194 $ 103 4.30%
Investment Securities:
Taxable investment securities 1,811 101 5.58% -- -- 0.00%
Tax-exempt investment securities -- -- 0.00% -- -- 0.00%
Loans (including loan fees) 24,275 2,410 9.93% 7,512 242 9.66%
-------- -------- ---- -------- ------ ----
Total interest earning assets 29,615 2,684 9.06% 14,706 345 7.04%
-------- ---- ------ ----
Allowance for loan losses (346) (32)
Cash & due from banks 1,363 1,008
Premises and equipment 1,960 2,208
Other assets 301 60
-------- --------
Total assets $ 32,893 $ 17,950
======== --------
Interest bearing liabilities:
Deposits:
Demand deposits 1,928 43 2.23% 720 4 1.67%
Savings and Money Market 8,006 292 3.65% 3,992 41 3.08%
Time deposits 14,946 832 5.57% 6,668 99 4.45%
Other borrowings -- -- 0.00% 188 16 8.51%
-------- -------- ---- ------- ------ ----
Total interest bearing liabilities 24,880 1,167 4.69% 11,568 160 4.15%
-------- ---- ------ ----
Non-interest bearing deposits 3,425 1,640
Other liabilities 160 128
Stockholders' equity 4,428 4,614
-------- --------
Total liabilities and stockholders' equity $ 32,893 $ 17,950
======== ========
Net interest income $ 1,517 $ 185
Net interest spread 4.37% 2.89%
==== ====
Net interest yield on average earning assets $ 29,615 $ 1,517 5.12% $ 14,706 $ 185 3.77%
======== ======== ==== ======== ====== ====
</TABLE>
As of December 31, 1999 and 1998 there were no loans on nonaccrual.
Loan fees are included in the interest income computation and were $166,873 and
$52,907 as of December 31, 1999 and 1998, respectively.
Statistical Information, continued
Rate and Volume Analysis - The following table reflects the change in net
interest income resulting from changes in interest rates and from asset and
liability volume. Federally tax-exempt interest is presented on a
taxable-equivalent basis assuming a 34% Federal tax rate. The change in interest
attributable to rate has been determined by applying the change in rate between
years to average balances outstanding in the later year. The change in interest
due to volume has
-11-
<PAGE> 12
been determined by applying the rate from the earlier year to the change in
average balances outstanding between years. Thus, changes that are not solely
due to volume have been consistently attributed to rate.
<TABLE>
<CAPTION>
1999 to 1998
Increase(decrease)
due to changes in
------------------
Yield/
Volume Rate Net
------ ----- -----
<S> <C> <C> <C>
(Amounts in Thousands)
Interest earned on:
Interest earning deposits and fed funds sold (177) 247 70
Investment securities:
Taxable investment securities 101 -- 101
Tax-exempt investment securities -- -- --
Loans 1,560 617 2,177
----- ----- -----
Total interest income 1,484 864 2,348
----- ----- -----
Interest paid on:
Deposits:
Demand deposits 20 19 39
Savings 124 127 251
Time deposits 369 364 733
Other borrowings (16) -- (16)
----- ----- -----
Total interest expense 497 510 1,007
----- ----- -----
</TABLE>
II. Investment Portfolio - Carrying Value of Securities
The following tables summarize the investment portfolio by type and maturity:
<TABLE>
<CAPTION>
Available for Sale
1999
----
(Amounts in Thousands)
<S> <C>
U. S. Treasury $ --
U. S. Government Agencies 2,611
State, county and municipal
Mortgage-Backed Securities --
------
Total $2,611
======
</TABLE>
Statistical Information, continued
-12-
<PAGE> 13
<TABLE>
<CAPTION>
Available for Sale
----------------------------------------------------------------------------------------------
Within After One After Five
One But Within But Within After
Year Yield Five Years Yield Ten Years Yield Ten Years Yield Totals
------ ----- ---------- ----- ---------- ----- --------- ------ ------
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
U. S. Treasury $ -- -- $ -- $ -- $ -- $ -- $ -- $ -- $ --
U. S. Government Agencies 2,611 5.7% -- -- -- -- -- -- 2,611
State, county and municipal -- -- -- -- -- -- -- -- --
Mortgage-Backed Securities -- -- -- -- -- -- -- -- --
------ --- ----- ----- ----- ------ ----- ------ ------
Total $2,611 5.7% $ -- $ -- $ -- $ -- $ -- $ -- $2,611
====== === ===== ===== ===== ====== ===== ====== ======
</TABLE>
The Company had no securities classified as held to maturity or trading as of
December 31, 1999 and 1998.
III. Loan Portfolio
The following tables summarize the breakdown of loans by type and the
contractual maturities of selected fixed and variable rate loans:
<TABLE>
<CAPTION>
1999 1998
-------- --------
(Dollars in Thousands)
<S> <C> <C> <C> <C>
Commercial $ 13,749 40.9% $ 5,623 43.5%
Real Estate - Construction 5,451 16.2% 1,336 10.3%
Real Estate - Mortgage 10,098 30.1% 4,098 31.6%
Installment Loans to Individuals 4,281 12.7% 1,865 14.4%
-------- ---- -------- ----
Total Loans 33,579 99.9% 12,922 99.8%
Less: Allowance for Loan losses (481) (195)
-------- --------
Total $ 33,098 $ 12,727
======== ========
</TABLE>
<TABLE>
<CAPTION>
Rate Structure
Maturity > One Year
-------- --------------
Over One Due Fixed Variable
One Year Through After Interest Interest
or Less Five Years Five Years Total Rate Rate
------- ---------- ---------- ------- -------- --------
<S> <C> <C> <C> <C> <C> <C>
Commercial $ 3,987 $ 8,944 $ 818 $13,749 $ 2,926 $ 6,836
Real estate - construction 4,980 299 172 5,451 366 105
------- ------- ------- ------- ------- -------
Total $ 8,967 $ 9,243 $ 990 $19,200 $ 3,292 $ 6,941
======= ======= ======= ======= ======= =======
</TABLE>
-13-
<PAGE> 14
Statistical Information continued
IV. Summary of Loan Loss Experience
<TABLE>
<CAPTION>
1999 1998
------- ------
(Amounts in Thousands)
<S> <C> <C>
Allowance for possible loan losses, beginning of period $ 195 $ --
------- ------
Charge-offs:
Commercial -- --
Real estate - construction -- --
Real estate - mortgage -- --
Consumer loans 4 --
------- ------
Total 4 --
------- ------
Recoveries:
Commercial -- --
Real estate - construction -- --
Real estate - mortgage -- --
Consumer loans -- --
------- ------
Total -- --
------- ------
Net charge-offs 4 --
------- ------
Additions charged to operations 290 195
Adjustments -- --
------- ------
Allowance for possible loan losses, end of period 481 195
------- ------
Average loans outstanding, net of unearned income $24,275 $7,512
======= ======
Ratio of net charge-offs during the period to average loans
outstanding during the period 0.02% 0.00%
======= ======
</TABLE>
RISK ELEMENTS
(Thousands)
<TABLE>
<CAPTION>
1999 1998
------- ------
<S> <C> <C>
Loans 90 days past due $ 1 $ --
Loans on nonaccrual -- --
Other Real Estate -- --
------- ------
Total Nonperforming assets $ 1 $ --
------- ------
Total Nonperforming assets as a
Percentage of loans 0.0% 0.0%
======= ======
</TABLE>
-14-
<PAGE> 15
Statistical Information, continued
The Bank's policy is to place loans on nonaccrual status when it appears that
the collection of principal and interest in accordance with the terms of the
loan is doubtful. Any loan which becomes 90 days past due as to principal or
interest is automatically placed on nonaccrual. Exceptions are allowed for
90-day past due loans when such loans are well secured and in process of
collection.
Management expects to incur losses on loans from time to time when borrowers'
financial conditions deteriorate. Where feasible, loans charged down or charged
off will continue to be collected. Management considers the current allowance
adequate to cover potential losses in the loan portfolio.
The following table summarizes information concerning the allocation of the
allowance for loan losses as of December 31, 1999:
<TABLE>
<CAPTION>
Allocated % of Total
Amount Allowance
--------- ----------
<S> <C> <C>
Commercial 230 47.9%
Real Estate - Construction 78 16.2%
Real Estate - Mortgage 111 23.1%
Installment Loans to Individuals 62 12.8%
Unallocated -- --
--- ------
Total 481 100.00%
=== ======
</TABLE>
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 have a sufficient history of portfolio performance on which to base
additions. Accordingly, additions to the reserve 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 .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.
In addition, management performs an on-going loan review process. All new loans
are risk rated under loan policy guidelines. On a monthly basis, the composite
risk ratings are evaluated in a model which assesses the adequacy of the current
allowance for loan losses, and this evaluation is presented to the Board of
Directors each month. Large loans are reviewed periodically. Risk ratings may be
changed if it appears that new loans may not have received the proper initial
grading or, if an existing loans credit conditions have improved or worsened. 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
evaluation.
-15-
<PAGE> 16
Statistical Information, continued
V. Deposits
The following table summarizes the average balances and average rates for
deposit accounts:
<TABLE>
<CAPTION>
1999 1998
---------------------- ----------------------
Average Average Average Average
Balance Rate Balance Rate
-------- ------- ------- -------
(Dollars in Thousands)
<S> <C> <C> <C> <C>
Non-interest bearing deposits 3,425 1,640
Interest bearing demand deposits 1,928 2.23% 720 1.67%
Savings and money market deposits 8,006 3.65% 3,992 3.08%
Time deposits 14,946 5.57% 6,668 4.45%
------- ---- ------- ----
Total average deposits $28,305 4.15% $13,020 3.34%
======= ==== ======= ====
</TABLE>
As of December 31, 1999 the amount outstanding of time certificates of deposit
of $100,000 or more was $8,451 thousand. Amounts by time remaining until
maturity on time deposits of $100,000 or more were:
<TABLE>
<S> <C>
(Thousands)
3 months or less $2,122
over 3 through 6 months 3,980
over 6 through 12 months 1,978
over 12 months 371
------
Total $8,451
======
</TABLE>
VI. Selected Financial Data (amounts in thousands, except per share amounts)
The following represents selected financial data for the years ended December
31, 1999 and 1998. This information should be read in conjunction with
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" and the financial statements and related notes included elsewhere in
this report.
<TABLE>
<CAPTION>
1999 1998
------ -------
<S> <C> <C>
Interest Income 2,684 469
Interest Expense 1,167 160
Net Interest Income 1,517 319
Provision for Loan Losses 290 195
Net Earnings 309 (520)
Net Earnings Per Share 0.60 (1.02)
Total Average Stockholder's Equity 4,428 4,614
Total Average Assets 32,893 17,950
Return on average assets 0.94% -2.90%
Return on average equity 6.98% -11.27%
Dividend payout ratio 0% 0%
Average equity to average asset ratio 13.46% 25.70%
</TABLE>
Statistical Information, continued
-16-
<PAGE> 17
VII. Short-term Borrowings
No category of short-term borrowings exceeds 30% of stockholders' equity.
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 boardroom on the upper level, with significant room for expansion.
The Bank also owns a branch in Rincon, Georgia at 600 South Columbia Avenue that
was opening in November 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.
PART II
ITEM 5. MARKET FOR REGISTRANTS COMMON EQUITY AND RELATED
STOCKHOLDER MATTERS
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.
-17-
<PAGE> 18
ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND PLAN
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
Total assets of $43,470,923 at December 31, 1999 are an increase of 113.9% from
$20,324,633 at December 31, 1998. At December 31, 1999, total deposits had
increased 144.4% to $38,490,123 from $15,752,457 at December 31, 1998. Total
loans increased 160.1% to $33,098,775 from $12,727,815 at December 31, 1998.
This represented a loan to deposit ratio at December 31, 1999 of 86.0% compared
to 80.9% at December 31, 1998. Earning assets represented approximately 87.7%
and 83.5% of total assets at December 31, 1999 and 1998, respectively.
CAPITAL
At December 31, 1999 and December 31, 1998, the Bank's capital position was
well in excess of FDIC guidelines to meet the definition of "well-capitalized".
Based on the level of the Bank's risk weighted assets at December 31, 1999 and
December 31, 1998, the Bank had $1.6 and $1.4 million, respectively, more
capital than necessary to satisfy the "well-capitalized" criteria.
LIQUIDITY
The Bank's internal and external liquidity resources are considered by
management to be adequate to handle expected growth and normal cash flow
demands from existing deposits and loans. Investment securities, exclusive of
unrealized gains and losses, increased $2,692,119 during 1999. The Bank began
purchasing available for sale securities during the first quarter of 1999. The
Bank had no securities classified as held to maturity as of December 31, 1999.
Federal funds sold decreased 43.2% to $2,410,000 at December 31, 1999, down
from $4,240,000 at December 31, 1998 due to investing of these funds in
securities and loans.
Current deposits provide the primary liquidity resource for loan disbursements
and Bank working capital. The Bank expects earnings from loans and investments
and other banking services, as well as the current loan to deposit position, to
provide sufficient liquidity for both the short and long term. The Bank intends
to manage its loan growth such that deposit flows will provide the primary
funding for all loans as well as cash reserves for working capital and short to
intermediate term marketable investments.
The Bank has established a Federal Funds Purchase line of credit with two
correspondent banks, which totals $2,250,000. This line is unsecured and is
designed to provide the Bank with short-term liquidity.
-18-
<PAGE> 19
RESULTS OF OPERATION
GENERAL
The Company's results of operations are determined by its abilities 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.
For the year ended December 31, 1999, the Company had net income of $308,500
($0.60 per share). The Company had a net loss of $520,322 ($1.02 per share) for
the year ended December 31, 1998.
INTEREST INCOME/INTEREST EXPENSE
For the period ended December 31, 1999, interest income from loans and
investments, including loan fees of $166,873, was $2,683,888, representing a
yield of 9.06% on average earning assets of $29,615,894. Interest expense was
$1,167,214, representing a cost of 4.69% on average interest bearing
liabilities of $24,881,494. Net interest income was $1,516,674, producing a net
yield of 5.12% on average earning assets.
For the year ended December 31, 1998, interest income from loans and
investments, including loan fees of $52,907, was $345,961 representing a yield
of 8.51% on average earning assets of $3,949,990. Interest expense was
$160,500, representing a cost of 5.48% on average interest bearing liabilities
of $2,845,430. Net interest income was $317,692, producing a net yield of 4.56%
on average earning assets.
ASSET QUALITY
The provision for loan losses for the years ended December 31, 1999 and 1998
was $290,000 and $195,000 respectively. Total charge-offs were $4,112 and $0
for the years ended December 31, 1999 and 1998, respectively, and were related
to the Bank's consumer portfolio. At December 31, 1999 and 1998, the Bank had
no loans past due 90 days or more. Also at December 31, 1999 and 1998, the Bank
had no loans on non-accrual status. The allowance for loan losses at December
31, 1999 and 1998 was $481,035 and $195,000, respectively. This represents
1.43% and 1.50% of total loans at December 31, 1999 and 1998, respectively.
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 reserve 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 that 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.
In addition, management performs on an on-going loan review process. All new
loans are risk rated under loan policy guidelines. On a monthly basis, the
composite risk ratings are evaluated in a model that assesses the adequacy of
the current allowance for loan losses, and this evaluation is presented to the
Board of Directors each month. Large loans are reviewed periodically. Risk
ratings may be changed if it appears that new loans may not have received the
proper initial grading or, if on existing loans, credit conditions have
improved or worsened.
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
evaluation.
The Bank's policy is to place loans on non-accrual status when it appears that
the collection of principal and interest in accordance with the terms of the
loan is doubtful.
-19-
<PAGE> 20
NON-INTEREST INCOME
Non-interest income for the years ended December 31, 1999 and 1998 was $204,004
and $9,577, respectively. This consisted primarily of service charges on
deposit accounts, which were $142,081 and $8,661 for the years ended December
31, 1999 and 1998, respectively, and miscellaneous service fees which were
$48,171 and $0 for the years ended December 31, 1999 and 1998. Service charges
on deposit accounts are evaluated annually against service charges from other
banks in the local market and against the Bank's own cost structure in
providing the deposit services. This income should grow with the growth in the
Bank's demand deposit account base.
NON-INTEREST EXPENSE
Non-interest expense for the years ended December 31, 1999 and 1998 was
$1,273,210 and $652,591, respectively. This consisted primarily of salaries and
benefits, which were $578,692 and $311,695 for the years ended December 31,
1999 and 1998, respectively. Other major expenses included in non-interest
expense were supplies of $51,539 and $64,391 for the years ended December 31,
1999 and 1998, respectively. Additionally, organization expenses of $76,478
were included in non-interest expense for the year ended December 31, 1998.
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 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 the 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.
-20-
<PAGE> 21
The Bank's interest rate sensitivity position at December 31, 1999 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 $ 5,332,000 $ 6,976,000 $ 19,573,000 $ 1,699,000
Securities 243,200 235,750 2,131,792 --
Federal Funds Sold 2,410,000 -- -- --
------------ ------------ ------------ ------------
Total Interest Rate Sensitive Assets $ 7,985,200 $ 7,211,750 $ 21,704,792 $ 1,699,000
------------ ------------ ------------ ------------
INTEREST RATE SENSITIVE LIABILITIES:
Interest Bearing Demand Deposits $ -- $ -- $ -- $ 4,421,373
Savings and Money Market Deposits 618,532 -- -- 7,164,121
Time Deposits 4,620,447 10,086,461 6,736,627 --
------------ ------------ ------------ ------------
Total Interest Rate Sensitive Liabilities $ 5,238,979 $ 10,086,461 $ 6,736,627 $ 11,585,494
------------ ------------ ------------ ------------
Interest Rate Sensitivity GAP $ 2,746,221 $ (2,874,711) $ 14,968,165 $ (9,886,494)
------------ ------------ ------------ ------------
Cumulative Interest Rate Sensitivity GAP $ 2,746,221 $ (128,490) $ 14,839,675 $ 4,953,181
------------ ------------ ------------ ------------
Cumulative GAP as a % of total assets at December 31, 1999 6.32% -0.30% 34.15% 11.40%
------------ ------------ ------------ ------------
</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.
At December 31, 1999, the above gap analysis indicates a negative cumulative
gap position thru the one-year time interval of $3,360,211. A negative gap
position indicates that the Company's rate sensitive liabilities will reprice
faster than its rate sensitive assets, with 58% of rate sensitive liabilities
and 43% of rate sensitive assets repricing within one year. The Bank is asset
sensitive, meaning that rising rates tend to be beneficial, in the near and
long term and is liability sensitive at the three-month and one-year time
horizons, meaning that falling rates tend to be beneficial to the Bank's net
interest margin. If interest rates were to rise in excess of 200 basis points,
the Bank could experience improved earnings in the near term, but such a rate
increase might significantly reduce the demand for loans in the Bank's local
market, thus diminishing the prospects for improved earnings. If interest rates
were to fall in excess of 200 basis points, the Bank could experience a short-
term decline in net interest margin and may even have difficulty retaining
maturing certificates of deposit without having to pay above market rates.
-21-
<PAGE> 22
ITEM 7. FINANCIAL STATEMENTS
-22-
<PAGE> 23
CITIZENS EFFINGHAM BANCSHARES, INC.
AND SUBSIDIARY
CONSOLIDATED FINANCIAL STATEMENTS
YEAR ENDED DECEMBER 31, 1999
-23-
<PAGE> 24
CITIZENS EFFINGHAM BANCSHARES, INC. AND SUBSIDIARY
CONSOLIDATED FINANCIAL STATEMENTS
YEAR ENDED DECEMBER 31, 1999
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>
-24-
<PAGE> 25
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, 1999 and 1998, and
the related statements of income, changes in shareholders' equity, and cash
flows for each of the years in the period ended December 31, 1999. 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, 1999 and 1998, and the
consolidated results of its operations and its cash flows for the years in the
period ended December 31, 1999, in conformity with generally accepted
accounting principles.
January 25, 2000
Dublin, Georgia
-25-
<PAGE> 26
CITIZENS EFFINGHAM BANCSHARES, INC. AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
As of December 31,
---------------------------
1999 1998
------------ ------------
<S> <C> <C>
ASSETS
Cash and due from banks $ 2,787,749 $ 1,283,185
Federal funds sold 2,410,000 4,240,000
------------ ------------
Total cash and cash equivalents 5,197,749 5,523,185
------------ ------------
Securities available for sale, at fair value 2,610,742 --
Loans, net of unearned income 33,579,810 12,922,815
Less - allowance for loan losses (481,035) (195,000)
------------ ------------
Loans, net 33,098,775 12,727,815
------------ ------------
Bank premises and equipment, net 1,935,866 1,971,213
Accrued interest receivable 366,567 87,012
Other assets 261,224 15,397
------------ ------------
TOTAL ASSETS $ 43,470,923 $ 20,324,622
============ ============
LIABILITIES AND SHAREHOLDERS' EQUITY
Deposits:
Non-interest bearing $ 4,843,875 $ 2,026,091
Interest-bearing 33,646,248 13,726,366
------------ ------------
Total deposits 38,490,123 15,752,457
Accrued interest payable 183,985 43,407
Accrued expenses and other liabilities 35,438 22,172
------------ ------------
Total liabilities 38,709,546 15,818,036
------------ ------------
Commitments and contingencies
Shareholders' Equity:
Common stock, $1 par value, authorized 20,000,000 shares, issued
and outstanding 512,000 shares 512,000 512,000
Paid-in capital surplus 4,608,000 4,608,000
Deficit accumulated during development stage (220,645) (220,645)
Accumulated deficit (84,269) (392,769)
Accumulated other comprehensive income (loss) (53,709) --
------------ ------------
Total shareholders' equity 4,761,377 4,506,586
------------ ------------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 43,470,923 $ 20,324,622
============ ============
</TABLE>
See Accompanying Notes to Consolidated Financial Statements
-26-
<PAGE> 27
CITIZENS EFFINGHAM BANCSHARES, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
<TABLE>
<CAPTION>
Deficit Accumulated
Paid-in accumulated Other
Common Capital during Accumulated Comprehensive
Stock Surplus development Deficit Income (Loss) Total
---------- ---------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C>
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 loss (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
Comprehensive income:
Net income -- -- -- 308,500 -- 308,500
Valuation allowance adjustment on
securities available for sale -- -- -- -- (53,709) (53,709)
---------- ---------- ---------- ---------- ---------- ----------
Total comprehensive income 254,791
----------
BALANCE, DECEMBER 31, 1999 $ 512,000 $4,608,000 $ (220,645) $ (84,269) $ (53,709) $4,761,377
========== ========== ========== ========== ========== ==========
</TABLE>
See Accompanying Notes to Consolidated Financial Statements
-27-
<PAGE> 28
CITIZENS EFFINGHAM BANCSHARES, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF INCOME
<TABLE>
<CAPTION>
Years Ended December 31,
---------------------------
1999 1998
------------ ------------
<S> <C> <C>
INTEREST AND DIVIDEND INCOME:
Interest and fees on loans $ 2,410,054 $ 242,607
Income on federal funds sold 173,326 103,354
Interest on investment securities:
Taxable income 100,508 --
Other interest -- 132,231
------------ ------------
Total interest income 2,683,888 478,192
------------ ------------
INTEREST EXPENSE:
Deposits 1,167,214 143,762
Short-term debt -- 16,738
------------ ------------
Total interest expense 1,167,214 160,500
------------ ------------
Net interest income before loan losses 1,516,674 317,692
Less - provision for loan losses 290,000 195,000
------------ ------------
Net interest income after provision for loan losses 1,226,674 122,692
------------ ------------
NONINTEREST INCOME:
Service charges on deposit accounts 142,081 8,661
Other service charges, commissions, and fees 48,171 --
Other income 13,752 916
------------ ------------
Total noninterest income 204,004 9,577
------------ ------------
NONINTEREST EXPENSES:
Salaries 578,692 311,695
Employee benefits 85,065 18,887
Net occupancy expenses 92,720 36,731
Equipment rental and depreciation of equipment 133,390 32,044
Organization expenses -- 76,478
Other expenses 383,343 176,756
------------ ------------
Total noninterest expense 1,273,210 652,591
------------ ------------
INCOME (LOSS) BEFORE INCOME TAXES 157,468 (520,322)
Less - Income tax benefit (151,032) --
------------ ------------
NET INCOME (LOSS) $ 308,500 $ (520,322)
============ ============
EARNINGS (LOSS) PER SHARE:
Basic $ 0.60 $ (1.02)
============ ============
Diluted $ 0.60 $ (1.02)
============ ============
</TABLE>
See Accompanying Notes to Consolidated Financial Statements
-28-
<PAGE> 29
CITIZENS EFFINGHAM BANCSHARES, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Years Ended December 31,
1999 1998
------------ ------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) $ 308,500 $ (520,322)
Adjustments to reconcile net income (loss) to net cash provided by
(used in) operating activities:
Provision for loan losses 290,000 195,000
Depreciation 121,133 35,019
Changes in accrued income and other assets (541,050) (63,428)
Changes in accrued expenses and other liabilities 141,756 62,939
------------ ------------
Net cash provided by (used in) operating activities 320,339 (290,792)
------------ ------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Net change in loans made to customers (20,660,960) (12,922,815)
Purchase of available for sale securities (2,646,190) --
Property and equipment expenditures (76,291) (1,606,323)
------------ ------------
Net cash used in investing activities (23,383,441) (14,529,138)
------------ ------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net increase in deposits 22,737,666 15,752,457
Proceeds from stock issuance -- 5,120,000
Payments on short-term borrowings -- (532,500)
------------ ------------
Net cash provided by financing activities 22,737,666 20,339,957
------------ ------------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS (325,436) 5,520,027
CASH AND CASH EQUIVALENTS, BEGINNING OF YEAR 5,523,185 3,158
------------ ------------
CASH AND CASH EQUIVALENTS, END OF YEAR $ 5,197,749 $ 5,523,185
============ ============
</TABLE>
See Accompanying Notes to Consolidated Financial Statements
-29-
<PAGE> 30
CITIZENS EFFINGHAM BANCSHARES, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEAR ENDED DECEMBER 31, 1999
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 Bank began operations in September 1998, as
Citizens Bank of Effingham, and operates as a state chartered bank in
Springfield and Rincon, Georgia. Citizens Effingham Bancshares, Inc.
operates as a bank holding company with one bank subsidiary. The
Company owns 100% of the outstanding stock of the Citizens Bank of
Effingham. The Company provides a variety of financial services to
individuals and small businesses through its office in South Georgia.
Its primary deposit products are 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.
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.
-30-
<PAGE> 31
CITIZENS EFFINGHAM BANCSHARES, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEAR ENDED DECEMBER 31, 1999
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. 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 that 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 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 its subsidiary 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 parent company. The Bank pays its allocation of
federal income taxes to the parent company or receives payment from
the parent 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.
-31-
<PAGE> 32
CITIZENS EFFINGHAM BANCSHARES, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEAR ENDED DECEMBER 31, 1999
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 years ended December 31, 1999 and 1998 was
$11,149 and $10,770.
12. EARNINGS PER COMMON SHARE - Basic earnings per share represents income
available to common shareholders divided by the weighted-average
number of common shares outstanding during the period. Diluted
earnings 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.
Earnings per common share have been computed based on the following:
<TABLE>
<CAPTION>
Years Ended December 31,
--------------------------
1999 1998
-------- ---------
<S> <C> <C>
Net income (loss) $308,500 $(520,322)
Less: Preferred stock dividends -- --
-------- ---------
Net income (loss) applicable to common stock $308,500 $(520,322)
======== =========
Weighted average number of common shares outstanding 512,000 512,000
Effect of dilutive options, warrants, etc -- --
-------- ---------
Weighted average number of common shares outstanding
used to calculate diluted earnings per common share 512,000 512,000
======== =========
</TABLE>
-32-
<PAGE> 33
CITIZENS EFFINGHAM BANCSHARES, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEAR ENDED DECEMBER 31, 1999
13. COMPREHENSIVE INCOME - The Company adopted SFAS No. 130, "Reporting
Comprehensive Income" as of January 1, 1998. Accounting principles
generally require that recognized revenue, expenses, gains and losses
be included in net income. Although certain changes in assets and
liabilities, such as unrealized gains and losses on available-for-sale
securities, are reported as a separate component of the equity section
of the balance sheet, such items, along with net income, are
components of comprehensive income. The adoption of SFAS No. 130 had
no effect on the Company net income or shareholders' equity.
The components of other comprehensive income and related tax effects
are as follows:
<TABLE>
<CAPTION>
Years Ended December 31,
------------------------------
1999 1998
------- --------
<S> <C> <C>
Unrealized holding gains (losses) on
available-for-sale securities $81,377 $ --
Less: Reclassification adjustment for (gains) losses
realized in income -- --
------- --------
Net unrealized gains 81,377 --
Tax effect 27,668 --
------- --------
Net-of-tax amount $53,709 $ --
======= ========
</TABLE>
B. INVESTMENT SECURITIES
Debt and equity securities have been classified in the balance sheet
according to management's intent. The following table reflects the
amortized cost and estimated market values of investments in debt
securities held at December 31, 1999. In addition, gross unrealized gains
and gross unrealized losses are disclosed as of December 31, 1999, in
accordance with Statement of Position 90-11 of the American Institute of
Certified Public Accountants, which is effective for financial statements
covering fiscal years ending after December 15, 1990.
The Company did not have any securities HELD TO MATURITY at December 31,
1999.
The book value and market values of securities AVAILABLE FOR SALE were:
<TABLE>
<CAPTION>
AMORTIZED UNREALIZED UNREALIZED ESTIMATED
COST GAINS LOSSES MARKET VALUE
---------- -------- ---------- ------------
<S> <C> <C> <C> <C>
DECEMBER 31, 1999:
Debt Securities
U.S. Treasury and other government agencies $2,692,119 $ -- $ 81,377 $2,610,742
---------- -------- ---------- ----------
Total debt securities 2,692,119 -- 81,377 2,610,742
Equity securities -- -- -- --
---------- -------- ---------- ----------
Total $2,692,119 $ -- $ 81,377 $2,610,742
========== ======== ========== ==========
</TABLE>
The book and market values of pledged securities were $800,000 and
$763,385, respectively, at December 31, 1999.
-33-
<PAGE> 34
CITIZENS EFFINGHAM BANCSHARES, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEAR ENDED DECEMBER 31, 1999
The amortized cost and estimated market value of debt securities held for
investment and of available for sale at December 31, 1999, by contractual
maturity, are shown below. Expected maturities will differ from contractual
maturities because borrowers may have the right to call or repay obligations
with or without call or prepayment penalties.
<TABLE>
<CAPTION>
December 31, 1999: Amortized Cost Market Value
-------------- -------------
<S> <C> <C>
Due in one year or less $ 500,696 $ 478,950
Due after one year through five years 2,191,423 2,131,792
Due after five years through ten years -- --
Due after ten years -- --
---------- ----------
Total $2,692,119 $2,610,742
========== ==========
</TABLE>
The market value is established by an independent pricing service as of the
approximate dates indicated. The differences between the book value and
market value reflect current interest rates and represent the potential
loss or gain had the portfolio been liquidated on that date. Security
losses or gains are realized only in the event of dispositions prior to
maturity.
At December 31, 1999, the Company did not hold investment securities of any
single issuer, other than obligations of the U.S. Treasury and other U.S.
Government agencies, whose aggregate book value exceeded ten percent of
shareholders' equity.
C. LOANS
The following is a summary of the loan portfolio by principal categories at
December 31, 1999 and 1998:
<TABLE>
<CAPTION>
1999 1998
------------ ------------
<S> <C> <C>
Mortgage loans on real estate:
Residential 1-4 family $ 7,744,048 $ 2,173,147
Commercial 8,421,363 --
Construction 5,450,433 1,143,825
------------ ------------
Total mortgage loans on real estate 21,615,844 3,316,972
------------ ------------
Commercial loans 7,680,062 7,676,222
------------ ------------
Other loans -
Personal 4,283,904 1,929,621
------------ ------------
Subtotal 33,579,810 12,922,815
Less:
Allowance for loan losses (481,035) (195,000)
------------ ------------
Loans, net $ 33,098,775 $ 12,727,815
============ ============
</TABLE>
Overdrawn accounts included in loans were $3,052 and $2,263 at December 31,
1999 and 1998.
-34-
<PAGE> 35
CITIZENS EFFINGHAM BANCSHARES, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEAR ENDED DECEMBER 31, 1999
D. ALLOWANCE FOR LOAN LOSSES
A summary of changes in allowance for loan losses of the Bank for the years
ended December 31, 1999 and 1998 is as follows:
<TABLE>
<CAPTION>
1999 1998
------------ ------------
<S> <C> <C>
Beginning Balance $ 195,000 $ --
Add - Provision for possible loan losses 290,000 195,000
------------ ------------
Subtotal 485,000 195,000
------------ ------------
Less:
Loans charged off 4,112 --
Recoveries on loans previously charged off (147) --
------------ ------------
Net loans charged off 3,965 --
------------ ------------
Balance, end of year $ 481,035 $ 195,000
============ ============
</TABLE>
At December 31, 1999, there were no loans on which the accrual of interest
had been discontinued or reduced.
E. BANK PREMISES AND EQUIPMENT
The following is a summary of asset classifications and depreciable lives
for the Bank at December 31, 1999 and 1998:
<TABLE>
<CAPTION>
Useful Lives (Years) 1999 1998
-------------------- ------------- ------------
<S> <C> <C> <C>
Land $ 340,666 $ 340,666
Banking house and improvements 8-40 1,178,829 1,164,418
Equipment, furniture, and fixtures 5-10 549,239 501,148
Automobiles 5 23,284 --
----------- -----------
Total 2,092,018 2,006,232
Less - accumulated depreciation (156,152) (35,019)
----------- -----------
Bank premises and equipment, net $ 1,935,866 $ 1,971,213
=========== ===========
</TABLE>
Depreciation included in operating expenses amounted to $121,133 and
$35,019 in 1999 and 1998.
Pursuant to the terms of noncancelable lease agreements in effect at
December 31, 1999, pertaining to banking premises and equipment, future
minimum rent commitments under various leases are as follows:
<TABLE>
<S> <C>
2000 $ 43,219
2001 47,534
2002 52,284
2003 57,523
2004 63,276
Thereafter 68,732
---------
Total future minimum rent commitments $ 332,568
=========
</TABLE>
The leases contain options to extend for periods from four to seven years.
The cost of such rentals is not included above. Total rent expense for the
year ended December 31, 1999 and amounted to $39,618.
-35-
<PAGE> 36
CITIZENS EFFINGHAM BANCSHARES, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEAR ENDED DECEMBER 31, 1999
F. DEPOSITS
The aggregate amount of time deposits exceeding $100,000 at December 31,
1999 and 1998 was $8,451,718 and $3,236,195 respectively, and the Bank had
deposit liabilities in NOW accounts of $2,519,410 and $1,006,020 at
December 31, 1999 and 1998.
At December 31, 1999, the scheduled maturities of time deposits are as
follows:
<TABLE>
<S> <C>
2000 $ 14,696,908
2001 5,046,605
2002 187,274
2003 687,574
2004 815,174
-------------
Total time deposits $ 21,433,535
=============
</TABLE>
G. SHORT-TERM BORROWINGS
The Bank had a line of credit for federal funds purchased of $2,250,000
with two correspondent institutions as of December 31, 1999. The Bank had
not drawn from this line of credit during the year ended December 31, 1999.
H. PROVISION FOR INCOME TAXES
The provision for income taxes for the year ended December 31, 1999 and
1998 was computed as follows:
<TABLE>
<CAPTION>
1999 1998
--------- -----------
<S> <C> <C>
Current tax expense $ 2,586 $ --
Deferred tax expense (benefit) (153,618) --
--------- -----------
Net provision for income taxes $(151,032) $ --
========= ===========
</TABLE>
The Company has a net operating loss (NOL) of $ 2,132 that is expected to
expire by the year 2013.
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>
Years Ended December 31, 1999 1998
------------------------ --------- -----------
<S> <C> <C>
Tax on pretax income at statutory rate $ 53,539 $ (176,909)
Benefit of graduated tax rates (8,876) --
Effect of unrealized net operating loss carryovers -- 113,482
Benefit of realized net operating loss carryovers (112,757) --
Provision for federal alternative minimum tax 2,586 --
Non-deductible business meals and entertainment 1,011 --
Non-deductible interest expense to carry tax-exempt income 211 --
Non-deductible social club dues 1,702 1,042
Effect of deferred tax attributes (88,448) 62,385
--------- -----------
Total $(151,032) $ --
========= ===========
Net effective tax rate -94.6% 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:
-36-
<PAGE> 37
CITIZENS EFFINGHAM BANCSHARES, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEAR ENDED DECEMBER 31, 1999
<TABLE>
<CAPTION>
1999 1998
--------- -----------
<S> <C> <C>
Deferred Income Tax Asset:
Provision for loan losses, net $ 157,552 $ 62,691
Organization costs 42,279 53,809
Unrealized loss on securities available for sale 27,668 --
AMT Credit Carryover 2,586 --
NOL carryover 725 113,482
--------- -----------
Total deferred income tax assets 230,810 229,982
--------- -----------
Deferred Income Tax Liabilities -
Depreciation (50,898) (23,012)
--------- -----------
Net deferred tax asset $ 179,912 $ 206,970
========= ===========
</TABLE>
I. LIMITATION ON DIVIDENDS
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, 1999, 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, the Bank is 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 or 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 $5,980,000
----------
Standby letters of credit 143,075
----------
Total $6,123,075
==========
</TABLE>
-37-
<PAGE> 38
CITIZENS EFFINGHAM BANCSHARES, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEAR ENDED DECEMBER 31, 1999
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 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.
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 1999
with respect to such loans to these individuals:
<TABLE>
<S> <C>
Balances at December 31, 1998 $ 964,000
New loans 1,526,479
Repayments (248,479)
-----------
Balances at December 31, 1999 $ 2,242,000
===========
</TABLE>
The Bank also had deposits from these related parties of approximately
$3,354,985 at December 31, 1999.
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>
1999 1998
---------- --------
<S> <C> <C>
Interest on deposits $1,026,636 $100,355
========== ========
Income taxes, net $ -- $ --
========== ========
</TABLE>
Other Non-Cash Transactions - Other non-cash transactions relating to
investing and financing activities were as follows:
<TABLE>
<CAPTION>
1999 1998
----------- -------
<S> <C> <C>
Increase in unrealized loss on available for sale securities $ (53,709) $ --
=========== =======
</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 does not extend
credit in excess of the legal lending limit to any single borrower or group
of related borrowers.
-38-
<PAGE> 39
CITIZENS EFFINGHAM BANCSHARES, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEAR ENDED DECEMBER 31, 1999
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. There were no uninsured balances at December
31, 1999.
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 judgements. 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.
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, 1999 and 1998 are as follows:
-39-
<PAGE> 40
CITIZENS EFFINGHAM BANCSHARES, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEAR ENDED DECEMBER 31, 1999
<TABLE>
<CAPTION>
1999 1998
-------------------------- -------------------------
Carrying Estimated Carrying Estimated
Amount Fair Value Amount Fair Value
----------- ----------- ----------- ----------
<S> <C> <C> <C> <C>
ASSETS:
Cash and short-term investments $ 5,197,749 $ 5,197,749 $ 5,523,185 $ 5,523,185
Securities available for sale 2,610,742 2,610,742 -- --
Loans 33,579,810 33,562,584 12,922,815 12,937,219
LIABILITY-
Deposits 38,490,123 38,585,595 15,752,457 15,769,498
UNRECOGNIZED FINANCIAL INSTRUMENTS:
Commitments to extend credit 5,980,000 5,980,000 2,708,000 2,708,000
Standby letters of credit and financial guarantees written 143,075 143,075 -- --
</TABLE>
P. OPERATING EXPENSES
Components of other operating expenses greater than 1% of total interest
income and other income for the periods ended December 31, 1999 and 1998
are:
<TABLE>
<CAPTION>
1999 1998
------------ ------------
<S> <C> <C>
Supplies/postage/printing $ 51,539 $ 64,391
Organization expense -- 27,998
Audit fees 29,938 16,869
Advertising 11,149 10,770
Legal fees 35,423 14,696
Telephone and communications 28,815 9,658
Miscellaneous expense 2,060 7,898
Utilities 18,702 6,801
Examination fees -- 5,000
</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
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 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, 1999,
the Bank meets all capital adequacy requirements to which it is subject. As
of December 31, 1999, 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.
-40-
<PAGE> 41
CITIZENS EFFINGHAM BANCSHARES, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEAR ENDED DECEMBER 31, 1999
<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, 1999:
Total Risk-Based Capital To
(Risk-Weighted Assets) 5,203,000 14.5% 2,871,000 > 8.0% 3,588,000 > 10.0%
- -
Tier I Capital To
(Risk-Weighted Assets) 4,755,000 13.3% 1,430,000 > 4.0% 2,145,000 > 6.0%
- -
Tier I Capital To
(Average Assets) 4,755,000 11.9% 1,598,000 > 4.0% 1,998,000 > 5.0%
- -
AS OF DECEMBER 31, 1998:
Total Risk-Based Capital To
(Risk-Weighted Assets) 4,638,000 14.5% 2,559,000 > 8.0% 3,199,000 > 10.0%
- -
Tier I Capital To
(Risk-Weighted Assets) 4,443,000 13.1% 1,357,00 > 4.0% 2,035,000 > 6.0%
- -
Tier I Capital To
(Average Assets) 4,443,000 8.4% 2,116,000 > 4.0% 2,645,000 > 5.0%
- -
</TABLE>
-41-
<PAGE> 42
CITIZEN EFFINGHAM BANCSHARES, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEAR ENDED DECEMBER 31, 1999
R. CONDENSED FINANCIAL STATEMENTS (PARENT COMPANY ONLY)
Condensed parent company financial information on Citizens Effingham
Bancshares, Inc., is as follows:
BALANCE SHEETS
<TABLE>
<CAPTION>
As of December 31,
--------------------------------
1999 1998
------------ ------------
ASSETS
<S> <C> <C>
Cash in subsidiary $ 30,667 $ 63,234
Due from subsidiary - income taxes 20,274 --
Investment in subsidiary, at equity in underlying net assets 4,700,934 4,443,352
Other current assets 12,088 --
------------ ------------
Total Assets $ 4,763,963 $ 4,506,586
============ ============
LIABILITIES
Income taxes payable $ 2,586 $ --
------------ ------------
Total Liabilities 2,586 --
------------ ------------
SHAREHOLDERS' EQUITY
Common stock, $1 par value; authorized 20,000,000 shares, issued
and outstanding 512,000 shares 512,000 512,000
Paid-in capital surplus 4,608,000 4,608,000
Deficit accumulated during development stage (220,645) (220,645)
Accumulated deficit (84,269) (392,769)
------------ ------------
Total 4,815,086 4,506,586
Less - unrealized gains (losses) on securities (53,709) --
------------ ------------
Total shareholders' equity 4,761,377 4,506,586
------------ ------------
Total Liabilities and Shareholders' Equity $ 4,763,963 $ 4,506,586
============ ============
</TABLE>
STATEMENTS OF INCOME AND ACCUMULATED DEFICIT
<TABLE>
<CAPTION>
Years Ended December 31,
--------------------------------
1999 1998
------------ ------------
<S> <C> <C>
OPERATING EXPENSES $ 32,567 $ 56,766
------------ ------------
LOSS BEFORE TAXES AND EQUITY IN UNDISTRIBUTED (32,567) (56,766)
Add - Benefit for income taxes 29,776 --
------------ ------------
LOSS BEFORE EQUITY IN UNDISTRIBUTED INCOME (LOSS) OF SUBSIDIARY (2,791) (56,766)
Equity in undistributed income (loss) of subsidiary 311,291 (463,556)
------------ ------------
NET INCOME (LOSS) 308,500 (520,322)
ACCUMULATED DEFICIT, BEGINNING (613,414) (93,092)
------------ ------------
ACCUMULATED DEFICIT, ENDING $ (304,914) $ (613,414)
============ ============
</TABLE>
-42-
<PAGE> 43
CITIZENS EFFINGHAM BANCSHARES, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEAR ENDED DECEMBER 31, 1999
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
For The Years Ended December 31,
--------------------------------
1999 1998
------------ ------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) $ 308,500 $ (520,322)
Adjustments to reconcile net income (loss) to net cash provided by
(used in) operating activities:
Equity investment income (loss) (311,291) 463,556
Net change in operating assets and liabilities:
Increase (decrease) in other current assets (12,088) --
Increase (decrease) in other liabilities (17,688) --
------------ ------------
Net cash used in operating activities (32,567) (56,766)
------------ ------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Investment in subsidiary -- (5,000,000)
------------ ------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from stock issuance -- 5,120,000
------------ ------------
Net cash provided by financing activities -- 5,120,000
------------ ------------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS (32,567) 63,234
CASH AND CASH EQUIVALENTS AT BEGINNING OF THE YEAR 63,234 --
------------ ------------
CASH AND CASH EQUIVALENTS AT THE END OF THE YEAR $ 30,667 $ 63,234
============ ============
</TABLE>
-43-
<PAGE> 44
ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
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, 1999, 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 Shearouse* (53) President, Chief Executive Officer of the Company
and President of the Bank
Jon G. Burns (47) Owner and Operator of B&S Feed and Farm Supply
Charles E. Hartzog (63) Retired Banker
Philip M. Heidt (51) Owner of Heidt Real Estate Services, Inc., which
operates Century 21/Heidt Realty
W. Harvey Kieffer (57) Owner and Operator of Kieffer Carter
Construction, Inc.
C. Murray Kight (67) Real Estate Developer
Thomas C. Strickland, Jr. (57) Owner and Operator of Strickland Funeral Home,
Inc. and Real Estate Developer
Mariben M. Thompson (59) Real Estate and Diversified Investor
Thomas O. Triplett, Sr. (64) Retired Banker and Former Legislator
J. Terrell Webb (69) Retired Pharmacist
H. Mitchell Weitman (53) Owner and Operator of Weitman Pharmacy, Inc.
Wendel H. Wilson (55) 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.
-44-
<PAGE> 45
ITEM 10. EXECUTIVE COMPENSATION
EXECUTIVE COMPENSATION
SUMMARY COMPENSATION TABLE
The following table presents the total compensation of the Company paid during
fiscal years 1999, 1998 and 1997 (since the Company's inception in April 1997)
to its chief executive officer. No executive officer of the Company earned over
$100,000 in salary and bonus during fiscal years 1999, 1998 and 1997.
<TABLE>
<CAPTION>
Annual Compensation Long-Term Compensation
------------------- ----------------------
Awards Payouts
------ -------
Other Restricted All
Annual Stock Options/ LTIP Other
Salary Bonus Compensation Awards SAR's Payouts Compensation
Name and Position Year ($) ($) (S) ($) (#) ($) ($)
- ----------------- ---- ------- ----- ------------ ---------- -------- ------- ------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Harry H. Shearouse, 1999 94,561 3,750 --
President and Chief 1998 88,333 -- -- -- -- -- --
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 would begin receiving a salary of $90,000
per year. The term of the employment agreement is three years from the date of
opening.
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 1999
The Company did not grant any options in fiscal year 1999.
-45-
<PAGE> 46
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 February 15, 2000, 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.
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 21,000(1) 4.10%
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 510 .10%
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%
</TABLE>
-46-
<PAGE> 47
<TABLE>
<CAPTION>
Number Percent
Name and Address Of Shares Of Class
- --------------------------- --------- --------
<S> <C> <C>
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%
H. Mitchell Weitman
P.O. Box 188
Springfield, GA 31329 5,000 0.98%
Wendel H. Wilson
930 Old Dixie Highway
Springfield, GA 31329 10,200(5) 1.99%
(B) ALL DIRECTORS AND
EXECUTIVE OFFICERS AS A GROUP
(12 PERSONS) 134,410 26.25%
</TABLE>
(1) Consists of (i) 16,000 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.
(5) Consists of (i) 5,000 shares owned directly by Mr. Wilson, (ii) 5,000
shares held in a trust in the name of Wendel H. Wilson as trustee for Troy
Allison Cowart, (iii) 100 shares held in a trust in the name of Wendel H.
Wilson as trustee for April Moore, and (iv) 100 shares held in the name of
Wendel H. Wilson as trustee for Ashley R. Moore.
-47-
<PAGE> 48
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.
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).
99 Notice and Proxy Statement
</TABLE>
- ---------------
* Compensatory plan or arrangement.
-48-
<PAGE> 49
(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
(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 intends to hold its annual meeting of shareholders on
April 6, 2000. The Company is filing its Proxy Statement with the Securities and
Exchange Commission with this Annual Report on Form 10-KSB.
-49-
<PAGE> 50
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: March 17, 2000
----------------------------------------
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.
-50-
<PAGE> 51
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 March 17, 2000
- ------------------------------ Board, Treasurer and Director
Harry H. Shearouse (Principal Executive Officer)
/s/ Carolyn B. Williamson Chief Financial Officer March 17, 2000
- ------------------------------ (Principal Financial and
Carolyn B. Williamson Accounting Officer)
Director
/s/ Jon G. Burns March 17, 2000
- ------------------------------
Jon G. Burns
/s/ Charles E. Hartzog Director March 17, 2000
- ------------------------------
Charles E. Hartzog
/s/ Philip M. Heidt Director March 17, 2000
- ------------------------------
Philip M. Heidt
/s/ W. Harvey Kieffer Director March 17, 2000
- ------------------------------
W. Harvey Kieffer
/s/ C. Murray Kight Director March 17, 2000
- ------------------------------
C. Murray Kight
/s/ Thomas C. Strickland, Jr. Director March 17, 2000
- ------------------------------
Thomas C. Strickland, Jr.
/s/ Mariben M. Thompson Director March 17, 2000
- ------------------------------
Mariben M. Thompson
/s/ Thomas O. Triplett, Sr. Director March 17, 2000
- ------------------------------
Thomas O. Triplett, Sr.
/s/ J. Terrell Webb Director March 17, 2000
- ------------------------------
J. Terrell Webb
/s/ H. Mitchell Weitman Director March 17, 2000
- ------------------------------
H. Mitchell Weitman
/s/ Wendel H. Wilson Director March 17, 2000
- ------------------------------
Wendel H. Wilson
</TABLE>
-51-
<PAGE> 52
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT
NUMBER EXHIBIT
- ------- -------
<S> <C>
3.1 Articles of Incorporation (1)
3.3 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).
99 Notice and Proxy Statement
</TABLE>
- ----------------
* Compensatory plan or agreement.
(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.
-52-
<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
-53-
<TABLE> <S> <C>
<ARTICLE> 9
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> DEC-31-1999
<CASH> 2,787,749
<INT-BEARING-DEPOSITS> 0
<FED-FUNDS-SOLD> 2,410,000
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 2,610,742
<INVESTMENTS-CARRYING> 0
<INVESTMENTS-MARKET> 0
<LOANS> 33,579,810
<ALLOWANCE> 481,035
<TOTAL-ASSETS> 43,470,923
<DEPOSITS> 38,490,123
<SHORT-TERM> 0
<LIABILITIES-OTHER> 219,423
<LONG-TERM> 0
0
0
<COMMON> 512,000
<OTHER-SE> 4,249,370
<TOTAL-LIABILITIES-AND-EQUITY> 4,761,377
<INTEREST-LOAN> 2,410,054
<INTEREST-INVEST> 100,508
<INTEREST-OTHER> 173,326
<INTEREST-TOTAL> 2,683,888
<INTEREST-DEPOSIT> 1,167,214
<INTEREST-EXPENSE> 0
<INTEREST-INCOME-NET> 1,516,674
<LOAN-LOSSES> 290,000
<SECURITIES-GAINS> 0
<EXPENSE-OTHER> 1,273,210
<INCOME-PRETAX> 157,468
<INCOME-PRE-EXTRAORDINARY> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 308,500
<EPS-BASIC> 0.60
<EPS-DILUTED> 0.60
<YIELD-ACTUAL> 3.9
<LOANS-NON> 0
<LOANS-PAST> 0
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 195,000
<CHARGE-OFFS> 4,112
<RECOVERIES> 147
<ALLOWANCE-CLOSE> 481,035
<ALLOWANCE-DOMESTIC> 481,035
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 0
</TABLE>
<PAGE> 1
CITIZENS EFFINGHAM BANCSHARES, INC.
802 South Laurel Street
Springfield, Georgia 31329
(912) 754-0754
March 10, 2000
To the Shareholders of Citizens Effingham Bancshares, Inc.:
You are cordially invited to attend the annual meeting of shareholders
of Citizens Effingham Bancshares, Inc. (the "Company") to be held at Citizens
Bank of Effingham, 802 South Laurel Street, Springfield, Georgia 31329, on
April 6, 2000 at 5:30 p.m. The official Notice of the Meeting and the Proxy
Statement of management of the Company accompany this letter.
The principal business of the meeting will be to elect four persons to
serve as directors for a term of three years and to review the operations of
the Company and its wholly-owned subsidiary, Citizens Bank of Effingham.
We cannot take any action at the meeting unless the holders of a
majority of the outstanding shares of Common Stock of the Company are
represented, either in person or by proxy. Therefore, WHETHER OR NOT you plan
to attend the meeting, please mark, date and sign the enclosed form of proxy,
and return it to the Company in the envelope provided as soon as possible.
Sincerely,
Harry H. Shearouse
President and Chief Executive Officer
March 10, 2000
<PAGE> 2
CITIZENS EFFINGHAM BANCSHARES, INC.
802 South Laurel Street
Springfield, Georgia 31329
(912) 754-0754
NOTICE OF THE ANNUAL MEETING OF SHAREHOLDERS
TO BE HELD APRIL 6, 2000
To the Shareholders of Citizens Effingham Bancshares, Inc:
Notice is hereby given that the Annual Meeting of Shareholders of
Citizens Effingham Bancshares, Inc. (the "Company") will be held on April 6,
2000, at 5:30 p.m. at Citizens Bank of Effingham, 802 South Laurel Street,
Springfield, Georgia 31329 for the following purposes:
(1) To elect four persons to serve as directors for a three-year
term; and
(2) To transact such other business as may properly come before
the meeting or any adjournments thereof.
The Board of Directors has fixed the close of business on February 15,
2000, as the record date for the determination of shareholders entitled to
notice of and to vote at the meeting or any adjournment.
To ensure that the greatest number of shareholders will be present
either by person or by proxy, we ask that you mark, date, sign and return the
enclosed form of proxy as soon as possible. If you attend the meeting in
person, you may revoke your proxy at the meeting and vote in person. You may
revoke your proxy any time before the proxy is exercised.
By Order of the Board of Directors,
Harry H. Shearouse
President and Chief Executive Officer
March 10, 2000
<PAGE> 3
CITIZENS EFFINGHAM BANCSHARES, INC
802 South Laurel Street
Springfield, Georgia 31329
(912) 754-0754
----------------------------------------------------------
PROXY STATEMENT FOR 2000 ANNUAL MEETING
----------------------------------------------------------
VOTING
This Proxy Statement is furnished in connection with the solicitation
of proxies by the Board of Directors of Citizens Effingham Bancshares, Inc.
(the "Company") for use at the Annual Meeting of Shareholders to be held on
April 6, 2000, and at any adjournments thereof. In addition to this
solicitation by mail, the officers and employees of the Company and its
wholly-owned subsidiary, Citizens Bank of Effingham (the "Bank"), without
additional compensation, may solicit proxies in favor of the proposal
(discussed below), if deemed necessary, by personal contact, letter, telephone
or other means of communication. Brokers, nominees and other custodians and
fiduciaries will be requested to forward proxy solicitation material to the
beneficial owners of the shares of the Company's common stock, where
appropriate, and the Company will reimburse them for their reasonable expenses
incurred in connection with the transmittals. The Company will bear the cost of
solicitation of proxies for the Annual Meeting.
This Proxy Statement and the form of proxy are first being mailed to
shareholders on or about March 10, 2000. If the enclosed form of proxy is
properly executed, returned, and not revoked, it will be voted in accordance
with the specifications made by the shareholder. If the form of proxy is signed
and returned but specifications are not made, the proxy will be voted FOR the
election of the nominees to the Board of Directors.
You can revoke your proxy at any time before it is voted by delivering
to Harry H. Shearouse, President and Chief Executive Officer of the Company, at
the main office of the Company, either a written revocation of the proxy or a
duly executed proxy bearing a later date or by attending the meeting and voting
in person.
The Board of Directors fixed the close of business on February 15,
2000 as the record date for determining the shareholders who are entitled to
notice of and to vote at the meeting. As of the close of business on the record
date, the authorized common stock, $1.00 par value (the "Common Stock"), of the
Company consisted of 20,000,000 shares, with 512,000 shares issued and
outstanding. Each issued and outstanding share is entitled to one vote. The
Articles of Incorporation of the Company authorize the Company to issue
10,000,000 shares of preferred stock, of which no shares are issued and
outstanding.
Directors are elected by a plurality of the shares present in person
or by proxy and entitled to vote. Only those votes actually cast will be
counted for the purpose of determining whether a
<PAGE> 4
particular nominee received sufficient votes to be elected. Accordingly, any
abstentions and broker non-votes, which occur when a broker submits a proxy
card without exercising discretionary voting authority on a non-routine matter,
will not be included in vote totals and will not be considered in determining
the outcome of the vote.
Approval of any other matter that may properly come before the Annual
Meeting requires the affirmative vote of a majority of shares of Common Stock
present in person or by proxy and entitled to vote on such matter. Abstentions
will be counted in determining the minimum number of votes required for
approval and will, therefore, have the effect of negative votes. Broker
non-votes will not be counted as votes for or against approval of any other
matter properly brought before the Annual Meeting.
DIRECTORS AND EXECUTIVE OFFICERS
ELECTION OF DIRECTORS
The Board recommends that the shareholders elect the nominees
identified below as Director Nominees. The Company's Articles of Incorporation
provide that the Board of Directors of the Company will be divided into three
classes, Class I, Class II and Class III, each of which is as nearly equal in
number as possible. The directors in each class serve for staggered terms of
three years each. The following table sets forth for each nominee and each
continuing director: (a) his or her name, (b) his or her age at December 31,
1999, (c) how long he or she has been a director of the Company, (d) his or her
position(s) with the Company, and (e) his or her principal occupation and
recent business experience.
CLASS II -DIRECTOR NOMINEES
For Three Year Term Expiring 2003
<TABLE>
<CAPTION>
POSITION WITH THE COMPANY
NAME (AGE) DIRECTOR SINCE AND BUSINESS EXPERIENCE
- ----------------------------- -------------- -----------------------------------------
<S> <C> <C>
Harry H. Shearouse* (53) 1997 President, Chief Executive Officer of the
Company and President of the Bank
C. Murray Kight (67) 1997 Real Estate Developer
Thomas C. Strickland, Jr. (57) 1997 Owner and Operator of Strickland Funeral
Home, Inc. and Real Estate Developer
Mariben M. Thompson (59) 1997 Real Estate and Diversified Investor
</TABLE>
2
<PAGE> 5
CLASS III - CONTINUING DIRECTORS
Term Expiring 2001
<TABLE>
<CAPTION>
POSITION WITH THE COMPANY
NAME (AGE) DIRECTOR SINCE AND BUSINESS EXPERIENCE
- ----------------------------- -------------- -----------------------------------------
<S> <C> <C>
Thomas O. Triplett, Sr. (64) 1997 Retired Banker and Former Legislator
J. Terrell Webb (69) 1997 Retired Pharmacist
H. Mitchell Weitman (53) 1997 Owner and Operator of Weitman Pharmacy,
Inc.
Wendel H. Wilson (55) 1997 Certified Public Accountant, Managing
Partner of Wilson & Kessler, C.P.A.
</TABLE>
CLASS I - CONTINUING DIRECTORS
Term Expiring 2002
<TABLE>
<CAPTION>
POSITION WITH THE COMPANY
NAME (AGE) DIRECTOR SINCE AND BUSINESS EXPERIENCE
- ----------------------------- -------------- -----------------------------------------
<S> <C> <C>
Jon G. Burns (47) 1997 Owner and Operator of B&S Feed and Farm
Supply
Charles E. Hartzog (63) 1997 Retired Banker
Philip M. Heidt (51) 1997 Owner of Heidt Real Estate Services, Inc.,
which operates Century 21/Heidt Realty
W. Harvey Kieffer (57) 1997 Owner and Operator of Kieffer Carter
Construction Company
</TABLE>
- ------------------
*Mr. Shearouse served as Vice President of First National Bank of Effingham
from 1992 until 1997.
Mr. Shearouse is the only executive officer of the
Company.
SECURITY OWNERSHIP OF 5% BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth the number of shares of the Company's
Common Stock beneficially owned as of February 15, 2000 by each director of the
Company and all executive officers and directors as a group. As of February 15,
2000, the Company did not have any shareholders who beneficially owned more
than 5% of the shares of the Company's outstanding Common Stock. 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.
Information relating to beneficial ownership of the Company is based
upon "beneficial ownership" concepts described in rules promulgated under the
Securities Exchange Act of 1934, as
3
<PAGE> 6
amended. Under these rules a person is deemed to be a "beneficial owner" of a
security if that person has or shares "voting power" or "investment power."
Voting power includes the power to vote or direct the voting of the security,
and investment power includes the power to dispose of or to direct the
disposition of the 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>
PERCENT
NAME AND ADDRESS NUMBER OF SHARES OF CLASS
---------------- ---------------- --------
<S> <C> <C>
(A) DIRECTORS
Jon G. Burns 21,000 (1) 4.10%
5829 Clyo Kildare Road
Newington, GA 30446
Charles E. Hartzog 12,500 2.44%
P. O. Box 433
Springfield, GA 31329
Philip M. Heidt 8,350 (2) 1.63%
2954 Springfield Egypt Road
Springfield, GA 31329
W. Harvey Kieffer 510 .10%
308 Merion Road
Rincon, GA 31326
C. Murray Kight 20,000 3.91%
P. O. Box 323
Springfield, GA 31329
Harry H. Shearouse (3) 10,000 1.95%
610 Stillwell Road
Springfield, GA 31329
Thomas C. Strickland, Jr. 16,850 (4) 3.29%
P. O. Box 295
Springfield, GA 31329
Mariben M. Thompson 5,000 0.98%
P. O. Box 129
Guyton, GA 31312
</TABLE>
4
<PAGE> 7
<TABLE>
<S> <C> <C>
Thomas O. Triplett, Sr. 5,000 0.98%
400 Lake Tomacheechee Drive
Rincon, GA 31326
J. Terrell Webb 20,000 3.91%
904 North Ash Street
Springfield, GA 31329
H. Mitchell Weitman 5,000 0.98%
P. O. Box 188
Springfield, GA 31329
Wendel H. Wilson 10,200 (5) 1.99%
930 Old Dixie Highway
Springfield, GA 31329
(B) ALL DIRECTORS AND EXECUTIVE 134,410 26.25%
OFFICERS, AS A GROUP (12 PERSONS)
</TABLE>
(1) Consists of (i) 16,000 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.
(5) Consists of (i) 5,000 shares owned directly by Mr. Wilson and (ii)
5,000 shares held in a trust in the name of Wendel H. Wilson as
trustee for Troy Allison Cowart, 100 shares held in a trust in the
name of Wendel H. Wilson as trustee for April Moore and 100 shares
held in the name of Wendel H. Wilson as trustee for Ashley R. Moore,
all of which Mr. Wilson has voting authority .
5
<PAGE> 8
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 and their affiliates, including members of their families,
corporations, partnerships or other organizations in which the directors and
officers may have a controlling interest. These transactions are on
substantially the same terms (including price, interest rate and collateral) as
those prevailing at the same time for comparable transactions with unrelated
parties. In the opinion of management, these transactions do not involve more
than the normal risk of collectibility or present other unfavorable features to
the Company or the Bank. Additionally, these transactions 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.
INDEPENDENT PUBLIC ACCOUNTANTS
The Company has selected the accounting firm of Thigpen Jones & Seaton
CPA to serve as auditors for the Company for the current year. The firm of
Thigpen Jones & Seaton CPA also served as the Company's auditors since 1997. A
representative of the firm is expected to be present at the meeting and will be
given the opportunity to make a statement if he or she desires to do so and
will be available to respond to appropriate questions from shareholders.
OTHER MATTERS
The Board of Directors of the Company knows of no other matters that
may be brought before the meeting. If, however, any matter other than the
election of directors, or matters incidental thereto, should properly come
before the meeting, votes will be cast pursuant to the proxies in accordance
with the best judgment of the proxyholders.
If you cannot be present in person, you are requested to complete,
sign, date and return the enclosed proxy promptly. An envelope has been
provided for that purpose. No postage is required if mailed in the United
States.
March 10, 2000
6
<PAGE> 9
CITIZENS EFFINGHAM BANCSHARES, INC.
PROXY
SOLICITED BY THE BOARD OF DIRECTORS
FOR THE ANNUAL MEETING OF SHAREHOLDERS
TO BE HELD ON APRIL 6, 2000
The undersigned hereby appoints Harry H. Shearouse or C. Murray Kight
or either of them, as Proxies, each with the power to appoint his substitute,
and hereby authorizes them or either of them to represent and to vote, as
designated below, all of the Common Stock of Citizens Effingham Bancshares,
Inc. (the "Company"), which the undersigned would be entitled to vote if
personally present at the Annual Meeting of Shareholders (the "Annual Meeting")
to be held at the main office of Citizens Bank of Effingham, located at 802
South Laurel Street, Springfield, Georgia 31329 and at any adjournments
thereof, upon the proposal described in the accompanying Notice of the Annual
Meeting and the Proxy Statement relating to the Annual Meeting, receipt of
which are hereby acknowledged.
THE BOARD OF DIRECTORS RECOMMENDS THAT SHAREHOLDERS VOTE FOR THE PROPOSAL.
PROPOSAL: To elect the four (4) persons listed below to serve as directors of
the Company for a term of three years:
Harry H. Shearouse Thomas C. Strickland, Jr.
C. Murray Kight Mariben M. Thompson
[ ] FOR all nominees listed above [ ] WITHHOLD authority to vote
(except as indicated below) for all nominees listed above
INSTRUCTION: To withhold authority for any individual nominee, mark "FOR"
above and write the nominee's name in
this _________________________________________________________________ space.
THIS PROXY WHEN PROPERLY EXECUTED WILL BE VOTED IN THE MANNER DIRECTED
BY THE UNDERSIGNED SHAREHOLDER. IF NO DIRECTION TO THE CONTRARY
IS INDICATED, IT WILL BE VOTED FOR THE PROPOSAL.
DISCRETIONARY AUTHORITY IS HEREBY CONFERRED
AS TO ALL OTHER MATTERS WHICH MAY COME
BEFORE THE ANNUAL MEETING.
If stock is held in the name of more than one person, all holders must
sign. Signatures should correspond exactly with the name or names appearing on
the stock certificate(s). When signing as attorney, executor, administrator,
trustee or guardian, please give full title as such. If a corporation, please
sign in full corporate name by President or other authorized officer. If a
partnership, please sign in partnership name by authorized person.
--------------------------------------------
Signature(s) of Shareholder(s)
[LABEL]
--------------------------------------------
Name(s) of Shareholders(s)
Date: _________________________________, 2000
(Be sure to date your Proxy)
Please mark, sign and date this Proxy, and return it in the enclosed
return-addressed envelope. No postage necessary.
I WILL __________ WILL NOT __________ ATTEND THE ANNUAL SHAREHOLDERS MEETING.
PLEASE RETURN PROXY AS SOON AS POSSIBLE
