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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-KSB
______________
Annual Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of
1934
For the fiscal year ended December 31, 1999
Commission File No. 000-23991
CNB Holdings, Inc.
(Name of Small Business Issuer in Its Charter)
Georgia 58-2362335
(State of Incorporation) (I.R.S. Employer
Identification Number)
7855 North Point Parkway, Suite 200
Alpharetta, Georgia 30022-4849
(Address of Principal Executive Offices) (Zip Code)
(770) 650-8262
(Issuer's Telephone Number, Including Area Code)
______________
Securities registered under Section 12(b) of the Exchange Act:
Title of Each Class Name of Exchange on Which Registered
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None N/A
Securities registered under Section 12(g) of the Exchange Act:
Common Stock, $1.00 par value per share
Check whether the issuer: (1) has filed all reports required to be filed by
Section 13 or 15(d) of the Exchange Act during the past 12 months (or 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 disclosure of delinquent filers in response to Item 405 of
Regulation S-B is not contained in this form, and no disclosure will be
contained, to the best of the issuer's knowledge, in definitive proxy or
information statements incorporated by reference in Part III of this Form 10-KSB
or any amendment to this Form 10-KSB. [_]
The issuer's revenues for its most recent fiscal year were $2,897,156.
The aggregate market value of the common stock held by non-affiliates of
the issuer (678,269 shares) on April 10, 2000 was approximately $5,341,368. For
the purpose of this response, directors, officers and holders of 5% or more of
the issuer's common stock are considered the affiliates of the issuer at that
date. Although directors and executive officers of the registrant were assumed
to be "affiliates" of the issuer for purposes of this calculation, the
classification is not to be interpreted as an admission of such status.
As of March 30, 2000, there were 1,058,897 shares of the issuer's common
stock outstanding.
Transitional Small Business Disclosure Format (check one): Yes [ ] No [X]
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PART I
CAUTIONARY NOTICE REGARDING FORWARD-LOOKING STATEMENTS
Certain of the statements made in this Report and in documents incorporated
by reference herein, including matters discussed under the caption "Management's
Discussion and Analysis of Financial Condition and Results of Operations," as
well as oral statements made by the Company or its officers, directors or
employees, may constitute forward-looking statements within the meaning of
Section 27A of the Securities Exchange Act of 1933, as amended (the "Securities
Act"), as amended. Such forward-looking statements are based on management's
beliefs, current expectations, estimates and projections about the financial
services industry, the economy and about CNB Holdings, Inc. (the "Company") and
its wholly-owned subsidiary, Chattahoochee National Bank (the "Bank") in
general. The words "expect," "anticipate," "intend," "plan," "believe," "seek,"
"estimate" and similar expressions are intended to identify such forward-looking
statements; however, this Report also contains other forward-looking statements
in addition to historical information. Such forward-looking statements are not
guarantees of future performance and are subject to risks, uncertainties and
other factors that may cause the actual results, performance or achievements of
the Company to differ materially from any results expressed or implied by such
forward-looking statements. Such factors include, without limitation, (i)
increased competition with other financial institutions, (ii) lack of sustained
growth in the economy in Fulton County, Georgia (iii) rapid fluctuations in
interest rates, (iv) the inability of the Bank to maintain regulatory capital
standards, and (v) changes in the legislative and regulatory environment. Many
of such factors are beyond the Company's ability to control or predict, and
readers are cautioned not to put undue reliance on such forward-looking
statements. The Company disclaims any obligation to update or revise any
forward-looking statements contained in this Report, whether as a result of new
information, future events or otherwise.
Item 1. Description of Business
General
The Company was incorporated under the laws of the State of Georgia on
November 5, 1997 and owns all of the outstanding capital stock of the Bank. In
a private offering and a separate public offering conducted during 1998, the
Company sold and issued an aggregate of 1,235,000 shares of common stock, par
value $1.00 per share (the "Common Stock"), at $10.00 per share. On May 29,
1998, the Company received approval from the Board of Governors of the Federal
Reserve System (the "Federal Reserve") and the Georgia Department of Banking and
Finance ("DBF") to become a bank holding company. Accordingly, the Company
purchased 100% of the Bank's common stock by injecting approximately $9.6
million into the Bank's capital accounts immediately prior to the commencement
of banking operations on July 27, 1998.
The Company was incorporated as a mechanism to enhance the Bank's ability
to serve its future customers' requirements for financial services. The holding
company structure provides flexibility for expansion of the Company's banking
business through the acquisition of other financial institutions and the
provision of additional banking-related services which the traditional
commercial bank may not be able to provide under present laws. For example,
banking regulations require that the Bank maintain a minimum ratio of capital to
assets. In the event that the Bank's growth is such that this minimum ratio is
not maintained, the Company may borrow funds, subject to the capital adequacy
guidelines of the Federal Reserve, and contribute them to the capital of the
Bank and otherwise raise capital in a manner which is unavailable to the Bank
under existing banking regulations.
At December 31, 1999, the assets of the Company consisted primarily of its
ownership of the capital stock of the Bank.
The Company's executive office is located at the Bank's main office, 7855
North Point Parkway, Suite 200, Alpharetta, Georgia, and its telephone number at
such location is (770) 650-8262. See "Item 2. Description of Properties."
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Business of the Bank
The Bank was organized in 1998 as a national bank to conduct a commercial
banking business from Alpharetta, Georgia. The Bank's primary federal regulator
is the Office of the Comptroller of the Currency ("OCC") and the Bank's deposits
are insured by the Federal Deposit Insurance Corporation ("FDIC"). The Bank
commenced operations on July 27, 1998. The Bank was formed to meet the banking
needs of individuals and small-to medium-sized businesses.
The Bank performs banking services customary for full service banks of
similar size and character. Such services include making consumer loans, real
estate loans, and commercial loans, providing other banking services such as
cash management services, travelers checks, and maintaining deposit accounts
such as checking accounts, money market accounts, and a variety of certificates
of deposit and IRA accounts.
On March 6, 2000, the Bank opened its second location at 3625 Brookside
Parkway in Alpharetta. The new location is on the ground floor of a five story
building in a large commercial office park. The Bank's target potential
commercial customers will surround this location. Additionally, the Bank added
Small Business Administration Loans to its product list.
Loan Approval and Review. The Bank's loan approval policies provide for
various levels of officer lending authority. When the amount of aggregate loans
to a single borrower exceeds that individual officer's lending authority, the
loan request is considered and approved by an officer with a higher lending
limit or the Loan Committee. The Bank does make any loans to any director or
executive officer of the Bank unless the loan is approved by the Board of
Directors of the Bank and is made on terms not more favorable to such person
than would be available to a person not affiliated with the Bank.
Lending Limits. The Bank's lending activities are subject to a variety of
lending limits imposed by federal law. While differing limits apply in certain
circumstances based on the type of loan or the nature of the borrower (including
the borrower's relationship to the Bank), in general, the Bank is subject to a
loan-to-one-borrower limit of an amount equal to 15% of the Bank's unimpaired
capital and surplus or 25% of the unimpaired capital and surplus if the excess
over 15% is within the guidelines set forth in 12 U.S.C. Section 84 as an
exception to the 15% limit. The Bank's initial lending limit is $1,339,000 for
loans not fully secured plus an additional $893,000 (or an aggregate of
approximately $2,232,000) for loans which meet the 12 U.S.C. Section 84
guidelines. These limits will increase or decrease as the Bank's capital
increases or decreases as a result of the Bank's earnings or losses, among other
reasons. Unless the Bank is able to sell participations in its loans to other
financial institutions, the Bank will not be able to meet all of the lending
needs of loan customers requiring aggregate extensions of credit above these
limits.
Consumer Loans. The Bank makes a variety of loans to individuals for
personal and household purposes, including secured and unsecured installment and
term loans, home equity loans and lines of credit, and revolving lines of credit
such as credit cards. These loans typically carry balances of less than $25,000
and, in the case of non-revolving loans, are amortized over a period not
exceeding 60 months, in many cases bearing interest at a fixed rate. The
revolving loans typically bear interest at a fixed rate and require monthly
payments of interest and a portion of the principal balance. The underwriting
criteria for home equity loans and lines of credit generally is the same as
applied by the Bank when making a first mortgage loan, and home equity lines of
credit typically expire ten years or less after origination. As with the other
categories of loans, the principal economic risk associated with consumer loans
is the creditworthiness of the Bank's borrowers. Borrower creditworthiness is
affected by general economic conditions, including unemployment rates, interest
rates, consumer bankruptcy rates and levels of consumer spending. The principal
competitors for consumer loans will be the established banks in the north Fulton
County area.
Real Estate Loans. The Bank makes commercial real estate loans,
construction and development loans, and residential real estate loans in and
around the Bank's primary service area ("PSA"). These loans include certain
commercial loans where the Bank takes a security interest in real estate out of
an abundance of caution and not as the principal collateral for the loan, but
exclude home equity loans, which are classified as consumer loans. Loan terms
generally are limited to five years or less, although payments may be structured
on a longer amortization basis. Interest rates may be fixed or adjustable. The
Bank generally charges an origination fee. Management attempts to reduce credit
risk in the commercial real estate portfolio by emphasizing loans on owner-
occupied office and retail buildings where the loan-to-value ratio, established
by independent appraisals, does not exceed 80%. In addition, the Bank may
require personal guarantees of the principal owners of the property backed with
a review by the Bank of the personal financial statements of the principal
owners. The principal economic risk associated with each category of anticipated
loans, including real estate loans, is the creditworthiness of the Bank's
borrowers. The risks associated with real estate loans
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vary with many economic factors, including employment levels and fluctuations in
the value of real estate, new job creation trends, tenant vacancy rates and the
quality of the borrower's management. The Bank competes for real estate loans
with a number of bank competitors which are well established in the PSA. Most of
these competitors have substantially greater resources and lending limits than
the Bank. As a result, the Bank may charge lower interest rates to attract
borrowers.
The Bank also originates mortgage loans for sale into the secondary market.
The Bank limits interest rate risk and credit risk on these loans by locking the
interest rate for each loan with the secondary investor and receiving the
investor's underwriting approval prior to originating the loan.
Commercial Loans and Leases. Loans for commercial purposes in various
lines of businesses are one of the primary components of the Bank's loan
portfolio. The terms of such loans vary by their purpose and underlying
collateral (if any). Equipment loans and leases are typically made for a term
of five years or less at fixed or variable rates, with the loan or lease fully
amortized over the term and secured by the financed equipment and with a loan-
to-value ratio of 80% or less and a lease-to-value ratio of 92% or less. Leases
have terms not to exceed 36 months and are mostly for heavy equipment used in
construction and road building. Loans to support working capital typically have
terms not exceeding one year and are usually secured by accounts receivable,
inventory or personal guarantees of the principals of the business. For loans
secured by accounts receivable or inventory, principal is typically repaid as
the assets securing the loan are converted into cash, and in other cases,
principal is typically due at maturity. The principal economic risk
associated with each category of anticipated loans, including commercial loans,
is the creditworthiness of the Bank's borrowers, which in turn is affected by
general economic conditions and the strength of the services and retail market
segments. In addition, the quality of the borrower's management and its ability
to properly evaluate changes in the supply and demand characteristics affecting
its respective markets for products and services and to effectively respond to
such changes are significant factors in the creditworthiness of a commercial
borrower. General economic factors affecting a borrower's ability to repay
include interest, inflation and employment rates, as well as other factors
affecting a borrower's customers, suppliers and employees. The well established
banks in the PSA make proportionately more loans to medium-to-large sized
businesses than the Bank. Many of the Bank's commercial loans are made to
small-to-medium-sized businesses who may be less able to withstand competitive,
economic and financial conditions than larger borrowers.
Other Banking Services. Other bank services include cash management
services, travelers checks, direct deposit of payroll and social security
checks, and automatic drafts for various accounts. The Bank is associated with
a shared network of automated teller machines that may be used by Bank customers
throughout Georgia and other states. In March, 2000, the Bank added its first
automated teller machine cash dispenser in its new location at 3625 Brookside
Parkway in Alpharetta. The Bank also offers MasterCard and VISA credit card
services through The Banker's Bank, Atlanta, Georgia as an agent for the Bank.
The Bank also offers to its targeted commercial customers a courier service
that will pick up non-cash deposits and minimal cash deposits of up to $200 from
the customer's place of business and deliver it to the Bank. The Bank believes
that this is an important service for its customers because the Bank currently
has only two locations. The Bank has contracted with a third party courier
service which has been approved by the Georgia Public Service Commission for
bank-related work.
Investments. In addition to loans, the Bank makes other investments
primarily in obligations of the United States or obligations guaranteed as to
principal and interest by the United States and other taxable securities. No
investment in any of those instruments exceeds any applicable limitation imposed
by law or regulation.
Deposits. The Bank offers a variety of deposit programs to individuals and
to small to medium-sized businesses and other organizations. The Bank offers
checking accounts, money market accounts, a variety of certificates of deposit
and IRA accounts. The primary sources of deposits are residents of, and
businesses and their employees located in, the PSA obtained through personal
solicitation by the Bank's officers and directors, direct mail solicitations and
advertisements published in the local media. Deposits are generated by offering
a broad array of competitively priced deposit services, including demand
deposits, regular savings accounts, money market deposits (transaction and
investment), certificates of deposit, retirement accounts and other deposit or
funds transfer services which may be permitted by law or regulation. The Bank is
authorized to accept and pay interest on deposits from individuals,
corporations, partnerships and any other type of legal entity, including
fiduciaries (such as private trusts). Qualified deposits are insured by the FDIC
in an amount up to $100,000.
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At December 31, 1999, the Bank had no customers with aggregate deposits
equal to or greater than $2,678,000, which is 10% of total deposits.
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 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.
Correspondent Banking. Correspondent banking involves the providing of
services by one bank to another bank which cannot provide that service for
itself from an economic or practical standpoint. The Bank is required to
purchase correspondent services offered by larger banks, including check
collections, purchase of Federal Funds, security safekeeping, investment
services, coin and currency supplies, overline and liquidity loan participations
and sales of loans to or participations with correspondent banks. The Bank sells
loan participations to correspondent banks with respect to loans which exceed
the Bank's lending limit. As compensation for services provided by a
correspondent, the Bank may maintain certain balances with such correspondents
in non-interest bearing accounts. The Bank has a correspondent relationship with
several banks, including Compass Bank, Birmingham, Alabama, The Banker's Bank,
Atlanta, Georgia, Synovus Financial Corporation, Columbus, Georgia and the
Federal Home Loan Bank of Atlanta. At December 31, 1999, the Bank had
outstanding participations with its correspondent banks of approximately
$625,000.
Primary Service Area. The PSA represents a geographic area which includes
Sandy Springs, Dunwoody, Roswell and Alpharetta. The boundaries of the PSA are
represented by the Fulton County/Forsyth County line on the north, the Fulton
County/Gwinnett County line on the east, Interstate 285 on the south and the
Fulton County/Cobb County line on the west. Areas of the PSA are located within
15 to 30 minutes drive time from Buckhead and downtown Atlanta and 30 to 45
minutes drive time from the north Georgia mountains and Lake Lanier.
Economic and Demographic Factors. The PSA represents a diverse suburban
market made up of older home communities, new golf club communities, municipal
facilities, two major shopping malls, numerous dining amenities, growing public
and private schools, headquarter locations of major national and international
companies and numerous small businesses. The cities of Alpharetta and Roswell
are the key economic focal points of the PSA. According to estimates released by
the U.S. Census Bureau on June 30, 1999, Alpharetta ranked first in Georgia in
terms of population growth between 1990 and 1998, representing a 91.0% change.
Roswell ranked twelfth with a population change of 19.0%. The aggregate
population of the PSA reported by the U.S. Census totaled 182,502 in 1990, is
estimated to be 232,098 in 1996 and is projected to be 264,672 by 2001.
The strength of the economy in north Fulton County relies on its large,
diversified small business community. Another significant economic factor of the
PSA is the shopping and retail establishments located at North Point Mall. The
one mile stretch of land located east of Georgia Highway 400 between Mansell
Road and Haynes Bridge Road represents one of the largest commercial retail
shopping areas in Georgia. Its major focal point is North Point Mall, which is
anchored by six major department stores and 180 specialty shops. The Bank is
located at the southern entrance of this retail/commercial area.
Employees. The Bank has 19 full-time employees and one part-time employee.
The Company does not have any employees who are not also employees of the Bank.
Competition. The banking business is highly competitive. The Bank competes
as a financial intermediary with other commercial banks, savings and loan
associations, credit unions, and money market mutual funds operating in the
Metropolitan Atlanta area. As of December 31, 1999, the north Fulton County area
was served by 16 commercial banks with a total of 80 offices. A number of these
competitors are well established in the PSA. Most of them have substantially
greater resources and lending limits than the Bank and other certain services,
such as extensive and established branch networks and trust services, that the
Bank does not provide.
The regional bank holding companies represented in the PSA are: Bank of
America, Wachovia Bank of Georgia, First Union National Bank of Georgia,
SunTrust Bank, SouthTrust Bank of Georgia, Regions Bank, Atlantic States Bank
and Colonial Bank. The larger regional banks' presence in the PSA is through
branch offices, with many of the customer service functions, as well as
authority for loan approval, being located outside of the PSA. There are several
community banks and two other de novo banks located in the PSA
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Monetary Policies. The results of operations of the Company and the Bank
are significantly affected by the credit policies of monetary authorities,
particularly the Federal Reserve. The instruments of monetary policy employed by
the Federal Reserve include open market operations in U.S. government
securities, changes in discount rates on member bank borrowings, and changes in
reserve requirements against bank deposits. In view of changing conditions in
the national economy and in the money markets, as well as the effect of action
by monetary and fiscal authorities, including the Federal Reserve, no prediction
can be made as to possible future changes in interest rates, deposit levels,
loan demand, or the business and earnings of the Bank.
Data Processing. The Bank has entered into a data processing servicing
agreement with FiServ Solutions, Inc. This servicing agreement provides for the
Bank to receive a full range of data processing services, including an automated
general ledger, deposit accounting, commercial, real estate and installment
lending data processing, central information file and ATM processing. Investment
portfolio accounting is provided by Compass Bank. Payroll processing is provided
by Express Pay, Inc.
Year 2000 Compliance
The Year 2000 issue referred generally to the data structure and processing
problem that may prevent systems from properly processing date-sensitive
information as a result of computer programs using two digits rather than four
digits to define the applicable year. The Company did not experience any
significant malfunctions or errors in its operating business systems when the
date changed from 1999 to 2000. Based on operations since January 1, 2000, the
Company does not expect any significant impact to its ongoing business as a
result of the Year 2000 issue. However, it is possible that the full impact of
the date change has not been fully recognized. For example, it is possible that
Year 2000 issues may occur with billing, payroll, or financial closings at
month, quarter, or year end. The Company believes any such problems are likely
to be minor and correctable. In addition, the Company could still be negatively
affected if its customers or third party service providers are adversely
affected by Year 2000 issues. The Company currently is not aware of any
significant Year 2000 or similar problems that have arisen for its customers or
third party service providers. The Company expended $17,000 on Year 2000
readiness efforts from 1997 through 1999.
Supervision and Regulation
The Company and the Bank are subject to state and federal banking laws and
regulations which impose specific requirements or restrictions and provide for
general regulatory oversight with respect to virtually all aspects of
operations. These laws and regulations are generally intended to protect
depositors, not stockholders. To the extent that the following summary describes
statutory or regulatory provisions, it is qualified in its entirety by reference
to the particular statutory and regulatory provisions. The operations of the
Company and the Bank may be affected by legislative changes and the policies of
various regulatory authorities. The Company is unable to predict the nature or
the extent of the effect on its business and earnings that fiscal or monetary
policies, economic control or new federal or state legislation may have in the
future.
Bank Holding Company Regulation. The Company is a bank holding company
within the meaning of the Bank Holding Company Act of 1956, as amended (the
"BHCA") and the Georgia Bank Holding Company Act, as amended (the "Georgia BHC
Act") and is regulated under such acts by the Federal Reserve and the DBF,
respectively.
Under the BHCA and the Georgia BHC Act, the Company is subject to periodic
examination by the Federal Reserve and the DBF and is required to file periodic
reports of its operations and such additional information as the Federal Reserve
and the DBF may require. The Company's and the Bank's activities are limited to
banking, managing or controlling banks, furnishing services to or performing
services for its subsidiaries, or engaging in any other activity that the
Federal Reserve determines to be so closely related to banking or managing or
controlling banks as to be a proper incident thereto.
Investments, Control and Activities. With certain limited exceptions, the
BHCA requires every bank holding company to obtain the prior approval of the
Federal Reserve before (i) acquiring substantially all the assets of any bank,
(ii) acquiring direct or indirect ownership or control of any voting shares of
any bank if after such acquisition it would own or control more than 5% of the
voting shares of such bank (unless it already owns or controls the majority of
such shares) or (iii) merging or consolidating with another bank holding
company. Acquisition of any additional banks would also require prior approval
from the DBF.
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In addition, and subject to certain exceptions, the BHCA and the Change in
Bank Control Act, together with regulations thereunder, require Federal Reserve
approval (or, depending on the circumstances, no notice of disapproval) prior to
any person or company acquiring "control" of a bank holding company, such as the
Company. Control is conclusively presumed to exist if an individual or company
acquires 25% or more of any class of voting securities of the bank holding
company.
Under the BHCA, the 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 the Federal Reserve, by order
or regulation, has found those activities to be so closely related to banking or
managing or controlling banks as to be a proper incident thereto. Some of the
activities that the Federal Reserve has determined by regulation to be proper
incidents to the business of banking include making or servicing loans and
certain types of leases, engaging in certain insurance and discount brokerage
activities, performing certain data processing services, acting in certain
circumstances as a fiduciary or investment or financial advisor, owning savings
associations, and making investments in certain corporations or projects
designed primarily to promote community welfare.
Source of Strength; Cross-Guarantee. In accordance with Federal Reserve
policy, the Company is expected to act as a source of financial strength to the
Bank and to commit resources to support the Bank in circumstances in which the
Company might not otherwise do so. Under the BHCA, the Federal Reserve may
require a bank holding company to suspend the payment of dividends, terminate
any activity, or relinquish control of a nonbank subsidiary (other than a
nonbank subsidiary of a bank) upon the Federal Reserve's determination that
there exists a serious risk to the financial soundness or stability of any
subsidiary depository institution of the bank holding company. Further, federal
bank regulatory authorities have additional discretion to require a bank holding
company to divest itself of any bank or nonbank subsidiary if the agency
determines that divestiture may aid the depository institution's financial
condition. The Bank may be required to indemnify, or cross-guarantee, the FDIC
against losses it incurs with respect to any other bank controlled by the
Company, which in effect makes the Company's assets available to the FDIC to
assist any failing or failed bank subsidiary of the Company.
The Georgia Code. All Georgia bank holding companies must register with the
DBF under the Financial Institutions Code of Georgia (the "Georgia Code"). A
registered bank holding company must provide the DBF with information with
respect to the financial conditions, operations, management and inter-company
relationships of the holding company and its subsidiaries. The DBF may also
require such other information as is necessary to keep itself informed about
whether the provisions of Georgia law and the regulations and orders issued
thereunder by the DBF have been complied with, and the DBF may make examinations
of any bank holding company and its subsidiaries.
National Bank Regulation. The Bank is the only subsidiary of the Company.
The Bank is a national banking association and a member of the Federal Reserve.
The OCC is the primary regulator for the Bank. The OCC regulates or monitors
all areas of the Bank's operations, including security devices and procedures,
adequacy of capitalization and loss reserves, loans, investments, borrowings,
deposits, mergers, issuances of securities, payment of dividends, interest rates
payable on deposits, interest rates or fees chargeable on loans, establishment
of branches, corporate reorganizations, maintenance of books and records and
adequacy of staff training to carry on safe lending and deposit gathering
practices. The Bank must maintain certain capital ratios and is subject to
limitations on aggregate investments in real estate, bank premises, and
furniture and fixtures.
Under the Federal Deposit Insurance Corporation Act of 1991 ("FDICIA"), all
insured institutions must undergo regular on-site examination by their
appropriate banking agency. The cost of examinations of insured depository
institutions and any affiliates may be assessed by the appropriate agency
against each institution or affiliate as it deems necessary or appropriate.
Insured institutions are required to submit annual reports to the FDIC and the
appropriate agency (and state supervisor when applicable). FDICIA also directs
the FDIC to develop with other appropriate agencies a method for insured
depository institutions to provide supplemental disclosure of the estimated fair
market value of assets and liabilities, to the extent feasible and practicable,
in any balance sheet, financial statement, report of condition or any other
report of any insured depository institution. FDICIA also requires the federal
banking regulatory agencies to prescribe, by regulation, standards for all
insured depository institutions and depository institution holding companies
relating, among other things, to: (i) internal controls, information systems and
audit systems; (ii) loan documentation; (iii) credit underwriting; (iv) interest
rate risk exposure; and (v) asset quality.
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Transactions with Affiliates and Insiders. The Bank is subject to the
provisions of Section 23A of the Federal Reserve Act, which place limits on the
amount of loans or extensions of credit to, or investments in, or certain other
transactions with, affiliates and on the amount of advances to third parties
collateralized by the securities or obligations of affiliates. In addition,
most of these loans and certain other transactions must be secured in prescribed
amounts. The Bank is also subject to the provisions of Section 23B of the
Federal Reserve Act that, among other things, prohibit an institution from
engaging in certain transactions with certain affiliates unless the transactions
are on terms substantially the same, or at least as favorable to such
institution or its subsidiaries, as those prevailing at the time for comparable
transactions with non-affiliated companies. The Bank is subject to certain
restrictions on extensions of credit to executive officers, directors, certain
principal stockholders and their related interests. Such extensions of credit
(i) must be made on substantially the same terms, including interest rates and
collateral, as those prevailing at the time for comparable transactions with
third parties and (ii) must not involve more than the normal risk of repayment
or present other unfavorable features.
Branching and Geographic Expansion. The Georgia Code presently permits the
establishment of branches by a state or national bank located in Georgia with
certain limitations. While banks may establish branches in any county in
Georgia, under the Georgia Code, it is unlawful without the prior approval of
the DBF (i) for any bank holding company to acquire direct or indirect ownership
or control of more than 5% of the voting shares of any bank, (ii) for any bank
holding company or subsidiary thereof, other than a bank, to acquire all or
substantially all of the assets of a bank, or (iii) for any bank holding company
to merge or consolidate with any other bank holding company. It is also
unlawful for any bank holding company to acquire direct or indirect ownership or
control of more than 5% percent of the voting shares of any bank unless such
bank has been in existence and continuously operating or incorporated as a bank
for a period of five years or more prior to the date of application to the DBF
for approval of such acquisition. In addition, in any such acquisition by an
existing bank holding company, the initial banking subsidiary of such bank
holding company must have been incorporated for not less than two years before
the holding company can acquire another bank.
The BHCA, as amended by the interstate banking provisions of the Riegle-
Neal Interstate Banking and Branch Efficiency Act of 1994 (the "Interstate
Banking Act"), repealed the prior statutory restrictions on interstate
acquisitions of banks by bank holding companies, such that the Company and any
other bank holding company located in Georgia may acquire a bank located in any
other state, and any bank holding company located outside Georgia may lawfully
acquire any bank based in another state, regardless of state law to the
contrary, in either case subject to certain deposit-percentage, aging
requirements and other restrictions. The Interstate Banking Act also generally
provides that national and state-chartered banks may branch interstate through
acquisitions of banks in other states. By adopting legislation prior to that
date, a state has the ability either to "opt in" and accelerate the date after
which interstate branching is permissible or "opt out" and prohibit interstate
branching altogether. In March 1996, the Georgia legislature adopted legislation
opting into interstate branching. As a result of these provisions, banking
organizations in other states, most significantly North Carolina, Florida and
Alabama, have entered the Georgia market through acquisitions of Georgia
institutions. Those acquisitions are subject to federal and Georgia approval as
described above. The Georgia legislation also provides that an out-of-state bank
may not enter the State of Georgia through a de novo branch, nor may it enter
through the acquisition of less than substantially all of the assets of an
existing bank.
Community Reinvestment Act. The Community Reinvestment Act requires that
each insured depository institution shall be evaluated by its primary federal
regulator with respect to its record in meeting the credit needs of its local
community, including low and moderate income neighborhoods, consistent with the
safe and sound operation of those institutions. These factors are also
considered in evaluating mergers, acquisitions and applications to open a branch
or facility.
Other Regulations. Interest and certain other charges collected or
contracted for by the Bank are subject to state usury laws and certain federal
laws concerning interest rates. The Bank's loan operations are also subject to
certain 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 such federal laws. The
deposit operations of the Bank also are subject to the Right to Financial
Privacy Act, which imposes a duty to maintain confidentiality of consumer
financial records and prescribes procedures for complying with administrative
subpoenas of financial records,
7
<PAGE>
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.
Enforcement Policies and Actions. The Financial Institutions Reform,
Recovery and Enforcement Act of 1989 ("FIRREA") and subsequent federal
legislation significantly increased the enforcement authorities of the FDIC and
other federal depository institution regulators, and authorizes the imposition
of civil money penalties up to $1 million per day. Persons who are affiliated
with depository institutions can be removed from any office held in such
institution and banned for life from participating in the affairs of any such
institution. Banking regulators have not hesitated to use the enforcement
authorities provided under FIRREA. Furthermore, regulators have broad power to
issue cease and desist orders that may, among other things, require affirmative
action to correct any harm resulting from a violation or practice, including
restitution, reimbursement, indemnifications or guarantees against loss. A
financial institution may also be ordered to restrict its growth, dispose of
certain assets, rescind agreements or contracts or take other actions as
determined by the ordering agency to be appropriate.
Deposit Insurance. The deposits of the Bank are currently insured to a
maximum of $100,000 per depositor, subject to certain aggregation rules. The
FDIC establishes rates for the payment of premiums by federally insured banks
and thrifts for deposit insurance. Separate insurance funds (the Bank Insurance
Fund ("BIF"), and the Savings Association Insurance Fund ("SAIF")) are
maintained for commercial banks and thrifts, with insurance premiums from the
industry used to offset losses from insurance payouts when banks and thrifts
fail. Due to a high rate of failures, the FDIC has adopted a risk-based deposit
insurance premium system for all insured depository institutions, including the
Bank, which requires that a depository institution pay to BIF or SAIF from $.03
to $.27 per $100 of insured deposits depending on its capital levels and risk
profile, as determined by its primary federal regulator on a semi-annual basis.
The Bank paid premiums at the lower end of this range during its first two years
of operations.
Dividends. The principal source of the Company's cash revenues comes from
dividends received from the Bank. The amount of dividends that may be paid by
the Bank to the Company depends on the Bank's earnings and capital position and
is limited by federal and state law, regulations, and policies. In addition, the
Federal Reserve has stated that bank holding companies should refrain from or
limit dividend increases or reduce or eliminate dividends under circumstances in
which the bank holding company fails to meet minimum capital requirements or in
which its earnings are impaired.
As a national bank, the Bank may not pay dividends from its paid-in-
capital. All dividends must be paid out of undivided profits then on hand, after
deducting expenses, including reserves for losses and bad debts. In addition, a
national bank is prohibited from declaring a dividend on its shares of common
stock until its surplus equals its stated capital, unless there has been
transferred to surplus no less than one-tenth of the bank's net profits of the
preceding two consecutive half-year periods (in the case of an annual dividend).
The approval of the OCC is required if the total of all dividends declared by a
national bank in any calendar year exceeds the total of its net profits for that
year combined with its retained net profits for the preceding two years, less
any required transfers to surplus.
Under FDICIA, the Bank may not pay a dividend if, after paying the
dividend, the Bank would be undercapitalized. See "-- Capital Regulations"
below.
Capital Regulations. Federal bank regulatory authorities have adopted
risk-based capital guidelines for banks and bank holding companies that are
designed to make regulatory capital requirements more sensitive to differences
in risk profile among banks and bank holding companies, account for off-balance
sheet exposure, and minimize disincentives for holding liquid assets. The
resulting capital ratios represent qualifying capital as a percentage of total
risk-weighted assets and off-balance sheet items. The guidelines are minimums,
and the federal regulators have noted that banks and bank holding companies
contemplating significant expansion programs should not allow expansion to
diminish their capital ratios and should maintain ratios well in excess of the
minimums.
FDICIA established a capital-based regulatory plan designed to promote
early intervention for troubled banks and requires the FDIC to choose the least
expensive resolution of bank failures. The capital-based regulatory framework
contains five categories of compliance with regulatory capital requirements,
including "well capitalized," "adequately capitalized," "undercapitalized,"
"significantly undercapitalized" and "critically undercapitalized." To qualify
as a "well capitalized" institution, a bank must have a leverage ratio of no
less than 5%, a Tier 1 risk-based ratio of no less than 6%, and a total risk-
based capital ratio of no less than 10%, and the bank must not be under any
order or directive from the appropriate regulatory agency to meet and maintain a
specific capital level.
8
<PAGE>
The current guidelines require all bank holding companies and federally-
regulated banks to maintain a minimum risk-based total capital ratio equal to
8%, of which at least 4% must be Tier 1 capital. Under the FDICIA regulations,
the applicable agency can treat an institution as if it were in the next lower
category if the agency determines (after notice and an opportunity for hearing)
that the institution is in an unsafe or unsound condition or is engaging in an
unsafe or unsound practice. The degree of regulatory scrutiny of a financial
institution will increase, and the permissible activities of the institution
will decrease, as it moves downward through the capital categories. Institutions
that fall into one of the three undercapitalized categories may be required to
(i) submit a capital restoration plan; (ii) raise additional capital; (iii)
restrict their growth, deposit interest rates, and other activities; (iv)
improve their management; (v) eliminate management fees; or (vi) divest
themselves of all or a part of their operations. Bank holding companies
controlling financial institutions can be called upon to boost the institutions'
capital and to partially guarantee the institutions' performance under their
capital restoration plans. Tier 1 capital includes stockholders' equity,
qualifying perpetual preferred stock and minority interests in equity accounts
of consolidated subsidiaries, but excludes goodwill and most other intangible
assets and excludes the allowance for loan and lease losses. Tier 2 capital
includes the excess of any preferred stock not included in Tier 1 capital,
mandatory convertible securities, hybrid capital instruments, subordinated debt
and intermediate-term preferred stock and general reserves for loan and lease
losses up to 1.25% of risk-weighted assets.
Under these guidelines, banks' and bank holding companies' assets are given
risk-weights of 0%, 20%, 50% or 100%. In addition, certain off-balance sheet
items are given credit conversion factors to convert them to asset equivalent
amounts to which an appropriate risk-weight will apply. These computations
result in the total risk-weighted assets. Most loans are assigned to the 100%
risk category, except for first mortgage loans fully secured by residential
property and, under certain circumstances, residential construction loans, both
of which carry a 50% rating. Most investment securities are assigned to the 20%
category, except for municipal or state revenue bonds, which have a 50% rating,
and direct obligations of or obligations guaranteed by the United States
Treasury or United States Government agencies, which have a 0% rating.
The Federal Reserve has also implemented a leverage ratio, which is Tier 1
capital as a percentage of average total assets less intangible assets, to be
used as a supplement to the risk-based guidelines. The principal objective of
the leverage ratio is to place a constraint on the maximum degree to which a
bank holding company may leverage its equity capital base. The minimum required
leverage ratio for top-rated institutions is 3%, but most institutions are
required to maintain an additional cushion of at least 1-2%.
<TABLE>
<CAPTION>
Tier 1 Risk- Total Risk-
Capital Category Tier 1 Capital Based Capital Ratio Based Capital Ratio
---------------- -------------- ------------------- -------------------
<S> <C> <C> <C>
Well Capitalized (1) 5% or more 6% or more 10% or more
Adequately Capitalized (1) 4% or more 4% or more 8% or more (2)
Undercapitalized (3) less than 4% less than 4% less than 8% (4)
Significantly Undercapitalized less than 3% less than 3% less than 6%
Critically Undercapitalized 2% or less (5) -- --
</TABLE>
_________________________________________
(1) An institution must meet all three minimums.
(2) 3% for composite 1-rated institutions, subject to appropriate federal
banking agency guidelines.
(3) An institution falls into this category if it is below the specified
capital level for any of the three capital measures.
(4) Less than 3% for composite 1-rated institutions, subject to appropriate
federal banking agency guidelines.
(5) Ratio of tangible equity to total assets.
These capital guidelines can affect the Bank and the Company in several
ways. While the Company has satisfied its leverage ratio requirements and the
Bank has been considered well-capitalized, rapid growth, poor loan portfolio
performance, or poor earnings performance, or a combination of these factors,
could change the Bank's and the Company's capital position in a relatively short
period of time, making an additional capital infusion necessary.
9
<PAGE>
Recent Legislative Developments. On November 12, 1999, President Clinton
signed the Gramm-Leach-Bliley Act of 1999 (the "GLB Act"). The Act addresses
concerns relating to the competitiveness and the safety and soundness of the
financial services industry and alters the structure, regulation, and
competitive relationships of the nation's financial institutions. Among other
things, the GLB Act:
. Repeals the Glass-Steagall Act of 1933 that separated commercial and
investment banking and eliminates the prohibition on insurance
underwriting activities under the BHCA.
. Creates "financial holding companies" that may conduct a broad list of
financial activities, including insurance and securities underwriting,
and real estate development and investment.
. Establishes the Federal Reserve as the primary federal regulator of
financial holding companies.
. Allows financial holding companies to conduct activities that are
"complementary" to banking.
. Allows banks to underwrite securities through direct subsidiaries and
use direct subsidiaries for insurance or securities sales or other
low-risk activities.
. Prohibits a bank holding company from merging with insurance or
securities firms or embarking on new powers if any of its banks earned
less than a "satisfactory" Community Reinvestment Act ("CRA") rating
on its most recent exam. The company would be barred from additional
powers or acquisitions if one of the banks' CRA ratings dropped below
"satisfactory" later.
. Extends the period between CRA exams to five years for banks and
thrifts under $250 million of assets that earned an "outstanding"
rating in their last exam. Small institutions with a "satisfactory"
rating would only be subject to CRA exams once every four years.
Regulators could conduct an exam sooner if a bank filed a merger
application or if the regulators have a "reasonable cause."
. Requires financial institutions to establish privacy policies and
disclose them at the start of a customer relationship and once a year
thereafter.
. Requires banks to give customers a chance to block sharing of
confidential information with third parties except in cases of
marketing agreements between financial institutions and some other
marketing agreements.
. Prohibits credit card and account numbers from being shared with
third-party marketers.
The GLB Act is considered one of the most significant banking laws since
Depression-era statutes were enacted. The Company does not believe that the GLB
Act will have a material adverse impact on the Company's operations. However, to
the extent that it allows banks, securities firms, and insurance firms to
affiliate, the financial services industry may experience further consolidation.
The GLB Act may have the result of increasing the amount of competition that the
Company faces from larger institutions and other companies offering financial
products and services, many of which may have substantially more financial
resources than the Company.
Item 2. Properties
The Company's executive office is located at the Bank's main office, 7855
North Point Parkway, Suite 200, Alpharetta, Georgia, in Fulton County. The site
is located East of Georgia Highway 400 at the intersection of Mansell Road and
North Point Parkway. The building is a one-story brick facility which houses
three businesses. The Bank has the central location with a small business on
each side. The Bank occupies 3,600 square feet of the total 21,600 square feet
of the building. The building houses officers, operations, storage and a lobby.
The Bank has two indoor teller stations and a vault.
This location offers high visibility in a high traffic area just south of
North Point Mall, and is a neighbor to a large retail shopping center. This
area is the central location for business, residential, commuting and shopping
in north Fulton County with proximity to Georgia Highway 400. Management
believes that the facilities maintained by the Company and the Bank are suitable
for its current operations. Management also believes that the Company and the
Bank are adequately covered by insurance.
On March 6, 2000, the Company opened a second location. This additional
banking facility is located at the Bank's leased facilities, 3625 Brookside
Parkway, Suite 100, Alpharetta, Georgia, in Fulton County. The site is also East
of Georgia Highway 400, East of North Point Parkway and on the South side of Old
Milton Parkway. The building is a five-story structure that houses 125,000
square feet of space available for small- to medium-sized businesses. The Bank
occupies 7,600 square feet of front, ground floor office space clearly visible
to all visitors and tenants. The building houses commercial lending, commercial
leasing, storage and a lobby. The Bank has two indoor teller stations and a
vault.
10
<PAGE>
This second location is located in a new, but fast growing, North Fulton
commercial office park called Brookside. The Brookside developers have zoned
this complex for small- to medium-sized businesses, the Bank's primary target
market. Management believes that the facility's proximity to Georgia Highway
400, North Point Parkway and other office parks in the area will further
facilitate the Bank's growth. This location is located approximately seven miles
Northeast of the Company's executive offices.
Item 3. Legal Proceedings
There are no material pending legal proceedings to which the Company or the
Bank is a party or of which any of their 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 or the Bank.
Item 4. Submission of Matters to a Vote of Security Holders.
Not applicable.
PART II
Item 5. Market for Common Equity and Related Stockholder Matters
A. Market Information.
The Common Stock of the Company began trading on the OTC Bulletin Board
(the "OTC BB") under the symbol "CHGD" on June 10, 1998. The market for the
Company's Common Stock must be characterized as a limited market due to its
relatively low trading volume and little analyst coverage. The following table
sets forth, for the periods indicated, the quarterly high and low bid price of
the Common Stock of the Company reported by the OTC BB. Prices reflect inter-
dealer prices without retail mark-up, mark-down or commissions and may not
necessarily represent actual transactions.
<TABLE>
<CAPTION>
Fiscal Year Ended December 31, 1999 Bid
----------------------------------- ------------------------
High Low
---- ---
<S> <C> <C>
First Quarter.................................................................... $ 9.25 $8.00
Second Quarter................................................................... $ 9.50 $8.00
Third Quarter.................................................................... $ 9.00 $7.00
Fourth Quarter................................................................... $ 9.50 $6.50
Fiscal Year Ended December 31, 1998 Bid
----------------------------------- ------------------------
High Low
---- ---
Third Quarter.................................................................... $12.00 $8.00
Fourth Quarter................................................................... $ 9.37 $7.50
</TABLE>
B. Holders of Common Stock.
As of March 29, 2000, there were 36 record holders of the Common Stock of
the Company. This number is exclusive of beneficial owners whose Company Common
Stock is held in street name.
C. Dividends.
To date, the Company has not paid any dividends on its Common Stock. As the
Company and the Bank are both start-up operations, it is the policy of the Board
of Directors of the Company to reinvest earnings for such period of time as is
necessary to ensure the success of the operations of the Company and of the
Bank. There are no current plans to initiate payment of cash dividends, and
future dividend policy will depend on the Bank's earnings, capital requirements,
financial condition and other factors considered relevant by the Board of
Directors of the Company.
11
<PAGE>
The Bank is restricted in its ability to pay dividends under national
banking laws and by regulations of the OCC. Pursuant to 12 U.S.C. Section 56, a
national bank may not pay dividends from its capital. All dividends must be paid
out of undivided profits, subject to other applicable provisions of law.
Payments of dividends out of undivided profits is further limited by 12 U.S.C.
Section 60(a), which prohibits the Bank from declaring a dividend on its shares
of Common Stock until its surplus equals its stated capital, unless there has
been transferred to surplus not less than one-tenth of the Bank's net income of
the preceding two consecutive half-year periods (in the case of an annual
dividend). Pursuant to 12 U.S.C. Section 60(b), the approval of the OCC is
required if the total of all dividends declared by the Bank in any calendar year
exceeds the total of its net income for that year combined with its retained net
income for the preceding two years, less any required transfers to surplus.
Item 6. Management's Discussion and Analysis or Plan of Operation
The purpose of the following discussion is to address information relating
to the financial condition and results of operations of the Company that may not
be readily apparent from a review of the consolidated financial statements and
notes thereto, which begin on page F-1 of this Report. This discussion should be
read in conjunction with information provided in the Company's consolidated
financial statements and accompanying footnotes, and with the statistical
information appearing elsewhere in this Report under the caption "Selected
Statistical Information." Unless otherwise noted, the discussion of net interest
income in this financial review is presented on a taxable equivalent basis to
facilitate performance comparisons among various taxable and tax-exempt assets.
Results of Operations
The Company was organized in November 1997 to serve as a bank holding
company for a proposed national bank. For approximately the first seven months
of operation, the main activities centered on seeking, interviewing and
selecting a cohesive group of organizers/directors; applying for a national bank
charter; applying to become a bank holding company; and filing a Registration
Statement (the "Registration Statement") with the Securities and Exchange
Commission pursuant to which the Company registered 1,035,000 shares of its
Common Stock at an offering price of $10.00 per share. The Company also sold
200,000 shares during a private placement. Upon the Registration Statement's
effectiveness, the organizers/directors focused their efforts on the sale of
such Common Stock and, by early July 1998, had completed all selling activities.
Net of selling expenses, the Company raised $11,405,283 in the offerings. From
late April to mid-July, management engaged in activities resulting in the
opening of the Bank. During the development stage, from November 5, 1997
("Inception") to July 27, 1998, net loss amounted to $101,912. Net loss, from
the Bank's opening to December 31, 1999, amounted to $588,909. Losses from
Inception to December 31, 1998 amounted to $793,577. Often, denovo banks have
losses for the first year of operations. The results for 1998 and 1999 were in
line with the Company's expectations.
During 1999, the Company initiated three share repurchase programs. In
March 2000, the third repurchase program was completed. Pursuant to the
programs, the Company repurchased a total of 176,103 shares of its common stock
for an average per share price of $8.68. Management believes that the repurchase
programs were a prudent use of excess liquidity that will further enhance
shareholder value.
In 1999, total assets increased 68.0% to $38.3 million and total deposits
increased 123.3% to $26.8 million. Total loans have grown 81.8% to $26.9
million, which creates a loan to deposit ratio of approximately 100%. At
December 31, 1998, total assets were $22.8 million, total deposits were $12.0
million and total loans were $14.8 million. The loan to deposit ratio was 123%.
Net Interest Income. The Company's results of operations are determined by
its ability to manage effectively interest income and expense, to minimize loan
and investment losses, to generate non-interest income and to control non-
interest expense. Since interest rates are determined by market forces and
economic conditions beyond the control of the Company, the ability to generate
net interest income is dependent upon the Company's ability to maintain an
adequate spread between the rate earned on earning assets and the rate paid on
interest-bearing liabilities, such as deposits and borrowings. Thus, net
interest income is the key performance measure of income.
12
<PAGE>
Presented below are various components of assets and liabilities, interest
income and expense as well as their yield/cost for the fiscal years ended 1999
and 1998. The Bank opened on July 27, 1998. Therefore, the December 31, 1998
components present only a partial year's results.
<TABLE>
<CAPTION>
December 31, 1999
In thousands (000), except percentages
---------------------------------------------------
Interest
Average Income/ Yield/
Balance Expense Cost
------- ------- ----
<S> <C> <C> <C>
Federal funds sold $ 2,171 $ 107 4.93%
Securities 6,800 380 5.59%
Loans and Leases, net 19,858 2,101 10.58%
-------- -------
Total earning assets $ 28,829 $ 2,588 8.98%
======== ======= =====
Interest-bearing deposits $ 17,874 $ 866 4.85%
Other borrowings 701 36 5.13%
-------- -------
Total interest-bearing liabilities $ 18,575 $ 902 4.86%
======== ======= =====
Net yield on earning assets 5.85%
=====
Net interest margin 4.12%
=====
December 31, 1998
In thousands (000), except percentages
---------------------------------------------------
Interest
Average Income/ Yield/
Balance Expense Cost
------- ------- ----
Federal funds sold $ 3,531 $ 190 5.41%
Securities 1,903 102 5.36%
Loans, net 3,883 409 10.53%
-------- -------
Total earning assets $ 9,317 $ 701 7.52%
======== ======= =====
Interest-bearing deposits $ 3,739 $ 168 4.49%
Other borrowings 71 5 7.00%
-------- -------
Total interest-bearing liabilities $ 3,810 $ 173 4.54%
======== ======= =====
Net yield on earning assets 2.98%
=====
Net interest margin 5.67%
=====
</TABLE>
As reflected above, average yield on earning assets amounted to 8.98% for
1999 compared to 7.52% for 1998. The average cost of funds amounted to 4.86% for
1999 compared to 4.54% for 1998. Net interest yield for the period ended
December 31, 1999 was 5.85% compared to 2.98% for period ended December 31,
1998. During 1999, key interest rates, such as The Wall Street Journal's Prime
Rate, increased throughout the year. There were three increases totaling a 0.75%
increase in this key rate during the year.
Non-Interest Income. Non-interest income for the period ended December 31,
1999 was $308,184 compared to $47,607 for the period ended December 31, 1998.
Non-interest income for the period represented 1.01% and .46% of average assets
respectively. One of management's goals for 2000 is to continue to improve non-
interest income as a percentage of average assets. Increases in non-interest fee
income for loan and lease sales should continue to improve this ratio.
13
<PAGE>
Non-Interest Expense. Non-interest expense for the fiscal year ended
December 31, 1999 was $1,896,264 compared to $987,359 for the fiscal year ended
December 31, 1998. As a percentage of total average assets, non-interest expense
amounted to 6.20% in 1999 compared to 9.48% in 1998. Below are the components of
non-interest expense for the fiscal years ended 1999 and 1998.
1999 1998
---- ----
Salaries and benefits $ 986,854 $ 489,133
Equipment and occupancy expense 249,930 137,067
Legal and professional 179,253 172,591
Data processing 81,686 37,048
Printing and supplies 53,013 28,471
Postage and courier 34,953 10,206
Telephone 33,826 21,003
Advertising 33,397 6,700
Marketing 23,395 35,108
Insurance-directors and officers 19,349 21,281
Business development 19,223 14,822
Other operating expenses 181,385 13,929
---------- ----------
Total non-interest expense $1,896,264 $ 987,359
========== ==========
14
<PAGE>
During 1999, allowance for loan losses increased by $183,000. In the Bank's
loan portfolio, there were no charge-offs during 1999. As of December 31, 1999,
management considers the allowance for loan losses to be adequate to absorb
possible future losses. However, there can be no assurance that charge-offs in
future periods will not exceed the allowance for loan losses or that additional
provisions to the allowance will not be required.
The following tables present an analysis of the net interest earnings of
the Bank for the fiscal years ended 1999 and 1998 with respect to each major
category of interest-earning asset and each major category of interest-bearing
liability. As the Bank did not commence banking operations until July 27, 1998,
the table for 1998 presents only a partial year's results.
<TABLE>
<CAPTION>
December 31, 1999
In thousands (000), except percentages
----------------------------------------------------------------
Average Interest Average
Assets Amount Earned Yield
------ ------------------ -------------- ----------
<S> <C> <C> <C>
Federal funds sold $ 2,171 $ 107 4.93%
Taxable securities 6,800 380 5.59%
Net loans 19,858/(1)/ 2,101/(2)/ 10.58%
------------------ --------------
Total earning assets $ 28,829 $ 2,588 8.98%
================== ============== ==========
<CAPTION>
Liabilities Average Interest Average
----------- Amount Expense Cost
<S> <C> <C> <C>
NOW and money market deposits $ 8,605 $ 419 4.87%
Savings deposits 8 0 0.00%
Time deposits 8,384 447 5.33%
Other borrowings 701 36 5.14%
----------------- --------------
Total interest-bearing liabilities $ 18,575 $ 902 4.86%
================= ============== ==========
Net yield on earning assets 5.85%
==========
Net interest margin 4.12%
==========
</TABLE>
______________________________________________
(1) During 1999, all loans accrued interest.
(2) Interest earned on net loans includes loan fees and loan service
fees of $182,629 in 1999.
15
<PAGE>
<TABLE>
<CAPTION>
December 31, 1999
In thousands (000), except percentages
----------------------------------------------------------------
Average Interest Average
Assets Amount Earned Yield
------ ----------------- --------------- --------------
<S> <C> <C> <C>
Federal funds sold $ 3,531 $ 191 5.39%
Taxable securities 1,903 102 5.33%
Net loans 3,883/(1)/ 409/(2)/ 10.52%
----------------- ---------------
Total earning assets $ 9,317 $ 702 7.52%
================= =============== ==============
<CAPTION>
Average Interest Average
Liabilities Amount Expense Cost
----------- ----------------- --------------- --------------
<S> <C> <C> <C>
NOW and money market deposits $ 1,438 $ 44 3.06%
Savings deposits 2 0 0.00%
Time deposits 2,299 124 5.39%
Other borrowings 71 5 7.04%
----------------- ---------------
Total interest-bearing liabilities $ 3,810 $ 173 4.54%
================= =============== =============
Net yield on earning assets 2.98%
=============
Net interest margin 5.67%
=============
</TABLE>
______________________________________________
(1) During 1998, all loans accrued interest.
(2) Interest earned on net loans includes loan fees and loan
service fees of $14,163 in 1998.
Rate/Volume Analysis of Net Interest Income. The Bank began banking
operations on July 27, 1998. Yet, these partial year results have been
annualized. The results for 1999 represent a full year of operations. For each
category of interest-earning assets and interest-bearing liabilities,
information is provided on changes attributable to (1) change in volume (change
in volume multiplied by old rate); (2) change in rate (change in rate multiplied
by old volume); and (3) a combination of change in rate and change in volume.
The changes in interest income and interest expense attributable to both volume
and rate have been allocated proportionately on a consistent basis to the change
due to volume and the change due to rate.
<TABLE>
<CAPTION>
Year Ended December 31,
1999 vs. 1998
(Dollars in thousands)
Changes Due To:
Increase
Increase (decrease) in: Rate Volume (Decrease)
---------- ---------- ----------
<S> <C> <C> <C>
Income from interest-earning assets:
Federal funds sold $ (16) $ (68) $ (84)
Taxable securities 4 274 278
Net loans 2 1,690 1,692
---------- ---------- ----------
Total interest income (10) 1,896 1,886
---------- ---------- ----------
Expense from interest-bearing liabilities:
NOW and money market deposits 40 335 375
Time deposits (1) 324 323
Other borrowings (2) 33 31
---------- ---------- ----------
Total interest expense (37) 692 729
---------- ---------- ----------
Net interest income $ (47) $ 1,204 $ 1,157
========== ========== ==========
</TABLE>
16
<PAGE>
Deposits. The following table presents, for the fiscal year ended 1998, the
average amount of and average rate paid on each of the described deposit
categories. As the Bank did not commence banking operations until July 27, 1998,
a presentation of the average amount of and average rate paid on each of the
Bank's deposit categories for the fiscal year ended 1997 cannot be produced.
<TABLE>
<CAPTION>
December 31, 1999
In thousands (000), except percentages
--------------------------------------
Average Average
Deposit Category Amount Rate Paid
---------------- ----------------- ------------
<S> <C> <C>
Non interest-bearing demand deposits $ 2,858 --
NOW and money market deposits 8,605 4.87%
Savings deposits 8 3.05%
Time deposits 8,384 5.33%
December 31, 1998
In thousands (000), except percentages
--------------------------------------
Average Average
Deposit Category Amount Rate Paid
---------------- ----------------- -------------
<S> <C> <C>
Non interest-bearing demand deposits $ 452 --
NOW and money market deposits 1,438 3.03%
Savings deposits 2 3.10%
Time deposits 2,299 5.41%
</TABLE>
The following table indicates amounts outstanding of time certificates of
deposit of $100,000 or more and respective maturities at December 31, 1999:
Time
Certificates of
Deposits
In thousands (000)
--------------------
3 months or less $2,118
3-6 months................. 2,220
6-12 months................ 1,270
Over 12 months............. 100
------
Total.................. $5,708
======
At December 31, 1999, the Bank had no deposit relationships that
represented concentrations.
Financial Condition
The following is a presentation of the average consolidated balance
sheet of the Company for the fiscal years ended 1999 and 1998 respectively.
This presentation includes all major categories of interest earning assets and
interest and interest bearing liabilities. As the Bank did not commence banking
operations until July 27, 1998, the comparison of the Company's average
consolidated balance sheet at December 31, 1998 with those at December 31, 1999
may not be indicative of the Bank's results had the Bank been in business for
the entire year.
17
<PAGE>
AVERAGE CONSOLIDATED ASSETS
In thousands (000)
-----------------------------------------------
<TABLE>
<CAPTION>
December 31,
1999 1998
----------------------------------
<S> <C> <C>
Federal funds sold $ 2,171 $ 3,531
Taxable securities 6,800 1,903
Net loans 19,858 3,883
--------------- -------------
Total earning assets $ 28,829 $ 9,317
Other assets 1,757 1,098
--------------- -------------
Total assets $ 30,586 $ 10,415
=============== =============
</TABLE>
AVERAGE CONSOLIDATED LIABILITIES AND
STOCKHOLDERS' EQUITY
In thousands (000)
-----------------------------------------------
<TABLE>
<CAPTION>
December 31,
1999 1998
--------------- -------------
<S> <C> <C>
Non interest-bearing deposits $ 2,858 $ 452
NOW and money market deposits 8,605 1,438
Savings deposits 8 2
Time deposits 8,384 2,299
Other borrowings 701 71
Other liabilities 32 114
--------------- -------------
Total liabilities $ 20,588 $ 4,376
Stockholders' equity 9,998 6,039
--------------- -------------
Total liabilities and
stockholders' equity $ 30,586 $ 10,415
=============== =============
</TABLE>
Loan Portfolio. The following table presents various categories of loans
contained in the Bank's loan portfolio for the fiscal year ended December 31,
1999 and December 31, 1998, and the total amount of all loans for such periods.
<TABLE>
<CAPTION>
December 31,
In thousands (000)
------------------
1999 1998
Type of Loan ---- ----
------------
<S> <C> <C>
Commercial loans $ 14,252 $ 8,066
Real estate - construction 4,464 1,460
Real estate - mortgage 3,895 2,843
Lease financing 3,215 1,894
Installment and other loans to individuals 1,097 568
-------------- --------------
Subtotal 26,923 14,832
Less: Deferred loan fees and costs 25 -
Less: Allowance for possible loan losses 405 222
-------------- --------------
Total (net of allowance) $ 26,493 $ 14,610
============== ==============
</TABLE>
18
<PAGE>
The following is a presentation of an analysis of maturities of loans as of
December 31, 1999:
<TABLE>
<CAPTION>
In thousands (000)
------------------
Due after
Due in 1 1 Year
Year or Less than Due after
Type of Loan Less 5 Years 5 Years Totals
- ------------ ------------- ------------- ------------- --------------
<S> <C> <C> <C> <C>
Commercial loans $ 4,113 $ 9,785 $ 354 $ 14,252
Real estate - construction 4,464 -- -- 4,464
Real estate - mortgage 1,962 1,446 487 3,895
Installment and other loans to individuals 376 322 399 1,097
Lease financing 1,462 1,753 -- 3,215
------------- ------------- ------------- --------------
Total $ 12,377 $ 13,306 $ 1,240 $ 26,923
============= ============= ============= ==============
</TABLE>
For the above loans, the following is a presentation of an analysis of
sensitivities to changes in interest rates as of December 31, 1999:
<TABLE>
<CAPTION>
In thousands (000)
------------------
Due after 1
Due in 1 Year Less Due after
Interest Category Year or Less than 5 Years 5 Years Totals
----------------- ------------ ------------ ---------- -----------
<S> <C> <C> <C> <C>
Predetermined interest rate $ 4,813 $ 7,089 $ 555 $ 12,457
Floating interest rate 14,042 424 -- 14,466
------------ ------------ ---------- -----------
Total $ 18,855 $ 7,513 $ 555 $ 26,923
============ ============ ========== ===========
</TABLE>
As of December 31, 1999, all loans were accruing interest, no accruing
loans were contractually past due 90 days or more as to principal and interest
payments and no loans were defined as "troubled debt restructurings."
As of December 31, 1999, there were no loans classified for regulatory
purposes as doubtful, substandard or special mention which (i) represent or
result from trends or uncertainties which management reasonably expects will
materially impact future operating results, liquidity, or capital resources, or
(ii) represent material credits about which management is aware of any
information which causes management to have serious doubts as to the ability of
such borrowers to comply with the loan repayment terms. There are no loans where
known information about possible credit problems of borrowers causes management
to have serious doubts as to the ability of such borrowers to comply with the
present loan repayment terms.
Accrual of interest is discontinued on a loan when management of the Bank
determines upon consideration of economic and business factors affecting
collection efforts that collection of interest is doubtful. During 1999, all
loans were accruing interest.
19
<PAGE>
Summary of Loan Loss Experience. An analysis of the Bank's loan loss
experience is furnished in the following table for the periods indicated, as
well as a breakdown of the allowance for possible loan losses.
Analysis of the Allowance for Possible Loan Losses
<TABLE>
<CAPTION>
December 31, 1999
-----------------
<S> <C>
Balance at beginning of period $ 222,000
Charge-offs:
Commercial loans 0
Real estate - construction 0
Real estate - mortgage 0
Installment and other loans to individuals 0
Lease financing 0
-----------------
Total 0
Recoveries
Commercial loans 0
Real estate - construction 0
Real estate - mortgage 0
Installment and other loans to individuals 0
Lease financing 0
-----------------
Total 0
-----------------
Net charge-offs 0
Additions charged to operations 183,000
-----------------
Balance at end of period $ 405,000
=================
Ratio of net charge-offs during the period to average loans
outstanding during the period 0%
=================
</TABLE>
Analysis of the Allowance for Possible Loan Losses
<TABLE>
<CAPTION>
December 31, 1998
-----------------
<S> <C>
Balance at beginning of period $ 0
Charge-offs:
Commercial loans 0
Real estate - construction 0
Real estate - mortgage 0
Installment and other loans to individuals 0
Lease financing 0
-----------------
Total 0
Recoveries
Commercial loans 0
Real estate - construction 0
Real estate - mortgage 0
Installment and other loans to individuals 0
Lease financing 0
-----------------
Total 0
-----------------
Net charge-offs 0
Additions charged to operations 222,000
-----------------
Balance at end of period $ 222,000
=================
Ratio of net charge-offs during the period to average loans
outstanding during the period 0%
=================
</TABLE>
20
<PAGE>
At December 31, 1999, the allowance for possible loan losses was allocated
as follows:
<TABLE>
<CAPTION>
Percent of
loans in each
category to
Amount total loans
------ -----------
<S> <C> <C>
Commercial loans $ 214,650 53%
Real estate - construction 68,650 17%
Real estate - mortgage 56,700 14%
Installment and other loans to individuals 16,200 4%
Lease financing 48,800 12%
Unallocated 0 0%
--------- -----------
Total $ 405,000 100%
========= ===========
</TABLE>
Loan Loss Reserve. In considering the adequacy of the Bank's allowance for
possible loan losses, management has focused on the fact that as of December 31,
1999, 53% of outstanding loans are in the category of commercial loans, which
includes commercial and industrial. Because of the larger average balance,
commercial loans are generally considered by management as having greater risk
per loan than other categories of loans in the Bank's loan portfolio. However,
over 85% of these commercial loans at December 31, 1999 were made on a secured
basis. Management believes that the secured condition of a large portion of its
commercial loan portfolio greatly reduces any risk of loss inherently present in
these types of loans.
Real estate construction loans were 17% of the Bank's outstanding loans as
of December 31, 1999. The Bank's loan policies prohibit the amount of the
original real estate construction loan to exceed 80% of the appraised value of
the collateral. Generally, these loans are owner-occupied real estate, not
leased facilities.
Real estate mortgage loans constituted 14% of outstanding loan balances at
December 31, 1999. All loans in this category represent commercial real estate
mortgages where the amount of the original loan generally does not exceed 80% of
the appraised value of the collateral. These loans are considered by management
to be well secured with a low risk of loss.
Lease financings represented 12% of the loan portfolio at December 31,
1999. These leases are generally for income producing commercial equipment,
such as heavy machinery used in construction and road building.
The Bank's consumer loan portfolio constituted 4% of the Bank's outstanding
loans at December 31, 1999. At December 31, 1999, the majority of the Company's
consumer loans were secured by collateral primarily consisting of automobiles,
boats and other personal property. Management believes that these loans involve
less risk than commercial loans.
During 1999, a review of the Bank's loan portfolio by an independent firm
was conducted. The purpose of this review was to assess the risk in the loan
portfolio and to determine the adequacy of the allowance for loan losses. The
review included analyses of historical performance, the level of non-conforming
and rated loans, loan volume and activity, review of loan files and
consideration of economic conditions and other pertinent information. Upon
completion and review by the Bank's Board of Directors and management, the Bank
approved the firm's report. The Bank will continue engaging, on an annual basis,
an independent firm to review the Bank's loan portfolio. In addition to the
independent reviews, the Bank's primary regulator, the OCC, also conducts an
annual examination of the loan portfolio. Upon completion, the OCC presents its
report of findings to the Bank's Board of Directors and management. Information
provided from the above two independent sources, together with information
provided by the management and other information known to the Bank's Board of
Directors, are utilized by the Board of Directors to monitor, on a quarterly
basis, the loan portfolio. Specifically, the Bank's Board of Directors attempts
to identify risks inherent in the loan portfolio (e.g., problem loans, potential
problem loans and loans to be charged off), assess the overall quality and
collectibility of the loan portfolio, and determine amounts of the allowance for
loan losses and the provision for loan losses to be reported based on the
results of their review.
21
<PAGE>
Investments. As of December 31, 1999, net loans comprised approximately
69% of the Bank's assets, investment securities comprised approximately 20% of
the Bank's assets and federal funds sold comprised approximately 5% of the
Bank's assets.
The following table presents, for the periods indicated, the book value of
the Bank's investments. All securities held at December 31, 1999 and 1998 were
categorized as available-for-sale.
<TABLE>
<CAPTION>
December 31,
Investment Category
-------------------
1999 1998
---- ----
<S> <C> <C>
Available-for-Sale:
-------------------
Obligations of U.S. Treasury and other U.S. agencies $ 7,530,851 $ 5,702,770
Federal Reserve Bank stock 288,000 288,000
Federal Home Loan Bank stock 149,800 51,100
----------- -----------
Total $ 7,968,651 $ 6,041,870
=========== ===========
</TABLE>
The following table indicates, for the fiscal year ended December 31, 1999,
the amount of investments due by contractual maturity in (i) one year or less,
(ii) one to five years, (iii) five to ten years, and (iv) over ten years:
<TABLE>
<CAPTION>
Investment Category
-------------------
Weighted
Average
Available-for-Sale: Amount Yield (1)
------------------- ------ ---------
<S> <C> <C>
Obligations of U.S. Treasury
and other U.S. agencies:
0-1 year $ 1,488,825 4.35%
Over 1 through 5 years 4,988,974 6.05%
Over 5 through 10 years 976,563 7.03%
Over 10 years 0 0
Federal Reserve Bank stock, no maturity 288,000 6.00%
Federal Home Loan Bank stock, no maturity 149,800 7.00%
-----------
Total $ 7,968,651 5.86%
=========== ====
</TABLE>
_________________________________________
(1) The Bank has not invested in any tax-exempt obligations.
Return on Equity and Assets. Returns on average consolidated assets and
average consolidated equity for fiscal years ended December 31, 1999 and
December 31, 1998 are presented below.
December 31,
1999 1998
----------------------
Loss on average assets (2.76%) (6.54%)
Loss on average equity (0.84%) (11.28%)
Average equity to average assets ratio 32.69% 57.98%
Dividend payout ratio N/A N/A
22
<PAGE>
Liquidity and Interest Rate Sensitivity. Net interest income, the
Company's primary source of earnings, fluctuates with significant interest rate
movements. To lessen the impact of these margin swings, the balance sheet should
be structured so that repricing opportunities exist for both assets and
liabilities in roughly equivalent amounts at approximately the same time
intervals. Imbalances in these repricing opportunities at any point in time
constitute interest rate sensitivity.
Interest rate sensitivity refers to the responsiveness of interest-bearing
assets and liabilities to changes in market interest rates. The rate sensitive
position, or gap, is the difference in the volume of rate sensitive assets and
liabilities, at a given time interval. The general objective of gap management
is to manage actively rate sensitive assets and liabilities so as to reduce the
impact of interest rate fluctuations on the net interest margin. Management
generally attempts to maintain a balance between rate sensitive assets and
liabilities as the exposure period is lengthened to minimize the Company's
overall interest rate risks.
The asset mix of the balance sheet is continually evaluated in terms of
several variables: yield, credit quality, appropriate funding sources and
liquidity. To effectively manage the liability mix of the balance sheet, there
should be a focus on expanding the various funding sources. The interest rate
sensitivity position at year-end 1999 is presented in the following table. The
difference between rate sensitive assets and rate sensitive liabilities, or the
interest rate sensitivity gap, is shown at the bottom of the table. Since all
interest rates and yields do not adjust at the same velocity, the gap is only a
general indicator of rate sensitivity.
<TABLE>
<CAPTION>
After 3 After 6 After 1
months but months year but
Within 3 within 6 but within within 5 After 5
months months 1 year years years Totals
------ ------ ------ ----- ----- ------
<S> <C> <C> <C> <C> <C> <C>
EARNING ASSETS
Loans $ 15,008 $ 996 $ 2,444 $ 7,920 $ 555 $ 26,923
US Government and agency -- -- 1,489 4,236 1,806 7,531
securities
Fed funds sold 1,991 -- -- -- -- 1,991
-------- -------- -------- -------- -------- --------
Total earning assets $ 16,999 $ 996 $ 3,933 $ 12,156 $ 2,361 $ 36,445
======== ======== ======== ======== ======== ========
FUNDING SOURCES
Demand deposits,
interest-bearing demand
and savings $ 14,875 $ -- $ -- $ -- $ -- $ 14,875
Certificates, less than
$100M 224 3,004 1,658 822 -- 5,708
Certificates $100M and
over 3,166 2,223 612 198 -- 6,199
-------- -------- -------- -------- -------- --------
Total interest-bearing
liabilities $ 18,265 $ 5,227 $ 2,270 $ 1,020 $ -- $ 26,782
======== ======== ======== ======== ======== ========
Interest-sensitivity gap $ -1,266 $ -4,231 $ 1,663 $ 11,136 $ 2,361 $ 9,663
Cumulative interest-
sensitivity gap $ -1,266 $ -5,497 $ -3,834 $ 7,302 $ 9,663 $ 9,663
Interest-sensitivity gap
ratio -3.79% -15.08% 4.56% 33.30% 7.06% 28.89%
Cumulative interest-
sensitivity gap ratio -3.79% -17.34% -10.52% 21.83% 28.89% 28.89%
</TABLE>
As evidenced by the table above, the Company is cumulatively liability
sensitive within one year. In a rising interest rate environment, an asset
sensitive position (a gap ratio over 1.0) is generally more advantageous as
earning assets are repriced sooner than the liabilities. Conversely, in a
declining interest rate environment, a liability sensitive position (a gap ratio
of less than 1.0) is generally more advantageous since liabilities are repriced
sooner than assets. With respect to the Company, an increase in interest rate
would result in higher earnings while a decline in interest rates will reduce
income. This, however, assumes that all other factors affecting income remain
constant.
As the Company continues to grow, management will structure its rate
sensitivity position to hedge against rapidly rising or falling interest rates.
The Bank's Asset/Liability Committee meets on a monthly basis and develops
management's strategy for the upcoming period. Such strategy includes
anticipations of future interest rate movements.
23
<PAGE>
Liquidity represents the ability to provide steady sources of funds for
loan commitments and investment activities, as well as to maintain sufficient
funds to cover deposit withdrawals and payment of debt and operating
obligations. These funds can be obtained by converting assets to cash or by
attracting new deposits. The Company's primary source of liquidity comes from
its ability to maintain and increase deposits through the Bank. Deposits grew by
$14.8 million in 1999. Below are the pertinent liquidity balances and ratios for
the periods ended December 31, 1999 and December 31, 1998.
1999 1998
---- ----
Cash and cash equivalents $ 1,056,784 1,053,182
Federal fund sold $ 1,990,593 380,000
Securities $ 7,968,651 6,041,870
CDs, over $100,000 to total deposits ratio 21.31% 42.66%
Loan to deposit ratio 100.43% 123.49%
Brokered deposits N/A N/A
At December 31, 1999, large denomination certificates accounted for 21.31%
of total deposits compared with 42.66% at December, 31, 1998. Large denomination
CDs are generally more volatile than other deposits. As a result, management
monitors the competitiveness of the rates it pays on its large denomination CDs
and periodically adjusts its rates in accordance with market demands.
Significant withdrawals of large denomination CDs may have a material adverse
effect on the Bank's liquidity. Management believes that since a majority of the
above certificates were obtained from Bank customers residing in Fulton County,
Georgia, the volatility of such deposits is lower than if such deposits were
obtained from depositors residing outside of Fulton County, as outside
depositors are more likely to be interest rate sensitive.
Cash and cash equivalents are the primary source of liquidity. At December
31, 1999, cash and cash equivalents amounted to $1.06 million, representing
2.76% of total assets. Securities available for sale provide a secondary source
of liquidity. Approximately $2.0 million of the $7.5 million in the Bank's
securities portfolio is scheduled to mature in 2001.
Brokered deposits are deposit instruments, such as certificates of deposit,
deposit notes, bank investment contracts and certain municipal investment
contracts that are issued through brokers and dealers who then offer and/or sell
these deposit instruments to one or more investors. As of December 31, 1999, the
Bank had no brokered deposits in its portfolio.
Management knows of no trends, demands, commitments, events or
uncertainties that should result in or are reasonably likely to result in the
Company's liquidity increasing or decreasing in any material way in the
foreseeable future.
Capital Adequacy. There are now two primary measures of capital adequacy
for banks and bank holding companies: (i) risk-based capital guidelines and (ii)
the leverage ratio.
The risk-based capital guidelines measure the amount of a bank's required
capital in relation to the degree of risk perceived in its assets and its off-
balance sheet items. Note that under the risk-based capital guidelines, capital
is divided into two "tiers." Tier 1 capital consists of common shareholders'
equity, non-cumulative and cumulative (bank holding companies only) perpetual
preferred stock and minority interest. Goodwill is subtracted from the total.
Tier 2 capital consists of the allowance for loan losses, hybrid capital
instruments, term subordinated debt and intermediate term preferred stock. Banks
are required to maintain a minimum risk-based capital ratio of 8.0%, with at
least 4.0% consisting of Tier 1 capital.
The second measure of capital adequacy relates to the leverage ratio. The
OCC has established a 3.0% minimum leverage ratio requirement. Note that the
leverage ratio is computed by dividing Tier 1 capital into total assets. For
banks that are not rated CAMEL 1 by their primary regulator (which includes the
Bank), the minimum leverage ratio should be 3.0% plus an additional cushion of
at least 1 to 2 %, depending upon risk profiles and other factors.
24
<PAGE>
In 1997, a rule was adopted by the Federal Reserve Board, the OCC and the
FDIC that adds a measure of interest rate risk to the determination of
supervisory capital adequacy. In connection with this new rule, the agencies
have also proposed a measurement process to measure interest rate risk. Under
this proposal, all items reported on the balance sheet, as well as off-balance
sheet items, would be reported according to maturity, repricing dates and cash
flow characteristics. A bank's reporting position would be multiplied by
duration-based risk factors and weighted according to rate sensitivity. The net
risk weighted position would be used in assessing capital adequacy. The
objective of this complex proposal is to determine the sensitivity of a bank to
various rising and declining interest rate scenarios.
The table below illustrates the Bank's and Company's regulatory capital
ratios at the date indicated:
<TABLE>
<CAPTION>
Minimum
regulatory
Bank December 31, 1999 requirement
---- ----------------- -----------
<S> <C> <C>
Tier 1 Capital 33.64% 4.0%
Tier 2 Capital 1.25% --
---------
Total risk-based capital ratio 34.89% 8.0%
========= =======
Leverage Ratio 25.26% 4.0%
========= =======
Company - Consolidated
----------------------
Tier 1 Capital 35.00% 4.0%
Tier 2 Capital 1.25% --
---------
Total risk-based capital ratio 36.25% 8.0%
========= =======
Leverage ratio 26.29% 4.0%
========= =======
</TABLE>
The above ratios indicate that the capital positions of the Bank and the
Company are sound and that both are well positioned for future growth.
Accounting Pronouncements
In June 1998, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards No. 133, "Accounting for Derivative
Instruments and Hedging Activities " ("SFAS No. 133"). This statement
establishes accounting and reporting standards for derivative instruments and
hedging activities. SFAS No. 133 is effective for fiscal years beginning after
June 15, 2000. Retroactive application to financial statements of prior periods
is not required. The Company does not currently have any derivative instruments
nor is it involved in hedging activities.
In April 1998, the Accounting Standards Executive Committee issued
Statement of Position 98-5, "Reporting on the Cost of Start-Up Activities" ("SOP
98-5") which requires costs of start-up activities and organization costs to be
expensed as incurred. SOP 98-5 is effective for fiscal years beginning after
December 15, 1998, with earlier application encouraged. The Company elected to
early adopt SOP 98-5 for the year ended December 31, 1998. The cumulative effect
of this accounting change resulted in a charge to earnings of approximately
$47,000.
Effects of Inflation and Changing Prices
Inflation generally increases the cost of funds and operating overhead, and
to the extent loans and other assets bear variable rates, the yields on such
assets. Unlike most industrial companies, virtually all of the assets and
liabilities of a financial institution are monetary in nature. As a result,
interest rates generally have a more significant impact on the performance of a
financial institution than the effects of general levels of inflation. Although
interest rates do not necessarily move in the same direction or to the same
extent as the prices of goods and services, increases in inflation generally
have resulted in increased interest rates. In addition, inflation affects
financial institutions' increased costs of goods and services purchased, the
cost of salaries and benefits, occupancy expense, and similar items. Inflation
and related increases in interest rates generally decrease the market value of
shareholders' equity. Mortgage originations and refinancings tend to slow as
interest rates increase, and can reduce the Company's earnings from such
activities and the income from the sale of residential mortgage loans in the
secondary market.
25
<PAGE>
Item 7. Financial Statements
The consolidated financial statements of the Company, including notes
thereto, and the report of independent certified public accountants are included
in this Report beginning at page F-1 and are incorporated herein by reference.
Item 8. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure
There has been no occurrence requiring a response to this Item.
PART III
Item 9. Directors, Executive Officers, Promoters and Control Persons;
Compliance with Section 16(a) of the Exchange Act
Each person listed below has been a director of the Company since July 27,
1998. Directors of the Company serve staggered terms, which means that one-
third of the directors will be elected each year at Company's annual meeting of
shareholders.
Each person listed below is also a director of the Bank. The Bank's
officers are appointed by the Bank's Board of Directors and hold office at the
will of the Bank's Board of Directors.
Michael L. Aldredge, age 47, has served as Operations Manager and Secretary of
Squire Inn, Inc., a hotel holding company, since 1990. Mr. Aldredge is also a
partner in KAL Jax Hotel, LTD, where he serves as Managing Partner of the Days
Inn Jacksonville Beach Resort. Mr. Aldredge is a member of the Loan Committee
of the Bank.
C. Dan Alford, age 39, has served as the Chief Financial Officer of Allied
Utility Network LLC, a consultant to the utility industry, since February 1998.
From 1989 to 1998, Mr. Alford served as the Executive Vice President and Chief
Operating Officer of A&C Enercom, Inc., a subsidiary of Virginia Electric Power
Company from 1996 to 1997, where he also served as General Manager of National
Operations for the Commercial & Industrial Division. Mr. Alford is a member of
the Audit and Compensation Committees of the Company and the Audit, Compliance
and Community Reinvestment Act Committee of the Bank.
Patricia Rhodes Grimes, age 51, has been retired from SunTrust Service
Corporation since 1992. She has extensive banking experience and held various
management level positions with SunTrust Service Corporation and Trusco Data
Systems, a division of Trust Company of Georgia. Most recently, Ms. Grimes
served as Senior Vice President and Manager of the Application Systems Division
with SunTrust Service Corporation, a subsidiary of SunTrust Banks, Inc. Ms.
Grimes also held positions with Trusco Data Systems, including Group Vice
President and Assistant Manager of Systems and Programming, Vice President and
Section Manager of Deposits, Financial and Human Resources Systems, Systems
Officer and Project Leader of the Demand Deposit System, and programmer/analyst
for Deposit Applications. Further, Ms. Grimes has served on the MIS Advisory
Board for the University of Georgia. Ms. Grimes is the Chairman of the
Marketing, Operation and Technology Committee of the Bank. She is also a member
of the Audit Committee of the Company, the Audit, Compliance and Community
Reinvestment Act Committee of the Bank, as well as the Compensation Committee of
the Company.
William H. Groce, Jr., age 64, is a retired executive from BellSouth
Telecommunications. Mr. Groce held various positions at BellSouth
Telecommunications throughout his career which began in 1958, including
Executive Assistant to the President of BellSouth Telecommunications and
Secretary to its Board of Directors from 1988 until his retirement in 1994. Mr.
Groce is the Secretary of the Company and Chairman of the Asset/Liability
Management Committee of the Bank.
David R. Hink, age 51, has been the Managing Principal of Strategic Solutions
Resources, a consultant to the utilities industry, since December 1996. In
addition, Mr. Hink is Executive Vice President of Ekercom, Inc., a software
company in which he also serves as a director. From 1995 to 1996, Mr. Hink
served as President of the MarKit Division of Severn Trent Systems, a software
company. From 1993 to 1995, Mr. Hink was employed with A&C Enercom, Inc., where
he served as Senior Vice President and was responsible for its information
technology group of companies, comprised of Entec Consulting and the Market
Applications Group. Mr. Hink is a member of the Compensation Committee of the
Company and the Loan Committee of the Bank.
26
<PAGE>
Mary E. Johnson, age 47, has served as the Controller of T. Stephen Johnson &
Associates, Inc., a financial services consulting firm, and its related entities
since 1987. She also serves as the Corporate Secretary and Treasurer to the
Board of Directors of Brightlane.com, Inc., an internet "super-site" offering
products and services to small business owners. Further, Ms. Johnson serves as
Corporate Secretary to the Board of Directors of Directo, Inc., a direct deposit
payroll services company that acts as an intermediary between employers and non-
banked employees. Ms. Johnson is a member of the Marketing Committee of the
Bank.
Robert W. Johnston, age 48, is a Vice President of TRC Staffing Services, Inc.,
in Atlanta, Georgia, a position he has held since January 2000. Prior to that
time, Mr. Johnston was a consultant to the staffing services industry through
his investment in Koala Enterprises, Inc. since 1978. Mr. Johnston is a member
of the Marketing Committee and the Operations/Technology Committee of the Bank.
H.N. Padget, Jr., age 44, is the President and Chief Executive Officer of the
Company and the Bank. He has been a banker in metropolitan Atlanta for over 20
years and has served in various management positions throughout his career. Mr.
Padget most recently served as Executive Vice President of Milton National Bank,
Alpharetta, Georgia from 1993 through October of 1997. Mr. Padget is the son of
Heber N. Padget, Sr., a director of the Company and the Bank.
Heber N. Padget, Sr., age 68, has been retired since 1991 from the farming
business he started in 1962. He owns the Padget Cattle Company and Wauka Chick
Company, both farming-related businesses located in Gainesville, Georgia. Mr.
Padget is a member of the Asset/Liability Management Committee of the Bank. Mr.
Padget is the father of H.N. Padget, Jr., the Company's and the Bank's President
and Chief Executive Officer
John A. Pond, age 52, has been the President of Pond & Company, an engineering
and architectural services company, since 1987. Mr. Pond holds a professional
engineer license as well as a professional land surveyor license. Mr. Pond is a
member of the Marketing Committee of the Bank.
Reid W. Simmons, age 52, has been the President, founder and co-owner of
OMSystems, Inc. (Orthotrac), a leading provider of computer hardware and
software for orthodontists since 1981. From 1970 until 1981, he held various
sales and management positions with NCR Corporation, including Regional Director
and National Director of Large Computer Systems. Mr. Simmons is a member of the
Audit Committee of the Company and the Marketing Committee and the Audit,
Compliance and Community Reinvestment Act Committee of the Bank.
W. Darrell Sumner, age 51, is the President and co-founder of Bank Assets, Inc.,
a firm that specializes in marketing, designing and implementing compensation
and benefit programs for financial institutions since 1992. Mr. Sumner is a
member of the Compensation Committee of the Company and the Loan Committee and
Asset/Liability Management Committee of the Bank.
W. David Sweatt, age 52, is the Chairman of the Company and the Bank. From 1996
through 1998, Mr. Sweatt managed personal investments. From 1993 until it was
sold in 1996, Mr. Sweatt was a director and the President and Chief Executive
Officer of Royal Bankshares of Acadiana, Inc., Lafayette, Louisiana, a
registered bank holding company which owned the Bank of Lafayette and Trust Bank
of the U.S., a non-depository trust company. Mr. Sweatt simultaneously served as
President and Chief Executive Officer of both subsidiaries of the holding
company. He is the Chairman of the Loan Committee and the Executive Committee of
the Bank.
Other Executive Officer
Danny F. Dukes, age 39, was named Chief Financial Officer of the Company and
Senior Vice President of the Bank and Controller of the Bank in January, 1999.
From March 1997 until December 1998, Mr. Dukes served as Vice President and
Chief Financial Officer of First Community Bancorp and First Community Bank &
Trust in Cartersville, Georgia. From March 1994 until March 1997, Mr. Dukes
served as Chief Financial Officer of Georgia Federal Credit Union, Atlanta,
Georgia.
There are no family relationships between any of the directors or executive
officers of the Company or the Bank, except that H.N. Padget, Jr., is the son of
Heber N. Padget, Sr.
27
<PAGE>
Section 16(a) Beneficial Ownership Reporting Compliance
Section 16(a) of the Securities and Exchange Act of 1934, as amended, and
related regulations of the Securities and Exchange Commission ("SEC"), require
the Company's executive officers and directors, and certain persons who own 10%
or more of Company common stock, to file with the SEC reports of their ownership
of Company common stock. The regulations also require these persons to furnish
the Company with copies of all Section 16(a) forms they file. To the Company's
knowledge, based solely on a review of the copies of such reports furnished to
the Company, the Company believes that during 1999 all filing requirements
applicable to such persons have been complied with, except that a Form 4, Report
of Changes in Beneficial Ownership of Securities was inadvertently filed late by
directors H.N. Padget, Jr. and W. David Sweatt, and executive officer Danny F.
Dukes.
Item 10. Executive Compensation
The following table sets forth a summary of the compensation paid to or
accrued on behalf of the Company's Chief Executive Officer during the last three
fiscal years. No other executive officer of the Company or the Bank received
annual salary and bonus in excess of $100,000 during the last fiscal year.
<TABLE>
<CAPTION>
Long Term
Compensation
Awards
------------
Securities
Annual Underlying
Fiscal Compensation/(1)/ Options
------------------------ ------------
Name and Principal Position Year Salary ($) Bonus ($) (#)
--------------------------- ------- ---------- --------- ------------
<S> <C> <C> <C> <C>
H.N. Padget, Jr. 1999 126,302 -- 6,000/(2)/
President and Chief Executive Officer 1998 125,000 10,000 35,000/(3)/
1997 20,833 -- --
</TABLE>
__________________________________
/(1)/ All cash compensation was paid by the Bank.
/(2)/ Consists of grant of non-qualified stock option for 6,000 shares of
Company common stock.
/(3)/ Consists of grants of performance-based incentive stock options for
30,000 shares of Company common stock, and an incentive stock option
for 5,000 shares of Company common stock.
Employment Agreement
In November 1997, the Company and the Bank entered into an employment
agreement with H.N. Padget, Jr. regarding Mr. Padget's employment as President
and Chief Executive Officer of the Company and the Bank (the "Employment
Agreement"). Under the terms of the Employment Agreement, Mr. Padget will
receive a salary of $125,000 per year with a 2 1/2% increase per year on the
anniversary date of the opening of the Bank. The Employment Agreement provides
that at the end of each year of operation, Mr. Padget will be entitled to
receive a cash bonus based on a performance matrix established against certain
budgets set by the Company. Additionally, the Employment Agreement provides that
the Company will grant Mr. Padget incentive stock options to purchase shares of
Company common stock, subject to achieving certain performance targets. On
August 19, 1998 Mr. Padget received grants of 30,000 performance-based incentive
stock options and 5,000 incentive stock options. Pursuant to the Employment
Agreement, the Company has also provided an automobile to be used by Mr. Padget.
The period of employment commenced on July 27, 1998 and continues for a period
of 36 months thereafter except in the event of Mr. Padget's death. The
employment may be terminated (i) at the election of the Company and the Bank for
cause; (ii) at Mr. Padget's election, upon the Bank and the Company's breach of
any material provision of the Employment Agreement; or (iii) upon Mr. Padget's
death or disability. In the event that Mr. Padget's employment is terminated by
the Company without cause, (a) the Company will be required to meet its
obligations under the Employment Agreement for a period of 12 months after the
date of termination with respect to Mr. Padget's compensation and health and
dental insurance coverages, and (b) Mr. Padget will be prohibited from competing
with the Bank or soliciting its customers or employees within the geographic
area set forth in the Employment Agreement for a period of 12 months after the
date of termination.
28
<PAGE>
Stock Option Plans
1998 Incentive Stock Option Plan
On May 20, 1998, the Company's Board of Directors and initial shareholders
adopted an Incentive Stock Option Plan (the "Incentive Plan") to promote equity
ownership of the Company by key senior officers, key officers and other key
employees of the Company and the Bank. The Incentive Plan was amended by the
shareholders of the Company at a Special Meeting held on November 25, 1998 to
increase the number of shares reserved thereunder from 60,000 to 115,000. The
Incentive Plan provides for the grant of options at the discretion of the
Company's Compensation Committee. The option exercise price must be at least
100% (110% in the case of a holder of 10% or more of the Company's common stock)
of the fair market value of Company common stock on the date the option is
granted and the options are exercisable by the holder thereof in full at any
time prior to their expiration in accordance with the terms of the Incentive
Plan. Stock options granted pursuant to the Incentive Plan expire on or before
the date which is the tenth anniversary of the date the option is granted, or
until the expiration of 90 days (or such lesser period as the Compensation
Committee may determine) from the date on which the person to whom they were
granted ceases to be employed by the Company or the Bank. As of March 30, 2000,
an aggregate of 83,500 shares of Company common stock had been granted under the
Incentive Plan.
1998 Non Qualified Stock Option Plan
On August 19, 1998, the Company's Board of Directors amended and restated
the Company's 1998 Non Qualified Stock Option Plan (the "Non Qualified Plan").
On November 25, 1998, the Company's shareholders approved the amended and
restated Non Qualified Plan. The purpose of the Non Qualified Plan is to
attract, retain and compensate key personnel and directors of the Company and
the Bank. There are 185,000 shares of Company common stock reserved under the
Non Qualified Plan. The Non Qualified Plan is administered by the Company's
Board of Directors. The option exercise price of options granted under the Non
Qualified Plan is the fair market value of Company common stock on the date the
option is granted and the options are exercisable by the holder thereof in full
at any time prior to their expiration in accordance with the terms of the Non
Qualified Plan. Stock options granted pursuant to the Non Qualified Plan expire
on or before the date which is the tenth anniversary of the date the option is
granted, or such lesser period as the Company's Board of Directors may
determine. As of March 30, 2000, an aggregate of 165,500 shares of Company
common stock had been granted under the Non Qualified Plan.
The following table sets forth certain information regarding the grant of stock
options in 1999 to Mr. Padget and the value of options held by him at the end of
such fiscal year.
Option Grants in Last Fiscal Year
Individual Grants
<TABLE>
<CAPTION>
% of Total
Number of Securities Options Granted Exercise or
Underlying Options to Employees in Base Price Expiration
Name Granted (#) Fiscal Year ($/Sh) Date
- ---------------- -------------------- --------------- ----------- -----------
<S> <C> <C> <C> <C>
H.N. Padget, Jr. 6,000 26.09% $8.25 12/2009
</TABLE>
The following table sets forth certain information regarding the exercise
of stock options in the 1999 by the person named in the Summary Compensation
Table and the value of options held by such person at the end of such fiscal
year.
<TABLE>
<CAPTION>
Number of Securities Value of Unexercised
Underlying Unexercised In-the-Money Options
Options at FY-End (#)/(1)/ at FY-End ($)/(1)/
Name Exercisable/Unexercisable Exercisable/Unexercisable
---- ------------------------- -------------------------
<S> <C> <C>
H.N. Padget, Jr. 16,666/24,334 0/0
</TABLE>
29
<PAGE>
Director Compensation
The directors of the Company and the Bank do not intend to be separately
compensated in cash for their services as directors until the Company's and the
Bank's net profits exceed their net losses since inception on a cumulative
basis. During the organization of the Company and the Bank, directors of the
Company and the Bank were not compensated for their services. On August 19,
1998, the Company's Board of Directors amended and restated the Company's 1998
Non Qualified Stock Option Plan (the "Non Qualified Plan") to include non-
employee directors and made individual grants to each such director. On November
25, 1998, the Company's shareholders approved the Non Qualified Plan.
Accordingly, during 1998, each non-employee director received a non qualified
option to purchase a number of shares of Company common stock (ranging in size
from 10,000 shares to 22,500 shares and aggregating 145,000 shares) in
consideration of his or her past service as a director and as a means of
attracting and retaining qualified individuals to serve on the Company's Board
of Directors. During 1999, the Company granted 3,000 non-qualified options to
Chairman David Sweat. These options are exercisable at $8.25 per share, vest
equally over a three-year period and expire in December 2009.
Item 11. Security Ownership of Certain Beneficial Owners and Management
The following table sets forth certain information with respect to the
beneficial ownership, as of March 15, 2000, of shares of Company common stock by
(i) each person known by the Company to be the beneficial owner of more than 5%
of the Company's issued and outstanding common stock, (ii) each of the Company's
directors, (iii) each of the Company's executive officers, and (iv) all
directors and executive officers of the Company as a group. Except as noted
below, the Company believes that each of the persons listed has sole investment
and voting power with respect to the shares included in the table.
<TABLE>
<CAPTION>
Amount and
Nature of
Beneficial Percent of
Name of Beneficial Owner Ownership/(1)/(2)/ Class
- ------------------------------------------------------------ ------------------ ----------
<S> <C> <C>
Michael L. Aldredge 14,333/(3)/ 1.35
C. Dan Alford 13,333/(4)/ 1.26
Patricia R. Grimes 16,666/(5)/ 1.57
William H. Groce, Jr. 30,000/(6)/ 2.82
David R. Hink 20,000/(7)/ 1.88
Mary E. Johnson 16,666/(8)/ 1.57
Robert W. Johnston 13,333/(9)/ 1.26
Heber N. Padget, Sr. 45,600/(10)/ 4.28
H.N. Padget, Jr. 28,666/(11)/ 2.67
John A. Pond 20,000/(12)/ 1.88
Reid W. Simmons 16,666/(13)/ 1.57
W. Darrell Sumner 13,333/(14)/ 1.26
W. David Sweatt 129,766/(15)/ 11.98
Danny F. Dukes 2,266/(16)/ *
------------
All directors and executive officers as a group (14 persons) 380,628/(16)/ 32.90
============
</TABLE>
_______________________
* Represents holdings of less than 1%.
/(1)/ The information contained in this table with respect to Company common
stock ownership reflects "beneficial ownership" as determined in
accordance with Rule 13d-3 under the Securities Exchange Act of 1934, as
amended (the "Exchange Act"). Information with respect to beneficial
ownership is based upon information furnished by each owner.
/(2)/ With respect to certain of the individual executive officers listed in the
table and the aggregate number of shares held by the directors and
executive officers as a group, the number of shares indicated includes
shares of Company common stock that the individual has the right to
acquire on or before May 14, 2000 (60 days from March 15, 2000), through
the exercise of options granted under the Company's 1998 Incentive Stock
Option Plan. Under the SEC's rules, a person is also deemed to be the
beneficial owner of any securities owned by such person's spouse, children
or relatives living in the same household. Accordingly, more than one
person may be deemed to be a beneficial owner of the same securities.
30
<PAGE>
/(3)/ Includes 1,000 shares held by Mr. Aldredge as custodian for his minor
children. Also includes 3,333 shares issuable upon the exercise of a
stock option that may be exercised within 60 days of March 15, 2000.
/(4)/ Includes 3,333 shares issuable upon the exercise of a stock option that
may be exercised within 60 days of March 15, 2000.
/(5)/ Includes 4,166 shares issuable upon the exercise of a stock option that
may be exercised within 60 days of March 15, 2000.
/(6)/ Includes 5,000 shares issuable upon the exercise of a stock option that
may be exercised within 60 days of March 15, 2000.
/(7)/ Includes 5,000 shares issuable upon the exercise of a stock option that
may be exercised within 60 days of March 15, 2000.
/(8)/ Includes 4,166 shares issuable upon the exercise of a stock option that
may be exercised within 60 days of March 15, 2000.
/(9)/ Includes 3,333 shares issuable upon the exercise of a stock option that
may be exercised within 60 days of March 15, 2000.
/(10)/ Includes 900 shares held by Mr. Padget's spouse and an aggregate of 5,000
shares held by Mr. Padget and his spouse as custodians for their
grandchildren. Mr. Padget shares investment and voting power over such
shares with his spouse. Also includes 7,500 shares issuable upon the
exercise of a stock option that may be exercised within 60 days of March
15, 2000.
/(11)/ Includes an aggregate of 5,000 shares held by Mr. Padget's children, as
to which Mr. Padget disclaims beneficial ownership and 16,666 shares
issuable upon the exercise of stock options that may be exercised within
60 days of March 15, 2000.
/(12)/ Includes an aggregate of 3,000 shares held by Mr. Pond's children. Also
includes 3,000 shares issuable upon the exercise of a stock option that
may be exercised within 60 days of March 15, 2000.
/(13)/ Includes 12,400 shares held by Simmons Investments, L.P., of which Mr.
Simmons is a general partner. Includes 4,166 shares issuable upon the
exercise of a stock option that may be exercised within 60 days of March
15, 2000
/(14)/ Includes 3,333 shares issuable upon the exercise of a stock option that
may be exercised within 60 days of March 15, 2000.
/(15)/ Includes 15,000 shares held by Mr. Sweatt's spouse and an aggregate of
10,000 shares held by Mr. Sweatt's spouse as custodian for their minor
children, as to which Mr. Sweatt shares voting and investment power with
his spouse. Also includes 24,166 shares issuable upon the exercise of
stock options that may be exercised within 60 days of March 15, 2000.
/(16)/ Includes 666 shares issuable upon the exercise of a stock option that may
be exercised within 60 days of March 15, 2000.
Item 12. Certain Relationship and Related Transactions
The Bank extends loans from time to time to certain of the Company's and
Bank's directors, their associates and members of the immediate families of the
directors and executive officers of the Company. These loans are made in the
ordinary course of business on substantially the same terms, including interest
rates, collateral and repayment terms, as those prevailing at the time for
comparable transactions with persons not affiliated with the Company or the
Bank, and do not involve more than the normal risk of collectibility or present
other unfavorable features.
31
<PAGE>
PART IV
Item 13. Exhibits, List and Reports on Form 8-K
(a) Exhibits. Periodic reports, proxy statements and other information
--------
filed by the Company with the SEC pursuant to the informational requirements of
the Securities Exchange Act of 1934, as amended may be inspected and copied at
the SEC's Public Reference Room, 450 Fifth Street, N.W., Washington, D.C. 20549,
and the public may obtain information on the operation of the Public Reference
Room by calling the SEC at 1-800-SEC-0330. The SEC also maintains an Internet
site (http://www.sec.gov) that makes available reports, proxy statements and
other information regarding the Company. The Company's SEC file number
reference is Commission File No. 0-23991.
Exhibit Description
- ------- -----------
3.1 Articles of Incorporation of the Company (Incorporated herein by
reference to the exhibit of the same number of the Company's
Registration Statement on Form SB-2 filed on April 1, 1998 (Commission
File No. 333-49137))
3.2 Bylaws of the Company (Incorporated herein by reference to the exhibit
of the same number of the Company's Registration Statement on Form SB-
2 filed on April 1, 1998 (Commission File No. 333-49137))
4.2 See Exhibits 3.1 and 3.2 hereto for provisions of the Articles of
Incorporation and Bylaws of the Company defining rights of holders of
the Common Stock.
10.1 Shopping Center Form Lease, dated March 23, 1998, between W.B.
Wiggins, Jr., and Chattahoochee National Bank (Incorporated herein by
reference to the exhibit of the same number of the Company's
Registration Statement on Form SB-2 filed on April 1, 1998 (Commission
File No. 333-49137))
10.2 Employment Agreement, dated as of November 1, 1997 among Chattahoochee
National Bank (In Organization), CNB Holdings, Inc. and H. N. Padget,
Jr. (Incorporated herein by reference to the exhibit of the same
number of the Company's Registration Statement on Form SB-2 filed on
April 1, 1998 (Commission File No. 333-49137))
10.3 Reserved.
10.4 Amended and Restated CNB Holdings, Inc. 1998 Incentive Stock Option
Plan (Incorporated herein by reference to Annex B of the Company's
Proxy Statement dated October 2, 1998 (Commission File No. 0-23991))
10.5 Amended and Restated CNB Holdings, Inc. 1998 Non-Qualified Stock
Option Plan (Incorporated herein by reference to Annex A of the
Company's Proxy Statement dated October 2, 1998 (Commission File No.
0-23991))
18.0 Letter On Change In Accounting Principles (Incorporated herein by
reference to the exhibit of the same number of the Company's Quarterly
Report on Form 10-QSB for the quarter ended September 30, 1998
(Commission File No. 0-23991))
21.1 Subsidiary of CNB Holdings, Inc.
27.1 Financial Data Schedule
(b) Reports on Form 8-K. No reports on Form 8-K were required to be filed
-------------------
by the Company during the fourth quarter of 1999.
32
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, as amended, the Registrant has duly caused this Report to
be signed on its behalf by the undersigned, thereunto duly authorized.
CNB HOLDINGS, INC.
Dated: April 12, 2000 By: /s/ H. N. Padget, Jr.
---------------------------------------
H. N. Padget, Jr.
President and Chief Executive Officer
(Principal Executive Officer)
Dated: April 12, 2000 By: /s/ Danny F. Dukes
---------------------------------------
Danny F. Dukes
Chief Financial Officer
(Principal Accounting Officer)
<PAGE>
Pursuant to the requirements of the Securities Exchange Act of 1934, as
amended, this Report has been signed below by the following persons on behalf of
the Registrant, in the capacities and on the dates indicated.
/s/ W. David Sweatt Date: April 12, 2000
- ---------------------------------------------
W. David Sweatt, Chairman of the Board of
Directors
- ---------------------------------------------
Michael L. Aldredge, Director
/s/ C. Dan Alford Date: April 12, 2000
- ---------------------------------------------
C. Dan Alford, Director
- ---------------------------------------------
Patricia R. Grimes, Director
/s/ William H. Groce, Jr. Date: April 12, 2000
- ---------------------------------------------
William H. Groce, Jr., Secretary and Director
/s/ David R. Hink Date: April 12, 2000
- ---------------------------------------------
David R. Hink, Director
/s/ Mary E. Johnson Date: April 12, 2000
- ---------------------------------------------
Mary E. Johnson, Director
- ---------------------------------------------
Robert W. Johnston, Director
- ---------------------------------------------
Heber N. Padget, Sr., Director
- ---------------------------------------------
John A. Pond, Director
- ---------------------------------------------
Reid W. Simmons, Director
/s/ H.N. Padget, Jr. Date: April 12, 2000
- ---------------------------------------------
H.N. Padget, Jr., President, Chief Executive
Officer and Director
(Principal Executive Officer)
/s/ W. Darrell Sumner Date: April 12, 2000
- ---------------------------------------------
W. Darrell Sumner, Director
<PAGE>
/s/ Danny F. Dukes Date: April 12, 2000
- ---------------------------------------------
Danny F. Dukes, Chief Financial Officer
(Principal Accounting Officer)
<PAGE>
CNB HOLDINGS, INC.
AND SUBSIDIARY
CONSOLIDATED FINANCIAL REPORT
DECEMBER 31, 1999
<PAGE>
CNB HOLDINGS, INC.
AND SUBSIDIARY
CONSOLIDATED FINANCIAL REPORT
DECEMBER 31, 1999
TABLE OF CONTENTS
-----------------
Page
-------
INDEPENDENT AUDITOR'S REPORT................................. 1
FINANCIAL STATEMENTS
Consolidated balance sheets............................. 2
Consolidated statements of operations................... 3
Consolidated statements of comprehensive loss........... 4
Consolidated statements of stockholders' equity......... 5
Consolidated statements of cash flows............. 6 and 7
Notes to consolidated financial statements........... 8-31
<PAGE>
INDEPENDENT AUDITOR'S REPORT
To the Board of Directors
CNB Holdings, Inc. and Subsidiary
Alpharetta, Georgia
We have audited the accompanying consolidated balance sheet of CNB
Holdings, Inc. and subsidiary as of December 31, 1999, and the related
consolidated statements of operations, comprehensive loss, stockholders' equity,
and cash flows for the year then ended. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audit. The financial
statements for December 31, 1998 have been audited by other auditors, whose
report, dated January 24, 1999, expressed an unqualified opinion on those
statements.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the 1999 consolidated financial statements referred to
above present fairly, in all material respects, the financial position of CNB
Holdings, Inc. and subsidiary as of December 31, 1999, and the results of their
operations and their cash flows for the year then ended, in conformity with
generally accepted accounting principles.
/s/ MAULDIN & JENKINS, LLC
Atlanta, Georgia
February 2, 2000
F-1
<PAGE>
CNB HOLDINGS, INC.
AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 1999 AND 1998
<TABLE>
<CAPTION>
1999 1998
---- ----
<S> <C> <C>
Assets
------
Cash and due from banks $ 1,056,784 $ 1,053,182
Federal funds sold and overnight deposits in banks 1,990,593 380,000
Securities available-for-sale 7,530,851 5,702,770
Other investments 437,800 339,100
Loans 26,897,806 14,831,983
Less allowance for loan losses 405,000 222,000
----------- -----------
Loans, net 26,492,806 14,609,983
----------- -----------
Premises and equipment 493,302 470,523
Other assets 344,136 261,012
----------- -----------
Total assets $38,346,272 $22,816,570
=========== ===========
Liabilities and Stockholders' Equity
------------------------------------
Deposits
Noninterest-bearing demand $ 3,061,875 $ 1,346,146
Interest-bearing demand 11,807,446 3,262,504
Savings 5,859 5,758
Time, $100,000 and over 5,708,543 5,124,023
Other time 6,198,926 2,272,812
----------- -----------
Total deposits 26,782,649 12,011,243
Other borrowings 2,000,000 --
Other liabilities 272,985 100,070
---------- ----------
Total liabilities 29,055,634 12,111,313
----------- -----------
Commitments and contingent liabilities
Stockholders' equity
Preferred stock, no par value; 10,000,000 shares
authorized; no shares issued and outstanding -- --
Common stock, par value $1.00; 10,000,000 shares
authorized; 1,235,000 issued 1,235,000 1,235,000
Capital surplus 10,170,283 10,170,283
Accumulated deficit (793,577) (709,289)
Treasury stock (1,235,326) --
Accumulated other comprehensive income (loss) (85,742) 9,263
----------- -----------
Total stockholders' equity 9,290,638 10,705,257
---------- ----------
Total liabilities and stockholders' equity $38,346,272 $22,816,570
=========== ===========
</TABLE>
See Notes to Consolidated Financial Statements.
F-2
<PAGE>
CNB HOLDINGS, INC.
AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF OPERATIONS
YEARS ENDED DECEMBER 31, 1999 AND 1998
<TABLE>
<CAPTION>
1999 1998
---------- ---------
<S> <C> <C>
Interest income
Loans $2,101,334 $ 408,664
Taxable securities 380,283 101,513
Federal funds sold 107,395 190,672
---------- ---------
Total interest income 2,589,012 700,849
---------- ---------
Interest expense
Deposits 865,745 168,039
Other borrowings 36,475 4,668
---------- ---------
Total interest expense 902,220 172,707
---------- ---------
Net interest income 1,686,792 528,142
Provision for loan losses 183,000 222,000
---------- ---------
Net interest income after
provision for loan losses 1,503,792 306,142
---------- ---------
Other income
Service charges on deposit accounts 37,225 916
Gains on sale of loans 149,426 --
Other operating income 121,533 46,691
---------- ---------
Total other income 308,184 47,607
---------- ---------
Other expense
Salaries and employee benefits 986,854 489,133
Equipment and occupancy expenses 249,930 137,067
Net realized losses on sales of
securities available-for-sale 1,635 --
Other operating expenses 657,845 361,159
---------- ---------
Total other expenses 1,896,264 987,359
---------- ---------
Loss before income taxes (84,288) (633,610)
Income taxes -- --
---------- ---------
Loss before cumulative effect of change in
accounting principle -- (633,610)
Cumulative effect on prior years of
change in accounting
principle for organization costs -- (47,400)
---------- ---------
Net loss $ (84,288) $(681,010)
========== =========
Basic and diluted losses per common share:
Loss before cumulative effect of
change in accounting principle $ (0.07) $ (0.90)
Cumulative effect on prior years of
change in accounting principle
for organization costs 0.00 (0.07)
---------- ---------
Basic and diluted losses per common share $ (0.07) $ (0.97)
========== =========
</TABLE>
See Notes to Consolidated Financial Statements.
F-3
<PAGE>
CNB HOLDINGS, INC.
AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF COMPREHENSIVE LOSS
YEARS ENDED DECEMBER 31, 1999 AND 1998
<TABLE>
<CAPTION>
1999 1998
--------- ---------
<S> <C> <C>
Net loss $ (84,288) $(681,010)
--------- ---------
Other comprehensive income (loss):
Unrealized gains (losses) on securities available-for-sale:
Unrealized holding gains (losses) arising during period,
net of tax (benefits) of $(54,486) and $5,667, respectively (96,051) 9,263
Reclassification adjustment for losses realized
in net loss, net of tax of $589 and $- -,
respectively 1,046 0
-------- ---------
Other comprehensive income (loss) (95,005) 9,263
-------- ---------
Comprehensive loss $(179,293) $(671,747)
======== =========
</TABLE>
See Notes to Consolidated Financial Statements.
F-4
<PAGE>
CNB HOLDINGS, INC.
AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
YEARS ENDED DECEMBER 31, 1999 AND 1998
<TABLE>
<CAPTION>
Common Stock
--------------------------------- Capital Accumulated
Shares Par Value Surplus Deficit
---------- ------------ --------------- ----------
<S> <C> <C> <C> <C>
Balance, December 31, 1997 - $ - $ 120,000 $ (28,279)
Net loss - - - (681,010)
Capital contribution - - 240,000 -
Proceeds from sale of common stock, net of expenses 1,235,000 1,235,000 10,170,283 -
Repayment of initial capital contribution - - (360,000) -
Other comprehensive income - - - -
--------- --------- ---------- ---------
Balance, December 31, 1998 1,235,000 1,235,000 10,170,283 (709,289)
Net loss - - - (84,288)
Purchase of treasury stock - - - -
Other comprehensive loss - - - -
--------- --------- ---------- ---------
Balance, December 31, 1999 1,235,000 1,235,000 $10,170,283 $(793,577)
========= ========= =========== =========
Accumulated
Treasury Stock Other Total
-------------------------------- Comprehensive Stockholders'
Shares Cost Income (Loss) Equity
---------- ------------ --------------- ----------
Balance, December 31, 1997 - $ - $ - $ 91,721
Net loss - - - (681,010)
Capital contribution - - - 240,000
Proceeds from sale of common stock, net of expenses - - - 11,405,283
Repayment of initial capital contribution - - - (360,000)
Other comprehensive income - - 9,263 9,263
------- ----------- -------- ----------
Balance, December 31, 1998 - - 9,263 10,705,257
Net loss - - - (84,288)
Purchase of treasury stock 139,472 (1,235,326) - (1,235,326)
Other comprehensive loss - - (95,005) (95,005)
------- --------- -------- ----------
Balance, December 31, 1999 139,472 $(1,235,326) $(85,742) $9,290,638
======= =========== ======== ==========
</TABLE>
See Notes to Consolidated Financial Statements.
F-5
<PAGE>
CNB HOLDINGS, INC.
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31, 1999 AND 1998
<TABLE>
<CAPTION>
1999 1998
------------- ----------------
<S> <C> <C>
OPERATING ACTIVITIES
Net loss $ (84,288) $ (681,010)
Adjustments to reconcile net loss
to net cash provided by
(used in) operating activities:
Net amortization of securities 13,122 7,077
Depreciation 129,348 54,871
Provision for loan losses 183,000 222,000
Cumulative effect of change
in accounting for
organization costs - 47,400
Net realized losses on sales
of securities
available-for-sale 1,635 -
Gains on sale of loans (149,426) -
Increase in interest receivable (71,174) (140,547)
Increase in interest payable 91,340 30,764
Other operating activities 123,522 (76,670)
---------- ----------
Net cash provided by (used in)
operating activities 237,079 (536,115)
---------- ----------
INVESTING ACTIVITIES
Purchases of securities available-for-sale (4,987,513) (5,865,109)
Purchases of other investments (98,700) (339,100)
Proceeds from sales of securities
available-for-sale 2,505,078 -
Paydowns and maturities of
securities available-for-sale 490,695 170,191
Proceeds from sale of loans 3,053,227 -
Net increase in loans 14,969,624) (14,831,983)
Purchase of premises and equipment (152,127) (464,447)
---------- -----------
Net cash used in
investing activities (14,158,964) (21,330,448)
---------- -----------
FINANCING ACTIVITIES
Net increase in deposits 14,771,406 12,011,243
Proceeds from (repayment of) other borrowings 2,000,000 (57,479)
Proceeds from sale of
common stock, net of expenses - 11,405,283
Proceeds from initial capital contribution - 240,000
Repayment of initial capital contribution - (360,000)
Purchase of treasury stock (1,235,326) -
---------- -----------
Net cash provided by
financing activities 15,536,080 23,239,047
---------- -----------
Net increase in cash and cash equivalents 1,614,195 1,372,484
Cash and cash equivalents at beginning of year 1,433,182 60,698
---------- -----------
Cash and cash equivalents at end of year $ 3,047,377 $ 1,433,182
========== ===========
</TABLE>
F-6
<PAGE>
CNB HOLDINGS, INC.
AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31, 1999 AND 1998
<TABLE>
<CAPTION>
1999 1998
-------- --------
<S> <C> <C>
SUPPLEMENTAL DISCLOSURE
Cash paid for interest $810,880 $141,943
NONCASH TRANSACTION
Unrealized (gains) losses on
securities available-for-sale $148,902 $(14,930)
</TABLE>
See Notes to Consolidated Financial Statements.
F-7
<PAGE>
CNB HOLDINGS, INC.
AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Nature of Business
CNB Holdings, Inc. (the "Company") is a bank holding company whose business is
conducted by its wholly-owned subsidiary, Chattahoochee National Bank, (the
"Bank"). The Bank is a commercial bank located in Alpharetta, Fulton County,
Georgia. The Bank provides a full range of banking services in its primary
market areas of Fulton and surrounding counties. The Company commenced its
banking operations on July 27, 1998.
Basis of Presentation
The consolidated financial statements include the accounts of the Company and
its subsidiaries. Significant intercompany transactions and accounts are
eliminated in consolidation.
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and disclosures of
contingent assets and liabilities as of the balance sheet date and the reported
amounts of revenues and expenses during the reporting period. Actual results
could differ from those estimates. Material estimates that are particularly
susceptible to significant change in the near term relate to the determination
of the allowance for loan losses and deferred tax assets.
Cash and Due From Banks
Cash on hand, cash items in process of collection, and amounts due from banks
are included in cash and due from banks.
The Company maintains amounts due from banks which, at times, may exceed
Federally insured limits. The Company has not experienced any losses in such
accounts.
Cash Equivalents
For purposes of reporting cash flows, the Company considers cash, due from
banks, Federal funds sold, and overnight deposits in banks as cash equivalents.
F-8
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
Securities and Other Investments
Securities are classified based on management's intention on the date of
purchase. Securities which management has the intent and ability to hold to
maturity would be classified as held-to-maturity and recorded at amortized cost.
All other debt securities are classified as available-for-sale and recorded at
fair value with net unrealized gains and losses reported in other comprehensive
income, net of tax. Other investments without a readily determinable fair
value are recorded at cost.
Interest and dividends on securities and other investments, including
amortization of premiums and accretion of discounts, are included in interest
income. Realized gains and losses from the sale of securities are determined
using the specific identification method.
Loans
Loans are reported at their outstanding principal balances less deferred loan
fees and costs and the allowance for loan losses. Interest income is accrued
based on the principal balance outstanding.
Nonrefundable loan fees and costs incurred for loans are deferred and recognized
in income over the life of the loans.
The allowance for loan losses is maintained at a level that management believes
to be adequate to absorb potential losses in the loan portfolio. Loan losses
are charged against the allowance when management believes the uncollectibility
of a loan is confirmed. Subsequent recoveries a re credited to the allowance.
Management's determination of the adequacy of the allowance is based on an
evaluation of the portfolio, past loan loss experience, current economic
conditions, volume, growth, composition of the loan portfolio, and other risks
inherent in the portfolio. This evaluation is inherently subjective as it
requires material estimates that are susceptible to significant change including
the amounts and timing of future cash flows expected to be received on impaired
loans. In addition, regulatory agencies, as an integral part of their
examination process, periodically review the Company's allowance for loan
losses, and may require the Company to record additions to the allowance based
on their judgment about information available to them at the time of their
examinations.
F-9
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
Loans (Continued)
The accrual of interest on loans is discontinued when, in management's opinion,
the borrower may be unable to meet payments as they become due. Interest income
is subsequently recognized only to the extent cash payments are received.
A loan is impaired when it is probable the Company will be unable to collect all
principal and interest payments due in accordance with the contractual terms of
the loan agreement. Individually identified impaired loans are measured based
on the present value of payments expected to be received, using the contractual
loan rate as the discount rate. Alternatively, measurement may be based on
observable market prices or, for loans that are solely dependent on the
collateral for repayment, measurement may be based on the fair value of the
collateral. If the recorded investment in the impaired loan exceeds the measure
of fair value, a valuation allowance is established as a component of the
allowance for loan losses. Changes to the valuation allowance are recorded as a
component of the provision for loan losses.
Sale of Loans
The Company originates and sells participations in certain loans. Gains are
recognized at the time the sale is consummated. The amount of gain recognized
on the sale of a specific loan is equal to the percentage resulting from
determining the fair value of the portion of the loan sold relative to the fair
value of the entire loan. Losses are recognized at the time the loan is
identified as held for sale and the loan's carrying value exceeds its fair
value.
Premises and Equipment
Premises and equipment are carried at cost less accumulated depreciation.
Depreciation is computed principally by the straight-line method over the
estimated useful lives of the assets.
F-10
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
Income Taxes
Income tax expense consists of current and deferred taxes. Current income tax
provisions approximate taxes to be paid or refunded for the applicable year.
Deferred income tax assets and liabilities are determined using the balance
sheet method. Under this method, the net deferred tax asset or liability is
determined based on the tax effects of the differences between the book and tax
bases of the various balance sheet assets and liabilities and gives current
recognition to changes in tax rates and laws.
Recognition of deferred tax balance sheet amounts is based on management's
belief that it is more likely than not that the tax benefit associated with
certain temporary differences will be realized. A valuation allowance would be
recorded for those deferred tax items for which it is more likely than not that
realization would not occur in the near term.
The Company and the Bank file a consolidated income tax return. Each entity
provides for income taxes based on its contribution to income taxes (benefits)
of the consolidated group.
Losses Per Common Share
Basic losses per common share are computed by dividing net loss by the weighted
average number of shares of common stock outstanding. Diluted losses per common
share are computed by dividing net loss by the sum of the weighted-average
number of shares of common stock outstanding and potential common shares.
Potential common shares outstanding consist of stock options.
Comprehensive Income
Statement of Financial Accounting Standards ("SFAS") No. 130, ("Reporting
Comprehensive Income"), describes comprehensive income as the total of all
components of comprehensive income, including net income. Other comprehensive
income refers to revenues, expenses, gains and losses that under generally
accepted accounting principles are included in comprehensive income but excluded
from net income. Currently, the Company's other comprehensive income consists
of unrealized gains and losses on available-for-sale securities.
F-11
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
Cumulative Effect of a Change in Accounting Principle
In April of 1998, the Accounting Standards Executive Committee issued Statement
of Position ("SOP") 98-5, "Reporting on the Costs of Start Up Activities". SOP
98-5 requires that costs of start-up activities and organization costs be
expensed as incurred. SOP 98-5 became effective for financial statements for
fiscal years beginning after December 15, 1998. Early adoption was encouraged
for fiscal years in which financial statements had not been issued. During the
fourth quarter of 1998, the Company wrote off $47,400 of unamortized
organization costs upon adoption of SOP 98-5. Prior to the adoption of SOP 98-
5, the Company had capitalized all organization costs with the intent of
amortizing the costs over a five year period upon commencement of banking
operations.
Recent Accounting Developments
In June 1998, the Financial Accounting Standards Board issued SFAS No. 133,
"Accounting for Derivative Instruments and Hedging Activities". The effective
date of this statement has been deferred by SFAS No. 137 until fiscal years
beginning after June 15, 2000. However, the statement permits early adoption as
of the beginning of any fiscal quarter after its issuance. The Company expects
to adopt this statement effective January 1, 2001. SFAS No. 133 requires the
Company to recognize all derivatives as either assets or liabilities in the
balance sheet at fair value. For derivatives that are not designated as hedges,
the gain or loss must be recognized in earnings in the period of change. For
derivatives that are designated as hedges, changes in the fair value of the
hedged assets, liabilities, or firm commitments must be recognized in earnings
or recognized in other comprehensive income until the hedged item is recognized
in earnings, depending on the nature of the hedge. The ineffective portion of a
derivative's change in fair value must be recognized in earnings immediately.
Management has not yet determined what effect the adoption of SFAS No. 133 will
have on the Company's earnings or financial position.
There are no other recent accounting pronouncements that have had, or are
expected to have, a material effect on the Company's financial statements.
F-12
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 2. SECURITIES
The amortized cost and fair value of securities are summarized as follows:
<TABLE>
<CAPTION>
Gross Gross
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
---------------- --------------- --------------- ----------------
<S> <C> <C> <C> <C>
Securities Available-for-Sale
December 31, 1999:
U.S. Government and agency
securities $4,998,364 $ -- $ (63,842) $4,934,522
Mortgage-backed securities 2,666,459 - (70,130) 2,596,329
---------- ------- --------- ----------
$7,664,823 $ - $(133,972) $7,530,851
========== ======= ========= ==========
December 31, 1998:
U.S. Government and agency
securities $5,687,840 $23,047 $ (8,117) $5,702,770
========== ======= ========= ==========
</TABLE>
Other investments consist of common stock in the Federal Reserve Bank of Atlanta
and the Federal Home Loan Bank of Atlanta.
The amortized cost and fair value of securities as of December 31, 1999 by
contractual maturity are shown below. Maturities may differ from contractual
maturities of mortgage-backed securities because the mortgages underlying the
securities may be called or prepaid with or without penalty. Therefore, these
securities are not included in the maturity categories in the following summary.
<TABLE>
<CAPTION>
Securities Available-for-Sale
--------------------------------------
Amortized Fair
Cost Value
----------------- -----------------
<S> <C> <C>
Due in one year or less $1,508,019 $1,488,280
Due from one year to five years 2,490,345 2,461,612
Due from five years to ten years 1,000,000 984,630
Mortgage-backed securities 2,666,459 2,596,329
---------- ----------
$7,664,823 $7,530,851
========== ==========
</TABLE>
Securities with a carrying value of $3,015,000 and $- - at December 31, 1999 and
1998, respectively, were pledged to secure public deposits and for other
purposes.
F-13
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 2. SECURITIES (Continued)
Gross gains and losses on sales of securities available-for-sale consist of the
following:
<TABLE>
<CAPTION>
Years Ended December 31,
------------------------------
1999 1998
-------- --------
<S> <C> <C> <C>
Gross gains $ 2,162 $ --
Gross losses (3,797) --
-------- -------
Net realized losses $ (1,635) $ --
======== =======
</TABLE>
NOTE 3. LOANS AND ALLOWANCE FOR LOAN LOSSES
The composition of loans is summarized as follows:
<TABLE>
<CAPTION>
December 31,
---------------------------------
1999 1998
----------- -----------
<S> <C> <C> <C>
Commercial $14,252,353 $ 8,066,156
Commercial lease financing 3,214,974 1,893,655
Real estate - construction 4,464,110 1,459,975
Real estate - mortgage 3,895,097 2,843,353
Consumer installment and other 1,096,007 568,844
----------- -----------
26,922,541 14,831,983
Deferred loan fees and costs (24,735) --
Allowance for loan losses (405,000) (222,000)
----------- -----------
Loans, net $26,492,806 $14,609,983
=========== ===========
</TABLE>
Changes in the allowance for loan losses are as follows:
<TABLE>
<CAPTION>
Years Ended December 31,
------------------------------
1999 1998
--------- ---------
<S> <C> <C> <C>
Balance, beginning of year $222,000 $ --
Provision for loan losses 183,000 222,000
Loans charged off -- --
Recoveries of loans previously charged off -- --
-------- --------
Balance, end of year $405,000 $222,000
======== ========
</TABLE>
F-14
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 3. LOANS AND ALLOWANCE FOR LOAN LOSSES (Continued)
Management has identified no material amounts of impaired loans as defined by
SFAS No. 114 ("Accounting by Creditors for Impairment of a Loan") as of December
31, 1999 or 1998.
The Company has granted loans to certain directors, executive officers, and
their related entities. The interest rates on these loans were substantially
the same as rates prevailing at the time of the transaction and repayment terms
are customary for the type of loan involved. Changes in related party loans for
the year ended December 31, 1999 are as follows:
<TABLE>
<S> <C> <C>
Balance, beginning of year $ 2,201,710
Advances 1,526,398
Repayments (1,568,291)
-----------
Balance, end of year $ 2,159,817
===========
</TABLE>
NOTE 4. PREMISES AND EQUIPMENT
Premises and equipment are summarized as follows:
<TABLE>
<CAPTION>
December 31,
---------------------------------
1999 1998
----------- -----------
<S> <C> <C> <C>
Leasehold improvements $ 85,562 $ 76,469
Equipment 591,959 448,925
--------- ---------
677,521 525,394
Accumulated depreciation (184,219) (54,871)
--------- ---------
$ 493,302 $470,523
========= ========
</TABLE>
F-15
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 4. PREMISES AND EQUIPMENT (Continued)
The Company currently operates out of offices in a retail facility pursuant to
an operating lease at a monthly rental of $5,453. In 2000, the Company will
lease additional facilities pursuant to an operating lease at a monthly rental
of $12,100. Rental expense was $78,237 and $49,073 for the years ended
December 31, 1999 and 1998, respectively.
The future minimum lease payments under the operating lease s at December 31,
1999 are as follows:
<TABLE>
<CAPTION>
<S> <C>
2000 192,472
2001 210,620
2002 214,451
2003 192,776
2004 158,113
Thereafter 19,836
-------
988,268
=======
</TABLE>
NOTE 5. DEPOSITS
The scheduled maturities of time deposits at December 31, 1999 are as follows:
<TABLE>
<CAPTION>
<S> <C>
2000 $ 9,733,976
2001 806,215
2002 489,048
2003 10,000
2004 868,230
-----------
$11,907,469
===========
</TABLE>
The Company had related party deposits at December 31, 1999 of $3,843,184.
F-16
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 6. OTHER BORROWINGS
Other borrowings consist of the following:
<TABLE>
<CAPTION>
December 31,
-------------------------------
1999 1998
---------- --------
<S> <C> <C>
Advance from Federal Home Loan Bank, fixed rate of
interest at 5.01%, due April 22, 2004, collateralized
by securities $1,000,000 $ --
Advance from Federal Home Loan Bank, variable rate of
interest (4.55% at December 31, 1999), due December 21,
2000, collateralized by securities 1,000,000 --
---------- -----
$2,000,000 $ --
========== ======
</TABLE>
NOTE 7. EMPLOYEE BENEFIT PLAN
The Company has a 401(k) retirement plan covering substantially all employees.
Contributions to the plan charged to expense during 1999 and 1998 amounted to
$7,702 and $609, respectively.
NOTE 8. STOCK OPTIONS
The Company has incentive and nonqualified stock option plans with common stock
reserved for key employees and directors. At December 31, 1999, the Company had
28,833 shares of its authorized but unissued common stock reserved for future
grants under the stock option plans. Option prices under these plans must equal
at least the fair value of the Company's common stock on the date of grant. If
the optionee owns more than 10% of the Company's common stock, the option price
must equal at least 110% of the fair value of the Company's common stock on the
date of grant. The options vest over time periods determined by the Board of
Directors and expire ten years from date of grant. Other pertinent information
related to the options is as follows:
F-17
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 8. STOCK OPTIONS (Continued)
<TABLE>
<CAPTION>
Years Ended December 31,
------------------------------------------------------------
1999 1998
--------------------------- -----------------------------
Weighted- Weighted-
Average Average
Exercise Exercise
Number Price Number Price
-------- ------------- ----------- ----------
<S> <C> <C> <C> <C>
Under option, beginning of year 250,500 $ 10.00 -- $ --
Granted 23,000 8.23 250,500 10.00
Exercised -- -- --
Terminated (2,333) 10.00 -- --
------- -------
Under option, end of year 271,167 9.85 250,500 10.00
======= =======
Exercisable, end of year 90,333 10.00 22,500 10.00
======= =======
Weighted-average fair value of
options granted during the year $ 4.95 $ 3.66
======= =======
</TABLE>
<TABLE>
<CAPTION>
Under Option, End of Year
----------------------------------------------------------------------------------------
Weighted-
Weighted- Average
Average Remaining
Range of Exercise Contractual
Number Prices Price Life in Years
------------- -------------------- -------------- ---------------
<S> <C> <C> <C> <C>
271,167 $8.00 - 10.00 $ 9.85 9
=======
Options Exercisable, End of Year
----------------------------------------------------------------------------------------
90,333 $10.00 $10.00 9
=======
</TABLE>
F-18
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 8. STOCK OPTIONS (Continued)
As permitted by SFAS No. 123 ("Accounting for Stock-Based Compensation"), the
Company recognizes compensation cost for stock-based employee compensation
awards in accordance with APB Opinion No. 25, ("Accounting for Stock Issued to
Employees"). The Company recognized no compensation cost for stock-based
employee compensation awards for the years ended December 31, 1999 and 1998. If
the Company had recognized compensation cost in accordance with SFAS No. 123,
net loss and losses per share would have been increased as follows:
<TABLE>
<CAPTION>
Year Ended December 31, 1999
--------------------------------------------------------
Basic Diluted
Losses Losses
Net Loss Per Share Per Share
--------------- --------------- ----------------
<S> <C> <C> <C>
As reported $ (84,288) $(0.07) $(0.07)
Stock-based compensation (248,269) (0.22) (0.22)
--------- ------ ------
As adjusted $(332,557) $(0.29) $(0.29)
========= ======= ======
</TABLE>
<TABLE>
<CAPTION>
Year Ended December 31, 1998
--------------------------------------------------------
Basic Diluted
Losses Losses
Net Loss Per Share Per Share
--------------- --------------- ----------------
<S> <C> <C> <C>
As reported $681,010) $(0.97) $(0.97)
Stock-based compensation (84,045) (0.12) (0.12)
-------- ----- ------
As adjusted $(765,055) $(1.09) $(1.09)
======== ===== ======
</TABLE>
The fair value of the options granted during the year was based upon the
discounted value of future cash flows of the options using the following
weighted-average assumptions:
<TABLE>
<CAPTION>
Years Ended December 31,
----------------------------
1999 1998
-------- -------
<S> <C> <C>
Risk-free interest rate 6.77% 4.93%
Expected life of the options 10 years 9 years
Expected dividends (as a percent of the fair
value of the stock) 0% 0%
Volatility 34% 62%
</TABLE>
F-19
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 9. INCOME TAXES
Income tax expense consists of the following:
<TABLE>
<CAPTION>
Years Ended December 31,
---------------------------------------
1999 1998
----------------- -----------------
<S> <C> <C>
Current $ 38,838 $(149,570)
Deferred (35,962) (106,065)
Change in valuation allowance (2,876) 255,635
--------- ---------
Income tax expense $ - $ -
========= =========
</TABLE>
The Company's income tax expense differs from the amounts computed by applying
the Federal income tax statutory rates to income before income taxes. A
reconciliation of the differences is as follows:
<TABLE>
<CAPTION>
Years Ended December 31,
---------------------------------------------------------------------
1999 1998
-------------------------------- --------------------------------
Amount Percent Amount Percent
--------------- ------------ --------------- ------------
<S> <C> <C> <C> <C>
Income taxes at statutory rate $28,658) (34)% $(231,543) (34)%
State income taxes - - (26,968) (4)
Change in valuation allowance (2,876) (3) 255,635 38
Change in rate assumptions 27,845 33 - -
Other items, net 3,689 4 2,876 -
------- ----- -------- -----
Income tax expense $ - -% $ - -%
======= ===== ======== =====
</TABLE>
F-20
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 9. INCOME TAXES (Continued)
The components of deferred income taxes are as follows:
<TABLE>
<CAPTION>
December 31,
--------------------------------------
1999 1998
----------------- -----------------
<S> <C> <C>
Deferred tax assets:
Loan loss reserves $116,649 $ 63,659
Deferred loan fees and costs 8,410 -
Deferred organization costs 28,220 46,133
Net operating loss carryforward 120,961 159,799
Other 1,807 -
Securities available-for-sale 48,230 -
-------- --------
324,277 269,591
-------- --------
Deferred tax liabilities:
Depreciation 13,079 -
Securities available-for-sale - 5,667
Other - 3,747
-------- --------
13,079 9,414
-------- --------
Valuation allowance 262,968 265,844
-------- --------
Net deferred tax assets (liabilities) $ 48,230 $ (5,667)
======== ========
</TABLE>
At December 31, 1999, the Company has available net operating loss carryforwards
of approximately $355,000 for Federal income tax purposes. If unused, the
carryforwards will expire beginning in 2013.
F-21
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 10. LOSSES PER COMMON SHARE
The following is a reconciliation of net loss and weighted-average shares
outstanding used in determining basic and diluted losses per common share (LPS):
<TABLE>
<CAPTION>
Year Ended December 31, 1998
--------------------------------------------------------
Net Weighted-Average Per share
Loss Shares Amount
--------- --------------- ---------
<S> <C> <C> <C>
Basic LPS $(84,288) 1,163,945 $(0.07)
Effect of Dilutive Securities
Stock options - -
-------- ---------
Diluted LPS $(84,288) 1,163,945 $(0.07)
======== ========= ======
</TABLE>
<TABLE>
<CAPTION>
Year Ended December 31, 1998
--------------------------------------------------------
Net Weighted-Average Per share
Loss Shares Amount
--------- --------------- ---------
<S> <C> <C> <C>
Basic LPS $(681,010) 700,680 $(0.97)
Effect of Dilutive Securities
Stock options - -
--------- -------
Diluted LPS $(681,010) 700,680 $(0.97)
========= ======= ======
</TABLE>
Because the exercise price of the stock options is equal to or greater than the
fair value of the Company's common stock, the stock options have no dilutive
effect.
NOTE 11. COMMITMENTS AND CONTINGENT LIABILITIES
In the normal course of business, the Company has entered into off-balance sheet
financial instruments which are not reflected in the financial statements.
These financial instruments include commitments to extend credit and standby
letters of credit. Such financial instruments are included in the financial
statements when funds are disbursed or the instruments become payable. These
instruments involve, to varying degrees, elements of credit risk in excess of
the amount recognized in the balance sheet.
F-22
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 11. COMMITMENTS AND CONTINGENT LIABILITIES (Continued)
The Company's exposure to credit loss in the event of nonperformance by the
other party to the financial instrument for commitments to extend credit and
standby letters of credit is represented by the contractual amount of those
instruments. A summary of the Company's commitments is as follows:
<TABLE>
<CAPTION>
December 31,
---------------------------------------
1999 1998
----------------- -----------------
<S> <C> <C>
Commitments to extend credit $7,125,000 $8,674,000
Standby letters of credit 139,500 -
---------- ----------
$7,264,500 $8,674,000
========== ==========
</TABLE>
Commitments to extend credit generally have fixed expiration dates or other
termination clauses and may require payment of a fee. Since many of the
commitments are expected to expire without being drawn upon, the total
commitment amounts do not necessarily represent future cash requirements. The
credit risk involved in issuing these financial instruments is essentially the
same as that involved in extending loans to customers. The Company evaluates
each customer's creditworthiness on a case-by-case basis. The amount of
collateral obtained, if deemed necessary by the Company upon extension of
credit, is based on management's credit evaluation of the customer. Collateral
held varies but may include real estate and improvements, marketable securities,
accounts receivable, inventory, equipment, and personal property.
Standby letters of credit are conditional commitments issued by the Company to
guarantee the performance of a customer to a third party. Those guarantees are
primarily issued to support public and private borrowing arrangements. The
credit risk involved in issuing letters of credit is essentially the same as
that involved in extending loans to customers. Collateral held varies as
specified above and is required in instances which the Company deems necessary.
In the normal course of business, the Company is involved in various legal
proceedings. In the opinion of management of the Company, any liability
resulting from such proceedings would not have a material effect on the
Company's financial statements.
F-23
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 12. CONCENTRATIONS OF CREDIT
The Company originates primarily commercial, residential, and consumer loans to
customers in Fulton County and surrounding counties. The ability of the
majority of the Company's customers to honor their contractual loan obligations
is dependent on the economy in these areas.
Ninety-six percent of the Company's loan portfolio is concentrated in commercial
loans and loans secured by real estate, of which a substantial portion is
secured by real estate in the Company's primary market areas. Accordingly, the
ultimate collectibility of the loan portfolio is susceptible to changes in
market conditions in the Company's primary market areas. The other significant
concentrations of credit by type of loan are set forth in Note 3.
The Company, as a matter of policy, does not generally extend credit to any
single borrower or group of related borrowers in excess of 15% of statutory
capital, or approximately $1,412,000.
NOTE 13. Regulatory Matters
The Bank is subject to certain restrictions on the amount of dividends that may
be declared without prior regulatory approval. At December 31, 1999, no amounts
were available for dividend declaration without regulatory approval.
The Company and the Bank are subject to various regulatory capital requirements
administered by the federal banking agencies. Failure to meet minimum capital
requirements can initiate certain mandatory, and possibly additional
discretionary actions by regulators that, if undertaken, could have a direct
material effect on the financial statements. Under capital adequacy guidelines
and the regulatory framework for prompt corrective action, the Company and the
Bank must meet specific capital guidelines that involve quantitative measures of
the assets, liabilities, and certain off-balance-sheet items as calculated under
regulatory accounting practices. The capital amounts and classification are
also subject to qualitative judgments by the regulators about components, risk
weightings, and other factors. Prompt corrective action provisions are not
applicable to bank holding companies.
Quantitative measures established by regulation to ensure capital adequacy
require the Company and the Banks to maintain minimum amounts and ratios of
Total and Tier I capital to risk-weighted assets and of Tier I capital to
average assets. Management believes, as of December 31, 1999, the Company and
the Bank met all capital adequacy requirements to which they are subject.
F-24
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 13. Regulatory Matters (Continued)
As of December 31, 1999, the most recent notification from the Federal Deposit
Insurance Corporation categorized the Bank as well capitalized under the
regulatory framework for prompt corrective action. To be categorized as well
capitalized, the Bank must maintain minimum total risk-based, Tier I risk-based,
and Tier I leverage ratios as set forth in the following table. There are no
conditions or events since that notification that management believes have
changed the Bank's category.
The Company and Bank's actual capital amounts and ratios are presented in the
following table.
<TABLE>
<CAPTION>
To Be Well
For Capital Capitalized Under
Adequacy Prompt Corrective
Actual Purposes Action Provisions
----------------------- -------------------------- ------------------------
Amount Ratio Amount Ratio Amount Ratio
--------- ----------- ------------- ---------- ------------ ---------
(Dollars in Thousands)
---------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
As of December 31, 1999:
Total Capital to Risk Weighted Assets
Consolidated $ 9,711 36.25% $2,144 8.00% $ N/A N/A
Bank $ 9,346 34.89% $2,144 8.00% $2,679 10.00%
Tier I Capital to Risk Weighted Assets
Consolidated $ 9,376 35.00% $1,072 4.00% $ N/A N/A
Bank $ 9,011 33.64% $1,072 4.00% $1,608 6.00%
Tier I Capital to Average Assets
Consolidated $ 9,376 26.29% $1,427 4.00% $ N/A N/A
Bank $ 9,011 25.26% $1,427 4.00% $1,784 5.00%
As of December 31, 1998:
Total Capital to Risk Weighted
Assets
Consolidated $10,902 71.3% $1,576 8.00% $ N/A N/A
Bank $ 9,198 60.2% $1,579 8.00% $1,974 10.00%
Tier I Capital to Risk Weighted
Assets
Consolidated $10,711 70.0% $ 788 4.00% $ N/A N/A
Bank $ 9,008 58.9% $ 790 4.00% $1,184 6.00%
Tier I Capital to Average Assets
Consolidated $10,711 54.4% $ 788 4.00% $ N/A N/A
Bank $ 9,008 46.6% $ 772 4.00% $ 985 5.00%
</TABLE>
F-25
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 14. FAIR VALUE OF FINANCIAL INSTRUMENTS
The following methods and assumptions were used by the Company in estimating its
fair value disclosures for financial instruments. In cases where quoted market
prices are not available, fair values are based on estimates using discounted
cash flow models. Those models are significantly affected by the assumptions
used, including the discount rates and estimates of future cash flows. In that
regard, the derived fair value estimates cannot be substantiated by comparison
to independent markets and, in many cases, could not be realized in immediate
settlement of the instrument. The use of different methodologies may have a
material effect on the estimated fair value amounts. Also, the fair value
estimates presented herein are based on pertinent information available to
management as of December 31, 1999 and 1998. Such amounts have not been
revalued for purposes of these financial statements since those dates and,
therefore, current estimates of fair value may differ significantly from the
amounts presented herein.
Cash, Due From Banks, Federal Funds Sold , and Overnight Deposits in Banks:
The carrying amounts of cash, due from banks, Federal funds sold, and overnight
deposits in banks approximate their fair value.
Securities and Other Investments:
Fair values for securities are based on available quoted market prices. The
carrying values of other investments with no readily determinable fair value
approximate fair value.
Loans:
For variable-rate loans that reprice frequently and have no significant change
in credit risk, fair values are based on carrying values. For other loans, the
fair values are estimated using discounted cash flow models, using current
market interest rates offered for loans with similar terms to borrowers of
similar credit quality. Fair values for impaired loans are estimated using
discounted cash flow models or based on the fair value of the underlying
collateral.
F-26
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 14. FAIR VALUE OF FINANCIAL INSTRUMENTS (Continued)
Deposits:
The carrying amounts of demand deposits, savings deposits, and variable-rate
certificates of deposit approximate their fair values. Fair values for fixed-
rate certificates of deposit are estimated using discounted cash flow models,
using current market interest rates offered on certificates with similar
remaining maturities.
Other Borrowings:
For variable-rate borrowings that reprice frequently, fair values are based on
carrying values. For fixed rate borrowings, the fair values are estimated using
discounted cash flow models, using interest rates currently being offered for
similar terms to borrowers of similar credit quality.
Accrued Interest:
The carrying amounts of accrued interest approximate their fair values.
Off-Balance Sheet Instruments:
Fair values of the Company's off-balance sheet financial instruments are based
on fees charged to enter into similar agreements. However, commitments to
extend credit and standby letters of credit do not represent a significant value
to the Company until such commitments are funded. The Company has determined
that these instruments do not have a distinguishable fair value and no fair
value has been assigned.
F-27
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 14. FAIR VALUE OF FINANCIAL INSTRUMENTS (Continued)
The carrying amounts and estimated fair values of the Company's financial
instruments were as follows:
<TABLE>
<CAPTION>
December 31, 1999 December 31, 1998
------------------------------------- -------------------------------------
Carrying Fair Carrying Fair
Amount Value Amount Value
----------------- ----------------- ----------------- -----------------
<S> <C> <C> <C> <C>
Financial assets:
Cash, due from banks, Federal
funds sold, and overnight
deposits in banks $ 3,047,377 $ 3,047,377 $ 1,433,182 $ 1,433,182
Securities available-for-sale
and other investments 7,968,651 7,968,651 6,041,870 6,041,870
Loans 26,492,806 26,717,701 14,609,983 14,605,748
Accrued interest receivable 211,721 211,721 140,547 140,547
Financial liabilities:
Deposits 26,782,649 26,675,180 12,011,243 12,059,974
Other borrowings 2,000,000 1,905,710 - -
Accrued interest payable 122,104 122,104 30,764 30,764
</TABLE>
F-28
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 15. SUPPLEMENTAL FINANCIAL DATA
Components of other operating income and expenses in excess of 1% of total
revenue are as follows:
<TABLE>
<CAPTION>
Years Ended December 31,
--------------------------------------
1999 1998
----------------- -----------------
<S> <C> <C>
Other income:
Mortgage origination fees $80,291 $ 32,552
Other expense:
Data processing 81,686 37,048
Insurance--directors and officers 19,349 21,281
Printing and supplies 53,013 28,471
Marketing 23,395 35,108
Postage and courier 34,953 10,206
Business development 19,223 14,822
Legal and professional 179,253 172,591
Advertising 33,397 6,700
Telephone 33,826 21,003
</TABLE>
NOTE 16. PARENT COMPANY FINANCIAL INFORMATION
The following information presents the condensed balance sheets, statements of
operations, and cash flows of CNB Holdings, Inc. as of and for the years ended
December 31, 1999 and 1998:
<TABLE>
<CAPTION>
CONDENSED BALANCE SHEETS
1999 1998
----------------- -----------------
<S> <C> <C>
Assets
Cash $ 365,289 $ 1,703,331
Investment in subsidiary 8,925,349 9,001,885
Other assets - 275
--------- ----------
Total assets $9,290,638 $10,705,491
========= ==========
Liabilities, other $ - $ 234
Stockholders' equity 9,290,638 10,705,257
--------- ----------
Total liabilities and stockholders' equity $9,290,638 $10,705,491
========= ==========
</TABLE>
F-29
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 16. PARENT COMPANY FINANCIAL INFORMATION (Continued)
<TABLE>
<CAPTION>
CONDENSED STATEMENTS OF OPERATIONS
1999 1998
----------------- -----------------
<S> <C> <C>
Income, interest $ 56,274 $ 109,015
---------- ---------
Expenses
Salaries and benefits - 56,882
Legal and professional 141,523 32,212
Other expense 17,508 46,153
---------- ---------
Total expenses 159,031 135,247
---------- ---------
Loss before cumulative effect of change in
accounting principle, income tax benefit, and
equity in undistributed income (loss) of subsidiary (102,757) (26,232)
Cumulative effect of change in accounting principle - (47,400)
---------- ---------
Loss before income tax benefit and equity in
undistributed income (loss) of subsidiary (102,757) (73,632)
Income tax benefits - -
---------- ---------
Loss before equity in undistributed income
(loss) of subsidiary (102,757) (73,632)
Equity in undistributed income (loss) of subsidiary 18,469 (607,378)
---------- ---------
Net loss $ (84,288) $(681,010)
========== =========
</TABLE>
F-30
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 16. PARENT COMPANY FINANCIAL INFORMATION (Continued)
<TABLE>
<CAPTION>
CONDENSED STATEMENTS OF CASH FLOWS
1999 1998
---------------- -----------------
OPERATING ACTIVITIES
<S> <C> <C>
Net loss $ (84,288) $ (681,010)
Adjustments to reconcile net loss to net
cash provided by (used in) operating activities:
Undistributed (income) loss of subsidiary (18,469) 607,378
Cumulative effect of change in accounting for
organization costs - 47,400
Other operating activities 41 41,061
---------- ----------
Net cash provided by (used in) operating activities (102,716) 14,829
---------- ----------
INVESTING ACTIVITIES
Contribution of capital to bank subsidiary - (9,600,000)
---------- ----------
Net cash used in investing activities - (9,600,000)
---------- ----------
FINANCING ACTIVITIES
Repayment of other borrowings - (57,479)
Proceeds from sales of capital stock, net of expenses - 11,405,283
Proceeds from initial capital contribution - 240,000
Return of initial capital contribution - (360,000)
Purchase of treasury stock (1,235,326) -
---------- ----------
Net cash provided by (used in) financing activities (1,235,326) 11,227,804
---------- ----------
Net increase (decrease) in cash (1,338,042) 1,642,633
Cash at beginning of year 1,703,331 60,698
---------- ----------
Cash at end of year $ 365,289 $ 1,703,331
========== ==========
</TABLE>
F-31
<PAGE>
EXHIBIT INDEX
-------------
Exhibit Number Description of Exhibit
-------------- ----------------------
21.1 Subsidiary of CNB Holdings, Inc.
27.1 Financial Data Schedule
<PAGE>
EXHIBIT 21.1
------------
SUBSIDIARY OF THE REGISTRANT
----------------------------
Chattahoochee National Bank, a national bank organized under the laws of the
United States
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 9
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> DEC-31-1999
<CASH> 1,056,784
<INT-BEARING-DEPOSITS> 0
<FED-FUNDS-SOLD> 1,990,593
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 7,530,851
<INVESTMENTS-CARRYING> 0
<INVESTMENTS-MARKET> 0
<LOANS> 26,897,806
<ALLOWANCE> 405,000
<TOTAL-ASSETS> 38,346,272
<DEPOSITS> 26,782,649
<SHORT-TERM> 1,000,000
<LIABILITIES-OTHER> 272,985
<LONG-TERM> 1,000,000
0
0
<COMMON> 1,235,000
<OTHER-SE> 8,055,638
<TOTAL-LIABILITIES-AND-EQUITY> 38,346,272
<INTEREST-LOAN> 2,101,334
<INTEREST-INVEST> 380,283
<INTEREST-OTHER> 107,395
<INTEREST-TOTAL> 2,589,012
<INTEREST-DEPOSIT> 865,745
<INTEREST-EXPENSE> 902,220
<INTEREST-INCOME-NET> 1,686,792
<LOAN-LOSSES> 183,000
<SECURITIES-GAINS> 0
<EXPENSE-OTHER> 1,896,264
<INCOME-PRETAX> (84,288)
<INCOME-PRE-EXTRAORDINARY> (84,288)
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (84,288)
<EPS-BASIC> $(0.07)
<EPS-DILUTED> $(0.07)
<YIELD-ACTUAL> 5.85
<LOANS-NON> 0
<LOANS-PAST> 0
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 222,000
<CHARGE-OFFS> 0
<RECOVERIES> 0
<ALLOWANCE-CLOSE> 405,000
<ALLOWANCE-DOMESTIC> 405,000
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 0
</TABLE>
