<PAGE>
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10Q
[X] Quarterly Report Under Section 13 or 15(d) of the Securities Exchange Act
of 1934
For the period ended June 30, 2000
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.
--------------------------------------------------------------------------------
(Exact name of registrant as specified in its charter)
Georgia 58-1455591
--------------------------------------------------------------------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
2325 Lakeview Parkway, Suite 450, Alpharetta, Georgia 30004-1976
--------------------------------------------------------------------------------
(Address of principal executive offices) (Zip Code)
(678) 624-1366
--------------------------------------------------------------------------------
(Registrant's telephone number, including area code)
--------------------------------------------------------------------------------
(Former name, former address and former fiscal year, if changed since last
report.)
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 the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
CLASS OUTSTANDING AS OF August 11, 2000
--------------------------------------------------------------------------------
Common stock, $1.00 par value 13,773,099
<PAGE>
CENTURY SOUTH BANKS, INC. AND SUBSIDIARIES
Form 10Q
INDEX
Page No.
--------
Part I. Financial Information
---------------------
Item 1. Financial Statements
Consolidated Balance Sheets 3
Consolidated Statements of Income 4
Condensed Consolidated Statements of Cash Flows 5
Notes to Consolidated Financial Statements 6
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 10
Item 3. Market Risk Disclosure 18
Part II. Other Information
-----------------
Item 6. Exhibits and Reports on Form 8-K 18
Signatures 19
2
<PAGE>
PART I - FINANCIAL INFORMATION
ITEM 1 - FINANCIAL STATEMENTS
CENTURY SOUTH BANKS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(Unaudited)
June 30, December 31,
2000 1999
---------------------------
(amounts in thousands,
except share data)
Assets
------
Cash and due from banks $ 48,420 65,373
Federal funds sold 3,860 9,080
Interest-earning deposits in other banks 3,267 2,776
Investment securities:
Available for sale 263,029 199,877
Held to maturity (fair value: June
30, 2000 - $20,674 and December 31,
1999 - $37,271) 20,462 36,714
Loans, net of unearned income 1,196,905 1,030,373
Less allowance for loan losses 17,448 15,183
---------- ---------
Loans, net 1,179,457 1,015,190
---------- ---------
Premises and equipment, net 32,522 30,318
Goodwill and other intangibles, net 10,590 4,331
Other assets 36,163 29,743
---------- ---------
Total assets $1,597,770 1,393,402
========== =========
Liabilities and Shareholders' Equity
------------------------------------
Liabilities:
Deposits:
Noninterest-bearing demand deposits $ 168,261 164,807
Interest-bearing deposits 1,143,795 1,024,802
---------- ---------
Total deposits 1,312,056 1,189,609
Federal funds purchased 31,242 11,022
Federal Home Loan Bank advances 87,081 41,491
Long-term debt 29 31
Other short-term borrowings 668 -
Accrued expenses and other liabilities 16,780 15,164
---------- ---------
Total liabilities 1,447,856 1,257,317
---------- ---------
Shareholders' Equity:
Common Stock-$1 par value. Authorized
30,000,000 shares; issued 14,041,411
and 13,033,856 shares at June 30, 2000
and December 31, 1999, respectively; and
outstanding 13,773,099 and 12,789,856
shares at June 30, 2000 and December
31, 1999, respectively 13,967 13,562
Additional paid-in capital 46,884 40,672
Retained earnings 100,345 92,460
Unearned compensation-restricted stock awards (628) (721)
Common stock in treasury (268,312 shares at
June 30, 2000 and 244,000 shares at
December 31, 1999, respectively), at cost (6,122) (6,014)
Accumulated other comprehensive income (loss) (4,532) (3,874)
---------- ---------
Total shareholders' equity 149,914 136,085
---------- ---------
Total liabilities and shareholders' equity $1,597,770 1,393,402
========== =========
See accompanying notes to consolidated financial statements.
3
<PAGE>
CENTURY SOUTH BANKS, INC. AND SUBSIDIARIES
Consolidated Statements of Income
(Unaudited)
<TABLE>
<CAPTION>
Three months ended Six months ended
June 30, June 30,
2000 1999 2000 1999
-------------------------------------------------------------
(amounts in thousands, except
per share data)
<S> <C> <C> <C> <C>
Interest income:
Loans, including fees $ 28,818 23,444 55,946 46,383
Federal funds sold 193 459 492 963
Interest on deposits in other banks 80 83 138 137
Investment securities:
Taxable 3,775 2,360 7,206 4,248
Nontaxable 671 796 1,409 1,589
-------- ------- ------- -------
Total interest income 33,537 27,142 65,191 53,320
-------- ------- ------- -------
Interest expense:
Deposits 14,043 10,918 27,201 21,400
Federal funds purchased 321 130 499 244
Federal Home Loan Bank advances 906 213 1,549 425
Long-term debt and other borrowings 50 8 85 13
-------- ------- ------- -------
Total interest expense 15,320 11,269 29,334 22,082
-------- ------- ------- -------
Net interest income 18,217 15,873 35,857 31,238
Provision for loan losses 662 722 1,345 1,269
-------- ------- ------- -------
Net interest income after
provision for loan losses 17,555 15,151 34,512 29,969
-------- ------- ------- -------
Noninterest income:
Service charges on deposit accounts 1,661 1,683 3,257 3,304
Securities gains, net - 199 81 440
Other operating income 1,868 1,466 3,520 2,876
-------- ------- ------- -------
Total noninterest income 3,529 3,348 6,858 6,620
-------- ------- ------- -------
Noninterest expense:
Salaries and employee benefits 7,758 6,691 14,956 13,425
Net occupancy and equipment expense 1,620 1,768 3,529 3,473
Other operating expenses 3,915 3,327 7,640 6,791
-------- ------- ------- -------
Total noninterest expense 13,293 11,786 26,125 23,689
-------- ------- ------- -------
Income before income taxes 7,792 6,713 15,245 12,900
Income tax expense 2,595 2,161 5,020 4,278
-------- ------- ------- -------
Net income $ 5,196 4,552 10,225 8,622
======== ======= ======= =======
Net income per share:
Basic $0.38 0.34 0.75 0.64
======== ======= ======= =======
Diluted $0.38 0.33 0.74 0.63
======== ======= ======= =======
Cash dividends declared per share $0.13000 0.12000 0.26000 0.24000
======== ======= ======= =======
</TABLE>
See accompanying notes to consolidated financial statements.
4
<PAGE>
CENTURY SOUTH BANKS, INC. AND SUBSIDIARIES
Condensed Consolidated Statements of Cash Flows
(Unaudited)
<TABLE>
<CAPTION>
Six months ended
June 30,
2000 1999
----------------------
(amounts in thousands)
<S> <C> <C>
Net cash provided by operating activities $ 5,573 10,363
-------- -------
Cash flows from investing activities:
Proceeds from sales of investment securities available for sale 7,229 7,663
Principal collections and maturities of investment securities:
Available for sale 21,323 31,537
Held to maturity 1,325 3,092
Proceeds from maturities of interest-earning deposits 72,332 83,568
Purchases of investment securities held to maturity - (3,560)
Purchases of investment securities available for sale (47,482) (72,495)
Investment in interest-earning deposits (72,343) (81,659)
Net increase in loans (66,506) (44,609)
Proceeds from sales of real estate acquired through foreclosure 413 1,268
Purchases of premises and equipment (2,248) (2,897)
Proceeds from sale of premises and equipment 1,190 71
Payment for purchase of Haywood, net of cash acquired (12,805) -
-------- -------
Net cash used in investing activities (97,572) (78,021)
-------- -------
Cash flows from financing activities:
Net increase in deposits 23,825 46,323
Net increase in federal funds purchased 20,220 11,500
Net increase in other borrowings 5,750 1,850
Proceeds from issuance of Federal Home Loan Bank advances 44,644 -
Payments on long-term debt,other borrowings and Federal
Home Loan Bank advances (15,464) (3,932)
Dividends paid to shareholders (3,159) (2,997)
Purchase of treasury stock (6,122) (345)
Proceeds from issuance of common stock 132 248
-------- -------
Net cash provided by financing activities 69,826 52,647
-------- -------
Net decrease in cash and cash equivalents (22,173) (15,011)
Cash and cash equivalents at beginning of period 74,453 89,358
-------- -------
Cash and cash equivalents at end of period $ 52,280 74,347
======== =======
Supplemental disclosure of cash paid during the period for:
Interest $ 28,356 23,007
======== =======
Income taxes $ 2,063 3,441
======== =======
Supplemental schedule of noncash investing and financing
Activities:
Real estate acquired through foreclosure $ 779 1,103
======== =======
Real estate sold and financed by the Company $ 499 167
======== =======
Treasury stock issued by the Company in merger $ 6,014 98
======== =======
Issuance of common stock for acquisition $ 13,364 -
======== =======
</TABLE>
See accompanying notes to consolidated financial statements.
5
<PAGE>
CENTURY SOUTH BANKS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(1) Basis of Presentation
---------------------
The unaudited consolidated financial statements include the accounts of Century
South Banks, Inc. ("the Parent Company") and its wholly owned subsidiaries,
Century South Bank of Dahlonega, Century South Bank of Ellijay, Century South
Bank of Polk County, Century South Bank of Northeast Georgia, N.A., Century
South Bank of Fannin County, N.A., Century South Bank of Dawsonville, Cenury
South Bank of Lavonia, Century South Bank of Danielsville, Century South Bank of
Central Georgia, N.A., Century South Bank of the Coastal Region, N.A., Century
South Bank of Alabama and Century South Bank of the Carolinas (collectively "the
Company"). In connection with the single brand initiative, the names of the
subsidiaries were changed effective May 8, 2000.
These accompanying unaudited consolidated financial statements have been
prepared in accordance with the instructions to Form 10-Q and therefore do not
include all information and notes necessary for a fair presentation of financial
position, results of operations, and cash flows in conformity with generally
accepted accounting principles. All adjustments consisting of normal recurring
accruals which, in the opinion of management, are necessary for a fair
presentation of the financial position and results of operations for the periods
covered by this report have been included.
(2) Statement No. 130 "Reporting Comprehensive Income"
--------------------------------------------------
Effective January 1, 1998, the Company adopted the provisions of Statement of
Financial Accounting Standards No. 130, "Reporting Comprehensive Income" ("SFAS
130"). This statement establishes standards for reporting and displaying
comprehensive income and its components in a full set of general purpose
financial statements. SFAS 130 requires all items that are required to be
recognized under accounting standards as components of comprehensive income be
reported in an annual financial statement that is displayed in equal prominence
with the other annual financial statements. For interim financial statements,
enterprises are required to disclose a total for comprehensive income in those
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".
Total comprehensive income for the three months ended June 30, 2000 was
$4,345,000 compared to $2,479,000 for the three months ended June 30, 1999.
Total comprehensive income for the six months ended June 30, 2000 was $9,567,000
as compared to $5,985,000 for the six months ended June 30, 1999.
6
<PAGE>
CENTURY SOUTH BANKS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)
(3) Long-Term Debt and Short-Term Borrowings
----------------------------------------
On May 31, 2000, the Company renewed a $15,000,000 revolving line of credit with
a bank which is payable on demand and matures on May 31, 2002. The line of
credit accrues interest at the Prime Lending Rate minus 1.5% on the LIBOR rate
plus 1.25% at the Company's option, as defined in the agreement, and is due
quarterly. The line of credit is secured by 100% of the outstanding common stock
of three of the Company's subsidiaries. As of June 30, 2000, there were no
advances under this line of credit.
Certain of the Company's subsidiaries have invested in Federal Home Loan Bank
stock for the purpose of establishing credit lines with the Federal Home Loan
Bank. At June 30, 2000, the total advances under these lines approximated $87.1
million. During the second quarter of 2000, advances of $44.0 million were
obtained. These advances mature at various dates through June 2008. The
purpose of these advances was to replace short-term deposits with longer term
funds. In addition to these advances, the subsidiaries have additional credit
available on their credit lines with the Federal Home Loan Bank. All lines with
the Federal Home Loan Bank are secured by a blanket lien on certain real estate
loans of each of the respective subsidiaries.
(4) Recent acquisitions
-------------------
On February 15, 2000, the Company completed a merger with Lanier Bankshares,
Inc. ("LBI") and its subsidiary bank, Lanier National Bank, located in
Gainesville, Georgia. The Company issued 1,766,021 shares of its common stock
in exchange for all of the issued and outstanding shares of LBI. The
acquisition was accounted for as a pooling of interests and, accordingly, all
financial information preceding the date of acquisition has been restated to
include the financial position and results of operations of the acquired entity.
The Company's consolidated financial statements for the three and six months
ended June 30, 1999 have been restated for the merger with LBI as follows:
7
<PAGE>
CENTURY SOUTH BANKS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)
Three months Six months
ended June 30, ended June 30,
(Amounts in thousands) 1999 1999
-------------------------------------------------------------------------------
Interest income:
Century South Banks, Inc. exclusive
of acquisition amounts $24,838 48,676
Lanier Bankshares, Inc. and
subsidiary 2,304 4,644
------- ------
Total $27,142 53,320
======= ======
Net interest income:
Century South Banks, Inc. exclusive
of acquisition amounts $14,611 28,730
Lanier Bankshares, Inc. and
subsidiary 1,262 2,508
------- ------
Total $15,873 31,238
======= ======
Noninterest income:
Century South Banks, Inc. exclusive
of acquisition amounts $ 3,159 6,255
Lanier Bankshares, Inc. and
subsidiary 189 365
------- ------
Total $ 3,348 6,620
======= ======
Net income:
Century South Banks, Inc. exclusive
of acquisition amounts $ 4,079 7,697
Lanier Bankshares, Inc. and
subsidiary 473 925
------- ------
Total $ 4,552 8,622
======= ======
The previously separate operations of LBI for the January 1 through February 15,
2000 period are not material to the consolidated financial statements of the
Company for the six months ended June 30, 2000.
Effective February 15, 2000, the Company acquired all of the issued and
outstanding shares of Haywood Bancshares, Inc. ("Haywood"), a one-bank holding
company in western North Carolina for a purchase price of approximately
$26,854,000 which included 626,469 shares of the Company's common stock at
$21.3321 per share, approximately $2,000 of cash in lieu of fractional shares,
approximately $13,264,000 in cash and other acquisition costs of approximately
$224,000. The acquisition was accounted for using the purchase method of
accounting and, hence, the results of operations of Haywood have been included
in the consolidated financial statements from the aforementioned effective date.
The assets and liabilities of Haywood, including purchase accounting
adjustments, as of the date of acquisition were as follows:
Loans, net $109,833,000
Other earning assets 31,714,000
Other assets 8,458,000
Goodwill and other intangibles 5,631,000
------------
155,636,000
Deposits 116,748,000
Other liabilities 12,034,000
------------
Purchase price $ 26,854,000
============
8
<PAGE>
CENTURY SOUTH BANKS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)
The following summarizes the unaudited pro forma consolidated results of
operations assuming Haywood had been acquired in a purchase accounting
transaction on January 1, 1999:
Six months ended
June 30, June 30,
2000 1999
-----------------------
Interest income $66,871,000 58,346,000
=========== ==========
Net interest income 36,625,000 33,508,000
=========== ==========
Noninterest income 6,912,000 6,890,000
=========== ==========
Net income 10,401,000 9,082,000
=========== ==========
Diluted net income per share based
on weighted average outstanding
shares of 13,918,072 and 14,247,724
for the six months ended June 30,
2000 and 1999, respectively $ 0.74 0.63
=========== ==========
(5) Recent Accounting Pronouncements
--------------------------------
In June 1998, the Financial Accounting Standards Board ("FASB") issued Statement
of Financial Accounting Standards No. 133, "Accounting for Derivative
Instruments and Hedging Activities" ("SFAS 133"). SFAS 133 establishes
accounting and reporting standards for derivative instruments and for hedging
activities. In June 1999, FASB issued Statement of Financial Accounting
Standards No. 137, "Accounting for Derivative Instruments and Hedging Activities
- Deferral of the Effective Date of FASB Statement No. 133: ("SFAS 137"). SFAS
137 amends the effective date of implementation of SFAS 133 to all fiscal
quarters of fiscal years beginning after June 15, 2000. The Company has not yet
determined the impact of SFAS 133 on the Company's financial statements.
9
<PAGE>
ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
GENERAL
-------
The following is a discussion of the Company's financial condition at June 30,
2000, compared to December 31, 1999, and results of operations for the three and
six month periods ended June 30, 2000, compared to the three and six month
periods ended June 30, 1999. This discussion should be read in conjunction with
the Company's unaudited consolidated financial statements and accompanying notes
appearing elsewhere in this report.
On February 15, 2000, the Company acquired Haywood Bancshares, Inc., a bank
holding company located in Waynesville, North Carolina, and its savings bank
subsidiary, Haywood Savings Bank. Also, on February 15, 2000, the Company
completed the acquisition of Lanier Bankshares, Inc., a bank holding company
located in Gainesville, Georgia, and its bank subsidiary, Lanier National Bank.
FINANCIAL CONDITION
-------------------
During the first six months of 2000, total assets increased $204.4 million or
approximately 14.7%, primarily due to the merger with Haywood Bancshares, Inc.
which added approximately $159.0 million in assets. This merger was accounted
for as a purchase. Exclusive of the Haywood merger, total assets increased
$45.4 million.
The amortized cost, gross unrealized gains and losses, and estimated fair value
of available for sale and held to maturity securities by type at June 30, 2000
were as follows:
<TABLE>
<CAPTION>
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 $143,287 135 (4,429) 138,993
State, county and
municipal securities 33,169 418 (665) 32,922
Mortgage-backed securities 16,779 38 (317) 16,500
Other debt securities 67,672 37 (2,279) 65,430
Equity securities 9,335 - (151) 9,184
------------------------------------------------
$270,242 628 (7,841) 263,029
------------------------------------------------
Held to maturity:
U.S. Government agencies $ 345 3 - 348
State, county and
municipal securities 17,884 222 (75) 18,031
Mortgage-backed securities 274 2 (2) 274
Other debt securities 1,959 62 - 2,021
------------------------------------------------
$ 20,462 289 (77) 20,674
------------------------------------------------
</TABLE>
Balances within the major deposit categories as of June 30, 2000 and December
31, 1999 are shown below:
<TABLE>
<S> <C> <C>
(amounts in millions)
June 30, December 31,
2000 1999
--------------------------
Noninterest-bearing demand deposits $ 168.3 164.8
Interest-bearing demand deposits 176.1 159.3
Money market accounts 205.8 171.6
Savings deposits 75.2 63.2
Certificates of deposit and
Individual retirement accounts
Of $100,000 or more 204.6 215.6
Other individual retirement accounts 59.9 56.2
Other certificates of deposit 422.2 358.9
-------- -------
$1,312.1 1,189.6
======== =======
</TABLE>
10
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS (Continued)
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, its liquidity position, and its interest sensitivity gap. 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 June 30, 2000, the Company's cash and due from banks was $48.4 million, its
federal funds sold were $3.9 million, its interest-earning deposits in other
banks were $3.3 million, and its investment securities designated as available
for sale were $263.0 million. 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 of up to
approximately $83.8 million, in addition to credit, which is available in the
form of Federal Home Loan Bank advances. Also, the Company has a secured
revolving line of credit with a bank of $15,000,000 of which $15,000,000 was
available at June 30, 2000.
During the first quarter of 2000, the Company acquired 164,294 shares of its
common stock as treasury shares. During the second quarter of 2000, the Company
acquired 104,018 shares of its common stock as treasury shares.
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.
11
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS (Continued)
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 June 30, 2000.
<TABLE>
<CAPTION>
0-90 days 91-365 days 1-5 years Over 5 years
Current Current Cumulative Current Cumulative Current Cumulative
--------------------------------------------------------------------------------------
(amounts in thousands)
<S> <C> <C> <C> <C> <C> <C> <C>
Interest-sensitive assets $ 443,629 260,861 704,490 547,554 1,252,044 235,479 1,487,523
Interest-sensitive
liabilities 690,484 387,201 1,077,685 160,638 1,238,323 24,492 1,262,815
--------- --------- --------- ------- --------- ------- ---------
Interest-sensitivity gap $(246,855) (126,340) (373,195) 386,916 13,721 210,987 224,708
========= ========= ========= ======= ========= ======= =========
Ratio of interest-sensitive
assets to interest-
sensitive liabilities 0.64 0.67 0.65 3.41 1.01 9.61 1.18
========= ======== ========= ======= ======== ======= ========
</TABLE>
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 June 30, 2000, 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 purpose 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. Management currently believes its interest sensitivity position is such
that short-term interest rate movements would not materially impact its net
interest income.
RESULTS OF OPERATIONS
---------------------
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 its deposits, federal funds purchased,
Federal Home Loan Bank advances, other short-term borrowings, and long-term
debt.
Net interest income for the three months ended June 30, 2000 increased
$2,344,000 or 14.77% over the same period of 1999. For the six months ended June
30, 2000, net interest income was $35,857,000 representing an increase of
$4,619,000 or 14.79% as compared to the six months ended June 30, 1999. The
average yield earned on interest-earning assets, on a tax equivalent basis,
increased to 9.18% for the six months ended June 30, 2000 from 9.11% for the six
months ended June 30, 1999 and the average rate paid on interest-bearing
liabilities increased to 4.86% for the six months ended June 30, 2000 from 4.54%
for the six months ended June 30, 1999. The Company's interest rate
differential decreased to 4.32% from 4.57% and its net interest margin (net
interest income divided by average interest-earning assets) decreased to 5.08%
for the first six months of 2000 from 5.37% for the same period of 1999.
12
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS (Continued)
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 Banks' 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 nonaccrual 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 all other
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 homogenous 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 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,
southwestern North Carolina and eastern Alabama. The ultimate collectibility of
a substantial portion of the Company's loan portfolio is dependent on or
susceptible to changes in market conditions in these markets.
The allowance for loan losses approximated 1.46% of outstanding loans at June
30, 2000 as compared to 1.47% at December 31, 1999 and 1.51% at June 30, 1999.
The allowance increased to $17,448,000 at June 30, 2000 from $15,183,000 at
December 31, 1999 and $14,598,000 at June 30, 1999. The provision for loan
losses increased to $1,345,000 for the six months ended June 30, 2000 from
$1,269,000 for the six months ended June 30, 1999. Net loan charge offs for the
six months ended June 30, 2000 were $458,000 as compared to $779,000 for the six
months ended June 30, 1999. Net loans charged off as a percentage of average
loans was 0.08% for the six months ended June 30, 2000 as compared to 0.16% for
the six months ended June 30, 1999.
13
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS (Continued)
The table below summarizes the changes in the allowance for loan losses for the
six months ended June 30, 2000 and the year ended December 31, 1999.
<TABLE>
<CAPTION>
Six months ended Year ended
June 30, 2000 December 31, 1999
---------------------------------------
<S> <C> <C>
Allowance for loan losses at
beginning of year $15,183 12,853
Loans charged off 947 3,193
Recoveries on loans previously
charged off 489 798
------- ------
Net loans charged off 458 2,395
Allowances for loan losses of
loans of subsidiary purchased 1,378 -
Provision for loan losses
charged to income 1,345 2,593
------- ------
Allowance for loan losses at
end of period $17,448 15,183
======= ======
</TABLE>
Nonperforming Loans, Nonperforming Assets, and Underperforming Loans
--------------------------------------------------------------------
Nonperforming loans include nonaccrual loans. The Company has not restructured
any loans of significance through June 30, 2000. Underperforming loans include
loans, which are past due with respect to principal or interest more than 90
days and still accruing interest. Nonperforming assets include nonperforming
loans, underperforming loans, real estate acquired through foreclosure,
securities that are in default, and other repossessed assets.
Accrual of interest on loans is discontinued when reasonable doubt exists as to
the full, timely collection of interest or principal or they become
contractually in default for 90 days or more as to either interest or principal
unless they are 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.
14
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS (Continued)
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 1) represent or result from trends or uncertainties which management
reasonably expects will materially impact future operating results, liquidity,
or capital resources, or 2) 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.
The table below provides information concerning nonperforming loans,
underperforming loans, nonperforming assets, and certain asset quality ratios
at June 30, 2000 and December 31, 1999.
<TABLE>
<CAPTION>
June 30, December 31,
2000 1999
-----------------------------------------------------
(amounts in thousands, except ratios and percentages)
<S> <C> <C>
Nonperforming loans $5,370 5,153
Other nonperforming assets 2,053 2,763
Underperforming loans 996 700
------ -----
Nonperforming assets $8,419 8,616
====== =====
Asset Quality Ratios:
Nonperforming loans to total loans,
Net of unearned income 0.45% 0.50%
====== =====
Nonperforming assets to total loans,
Net of unearned income,real estate
Acquired through foreclosure, and
Other repossessed assets 0.70% 0.83%
====== =====
Allowance for loan losses to
Nonperforming loans 3.25x 2.95x
====== =====
Underperforming loans to total loans,
Net of unearned income 0.08% 0.07%
====== =====
</TABLE>
Noninterest Income
------------------
Noninterest income for the second quarter of 2000 increased $181,000 or 5.4% as
compared to the same period of 1999. This increase was primarily due to the
acquisition of Haywood which added $160,000 in noninterest income for the
quarter. Other increases included an increase in brokerage fees of $77,000, an
increase in mortgage related commissions of $60,000, insurance commissions of
$35,000, and debit card income of $33,000 which are partially offset by a
decrease in service charges on deposit accounts of $22,000 and a decrease in net
securities gains of $199,000. For the six months ended June 30, 2000,
noninterest income increased $238,000 or 3.6%. This increase was also primarily
due to the acquisition of Haywood which added $254,000 in noninterest income for
the first six months of 2000. Other increases included an increase in brokerage
fees of $202,000, an increase in mortgage related commissions of $114,000, and
an increase in insurance commissions of $125,000 which are partially offset by a
decrease in service charges on deposit accounts of $47,000 and a decrease in net
securities gains of $359,000.
15
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS (Continued)
Noninterest Expense
-------------------
Noninterest expense increased $1,507,000 for the second quarter of 2000 compared
to the second quarter of 1999. Approximately $760,000 or 50.4% of this increase
is represented by the noninterest expense of Haywood as such expenses have been
included since the February 15, 2000 date of acquisition. Excluding the Haywood
impact, salaries and benefits expense increased $370,000 in 2000 compared to
1999. For the six months ended June 30, 2000, noninterest expense increased
$2,436,000 or 10.3% as compared to the same period in 1999. This increase was
also impacted by the acquisition of Haywood with an increase of $1,208,000 or
49.6% in noninterest expense. Excluding the Haywood impact, salaries and
benefits expense increased $834,000 in 2000 compared to 1999.
Telecommunications expenses have increased by approximately $137,000 in the
first six months of 2000 compared to the first six months of 1999 as the Company
has expanded its subsidiary bank network into Alabama and North Carolina.
Income Tax Expense
------------------
The second quarter 2000 income tax expense was approximately $2,595,000, or an
effective rate of 33.3%, as compared to $2,161,000 for the second quarter of
1999, or an effective rate of 32.2%. During the first six months of 2000 income
tax expense was approximately $5,020,000, or an effective rate of 32.9%, as
compared to approximately $4,278,000 for the first six months of 1999, or an
effective rate of 33.2%.
Net Income
----------
The Company's second quarter 2000 net earnings were $0.38 per diluted share or
$5,196,000 as compared to $0.33 per diluted share or $4,552,000 for the second
quarter of 1999, representing an increase in net earnings per share of 15.2%.
Net earnings for the first six months of 2000 were $0.74 per diluted share or
$10,225,000 as compared to $0.63 per diluted share or $8,622,000 for the first
six months of 1999.
Performance Ratios
------------------
Performance of banks is often measured by various ratio analyses. Two widely
recognized performance indicators are return on average equity and return on
average assets. The return on average equity for the six months ended June 30,
2000 was 13.96% (annualized) as compared to 12.52% (annualized) for the six
months ended June 30, 1999. The Company's return on average assets was 1.34%
(annualized) and 1.35% (annualized) for the six month periods ended June 30,
2000 and 1999, respectively.
16
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS (Continued)
Capital Resources
-----------------
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 Parent company and
subsidiary banks individually, to maintain minimum amounts and ratios (set forth
in the table below) 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 June 30, 2000 that the Company meets
all capital adequacy requirements to which it is subject.
The Company's actual capital amounts and ratios are presented below on a
consolidated basis:
<TABLE>
<CAPTION>
For
Capital
Actual Adequacy Purposes
----------------------------------------------------------------
Amount Ratio Amount Ratio
----------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
As of June 30, 2000:
Total Capital (to Risk Weighted Assets): $158,410 14.1% equal to or $90,161 equal to or 8.0%
greater than greater than
Tier 1 Capital (to Risk Weighted Assets): $144,281 12.8% equal to or $45,080 equal to or 4.0%
greater than greater than
Tier 1 Capital (to Average Assets): $144,281 9.1% equal to or $63,126 equal to or 4.0%
greater than greater than
</TABLE>
The Company continues to maintain a level of capital well in excess of
regulatory requirements and available for supporting future growth. The
Company's level of capital can be measured by its average shareholders' equity
to average assets ratio of 9.60% and its ratio of shareholders' equity to assets
of 9.38% at June 30, 2000.
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.
17
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS (Continued)
Year 2000
---------
The Year 2000 issue refers generally to the data structure problem that prevents
systems from properly recognizing dates after the year 1999. 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 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 would impact operation of these systems.
All plans were finalized, tested, and implemented before third quarter 1999.
Cash reserves for the Year 2000 issue reached $11 million by December 31, 1999.
With no significant cash withdrawals, all of these special Year 2000 cash
reserves were eliminated by January 7, 2000.
The Company spent approximately $1.2 million to modify its computer information
systems. The replacement of personal computers and software was approximately
$700,000, which was recorded as capital expenditures and amortized. The
remainder was expensed as incurred and did not have a material effect on the
Company's financial condition or results of operation.
Overall, the Company's Year 2000 program was successful. No disruption of
business occurred due to the Year 2000 issue. However, there are several dates
that have been and will be closely monitored for the coming year and in the
future. All software and computer related components will continue to be
required to undergo Year 2000 testing and/or certification.
ITEM 3 - MARKET RISK DISCLOSURE
The information called for concerning market risk of the Company is not included
as there have not been any significant changes in the market rate table as shown
in the Company's 1999 Annual Report filed on Form 10-K.
PART II. OTHER INFORMATION
Item 6. Exhibits and Report on Form 8-K
(a) Exhibits
The following exhibits are attached:
Exhibit 11 Computation of Per Share Earnings
Exhibit 20 Shareholders' Report
Exhibit 27.1 Financial Data Schedule as of and for the six
months ended June 30, 2000
Exhibit 27.2 Financial Date Schedule as of and for the six
months ended June 30, 1999
(b) There were no reports filed on Form 8-K for the
quarter ended June 30, 2000.
18
<PAGE>
Signatures
Pursuant to the requirements 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.
DATE: August 14, 2000 By: /s/ Joseph W. Evans
--------------- ---------------------
Joseph W. Evans
President and Chief
Executive Officer
DATE: August 14, 2000 By: /s/ Stephen W. Doughty
--------------- ------------------------
Stephen W. Doughty
Chief Risk Management
Officer and Chief Financial
Officer
19
