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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-K
(Mark One)
[x] Annual report pursuant to section 13 or 15(d) of the Securities Exchange
Act of 1934 for the fiscal year ended December 31, 1998 or
-----------------
[ ] Transition report pursuant to section 13 or 15(d) of the Securities
Exchange Act of 1934 for the transition period from _________________ to
_____________
Commission file number 0-26254
Century South Banks, Inc.
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(Exact name of registrant as specified in its charter)
Georgia 58-1455591
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(State or other jurisdiction of (IRS Employer - Identification
incorporation or organization) Number)
60 Main Street West, Dahlonega, Georgia 30533
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(Address of principal executive offices) (Zip Code)
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Registrant's telephone number, including area code: (706) 864-1111
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act: Common stock, $1.00 par value
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Indicate by check mark whether the Registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the Registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes X No .
----- -----
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [ ]
The aggregate market value of the Registrant's common stock (based upon the mean
of the closing high and low sales price reported by the Nasdaq Stock Market)
held by nonaffiliates as of March 24, 1999 was approximately $200,644,607. For
the purposes of this response, directors, executive officers, and holders of 5%
or more of the Registrant's common stock are considered affiliates of the
Registrant at that date.
The Registrant had 10,992,227 shares of its common stock outstanding as of March
24, 1999.
Documents Incorporated by Reference
- - ------------------------------------
Portions of the Company's Proxy Statement for the Company's 1999 Annual Meeting
of Shareholders, to be filed subsequent to the filing of this Report, is
incorporated by reference into Part III, Items 10, 11, 12, and 13, and Part IV,
Item 14 of this Report, with the exception of information regarding executive
officers required under Item 10 of Part III, which information is included in
Part I, Item 1.
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Century South Banks, Inc.
Form 10-K
Index
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Page
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PART I
Item 1. BUSINESS.................................................. 3
Item 2. PROPERTIES................................................ 9
Item 3. LEGAL PROCEEDINGS......................................... 10
Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS....... 10
PART II
Item 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED
SHAREHOLDER MATTERS..................................... 11
Item 6. SELECTED FINANCIAL DATA................................... 11
Item 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS..................... 12
Item 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK 26
Item 8. CONSOLIDATED FINANCIAL STATEMENTS AND SUPPLEMENTARY
DATA.................................................... 28
Item 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
ACCOUNTING AND FINANCIAL DISCLOSURE..................... 54
PART III
Item 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT........ 54
Item 11. EXECUTIVE COMPENSATION.................................... 54
Item 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS
AND MANAGEMENT.......................................... 54
Item 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS............ 54
PART IV
Item 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND
REPORTS ON FORM 8-K..................................... 55
SIGNATURES.................................................................. 57
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2
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PART I
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CAUTIONARY NOTICE REGARDING FORWARD-LOOKING STATEMENTS
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This Report contains forward-looking statements, including, but not limited to,
statements regarding, among other items, (i) Century South Banks, Inc.'s (the
"Company") plans, intentions or expectations, (ii) general competitive
conditions, and (iii) the Company's management information systems. This notice
is intended to take advantage of the "safe harbor" provided by the Private
Securities Litigation Reform Act of 1995 with respect to such forward-looking
statements. These forward-looking statements involve a number of risks and
uncertainties. Among others, factors that could cause actual results to differ
materially are the following: fluctuations in interest rates, inflation,
competition in the geographic business areas in which the Company does business,
and development of trends in the general economy; the highly competitive nature
of the banking industry; the dependence on key personnel who have been hired or
retained by the Company; changes in regulatory requirements which are applicable
to the Company's business; and the risk factors listed from time to time in the
Company's Registration Statements filed with the Securities and Exchange
Commission.
Item 1. BUSINESS
BUSINESS OF THE COMPANY
-----------------------
The Company is a $1.05 billion asset multibank holding company which engages
through its wholly-owned subsidiaries, Bank of Dahlonega ("BOD"), The Bank of
Ellijay ("BOE"), First Bank of Polk County ("FBPC"), Georgia First Bank ("GFB"),
Fannin County Bank, N.A. ("FCB"), Gwinnett National Bank ("GNB"), First
Community Bank of Dawsonville ("FCBD"), Peoples Bank ("PBL"), Bank of
Danielsville ("DAN"), First South Bank, N.A. ("FSB"), and AmeriBank, N.A.
("AMB") - (collectively the "Banks") in providing a full range of banking
services to customers of the Banks. The Company's executive offices are located
at 60 Main Street West, Dahlonega, Georgia 30533 and its telephone number is
(706) 864-1111.
The Company was incorporated as a Georgia business corporation in 1981. In the
last quarter of 1982, the Company acquired all of the issued and outstanding
common stock of BOD, on May 31, 1985, the Company acquired all of the issued and
outstanding shares of BOE. The Company acquired all of the issued and
outstanding shares of common stock of The First National Bank of Polk County
("FNBPC"), Copperhill, Tennessee, on December 16, 1988 and acquired 95.4% of the
issued and outstanding shares of common stock of GFB on September 11, 1989,
bringing its ownership of the common stock of GFB to 100%. The Company acquired
all of the issued and outstanding shares of First Union Bancorp ("FUB") and its
wholly owned banking subsidiary, First National Bank of Union County ("FNBUC"),
on April 30, 1990. On November 30, 1998, FNBUC was sold for approximately $6.1
million.
On May 31, 1994, the Company acquired the charter of Martin Bank ("Martin
Bank"), Dyersburg, Tennessee. In addition, with regulatory approval, FNBPC
relocated its charter to Blue Ridge, Georgia. FNBPC acquired assets of
approximately $28 million and assumed deposit liabilities of approximately $43
million of the Blue Ridge, Georgia offices of NationsBank of Georgia, N.A.
("Nations") on May 31, 1994. In conjunction with these transactions, effective
May 31, 1994, Martin Bank changed its name to FBPC, Copperhill, Tennessee and
FNBPC changed its name to FCB, Blue Ridge, Georgia. In a simultaneous
transaction, FBPC acquired assets of approximately $53 million and assumed
liabilities of approximately $56 million from FNBPC.
On April 14, 1995, the Company completed the acquisitions of Gwinnett Bancorp,
Inc. ("GBI"), a bank holding company located in Duluth, Georgia, and its
subsidiary bank GNB, and FCBD, located in Dawsonville, Georgia. These
transactions were accounted for as poolings of interests, and accordingly,
financial information preceding the dates of acquisition were restated to
include the financial position and results of operations of GBI, and its
subsidiary GNB, and FCBD.
3
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On December 14, and December 27, 1995, the Company completed the acquisitions of
Peoples Bank, located in Lavonia, Georgia, and DAN, located in Danielsville,
Georgia, respectively. These transactions were accounted for as poolings of
interests, and accordingly, financial information preceding the dates of
acquisition were restated to include the financial position and results of
operations of PBL and DAN.
On December 16, 1997, the Company completed the merger with Bank Corporation of
Georgia ("BCG"), a bank holding company located in Macon, Georgia and its
subsidiary banks, FSB and AMB. This transaction was accounted for as a pooling
of interests, and accordingly, financial information preceding the date of
acquisition was restated to include the financial position and results of
operations of BCG. The combined entity now maintains dual headquarters in
Dahlonega, Georgia and Macon, Georgia.
Because of its ownership of all the issued and outstanding shares of the common
stock of the Banks, the Company is a "Bank Holding Company" as that term is
defined under the Bank Holding Company Act of 1956 as amended (the "Act"), and
under the bank holding company laws of the State of Georgia ("Georgia Code").
As a bank holding company, the Company is subject to the applicable provisions
of the Act and the Georgia Act as well as to supervision by the Board of
Governors of the Federal Reserve System (the "Board") and the State of Georgia
Department of Banking and Finance (the "GDBF"). The Company's primary business
as a bank holding company is to manage the business affairs of its banking
subsidiaries. The Banks provide a full range of banking services to their
customers. BOD, BOE, GFB, FCBD, PBL and DAN were organized under the state
banking laws of Georgia and are not members of the Board. FBPC is organized
under the state banking laws of Tennessee and is not a member bank of the Board.
FCB, GNB, FSB, and AMB were organized under the Federal banking laws of the
United States and are member banks of the Board.
DEPOSITS
--------
The Banks offer a full range of interest bearing and non-interest bearing
deposit accounts, including checking accounts, negotiable order of withdrawal
("NOW") accounts, money market checking accounts, individual retirement
accounts, regular statement savings accounts and certificates of deposit. The
sources of deposits are residents, businesses and employees of businesses within
the Banks' market areas, obtained through the personal solicitation of the
Banks' officers and directors, direct mail solicitation and advertisements
published in the local media. The Banks pay competitive interest rates on time
and savings deposits up to the maximum permitted by law or regulation. In
addition, the Banks have implemented service charge fee schedules competitive
with other financial institutions in their market areas, covering such matters
as maintenance fees on checking accounts, per item processing fees on checking
accounts, returned check charges and the like.
LOAN PORTFOLIO
--------------
The Banks engage in a full complement of lending activities, including real
estate, commercial and consumer installment loans. The Banks generally
concentrate their lending efforts on real estate mortgage loans. As of December
31, 1998, the Banks' loan portfolio consisted of 74% real estate loans (62% real
estate mortgage and 12% real estate construction), 15% commercial loans, and 11%
consumer installment loans. While risk of loss is primarily tied to the credit
quality of the various borrowers, risk of loss may also increase due to factors
beyond the Banks' control, such as local, regional and/or national economic
downturns. General conditions in the real estate market may also impact the
relative risk in the Banks' real estate portfolio. Of the Banks' target areas of
lending activities, commercial loans are generally considered to have a greater
risk of loss than real estate loans or consumer installment loans.
COMPETITION
-----------
The banking business is highly competitive. Each of the Banks faces strong
competition from commercial banks located in each Banks' primary market area.
The Banks also compete with other financial services organizations, including
savings and loan associations, finance companies, credit unions and certain
governmental agencies. Many of these competing institutions are larger in size
and have access to resources with higher lending limits. Further, recent
legislation, regulatory changes and competition from unregulated entities have
eliminated many traditional distinctions between commercial banks, savings and
loan associations and other providers of financial services. Consequently,
competition among financial institutions of all types is virtually unlimited
with respect to legal ability and authority to provide most financial services.
It is anticipated that additional competition will continue from new entrants to
the Banks' primary market areas.
EMPLOYEES
---------
As of December 31, 1998, the Company had approximately 547 employees, with
approximately 91 employees serving the Company directly. As of December 31,
1998, BOD had 47 employees, BOE had 36 employees, FBPC had 44 employees, GFB had
58 employees, FCB had 28 employees, GNB had 17 employees, FCBD had 25 employees,
PBL had 18 employees, DAN had 35 employees, FSB had 90 employees, and AMB had 58
employees. The Company is not a party to any collective bargaining agreement and
the Company believes that its relations with its employees are good.
4
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EXECUTIVE OFFICERS
------------------
The following table sets forth certain information regarding the Company's
executive officers:
Name Age Position
- - ------------------------------------- --- ----------------------------
William H. Anderson, II 61 Chairman
James A. Faulkner 54 Vice Chairman and Chief
Executive Officer
J. Russell Ivie 63 Vice Chairman
Joseph W. Evans 49 President, Chief Operating
Officer and Chief Financial Officer
Tony E. Collins 45 Executive Vice President and
Chief Administrative Officer
Stephen W. Doughty 47 Executive Vice President and
Chief Credit Officer
Sidney J. Wooten 45 Executive Vice President and
Regional Executive
J. Thomas Wiley, Jr. 45 Executive Vice President and
Regional Executive
William H. Anderson, II has been Chairman of the Board of the Company since
December 16, 1997. Prior to his election, Mr. Anderson had served as BCG's
Chairman of the Board since 1980.
James A. Faulkner has been Chief Executive Officer of the Company since 1991.
On December 16, 1997, he was elected Vice Chairman. Mr. Faulkner had served as
President of the Company from 1989 to December 16, 1997 and Executive Vice
President from 1981 to 1989.
J. Russell Ivie was elected Vice Chairman on December 16, 1997. Mr. Ivie served
as Chairman of the Board of the Company from 1989 to December 16, 1997. Mr.
Ivie has also served as President and Chief Executive Officer of the Company.
Joseph W. Evans was elected President, Chief Operating Officer and Chief
Financial Officer of the Company on December 16, 1997. Prior to his election,
Mr. Evans had served as BCG's President and Chief Executive Officer since 1984.
Tony E. Collins was elected Executive Vice President and Chief Administrative
Officer on December 16, 1997. Prior to his election, Mr. Collins had been
Senior Vice President of the Company since 1996 and Chief Operations Officer
since 1993.
Stephen W. Doughty was elected Executive Vice President and Chief Credit Officer
of the Company on December 16, 1997. Prior to his election, Mr. Doughty had
served as BCG's Executive Vice President since 1989.
Sidney J. Wooten was elected Executive Vice President and Regional Executive of
the Company on December 16, 1997, after joining the Company in September of
1997.
J. Thomas Wiley, Jr. was elected Executive Vice President and Regional Executive
of the Company on July 22, 1998. Mr. Wiley also serves as President and Chief
Executive Officer of AMB, a position he has held since 1990.
5
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SUPERVISION, REGULATION, AND OTHER FACTORS
------------------------------------------
Bank Holding Company Regulations
- - --------------------------------
Offers and sales of the common stock of the Company are subject to the
registration requirements of the Securities Act of 1933, as amended, and the
regulations promulgated thereunder which are administered by the Securities and
Exchange Commission. Such offers and sales are also subject to the registration
requirements of various state securities laws. The Company is subject to the
reporting requirements of the Securities Exchange Act of 1934, as amended.
The Company is a registered bank holding company under the Act and the Georgia
Code and is regulated under such laws by the Board and by the GDBF,
respectively. As a bank holding company, the Company is required to file with
the Board an annual report and such additional information as the Board may
require pursuant to the Act. The Board may also conduct examinations of the
Company and each of its subsidiaries. The Board possesses cease-and-desist
powers over bank holding companies if their actions represent an unsafe or
unsound practice or violation of laws.
The Act also requires every bank holding company to obtain prior approval from
the Board before acquiring direct or indirect ownership or control of more than
5% of the voting shares of any bank which is not already majority owned or
controlled by the bank holding company. The Board is prohibited, however, from
approving the acquisition by the Company of the voting shares of, or
substantially all the assets of, any bank located outside Georgia, unless such
acquisition is specifically authorized by the laws of the state in which the
bank is located. Under Georgia law, the Company is authorized to acquire
ownership or control of additional banks in Georgia, Alabama, Florida, Kentucky,
Louisiana, Maryland, Mississippi, North Carolina, South Carolina, Tennessee,
Virginia, and the District of Columbia. Acquisition of any additional state
chartered banks would require prior approval from the Board, the GDBF, the
Federal Deposit Insurance Corporation (the "FDIC"), and the applicable state
banking agency of the state in which such bank is located. The acquisition of a
national bank would require prior approval from the Board, the Office of the
Comptroller of the Currency (the "OCC"), the GDBF, and the FDIC.
The Act and Georgia Code further provide that the Board and the GDBF will not
approve any acquisition, merger, or consolidation (i) which would result in a
monopoly, (ii) which would be in furtherance of any combination or conspiracy to
monopolize or attempt to monopolize the business of banking in any part of the
United States, (iii) the effect of which may be substantially to lessen
competition or to tend to create a monopoly in any section of the country, or
(iv) which in any other manner would be in restraint of trade, unless the
anticompetitive effects of the proposed transaction are clearly outweighed in
the public interest by the probable effect of the transaction in meeting the
convenience and needs of the community to be served.
In addition to having the right to acquire ownership or control of other banks,
the Company is authorized to acquire ownership or control of nonbanking
companies, provided the activities of such companies are so closely related to
banking or managing or controlling banks that the Board considers such
activities to be proper to the operation and control of banks. Regulation Y,
promulgated by the Board, sets forth those activities which are regarded as
closely related to banking or managing or controlling banks and, thus, are
permissible activities for bank holding companies, subject to approval by the
Board in individual cases.
Banks' Supervision and Regulations
- - ----------------------------------
BOD, BOE, GFB, FCBD, PBL, and DAN are insured state nonmember banks chartered by
the GDBF and are subject to supervision by, and are regularly examined by, the
GDBF and the FDIC.
FBPC is an insured state nonmember bank chartered by the Tennessee Department of
Financial Institutions ("TDFI") and is subject to supervision by the TDFI and
the FDIC.
FCB, GNB, FSB and AMB are insured national banks chartered under the laws of the
United States. All are members of the Board, are subject to the supervision of
the OCC and the FDIC, and are regularly examined by the OCC.
To the extent provided by law, deposits of the Banks are insured by the FDIC.
6
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Subsidiary banks of a banking holding company are subject to certain
restrictions imposed by the Act on any extension of credit to the bank holding
company or any of its subsidiaries, on investment in the stock or the securities
thereof, and on the taking of such stock or securities as collateral for loans
to any borrower.
Other Factors
- - -------------
Legislation has been adopted in order to assist in the resolution of the
insolvency of the Federal Savings and Loan Insurance Corporation, which insured
deposits maintained in most savings and loan associations and savings banks.
The Financial Institutions Reform, Recovery, and Enforcement Act of 1989
("FIRREA") was adopted in order to address these issues. FIRREA contains major
regulatory reforms, strong capital standards, and safeguards for the disposal of
recoverable assets.
As a result of the enactment of FIRREA, a depository institution insured by the
FDIC can be held liable for any loss incurred by, or reasonably expected to be
incurred by, the FDIC in connection with (i) the default of a commonly
controlled FDIC insured depository institution; or (ii) any assistance provided
by the FDIC to a commonly controlled FDIC insured depository institution in
danger of default. "Default" is defined generally as the appointment of a
conservator or receiver and "in danger of default" is defined generally as the
existence of certain conditions indicating that a "default" is likely to occur
in the absence of regulatory assistance. The Banks are FDIC-insured depository
institutions within the meaning of FIRREA.
Additional Legislation
- - ----------------------
The Company is subject to capital adequacy guidelines as established by the
Board. The Board has established risk-based capital guidelines for bank holding
companies which are applied to the Company and on a bank-only basis. The Board
has announced that these capital requirements are minimum requirements for the
most highly rated banking organizations and other banking organizations are
expected to maintain capital at higher levels.
The guidelines define Tier 1 Capital, Tier II Capital and Total Capital and
provide risk-based capital ratios calculated with reference to risk-weighted
assets which include both on and off-balance sheet exposures. Tier 1 Capital
must represent at least 50% of qualifying total capital and consists of common
and qualifying preferred shareholders' equity and minority interests in equity
accounts of consolidated subsidiaries, less goodwill. Tier II Capital consists
of allowances for loan and lease losses, perpetual preferred stock and related
surplus, hybrid capital instruments and mandatory convertible debt securities,
term subordinated debt and intermediate-term preferred stock, including related
surplus. Total Capital consists of Tier I Capital plus Tier II Capital less a
bank's investment in unconsolidated subsidiaries, reciprocal holdings of banking
organizations' capital securities, and other discretionary deductions.
The minimum required ratio for qualifying Total Capital to risk-weighted assets
(including grandfathered goodwill) as of December 31, 1998 was 8%, of which 4%
was required to be Tier 1 Capital. As of December 31, 1998, the Company's Tier 1
Capital was $113,927,000 or 15.06%, Tier II Capital was $9,718,000 or 16.35%,
and its Total Risk-Based Capital was $123,645,000 determined in accordance with
the above regulatory requirements. Accordingly, 92.1% of the Company's
qualifying Total Risk-Based Capital was Tier 1 Capital.
Regarding regulation of the Company and the Banks, bills may be introduced in
the United States Congress and the Georgia Legislature to alter the structure,
regulation and competitive relationships of the nation's financial institutions.
As to other adopted legislation, the Federal Deposit Insurance Corporation
Improvement Act of 1991 ("FDICIA") was enacted to further regulate the banking
industry. The principal initial effect of FDICIA is to permit the Bank
Insurance Fund (the "BIF") to borrow up to $30 billion from the U.S. Treasury
(to be repaid through deposit insurance premiums over 15 years) and to permit
the BIF to borrow working capital from the Federal Financing Bank in an amount
up to 90% of the value of the assets the FDIC has acquired from failed banks,
which, it is estimated, would yield approximately $40 billion in working
capital.
7
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The additional supervisory powers and regulations mandated by FDICIA include a
"prompt corrective action" program based upon five regulatory zones for banks,
in which all banks are placed, largely based on their capital positions.
Regulators are permitted to take increasingly harsh action as a bank's financial
condition declines. Regulators are also empowered to place in receivership or
require the sale of a bank to another depository institution when a bank's
capital leverage ratio reaches 2%. Better capitalized institutions are
generally subject to less onerous regulation and supervision than banks with
lesser amounts of capital under FDICIA. Other sections of FDICIA impose
substantial new audit and reporting requirements and increase the role of
independent accountants and outside directors.
In additon, the Riegle Community Development and Regulatory Improvement Act (the
"CDA") and the Riegle-Neal Interstate Banking and Branching Act (the "Interstate
Banking Act") were passed in 1994. The CDA created the Community Development
Financial Institution Fund to provide assistance to new and existing community
lenders. The CDA also includes regulatory and paperwork reduction provisions,
and enhanced consumer protections. The Interstate Banking Act allows banks to
acquire out of state banks after one year, and out of state branches through
interstate mergers, beginning June 1, 1997. The Interstate Banking Act also
protects key provisions of state law, establishes a mechanism for de novo
branching, and includes provisions relating to interstate branching by foreign
banks.
FDIC Insurance Assessments
- - --------------------------
The FDIC adopted regulations amending the deposit insurance assessments
applicable to the Banks. The regulations provide for a risk based premium
system which requires higher assessment rates for banks which the FDIC
determines pose greater risks to the BIF.
Under the new regulations, banks pay an assessment depending upon risk
classification. Although the new regulations were adopted by the FDIC as final
regulations, the Board of the FDIC will consider whether changes in economic and
industry conditions require adjustments in the range of assessment rates to be
charged in future years.
To arrive at risk based assessments, the FDIC places each bank in one of nine
risk categories using a two step process based on capital ratios and on other
relevant information. Each bank is assigned to one of three groups (well
capitalized, adequately capitalized, or under capitalized) based on its capital
ratios. The FDIC has also assigned each bank to one of three subgroups based
upon an evaluation of the risk posed by the bank. The three subgroups include
(i) banks that are financially sound with only a few minor weaknesses, (ii)
those banks with weaknesses which, if not corrected, could result in significant
deterioration of the bank and increased risk to the BIF, and (iii) those banks
that pose a substantial probability of loss to the BIF unless corrective action
is taken. These supervisory evaluations modify premium rates within each of the
three capital groups with the result being the nine risk categories and
assessment rates based on a summary multiplier.
The Company has been informed by the FDIC that its Banks have been classified as
well capitalized and in the lowest risk category and will be assessed
accordingly for 1999.
MONETARY POLICY
---------------
The earnings of the Company are affected by domestic and foreign economic
conditions, particularly by the monetary and fiscal policies of the United
States Government and its agencies.
The Board has had, and will continue to have, an important impact on the
operating results of banks through its power to implement national monetary
policy in order, among other things, to mitigate recessionary and inflationary
pressures by regulating the national money supply. The techniques used by the
Board include setting the reserve requirements of member banks and establishing
the discount rate on member bank borrowings. The Board also conducts open
market transactions in United States Government securities.
8
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Periodically, bills are pending before the United States Congress which contain
wide-ranging proposals for altering the structures, regulations, and competitive
relationships of the nation's financial institutions. President Clinton has
proposed such bills which have not yet been finalized. These bills may include
proposals to restructure reserve requirements of banks, to prohibit banks and
bank holding companies from conducting certain types of activities, to subject
banks to increased disclosure and reporting requirements, to eliminate on a
regional or other basis the present restriction on interstate expansion by banks
or bank holding companies, to alter the statutory separation of commercial and
investment banking, and to expand further the powers of savings and loan
institutions and other competitors of banks. It cannot be predicted whether or
in what form any of these proposals will be adopted or the extent to which the
business of the Company may be affected thereby.
SELECTED STATISTICAL INFORMATION
--------------------------------
See Part II, Item 7.
Item 2. PROPERTIES
The Company and the Banks own or lease all of the real property and/or buildings
in which they are located. All of such buildings are in a good state of repair
and are appropriately designed for the purposes for which they are used.
BOD's main banking office is located at 60 Main Street West, Dahlonega, Georgia
and its branch offices are also located in Dahlonega, Georgia. BOD's main
office is a three-story building containing approximately 30,000 square feet
located on approximately two acres which is owned by BOD. BOD utilizes all of
the first floor and approximately 6,200 square feet of the second floor of the
main office building while the Company leases 3,800 square feet of the second
floor and all of the third floor, which houses the Company's executive offices.
BOD operates a full-service branch located at 148 Memorial Drive which consists
of approximately 1,200 square feet of space. Both the main office and the
Memorial Drive branch are owned by BOD.
BOD refurbished a former warehouse building into administrative offices which is
leased to the Company for its Accounting Department. The building has
approximately 3,600 square feet. The Company is also leasing approximately
2,400 square feet of space for use by the Internal Auditing Department in
Dawsonville and approximately 700 square feet of space for use by the Special
Assets Department.
BOD operates a limited service branch facility located in the Wal-Mart
SuperCenter in Dahlonega, Georgia. The branch consists of approximately 540
square feet and is being leased by BOD from Wal-Mart Stores, Inc.
The main banking office of BOE is located in an approximately 8,000 square foot
one-story building owned by BOE in downtown Ellijay, Georgia. BOE occupies the
entire building and provides parking facilities adjacent to the building. BOE
opened a full-service branch office on March 12, 1990, which comprises
approximately 14,000 square feet and also houses BOE's operations center.
The main banking office of FBPC is located in an approximately 14,000 square
foot two-story building owned by FBPC in downtown Copperhill, Tennessee. FBPC
occupies the entire building. FBPC also owns and operates two full-service
branch facilities; one located in Ducktown, Tennessee in an approximately 3,000
square foot building and one in Turtletown, Tennessee in an approximately 840
square foot building.
GFB's main banking office is located at 455 Jesse Jewell Parkway, Gainesville,
Georgia. The 18,000 square foot facility includes drive-in banking and retail
banking facilities. GFB operates a full-service branch facility located at the
intersection of McEver Road and Browns Bridge Road in Gainesville, Georgia. The
facility consists of 2,300 square feet and was purchased by the Company from the
Resolution Trust Corporation in March 1991. The Company leased the facility to
GFB through December 1992 which at such time was purchased from the Company by
GFB. In October 1993, GFB opened a full-service branch facility located on the
Limestone Parkway, Gainesville, Georgia. In September of 1998, the branch was
closed and the building is now housing the operations department of GFB. The
facility consists of 2,820 square feet of leased space. In May 1996, GFB opened
a full-service branch facility located in Flowery Branch, Georgia. This
facility consists of 2,400 square feet and is owned by GFB.
9
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The main banking office of FCB is located at 480 West First Street, Blue Ridge,
Georgia. The main office of FCB contains approximately 7,100 square feet of
space. FCB also operates a branch office located in the Valley Village Shopping
Center, 111 County Road 260, Blue Ridge, Georgia. This office contains
approximately 2,150 square feet of space and is owned by FCB.
GNB is located at 3200 Peachtree Industrial Boulevard, Duluth, Georgia. GNB
leases approximately 9,000 square feet of the 27,000 square foot facility. GNB
has offices on the first and second floors of the three-story building. In
December 1996, GNB opened a full-service branch facility located in Dacula,
Georgia. In June 1998, this branch was closed and in October 1998 the building
was sold. The office contained approximately 2,623 square feet of space and was
owned by GNB.
FCBD is located at 136 Highway 400 South, Dawsonville, Georgia. The building
contains approximately 10,668 square feet of space and is owned by FCBD. In
September 1996, FCBD opened a full-service branch facility located in downtown
Dawsonville, Georgia. This office contains approximately 2,300 square feet of
space and is owned by FCBD.
PBL is located at 13321 Jones Street, Lavonia, Georgia. The building contains
approximately 11,000 square feet of space and is owned by PBL.
The main banking office of DAN is located at Courthouse Square, Danielsville,
Georgia. The main office of DAN contains approximately 4,500 square feet of
space. DAN operates two full-service branch facilities, one located at Highway
72 in Colbert, Georgia which contains 2,400 square feet and one located at
Highway 29 North in Hull, Georgia which contains 2,400 square feet. All
facilities are owned by DAN.
FSB has five banking locations. The main office of FSB is located at 4961
Forsyth Road, Macon, Georgia and is owned by FSB. FSB leases its loan operations
office space from William H. Anderson, II, Chairman of the Company's Board of
Directors. The Company also leases space from Mr. Anderson for the Macon
headquarters. FSB operates one branch in each of Peach, Macon, Bibb and Coweta
Counties.
AMB has three banking locations. The main office of AMB is located at 7393
Hodgson Memorial Drive, Savannah, Georgia and is owned by AMB. AMB operates two
branches, one in Chatham County and one in Effingham County. Effective March 5,
1998, AMB closed a branch which was also located in Chatham County.
Item 3. LEGAL PROCEEDINGS
The nature of the business of the Company and the Banks ordinarily results in a
certain amount of litigation. Accordingly, the Company and the Banks are
parties (both as plaintiff and defendant) to a limited number of lawsuits
incidental to their respective businesses and, in certain of such suits, claims
or counterclaims have been asserted. In the opinion of management, based in
part on the advice of counsel, the ultimate disposition of these matters will
not have a material adverse impact on the Company's consolidated financial
position or results of operations.
Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matter was submitted during the fourth quarter ended December 31, 1998 to a
vote of security holders of the Company.
10
<PAGE>
PART II
-------
Item 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED SHAREHOLDER MATTERS
See Part II, Item 7 - Management's Discussion and Analysis of Financial
Condition and Results of Operations - Market and Dividend Information.
Item 6. SELECTED FINANCIAL DATA
<TABLE>
<CAPTION>
(Amounts in thousands, except per share data and percentages) 1998 1997 1996 1995 1994
- - ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Summary of Operations
Net interest income $ 53,394 $ 50,458 $ 48,218 $ 44,411 $ 38,689
Provision for loan losses 1,772 5,201 2,166 2,159 1,390
Net income 14,681 9,632 12,683 10,759 9,300
- - ------------------------------------------------------------------------------------------------------------------------------------
Per Share Data
Net income - basic 1.34 0.89 1.18 1.02 0.90
Net income - diluted 1.32 0.87 1.15 1.00 0.88
Cash dividends declared 0.44 0.42 0.40 0.38 0.34
Book value 10.85 10.04 9.44 8.64 7.54
Tangible book value 10.42 9.37 8.70 7.91 6.70
- - ------------------------------------------------------------------------------------------------------------------------------------
Balance Sheet Summary
Investment securities 143,561 178,804 192,937 193,398 196,207
Loans, net 776,389 746,392 688,431 647,352 592,860
Deposits 912,953 960,336 928,971 850,530 802,761
Assets 1,054,952 1,088,368 1,051,399 976,203 917,484
Long-term debt and other borrowings:
Federal Home Loan Bank advances 12,780 6,881 6,982 14,183 15,183
Other long-term debt 35 39 1,741 6,327 8,774
Other borrowings -- 1,500 -- 501 1,850
Average shareholders' equity 114,367 105,735 96,312 86,937 77,024
Average total assets 1,060,852 1,052,695 1,004,260 928,238 855,343
- - ------------------------------------------------------------------------------------------------------------------------------------
Financial Ratios
Net income to average assets 1.38% 0.91% 1.26% 1.16% 1.09%
Overhead ratio (1) 2.78 3.03 2.80 2.95 3.03
Net income to average shareholders' equity 12.84 9.11 13.17 12.38 12.07
Dividend payout ratio (2) 32.73 37.04 24.32 21.41 17.46
Average shareholders' equity to
average total assets 10.78 10.04 9.59 9.37 9.01
- - ------------------------------------------------------------------------------------------------------------------------------------
(1) Represents noninterest expense less noninterest income divided by average assets.
(2) Represents dividends declared (excluding those of pooled subsidiaries) divided by net income.
</TABLE>
11
<PAGE>
Item 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
Introduction
The Company is a multibank holding company providing a full range of banking
services to individual and corporate customers in the communities of its market
areas which include the areas of northern, middle and coastal Georgia,
southeastern Tennessee, and southwestern North Carolina. These areas are served
through the Company's eleven banking affiliates and their branch banks,
(collectively the "Banks").
The Company was formed and became the parent company of Bank of Dahlonega
located in Dahlonega, Georgia in 1982 and has grown steadily ever since.
As part of the Company's strategic plan to exit unprofitable markets in order
to enhance returns, the Company sold FNCUC on November 30, 1998 to Appalachian
Bancshares, Inc. The sale resulted in a net gain of approximately $670,000.
On December 16, 1997, the Company merged with BCG, a bank holding company
located in Macon, Georgia and its subsidiary banks, FSB, and AMB. This
transaction has been accounted for as a pooling of interests, and accordingly,
financial information preceding the date of acquisition has been restated to
include the financial position and results of operations of BCG, and FSB and
AMB.
Because of its ownership of all of the issued and outstanding shares of the
common stock of the Banks, the Company is a "Bank Holding Company" as that term
is defined under the Act, as amended, and under the bank holding company laws of
the Georgia Code. As a bank holding company, the Company is subject to the
applicable provisions of the Act and the Georgia Code as well as to supervision
by the Board and the GDBF. The Company's primary business as a bank holding
company is to manage the business affairs of its bank subsidiaries.
The Company's mission is to provide high quality banking services to the
communities of its service area while maximizing the return on its shareholders'
investments and assisting the communities of its service area in reaching their
fullest potential. The Company accomplishes and intends to continue
accomplishing this mission by expanding its customer base in existing and new
markets, and by expanding the range of banking services offered to its existing
customers.
The following discussion sets forth the major factors which affected the
Company's financial condition and results of operations. This discussion should
be read in conjunction with the Company's consolidated financial statements and
related notes.
Results of Operations
The Company's net income for the year ended December 31, 1998 was $14,681,000
compared to $9,632,000 for the year ended December 31, 1997, an increase of
approximately $5,049,000 or 52%. The Company's diluted earnings per share was
$1.32, an increase of $0.45 per share or 52% from diluted earnings per share
for the year ended December 31, 1997 of $0.87. The Company's emphasis on
maintaining its net interest margin resulted in an increase in net interest
income of $2,936,000. Additionally, noninterest income increased $4,800,000 and
the provision for loan losses decreased $3,429,000. An increase in noninterest
expense of $2,461,000 offset the increases in net interest income and
noninterest income and decrease in the provision for loan loss.
12
<PAGE>
The following table summarizes the results of operations, including selected
financial performance ratios, of the Company for the three years ended
December 31, 1998:
<TABLE>
<CAPTION>
(Amounts in thousands, except per share data) 1998 1997 1996
- - ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Interest income $91,935 $90,806 $87,261
Interest expense 38,541 40,348 39,043
- - ------------------------------------------------------------------------------------------------------------------------------------
Net interest income 53,394 50,458 48,218
- - ------------------------------------------------------------------------------------------------------------------------------------
Provision for loan losses 1,772 5,201 2,166
Noninterest income 15,209 10,409 9,693
Noninterest expense 44,717 42,256 37,796
Income tax expense 7,433 3,778 5,266
- - ------------------------------------------------------------------------------------------------------------------------------------
Net income $14,681 $ 9,632 $12,683
- - ------------------------------------------------------------------------------------------------------------------------------------
Earnings per common share:
Basic $ 1.34 $ 0.89 $ 1.18
Diluted $ 1.32 $ 0.87 $ 1.15
- - ------------------------------------------------------------------------------------------------------------------------------------
Weighted average common shares outstanding:
Basic 10,965 10,838 10,769
Diluted 11,161 11,101 11,001
- - ------------------------------------------------------------------------------------------------------------------------------------
Cash dividends declared per share $0.4375 $0.4175 $0.3975
- - ------------------------------------------------------------------------------------------------------------------------------------
Return on average assets 1.38% 0.91% 1.26%
Return on average equity 12.84 9.11 13.17
Shareholders' equity to assets (average) 10.78 10.04 9.59
Shareholders' equity to assets (period-end) 11.31 10.03 9.72
Dividend payout ratio (1) 32.73 37.04 24.32
- - ------------------------------------------------------------------------------------------------------------------------------------
(1) Determined by dividing dividends declared (excluding those of pooled subsidiaries) by net income.
</TABLE>
Net Interest Income
The Company's net interest income is its principal source of income. Interest
earning assets for the Company include loans, federal funds sold, interest
earning deposits in other banks, and investment securities. The Company's
interest bearing liabilities include deposits, federal funds purchased, long-
term debt, and short-term borrowings.
In 1998, net interest income was $53,394,000 representing an increase of
$2,936,000 or 5.82% as compared to 1997. The average yield earned on interest
earning assets increased to 9.45% in 1998 from 9.43% in 1997 and the average
rate paid on interest bearing liabilities decreased to 4.77% in 1998 from 4.93%
in 1997. The Company's net interest margin (net interest income divided by
average interest earning assets), on a tax equivalent basis, increased to 5.52%
for 1998 from 5.28% for 1997.
In 1997, net interest income was $50,458,000 representing an increase of
$2,240,000 or 4.65% as compared to 1996. The average yield earned on interest
earning assets decreased to 9.43% in 1997 from 9.59% in 1996 and the average
rate paid on interest bearing liabilities decreased to 4.93% in 1997 from 4.98%
in 1996. The Company's net interest margin (net interest income divided by
average interest earning assets), on a tax equivalent basis, decreased to 5.28%
for 1997 from 5.35% for 1996.
13
<PAGE>
The following table presents average balance sheets, yields and interest
earned on interest earning assets, and rates and interest paid on interest
bearing liabilities of the Company for the three years ended December 31, 1998.
<TABLE>
<CAPTION>
1998 1997 1996
- - ------------------------------------------------------------------------------------------------------------------------------------
(Amounts in thousands, Average Yields Average Yields Average Yields
except ratios) balances Interest /rates balances Interest /rates balances Interest /rates
- - ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Assets
Interest earning assets:
Interest earning deposits $ 11,821 $ 732 6.19% $ 18,097 $ 818 4.52% $ 987 $ 61 6.18%
Federal funds sold 38,259 2,061 5.39 37,695 2,060 5.46 40,125 2,145 5.35
Taxable investment
securities 116,012 7,260 6.26 152,888 9,812 6.42 157,994 9,893 6.26
Nontaxable investment
securities (2) 34,281 2,467 7.20 41,033 3,061 7.46 43,479 3,424 7.88
Loans, net (1) (2) 779,861 80,106 10.27 722,718 75,911 10.50 676,909 72,668 10.74
- - ------------------------------------------------------------------------------------------------------------------------------------
Total interest
earning assets 980,234 92,626 9.45 972,431 91,662 9.43 919,494 88,191 9.59
- - ------------------------------------------------------------------------------------------------------------------------------------
Noninterest earning assets:
Cash and due from
banks 40,262 37,376 42,740
Premises and
equipment, net 25,713 27,467 25,755
Other assets 27,376 27,377 26,573
Allowance for
loan losses (12,733) (11,956) (10,302)
- - ------------------------------------------------------------------------------------------------------------------------------------
Total noninterest
earning assets 80,618 80,264 84,766
- - ------------------------------------------------------------------------------------------------------------------------------------
Total assets $1,060,852 $1,052,695 $1,004,260
- - ------------------------------------------------------------------------------------------------------------------------------------
Liabilities and
Shareholders' Equity
Interest bearing liabilities:
Interest bearing
demand deposits $ 261,776 $ 8,349 3.19% $ 225,899 $ 7,087 3.14% $ 195,725 $ 6,030 3.08%
Savings deposits 55,164 1,600 2.90 72,324 2,805 3.88 72,046 2,390 3.32
Individual retirement
accounts 63,351 3,788 5.98 62,547 3,757 6.01 59,492 3,561 5.99
Certificates of deposit 420,567 24,380 5.80 447,892 26,093 5.83 442,576 26,176 5.91
Federal funds purchased 537 30 5.59 833 30 3.60 1,232 63 5.11
Long-term debt and
other borrowings 6,474 394 6.09 8,920 576 6.46 13,332 823 6.17
- - ------------------------------------------------------------------------------------------------------------------------------------
Total interest bearing
liabilities 807,869 38,541 4.77 818,415 40,348 4.93 784,403 39,043 4.98
- - ------------------------------------------------------------------------------------------------------------------------------------
Noninterest bearing liabilities
and shareholders' equity:
Noninterest bearing
deposits 128,917 119,675 113,050
Other liabilities 9,699 8,870 10,495
Shareholders' equity 114,367 105,735 96,312
- - ------------------------------------------------------------------------------------------------------------------------------------
Total liabilities and
shareholders' equity $1,060,852 $1,052,695 $ 1,004,260
- - ------------------------------------------------------------------------------------------------------------------------------------
Interest rate differential (3) 4.68% 4.50% 4.61%
- - ------------------------------------------------------------------------------------------------------------------------------------
Net interest income $ 54,085 $51,314 $ 49,148
- - ------------------------------------------------------------------------------------------------------------------------------------
Net interest margin (4) 5.52 5.28 5.35
- - ------------------------------------------------------------------------------------------------------------------------------------
Average interest earning
assets to average
total assets 92.40 92.38 91.56
- - ------------------------------------------------------------------------------------------------------------------------------------
Average loans to
average deposits 83.88 77.85 76.67
- - ------------------------------------------------------------------------------------------------------------------------------------
</TABLE>
(1) Average loans are shown net of unearned income. Nonperforming and
underperforming loans are included. Interest income includes loan fees as
follows (amounts in thousands): 1998 - $5,811;1997 - $4,646; 1996 - $4,173.
Income, if recognized, on nonaccrual loans is recorded on a cash basis.
(2) Interest income includes the effects of taxable equivalent adjustments
(reduced by the non-deductible portion of interest expense) using a federal
income tax rate of 35% in 1998, 1997 and 1996.
(3) Interest rate differential is the average yield earned on interest earning
assets less the average rate paid on interest bearing liabilities.
(4) Net interest margin is net interest income divided by average interest
earning assets.
14
<PAGE>
The following table presents the changes in the Company's net interest income
as a result of changes in volume and rate of its interest earning assets and
interest bearing liabilities from 1997 to 1998 and from 1996 to 1997.
<TABLE>
<CAPTION>
1998 vs.1997 1997 vs. 1996
(Amounts in thousands) (1) Volume Rate Net Volume Rate Net
- - ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Interest income:
Interest earning deposits in other banks $ (389) $ 303 $ (86) $ 774 $ (17) $ 757
Federal funds sold 30 (29) 1 (133) 48 (85)
Taxable investment securities (2,290) (262) (2,552) (324) 243 (81)
Nontaxable investment securities (2) (486) (108) (594) (183) (180) (363)
Loans, net (2) 5,870 (1,675) 4,195 4,812 (1,569) 3,243
- - ------------------------------------------------------------------------------------------------------------------------------------
Total interest income 2,735 (1,771) 964 4,946 (1,475) 3,471
- - ------------------------------------------------------------------------------------------------------------------------------------
Interest expense:
Interest bearing demand deposits 1,272 (10) 1,262 985 72 1,057
Savings deposits (498) (707) (1,205) 11 404 415
Individual retirement accounts 48 (17) 31 184 12 196
Certificates of deposit (1,597) (116) (1,713) 310 (393) (83)
Federal funds purchased (16) 16 0 (14) (19) (33)
Long-term debt and other borrowings (137) (45) (182) (313) 66 (247)
- - ------------------------------------------------------------------------------------------------------------------------------------
Total interest expense (928) (879) (1,807) 1,163 142 1,305
- - ------------------------------------------------------------------------------------------------------------------------------------
Net interest income $ 3,663 $ (892) $ 2,771 $3,783 $(1,617) $2,166
- - ------------------------------------------------------------------------------------------------------------------------------------
</TABLE>
(1) The change in interest due to rate is calculated by multiplying the previous
volume by the rate change and the change in interest due to volume is
calculated by multiplying the change in volume by the previous rate. The
change in interest due to both rate and volume has been allocated to the
volume and rate components in proportion to the relationship of the absolute
dollar amounts of the change in each.
(2) Interest income includes the effects of taxable equivalent adjustments
(reduced by the non-deductible portion of interest expense) using a federal
income tax rate of 35% in 1998, 1997 and 1996.
Allowance for Loan Losses
The Company maintains an allowance for loan losses appropriate for the
quality of the loan portfolio and sufficient to meet anticipated future loan
losses. The Company utilizes a comprehensive loan review and risk identification
process and the analysis of affiliate bank financial trends to determine the
adequacy of the allowance. Many factors are considered when evaluating the
allowance. The Company's quarterly analysis is based on historical loss trends;
migration trends in criticized and classified loans in the portfolio; trends in
past due and non-accrual loans; trends in portfolio volume, composition,
maturity, and concentrations; changes in local and regional economic market
conditions; the accuracy of the loan review and risk identification system; and
the experience, ability and depth of lending personnel and management.
In determining the appropriate level of the allowance for each affiliate
bank, the Company relies primarily on analysis of the major components of the
loan portfolio such as commercial loans, commercial real estate loans, consumer
loans, construction loans, residential real estate loans, and all other loans
and unfunded commitments. The Company has established a minimum loss factor for
certain problem loan grade categories and for general categories of non-problem
loans. All significant problem loans are reviewed individually to establish
either the minimum loss factor (formula) or a specific reserve higher than the
formula. All significant non-problem loans are reserved at the greater of the
minimum loss rate for the category of loans or the weighted average historical
loss rate over a defined loss horizon as computed from the migration analysis.
Other homogeneous loan pools such as the consumer loans, construction loans, and
residential mortgage loans, are reserved at the greater of the minimum loss rate
or the weighted average historical loss rate as computed in the migration
analysis.
Management evaluates the allowance on a quarterly basis. The provision for
loan losses is for each affiliate bank is adjusted to the appropriate level
based on the analysis methodology described above.
A substantial portion of the Company's loan portfolio is secured by real
estate in markets in northern, middle and coastal Georgia, southeastern
Tennessee, and southwestern North Carolina. The ultimate collectibility of a
substantial portion of the Company's loan portfolio is dependent on or
susceptible to changes in economic conditions in these markets.
The allowance for loan losses approximated 1.48% of outstanding loans at
December 31, 1998 and 1.63% at December 31, 1997. The allowance decreased to
$11,631,000 at December 31, 1998 from $12,339,000 at December 31, 1997. The
decrease in the provision for loan losses to $1,772,000 in 1998 from $5,201,000
in 1997 was primarily a result of an in-depth study in 1997 of the loan
portfolios at two of the banks where recent management changes had occurred. Net
loans charged off in 1998 were $1,922,000 or approximately 0.25% of average
loans outstanding as compared to $3,276,000 or 0.45% in 1997. Net loans charged
off in 1998 reflect the continued impact from the studies performed at the two
banks in 1997.
The allowance for loan losses approximated 1.63% of outstanding loans at
December 31, 1997 and 1.49% at December 31, 1996. The allowance increased to
$12,339,000 at December 31, 1997 from $10,414,000 at December 31, 1996. The
provision for loan losses increased to $5,201,000 in 1997 from $2,166,000 in
1996 as a result of the subsidiary bank analysis discussed in the preceding
paragraph. Net loans charged off in 1997 were $3,276,000 or approximately 0.45%
of average loans outstanding as compared to $1,452,000 or 0.21% in 1996.
The following table summarizes the changes in the allowance for loan losses
arising from loans charged off and recoveries on loans previously charged off by
loan category, additions to the allowance which have been charged to income in
the Company's consolidated statements of income, and additions resulting from
the purchased allowance of acquired subsidiaries for the years ended December
31:
15
<PAGE>
<TABLE>
<CAPTION>
(Amounts in thousands, except ratios and percentages) 1998 1997 1996 1995 1994
<S> <C> <C> <C> <C> <C>
- - --------------------------------------------------------------------------------------------------------------
Average loans outstanding, net of
unearned income $779,861 $722,718 $676,909 $626,345 $570,800
- - ---------------------------------------------------------------------------------------------------------------
Allowance for loan losses
at beginning of year $12,339 $10,414 $9,700 $9,162 $8,447
Loans charged off:
Commercial, Financial & Agricultural 1,195 808 302 488 688
Real Estate 480 1,379 486 753 226
Consumer Installment 979 1,557 1,302 869 611
- - ----------------------------------------------------------------------------------------------------------------
Total loans charged off 2,654 3,744 2,090 2,110 1,525
- - ----------------------------------------------------------------------------------------------------------------
Recoveries on loans previously charged off:
Commercial, Financial & Agricultural 80 110 54 106 87
Real Estate 290 89 289 136 182
Consumer Installment 362 269 295 247 277
- - ----------------------------------------------------------------------------------------------------------------
Total loans recovered 732 468 638 489 546
- - ----------------------------------------------------------------------------------------------------------------
Net loans charged off 1,922 3,276 1,452 1,621 979
Allowances for loan losses of loans of bank subsidiary sold (558) 0 0 0 (166)
Provision for loan losses charged to income 1,772 5,201 2,166 2,159 1,390
Allowance for loan losses of
acquired subsidiary 0 0 0 0 470
- - ----------------------------------------------------------------------------------------------------------------
Allowance for loan losses at
year end $11,631 $12,339 $10,414 $9,700 $9,162
- - ----------------------------------------------------------------------------------------------------------------
Ratio of net loans charged off to
average loans outstanding, net of
unearned income 0.25% 0.45% 0.21% 0.26% 0.17%
- - ----------------------------------------------------------------------------------------------------------------
Allowance for loan losses to loans, net
of unearned income 1.48% 1.63% 1.49% 1.48% 1.52%
- - ----------------------------------------------------------------------------------------------------------------
</TABLE>
Total loan charge offs decreased by $1,090,000 in 1998 from 1997. This was
primarily due to an increase in 1997 resulting from management's identification
in that year of certain loans primarily at two of the Banks for which the credit
quality had deteriorated and the adoption by the Company of the loan charge off
policy followed by the BCG banks.
Nonperforming Loans, Nonperforming Assets, and Underperforming Loans
Nonperforming loans include nonaccrual loans. The Company has not restructured
any loans of significance through December 31, 1998. Nonperforming assets
include nonperforming loans, real estate acquired through foreclosure, and other
repossessed assets. Underperforming loans consist of loans that are past due
with respect to principal or interest more than 90 days and still accruing
interest.
16
<PAGE>
Accrual of interest on a loan is discontinued when reasonable doubt exists as
to the full, timely collection of interest or principal or it becomes
contractually in default for 90 days or more as to either interest or principal
unless it is both well secured and in the process of collection. When a loan is
placed on nonaccrual status, previously accrued and uncollected interest for the
year in which the loan is placed on nonaccrual status is charged to interest
income on loans unless management believes the accrued interest is recoverable
through the liquidation of collateral.
Management is not aware of any loans classified for regulatory purposes as
loss, doubtful, substandard, or special mention that have not been disclosed
below 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.
Nonperforming loans were $3,997,000 at December 31, 1998 compared to
$4,595,000 at December 31, 1997. Nonperforming loans represented 0.51% of total
loans at December 31, 1998 as compared to 0.61% of total loans at December 31,
1997. Nonperforming assets increased to $8,682,000 at December 31, 1998 as
compared to $7,436,000 at December 31, 1997, primarily due to increases in other
real estate at several of the Banks and at the Parent Company level as a result
of the parent company acquiring other real estate from FNBUC prior to its sale.
Nonperforming assets represented 1.10% of total loans, real estate acquired
through foreclosure, and other nonperforming assets at December 31, 1998 as
compared to 0.98% at December 31, 1997.
Underperforming loans, consisting of loans past due 90 days or more which are
still accruing interest, are much more volatile and tend to fluctuate more
frequently based upon the timing of payment collection, transfer to
nonperforming status, or transfer to current status. Underperforming loans
decreased to $734,000 at December 31, 1998 from $2,535,000 at December 31, 1997.
Such loans represented 0.09% and 0.33% of total loans at December 31, 1998 and
1997, respectively.
The table below provides information concerning nonperforming loans,
nonperforming assets, and underperforming loans and certain asset quality ratios
at December 31 for each of the last five years.
<TABLE>
<CAPTION>
(Amounts in thousands, except ratios and percentages) 1998 1997 1996 1995 1994
- - ----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Loans, net of unearned income $788,020 $758,731 $698,845 $657,052 $602,022
- - ----------------------------------------------------------------------------------------------------------------------------
Allowance for loan losses $ 11,631 $ 12,339 $ 10,414 $ 9,700 $ 9,162
- - ----------------------------------------------------------------------------------------------------------------------------
Nonperforming loans $ 3,997 $ 4,595 $ 3,387 $ 2,793 $ 3,490
Real estate acquired through foreclosure
and other nonperforming assets 4,685 2,841 3,188 2,701 2,781
Nonperforming assets $ 8,682 $ 7,436 $ 6,575 $ 5,494 $ 6,271
- - ----------------------------------------------------------------------------------------------------------------------------
Underperforming loans - still accruing $ 734 $ 2,535 $ 1,797 $ 1,746 $ 1,088
- - ----------------------------------------------------------------------------------------------------------------------------
Asset quality ratios:
Nonperforming loans to total loans,
net of unearned income 0.51% 0.61% 0.48% 0.43% 0.58%
- - ----------------------------------------------------------------------------------------------------------------------------
Nonperforming assets to total loans, net of unearned
Income, real estate acquired through foreclosure,
and other nonperforming assets 1.10% 0.98% 0.94% 0.84% 1.04%
- - ----------------------------------------------------------------------------------------------------------------------------
Allowance for loan losses,
to nonperforming loans 2.91x 2.69x 3.07x 3.47x 2.63x
- - ----------------------------------------------------------------------------------------------------------------------------
Underperforming loans to total loans,
net of unearned income 0.09% 0.33% 0.26% 0.27% 0.18%
- - ----------------------------------------------------------------------------------------------------------------------------
</TABLE>
17
<PAGE>
Interest income on nonaccrual loans that would have been reported for the
years ended December 31, 1998, 1997, and 1996 is summarized as follows:
(Amounts in thousands) 1998 1997 1996
--------------------------------------------------------
Interest at contractual rate $1,294 $1,615 $585
Less interest recorded as income 1,053 1,406 334
--------------------------------------------------------
Reduction of interest income $ 241 $ 209 $251
========================================================
The Company has allocated the allowance for loan losses according to the
amount deemed to be reasonably necessary to provide for the possibility of
losses being incurred within the categories of loans set forth in the table
below. This allocation is based on management's evaluation of the loan portfolio
under current economic conditions, past loan loss experience, the adequacy and
nature of the collateral, and such factors, which, in the judgment of
management, deserve recognition in estimating loan losses. Regulatory agencies,
as an integral part of their examination process, periodically review the
Company's allowances for losses on loans and real estate acquired through
foreclosure and other nonperforming assets. Such agencies may require the
Company to recognize additions to the allowances based on their judgments about
information available to them at the time of their examination. Because the
allocation is based on estimates and subjective judgment, it is not necessarily
indicative of the specific amounts or loan categories in which loan charge offs
may occur. In 1998, the level of real estate allowance increased while the
consumer installment level decreased due to fluctuations in the allocation and
the sale of the credit card portfolio.
The amounts of such components of the allowance for loan losses and the
percentages of each loan category to total loans outstanding at December 31 are
presented below:
<TABLE>
<CAPTION>
(Amounts in thousands, except percentages) 1998 1997 1996 1995 1994
- - ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Allocation of allowance for
loan losses by loan type:
Commercial, financial and agricultural $ 1,082 $ 1,353 $ 4,063 $3,769 $3,704
Real estate 9,729 8,987 4,638 4,020 3,645
Consumer installment 820 1,999 1,713 1,911 1,813
- - ------------------------------------------------------------------------------------------------------------------------------------
Total $11,631 $12,339 $10,414 $9,700 $9,162
- - ------------------------------------------------------------------------------------------------------------------------------------
Loan balances by type as a percentage
of total loans outstanding:
Commercial, financial and agricultural 15.2% 18.2% 18.1% 18.8% 20.7%
Real estate 74.0 70.1 69.1 67.4 65.8
Consumer installment 10.8 11.7 12.8 13.8 13.5
- - ------------------------------------------------------------------------------------------------------------------------------------
Total 100.0% 100.0% 100.0% 100.0% 100.0%
- - ------------------------------------------------------------------------------------------------------------------------------------
</TABLE>
Noninterest Income
Noninterest income increased $4,800,000 or 46.11% in 1998 from 1997. A primary
factor in the increase of noninterest income was a gross gain, exclusive of
related amortization expense included in noninterest expense, of $2,356,000
associated with the sale of FNBUC on November 30, 1998. Other factors included
increases in mortgage loan origination fees of $1,239,000, service charges on
deposit accounts of $210,000, and a net gain on the sale of a branch of
$800,000.
Noninterest income increased $716,000 or 7.4% in 1997 from 1996. Increases
were primarily in service charges on deposit accounts and mortgage loan
origination fees.
18
<PAGE>
Noninterest Expense
Noninterest expense increased $2,461,000 or 5.82% in 1998. Salaries and
benefits expenses increased $2,170,000 or 9.83% in 1998. Occupancy related
expenses decreased by $379,000. Amortization expense associated with the sale
of FNBUC was $1,686,000.
Noninterest expense increased $4,460,000 or 11.8% in 1997. Salaries and
benefits expenses increased $2,698,000 or 13.9% in 1997, representing growth in
the number of employees. Occupancy related expenses increased by $1,115,000.
Income Taxes
The Company provided income tax expense of $7,433,000, $3,778,000 and $5,266,000
or approximately 33.6%, 28.2%, and 29.3%, of its income before income taxes in
1998, 1997, and 1996, respectively. The Company expects its effective income tax
rate to slightly increase in 1999 as a result of expected decreased tax free
income as a percentage of total income due to the unavailability of high
yielding bank qualified tax free investments.
Loan Portfolio
During 1998, average loans outstanding net of unearned income, increased from
$723 million to $780 million and comprised 79.6% of average interest earning
assets and 73.5% of average total assets. During 1997, average loans outstanding
net of unearned income, increased from $677 million to $723 million and
comprised 74.3% of average interest earning assets and 68.7% of average total
assets. The relative level of average loans, when compared to the level of
average deposits, increased in 1998 as a result of management's emphasis on
maximizing the Company's level of investments in loans to interest earning
assets to improve the overall yield on interest earning assets. This is evident
in the ratio of average loans to average deposits which was 83.9%, 77.9% and
76.7% in 1998, 1997, and 1996, respectively.
The following table presents the composition of the Company's loan portfolio
by type at December 31 for each of the last five years.
<TABLE>
<CAPTION>
(Amounts in thousands) 1998 1997 1996 1995 1994
- - ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Commercial, financial, and agricultural $120,138 $138,324 $126,891 $123,584 $124,743
Real estate - construction 95,035 86,086 81,811 66,472 57,744
Real estate mortgage 488,645 446,333 402,038 377,699 337,809
Consumer installment 84,823 89,072 89,512 90,880 81,654
Mortgage loans held for sale -- -- -- -- 1,164
- - ------------------------------------------------------------------------------------------------------------------------------------
Total loans 788,641 759,815 700,252 658,635 603,114
Unearned income 621 1,084 1,407 1,583 1,092
Allowance for loan losses 11,631 12,339 10,414 9,700 9,162
- - ------------------------------------------------------------------------------------------------------------------------------------
Loans, net $776,389 $746,392 $688,431 $647,352 $592,860
- - ------------------------------------------------------------------------------------------------------------------------------------
</TABLE>
The following table shows the maturity of selected loan categories as of
December 31, 1998. Also provided are the amounts due after one year classified
according to the sensitivity in interest rates.
<TABLE>
<CAPTION>
Maturing
after one but within
(Amounts in thousands) Within one year five years After five years
- - ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Commercial, financial and agricultural $ 47,561 $ 53,484 $ 19,093
Real estate - construction 75,122 11,841 8,072
Real estate - mortgage 137,005 209,129 142,511
- - ------------------------------------------------------------------------------------------------------------------------------------
Summary of above loans due after one year:
Total fixed rate due after one year $267,333
Total adjustable rate due after one year 176,797
- - -----------------------------------------------------------------------------
Total loans due after one year $444,130
- - -----------------------------------------------------------------------------
</TABLE>
19
<PAGE>
Actual repayments of loans may differ from the contractual maturities
reflected above because borrowers have the right to prepay obligations with and
without prepayment penalties. Additionally, the refinancing of such loans or the
potential delinquency of such loans could also cause differences between the
contractual maturities reflected above and the actual repayment of such loans.
Investment Securities
The Company's investment securities portfolio serves several essential
functions, such as providing a vehicle for the investment of available funds,
furnishing liquidity, and supplying securities to pledge as required for certain
deposits. As a result, the Company has segmented its investment securities
portfolio to identify those securities that could possibly be used in future
asset/liability restructuring (securities available for sale). Average
investment securities, which includes securities held to maturity and securities
available for sale, decreased $43,628,000 or 22.5% in 1998 compared to a
decrease of $7,552,000 or 3.7% in 1997. During 1998 and 1997, average investment
securities comprised 15.3% and 19.9%, respectively, of average interest earning
assets and 14.2% and 18.4%, respectively, of average total assets.
At December 31, 1998, investment securities with fair value of approximately
$117 million were identified as securities available for sale. These securities
are carried at fair value with net unrealized gains reflected as a component of
shareholders' equity.
The tables below present the carrying values and the relative composition of
investment securities, included in the available for sale and held to maturity
portfolios, at December 31, 1998, 1997, and 1996.
<TABLE>
<CAPTION>
1998
----------------------------------------------------------
Available for Sale Held to Maturity
(Amounts in thousands, Carrying % of total Carrying % of total
except percentages) value securities value securities
- - -----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
U.S. Treasury and
U.S. Government agencies $52,200 36.4% $ 920 0.6%
State, county and municipal securities 8,858 6.1% 22,831 15.9%
Mortgage-backed securities 15,079 10.5% 686 0.5%
Other debt securities 34,143 23.8% 1,947 1.4%
Equity securities 6,897 4.8% - -
----------------------------------------------------------
Total investment securities $117,177 81.6% $26,384 18.4%
----------------------------------------------------------
1997
----------------------------------------------------------
Available for Sale Held to Maturity
(Amounts in thousands, Carrying % of total Carrying % of total
except percentages) value securities value securities
- - ------------------------------------- ----------------------------------------------------------
<S> <C> <C> <C> <C>
U.S. Treasury and
U.S. Government agencies $ 96,407 53.9% $ 8,813 4.9%
State, county and municipal securities 11,492 6.4% 27,630 15.5%
Mortgage-backed securities 17,036 9.5% 1,729 1.0%
Other debt securities 7,887 4.4% 2,040 1.2%
Equity securities 5,770 3.2% - -
----------------------------------------------------------
Total investment securities $138,592 77.4% $40,212 22.6%
----------------------------------------------------------
1996
----------------------------------------------------------
Available for Sale Held to Maturity
(Amounts in thousands, Carrying % of total Carrying % of total
except percentages) value securities value securities
- - ------------------------------------- ----------------------------------------------------------
U.S. Treasury and
U.S. Government agencies $ 92,820 48.1% $11,024 5.7%
State, county and municipal securities 14,724 7.6% 28,211 14.6%
Mortgage-backed securities 31,560 16.4% 2,023 1.1%
Other debt securities 4,859 2.5% 2,305 1.2%
Equity securities 5,411 2.8% - -
----------------------------------------------------------
Total investment securities $149,374 77.4% $43,563 22.6%
----------------------------------------------------------
</TABLE>
20
<PAGE>
The Company and the Banks did not have investments with a single issuer in
the aggregate exceeding 10% of the Company's shareholders' equity at December
31, 1998, 1997 and 1996, except for the U.S. Treasury and U.S. Government
agencies securities as shown in the table above.
The table below presents contractual maturities and yields of the debt
securities included in the Company's investment securities portfolio at December
31, 1998. Expected maturities may differ from contractual maturities because
issuers may have the right to call or prepay obligations with and without call
or prepayment penalties.
<TABLE>
<CAPTION>
Maturing
- - ------------------------------------------------------------------------------------------------------------------------------------
After one but After five but
Within one year Within five year Within ten year After ten years
- - ------------------------------------------------------------------------------------------------------------------------------------
(Amounts in thousands, Carrying Carrying Carrying Carrying
except percentages) value Yield value Yield value Yield value Yield
- - ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Available for sale (AFS):
U.S. Treasury and U.S.
Government agencies $18,391 6.54% $31,364 6.24% $2,445 6.67% $ -- --%
State, county, and
municipal
securities (1) 1,585 11.08 5,280 8.60 515 8.36 1,478 9.58
Mortgage-backed securities 1,854 6.54 11,410 7.24 366 7.36 1,449 8.26
Other debt securities 849 13.04 4,888 4.76 257 4.10 28,149 6.29
- - ------------------------------------------------------------------------------------------------------------------------------------
Total debt
securities-AFS $22,679 8.20% $52,942 6.00% $3,583 5.93% $31,076 6.38%
- - ------------------------------------------------------------------------------------------------------------------------------------
Held to maturity (HTM):
U.S. Treasury and U.S.
Government agencies $ 547 4.62% $ 321 4.80% $ 52 -- $ -- --%
State, county, and
municipal
securities (1) 3,177 8.98 12,167 7.90 6,359 8.20 1,128 9.58
Mortgage-backed securities 225 4.03 411 8.01 50 5.83 --
Other debt securities -- -- -- -- 1,947 6.36 -- --
- - ------------------------------------------------------------------------------------------------------------------------------------
Total debt
securities-HTM $ 3,949 7.63% $12,899 7.82% $8,408 7.75% $ 1,128 9.58%
- - ------------------------------------------------------------------------------------------------------------------------------------
(1) Yields on state, county, and municipal securities have not been computed on a tax equivalent basis.
</TABLE>
Deposits
Average deposits increased $2 million or 0.2% to $930 million during 1998 from
$928 million during 1997.
Average deposits by type, their relationship to total average deposits, and
the average rate paid on deposits by type for the years ended December 31, 1998,
1997, and 1996, respectively, are as follows:
<TABLE>
<CAPTION>
1998 1997 1996
- - ------------------------------------------------------------------------------------------------------------------------------------
% of % of % of
(Amounts in thousands, total total total
except percentages) Amount deposits Rate Amount deposits Rate Amount deposits Rate
- - ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Noninterest bearing
demand deposits $128,917 13.9% N/A $119,675 12.9% N/A $113,050 12.8% N/A
Interest bearing
demand deposits 261,776 28.2 3.19% 225,899 24.3 3.14% 195,725 22.2 3.08%
Savings deposits 55,164 5.9 2.90 72,324 7.8 3.88 72,046 8.2 3.32
Individual retirement
accounts 63,351 6.8 5.98 62,547 6.7 6.01 59,492 6.7 5.99
Certificates of deposit 420,567 45.2 5.80 447,892 48.3 5.83 442,576 50.1 5.91
-------- ----- -------- ----- -------- -----
Total average deposits $929,775 100.0% 4.10% $928,337 100.0% 4.28% $882,889 100.0% 4.32%
-------- ----- -------- ----- -------- -----
</TABLE>
21
<PAGE>
The contractual maturities of certificates of deposit and individual
retirement accounts of $100,000 or more as of December 31, 1998 are presented
below.
<TABLE>
<CAPTION>
(Amounts in thousands)
--------------------------------------------------------------
<S> <C>
Three months or less $ 32,311
Over three months through six months 28,726
Over six months through twelve months 44,930
Over twelve months 21,539
--------
Total $127,506
--------
</TABLE>
The Company has analyzed the composition of its certificates of deposit and
individual retirement accounts of $100,000 or more and believes that less than
50% of such deposits should be deemed "volatile" and thereby affect the
Company's liquidity. The "volatile" deposits are with governmental bodies in the
states or in the local communities in the markets that the Company and the Banks
serve. The remainder of these certificates of deposit and individual retirement
accounts are with individuals who reside in the local areas and with whom the
Banks have had consistent deposit relations for long periods of time.
Liquidity and Interest Rate Sensitivity
Liquidity management involves the matching of the cash flow requirements of
customers, either depositors withdrawing funds or borrowers needing loans, and
the ability of the Company to meet those requirements. Management monitors and
maintains appropriate levels of assets and liabilities so that maturities of
assets are such that adequate funds are provided to meet estimated customer
withdrawals and loan requests.
The Company's liquidity position depends primarily upon the liquidity of its
assets relative to its need to respond to short-term demand for funds caused by
withdrawals from deposit accounts and loan funding commitments. Primary sources
of liquidity are scheduled payments on the Company's loans and interest on and
maturities of its investments. Occasionally, the Company will sell investment
securities available for sale in connection with the management of its income
tax position and its interest sensitivity gap. Proceeds from such sales
amounted to approximately $1,059,000 during 1998 and represent another source of
liquidity to the Company. Principal payments on loans also provide the Company
with another source of liquidity. The Company may also utilize its cash and due
from banks, interest earning deposits in other banks and federal funds sold, to
meet liquidity requirements as needed. At December 31, 1998, the Company's cash
and due from banks were $49,227,000, its interest earning deposits in other
banks were $7,875,000, its federal funds sold were $29,430,000 and its
investment securities designated as available for sale were $117,177,000. All of
the above could be converted to cash on relatively short notice.
The Company also has the ability, on a short-term basis, to purchase federal
funds from other financial institutions. Presently, the Company has made
arrangements with commercial banks for short-term unsecured advances up to
approximately $43,700,000, in addition to $53,600,000 which is available to the
Company, subject to available collateral, in the form of additional Federal Home
Loan Bank advances.
The relative interest rate sensitivity of the Company's assets and
liabilities indicates the extent to which the Company's net interest income may
be affected by interest rate movements. The Company's ability to reprice assets
and liabilities in the same dollar amounts and at the same time minimizes
interest rate risks. One method of measuring the impact of interest rate changes
on net interest income is to measure, in a number of time frames, the interest
sensitivity gap, by subtracting interest sensitive liabilities from interest
sensitive assets, as reflected in the following table. Such interest sensitivity
gap represents the risk, or opportunity, in repricing. If more assets than
liabilities are repriced at a given time in a rising rate environment, net
interest income improves; in a declining rate environment, net interest income
deteriorates. Conversely, if more liabilities than assets are repriced while
interest rates are rising, net interest income deteriorates; if interest rates
are falling, net interest income improves.
22
<PAGE>
The Company's strategy in minimizing interest rate risk is to minimize the
impact of short-term interest rate movements on its net interest income while
managing its middle and long-term interest sensitivity gap in light of overall
economic trends in interest rates. The following table illustrates the relative
sensitivity of the Company to changing interest rates as of December 31, 1998.
<TABLE>
<CAPTION>
Repricing
- - ------------------------------------------------------------------------------------------------------------------------------------
(Amounts in thousands, 0-90 days 91-365 days One to five years Over five years
except ratios) Current Current Cumulative Current Cumulative Current Cumulative
- - ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
Interest sensitive assets:
Loans $ 278,945 $169,844 $ 448,789 $284,353 $733,142 $54,878 $788,020
Investment securities (1) 17,891 15,861 33,752 86,933 120,685 14,965 135,650
Interest earning deposits in
other banks and federal
funds sold 34,731 2,376 37,107 198 37,305 - 37,305
- - ------------------------------------------------------------------------------------------------------------------------------------
Total interest sensitive
assets 331,567 188,081 519,648 371,484 891,132 69,843 960,975
- - ------------------------------------------------------------------------------------------------------------------------------------
Interest sensitive liabilities:
Interest bearing demand and
savings deposits 319,688 - 319,688 - 319,688 - 319,688
Certificates of deposit and
individual retirement accounts
of $100 or more 32,410 73,557 105,967 21,539 127,506 - 127,506
Other certificates of deposit and
individual retirement accounts 80,215 178,037 258,252 71,719 329,971 - 329,971
Federal funds purchased,
short-term borrowings and
long-term debt 2,000 - 2,000 10,035 12,035 780 12,815
- - ------------------------------------------------------------------------------------------------------------------------------------
Total interest sensitive
liabilities 434,313 251,594 685,907 103,293 789,200 780 789,980
- - ------------------------------------------------------------------------------------------------------------------------------------
Interest sensitivity gap $(102,746) $(63,513) $(166,259) $268,191 $101,932 $69,063 $170,995
- - ------------------------------------------------------------------------------------------------------------------------------------
Ratio of interest sensitive assets
to interest sensitive liabilities 0.76 0.75 0.76 3.60 1.13 1.01 1.22
</TABLE>
(1) Amounts exclude unrealized gains (losses) on investment securities.
The Company's strategy is to maintain a ratio of interest sensitive assets to
interest sensitive liabilities in the range of .80 to 1.20 at the less than one
year time frame. At December 31, 1998, the Company was slightly below this
range. However, this slight deviation is not considered significant due to the
nature of sensitivity. For example, the ratio in the one-year time frame is
significantly impacted by the classification of all interest bearing demand and
savings deposits as immediately rate sensitive for purposes of this analysis.
These accounts are generally less sensitive to short-term interest rate
movements. Derivative financial instruments, consisting primarily of interest
rate swaps and purchased floors, are components of the Company's interest risk
management profile. The Company uses these instruments to limit its sensitivity
to changes in interest rates and thus limit the volatility of net interest
income. (See Item 7A - "Quantitative and Qualitative Disclosures About Market
Risk.") Management currently believes its interest sensitivity position is such
that short-term interest rate movements would not materially impact its net
interest income.
Inflation
Inflation impacts the growth in total assets in the banking industry and causes
a need to increase equity capital at higher than normal rates to meet capital
adequacy requirements. The Company copes with the effects of inflation through
effectively managing its interest rate sensitivity gap position, by periodically
reviewing and adjusting its pricing of services to consider current costs, and
through managing its dividend payout policy relative to its level of net income.
The impact of inflation has been minimal to the Company in recent years.
23
<PAGE>
Year 2000
The Year 2000 issue refers generally to the data structure problem that will
prevent systems from properly recognizing dates after the year 1999. For
example, computer programs and various types of electronic equipment that
process date information by reference to two digits rather than four to define
the applicable year may recognize a date using "00" as the year 1900 rather than
the Year 2000. The Year 2000 problem may occur in computer software programs,
computer hardware systems and any device that relies on a computer chip if that
chip relies on date information. Even if the systems that process date-
sensitive data are Year 2000 compliant, a Year 2000 problem may exist to the
extent that the data that such systems process is not. In addition to
evaluating the Year 2000 issues relative to its own systems, companies must also
assess the ability of the third parties upon which they rely to function on
January 1, 2000 and thereafter.
The Company has appointed a Year 2000 committee with a full time Year 2000
coordinator to conduct a comprehensive review of its operational and financial
systems to determine how the Year 2000 will impact operation of these systems.
The committee has developed a plan which identified all critical systems and has
assessed solutions for all systems that were found to not be Year 2000
compliant. Each Board of Directors of the affiliate banks as well as the Board
of Directors of the Company has reviewed the overall project plans for the banks
with progress toward completion monitored regularly. To date, confirmations have
been received from the Company's primary processing vendors and counterparties
that plans have been developed to address processing transactions in the Year
2000. Comprehensive testing plans, which were developed to ensure all critical
applications will process normally in the Year 2000, have been successfully
completed. The Company has reviewed all testing results to ensure accuracy and
complete preparedness. Project plans call for an ongoing monitoring of systems
to ensure full Year 2000 compliance. Contingency plans will be monitored and
updated as circumstances warrant. Regular communications procedures have been
established between the core-processing vendor and the Company to ensure any
future testing of all applications are completed and thoroughly reviewed.
Customer awareness and preparedness is also a priority. Loan relationships
which could be materially affected by the Year 2000 issue are being identified
and monitored. An employee and customer awareness campaign began on
September 1, 1998 and will be ongoing through 1999. Disaster recovery and
business resumption plans are also being developed based upon each Bank's unique
structure. These plans will provide the Company direction in the event an
unforeseen circumstance arises due to the Year 2000. An unforeseen circumstance
can be anything from a vault not opening to a power failure to a natural
disaster. Century South's liquidity policy is also being evaluated and updated
to ensure an adequate supply of cash is on hand in the event of increased
demand. All plans will be finalized, tested and implemented before third quarter
1999.
The Company spent approximately $1,126,000 in 1998 to modify its computer
information systems. The Company expects to spend approximately $75,000 in 1999
to complete this process. The replacement of personal computers and software
will be approximately $500,000, which will be recorded as capital expenditures
and amortized. The remainder will be expensed as incurred and are not expected
to have a material effect on the Company's financial condition or results of
operation for 1998 or 1999. The costs of the project have been derived from
actual expenditures plus estimated additional expenditures related to Year 2000
that have not yet been incurred. The dates on which the Company anticipates
completion of the project along with the costs of the Year 2000 project are
based upon management's estimates, which were formulated utilizing assumptions
centered on the Year 2000 impact. There are no guarantees that these estimates
will be attained, and actual results could differ in reality from those
anticipated.
24
<PAGE>
Market and Dividend Information
The Company's common stock trades on the Nasdaq National Market tier of The
Nasdaq Stock Market under the symbol "CSBI". There were approximately 2,750
shareholders of record of the Company's common stock at December 31, 1998.
The following table sets forth the high and low bid prices and the cash
dividends declared on the Company's common stock by quarter for 1998 and 1997.
<TABLE>
<CAPTION>
1998 1997
- - ------------------------------------------------------------------------------------------------------------------------------------
Price Cash dividends Price Cash dividends
Quarter Ended High Low declared High Low declared
- - ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
March 31 $25.75 $23.50 $.10750 $20.50 $17.75 $.10250
June 30 38.25 24.50 .10875 20.00 18.00 .10375
September 30 38.00 25.00 .11000 20.38 18.00 .10500
December 31 30.50 25.75 .11125 25.00 19.75 .10625
</TABLE>
The Company expects to continue its policy of paying quarterly cash dividends
although there is no assurance that such dividends will continue to be paid in
the future. The payment of dividends in the future is dependent on the Banks'
future income, financial position, capital requirements and other
considerations. In addition, the payment of dividends is subject to the
restrictions described in note 15 to the Company's consolidated financial
statements.
Summary of Quarterly Financial Data
Presented below is a summary of the unaudited consolidated quarterly financial
data for the years ended December 31, 1998 and 1997.
<TABLE>
<CAPTION>
Fourth Third Second First
(Amounts in thousands, except per share data) Quarter Quarter Quarter Quarter
- - ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
1998:
Interest income $22,579 $23,219 $23,206 $22,931
Net interest income 13,314 13,506 13,482 13,092
Provision for loan losses 300 463 502 507
Income before income taxes 5,680 5,535 5,496 5,403
Net income 3,899 3,622 3,630 3,530
Net income per share:
Basic 0.35 0.33 0.33 0.32
Diluted 0.35 0.32 0.33 0.32
Weighted average common shares
outstanding:
Basic 11,020 11,015 10,941 10,880
Diluted 11,162 11,188 11,164 11,137
1997:
Interest income 23,293 22,873 22,573 22,067
Net interest income 12,877 12,834 12,393 12,354
Provision for loan losses 209 115 4,216 661
Income (loss) before income taxes 4,836 5,497 (1,052) 4,129
Net income (loss) 3,328 3,506 (68) 2,866
Net income (loss) per share:
Basic 0.31 0.32 (0.01) 0.27
Diluted 0.30 0.32 (0.01) 0.26
Weighted average common shares
outstanding:
Basic 10,838 10,838 10,833 10,829
Diluted 11,116 11,093 11,058 11,093
</TABLE>
25
<PAGE>
Item 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
With respect to banks and their holding companies, market risk is defined
as the risk of loss arising from adverse changes in market interest rates and
prices. This risk of loss can result in either lower fair values or reduced net
interest income.
The Company's primary market risk exposure is currently in the interest
rate risk inherent in its lending and deposit taking activities. Within interest
rate risk, the Company is most vulnerable to changes in the short-term U.S.
prime interest rate because of the nature of its loan portfolio yields. The
Company manages its interest rate risk through various tools, including
monitoring of its interest sensitivity gap and use of purchased interest rate
swaps and floors.
The following table provides information about the Company's on-balance
sheet financial instruments and derivative financial instruments used for
purposes other than trading that are sensitive to changes in interest rates. For
loans, investment securities, and liabilities with contractual maturities, the
table presents principal cash flows and related weighted-average interest rates
by contractual maturities adjusted for prepayment assumptions based on the
Company's historical experience and anticipated results of the impact of
interest-rate fluctuations on the prepayment of mortgage-backed securities.
Equity securities, with a fair value of $6,897,000 at December 31, 1998, are not
included as they are not sensitive to changes in interest rates. For interest
bearing deposits that have no contractual maturity, the table presents principal
cash flows based on the Company's historical experience and management's
judgment, as applicable, concerning their most likely withdrawal behaviors. For
interest rate swaps and interest rate floors, the table presents notional
amounts and, as applicable, weighted-average interest rates by contractual
maturity date. Notional amounts are used to calculate the contractual payments
to be exchanged under the contracts.
Weighted-average variable rates represent the variable rates in effect at
December 31, 1998.
<TABLE>
<CAPTION>
Expected Maturity Date
- - -----------------------------------------------------------------------------------------------------------------------------------
Estimated
(Amounts in thousands, except percentages) 1999 2000 2001 2002 2003 There-after Total Fair Value
- - -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Assets
Investment securities:
Fixed rate $ 27,287 $13,820 $12,310 $ 8,804 $14,668 $ 49,652 $126,542 $127,840
Average interest rate 5.99% 5.77% 6.15% 5.83% 6.46% 6.38% 6.18% -
Variable rate $ 361 $ 350 - - - $ 8,397 $ 9,108 $ 8,625
Average interest rate 3.59% 4.80% - - - 6.22% 6.06% -
Loans:
Fixed rate $164,875 $81,907 $88,301 $34,506 $60,477 $ 58,411 $488,477 $488,885
Average interest rate 8.45% 9.21% 9.20% 9.57% 9.10% 9.11% 8.95% -
Variable rate $ 88,418 $23,551 $23,431 $10,288 $ 8,995 $144,860 $299,543 $299,543
Average interest rate 8.14% 8.55% 9.03% 9.25% 9.12% 9.04% 8.74% -
Other interest bearing assets:
Fixed rate $ 2,376 $ 1,980 - - - - $ 4,356 $ 4,356
Average interest rate 5.86% 6.09% - - - - 5.96% -
Variable rate $ 32,949 - - - - - $ 32,949 $ 32,949
Average interest rate 5.29% - - - - - 5.29% -
Liabilities
Interest bearing deposits and savings $ 2,455 $ 2,744 $ 4,899 $ 4,899 $ 4,899 $299,792 $319,688 $319,688
Average interest rate 3.14% 3.14% 3.14% 3.14% 3.14% 3.14% 3.14% -
Time deposits:
Fixed rate $311,207 $85,444 $27,764 $13,429 $13,134 $ 5,628 $456,606 $461,092
Average interest rate 5.29% 5.71% 5.75% 5.83% 5.09% 5.09% 5.40% -
Variable rate $ 371 $ 500 - - - - $ 871 $ 871
Average interest rate 4.40% 4.54% - - - - 4.48% -
Long-term debt:
Fixed rate - $10,000 - - - $ 815 $ 10,815 $ 11,292
Average interest rate - 5.13% - - - 7.74% 5.32% -
Variable rate $ 2,000 - - - - - $ 2,000 $ 2,000
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Average interest rate 5.26% - - - - - 5.26% -
Interest Rate Derivatives
Interest rate swaps:
Pay variable federal funds $ 5,000 $10,000 - - - - $ 15,000 $211
Rate
Average pay rate 5.02% 5.02% - - - - 5.02% -
Average receive rate 5.74% 5.74% - - - - 5.74% -
Pay variable LIBOR $ 5,000 - - - - - $ 5,000 $ 40
Average pay rate 5.91% - - - - - 5.91% -
Average receive rate 5.88% - - - - - 5.88% -
Purchased interest rate floors $30,000 $80,000 $75,000 - - - $185,000 $799
Federal funds rate
Average strike rate 5.00% 4.75% 4.50% - - - 4.69% -
</TABLE>
26
<PAGE>
Independent Auditor's Report
The Board of Directors and Shareholders
Century South Banks, Inc.:
We have audited the accompanying consolidated balance sheets of Century
South Banks, Inc. and subsidiaries ("the Company") as of December 31, 1998 and
1997, and the related consolidated statements of income, shareholders' equity
and comprehensive income, and cash flows for each of the years in the three-year
period ended December 31, 1998. These consolidated financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these consolidated financial statements based on our audits. We did
not audit the consolidated financial statements of Bank Corporation of Georgia
and subsidiaries for the year ended December 31, 1996, which statements are
combined with the consolidated financial statements of the Company as a result
of the 1997 pooling-of-interests described in Note 2 to the consolidated
financial statements, and which statements reflect total net interest income
constituting 30 percent of the 1996 related consolidated amounts. Those
statements were audited by other auditors whose report has been furnished to us,
and our opinion, insofar as it relates to the amounts included for Bank
Corporation of Georgia and subsidiaries, is based solely on the report of the
other auditors.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, based on our audits and the report of other auditors,
the consolidated financial statements referred to above present fairly, in all
material respects, the financial position of Century South Banks, Inc. and
subsidiaries as of December 31, 1998 and 1997, and the results of their
operations and their cash flows for each of the years in the three-year period
ended December 31, 1998, in conformity with generally accepted accounting
principles.
KPMG LLP
Atlanta, Georgia
January 22, 1999
27
<PAGE>
Item 8. CONSOLIDATED FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
<TABLE>
<CAPTION>
Consolidated Balance Sheets
December 31,
(Amounts in thousands, except share and per share data) 1998 1997
- - ------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Assets
Cash and due from banks (note 3) $ 49,227 $ 43,146
Federal funds sold 29,430 33,870
Interest earning deposits in other banks 7,875 32,465
Investment securities (note 4):
Available for sale 117,177 138,592
Held to maturity (fair value: 1998 - $27,521
and 1997 - $41,153) 26,384 40,212
Loans, net of unearned income (note 5) 788,020 758,731
Less allowance for loan losses 11,631 12,339
- - ------------------------------------------------------------------------------------------------------------------------------
Loans, net 776,389 746,392
- - ------------------------------------------------------------------------------------------------------------------------------
Premises and equipment, net (note 6) 23,686 26,849
Goodwill and other intangibles, net 4,637 7,284
Other assets (notes 7 and 10) 20,147 19,558
- - ------------------------------------------------------------------------------------------------------------------------------
Total assets $1,054,952 $1,088,368
- - ------------------------------------------------------------------------------------------------------------------------------
Liabilities
Deposits:
Noninterest bearing demand deposits $ 135,788 $ 129,418
Interest bearing deposits (note 8) 777,165 830,918
- - ------------------------------------------------------------------------------------------------------------------------------
Total deposits 912,953 960,336
Federal funds purchased -- 160
Other short-term borrowings (note 9) -- 1,500
Long-term debt (note 9) 12,815 6,920
Accrued expenses and other liabilities 9,853 10,314
- - ------------------------------------------------------------------------------------------------------------------------------
Total liabilities 935,621 979,230
- - ------------------------------------------------------------------------------------------------------------------------------
Shareholders' equity (notes 2, 9, 11, 15, and 16):
Common stock-$1 par value. Authorized 15,000,000 shares;
issued 11,088,226 shares in 1998, 10,924,699 in 1997, and
outstanding 11,002,327 shares in 1998 and 10,865,800
shares in 1997 11,088 10,925
Additional paid-in capital 34,955 34,282
Retained earnings 73,442 63,566
Common stock in treasury (85,899 and 58,899 shares in 1998
and 1997, respectively), at cost (1,051) (306)
Accumulated other comprehensive income (note 18) 897 671
- - ------------------------------------------------------------------------------------------------------------------------------
Total shareholders' equity 119,331 109,138
- - ------------------------------------------------------------------------------------------------------------------------------
Commitments and contingencies (notes 2, 5, 11, 12 and 17)
Total liabilities and shareholders' equity $1,054,952 $1,088,368
- - ------------------------------------------------------------------------------------------------------------------------------
</TABLE>
See accompanying notes to consolidated financial statements.
28
<PAGE>
Consolidated Statements of Income
<TABLE>
<CAPTION>
Years ended December 31,
(Amounts in thousands, except per share data) 1998 1997 1996
- - ------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Interest income:
Loans, including fees $79,988 $75,771 $72,540
Federal funds sold 2,061 2,060 2,145
Interest on deposits in other banks 732 818 61
Investment securities:
Taxable 7,260 9,812 9,893
Nontaxable 1,894 2,345 2,622
- - ------------------------------------------------------------------------------------------------------------------------------
Total interest income 91,935 90,806 87,261
- - ------------------------------------------------------------------------------------------------------------------------------
Interest expense:
Deposits (note 8) 38,117 39,742 38,157
Federal funds purchased 30 30 63
Long-term debt and other borrowings 394 576 823
- - ------------------------------------------------------------------------------------------------------------------------------
Total interest expense 38,541 40,348 39,043
- - ------------------------------------------------------------------------------------------------------------------------------
Net interest income 53,394 50,458 48,218
Provision for loan losses (note 5) 1,772 5,201 2,166
- - ------------------------------------------------------------------------------------------------------------------------------
Net interest income after provision for
loan losses 51,622 45,257 46,052
- - ------------------------------------------------------------------------------------------------------------------------------
Noninterest income:
Service charges on deposit accounts 6,044 5,834 5,451
Securities gains, net (note 4) 393 23 215
Other operating income (note 14) 8,772 4,552 4,027
- - ------------------------------------------------------------------------------------------------------------------------------
Total noninterest income 15,209 10,409 9,693
- - ------------------------------------------------------------------------------------------------------------------------------
Noninterest expense:
Salaries and employee benefits (note 11) 24,250 22,080 19,382
Occupancy and equipment expense, net 5,902 6,281 5,166
Other operating expenses (note 14) 14,565 13,895 13,248
- - ------------------------------------------------------------------------------------------------------------------------------
Total noninterest expense 44,717 42,256 37,796
- - ------------------------------------------------------------------------------------------------------------------------------
Income before income taxes 22,114 13,410 17,949
Income tax expense (note 10) 7,433 3,778 5,266
- - ------------------------------------------------------------------------------------------------------------------------------
Net income $14,681 $ 9,632 $ 12,683
- - ------------------------------------------------------------------------------------------------------------------------------
Net income per common share:
Basic $1.34 $0.89 $1.18
Diluted $1.32 $0.87 $1.15
- - ------------------------------------------------------------------------------------------------------------------------------
Weighted average common shares outstanding:
Basic 10,965 10,838 10,769
Diluted 11,161 11,101 11,001
- - ------------------------------------------------------------------------------------------------------------------------------
See accompanying notes to consolidated financial statements.
</TABLE>
29
<PAGE>
Consolidated Statements of Shareholders' Equity and Comprehensive Income
Years ended December 31, 1998, 1997 and 1996
<TABLE>
<CAPTION>
Accumulated
Additional Unearned other
(Amounts in thousands, Comprehensive Common paid-in Retained ESOP Treasury comprehensive
except per share data) Income stock (1) capital earnings shares stock (2) income Total
- - -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Balance at
December 31, 1995 $10,678 $32,444 $48,360 $(497) $(337) $1,091 $91,739
Comprehensive income:
Net income $12,683 - - 12,683 - - - 12,683
Other comprehensive income (loss) due to
unrealized losses on investment
securities (877) - - - - - (877) (877)
-------
Total comprehensive income $11,806
=======
Cash dividends declared -
$0.3975 per share - - (3,085) - - - (3,085)
Issuance of common stock
of pooled subsidiary
for acquisition 201 1,584 - - - - 1,785
Exercise of stock options 9 23 - - - - 32
Principal payments on
ESOP loan (note 11) - - - 164 - - 164
Cash dividends of
pooled subsidiary
prior to acquisition - - (227) - - - (227)
-----------------------------------------------------------------------------------------
Balance at December 31, 1996 $10,888 $34,051 $57,731 $(333) $ (337) $214 $102,214
Comprehensive income:
Net income $ 9,632 - - 9,632 - - - 9,632
Other comprehensive income due to
unrealized gains on investment
securities 457 - - - - - 457 457
-------
Total comprehensive income $10,089
-------
Cash dividends declared -
$0.4175 per share - - (3,568) - - - (3,568)
Exercise of stock options 37 119 - - - - 156
Stock option tax benefit - 38 - - - - 38
Issuance of stock under
incentive plan - 74 - - 31 - 105
Principal payments on
ESOP loan (note 11) - - - 333 - - 333
Cash dividends of pooled subsidiary
prior to acquisition - - (229) - - - (229)
-----------------------------------------------------------------------------
Balance at December 31, 1997 $10,925 $34,282 $63,566 $ - $(306) $671 $109,138
Comprehensive income:
Net income $14,681 - - 14,681 - - - 14,681
Other comprehensive income due
unrealized gains on investment
securities 226 - - - - - 226 226
-------
Total comprehensive income $14,907
-------
Cash dividends declared -
$0.4375 per share - - (4,805) - - - (4,805)
Exercise of stock options 163 673 - - - - 836
Purchase of treasury stock - - - - (745) - (745)
Balance at December 31, 1998 $11,088 $34,955 $73,442 $ - $(1,051) $897 $119,331
</TABLE>
(1) Common shares issued: 11,088 shares at December 31, 1998, 10,925 shares at
December 31, 1997, 10,888 shares at December 31, 1996, and 10,678 shares at
December 31, 1995.
(2) Common stock held in treasury: 86 shares at December 31, 1998, 59 shares at
December 31, 1997, 65 shares at December 31, 1996 and 1995.
See accompanying notes to consolidated financial statements.
30
<PAGE>
Consolidated Statements of Cash Flows
<TABLE>
<CAPTION>
Years ended December 31,
(Amounts in thousands) 1998 1997 1996
- - --------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Cash flows from operating activities:
Net income $ 14,681 $ 9,632 $ 12,683
Adjustments to reconcile net income to net cash
provided by operating activities:
Provision for loan losses 1,772 5,201 2,166
Write-downs and other (gains) losses on sale of other
real estate (212) (164) 89
Depreciation 2,717 2,908 2,278
Amortization and accretion, net 874 722 676
Minority interest in earnings of subsidiary -- -- 47
Securities gains, net (393) (23) (215)
Gain on sale of mortgage servicing rights -- -- (224)
Gain on sale of subsidiary bank (670) -- --
Gain on sale of branch (847) -- --
Deferred income tax expense (benefit) 89 (902) (608)
Decrease (increase) in other assets 1,281 (1,789) (2,192)
Increase (decrease) in accrued expenses and other
liabilities 71 (402) (881)
- - --------------------------------------------------------------------------------------------------
Net cash provided by operating activities 19,363 18,761 13,819
- - --------------------------------------------------------------------------------------------------
Cash flows from investing activities:
Proceeds from sales of investment securities available
for sale 1,059 7,351 17,636
Principal collections and maturities of investment
securities available for sale 68,315 39,309 36,118
Principal collections and maturities of investment
securities held to maturity 13,195 5,259 11,568
Proceeds from maturities of interest earning deposits
with banks 192,033 41,305 2,235
Purchases of investment securities held to maturity (200) (1,785) (1,618)
Purchases of investment securities available for sale (50,780) (35,134) (64,041)
Investment in interest earning deposits with banks (167,849) (54,451) (21,101)
Proceeds from sales of other real estate 3,549 2,103 645
Net increase in loans (62,839) (65,340) (41,054)
Purchase of premises and equipment (3,111) (1,869) (6,151)
Proceeds from sales of premises and equipment 1,425 285 105
Proceeds from sale of mortgage servicing rights -- -- 108
Net cash (paid) received from (sale)/acquisition of
branch (15,065) -- 12,688
Net cash disbursed for sale of bank subsidiary (10,984) -- --
Cash paid to dissenting and fractional shareholders
of subsidiaries
in connection with acquisitions of the subsidiaries -- -- (121)
- - --------------------------------------------------------------------------------------------------
Net cash used in investing activities (31,252) (62,967) (52,983)
- - --------------------------------------------------------------------------------------------------
Cash flows from financing activities:
Net increase in deposits 13,934 31,365 61,751
Net (decrease) increase in federal funds purchased (160) (840) 1,000
Proceeds from issuance of long-term debt and other
borrowings 13,125 6,236 5,414
Payments on long-term debt and other borrowings (8,730) (6,206) (17,538)
Dividends paid to shareholders (4,730) (3,431) (3,272)
Proceeds from issuance of common stock 836 156 32
Purchase of treasury stock (745) -- --
- - --------------------------------------------------------------------------------------------------
Net cash provided by financing activities 13,530 27,280 47,387
- - --------------------------------------------------------------------------------------------------
Net increase (decrease) in cash and cash equivalents 1,641 (16,926) 8,223
- - --------------------------------------------------------------------------------------------------
Cash and cash equivalents at beginning of year 77,016 93,942 85,719
- - --------------------------------------------------------------------------------------------------
Cash and cash equivalents at end of year $ 78,657 $ 77,016 $ 93,942
- - --------------------------------------------------------------------------------------------------
</TABLE>
31
<PAGE>
<TABLE>
<CAPTION>
Supplemental disclosures of cash paid during the year for:
<S> <C> <C> <C>
Interest $ 38,837 $ 40,165 $ 39,738
Income taxes $ 6,751 $ 5,201 $ 6,133
- - --------------------------------------------------------------------------------------------------
Supplemental schedule of noncash investing and
financing activities:
Real estate acquired through foreclosure $ 7,039 $ 3,962 $ 2,799
Real estate sold and financed by the Company $ 1,819 $ 1,784 $ 1,712
Net reduction in guaranteed ESOP loan recorded
in shareholders' equity $ -- $ 333 $ 164
- - --------------------------------------------------------------------------------------------------
See accompanying notes to consolidated financial statements.
</TABLE>
Notes to Consolidated Financial Statements
December 31, 1998, 1997 and 1996
Note 1. Summary of Significant Accounting Policies
The accounting and reporting policies of the Company and its subsidiaries
conform to generally accepted accounting principles and to general practices
within the banking industry. The following is a description of the more
significant of those policies.
Business
The Company provides a full range of banking services to individual and
corporate customers through its banking subsidiaries in Georgia and Tennessee.
The Company is subject to competition from other financial institutions, is
subject to the regulations of certain Federal and state agencies, and undergoes
periodic examinations by those regulatory agencies.
Basis of Financial Statement Presentation
The consolidated financial statements include the accounts of the Company and
its wholly-owned bank subsidiaries. The Company has eleven wholly-owned bank
subsidiaries predominantly involved in commercial banking activities. All
significant intercompany accounts and transactions are eliminated in
consolidation.
The consolidated financial statements have been prepared in conformity with
generally accepted accounting principles. In preparing the consolidated
financial statements, management is required to make estimates and assumptions
that affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenues and expenses during the reporting period.
Actual results could differ from those estimates.
Material estimates that are particularly susceptible to significant change in
the near term relate to the determination of the allowance for loan losses and
the valuation of real estate acquired in connection with foreclosures or in
satisfaction of loans. In connection with the determination of the allowances
for losses on loans and real estate acquired through foreclosure, management
obtains independent appraisals and reviews available market data such as
comparable sales and recent market trends through discussions with local real
estate professionals.
Cash and Cash Equivalents
Cash equivalents include due from banks and federal funds sold. Generally,
federal funds are sold for periods of less than 90 days.
Investment Securities
The Company has classified its investment securities in two categories:
available for sale or held to maturity. Held to maturity securities are those
securities for which the Company has the ability and intent to hold the security
until maturity. All other securities are classified as available for sale. The
classification of investment securities is determined at the date of purchase.
Available for sale securities are recorded at fair value. Held to maturity
securities are recorded at cost adjusted for the amortization or accretion of
premiums or discounts. Unrealized holding gains and losses, net of the related
income tax effects, on securities available for sale are excluded from earnings
and are reported as accumulated other comprehensive income within shareholders'
equity until realized.
32
<PAGE>
Available for sale securities transferred into the held to maturity category
are recorded at fair value at date of transfer. The related unrealized holding
gain or loss at date of transfer is reported as a component of shareholders'
equity and is amortized over the remaining life of the security as an adjustment
of yield.
Mortgage-backed securities held to maturity are recorded at their unpaid
principal balances, adjusted for unamortized premiums and unaccreted discounts.
Mortgage-backed securities available for sale are recorded at their estimated
fair value. Principal repayments received on mortgage-backed securities are
included in proceeds from maturities of investment securities in the
consolidated statements of cash flows for the available for sale securities and
held to maturity securities, as applicable.
A decline in the market value of any available for sale or held to maturity
security below cost that is deemed other than temporary results in a charge to
earnings and the establishment of a new cost basis for the security. At December
31, 1998, the Company did not have any securities with other than temporary
impairment for which a new cost basis had not been established.
Premiums and discounts are amortized or accreted over the life of the related
investment security as an adjustment to yield using the effective interest
method and prepayment assumptions. Dividend and interest income are recognized
when earned. Realized gains and losses for investment securities sold are
recognized on the settlement date and are derived using the specific
identification method for determining the cost of securities sold. The financial
statement impact of settlement date accounting versus trade date accounting is
immaterial.
Loans and Interest Income
Loans are recorded at principal amounts outstanding, net of unearned income,
purchase discounts and the allowance for loan losses. Interest income on loans
is recognized on a level yield basis.
Loan fees, net of certain direct origination costs, are deferred and amortized
over the estimated terms of the loans using a method which approximates a level
yield. Discounts on loans purchased are amortized into income over the
estimated terms of the loans using a method which approximates level yield.
Loans on which the accrual of interest has been discontinued are designated as
nonaccrual loans. Accrual of interest on a loan is discontinued when reasonable
doubt exists as to the full collection of interest or principal, or it becomes
contractually in default for 90 days or more as to either interest or principal
unless it is both well secured and in the process of collection. When a loan is
placed on nonaccrual status, previously accrued and uncollected interest for the
year in which the loan is placed on nonaccrual status is charged to interest
income on loans with the balance, if any, charged to the allowance for loan
losses, unless management believes that the accrued interest is recoverable
through the liquidation of collateral. Nonaccrual loans may only be returned to
accruing status when, in management's judgment, they are determined to be fully
collectible.
Impaired loans are measured based on the present value of expected future cash
flows, discounted at the loan's effective interest rate, or at the loan's
observable market price, or the fair value of the collateral if the loan is
collateral dependent.
A loan is considered impaired when it is probable that the Company will be
unable to collect all amounts due according to the contractual terms of the loan
agreement. When the ultimate collectibility of an impaired loan's principal is
in doubt, cash receipts are applied under the contractual terms of the loan
agreement first to principal and then to interest income. Once the recorded
principal balance has been reduced to zero, future cash receipts are applied to
interest income, to the extent that interest has not been previously recognized.
Additional future cash receipts are recorded as recoveries of any amounts
previously charged off.
Allowance for Loan Losses
The allowance for loan losses is based on management's evaluation of the loan
portfolio under current economic conditions, past loan loss experience, adequacy
of collateral, and such other factors which in management's judgment, deserve
recognition in estimating loan losses. Loans are charged to the allowance when,
in the opinion of management, such loans are deemed to be uncollectible.
Subsequent recoveries are added to the allowance.
A substantial portion of the Company's loans is secured by real estate in
markets in northern, middle and coastal Georgia, southeastern Tennessee, and
southwestern North Carolina. In addition, a substantial portion of the Company's
real estate acquired through foreclosure is located in these same markets.
Accordingly, the ultimate collectibility of a substantial portion of the
Company's loan portfolio and the recovery of a substantial portion of the
Company's real estate acquired through foreclosure are susceptible to changes in
market conditions in these markets.
33
<PAGE>
Management believes that the allowance for losses on loans is adequate. While
management uses available information to recognize losses on loans, future
additions to the allowance may be necessary based on changes in economic
conditions, particularly in northern, middle and coastal Georgia, southeastern
Tennessee, and southwestern North Carolina. In addition, various regulatory
agencies, as an integral part of their examination process, periodically review
the Company's allowance for losses on loans. Such agencies may require the
Company to recognize additions to the allowance based on their judgments about
information available to them at the time of their examination.
Premises and Equipment
Premises and equipment, including the cost of purchased computer software, are
stated at cost less accumulated depreciation and amortization which are computed
using straight-line or accelerated methods over the estimated useful lives of
the related assets, which range from three to forty years.
Real Estate Acquired Through Foreclosure
Real estate acquired through foreclosure is reported at the lower of cost or
fair value, adjusted for estimated selling costs. Fair value is determined on
the basis of current appraisals, comparable sales, and other estimates of value
obtained principally from independent sources. Any excess of the loan balance at
the time of foreclosure over the fair value of the real estate held as
collateral, as adjusted, is treated as a loan loss. Further deterioration in the
fair value of real estate acquired through foreclosure during the disposition
period is charged to other operating expenses.
Goodwill and Other Intangibles
Goodwill is being amortized using the straight-line method over periods ranging
from 15 to 20 years.
Other acquired intangible assets, such as core deposit premiums, are
amortized over the periods benefited, ranging from seven to twelve years.
Amortization periods for intangible assets are monitored to determine if
events and circumstances require such periods to be reduced. Goodwill and core
deposit premiums are reviewed for impairment on the basis of whether these
assets are fully recoverable from expected undiscounted cash flows of the
related businesses.
Derivative Financial Instruments
The Company uses derivative financial instruments to swap floating rate assets
or liabilities to fixed rate and to hedge the interest rate spread between
assets and liabilities. These transactions serve to better match the repricing
characteristics of various assets and liabilities, reduce spread risk, adjust
overall rate sensitivity and enhance net interest income.
Interest rate swaps, purchased floors, and purchased caps are accounted for
on an accrual basis, and the net interest differential, including amortization
of premiums paid, if any, is recognized as an adjustment to interest income or
expense of the related designated asset or liability. Changes in fair values of
the swaps, purchased floors, or purchased caps are not recorded in the
consolidated statements of income because these agreements are being treated as
a synthetic alteration of the designated assets or liabilities. The Company
considers its interest rate swaps to be a synthetic alteration of an asset or
liability as long as (i) the swap is designated with a specific asset or
liability or finite pool of assets or liabilities; (ii) there is a high
correlation, at inception and throughout the period of the synthetic alteration,
between changes in the interest income or expense generated by the swap and
changes in the interest income or expense generated by the designated asset or
liability; (iii) the notional amount of the swap is less than or equal to the
principal amount of the designated asset or liability; and (iv) the swap term is
less than or equal to the remaining term of the designated asset or liability.
The criteria for consideration of a floor or cap as a synthetic alteration of an
asset or liability are generally the same as those for a swap arrangement.
If the swap, floor, or cap arrangements are terminated before their
maturity, the net proceeds received or paid are deferred and amortized over the
shorter of the remaining contract life or the maturity of the designated asset
or liability as an adjustment to interest income or expense. If the designated
asset or liability is sold or matures, the swap agreement is marked to market
and the gain or loss is included in the gain or loss on the sale/maturity of the
designated asset or liability. Changes in the fair value of any undesignated
swaps, floors, and caps are included in other income in the consolidated
statements of income.
34
<PAGE>
Income Taxes
The Company accounts for income taxes under the asset and liability method.
Deferred income tax assets and liabilities are recognized for the future tax
consequences attributable to differences between the financial statement
carrying amounts of existing assets and liabilities and their respective tax
bases. Deferred income tax assets and liabilities are measured using enacted tax
rates expected to apply to taxable income in the years in which those temporary
differences are expected to be recovered or settled. The effect on deferred
income tax assets and liabilities of a change in tax rates is recognized in
income in the period that includes the enactment date.
Stock-Based Compensation
The Company accounts for its stock-based compensation plans in accordance with
the provisions of Accounting Principles Board Opinion No. 25, Accounting for
Stock Issued to Employees ("APB Opinion 25"), and related interpretations. In
October 1995, Statement of Financial Accounting Standards No. 123, Accounting
for Stock-Based Compensation ("SFAS 123"), was issued. SFAS 123 allows entities
to continue to apply the provisions of APB Opinion 25 for recognizing stock-
based compensation expense in the basic financial statements. However, companies
are encouraged to adopt a new accounting method based on the estimated fair
value of stock-based compensation. Companies that do not follow the new fair
value based method are required to provide expanded disclosures in the notes to
the financial statements. The Company has elected to continue to apply the
provisions of APB Opinion 25 and follow the disclosure provisions of SFAS 123.
Earnings Per Share
In 1997, the Company adopted the provisions of Statement of Financial Accounting
Standards No. 128, Earnings Per Share ("SFAS 128"). SFAS 128 supersedes APB
Opinion No. 15, Earnings Per Share and specifies the computation, presentation,
and disclosure requirements for earnings per share ("EPS").
Basic EPS excludes dilution and is computed by dividing net income by the
weighted average shares outstanding. Diluted EPS is computed by dividing net
income by the weighted average shares outstanding plus 196,000, 263,000, and
232,000 potential shares in 1998, 1997, and 1996, respectively upon the
potential exercise of dilutive options assuming the exercise proceeds have been
used to repurchase shares pursuant to the treasury stock method.
Recent Accounting Pronouncements
In June 1998, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards ("SFAS") No. 133, Accounting for
Derivative Instruments and Hedging Activities. SFAS No. 133 establishes
accounting and reporting standards for derivative instruments and for hedging
activities. This statement is effective for all fiscal quarters of fiscal years
beginning after June 15, 1999. The Company has not yet determined the impact of
SFAS No. 133 on the Company's financial statements upon adoption.
In October, 1998, the FASB issued SFAS No. 134, Accounting for Mortgage-Backed
Securities Retained After the Securitization of Mortgage Loans Held for Sale by
a Mortgage-Banking Enterprise, an Amendment of FASB Statement No. 65. SFAS No.
134 is effective for the first quarter beginning after December 15, 1998. The
Company does not believe the provisions of SFAS No. 134 will have a significant
impact on the financial statements upon adoption.
35
<PAGE>
Note 2. Business Combinations
On November 30, 1998, the Company sold its subsidiary, First National Bank of
Union County, to Appalachian Bancshares, Inc. in Ellijay, Georgia, for a sales
price of $6,100,000, resulting in a net gain of $670,000.
On July 9, 1998, the Company and Independent Bancorp, Inc., with assets of
approximately $92 million, signed a letter of intent to merge their two
respective bank holding companies. Under the proposed merger, Independent
Bancorp shareholders will receive 3.2411 shares of the Company's stock for each
share of Independent Bancorp stock. The merger should be completed by early in
the second quarter of 1999.
A significant subsequent event will occur with the merging of the charters of
two bank subsidiaries at the close of business on February 12, 1999. The
charters of Georgia First Bank in Gainesville, Georgia and Gwinnett National
Bank in Duluth, Georgia will merge. All financial information will be
consolidated into one charter which will be named Georgia First Bank, N.A.
On December 16, 1997, the Company merged with Bank Corporation of Georgia
("BCGA"), a bank holding company located in Macon, Georgia and its subsidiary
banks, First South Bank, N.A. ("FSB") based in Macon, Georgia and Ameribank,
N.A. ("AMB") based in Savannah, Georgia. The Company issued 3,069,993 shares of
its common stock in exchange for all of the issued and outstanding shares of
BCGA.
This acquisition has been accounted for as a pooling of interests and,
accordingly, financial information preceding the dates of acquisition has been
restated to include the financial position and results of operations of the
acquired entity. The Company's financial statements for the years ended
December 31, 1997 and 1996 have been restated for the merger with BCGA as
follows:
<TABLE>
<CAPTION>
(Amounts in thousands) 1997 1996
- - ------------------------------------------------------------------------------------------------------------------------------
Net interest income:
<S> <C> <C>
Century South Banks, Inc. exclusive of
pre-acquisition amounts $34,817 $33,661
Bank Corporation of Georgia and
Subsidiaries (a) 15,641 14,557
- - ------------------------------------------------------------------------------------------------------------------------------
Total $50,458 $48,218
- - ------------------------------------------------------------------------------------------------------------------------------
Net Income:
Century South Banks, Inc. exclusive of
pre-acquisition amounts $ 4,761 $ 9,370
Bank Corporation of Georgia and
Subsidiaries (a) 4,871 3,313
- - ----------------------------------------------------------------------------------------------------------------------------
Total $ 9,632 $12,683
- - ----------------------------------------------------------------------------------------------------------------------------
</TABLE>
(a) The 1997 balances reflect the results of operations for the year ended
December 31, 1997, as the post-merger 1997 results are immaterial.
In June 1996, BCGA completed the acquisition of Effingham Bank & Trust
("Effingham") located in Rincon, Georgia. BCGA issued 204,928 shares
(equivalent of 276,653 Company shares) of its common stock in exchange for all
of the issued and outstanding shares of Effingham except for dissenting and
fractional shares for which BCGA paid $53,352 in cash. This acquisition was
accounted for as a pooling of interests.
As of March 1996, BCGA owned 67 % of the common stock of AmeriCorp, Inc. the
parent company of AMB. In March 1996, BCGA acquired the minority interest in
AmeriCorp, Inc. and issued 149,215 shares (equivalent of 201,440 Company shares)
for all of the remaining outstanding shares of AmeriCorp, Inc. except for
dissenting and fractional shares, for which BCGA paid $67,432 in cash. This
acquisition was accounted for as a purchase.
In February 1996, AMB acquired certain assets and assumed certain liabilities
of the Bank South, N.A., Victory Drive branch in Savannah, Georgia. Bank South
paid to AMB $12,688,000 as consideration for this transaction. The acquisition
was accounted for as a purchase.
Note 3. Restricted Cash
Aggregate reserves (in the form of deposits with the Federal Reserve Bank and
vault cash) of approximately $5,544,000 and $6,346,000 were maintained to
satisfy regulatory requirements as of December 31, 1998 and 1997, respectively.
36
<PAGE>
Note 4. Investment Securities
The amortized cost, gross unrealized gains and losses, and estimated fair value
of available for sale and held to maturity securities by security type at
December 31, 1998 and 1997 are as follows:
<TABLE>
<CAPTION>
1998
--------------------------------------------------------------
Gross Gross
Amortized unrealized unrealized Estimated
(Amounts in thousands) Cost gains losses fair value
- - -----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Available for sale:
U.S. Treasury and U.S. Government agencies $ 51,179 $1,021 $ -- $ 52,200
State, county and municipal securities 8,751 253 (146) 8,858
Mortgage-backed securities 14,880 204 (5) 15,079
Other debt securities 34,456 52 (365) 34,143
Equity securities 6,374 528 (5) 6,897
--------------------------------------------------------------
$115,640 $2,058 $(521) $117,177
==============================================================
Held to maturity:
U.S. Treasury and U.S. Government agencies $ 920 $ 28 $ (1) $ 947
State, county and municipal securities 22,831 1,035 -- 23,866
Mortgage-backed securities 686 17 (1) 702
Other debt securities 1,947 59 -- 2,006
--------------------------------------------------------------
$ 26,384 $1,139 $ (2) $ 27,521
==============================================================
1997
--------------------------------------------------------------
Gross Gross
Amortized unrealized unrealized Estimated
(Amounts in thousands) Cost gains losses fair value
- - -----------------------------------------------------------------------------------------------------------------------
Available for sale:
U.S. Treasury and U.S. Government agencies $ 95,647 $ 837 $ (77) $ 96,407
State, county and municipal securities 11,240 270 (18) 11,492
Mortgage-backed securities 16,806 247 (17) 17,036
Other debt securities 7,916 43 (72) 7,887
Equity securities 5,673 121 (24) 5,770
--------------------------------------------------------------
$137,282 $1,518 $(208) $138,592
==============================================================
Held to maturity:
U.S. Treasury and U> S> Government agencies $ 8,813 $ 98 $ (18) $ 8,893
State, county and municipal securities 27,630 859 (94) 28,395
Mortgage-backed securities 1,729 27 (3) 1,753
Other debt securities 2,040 72 -- 2,112
--------------------------------------------------------------
$ 40,212 $1,056 $(115) $ 41,153
==============================================================
</TABLE>
37
<PAGE>
Included as a component of amortized cost the unamortized portion of
unrealized gains, which occurred when the Company transferred available for sale
securities to the held to maturity category in previous years. These amounts
approximated $196,000 and $213,000 at December 31, 1998 and 1997, respectively.
The amortized cost and estimated fair values of investment securities at
December 31, 1998, by contractual maturity are shown below. Actual maturities
may differ from contractual maturities because issuers may have the right to
call or prepay obligations with or without call or prepayment penalties.
Mortgage-backed securities and other investment securities which have prepayment
provisions are assigned to maturity categories based on their estimated average
lives.
<TABLE>
<CAPTION>
Amortized Estimated
(Amounts in thousands) cost fair value
------------------------------------------------------------------
<S> <C> <C>
Available for sale:
Due in one year or less $ 22,499 $ 22,679
Due after one year through five years 51,935 52,942
Due after five years through ten years 3,420 3,583
Due after ten years 31,412 31,076
Equity securities 6,374 6,897
------------------------------------------------------------------
$115,640 $117,177
------------------------------------------------------------------
Held to maturity:
Due in one year or less $ 3,949 $ 4,040
Due after one year through five years 12,899 13,435
Due after five years through ten years 8,408 8,804
Due after ten years 1,128 1,242
------------------------------------------------------------------
$ 26,384 $ 27,521
------------------------------------------------------------------
</TABLE>
Proceeds from sales of securities available for sale during 1998, 1997 and
1996 were $1,059,000, $7,351,000 and $17,636,000 respectively. Securities
gains, net for 1998, 1997 and 1996 included gross realized gains of
approximately $396,000, $48,000, and $248,000, and gross realized losses of
approximately $3,000, $25,000, and $33,000, respectively.
Securities with a carrying value of approximately $82,214,000 in 1998 and
$114,411,000 in 1997, respectively, were pledged to secure public funds on
deposit and for other purposes as required by law.
Note 5. Loans
Loans outstanding, by classification, are summarized as follows at December 31:
<TABLE>
<CAPTION>
(Amounts in thousands) 1998 1997
------------------------------------------------------------------
<S> <C> <C>
Commercial, financial, and agricultural $120,138 $138,324
Real estate-construction 95,035 86,086
Real estate-mortgage 488,645 446,333
Consumer installment 84,823 89,072
------------------------------------------------------------------
788,641 759,815
Less: Unearned income 621 1,084
Allowance for loan losses 11,631 12,339
------------------------------------------------------------------
Net loans $776,389 $746,392
------------------------------------------------------------------
</TABLE>
At December 31, 1998 and 1997, the Company was servicing commercial loans for
others totaling $5,833,000 and $10,318,000, respectively.
At December 31, 1998, outstanding commitments included commitments to fund
commercial, consumer, real estate-construction, and real estate-mortgage loans
of approximately $85,403,000. It is the opinion of management that such
commitments do not involve more than the normal credit risk.
38
<PAGE>
Transactions in the allowance for loan losses are summarized as follows for
the years ended December 31, 1998, 1997, and 1996.
<TABLE>
<CAPTION>
(Amounts in thousands) 1998 1997 1996
---------------------------------------------------------------------------
<S> <C> <C> <C>
Balance at beginning of year $12,339 $10,414 $ 9,700
Provision charged to operating expense 1,772 5,201 2,166
Recoveries on loans previously charged off 732 468 638
Allowance for loan losses of loans of bank
subsidiary sold (558) - -
Loans charged off (2,654) (3,744) (2,090)
----------------------------------------------------------------------------
Balance at end of year $11,631 $12,339 $10,414
----------------------------------------------------------------------------
</TABLE>
Nonaccrual loans amounted to $3,997,000 at December 31, 1998 and $4,595,000
at December 31, 1997. The approximate effect on interest income of nonaccrual
loans for the years ended December 31, 1998, 1997, and 1996 is summarized as
follows:
<TABLE>
<CAPTION>
(Amounts in thousands) 1998 1997 1996
---------------------------------------------------------------------------
<S> <C> <C> <C>
Interest at contractual rate $1,294 $1,615 $ 585
Less interest recorded as income 1,053 1,406 334
---------------------------------------------------------------------------
Reduction of interest income $ 241 $ 209 $ 251
---------------------------------------------------------------------------
</TABLE>
Impaired loans and related amounts included in the allowance for loan losses
at December 31, 1998 and 1997 are as follows:
<TABLE>
<CAPTION>
1998 1997
Principal Principal
(Amounts in thousands) Balance Allowance Balance Allowance
- - ------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Impaired loans, with a related allowance $ 963 $221 $1,460 $463
Impaired loans, without allowance 3,858 -- 6,512 --
- - ------------------------------------------------------------------------------------
Total $4,821 $221 $7,972 $463
- - ------------------------------------------------------------------------------------
</TABLE>
The allowance amounts were primarily determined using the fair value of the
related collateral.
The average recorded investment in impaired loans for the year ended December
31, 1998 was $4,926,000. Interest income of approximately $433,000 was
recognized on impaired loans for the year ended December 31, 1998.
The average recorded investment in impaired loans for the year ended December
31, 1997 was $6,373,000. Interest income of approximately $765,000 was
recognized on impaired loans for the year ended December 31, 1997.
The average recorded investment in impaired loans for the year ended December
31, 1996 was $6,298,000. The interest income on impaired loans for the year
ended December 31, 1996 was approximately $461,000.
The Company has direct and indirect loans outstanding to certain executive
officers, directors, and principal holders of equity securities (including their
associates). All of these loans were made in the ordinary course of business on
substantially the same terms, including interest rate and collateral, as those
prevailing at the time for comparable transactions with other persons, and did
not involve more than the normal credit risk or present other unfavorable
features. The following is a summary of such loans outstanding and the activity
in these loans for 1998:
<TABLE>
<CAPTION>
(Amounts in thousands)
---------------------------------------------------------------------
<S> <C>
Balance at December 31, 1997 $37,774
Adjustment due to changes in related parties (949)
---------------------------------------------------------------------
Adjusted balance at December 31, 1997 36,825
New loans 29,978
Repayments 18,482
---------------------------------------------------------------------
Balance at December 31, 1998 $48,321
---------------------------------------------------------------------
</TABLE>
39
<PAGE>
Note 6. Premises and Equipment
Premises and equipment at December 31, 1998 and 1997 are summarized as follows:
<TABLE>
<CAPTION>
(Amounts in thousands) 1998 1997
---------------------------------------------------------------------
<S> <C> <C>
Land $ 4,440 $ 5,602
Buildings and improvements 18,100 20,284
Furniture and equipment 17,216 19,327
Leasehold improvements 417 360
Construction in progress 508 252
--------------------------------------------------------------------
40,681 45,825
Accumulated depreciation and amortization (16,995) (18,976)
-------------------------------------------------------------------
$ 23,686 $ 26,849
-------------------------------------------------------------------
</TABLE>
Note 7. Real Estate Acquired Through Foreclosure
Real estate acquired through foreclosure, in the net amount of $4,686,000 and
$2,803,000 at December 31, 1998 and 1997, respectively, is included in other
assets.
Note 8. Interest Bearing Deposits
A summary of interest bearing deposits at December 31, 1998 and 1997 is as
follows:
<TABLE>
<CAPTION>
(Amounts in thousands) 1998 1997
---------------------------------------------------------------------
<S> <C> <C>
Interest bearing demand deposits $146,346 $157,335
Money market accounts 120,608 104,708
Savings deposits 52,734 64,162
Certificates of deposit and individual retirement
accounts of $100 or more 127,506 130,405
Other individual retirement accounts 48,588 52,804
Other certificates of deposit 281,383 321,504
---------------------------------------------------------------------
$777,165 $830,918
---------------------------------------------------------------------
</TABLE>
Interest expense on certificates of deposit and individual retirement
accounts of $100,000 or more was approximately $7,539,000, $5,851,000, and
$7,151,000, for the years ended December 31, 1998, 1997, and 1996, respectively.
Note 9. Long-Term Debt and Short-Term Borrowings
Short-term borrowings at December 31, 1998 and 1997 consist of the following:
(Amounts in thousands) 1998 1997
- - --------------------------------------------------------------------------------
Credit facility with a bank at prime less 100 basis points with
maximum borrowing of up to $15,000; interest payable monthly;
maturing January 30, 1998; secured by the common stock of
three bank subsidiaries $ -- $1,500
40
<PAGE>
A summary of long-term debt at December 31, 1998 and 1997 is as follows:
<TABLE>
<CAPTION>
(Amounts in thousands) 1998 1997
- - -----------------------------------------------------------------------------------------
<S> <C> <C>
Credit facilities with Federal Home Loan Banks with maximum
borrowings of up to $66,000, secured by qualified real
estate loans:
Fixed rate of 7.74%, with monthly principal payments of $8,
Maturing September 1, 2006 780 881
Fixed rate of 5.16%, maturing November 20, 2000 5,000 --
Fixed rate of 5.83%, maturing January 2, 1998 -- 2,000
Variable rate based on monthly LIBOR $2,000 maturing on
January 13, 1999 2,000 4,000
Fixed rate of 5.11%, maturing November 20, 2000 5,000 --
Other notes payable with a fixed rate of 8.75%, maturing on
May 4, 2005 35 39
- - -----------------------------------------------------------------------------------------
Total long-term debt $12,815 $6,920
- - -----------------------------------------------------------------------------------------
</TABLE>
The provisions of the loan and security agreements associated with certain of
the promissory notes restrict, within specified limits, the Company from, among
other things, incurring borrowings and the sale or transfer of assets without
prior written consent. At December 31, 1998, the Company was in compliance with
the covenants of the aforementioned loan and security agreements.
Required principal payments on long-term debt for years subsequent to
December 31, 1998 are: 1999 - $2.1 million; 2000 - $10.1 million; 2001 - $0.1
million; 2002 - $0.1 million; 2003 - $0.1 million; and thereafter $0.3 million.
Note 10. Income Taxes
The components of income tax expense (benefit) are as follows:
<TABLE>
<CAPTION>
(Amounts in thousands) 1998 1997 1996
---------------------------------------------------------------
<S> <C> <C> <C>
Current:
Federal $6,740 $4,472 $5,617
State 604 208 257
---------------------------------------------------------------
7,344 4,680 5,874
---------------------------------------------------------------
Deferred:
Federal 76 (768) (518)
State 13 (134) (90)
---------------------------------------------------------------
89 (902) (608)
---------------------------------------------------------------
$7,433 $3,778 $5,266
---------------------------------------------------------------
</TABLE>
The following is a summary of the differences between the income tax expense
as shown in the consolidated statements of income and income tax expense that
would result from applying the statutory Federal income tax rate of 35% in 1998,
1997 and 1996 to income before income taxes:
<TABLE>
<CAPTION>
(Amounts in thousands) 1998 1997 1996
- - -----------------------------------------------------------------------------------
<S> <C> <C> <C>
Computed "expected" tax expense $7,740 $4,693 $6,282
Increase (decrease) resulting from:
Tax-exempt interest (682) (841) (903)
Amortization of goodwill and other intangibles 197 154 134
Acquisition costs 12 83 31
State income tax, net of federal income tax benefit 401 48 108
Tax-exempt portion of gain on sale of subsidiary (238) -- --
Changes in valuation allowance -- -- (552)
Other, net 3 (359) 166
- - -----------------------------------------------------------------------------------
$7,433 $3,778 $5,266
- - -----------------------------------------------------------------------------------
</TABLE>
41
<PAGE>
The tax effects of temporary differences that give rise to significant
portions of the deferred income tax assets and deferred income tax liabilities
at December 31, 1998 and 1997 are presented below:
<TABLE>
<CAPTION>
(Amounts in thousands) 1998 1997
- - -----------------------------------------------------------------------------------
<S> <C> <C>
Deferred income tax assets:
Allowance for losses on real estate acquired through foreclosure $ 72 $ 110
Deferred compensation 227 238
Allowance for loan losses 4,061 3,979
Unearned income 107 92
Net operating losses 1,155 1,537
Tax credits 124 124
Other 202 92
- - -----------------------------------------------------------------------------------
Total gross deferred income tax assets 5,948 6,172
- - -----------------------------------------------------------------------------------
Deferred income tax liabilities:
Net unrealized gains on investment securities 551 422
Depreciation 848 937
Other, net 109 156
- - -----------------------------------------------------------------------------------
Total gross deferred income tax liabilities 1,509 1,515
- - -----------------------------------------------------------------------------------
Net deferred income tax assets $4,439 $4,657
- - -----------------------------------------------------------------------------------
</TABLE>
There was no valuation allowance for deferred tax assets at December 31, 1998
or 1997.
In assessing the realizability of deferred tax assets, management considers
whether it is more likely than not that some portion or all of the deferred tax
assets will not be realized. The ultimate realization of deferred tax assets is
dependent upon the generation of future taxable income during the periods in
which those temporary differences become deductible. Management considers the
scheduled reversal of deferred tax liabilities, projected future taxable income,
and tax planning strategies in making this assessment. Based upon the level of
historical taxable income and projections for future taxable income over the
periods in which the temporary differences resulting in the deferred tax assets
are deductible, management believes it is more likely than not that the Company
will realize the benefits of these deductible differences.
Consolidated Federal and Georgia tax net operating losses, approximating
$2,588,000 and $6,708,000 at December 31, 1998, respectively, are available to
offset future consolidated taxable income. The use of these carryforwards is
limited to future consolidated taxable earnings and to annual limitations
imposed by the Internal Revenue Code. The Company may use no more than
$1,007,000 annually of its remaining Federal and State of Georgia net operating
losses which begin to expire in 2003.
Note 11. Employee Benefits
- - --------------------------
(a) Employee Benefit Plans
The Company provides a contributory, trusteed 401(k) profit sharing and employee
stock ownership plan to substantially all full-time employees. In April 1998,
the CSBI employee stock ownership plan merged with the CSBI 401(k) plan. Other
retirement plans of acquired subsidiaries merged with the surviving CSBI 401(k)
plan in August 1998. Annual employer contributions to the plan are determined
at the discretion of the Board of Directors of the Company and its subsidiaries.
Contributions expense to the Company's 401(k) plan for 1998 totaled
approximately $516,000. In prior years, aggregate contributions and
compensation expenses relating to the plans were approximately $512,000 and
$473,000 in 1997 and 1996, respectively.
(b) Stock Option Plans
In April 1994, the Company adopted the Century South Banks, Inc. Incentive Stock
Option Plan ("ISOP") under which the Compensation Committee of the Board of
Directors has the authority to grant stock options to key employees of the
Company. Five hundred thousand shares of common stock are reserved for issuance
under the ISOP. Recipients of the options are fully vested upon grant of the
options or over periods ranging from one to ten years. Options are granted with
exercise prices at least equal to the fair value of a share of stock on the
grant date and with a maximum term of ten years.
42
<PAGE>
BCGA had a fixed stock option plan under which stock options were granted
with exercise prices approximating market value of its common stock at the grant
date. Outstanding options under this plan were exchanged for options for
Company common stock on an equivalent basis to shares exchanged in connection
with the merger discussed in note 2. Such options vest over periods ranging
from two to five years and have a maximum term of ten years.
A summary of the status of the Company's ISOP and other fixed stock option
plans as of December 31, 1998, 1997, and 1996 and changes during the years ended
on those dates is presented below:
<TABLE>
<CAPTION>
1998 1997 1996
- - -------------------------------------------------------------------------------------------------------------------------------
Weighted Weighted Weighted
Average Average Average
Shares Exercise Price Shares Exercise Price Shares Exercise Price
- - -------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Fixed Stock Options
Outstanding at beginning of year 372,471 $ 7.00 375,318 $ 5.72 327,098 $4.98
Granted 65,000 30.23 33,375 18.30 57,501 9.24
Exercised (159,983) 5.11 (36,222) 4.31 (9,281) 3.58
Cancelled -- -- -- -- -- --
- - ------------------------------------------------------------------------------------------------------------------------------
Outstanding at end of year 277,488 13.52 372,471 $ 7.00 375,318 $5.72
Options exercisable at year-end 231,963 12.89 296,065 $ 5.22 313,725 $4.79
- - ------------------------------------------------------------------------------------------------------------------------------
</TABLE>
The following table summarizes information about fixed stock options
outstanding at December 31, 1998:
<TABLE>
<CAPTION>
Weighted
Weighted Average Weighted
Range of Average Remaining Average
Number Outstanding Exercise Prices Exercise Price Contractual Life Number Exercisable Exercise Price
- - -----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
123,676 4.29- 6.33 5.65 3.65 123,676 5.65
43,287 7.41-12.00 7.56 4.31 43,287 7.56
110,525 12.22-33.00 30.23 9.13 65,000 30.23
</TABLE>
The per share weighted-average fair value of stock options granted during
1998, 1997, and 1996 was $15.07, $7.23, and $5.33, respectively, using the Black
Scholes option-pricing model with the following weighted-average assumptions:
expected life of nine years, expected dividend yield of 2.32% in 1998 and 2.55%
in 1997 and 1996, risk free interest rate of 5.80% in 1998 and 5.70% in 1997 and
1996, and an expected volatility of 36.58%, 31.14%, and 29.60%, for each of the
years ended December 31, 1998, 1997, and 1996, respectively.
(C) Stock Award Plan
On April 1, 1998, the Board of Directors of the Company adopted the Century
South Banks, Inc. 1998 Executive Stock Plan (the "Executive Stock Plan") which
was approved by the shareholders on May 13, 1998. The purpose of the Executive
Stock Plan is to encourage and provide an additional incentive to officers and
other key employees of the Company to increase the value of the Company and its
common stock by permitting them to acquire a significant equity interest in the
Company. Up to 3.5% of the outstanding shares have been reserved for issuance
in connection with awards granted under the Executive Stock Plan. Such shares
may be awarded from authorized and unissued shares or from previously issued
shares, which are acquired in open market purchases. The Executive Stock Plan
provides for the issuance of shares of common stock through grants of options to
purchase common stock, grants of stock appreciation rights and grants of
restricted stock.
In July 1998, 233,000 shares of restricted stock were granted under the plan.
In October 1998, 4,000 shares were granted to become effective in 1999 subject
to the attainment of certain performance measures. Shares granted under the plan
are not considered earned until the performance measures are met. Upon earning
of the awards, the awards are subject to a service condition and vest over
periods of up to ten years. The recipient of the awards is entitled to the
dividends on shares once share awards are earned.
43
<PAGE>
The Company applies the provisions of APB Opinion No. 25 in accounting for
the fixed stock option plans and accordingly, compensation costs using the fair-
value based method provided by SFAS 123 for the options granted during the three
years ended December 31, 1998 have not been recognized in the accompanying
consolidated financial statements. Had the Company determined compensation cost
based on the fair value at the grant date for its stock options under SFAS 123,
the Company's net income would have been reduced to the pro forma amounts
indicated below:
<TABLE>
<CAPTION>
Years ended December 31, 1998 1997 1996
- - ------------------------------------------------------------
<S> <C> <C> <C>
Net income (in thousands):
As reported $14.681 $9,632 $12,683
Pro forma 14,595 9,581 12,545
Diluted net income per share:
As reported $ 1.32 $ 0.87 $ 1.15
Pro forma $ 1.31 $ 0.86 $ 1.14
</TABLE>
Pro forma amounts reflect only options granted in 1998, 1997, 1996, and
1995. The full impact of calculating compensation cost for stock options under
SFAS 123 is not reflected in the pro forma net income amounts presented above.
The pro forma net income amounts above do not include compensation cost for
options granted prior to January 1, 1995.
Note 12. Commitments and Contingencies
In the normal course of business, the Company's various subsidiaries have
entered into commitments to extend credit which are not reflected in the
accompanying financial statements, including approximately $3,924,000 under
standby letters of credit at December 31, 1998. It is the opinion of management
that such commitments do not involve more than the normal credit risk.
The Company and its subsidiaries are involved in various claims and legal
actions arising in the ordinary course of business. In the opinion of
management, based in part on the advice of counsel, the ultimate disposition of
these matters will not have a material adverse impact on the Company's
consolidated financial position or results of operations.
Note 13. Fair Value of Financial Instruments
Statement of Financial Accounting Standards No. 107, Disclosures about Fair
Value of Financial Instruments ("SFAS 107"), requires that the Company disclose
estimated fair values for its financial instruments. Fair value estimates,
methods, and assumptions are set forth below for the Company's financial
instruments.
Cash and Due From Banks, Interest Earning Deposits in Other Banks, Federal Funds
Sold and Purchased, and Short-term Borrowings
The carrying amount of these instruments approximates fair value because of the
short-term maturities of these instruments.
Investment Securities
The fair value of investment securities, except certain state and municipal
securities, is estimated based on published bid prices or bid quotations
received from securities dealers. The fair value of certain state and municipal
securities is not readily available through market sources other than dealer
quotations, so fair value estimates are based on quoted market prices of similar
instruments, adjusted for differences between the quoted instruments and the
instruments being valued.
The following table presents information on the fair value of investment
securities:
<TABLE>
<CAPTION>
December 31, 1998 December 31, 1997
- - -----------------------------------------------------------------------------------------------------
Carrying Estimated Carrying Estimated
(Amounts in thousands) amount fair value amount fair value
- - -----------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Investment securities available for sale $117,177 $117,177 $138,592 $138,592
Investment securities held to maturity 26,384 27,521 40,212 41,153
- - -----------------------------------------------------------------------------------------------------
Total $143,561 $144,698 $178,804 $179,745
- - -----------------------------------------------------------------------------------------------------
</TABLE>
44
<PAGE>
Derivatives
The fair value of interest rate swap agreements and purchased floors is obtained
from dealer quotes. These values represent the estimated amount that the Company
would receive or pay to terminate the contracts or agreements, taking into
account current interest rates, and when appropriate, the creditworthiness of
the counterparties.
The following table presents information on the fair value of derivatives:
<TABLE>
<CAPTION>
December 31, 1998 December 31, 1997
Carrying Estimated Carrying Estimated
(Amounts in thousands) amount fair value amount fair value
- - -------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Interest rate swap agreements $-- $ 251 $-- $ 44
Purchased interest rate floors 235 799 219 185
- - -------------------------------------------------------------------------------------------------
Total $235 $1,050 $219 $229
- - -------------------------------------------------------------------------------------------------
</TABLE>
Loans
Fair values are estimated for portfolios of loans with similar financial
characteristics. The fair value of loans is calculated by discounting scheduled
cash flows through the estimated maturity using estimated market discount rates
that reflect the credit and interest rate risk inherent in the loan. The
estimate of maturity is based on the Company's historical experience with
repayments for each loan classification, modified, as required, by an estimate
of the effect of the current economic and lending conditions.
The following table presents information on the fair value of loans:
<TABLE>
<CAPTION>
December 31, 1998 December 31, 1997
---------------------- ---------------------
Carrying Estimated Carrying Estimated
(Amounts in thousands) amount fair value amount fair value
- - --------------------------------------------- --------- ----------- --------- ----------
<S> <C> <C> <C> <C>
Commercial and consumer real estate related $552,601 $552,887 $532,419 $530,039
All other loans 236,040 236,162 227,396 226,403
Unearned income (621) (621) (1,084) --
Allowance for loan losses (11,631) -- (12,339) --
- - --------------------------------------------- -------- -------- -------- --------
Total $776,389 $788,428 $746,392 $756,442
- - --------------------------------------------- -------- -------- -------- --------
</TABLE>
Deposit Liabilities
Under SFAS 107, the fair value of deposits with no stated maturity, such as
noninterest bearing demand deposits, savings accounts, NOW accounts, and money
market accounts, is equal to the amount payable on demand. The fair value of
certificates of deposit and individual retirement accounts is based on the
discounted value of contractual cash flows. The discount rate is estimated using
the rates currently offered for deposits of similar remaining maturities.
The following table presents information on the fair value of deposits:
<TABLE>
<CAPTION>
December 31, 1998 December 31, 1997
--------------------- ---------------------
Carrying Estimated Carrying Estimated
(Amounts in thousands) amount fair value amount fair value
- - ------------------------------------------ --------- ---------- --------- ----------
<S> <C> <C> <C> <C>
Noninterest bearing demand deposits $135,788 $135,788 $129,418 $129,418
Savings and NOW accounts 199,080 199,080 221,497 221,497
Money market accounts 120,608 120,608 104,708 104,708
Certificates of deposit and individual
retirement accounts:
Maturing within twelve months or less 364,061 366,058 384,387 385,746
Maturing beyond one year 93,416 95,905 120,326 121,903
-------- -------- -------- --------
Total $912,953 $917,439 $960,336 $963,272
-------- -------- -------- --------
</TABLE>
45
<PAGE>
The fair value estimates do not include the benefit that results from the low
cost funding provided by the deposit liabilities compared to the cost of
borrowing funds in the credit markets. The table below presents at December 31,
1998 and 1997, the fair value that the Company's assets would increase if the
fair value of the deposit base intangibles was included in the accompanying
consolidated balance sheets.
<TABLE>
<CAPTION>
December 31, 1998 December 31, 1997
- - ---------------------------------------------------------------------------
Estimated Estimated
(Amounts in thousands) (unaudited) fair value fair value
- - --------------------------------------------------------------------------
<S> <C> <C>
Core deposit intangible $28,522 $28,382
Less: Recorded amounts 914 1,287
- - --------------------------------------------------------------------------
Net increase in fair value $27,608 $27,095
- - --------------------------------------------------------------------------
</TABLE>
Long-Term Debt
The fair value of the Company's long-term debt is estimated based on the quoted
market prices for the same or similar issues or on the current rates offered to
the Company for debt of the same remaining maturities. At December 31, 1998 and
1997, the fair value of the long-term debt was $13,327,000 and $7,352,000,
respectively. At December 31, 1998 and 1997, the carrying amount of long-term
debt was $12,815,000 and $6,920,000, respectively.
Commitments
The fair value of commitments to extend credit to fund commercial, consumer,
real estate-construction, and real estate-mortgage loans is equal to the
carrying amount of commitments outstanding at December 31, 1998 and 1997, which
is not significant. This is based on the fact that the Company generally does
not offer lending commitments to its customers for long periods and, therefore,
the underlying rates of the commitments approximate market rates.
Limitations
Fair value estimates are made at a specific point in time, based on relevant
market information and information about the financial instrument. These
estimates do not reflect any premium or discount that could result from offering
for sale at one time the Company's entire holdings of a particular financial
instrument. Because no market exists for a significant portion of the Company's
financial instruments, fair value estimates are based on judgments regarding
future expected loss experience, current economic conditions, risk
characteristics of various financial instruments, and other factors. These
estimates are subjective in nature and involve uncertainties and matters of
significant judgment and therefore cannot be determined with precision. Changes
in assumptions could significantly affect the estimates.
Fair value estimates are based on existing on- and off-balance sheet
financial instruments without attempting to estimate the value of anticipated
future business and the value of assets and liabilities that are not considered
financial instruments. Other significant assets that are not considered
financial instruments include deferred income tax assets, premises and
equipment, and goodwill and certain intangibles. In addition, the tax
ramifications related to the realization of the unrealized gains and losses can
have a significant effect on fair value estimates and have not been considered
in any of the estimates.
Note 14. Supplementary Income Statement Information
Components of other operating income and expenses in excess of 1% of total
income for any of the respective years are as follows:
<TABLE>
<CAPTION>
(Amounts in thousands) 1998 1997 1996
- - -----------------------------------------------------------------------------
<S> <C> <C> <C>
Income:
Income associated with originating, servicing, and
selling mortgage loans $2,584 $1,391 $ 804
Expenses:
Regulatory agency fees and insurance assessments 406 394 329
Computer services 1,580 1,021 909
Stationery and supplies 873 960 1,039
- - ------------------------------------------------------------------------------
</TABLE>
Rental expense on computers, buildings and office equipment, including
cancelable leases, was $812,000, $805,000, and $589,000, for the years ended
December 31, 1998, 1997, and 1996, respectively.
46
<PAGE>
Note 15. Condensed Financial Information of Century South Banks, Inc. (Parent
Only)
Condensed Balance Sheets
<TABLE>
<CAPTION>
December 31,
(Amounts in thousands) 1998 1997
------- -------
<S> <C> <C>
Assets
Cash $ 3,654 $ 2,138
Investment in consolidated bank subsidiaries, at equity 102,767 101,869
Investment securities 1,212 282
Loans, net 6,540 --
Premises and equipment, net 917 472
Goodwill, net 3,247 5,451
Other intangible assets, net 150 291
ORE, net 1,478 --
Other assets 1,400 814
- - ----------------------------------------------------------------------------------------
Total assets $121,365 $111,317
- - ----------------------------------------------------------------------------------------
Liabilities
Other borrowings $ -- $ 1,500
Other liabilities 2,034 679
- - ----------------------------------------------------------------------------------------
Total liabilities 2,034 2,179
- - ----------------------------------------------------------------------------------------
Shareholders' equity
Common stock 11,088 10,925
Additional paid-in capital 34,955 34,282
Retained earnings 73,442 63,566
Common stock in treasury (1,051) (306)
Accumulated other comprehensive income 897 671
- - ----------------------------------------------------------------------------------------
Total shareholders' equity 119,331 109,138
- - ----------------------------------------------------------------------------------------
Total liabilities and shareholders' equity $121,365 $111,317
- - ----------------------------------------------------------------------------------------
Condensed Statements of Income
Years ended December 31,
(Amounts in thousands) 1998 1997 1996
- - ----------------------------------------------------------------------------------------
Income:
Dividends received from bank subsidiaries $10,893 $ 6,263 $ 10,054
Interest income 46 -- 4
Other income 9,124 4,618 3,116
- - ----------------------------------------------------------------------------------------
Total income 20,063 10,881 13,174
- - ----------------------------------------------------------------------------------------
Expenses:
Interest expense 27 114 209
Salaries and employee benefits 5,338 4,296 3,308
Other expenses 5,200 2,994 2,351
- - ----------------------------------------------------------------------------------------
Total expenses 10,565 7,404 5,868
- - ----------------------------------------------------------------------------------------
Income before income taxes and equity in
undistributed income of subsidiaries 9,498 3,477 7,306
Income tax benefit-allocated from
consolidated income tax return 512 603 1,229
- - ----------------------------------------------------------------------------------------
Income before equity in undistributed
income of subsidiaries 10,010 4,080 8,535
Equity in undistributed income of subsidiaries 4,671 5,552 4,148
- - ----------------------------------------------------------------------------------------
Net income $14,681 $ 9,632 $ 12,683
- - ----------------------------------------------------------------------------------------
</TABLE>
47
<PAGE>
<TABLE>
<CAPTION>
Condensed Statements of Cash Flows
Years ended December 31,
(Amounts in thousands) 1998 1997 1996
- - ----------------------------------------------------------------------------------------
<S> <C> <C> <C>
Cash flows from operating activities:
Net income $14,681 $ 9,632 $ 12,683
Adjustments to reconcile net income to net cash
provided by operating activities:
Equity in undistributed income of subsidiaries (4,671) (5,552) (4,148)
Gain on sales of bank subsidiary (670) -- --
Depreciation 186 93 49
Amortization 626 536 529
Preferred stock dividends in kind -- -- (52)
Decrease (increase) in other assets
and other intangible assets (2,183) 555 (717)
Increase (decrease) in other liabilities 1,280 (728) (301)
- - ----------------------------------------------------------------------------------------
Net cash provided by operating activities 9,249 4,536 8,043
- - ----------------------------------------------------------------------------------------
Cash flows from investing activities:
Purchase of investment securities (1,188) -- --
Proceeds from sale of investment securities 665 -- --
Investment in bank subsidiary -- -- --
Purchase of premises and equipment (762) (270) (94)
Net increase in loans (6,540) -- --
Proceeds from sale of premises and equipment 131 5 419
Proceeds from sale of bank subsidiary 6,100 -- --
Cash paid to dissenting and fractional shareholders
by subsidiaries in connection with acquisitions of
subsidiaries -- -- (121)
- - ----------------------------------------------------------------------------------------
Net cash provided by (used in) investing activities (1,594) (265) 204
- - ----------------------------------------------------------------------------------------
Cash flows from financing activities:
Proceeds from issuance of long-term debt 1,500 -- --
Payments on long-term debt (1,500) (1,304) (4,396)
Proceeds from issuance of short-term borrowings -- 1,925 2,824
Payments on short-term borrowings (1,500) (425) (2,825)
Proceeds from issuance of common stock 836 156 32
Dividends paid (4,730) (3,431) (3,272)
Purchase of treasury stock (745) -- --
- - ----------------------------------------------------------------------------------------
Net cash used in financing activities (6,139) (3,079) (7,637)
- - ----------------------------------------------------------------------------------------
Net increase in cash 1,516 1,192 610
Cash at beginning of year 2,138 946 336
- - ----------------------------------------------------------------------------------------
Cash at end of year $ 3,654 $ 2,138 $ 946
========================================================================================
Supplemental disclosures of cash paid during year for:
Interest $ 27 $ 114 $ 261
Income taxes $ 6,750 $ 5,201 $ 5,942
- - ----------------------------------------------------------------------------------------
</TABLE>
48
<PAGE>
The amount of dividends paid to the Company from the subsidiary banks is
limited by various banking regulatory agencies. The amount of cash dividends
available from subsidiary banks for payment in 1999 without prior approval from
the banking regulatory agencies, is approximately $19,636,000, subject to
maintenance of required capital.
As a result of these regulatory limitations, at December 31, 1998,
approximately $83,131,000 of the Company's investment in net assets of
subsidiary banks of $102,767,000 was restricted from transfer by subsidiary
banks to the Company in the form of cash dividends.
Note 16. Shareholders' Equity and Regulatory Matters
The Company is subject to various regulatory capital requirements administered
by the federal banking agencies. Failure to meet minimum capital requirements
can initiate certain mandatory, and possibly additional discretionary actions by
regulators that, if undertaken, could have a direct material effect on the
Company's consolidated financial statements. Under capital adequacy guidelines
and the regulatory framework for prompt corrective action, the Company must meet
specific capital guidelines that involve quantitative measures of 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.
Quantitative measures established by regulation to ensure capital adequacy
require the Company on a consolidated basis, and the Company and subsidiary
banks individually, to maintain minimum amounts and ratios (set forth in the
following table) of total and Tier 1 capital, (as defined in the regulations),
to risk-weighted assets (as defined) and of Tier 1 capital to average assets.
Management believes, as of December 31, 1998, that the Company meets all capital
adequacy requirements to which it is subject.
As of December 31, 1998, the most recent notifications from The Federal
Reserve Bank of Atlanta and the FDIC categorized the Company's subsidiary banks
as well-capitalized under the regulatory framework for prompt corrective action.
To be categorized as well-capitalized the Company and its subsidiaries must
maintain minimum total risk based, Tier 1 risk based, and tier 1 leverage ratios
as set forth in the following table. Management is not aware of the existence
of any conditions or events occurring subsequent to December 31, 1998 which
would affect the Company's or the subsidiaries' well-capitalized classification.
49
<PAGE>
The Company's actual capital amounts and ratios are presented below on a
consolidated basis and for each significant subsidiary:
<TABLE>
<CAPTION>
To Be Well
Capitalized
For Capital Under Prompt
Corrective
Actual Adequacy Action
Purposes Provisions
---------------------------------------------------------------
(Amounts in thousands) Amount Ratio Amount Ratio Amount Ratio
---------------------------------------------------------------
(Greater Than or Equal To)
--------------------------------------
<S> <C> <C> <C> <C> <C> <C>
As of December 31, 1998:
Total Capital (to Risk Weighted Assets):
Consolidated $123,645 16.4 $60,514 8.0% N/A N/A
Ameribank, N.A. 15,314 14.5 8,474 8.0% $10,593 10.0%
Bank of Dahlonega 12,850 16.0 6,410 8.0% 8,012 10.0%
First South Bank, N.A. 19,303 14.3 10,840 8.0% 13,550 10.0%
First Bank of Polk County 9,866 15.5 5,108 8.0% 6,385 10.0%
Georgia First Bank 12,747 12.6 8,088 8.0% 10,110 10.0%
Tier 1 Capital (to Risk Weighted Assets):
Consolidated $113,927 15.1 $30,257 4.0% N/A N/A
Ameribank, N.A. 14,232 13.4 4,237 4.0% 6,356 6.0%
Bank of Dahlonega 11,844 14.8 3,205 4.0% 4,807 6.0%
First South Bank, N.A. 17,608 13.0 5,420 4.0% 8,130 6.0%
First Bank of Polk County 9,064 14.2 2,554 4.0% 3,831 6.0%
Georgia First Bank 11,483 11.4 4,044 4.0% 6,066 6.0%
Tier 1 Capital (to Average Assets):
Consolidated $113,927 10.8 $42,378 4.0% N/A N/A
Ameribank, N.A. 14,232 9.7 5,525 4.0% 6,906 5.0%
Bank of Dahlonega 11,844 9.5 4,877 4.0% 6,097 5.0%
First South Bank, N.A. 17,608 10.4 6,656 4.0% 8,320 5.0%
First Bank of Polk County 9,064 10.2 3,417 4.0% 4,271 5.0%
Georgia First Bank 11,483 8.9 5,372 4.0% 6,714 5.0%
As of December 31, 1997:
Total Capital (to Risk Weighted Assets):
Consolidated $110,539 14.7% $60,305 8.0% N/A N/A
Ameribank, N.A. 13,044 15.0% 6,940 8.0% $ 8,675 10.0%
Bank of Dahlonega 12,208 15.2% 6,409 8.0% 8,011 10.0%
First South Bank, N.A. 18,148 14.4% 10,092 8.0% 12,615 10.0%
First Bank of Polk County 8,493 15.7% 4,330 8.0% 5,412 10.0%
Bank of Danielsville 7,550 19.3% 3,133 8.0% 3,916 10.0%
Georgia First Bank 12,358 11.0% 8,988 8.0% 11,235 10.0%
Tier 1 Capital (to Risk Weighted Assets):
Consolidated $101,105 13.4% $30,153 4.0% N/A N/A
Ameribank, N.A. 12,006 13.8% 3,470 4.0% $ 5,205 6.0%
Bank of Dahlonega 11,199 14.0% 3,204 4.0% 4,807 6.0%
First South Bank, N.A. 16,581 13.1% 5,046 4.0% 7,569 6.0%
First Bank of Polk County 7,811 14.4% 2,165 4.0% 3,247 6.0%
Bank of Danielsville 7,060 18.0% 1,566 4.0% 2,349 6.0%
Georgia First Bank 11,085 10.0% 4,494 4.0% 6,741 6.0%
</TABLE>
50
<PAGE>
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C> <C> <C>
(Greater Than or Equal To)
-----------------------------------------
Tier 1 Capital (to Average Assets):
Consolidated $101,105 9.4% $42,100 4.0% N/A N/A
Ameribank, N.A. 12,006 10.0% 4,807 4.0% $ 6,009 5.0%
Bank of Dahlonega 11,199 9.6% 4,766 4.0% 5,957 5.0%
First South Bank, N.A. 16,581 9.2% 5,654 4.0% 7,068 5.0%
First Bank of Polk County 7,811 10.0% 3,032 4.0% 3,790 5.0%
Bank of Danielsville 7,060 11.3% 2,442 4.0% 3,053 5.0%
Georgia First Bank 11,085 8.1% 5,540 4.0% 6,925 5.0%
</TABLE>
Note 17. Off-balance Sheet Derivative Financial Instruments
Derivative financial instruments, such as interest rate swaps and purchased
floors, are components of the Company's risk management profile. The Company
uses interest rate swap contracts as hedges against volatility in the variable
rate loan portfolio.
The following summary presents information pertaining to the Company's
interest rate swaps at December 31, 1998:
<TABLE>
<CAPTION>
Net Average Weighted Weighted
Notional unrealized Months to Average Pay Average Receive
(Amounts in thousands) Amount gain (loss) Maturity Rate (a) Rate
<S> <C> <C> <C> <C> <C>
Pay variable 3 month LIBOR $ 5,000 $ 40 11 5.88% 5.91%
Pay variable Federal Funds Rate 15,000 211 18 5.02 5.74
- - ---------------------------------------------------------------------------------------------------------
Total $20,000 $251 16.3 5.08% 5.79%
</TABLE>
(a) Weighted-average variable rates represent variable rates in effect at
December 31, 1998.
In addition, the Company has purchased interest rate floor contracts with
aggregate notional amounts of $185,000,000 and with remaining maturities ranging
from one to three years. Under the terms of these agreements, the Company will
be reimbursed on a quarterly basis for decreases in the federal funds rate for
any period during the agreement in which the federal funds rate falls below a
specified strike rate. The strike rates on these agreements range from 4.5 to
5.0%. The carrying amount of premiums related to the purchase of these contracts
amounted to $235,000, $219,000 and $111,000 at December 31, 1998, 1997, and 1996
respectively. Related premium amortization expense was approximately $130,000,
$61,000 and $44,000 for 1998 ,1997, and 1996 respectively.
Note 18. Accumulated Other Comprehensive Income
Effective January 1, 1998, the Company adopted the provisions of SFAS No. 130,
Reporting Comprehensive Income. This statement establishes standards for
reporting and displaying comprehensive income and its components in a full set
of general purpose financial statements. SFAS No. 130 requires all items that
are required to be recognized under accounting standards as components of
comprehensive income be reported in a financial statement that is displayed in
equal prominence with the other financial statements. The term "comprehensive
income" is used in the statement to describe the total of all components of
comprehensive income including net income. "Other comprehensive income" for the
Company consists of items recorded directly in shareholders' equity under SFAS
No. 115, Accounting for Certain Investments in Debt and Equity Securities.
51
<PAGE>
The following table sets forth the amounts of other comprehensive income
included in shareholders' equity along with the related tax effect for the years
ended December 31, 1998, 1997, and 1996:
Tax Net of
Pretax (Expense) Tax
Amount Benefit Amount
--------------------------------
(Amounts in thousands)
1998:
Net unrealized holding gains on
investment securities available
for sale arising during the year $ 741 (260) 481
Less reclassification adjustment
for net gains realized in net
income 393 (138) (255)
---------------------------------
Other comprehensive income $ 348 (122) 226
---------------------------------
1997:
Net unrealized holding gains on
investment securities available
for sale arising during the year $ 703 (246) 457
Less reclassification adjustment
for net gains realized in net
income 23 (8) (15)
---------------------------------
Other comprehensive income $ 703 (246) 457
---------------------------------
1996:
Net realized holding losses on
investment securities available
for sale arising during the year $(1,134) 397 (737)
Less reclassification adjustment
for net gains realized in net
income 215 (75) (140)
---------------------------------
Other comprehensive loss $(1,349) 472 (877)
---------------------------------
Note 19. Segment Disclosure
Effective January 1, 1998, the Company also adopted the provisions of SFAS No.
131, Disclosures about Segments of an Enterprise and Related Information. SFAS
No. 131 establishes new standards for the disclosures made by public business
enterprises to report information about operating segments in annual financial
statements and requires those enterprises to report selected information about
operating segments in interim financial reports issued to shareholders. It also
establishes standards for related disclosures about products and services,
geographic areas, and major customers. The Company does not have any segments
other than banking that are considered material.
52
<PAGE>
Item 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
There has been no occurrence requiring a response to this Item.
PART III
--------
Certain information required by Part III is omitted from this Report pursuant to
General Instruction G(3) of Form 10-K and is incorporated by reference from the
Company's definitive Proxy Statement (the "Proxy Statement") to be filed not
later than 120 days after the end of the fiscal year covered by this Report.
Item 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The information concerning the Company's directors and executive officers is set
forth in the Proxy Statement under the headings "Election of Directors" and
"Compliance with Section 16(a) of the Securities and Exchange Act of 1934,
which information is incorporated herein by reference. The information
concerning the Company's executive officers required by this Item is set forth
in Part 1, Item 1 under the heading "Executive Officers."
Item 11. EXECUTIVE COMPENSATION
The information concerning executive compensation is set forth in the Proxy
Statement under the heading "Executive Compensation" which information is
incorporated herein by reference.
Item 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information concerning security ownership of certain beneficial owners and
management is set forth in the Proxy Statement under the heading "Security
Ownership of Certain Beneficial Owners and Management", which information is
incorporated herein by reference.
Item 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information concerning certain relationships and related transactions is set
forth in the Proxy Statement under the heading "Certain Relationships and
Related Transactions", which information is incorporated herein by reference.
53
<PAGE>
PART IV
-------
Item 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
(a)(1) Financial Statements
The following consolidated financial statements of the Company and its
subsidiaries, together with the independent auditors' report, appear in Item 8.
Page Number
Consolidated Financial Statements in Section
- - --------------------------------- -----------
Independent Auditors' Report.................................. 27
Consolidated Balance Sheets as of December 31, 1998
and 1997...................................................... 28
Consolidated Statements of Income for the Years Ended
December 31, 1998, 1997, and 1996............................ 29
Consolidated Statements of Shareholders' Equity and
Comprehensive Income for the Years Ended December 31, 1998,
1997, and 1996............................................... 30
Consolidated Statement of Cash Flows for the Years Ended
December 31, 1998, 1997, and 1996............................ 31-32
(2) Financial Statement Schedules
Financial statement schedules have been omitted because they are not applicable
or the required information has been incorporated in the consolidated financial
statements and related notes.
(3) Exhibit Index
Exhibit No. Document
- - ----------- --------
3.1 Articles of Incorporation of Century South Banks, Inc. Incorporated
by reference from Registration Statement No. 33-18527 filed on Form
S-8 on March 23, 1990 and as amended on April 10, 1990.
3.2 Bylaws of Century South Banks, Inc. Incorporated by reference from
Registration Statement No. 333-72579 filed on Form S-4 on February
18, 1999.
10.1 Employee Stock Ownership Plan of Century South Banks, Inc.
Incorporated by reference from Registration Statement No. 33-18527
filed on Form S-8 on March 23, 1990 and as amended on April 10,
1990.
10.2 Dividend Reinvestment Plan of Century South Banks, Inc. Incorporated
by reference from Registration Statement No. 33-37784 filed on Form
S-3 on November 14, 1990 and as amended on June 13, 1996 and
March 31, 1999.
10.3 Incentive Stock Option Plan of Century South Banks, Inc.
Incorporated by reference from Registration Statement No. 33-91922
filed on Form S-8 on May 4, 1995 and as amended on December 30,
1997.
54
<PAGE>
10.4 Employee Compensation Agreement incorporated by reference from
Annual Report filed on Form 10-K for the fiscal year ended December
31, 1997.
*13.1 Quarterly Report to Shareholders for the quarter ended December 31,
1998 filed herewith.
21.1 Subsidiaries of Century South Banks, Inc. consist of:
Bank of Dahlonega - Dahlonega, Georgia
The Bank of Ellijay - Ellijay, Georgia
First Bank of Polk County - Copperhill, Tennessee
Georgia First Bank - Gainesville, Georgia
Fannin County Bank, N.A. - Blue Ridge, Georgia
Gwinnett National Bank - Duluth, Georgia
First Community Bank of Dawsonville - Dawsonville, Georgia
Peoples Bank - Lavonia, Georgia
Bank of Danielsville - Danielsville, Georgia
First South Bank, N.A. Macon, Georgia
AmeriBank, N.A. Savannah, Georgia
23.1 Consent of KPMG LLP
23.2 Consent of Porter Keadle Moore, LLP
23.3 Report of Porter Keadle Moore, LLP
27.1 Financial Data Schedule as of and for the year ended December 31,
1998 (for SEC use only).
- - ---------
* To be filed by Amendment.
(b) Reports on Form 8-K.
No reports on Form 8-K were filed during the quarter ended December 31, 1998.
55
<PAGE>
SIGNATURES
----------
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the Registrant has duly caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized.
CENTURY SOUTH BANKS, INC.
(Registrant)
/s/ James A. Faulkner
-----------------------------------------
James A. Faulkner
Vice Chairman, Chief Executive Officer,
and Director
/s/ Joseph W. Evans
------------------------------------------
Joseph W. Evans
President, Chief Operating Officer, Chief
Financial Officer and Director
/s/ Susan J. Anderson
-----------------------------------------
Susan J. Anderson
Senior Vice President and
Corporate Controller
Date: March 31, 1999
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed by the following persons on behalf of the Registrant and in the
capacities and on the dates indicated.
By: /s/ William H. Anderson, II Date: March 31, 1999
-------------------------------- --------------
William H. Anderson, II,
Chairman of the Board and
Director
By: /s/ James A. Faulkner Date: March 31, 1999
-------------------------------- --------------
James A. Faulkner, Vice Chairman
of the Board, Chief Executive
Officer and Director
By: /s/ J. Russell Ivie Date: March 31, 1999
-------------------------------- --------------
J. Russell Ivie, Vice Chairman
of the Board and Director
By: /s/ James R. Balkcom, Jr. Date: March 31, 1999
-------------------------------- --------------
James R. Balkcom, Jr., Director
56
<PAGE>
By: /s/ William L. Chandler Date: March 31, 1999
-------------------------------- --------------
William L. Chandler, Director
By: /s/ Joseph W. Evans Date: March 31, 1999
-------------------------------- --------------
Joseph W. Evans, President,
Chief Operating Officer, Chief
Financial Officer and Director
By: /s/ Thomas T. Folger, Jr. Date: March 31, 1999
-------------------------------- --------------
Thomas T. Folger, Jr., Director
By: /s/ Quill O. Healey Date: March 31, 1999
-------------------------------- --------------
Quill O. Healey, Director
By: /s/ Frank C. Jones Date: March 31, 1999
-------------------------------- --------------
Frank C. Jones, Director
By: /s/ John B. McKibbon, III Date: March 31, 1999
-------------------------------- --------------
John B. McKibbon, III, Director
By: /s/ E. Paul Stringer Date: March 31, 1999
-------------------------------- --------------
E. Paul Stringer, Director
57
<PAGE>
Accountants' Consent
The Board of Directors
Century South Banks, Inc.:
We consent to incorporation by reference in the Registration Statements
(Nos. 333-06377 and 33-37784) on Form S-3 and (Nos. 33-18527 and 33-91922) on
Form S-8 of Century South Banks, Inc. of our report dated January 22, 1999,
relating to the consolidated balance sheets of Century South Banks, Inc. and
subsidiaries as of December 31, 1998 and 1997, and the related consolidated
statements of income, shareholders' equity and comprehensive income, and cash
flows for each of the years in the three-year period ended December 31, 1998,
which report is included in the December 31, 1998 Annual Report on Form 10-K of
Century South Banks, Inc.
KPMG LLP
Atlanta, Georgia
March 31, 1999
<PAGE>
Consent of Independent Auditor
We consent to incorporation by reference in the Registration Statements on Form
S-3 (File Nos. 333-00377 and 33-37784) and on Forms S-8 (File No. 33-18527 and
33-91922) of Century South Banks, Inc. of our report dated March 5, 1997, except
for note 14, as to which the date is July 11, 1997 relating to the consolidated
statements of earnings, changes in shareholders' equity, and cash flows for the
years ended December 31, 1996 and 1995, which report appears in the December 31,
1997 Annual Report on Form 10-K of Century South Banks, Inc.
PORTER KEADLE MOORE, LLP
Successor the practice of
Evans, Porter, Bryan & Co.
Atlanta, Georgia
March 31, 1999
<PAGE>
EXHIBIT 23.3
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
The Board of Directors and Shareholders
Bank Corporation of Georgia
Macon, Georgia
We have audited the consolidated statements of earnings, changes in
shareholders' equity, and cash flows for the year ended December 31, 1996. These
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted accounting
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 presentations.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the results of operations and the cash flows
for Bank Corporation of Georgia and subsidiaries for the year ended December 31,
1996, in conformity with generally accepted accounting principles.
PORTER KEADLE MOORE, LLP
Successor to the practice of
Evans, Porter, Bryan & Co.
Atlanta, Georgia
March 5, 1997, except for note 14, as to which the date is July 11, 1997.
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