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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
____________________
FORM 10-K
[X] Annual report pursuant to section 13 or 15(d) of the Securities Exchange Act
of 1934 for the fiscal year ended December 31, 1999, 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 of incorporation (IRS Employer - Identification
or organization) Number)
60 Main Street West, Dahlonega, Georgia 30533
(Address of principal executive offices) (Zip Code)
____________________
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
____________________
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 [ ].
Indicated 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 20, 2000, was approximately
$254,214,000. 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 13,800,250 shares of its common stock outstanding as of
March 20, 2000.
Documents Incorporated by Reference in this Form 10-K:
Portions of the Company's Proxy Statement for the Company's 2000 Annual
Meeting of Shareholders, to be filed with the Securities and Exchange Commission
within 120 days of the Registrant's fiscal year end, is incorporated by
reference into Part III, Items, 10, 11, 12, and 13 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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TABLE OF CONTENTS
Item No. Page No.
- -------- -------
CAUTIONARY NOTICE REGARDING FORWARD-LOOKING STATEMENTS................. 3
PART I
1. Business.......................................................... 4
2. Properties........................................................ 11
3. Legal Proceedings................................................. 11
4. Submission of Matters to a Vote of Security Holders............... 11
PART II
5. Market for Registrant's Common Equity and Related Shareholder
Matters....................................................... 11
6. Selected Financial Data........................................... 12
7. Management's Discussion and Analysis of Financial Condition
and Results of Operations..................................... 13
7A. Quantitative and Qualitative Disclosures About Market Risk........ 29
8. Consolidated Financial Statements and Supplementary Data.......... 32
9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure.......................................... 58
PART III
10. Directors and Executive Officers of the Registrant................ 58
11. Executive Compensation............................................ 59
12. Security Ownership of Certain Beneficial Owners and Management.... 59
13. Certain Relationships and Related Transactions.................... 59
PART IV
14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K.. 59
SIGNATURES............................................................. 61
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CAUTIONARY NOTICE REGARDING FORWARD-LOOKING STATEMENTS
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, (iii) the Company's management information systems, (iv) revenues,
income or loss, earnings or loss per share, the payment or non-payment of
dividends, capital structure and other financial items, (v) future economic
performance, and (vi) statements of assumptions underlying such statements.
Words such as "believes", "anticipates", "expects", "intends", or similar
expressions indicate the use of forward-looking statements.
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.
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PART I
ITEM 1. BUSINESS
General
The Company is a $1.27 billion asset multibank holding company headquartered
in Alpharetta, Georgia. The Company was organized as a business corporation
under the laws of the State of Georgia in 1981 and is a registered bank holding
company under the Bank Holding Company Act of 1956, as amended (the "Act") and
under the bank holding company laws of the State of Georgia. The Company
conducts operations in Georgia, Tennessee, Alabama, and North Carolina through
its wholly-owned subsidiaries, Bank of Dahlonega ("BOD"), The Bank of Ellijay
("BOE"), First Bank of Polk County ("FBPC"), Georgia First Bank, N.A. ("GFB"),
Fannin County Bank, N.A. ("FCB"), First Community Bank of Dawsonville, ("FCBD"),
Peoples Bank ("PBL"), Bank of Danielsville ("DAN"), First South Bank, N.A.
("FSB"), AmeriBank, N.A. ("AMB"), The Independent Bank of Oxford ("IBO"),
Haywood Savings Bank ("HSB"), and Lanier National Bank ("LNB") -(collectively,
the "Banks").
In August of 1999, the Company announced plans to consolidate its two Georgia
headquarters into one office located in Alpharetta, Georgia, a suburb of
Atlanta. The dual Georgia headquarters had resulted from a previously
consummated merger transaction. The Company also announced plans to build a
single identity for its 13 different bank brands. When the Company's single
bank brand initiative is completed, all of the Banks will operate under the
"Century South Bank" brand name with a geographic identifier attached. Each of
the Banks will continue to foster and promote the Company's community bank
philosophy of autonomous decision-making and responsive, personal service.
The Banks provide a wide range of commercial banking products and services.
The Banks' products and services include interest bearing and non-interest
bearing checking and savings accounts; retirement accounts; certificates of
deposit; real estate, commercial and consumer installment loans; direct deposit
services; wire transfer services; and automated teller machines.
Acquisitions
The acquisition of unaffiliated financial institutions has been a principal
source of the Company's growth over the past several years. On December 16,
1997, the Company acquired Bank Corporation of Georgia ("BCG"), a bank holding
company located in Macon, Georgia, and its subsidiary banks, FSB and AMB. On
April 13, 1999, the Company completed the acquisition of Independent Bancorp,
Inc., a bank holding company located in Oxford, Alabama, and its bank
subsidiary, IBO.
Subsequent Events
On February 15, 2000, the Company acquired Haywood Bancshares, Inc., a bank
holding company located in Waynesville, North Carolina, and its savings bank
subsidiary, HSB. 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, LNB. The combined assets of HSB
and LNB approximate $270 million.
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 the residents, businesses and employees of businesses
within the Banks' market areas. Deposits are 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.
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Loan Portfolio
The Banks engage in a full complement of lending activities, including real
estate-related, commercial and financial loans and consumer installment loans.
The Banks generally concentrate their lending efforts on real estate mortgage
loans. As of December 31, 1999, the Banks' loan portfolio consisted of 75.1%
real estate-related loans (60.4% mortgage loans and 14.7% construction loans),
14.1% commercial and financial loans, and 10.8% 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 and financial loans are generally considered to have a greater risk
of loss than real estate loans or consumer installment loans.
Real Estate Loans. Loans secured by real estate are the primary component of
the Company's loan portfolio, constituting approximately $714.7 million or 75.1%
of the total loans at December 31, 1999, net of unearned interest. The Banks'
real estate loan portfolio is comprised of commercial and residential mortgage
loans. Real estate mortgage loans held in the Banks' loan portfolio, both fixed
and variable rate, are made based upon amortization schedules, which typically
do not exceed 15 years, with maturity dates of 5 years or less. The majority of
the Banks' commercial mortgage loans are at variable rates, which approximate
current market rates. Construction loans are made on a variable rate basis.
Origination fees are normally charged for all loans secured by real estate. The
Banks' primary type of residential mortgage loan is the single-family first
mortgage, typically structured with fixed or adjustable interest rates, based on
market conditions.
The Banks' nonresidential mortgage loans include commercial, industrial, and
unimproved real estate loans. The Banks generally require nonresidential
mortgage loans to have a loan-to-value ratio not to exceed 80% and underwrite
their commercial loans on the bases of the borrower's cash flow and ability to
service the debt from earnings as well as usually on the basis of the value of
the collateral. Terms on construction loans are usually less than twelve
months, and the Banks typically require real estate mortgages and personal
guarantees supported by financial statements and a review of the guarantor's
personal finances.
Commercial, Financial and Agricultural Loans. Commercial, financial and
agricultural loans were the next largest component of the Banks' loan portfolio,
constituting $133.8 million or 14.1% of the total loans at December 31, 1999,
net of unearned interest. The Banks make loans for commercial purposes in
various lines of business. These loans are typically made on terms up to five
years at fixed or variable rates. The loans are secured by various types of
collateral including real estate, accounts receivable, inventory, or, in the
case of equipment loans, the financed equipment. The Banks manage their credit
risk on commercial loans by underwriting the loan based on the borrower's cash
flow, ability to service the debt from earnings, financial strength exhibited on
its balance sheet, and by limiting the loan to value ratio. Historically, the
Banks have loaned up to 70% on loans secured by accounts receivable, up to 65%
on loans secured by inventory, and up to 80% on loans secured by equipment.
While the Banks also make some unsecured commercial loans, these are limited,
constituting less than 1% of total loans.
Consumer Installment Loans. Consumer loans constituted $103.2 million or
10.8% of the Banks' loan portfolio at December 31, 1999, net of unearned
interest. Consumer lending includes installment lending to individuals in the
Banks' market areas and generally consist of loans to purchase automobiles and
other consumer durable goods. Consumer loans are underwritten based on the
borrower's income, current debt level, past credit history, and collateral.
Consumer rates are both variable and fixed, with terms negotiable. Terms
generally range from one to five years depending on the nature and condition of
the collateral. Periodic amortization, generally monthly, is required.
Competition
The banking business is highly competitive, with each of the Banks facing
strong competition from commercial banks located in its primary market area.
The Banks also compete with other financial service 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. Furthermore, 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.
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Supervision and Regulation
Bank Holding Company Regulations
The Company is a registered bank holding company under the Act and the bank
holding company laws of the State of Georgia. Accordingly, the Company is
regulated under such laws by the Board of Governors of the Federal Reserve
System (the "Board") and by the Georgia Department of Banking and Finance (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 (i) it acquires direct or indirect ownership or control of any
voting shares of any bank if, after the acquisition, the bank holding company
will directly or indirectly own or control more than 5% of the bank's voting
shares; (ii) it or any of its non-bank subsidiaries acquire all or substantially
all of the assets of any bank; or (iii) it merges or consolidates with any other
bank holding company.
The Act and Georgia law 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. The Board is also required
to consider the financial and managerial resources and future prospects of the
bank holding companies and banks concerned and the convenience and needs of the
community to be served. The Board's consideration of financial resources
generally focuses on capital adequacy, which is discussed below.
The Company and other bank holding companies located in Georgia may acquire a
bank located in any other state, and any bank holding company located outside of
Georgia may acquire any Georgia-based bank, regardless of state law to the
contrary. In each case, certain deposit-percentage, aging requirements and
other restrictions will apply. By adopting legislation, a state could elect
either to "opt in" and accelerate the date after which interstate branching
would be permissible or "opt out" and prohibit interstate branching altogether.
The Georgia Interstate Banking Act provides that interstate acquisitions by or
of institutions located in Georgia are permitted in states that also allow
national interstate acquisitions. The Georgia Interstate Branching Act permits
Georgia-based banks and bank holding companies owning or acquiring banks outside
of Georgia and all non-Georgia banks and bank holding companies owning or
acquiring banks in Georgia to merge any lawfully acquired bank into an
interstate branch network. The Georgia Interstate Branching Act also allows
banks to establish new start-up branches throughout Georgia, which removes a
barrier to competition.
The Act has generally prohibited a bank holding company from engaging in
activities other than banking or managing or controlling banks or other
permissible subsidiaries and from acquiring or keeping direct or indirect
control of any company engaged in any activities other than those activities
that the Board determines to be closely related to banking or managing or
controlling banks. Provisions of the Gramm-Leach-Bliley Act of 1999, discussed
below, have expanded the permissible activities of a bank holding company and
its subsidiaries. In determining whether a particular activity is permissible,
the Board must consider whether the performance of such an activity reasonably
can be expected to produce benefits to the public, such as greater convenience,
increased competition, or gains in efficiency, that outweigh possible adverse
effects, such as undue concentration of resources, decreased or unfair
competition, conflicts of interest, or unsound banking practices. The Act does
not place territorial limitations on permissible non-banking activities of bank
holding companies. Despite prior approval, the Board may order a holding
company or its subsidiaries to terminate any activity or to terminate its
ownership or control of any subsidiary when it has reasonable cause to believe
that the holding company's continued ownership, activity, or control constitutes
a serious risk to the financial safety, soundness, or stability of any of its
bank subsidiaries.
Gramm-Leach-Bliley Act of 1999
On November 12, 1999, President Clinton signed into law the Gramm-Leach-Bliley
Act of 1999 (the "GLB Act") which makes major changes to the statutory framework
for providing banking and other financial services in the United States. The
GLB Act, among other things, repeals the provisions of the Glass-Steagall Act,
which prohibited affiliations of commercial banks and securities underwriting
firms. In addition, the GLB Act amends the Act to allow for the affiliation of
commercial banks and insurance underwriting companies.
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The GLB Act amends the Act to allow for a holding company structure that
engages in a full range of financial activities through a new entity known as a
"financial holding company." A financial holding company may engage in not only
banking, securities, and insurance activities, but also merchant banking and
additional activities that the Board, in consultation with the Department of the
Treasury, determines to be financial in nature, or activities that are
incidental or complimentary to such financial activities and that do not pose a
substantial risk to the safety and soundness of the holding company or its
banking subsidiaries. In order for a bank holding company to become affiliated
with securities and insurance firms, the bank holding company must become a
financial holding company. To become a financial holding company, a bank
holding company must file a declaration with the Board, electing to engage in
activities permissible for financial holding companies and must certify that it
is eligible to do so because all of its insured depository institution
subsidiaries are well-capitalized and well-managed. In addition, the Board must
also determine that each insured depository institution subsidiary of the bank
holding company has at least a "satisfactory" rating under the Community
Reinvestment Act.
The GLB Act is considered to be one of the most significant banking laws since
Depression-era statutes were enacted. The Company does not believe that the GLB
Act will have a material adverse impact on the Company's operations. However,
to the extent that it allows banks, securities firms, and insurance firms to
affiliate, the financial services industry may experience further consolidation.
The GLB Act may have the result of increasing the amount of competition that the
Company faces from larger institutions and other companies offering financial
products and services, many of which may have substantially more financial
resources than the Company.
Banks' Supervision and Regulations
Each of the Banks is a member of the Federal Deposit Insurance Corporation
(the "FDIC"), and as such, the Banks' deposits are insured by the FDIC to the
maximum extent provided by law. Each of the Banks is also subject to numerous
federal and state statutes and regulations that affect its business, activities,
and operations. Each of the Banks is supervised and examined by one or more
federal or state regulatory agencies.
BOD, BOE, FCBD, PBL, 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. IBO is an insured state nonmember bank charted by the
Alabama Department of Financial Institutions ("ALFI") and is subject to
supervision by the ALFI and the FDIC. FCB, GFB, FSB, AMB, and LNB 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 Office of the Comptroller of
the Currency ("OCC") and the FDIC, and are regularly examined by the OCC. HSB is
an insured federal savings bank chartered under the laws of the United States
and is subject to supervision by the FDIC and Office of Thrift Supervision
("OTS") and is regularly examined by the OTS.
In addition, the Banks 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.
The following summary describes the significant federal and state laws
applicable to the Company and the Banks. To the extent statutory or regulatory
provisions are described, the description is qualified in its entirety by
reference to the particular statutory or regulatory provisions.
Capital Adequacy
The Company and the Banks are subject to capital adequacy guidelines as
established by the Board. The Board has established risk-based capital
guidelines and leverage-based 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 I 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 I Capital
must represent at least 50% of qualifying total capital and consists of common
and qualifying preferred shareholders' equity and minority interest 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.
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The minimum required ratio for qualifying Total Capital to risk-weighted
assets (including grandfathered goodwill) as of December 31, 1999, was 8%, of
which 4% was required to be Tier I Capital. As of December 31, 1999, the
Company's Tier I Capital was $124,626,000 or 13.42%, Tier II Capital was
$11,645,000, and its Total Risk-Based Capital was $136,271,000 or 14.68% as
determined in accordance with the above regulatory requirements. Accordingly,
91.5% of the Company's qualifying Total Risk-Based Capital was Tier I Capital.
See Note 16 to the Company's consolidated financial statements for additional
disclosures related to the Company's and the Banks' capital requirements and
ratios.
In addition, the Board has established minimum leverage ratio guidelines for
bank holding companies. These guidelines provide for a minimum ratio of Tier 1
Capital to average assets, less goodwill and certain other intangible assets, of
3% for bank holding companies that meet certain specified criteria, including
having the highest regulatory rating. All other bank holding companies are
required to maintain a leverage ratio of at least 3%, plus an additional cushion
of 100 to 200 basis points. These guidelines also provide that bank holding
companies experiencing internal growth or making acquisitions, as is the case
for the Company, will be expected to maintain strong capital positions
substantially above the minimum supervisory levels without significant reliance
on intangible assets. Furthermore, the Board has indicated that it will
consider a bank holding company's Tier 1 Capital leverage ratio, after deducting
all intangibles, and other indicators of capital strength in evaluating
proposals for expansion or new activities.
The Banks are also subject to capital requirements imposed by the OCC (in the
case of the national banks), the FDIC (in the case of the state-chartered
banks), and the OTS (in the case of HSB), which are substantially similar to
those adopted by the Board for bank holding companies.
Failure to meet capital guidelines could subject a bank to a variety of
enforcement remedies, including the issuance of a capital directive, the
termination of deposit insurance by the FDIC, a prohibition on the taking of
brokered deposits, and certain other restrictions on its business. As described
below, substantial additional restrictions can be imposed on FDIC-insured
depository institutions that fail to meet applicable capital requirements. See
- - "Prompt Corrective Action."
Payment of Dividends
The Company is a legal entity separate and distinct from its banking
subsidiaries. The principal sources of the Company's cash flow, including cash
flow to pay dividends to its shareholders, are dividends received from the
Banks. Statutory and regulatory limitations apply to the Banks' payment of
dividends to the Company, as well as to the Company's payment of dividends to
its shareholders.
If, in the opinion of the federal banking regulators, a depository institution
was engaged in or about to engage in an unsafe or unsound practice, such
authority could require, after notice and a hearing, that the depository
institution cease and desist from the practice. The federal banking agencies
have indicated that paying dividends that deplete a depository institution's
capital base to an inadequate level would be an unsafe and unsound banking
practice. Under the Federal Deposit Insurance Corporation Improvement Act of
1991, a depository institution may not pay any dividend if payment would cause
it to become undercapitalized or if it already is undercapitalized. Moreover,
the federal agencies have issued policy statements that provide that bank
holding companies and insured banks should generally only pay dividends out of
current operating earnings. See - "Prompt Corrective Action."
The payment of dividends by the Company and the Banks may also be affected by
other factors, such as the requirement to maintain adequate capital above
regulatory guidelines.
Support of Subsidiary Institutions
Under Federal Reserve policy, the Company is expected to act as a source of
financial strength for, and to commit resources to support, the Banks. This
support may be required at times when, without this Federal Reserve policy, the
Company might not be inclined to provide it. In addition, any capital loans by
the Company to any of the Banks will be repaid only after the Bank's deposits
and certain other indebtedness is repaid in full. In the event of a bank
holding company's bankruptcy, any commitment by the bank holding company to a
federal bank regulatory agency to maintain the capital of a banking subsidiary
will be assumed by the bankruptcy trustee and entitled to a priority of payment.
In addition the Financial Institutions Reform, Recovery and Enforcement Act of
1989 ("FIRREA") imposes "cross-guarantee" provisions on community-controlled
financial institutions. 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.
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Prompt Corrective Action
The Federal Deposit Insurance Corporation Improvement Act of 1991 "(FDICIA")
establishes additional supervisory powers and regulations, including a "prompt
corrective action" program based upon five regulatory zones for banks, in which
all banks are placed, largely based on their capital positions. The extent of
regulatory power depends on whether the institution is well capitalized,
adequately capitalized, undercapitalized, significantly undercapitalized or
critically undercapitalized, as defined under federal law. 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.
FDIC Insurance Assessments
The FDIC has adopted regulations which provide for a risk based premium
system, requiring higher assessment rates for banks, which the FDIC determines,
pose greater risks to the BIF. Under the regulations, banks pay an assessment
depending upon risk classification. 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 supervisory 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. Assessments range from 0 to 27 cents per $100 of
deposits, depending on the bank's capital ratios and supervisory subgroup
assignment.
The Company has been informed by the FDIC that the Banks have been classified
as well capitalized, are in the lowest risk category and will be assessed
accordingly for 2000.
The FDIC may terminate its insurance of deposits if it finds that the
institution has engaged in unsafe and unsound practices, is in an unsafe or
unsound condition to continue operations or has violated any applicable law,
regulation, rule, order, or condition imposed by the FDIC.
Community Reinvestment Act
The Community Reinvestment Act of 1977 (the "CRA") requires the federal bank
regulatory agencies to encourage financial institutions to meet the credit needs
of low and moderate income borrowers in their local communities. Under
regulations promulgated by federal banking agencies, an institution's size and
business strategy determines the type of examination that it will receive.
Large, retail-oriented institutions will be examined using a performance-based
lending, investment and service test, while smaller institutions will be
examined using a streamlined approach. All institutions have the option of
being evaluated under a strategic plan formulated with community input and
preapproved by the bank regulatory agency.
CRA regulations provide for certain disclosure obligations. In accordance
with the CRA, each institution must post a CRA notice advising the public of the
right to comment to the institution and its regulator on the institution's CRA
performance and to review the institution's CRA public file. Each lending
institution must maintain for public inspection a public file that includes a
listing of branch locations and services, a summary of lending activity, a map
of its communities, and any written comments from the public on its performance
in meeting community credit needs. Public disclosure of written CRA evaluations
of financial institutions made by regulatory agencies is required by the CRA.
This promotes enforcement of CRA requirements by providing the public with the
status of a particular institution's community investment record.
In addition to public disclosure of an institution's CRA assessment,
regulatory authorities are required to consider an institution's CRA assessment
when an institution applies for approval to establish a new branch which will
accept deposits, to relocate an existing branch, or to merge with another
federally regulated financial institution.
9
<PAGE>
Monetary Policy
The earnings of the Banks, and thus, of the Company, are affected by domestic
and foreign economic conditions, particularly by the monetary and fiscal
policies of the Board.
The Board has had, and will continue to have, an important impact on the
operating results of the 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 other
depository institutions, establishing the discount rate on member bank
borrowings and open market transactions in United States Government securities.
In view of the changing conditions in the national economy and in the money
markets, as well as the effect of action of monetary and fiscal authorities,
including the Board, no prediction can be made as to possible future changes in
interest rates, deposit levels, loan demand or the business and earnings of the
Banks.
Employees
As of December 31, 1999, the Company had approximately 570 employees, with
approximately 93 employees serving the Company directly. As of December 31,
1999, BOD had 43 employees, BOE had 35 employees, FBPC had 43 employees, GFB had
66 employees, FCB had 26 employees, FCBD had 25 employees, PBL had 18 employees,
DAN had 29 employees, FSB had 94 employees, AMB had 58 employees, and IBO had
39 employees. The Company is not a party to any collective bargaining agreement
and the Company believes that its relations with its employees are good.
Executive Officers
The Executive Officers of the Company serve at the pleasure of the Board of
Directors. Set forth below are the current Executive Officers of CSBI and a
brief explanation of their principal employment during the last five (5) years.
William H. Anderson, II - Age 62 - Chairman. Mr. Anderson has served as
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.
Joseph W. Evans - Age 50 - President, Chief Executive Officer, Chief Operating
Officer, and Chief Financial Officer. Mr. Evans serves as Chief Executive
Officer of the Company. Mr. Evans also serves as President, Chief Operating
Officer and Chief Financial Officer of the Company since December 16, 1997.
Prior to this date, Mr. Evans served as BCG's President and Chief Executive
Officer since 1984.
James A. Faulkner - Age 55 - Vice Chairman. Mr. Faulkner served as Chief
Executive Officer of the Company from 1991 through 1999. On December 16, 1997,
he was elected Vice Chairman. Prior to this date, Mr. Faulkner served as
President of the Company from 1989 to December 16, 1997, and Executive Vice
President from 1981 to 1989.
J. Russell Ivie - Age 64 - Vice Chairman. Mr. 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 also served as President and Chief
Executive Officer of the Company.
Tony E. Collins - Age 46 - Executive Vice President and Chief Administrative
Officer. Mr. Collins has served as Executive Vice President and Chief
Administrative Officer of the Company since December 16, 1997. Prior to this
date, Mr. Collins served as Senior Vice President of the Company since 1996 and
Chief Operations Officer since 1993.
E. Max Crook - Age 58 - Executive Vice President and Regional Executive. Mr.
Crook has served as Executive Vice President and Regional Executive of the
Company since March 24, 1999, after joining the Company in 1997. Prior to this
date, Mr. Crook was Executive Vice President of FSB from July of 1997 until May
of 1998 when he was named Chairman and CEO of FSB. Prior to joining the Company,
Mr. Crook worked for another bank holding company.
Stephen W. Doughty - Age 48 - Executive Vice President and Chief Credit
Officer. Mr. Doughty has served as Executive Vice President and Chief Credit
Officer of the Company since December 16, 1997. Prior to this date, Mr. Doughty
served as BCG's Executive Vice President since 1989.
J. Perry Hendrix - Age 46 - Executive Vice President and Regional Executive.
Mr. Hendrix has served as Executive Vice President and Regional Executive of the
Company since March 24, 1999. Prior to this date, Mr. Hendrix served as Chief
Executive Officer of GFB since 1998. Prior to joining the Company, Mr. Hendrix
worked for another bank holding company.
J. Thomas Wiley, Jr. - Age 46 - Executive Vice President and Chief Banking
Officer. Mr. Wiley serves as Chief Banking Officer of the Company. Mr. Wiley has
served as Executive Vice President of the Company since July 22, 1998. Mr. Wiley
also served as Regional Executive of the Company from July 22, 1998 until 1999.
Prior to this date, Mr. Wiley served as President and Chief Executive Officer of
AMB since 1990.
10
<PAGE>
Sidney J. Wooten - Age 46 - Executive Vice President and Regional Executive.
Mr. Wooten has served as Executive Vice President and Regional Executive of the
Company since December 16, 1997, after joining the Company in 1997. Prior to
joining the Company, Mr. Wooten worked for another bank holding company.
ITEM 2. PROPERTIES
The Company and the Banks own, in some cases, subject to mortgages or other
security interests, 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.
In the first quarter of 2000, the Company leased space in a building in
Alpharetta, Georgia, which will serve as the Company's corporate headquarters.
The Company currently operates 31 banking offices. Of the 31 banking offices,
seventeen offices are in north Georgia, nine offices are located in middle and
coastal Georgia, three offices operate in southeastern Tennessee, and two
offices are in eastern Alabama. See Note 6 to the Company's consolidated
financial statements for additional disclosures related to the Company's
properties and other fixed assets.
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 to a vote of security holders of the Company during
the fourth quarter ended December 31, 1999.
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.
11
<PAGE>
ITEM 6. SELECTED FINANCIAL DATA
FIVE-YEAR SUMMARY OF SELECTED FINANCIAL DATA
(Amounts in thousands, except ratios and per share data)
The following data has been restated to reflect the acquisition of Independent
Bancorp, Inc.
<TABLE>
<CAPTION>
Year Ended December 31,
-----------------------------------------------------------------
1999 1998 1997 1996 1995
<S> <C> <C> <C> <C> <C>
Summary of Operations:
Net interest income............................ $ 59,005 $ 56,867 $ 53,604 $ 50,837 $ 46,613
Provision for loan losses...................... 2,443 3,135 5,397 2,350 2,261
Net income..................................... 14,290 15,378 10,969 13,823 11,591
Per Share Data:
Net income - basic............................. 1.22 1.32 0.95 1.21 1.03
Net income - diluted........................... 1.21 1.30 0.93 1.18 1.01
Cash dividends declared........................ 0.48 0.44 0.42 0.40 0.38
Book value..................................... 10.80 10.77 9.99 9.32 8.33
Tangible book value............................ 10.42 10.38 9.36 8.62 7.65
Balance Sheet Summary:
Investment securities.......................... $ 207,214 $ 171,566 $ 204,691 $ 213,973 $ 211,698
Loans, net..................................... 937,179 833,853 796,951 729,123 681,655
Deposits....................................... 1,084,953 993,308 1,033,778 991,239 905,155
Assets......................................... 1,272,460 1,146,720 1,170,023 1,120,205 1,035,846
Long-term debt and other borrowings:
Federal Home Loan Bank advances.............. 39,180 16,280 6,881 6,982 14,183
Other long-term debt......................... 31 35 1,539 1,741 6,828
Other borrowings............................. - - - - -
Average shareholders' equity................... 127,949 121,204 111,388 100,867 90,664
Average total assets........................... 1,201,419 1,151,993 1,129,069 1,072,562 984,993
Financial Ratios:
Net income to average assets................... 1.19% 1.33% 0.97% 1.29% 1.18%
Overhead ratio (1)............................. 2.94 2.68 2.91 2.72 2.88
Net income to average shareholders' equity..... 11.17 12.69 9.85 13.70 12.78
Dividend payout ratio (2)...................... 38.70 31.25 32.53 22.32 19.87
Average shareholders' equity to average total
assets........................................ 10.65 10.52 9.83 9.40 9.20
</TABLE>
(1) Represents noninterest expense less noninterest income divided by average
assets.
(2) Represents dividends declared (excluding those of pooled subsidiaries)
divided by net income.
12
<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, southwestern North Carolina, and eastern Alabama. These
areas are served through the thirteen 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. The
acquisition of unaffiliated financial institutions has been a principal source
of the Company's growth over the past several years. On December 16, 1997, the
Company acquired BCG, a bank holding company located in Macon, Georgia, and its
subsidiary banks, FSB and AMB. On April 13, 1999, the Company completed the
acquisition of Independent Bancorp, Inc., a bank holding company located in
Oxford, Alabama, and its bank subsidiary, IBO. 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 LNB. These
acquisitions were accounted for as poolings of interests. Under this method of
accounting, as of the effective time of the acquisitions, the assets and
liabilities of the acquired institutions are added to those of the acquirer's at
their recorded book values and the shareholders' equity accounts of the acquired
institutions are combined on the acquirer's consolidated balance sheet.
In addition to the pooling of interests transactions discussed above, on
February 15, 2000, the Company acquired Haywood Bancshares, Inc., a bank holding
company located in Waynesville, North Carolina, and its savings bank subsidiary,
HSB, in a transaction accounted for as a purchase. Under this method, the
reported results of operations of the acquirer are included with the results of
the acquired institution from and after the closing date of the acquisition.
The assets, including intangible assets, and liabilities of the acquired
institution are recorded at their fair values as of the closing date of the
acquisition. Any excess of the purchase consideration over the fair values of
the assets and liabilities of the acquired institution is recorded as goodwill
and amortized over time.
As part of the Company's strategic plan to exit unprofitable markets in order
to enhance returns, the Company sold First National Bank of Union County
("FNBUC") on November 30, 1998, to Appalachian Bancshares, Inc. The sale
resulted in a net gain of approximately $670,000.
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 to
accomplish 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, 1999 was $14,290,000
compared to $15,378,000 for the year ended December 31, 1998, a decrease of
approximately $1,088,000 or 7.07%. The decrease in net income for 1999 compared
to 1998 is primarily attributable to special charges of approximately $1.7
million after taxes that were recorded in 1999 relating to merger integration
and merger related expenses, and nonrecurring gains recorded in 1998 from the
sale of FNBUC and two branches of GFB and FSB which aggregated approximately $1
million after taxes. The Company's diluted earnings per share for the year
ended December 31, 1999 was $1.21, a decrease of $0.09 per share or 6.92% from
diluted earnings per share for the year ended December 31, 1998, of $1.30. The
Company's emphasis on maintaining its net interest margin resulted in an
increase in net interest income of $2,138,000. Additionally, noninterest income
decreased $3,667,000 and the provision for loan losses decreased $692,000. An
increase in noninterest expense of $739,000 partially offset the increase in net
interest income and decrease in provision for loan losses.
13
<PAGE>
The following table summarizes the results of operations, including selected
financial performance ratios, of the Company for the three years ended December
31, 1999:
RESULTS OF OPERATIONS
(Amounts in thousands, except per share data)
<TABLE>
<CAPTION>
1999 1998 1997
<S> <C> <C> <C>
Interest income........................... $100,439 $99,478 $97,317
Interest expense.......................... 41,434 42,611 43,713
-------- ------- -------
Net interest income...................... 59,005 56,867 53,604
Provision for loan losses................. 2,443 3,135 5,397
Noninterest income........................ 12,157 15,824 10,933
Noninterest expense....................... 47,505 46,766 43,952
Income tax expense........................ 6,924 7,412 4,219
-------- ------- -------
Net income............................... 14,290 15,378 10,969
Earnings per common share:
Basic.................................... $ 1.22 $ 1.32 $ 0.95
Diluted.................................. $ 1.21 $ 1.30 $ 0.93
Weighted average common shares
outstanding:
Basic.................................. 11,724 11,664 11,537
Diluted................................ 11,824 11,860 11,801
Cash dividends declared per share......... $ 0.4800 $0.4375 $0.4175
Return on average assets.................. 1.19% 1.33% 0.97%
Return on average equity.................. 11.17 12.69 9.85
Shareholders' equity to assets (average).. 10.65 10.52 9.83
Shareholders' equity to assets
(period-end)............................ 9.80 10.99 9.87
Dividend payout ratio (1)................. 38.70 31.25 32.53
</TABLE>
(1) Determined by dividing dividends declared (excluding those of pooled
subsidiaries) by net income.
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 earning liabilities include deposits, federal funds purchased, long-
term debt, and short-term borrowings.
In 1999, net interest income was $59,005,000 representing an increase of
$2,138,000 or 3.76% as compared to 1998. The average yield earned on interest
earning assets decreased to 9.05% in 1999 from 9.44% in 1998, and the average
rate paid on interest bearing liabilities decreased to 4.49% in 1999, from 4.82%
in 1998. The Company's net interest margin (net interest income divided by
average interest earning assets), on a tax equivalent basis, decreased to 5.35%
for 1999, from 5.43% for 1998.
In 1998, net interest income was $56,867,000 representing an increase of
$3,263,000 or 6.09% as compared to 1997. The average yield earned on interest
earning assets was 9.44% in 1998 and 1997, and the average rate paid on interest
bearing liabilities decreased to 4.82% in 1998 from 4.96% in 1997. The
Company's net interest margin (net interest income divided by average interest
earning assets), on a tax equivalent basis, increased to 5.43% for 1998, from
5.26% for 1997.
14
<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, 1999:
YIELD ANALYSIS
(Amounts in thousand, except yields and rates)
<TABLE>
<CAPTION>
Year ended December 31,
---------------------------------------------------------------
1999 1998
Average Yield/ Average Yield/
Balance Interest Rate Balance Interest Rate
---------- -------- ---- ---------- -------- -----
<S> <C> <C> <C> <C> <C> <C>
ASSETS:
Earning assets:
Interest earning deposits............. $ 4,035 $ 184 4.56% $ 11,865 $ 733 6.18%
Federal funds sold.................... 31,049 1,557 5.01 39,618 2,134 5.39
Taxable investment securities......... 142,836 8,717 6.10 127,976 7,956 6.22
Nontaxable investment securities(2)... 44,363 2,571 5.80 49,357 3,546 7.18
Loans, net(1)(2)...................... 896,473 88,242 9.84 835,204 86,032 10.30
---------- -------- ---- ---------- -------- -----
Total interest earning assets........ 1,118,756 101,271 9.05 1,064,020 100,401 9.44
Noninterest earning assets:
Cash and due from banks............... 42,201 42,834
Premises and equipment, net........... 26,538 27,327
Other assets.......................... 27,585 31,124
Allowance for loan losses............. (13,661) (13,312)
---------- ----------
Total noninterest earning assets..... 82,663 87,973
---------- ----------
Total assets........................ $1,201,419 $1,151,993
========== ==========
LIABILITIES AND
SHAREHOLDERS' EQUITY
Interest bearing liabilities:
Interest bearing demand deposits...... $ 291,009 $ 8,996 3.09% $ 272,569 $ 8,753 3.21%
Savings deposits...................... 55,518 1,309 2.36 57,922 1,681 2.90
Individual retirement accounts........ 65,726 3,718 5.66 68,793 4,119 5.99
Certificates of deposit............... 477,011 25,526 5.35 473,823 27,519 5.81
Federal funds purchased............... 10,623 548 5.16 718 41 5.71
Long-term debt and other
borrowings........................... 23,855 1,337 5.60 9,941 498 5.01
---------- -------- ---- ---------- -------- -----
Total interest bearing liabilities... 923,742 41,434 4.49 883,766 42,611 4.82
Noninterest bearing liabilities and
shareholders' equity:
Noninterest bearing deposits.......... 138,753 137,033
Other liabilities..................... 10,975 9,990
Shareholders' equity.................. 127,949 121,204
---------- ----------
Total liabilities and shareholders'
equity.............................. $1,201,419 $1,151,993
========== ==========
Interest rate differential(3)........... 4.56% 4.61%
Net interest income.................... $ 59,837 $ 57,790
Net interest margin(4).................. 5.35 5.43
Average interest earning assets to
average total assets.................. 93.12 92.36
Average loans to average deposits....... 87.20 82.68
</TABLE>
<TABLE>
<CAPTION>
Year ended December 31,
----------------------------
1997
Average Yield/
Balance Interest Rate
---------- ------- ------
<S> <C> <C> <C>
ASSETS:
Earning assets:
Interest earning deposits............. $ 18,133 $ 820 4.52%
Federal funds sold.................... 39,419 2,151 5.46
Taxable investment securities......... 162,584 10,425 6.41
Nontaxable investment securities(2)... 55,257 4,285 7.75
Loans, net(1)(2)...................... 769,104 80,921 10.52
---------- ------- -----
Total interest earning assets........ 1,044,497 98,602 9.44
Noninterest earning assets:
Cash and due from banks............... 39,648
Premises and equipment, net........... 27,467
Other assets.......................... 29,889
Allowance for loan losses............. (12,432)
----------
Total noninterest earning assets..... 84,572
Total assets........................ 1,129,069
==========
LIABILITIES AND
SHAREHOLDERS' EQUITY
Interest bearing liabilities:
Interest bearing demand deposits...... $ 237,554 $ 7,529 3.17%
Savings deposits...................... 75,489 2,899 3.84
Individual retirement accounts........ 66,689 4,032 6.05
Certificates of deposit............... 491,526 28,638 5.83
Federal funds purchased............... 833 39 4.68
Long-term debt and other
borrowings........................... 9,078 576 6.35
---------- ------- -----
Total interest bearing liabilities... 881,169 43,713 4.96
Noninterest bearing liabilities and
shareholders' equity:
Noninterest bearing deposits.......... 127,008
Other liabilities..................... 9,504
Shareholders' equity.................. 111,388
----------
Total liabilities and shareholders'
equity.............................. $1,129,069
==========
Interest rate differential(3)........... 4.48%
Net interest income..................... $54,889
Net interest margin(4).................. 5.26
Average interest earning assets to
average total assets.................. 92.51
Average loans to average deposits....... 77.04
</TABLE>
(1) Average loans shown net of unearned income. Nonperforming and
underperforming loans are included. Interest income includes loan fees as
follows (amounts in thousands): 1999 - $6,909; 1998 - $6,105; 1997 -
$4,869. 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 1999, 1998, and 1997.
(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.
15
<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 for 1999 and 1998.
<TABLE>
<CAPTION>
ANALYSIS OF CHANGES IN NET INTEREST INCOME
(Amounts in thousands) (1)
December 31,
-------------------------------------------------------
1999 Compared to 1998 1998 Compared to 1997
Variance Due to Variance Due to
Volume Rate Net Volume Rate Net
-------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Interest income:
Interest earning deposits
in other banks....................... $ (357) $ (192) $ (549) $ (387) $ 300 $ (87)
Federal funds sold.................... (430) (147) (577) 11 (28) (17)
Taxable investment securities......... 907 (146) 761 (2,152) (317) (2,469)
Nontaxable investment securities(2)... (289) (686) (975) (424) (315) (739)
Loans, net(2)......................... 6,031 (3,821) 2,210 6,809 (1,698) 5,111
------ ------- ------- ------- ------- -------
Total interest income............... 5,862 (4,992) 870 3,857 (2,058) 1,799
====== ======= ======= ======= ======= =======
Interest expense:
Interest bearing demand deposits...... 570 (327) 243 1,124 100 1,224
Savings deposits...................... (57) (315) (372) (510) (708) (1,218)
Individual retirement accounts........ (173) (228) (401) 126 (39) 87
Certificates of deposit............... 171 (2,164) (1,993) (1,208) (91) (1,119)
Federal funds purchased............... 511 (4) 507 (7) 9 2
Long-term debt and other
borrowings........................... 780 59 839 43 (121) (78)
------ ------- ------- ------- ------- -------
Total interest expense.............. 1,802 (2,979) (1,177) (252) (850) (1,102)
====== ======= ======= ======= ======= =======
Net interest income..................... $4,060 $(2,013) $ 2,047 $ 4,109 $(1,208) $ 2,901
====== ======= ======= ======= ======= =======
</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 component.
(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 1999, 1998, and 1997.
16
<PAGE>
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 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 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 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 economic conditions in these markets.
The allowance for loan losses approximated 1.47% of outstanding loans at
December 31, 1999, and 1.54% at December 31, 1998. The allowance increased from
$13,035,000 at December 31, 1998, to $14,030,000 at December 31, 1999. Net
loans charged off in 1999 were $1,448,000 or approximately .16% of average loans
outstanding as compared to $2,395,000 or .29% in 1998.
The allowance for loan losses approximated 1.54% of outstanding loans at
December 31, 1998 and 1.59% at December 31, 1997. The allowance increased to
$13,035,000 at December 31, 1998, from $12,853,000 at December 31, 1997. The
provision for loan losses decreased to $3,135,000 in 1998 from $5,397,000 in
1997. Net loans charged off in 1998 were $2,395,000 or approximately .29% of
average loans outstanding as compared to $3,405,000 or .44% in 1997.
17
<PAGE>
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.
ALLOWANCE FOR LOAN LOSSES
(Amounts in thousands, except percentages)
<TABLE>
<CAPTION>
Year Ended December 31,
----------------------------------------------------
1999 1998 1997 1996 1995
<S> <C> <C> <C> <C> <C>
Average loans outstanding, net
of unearned income.................. $896,473 $835,204 $769,104 $714,429 $658,151
======== ======== ======== ======== ========
Allowance for loan losses at
beginning of year................... $ 13,035 $ 12,853 $ 10,861 $ 10,050 $ 9,438
Loans charged off:
Commercial, financial, &
agricultural...................... 945 1,554 827 306 491
Real estate......................... 662 483 1,391 502 758
Consumer installment................ 1,144 1,156 1,690 1,372 900
-------- -------- -------- -------- --------
Total loans charged off........... 2,751 3,193 3,908 2,180 2,149
-------- -------- -------- -------- --------
Recoveries on loans previously
charged off:
Commercial, financial, &
agricultural...................... 580 87 111 54 106
Real estate......................... 214 296 92 289 136
Consumer installment................ 509 415 300 298 258
-------- -------- -------- -------- --------
Total loans recovered............. 1,303 798 503 641 500
-------- -------- -------- -------- --------
Net loans charged off.................. 1,448 2,395 3,405 1,539 1,649
Allowances for loan losses of loans
of bank subsidiary sold.......... - (558) - - -
Provision for loan losses charged to
income............................ 2,443 3,135 5,397 2,350 2,261
Allowance for loan losses at year end.. $ 14,030 $ 13,035 $ 12,853 $ 10,861 $ 10,050
======== ======== ======== ======== ========
Ratio of net loans charged off to
average loans outstanding, net
of unearned income................ 0.16% 0.29% 0.44% 0.22% 0.25%
Allowance for loan losses to loans,
net of unearned income............ 1.47% 1.54% 1.59% 1.47% 1.45%
</TABLE>
Total recoveries increased by $505,000 in 1999 from 1998. This was primarily
due to management's decision to form a Special Assets Division that was given
the responsibility of recovering loans that were previously charged off. This
additional emphasis on the recovery of loans decreased net loans charged off
from $2,395,000 in 1998 to $1,448,000 in 1999.
18
<PAGE>
Nonperforming Loans, Nonperforming Assets, and Underperforming Loans
Nonperforming loans include nonaccrual loans. The Company has not
restructured any loans of significance through December 31, 1999.
Underperforming loans consist of loans that 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 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 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 $5,144,000 at December 31, 1999, compared to
$4,631,000 at December 31, 1998. Nonperforming loans represented 0.54% of total
loans at December 31, 1999, as compared to 0.55% of total loans at December 31,
1998. Nonperforming assets decreased to $8,414,000 at December 31, 1999, as
compared to $10,245,000 at December 31, 1998, primarily due to decreases in
other real estate at several of the Banks and at the Parent Company.
Nonperforming assets represented 0.88% of total loans, real estate acquired
through foreclosure, and other nonperforming assets at December 31, 1999, as
compared to 1.21% at December 31, 1998.
Underperforming loans, consisting of loan 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 $674,000 at December 31, 1999, from $841,000 at December 31, 1998.
Such loans represented 0.07% and 0.10% of total loans at December 31, 1999 and
1998, 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.
NONPERFORMING ASSETS
(Amounts in thousands, except percentages)
<TABLE>
<CAPTION>
At December 31,
------------------------------------------------------
1999 1998 1997 1996 1995
<S> <C> <C> <C> <C> <C>
Loans, net of unearned income..................... $951,209 $846,888 $809,804 $739,984 $691,705
======== ======== ======== ======== ========
Allowance for loan losses......................... $ 14,030 $ 13,035 $ 12,853 $ 10,861 $ 10,050
======== ======== ======== ======== ========
Nonperforming loans............................... $ 5,144 $ 4,631 $ 4,790 $ 3,396 $ 2,793
Real estate acquired through foreclosure and
other nonperforming assets..................... 2,596 4,773 2,919 3,233 2,708
Underperforming loans - still accruing............ 674 841 2,635 1,837 1,746
-------- -------- -------- -------- --------
Nonperforming assets......................... $ 8,414 $ 10,245 $ 10,344 $ 8,466 $ 7,247
======== ======== ======== ======== ========
Asset quality ratios:
Nonperforming loans to total loans, net of
unearned income................................ 0.54% 0.55% 0.59% 0.46% 0.40%
Nonperforming assets to total loans, real estate
acquired through foreclosure, and other
nonperforming assets.......................... 0.88% 1.21% 1.28% 1.14% 1.05%
Allowance for loan losses to nonperforming
loans.......................................... 2.73x 2.81x 2.68x 3.20x 3.60x
Underperforming loans to total loans, net of
unearned income................................ 0.07% 0.10% 0.33% 0.25% 0.25%
</TABLE>
19
<PAGE>
Interest income on nonaccrual loans that would have been reported for the
years ended December 31, 1999, 1998, and 1997 is summarized as follows:
INTEREST INCOME
(Amounts in thousands)
1999 1998 1997
Interest at contractual rate...... $1,444 $1,465 $1,681
Less interest recorded as income.. 1,106 1,194 1,459
------ ------ ------
Reduction of interest income...... $ 338 $ 271 $ 222
====== ====== ======
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 1999, the level of real estate allowance increased while the
consumer installment level decreased due to fluctuations in the allocation and
changes in the mix of loans within the portfolio.
The amounts of such components of the allowance for loan losses and the
percentages of each loan category to total loans outstanding are presented
below:
<TABLE>
<CAPTION>
ALLOWANCE FOR LOAN LOSSES
(Amounts in thousands, except percentages)
Year Ended December 31,
------------------------------------------------
1999 1998 1997 1996 1995
<S> <C> <C> <C> <C> <C>
Allocation of allowance for loan losses by
loan type:
Commercial, financial, and agricultural.. $ 2,150 $ 1,305 $ 1,435 $ 4,136 $ 3,831
Real estate.............................. 10,838 10,596 9,320 4,938 4,255
Consumer installment..................... 1,042 1,134 2,098 1,787 1,964
------- ------- ------- ------- -------
Total................................. $14,030 $13,035 $12,853 $10,861 $10,050
======= ======= ======= ======= =======
Loan balances by type as a percentage of
total loans outstanding:
Commercial, financial, and agricultural.. 14.1% 15.3% 18.1% 18.0% 18.7%
Real estate.............................. 75.1 73.1 69.7 69.0 67.4
Consumer installment..................... 10.8 11.6 12.2 13.0 13.9
------- ------- ------- ------- -------
Total................................. 100.0% 100.0% 100.0% 100.0% 100.0%
======= ======= ======= ======= =======
</TABLE>
20
<PAGE>
Noninterest Income
Noninterest income decreased $3,667,000 or 23.17% in 1999 from 1998. A
primary factor in the decrease of noninterest income were several nonrecurring
items in 1998 including a gross gain, exclusive of related amortization expense
of $2,356,000 associated with the sale of FNBUC on November 30, 1998 and gains
on the sale of two branches of approximately $600,000 in 1998. Other factors
included decreases during 1999 in mortgage loan origination fees of $266,000 and
service charges on deposit accounts of $467,000.
Noninterest income increased $4,891,000 or 44.7% in 1998 from 1997. Increases
were primarily in mortgage loan origination fees of $1,257,000 and the gains on
sale of branches and sale of FNBUC described above.
Noninterest Expense
Noninterest expense increased $739,000 or 1.58% in 1999. Occupancy related
expenses increased by $483,000, while stationery and supplies and professional
fees decreased by $189,000 and $291,000, respectively. Also, special charges of
approximately $2,800,000 were taken in the fourth quarter of 1999 associated
with the consolidation of the Company's two headquarters into one location and
costs associated with building a single identity for its thirteen affiliates.
The nonrecurring charge included costs to: (i) move the Company's Dahlonega and
Macon, Georgia headquarters to Alpharetta, Georgia; (ii) reduce employment at
the two headquarters and pay related severance benefits; (iii) rename the
Company's banks and market the uniform "Century South Bank" brand name; (iv)
revise and update operating policies and procedures; and (v) write-off redundant
and outdated equipment. In 1998, the Company recorded amortization expense of
$1,686,000 associated with the sale of FNBUC.
Noninterest expense increased $2,814,000 or 6.4% in 1998. Salaries and
benefits expenses increased $2,345,000 or 10.22% in 1998, representing growth in
the number of employees. Occupancy related expenses decreased by $370,000.
Income Taxes
The Company provided income tax expense of $6,924,000, $7,412,000, and
$4,219,000 or approximately 32.6%, 32.5%, and 27.8% of its income before income
taxes in 1999, 1998, and 1997, respectively. The Company expects its effective
income tax rate to increase slightly in 2000 as a result of expected decreased
tax exempt income as a percentage of total income due to the unavailability of
high yielding bank qualified tax exempt investments and also to overall growth
in the loan portfolio.
In 1999, three of the subsidiary banks formed captive Real Estate Investment
Trusts ("REITs") for various business purposes. Because of the taxation
requirements of REITs, the Company has experienced a positive impact on its
overall effective income tax rate.
Loan Portfolio
During 1999, average loans outstanding net of unearned income, increased from
$835 million to $896 million and comprised 80.1% of average interest earning
assets and 74.6% of average total assets. During 1998, average loans
outstanding net of unearned income, increased from $769 million to $835 million
and comprised 78.5% of average interest earning assets and 72.5% of average
total assets. The relative level of average loans, when compared to the level
of average deposits, increased in 1999 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 87.2%, 82.7%, and
77.0% in 1999, 1998, and 1997, 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>
COMPOSITION OF LOAN PORTFOLIO
(Amounts in thousands)
1999 1998 1997 1996 1995
<S> <C> <C> <C> <C> <C>
Commercial, financial, and agricultural.. $133,827 $129,497 $146,449 $133,642 $129,693
Real estate - construction............... 140,069 97,350 88,441 83,227 67,743
Real estate - mortgage................... 574,657 522,672 477,048 428,180 399,743
Consumer installment..................... 103,231 97,990 98,950 96,342 96,109
-------- -------- -------- -------- --------
Total loans........................... 951,784 847,509 810,888 741,391 693,288
Unearned income.......................... 575 621 1,084 1,407 1,583
Allowance for loan losses................ 14,030 13,035 12,853 10,861 10,050
-------- -------- -------- -------- --------
Loans, net............................ $937,179 $833,853 $796,951 $729,123 $681,655
======== ======== ======== ======== ========
</TABLE>
21
<PAGE>
The following table shows the maturity of selected loan categories as of
December 31, 1999. Also provided are the amounts due after one year classified
according to the sensitivity in interest rates.
<TABLE>
<CAPTION>
LOAN MATURITY AND SENSITIVITY TO CHANGES IN INTEREST RATES
(Amounts in thousands)
Maturing
Within after one but After
one year within five years five years
<S> <C> <C> <C>
Commercial, financial, and agricultural...... $ 54,268 $ 60,609 $ 18,950
======== ======== ========
Real estate - construction................... 103,865 21,374 14,830
======== ======== ========
Real estate - mortgage....................... 138,734 272,036 163,887
======== ======== ========
Summary of above loans due after one year:
Total fixed rate due after one year....... $359,899
Total adjustable rate due after one year.. 191,787
--------
Total loans due after one year........... $551,686
========
</TABLE>
Actual repayments of loans may differ from the contractual maturities
reflected above because borrowers have the right to prepay obligations with and
without repayment 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, increased $9,866,000 or 5.6% in 1999, compared to a decrease
of $40,508,000 or 18.6% in 1998. During 1999 and 1998, average investment
securities comprised 16.7% and 16.7%, respectively, of average interest earning
assets and 15.6% and 15.4%, respectively, of average total assets.
At December 31, 1999, investment securities with fair value of approximately
$185 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.
22
<PAGE>
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, 1999 and 1998.
AVAILABLE FOR SALE SECURITIES
(Amounts in thousands, except percentages)
<TABLE>
<CAPTION>
1999 1998
-------------------- --------------------
Carrying % of total Carrying % of total
value securities value securities
<S> <C> <C> <C> <C>
U.S. Treasury and U.S.
Government agencies.................... $ 94,563 45.6% $ 55,736 32.4%
State, county, and municipal securities.. 22,204 10.7 12,113 7.0
Mortgage-backed securities............... 13,623 6.6 21,132 12.4
Other debt securities.................... 47,926 23.1 35,385 20.7
Equity securities........................ 7,123 3.4 7,818 4.5
-------- ---- -------- ----
Total investment securities............ $185,439 89.4% $132,184 77.0%
======== ==== ======== ====
</TABLE>
<TABLE>
<CAPTION>
HELD TO MATURITY SECURITIES
(Amounts in thousands, except percentages)
1999 1998
-------------------- --------------------
Carrying % of total Carrying % of total
value securities value securities
<S> <C> <C> <C> <C>
U.S. Treasury and U.S.
Government agencies................... $ 337 0.2% $ 1,711 1.0%
State, county, and municipal securities.. 19,168 9.4 35,016 20.4
Mortgage-backed securities............... 315 0.2 708 4.1
Other debt securities.................... 1,955 0.9 1,947 11.3
------- ---- ------- ----
Total investment securities........... $21,775 10.6% $39,382 23.0%
======= ==== ======= ====
</TABLE>
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,
1999, 1998, and 1997, except for the U.S. Treasury and U.S. Government agencies
securities as shown in the table above.
23
<PAGE>
The table below presents contractual maturities and yields of the debt
securities included in the Company's investment securities portfolio at December
31, 1999. 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>
INVESTMENT SECURITIES MATURITY DISTRIBUTION AND YIELDS
(Amounts in thousands, except yields)
After one but After five but
Within one year within five years within ten years After ten years
Carrying Carrying Carrying Carrying
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.......... $19,737 6.13% $44,997 6.51% $27,698 6.01% $ 2,131 6.50%
State, county, and municipal
securities (1)............... 2,110 7.91 5,045 8.23 6,124 8.75 8,924 5.66
Mortgage-backed securities.... 305 5.22 5,212 7.04 799 8.68 7,307 7.00
Other debt securities......... 113 6.65 - - 1,725 6.35 46,088 7.33
------- ---- ------- ---- ------- ---- ------- -----
Total debt securities-AFS.... $22,265 6.28% $55,254 6.71% $36,346 6.49% $64,451 7.02%
======= ==== ======= ==== ======= ==== ======= =====
Held to Maturity (HTM):
U.S. Treasury and U.S.
Government agencies.......... $ 337 4.64% - - - - - -
State, county, and municipal
securities (1)............... 1,719 7.81 12,753 8.00 3,681 9.09 1,015 10.32
Mortgage-backed securities.... - - 141 8.31 - - 174 6.08
Other debt securities......... - - - - 1,955 6.06 - -
------- ---- ------- ---- ------- ---- ------- -----
Total debt securities-HTM.... $ 2,056 7.29% $12,894 8.00% $ 5,636 8.04% $ 1,189 9.70%
======= ==== ======= ==== ======= ==== ======= =====
</TABLE>
(1) Yields on state, county, and municipal securities have not been computed on
a tax equivalent basis.
Deposits
Average deposits increased $18 million or 1.75%.
Average deposits by type, their relationship to total average deposits, and
the average rate paid on deposits by type for the three years ended December 31,
1999 are as follows:
<TABLE>
<CAPTION>
DEPOSITS
(Amounts in thousands, except percentages)
1999 1998 1997
% of total % of total % of total
Amount deposits Rate Amount deposits Rate Amount deposits Rate
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Noninterest bearing demand
deposits................... $ 138,753 13.5% N/A $ 137,033 13.6% N/A $127,008 12.7% N/A
Interest bearing demand
deposits................... 291,009 28.3 3.09% 272,569 27.0 3.21% 237,554 23.8 3.17%
Savings deposits............ 55,518 5.4 2.36 57,922 5.7 2.90 75,489 7.6 3.84
Individual retirement
accounts................... 65,726 6.4 5.66 68,793 6.8 5.99 66,689 6.7 6.05
Certificates of deposit..... 477,011 46.4 5.35 473,823 46.9 5.81 491,526 49.2 5.83
---------- ----- ---- ---------- ----- ---- -------- ----- ----
Total average deposits..... $1,028,017 100.0% 3.85% $1,010,140 100.0% 4.17% $998,266 100.0% 4.32%
========== ===== ==== ========== ===== ==== ======== ===== ====
</TABLE>
24
<PAGE>
The contractual maturities of certificates of deposit and individual
retirement accounts of $100,000 or more as of December 31, 1999, are presented
below.
MATURITIES OF TIME DEPOSITS OF $100,000 OR MORE
(Amounts in thousands)
Three months or less................... $ 56,548
Over three months through six months... 37,353
Over six months through twelve months.. 58,425
Over twelve months..................... 37,849
--------
Total................................ $190,175
========
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 $8,018,000 during 1999 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, 1999, the Company's cash
and due from banks were $60,004,000, its interest earning deposits in other
banks were $2,761,000, its federal funds sold were $8,140,000, and its
investment securities designated as available for sale were $185,439,000. 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 $54,500,000, in addition to $56,820,000, which is available to the
Company, subject to available collateral, in the form of additional Federal Home
Loan Bank advances.
The Company has authorized the acquisition of treasury shares up to amounts
necessary to effect the purchase business combination of Haywood Bancshares,
Inc. ("Haywood"). Prior to the February 15, 2000 closing of this purchase
business combination, the Company had purchased as of December 31, 1999, 244,000
of its common shares specifically for the acquisition of Haywood. The Company
issued 626,469 shares in the purchase of Haywood, including the aforementioned
244,000 treasury shares. For an approximate 3 month period ending on or about
May 15, 2000, the Company has authorized the repurchase of up to 382,000 shares
as share float permits, which represents the net shares issued in the Haywood
purchase combination.
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.
25
<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, 1999.
<TABLE>
<CAPTION>
INTEREST SENSITIVITY ANALYSIS
(Amounts in thousands, except ratios)
0-90 days 91-365 days One to five years Over five years
Current Current Cumulative Current Cumulative Current Cumulative
<S> <C> <C> <C> <C> <C> <C> <C>
Interest sensitive assets:
Loans........................... $ 321,989 $ 163,431 $ 485,420 $371,615 $ 857,035 $ 94,174 $ 951,209
Investment securities (1)....... 30,132 11,386 41,518 110,699 152,217 53,346 205,563
Interest earning deposits in
other banks and federal
funds sold..................... 9,911 990 10,901 - 10,901 - 10,901
--------- --------- --------- -------- ---------- -------- ----------
Total interest sensitive
assets...................... $ 362,032 $ 175,807 $ 537,839 $482,314 $1,020,153 $147,520 $1,167,673
========= ========= ========= ======== ========== ======== ==========
Interest sensitive liabilities:
Interest bearing demand
and savings deposits........... 361,910 - 361,910 - 361,910 - 361,910
Certificates of deposit and
individual retirement
accounts of $100 or more....... 55,991 95,427 151,418 38,757 190,175 - 190,175
Other certificates of deposit
and individual retirement
accounts....................... 111,142 174,488 285,630 99,512 385,142 - 385,142
Federal funds purchased,
short-term borrowings,
and long-term debt............. 35,522 10,000 45,522 31 45,553 4,180 49,733
--------- --------- --------- -------- ---------- -------- ----------
Total interest sensitive
liabilities................. $ 564,565 $ 279,915 $ 844,480 $138,300 $ 982,780 $ 4,180 $ 986,960
========= ========= ========= ======== ========== ======== ==========
Interest sensitivity gap......... (202,533) (104,108) (306,641) 344,014 37,373 143,340 180,713
Ratio of interest sensitive
assets to interest sensitive
liabilities..................... 0.64 0.63 0.64 3.49 1.04 35.29 1.18
</TABLE>
(1) Amounts exclude unrealized gains (losses) on investment securities and
exclude equity securities, which are not interest sensitive.
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, 1999, 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.
26
<PAGE>
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.
Year 2000
The Year 2000 issue referred generally to the data structure problem that
prevents 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 could 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 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.
The committee developed plans to identify all critical systems and developed
solutions for all systems that were found to not be Year 2000 compliant. The
Board of Directors of each affiliate bank as well as the Board of Directors of
the Company reviewed the overall project plans for the banks with progress
toward completion monitored regularly. The Company reviewed all testing results
to ensure accuracy and complete preparedness. In addition, comprehensive
testing plans were developed to ensure that all critical applications would
process normally in the Year 2000. Regular communications procedures were
established between the core-processing vendor and the Company to ensure testing
of all applications were completed and thoroughly reviewed. Contingency plans
were also enhanced to ensure direction in the event a non-compliant system or
component was detected. Disaster recovery and business resumption plans were
developed based upon each bank's unique structure. These plans would provide
the Company with direction in the event an unforeseen circumstance arose due to
the Year 2000. An unforeseen circumstance could have been anything from a vault
not opening to a power failure to a natural disaster. All plans were finalized,
tested, and implemented before third quarter 1999. Customer awareness and
preparedness was also a priority. An employee and customer awareness campaign
began on September 1, 1998, and was ongoing through the remainder of 1998 and
1999. Loan relationships that could be materially affected by the Year 2000
issue were identified and monitored. Liquidity levels were maintained at
required levels. 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.
27
<PAGE>
Market and Dividend Information
The Company's common stock trades on the Nasdaq National Market under the
symbol "CSBI". There were approximately 2800 shareholders of record of the
Company's common stock as of December 31, 1999.
The following table sets forth the high and low bid prices of the Company's
common stock as reported by the Nasdaq National Market and the cash dividends
declared per share on the Company's common stock by quarter for 1999 and 1998.
<TABLE>
<CAPTION>
MARKET INFORMATION
1999 1998
Cash Cash
Price dividends Price dividends
High Low declared High Low declared
------- --------- -------- --------- ------ --------
<S> <C> <C> <C> <C> <C> <C>
Quarter Ended:
March 31........ $30.125 $22.625 $.12000 $25.75 $23.50 $.10750
June 30......... 27.50 22.00 .12000 38.25 24.50 .10875
September 30.... 25.00 20.875 .12000 38.00 25.00 .11000
December 31..... 25.00 20.125 .12000 30.50 25.75 .11125
</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, including the ability of the Banks to pay dividends to the
Company, the amount of which is subject to regulatory limitations. Restrictions
on the Company's ability to pay dividends are 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, 1999 and 1998.
<TABLE>
<CAPTION>
QUARTERLY FINANCIAL DATA SUMMARY
(Amounts in thousands, except per share data)
1999 Quarters 1998 Quarters
-------------------------------- -------------------------------
First Second Third Fourth First Second Third Fourth
----- ------ ----- ------ ----- ------ ----- ------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Interest income........ $23,838 $24,838 $25,431 $26,332 $24,692 $25,058 $25,192 $24,536
Net interest income.... 14,119 14,611 14,959 15,316 13,921 14,349 14,408 14,189
Provision for loan
losses.............. 488 691 564 700 552 562 613 1,408
Income before income
taxes................. 5,545 6,047 6,114 3,508 5,856 5,945 5,938 5,051
Net income............. 3,617 4,080 4,099 2,494 3,872 3,969 3,944 3,593
Net income per share:
Basic................. 0.31 0.35 0.35 0.21 0.33 0.34 0.34 0.31
Diluted............... 0.30 0.35 0.35 0.21 0.33 0.33 0.33 0.31
Weighted average
common shares
outstanding:
Basic................. 11,727 11,743 11,765 11,610 11,580 11,640 11,714 11,719
Diluted............... 11,858 11,809 11,836 11,686 11,836 11,863 11,887 11,861
</TABLE>
28
<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 $7,123,000 at December 31, 1999, 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.
29
<PAGE>
Weighted-average variable rates represent the variable rates in effect at
December 31, 1999.
<TABLE>
<CAPTION>
ON-BALANCE SHEET FINANCIAL INSTRUMENTS BY EXPECTED MATURITY DATE
(Amounts in thousands, except percentages)
There- Total Fair Value Total Fair Value
2000 2001 2002 2003 2004 after 1999 1999 1998 1998
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Assets
Investment securities:
Fixed rate............. $ 14,249 $ 12,266 $ 7,716 $19,578 $38,137 $103,958 $195,904 $191,006 $151,561 $157,852
Average interest rate.. 5.50% 6.06% 5.52% 5.73% 5.87% 6.25% 6.03% - 6.28% -
Variable rate.......... $ 350 - - $ 89 - $ 9,220 $ 9,659 $ 9,421 $ 11,018 $ 7,785
Average interest rate.. 4.64% - - 5.88% - 6.37% 6.30% - 6.06% -
Loans:
Fixed rate............. $180,966 $108,455 $114,281 $66,559 $77,650 $ 68,083 $615,994 $612,472 $524,386 $525,030
Average interest rate.. 9.43% 9.35% 9.21% 9.33% 8.77% 8.90% 9.22% - 9.07% -
Variable rate.......... $110,567 $ 44,211 $ 26,694 $ 8,516 $ 5,346 $139,881 $335,215 $333,284 $322,502 $322,887
Average interest rate.. 8.88% 9.01% 9.19% 9.37% 9.58% 9.38% 9.34% - 8.84% -
Other interest bearing
assets:
Fixed rate............. $ 1,980 - - - - - $ 1,980 $ 1,980 $ 4,487 $ 4,487
Average interest rate.. 5.78% - - - - - 5.78% - 5.96% -
Variable rate.......... $ 8,921 - - - - - $ 8,921 $ 8,921 $ 34,012 $ 34,012
Average interest rate.. 4.91% - - - - - 4.91% - 5.29% -
Liabilities
Interest bearing deposits
and savings:........... $ 2,778 $ 3,106 $ 5,545 $ 5,545 $ 5,545 $339,391 $361,910 $361,910 $333,629 $333,629
Average interest rate.. 2.97% 2.97% 2.97% 2.97% 2.97% 2.97% 2.97% - 3.19% -
Time deposits:
Fixed rate............. $356,735 $145,868 $ 26,901 $20,642 $13,619 $ 10,305 $574,070 $576,073 $515,178 $519,645
Average interest rate.. 5.31% 5.85% 5.68% 5.52% 5.39% 5.28% 5.47% - 5.55% -
Variable rate.......... $ 990 $ 257 - - - - $ 1,247 $ 1,270 $1,493 1,512
Average interest rate.. 4.76% 5.28% - - - - 4.87% - 4.48% -
Federal funds purchased
and long-term debt:
Fixed rate............. $ 35,000 - - - - $ 4,211 $ 39,211 $ 39,969 $ 14,315 $ 14,792
Average interest rate.. 5.50% - - - - 7.33% 5.70% - 5.41% -
Variable rate.......... $ 10,522 - - - - - $ 10,522 $ 10,522 $ 2,000 $ 2,000
Average interest rate.. 5.875% - - - - - 5.875% - 5.26% -
Interest Rate Derivatives
Interest rate swaps:
Pay variable-federal
funds rate.......... $ 10,000 - - - - - $ 10,000 $ (41) $ 15,000 211
Average pay rate....... 5.51% - - - - - 5.51% - 5.02% -
Average receive rate... 5.76% - - - - - 5.76% - 5.74% -
Pay variable-LIBOR........ - - - - - - - - $ 5,000 40
Average pay rate.......... - - - - - - - - 5.91% -
Average receive rate...... - - - - - - - - 5.88% -
Purchased interest rate
floors:................ $ 80,000 $ 75,000 $ 25,000 - - - $180,000 $ 5 $185,000 799
Average strike rate..... 4.75% 4.50% 5.00% - - - 4.68% - 4.69% -
</TABLE>
30
<PAGE>
Independent Auditors' 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, 1999 and 1998,
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, 1999. 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 conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the 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, 1999 and 1998, and the
results of their operations and their cash flows for each of the years in the
three-year period ended December 31, 1999, in conformity with generally accepted
accounting principles.
KPMG LLP
Atlanta, Georgia
January 21, 2000, except for Note 2,
as to which the date is February 15, 2000
31
<PAGE>
ITEM 8. CONSOLIDATED FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
<TABLE>
<CAPTION>
CONSOLIDATED BALANCE SHEETS
December 31, 1999 and 1998
(Amounts in thousands, except share and per share data)
Assets: 1999 1998
---------- ----------
<S> <C> <C>
Cash and due from banks (note 3)....................................... $ 60,004 $ 51,420
Federal funds sold...................................................... 8,140 30,550
Interest earning deposits in other banks................................ 2,761 4,949
Investment securities (note 4):
Available for sale.................................................... 185,439 132,184
Held to maturity (fair value: 1999 - $22,111 and 1998 - $41,271)...... 21,775 39,382
Loans, net of unearned income (note 5)................................. 951,209 846,888
Less allowance for loan losses........................................ 14,030 13,035
---------- ----------
Loans, net......................................................... 937,179 833,853
---------- ----------
Premises and equipment, net (note 6)................................... 26,888 25,300
Goodwill and other intangibles, net..................................... 4,331 4,637
Other assets (notes 7 and 10).......................................... 25,943 24,445
---------- ----------
Total assets....................................................... $1,272,460 $1,146,720
========== ==========
Liabilities:
Deposits:
Noninterest bearing demand deposits................................... $ 147,726 $ 143,008
Interest bearing deposits (note 8)................................... 937,227 850,300
---------- ----------
Total deposits..................................................... 1,084,953 993,308
---------- ----------
Federal funds purchased................................................. 10,522 -
Long-term debt (note 9)................................................ 39,211 16,315
Accrued expenses and other liabilities.................................. 13,024 11,045
---------- ----------
Total liabilities.................................................. 1,147,710 1,020,668
---------- ----------
Shareholders' equity (notes 2, 11, 15, and 16):
Common stock - $1 par value. Authorized 30,000,000 shares; issued
11,796,030 shares in 1999, 11,787,334 in 1998, and outstanding
11,552,030 shares in 1999 and 11,701,435 shares in 1998............. 11,796 11,787
Additional paid-in capital.............................................. 36,122 36,106
Retained earnings....................................................... 86,916 78,219
Common stock in treasury (244,000 and 85,899 shares in 1999 and 1998,
respectively), at cost............................................. (5,872) (1,051)
Unearned compensation - restricted stock awards......................... (721) -
Accumulated other comprehensive income (loss) (note 18)................ (3,491) 991
---------- ----------
Total shareholders' equity.................................... 124,750 126,052
---------- ----------
Commitments and contingencies (notes 2, 5, 11, 12, and 17).............
Total liabilities and shareholders' equity.................... $1,272,460 $1,146,720
========== ==========
</TABLE>
See accompanying notes to consolidated financial statements.
32
<PAGE>
<TABLE>
<CAPTION>
CONSOLIDATED STATEMENTS OF INCOME
For the years ended December 31, 1999, 1998, and 1997
(Amounts in thousands, except per share data)
1999 1998 1997
<S> <C> <C> <C>
Interest income:
Loans, including fees................................... $ 87,533 $85,909 $80,771
Federal funds sold...................................... 1,557 2,134 2,151
Interest on deposits in other banks..................... 184 733 819
Investment securities:
Taxable.............................................. 8,717 7,956 10,426
Nontaxable........................................... 2,448 2,746 3,150
-------- ------- -------
Total interest income.............................. 100,439 99,478 97,317
-------- ------- -------
Interest expense:
Deposits (note 8)...................................... 39,549 42,072 43,098
Federal funds purchased................................. 548 40 39
Long-term debt and other borrowings..................... 1,337 499 576
-------- ------- -------
Total interest expense............................. 41,434 42,611 43,713
-------- ------- -------
Net interest income.................................. 59,005 56,867 53,604
Provision for loan losses (note 5)....................... 2,443 3,135 5,397
-------- ------- -------
Net interest income after provision for loan losses.. 56,562 53,732 48,207
-------- ------- -------
Noninterest income:
Service charges on deposit accounts..................... 6,084 6,551 6,276
Securities gains, net (note 4)......................... 474 393 24
Other operating income (notes 2 and 14)................ 5,599 8,880 4,633
-------- ------- -------
Total noninterest income........................... 12,157 15,824 10,933
-------- ------- -------
Noninterest expense:
Salaries and employee benefits (note 11)................ 25,338 25,293 22,948
Occupancy and equipment expense, net.................... 6,628 6,145 6,515
Other operating expenses (note 14)..................... 15,539 15,328 14,489
-------- ------- -------
Total noninterest expense.......................... 47,505 46,766 43,952
-------- ------- -------
Income before income taxes........................... 21,214 22,790 15,188
Income tax expense (note 10)............................. 6,924 7,412 4,219
-------- ------- -------
Net income........................................... $ 14,290 $15,378 $10,969
======== ======= =======
Net income per common share:
Basic................................................ $1.22 $1.32 $0.95
Diluted.............................................. $1.21 $1.30 $0.93
Weighted average common shares outstanding:
Basic................................................ 11,724 11,664 11,537
Diluted.............................................. 11,824 11,860 11,801
</TABLE>
See accompanying notes to consolidated financial statements.
33
<PAGE>
<TABLE>
<CAPTION>
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
AND COMPREHENSIVE INCOME
For the years ended December 31, 1999, 1998, and 1997
(Amounts in thousands, except per share data)
Additional Unearned
Comprehensive Common paid-in Retained ESOP
Income stock (1) capital earnings shares
- -----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Balance at December 31, 1996: $11,587 $35,202 $61,058 ($333)
Comprehensive income:
Net income $10,969 - - 10,969 -
Other comprehensive income due to
unrealized gains on investment 514 - - - -
securities -------
Total comprehensive income $11,483
Cash dividends declared - $0.4175 per share ======= - - (3,568) -
Exercise of stock options 37 119 - -
Stock option tax benefit - 38 - -
Issuance of stock under incentive plan - 74 - -
Principal payments on ESOP loan (note 11) - - - 333
Cash dividends of pooled subsidiary prior
to acquisition - - (444) -
---------------------------------------------
Balance at December 31, 1997 $11,624 $35,433 $68,015 $ -
Comprehensive income:
Net income $15,378 - - 15,378 -
Other comprehensive income due to
unrealized gains on investment 263 - - - -
securities -------
Total comprehensive income $15,641
Cash dividends declared - $0.4375 per share ======= - - (4,805) -
Exercise of stock options 163 673 - -
Purchase of treasury stock - - - -
Cash dividends of pooled subsidiary prior
to acquisition - - (369) -
Balance at December 31, 1998 $11,787 $36,106 $78,219 $ -
---------------------------------------------
Comprehensive income:
Net income $14,290 - - 14,290 -
Other comprehensive loss due to
unrealized losses on investment (4,482) - - - -
securities -------
Total comprehensive income $ 9,808
Cash dividends declared - $0.48 per share - - (5,530) -
Exercise of stock options 77 513 - -
Issuance of restricted stock awards 35 939 - -
Forfeiture of restricted stock awards (4) (137) - -
Amortization on restricted stock awards - - - -
Paid fractional shares for IBO - (2) - -
Purchase of treasury stock - - - -
Treasury shares issued in business (99) (1,297) - -
combination
Cash dividends of pooled subsidiary prior
to acquisition - - (63) -
---------------------------------------------
Balance at December 31, 1999 $11,796 $36,122 $86,916 $ -
</TABLE>
<TABLE>
<CAPTION>
Accumulated
Unearned other
Compensation Treasury comprehensive
Stock stock (2) income Total
- -----------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Balance at December 31, 1996: $ - ($337) $ 214 $107,391
Comprehensive income:
Net income - - - 10,969
Other comprehensive income due to
unrealized gains on investment - - 514 514
securities
Total comprehensive income
Cash dividends declared - $0.4175 per share - - - (3,568)
Exercise of stock options - - - 156
Stock option tax benefit - - - 38
Issuance of stock under incentive plan - 31 - 105
Principal payments on ESOP loan (note 11) - - - 333
Cash dividends of pooled subsidiary prior
to acquisition - - - (444)
------------------------------------------------------
Balance at December 31, 1997 $ - ($306) $ 728 $115,494
Comprehensive income:
Net income - - - 15,378
Other comprehensive income due to
unrealized gains on investment - - 263 263
securities
Total comprehensive income
Cash dividends declared - $0.4375 per share - - - (4,805)
Exercise of stock options - - - 836
Purchase of treasury stock - (745) - (745)
Cash dividends of pooled subsidiary prior
to acquisition - - - (369)
------------------------------------------------------
Balance at December 31, 1998 $ - ($1,051) $ 991 $126,052
Comprehensive income:
Net income - - - 14,290
Other comprehensive loss due to
unrealized losses on investment - - (4,482) (4,482)
securities
Total comprehensive income
Cash dividends declared - $0.48 per share - - - (5,530)
Exercise of stock options - - - 590
Issuance of restricted stock awards (974) - - -
Forfeiture of restricted stock awards 127 - - (14)
Amortization on restricted stock awards 126 - - 126
Paid fractional shares for IBO - - - (2)
Purchase of treasury stock - (6,217) - (6,217)
Treasury shares issued in business - 1,396 - -
combination
Cash dividends of pooled subsidiary prior
to acquisition - - - (63)
------------------------------------------------------
Balance at December 31, 1999 $(721) $ (5,872) $(3,491) $124,750
</TABLE>
(1) Common shares issued: 11,796 shares at December 31, 1999, 11,787 shares at
December 31, 1998, 11,624 shares at December 31, 1997, and 11,533 shares at
December 31, 1996.
(2) Common stock held in treasury: 244 shares at December 31, 1999, 86 shares
at December 31, 1998, 59 shares at December 31, 1997, and 65 shares at
December 31, 1996.
See accompanying notes to consolidated financial statements.
34
<PAGE>
<TABLE>
<CAPTION>
CONSOLIDATED STATEMENTS OF CASH FLOWS
For the years ended December 31, 1999, 1998, and 1997
(Amounts in thousands)
1999 1998 1997
<S> <C> <C> <C>
Cash flows from operating activities:
Net income......................................................................... $ 14,290 $ 15,378 $ 10,969
Adjustments to reconcile net income to net cash provided by operating activities:
Provision for loan losses....................................................... 2,443 3,135 5,397
Write-downs and other (gains) losses on sale of other real estate............... - (212) (162)
Depreciation.................................................................... 2,962 2,810 3,013
Amortization and accretion, net................................................. 344 874 722
Securities gains, net........................................................... (474) (393) (24)
Gain on sale of subsidiary bank................................................. - (670) -
Gain on sale of branch.......................................................... - (847) -
Deferred income tax expense (benefit)........................................... (790) (290) (890)
Decrease (increase) in other assets............................................. (1,020) 1,143 1,517
Increase (decrease) in accrued expenses and other liabilities................... 1,931 182 (242)
--------- --------- --------
Net cash provided by operating activities...................................... 20,476 21,112 20,300
--------- --------- --------
Cash flows from investing activities:
Proceeds from sales of investment securities available for sale.................... 8,018 1,059 10,971
Principal collections and maturities of investment securities available for sale... 43,430 73,656 40,171
Principal collections and maturities of investment securities held to maturity..... 4,084 14,005 5,468
Proceeds from maturities of interest earning deposits with banks................... 197,684 192,033 41,305
Purchases of investment securities held to maturity................................ - (955) (2,519)
Purchases of investment securities available for sale.............................. (97,732) (58,221) (41,798)
Investment in interest earning deposits with banks................................. (195,496) (167,849) (54,451)
Proceeds from sales of other real estate........................................... 3,184 3,549 2,124
Net increase in loans.............................................................. (106,927) (71,036) (75,481)
Purchase of premises and equipment................................................. (4,730) (3,619) (2,308)
Proceeds from sales of premises and equipment...................................... 182 1,425 285
Net cash (paid) received from (sale) acquisition of branch......................... - (15,065) -
Net cash disbursed for sale of bank subsidiary..................................... - (10,984) -
Purchase of life insurance contracts............................................... - (1,684) (538)
--------- --------- --------
Net cash used in investing activities........................................... (148,303) (43,686) (76,771)
--------- --------- --------
Cash flows from financing activities:
Net increase in deposits........................................................... 91,645 23,801 42,539
Net (decrease) increase in federal funds purchased................................. 10,522 (160) (840)
Proceeds from issuance of long-term debt and other borrowings...................... 28,800 15,815 6,686
Payments on long-term debt and other borrowings.................................... (5,905) (8,730) (6,206)
Dividends paid to shareholders..................................................... (5,435) (5,074) (3,646)
Proceeds from issuance of common stock............................................. 590 836 156
Purchase of treasury stock......................................................... (6,217) (745) -
--------- --------- --------
Net cash provided by financing activities......................................... 114,001 25,743 38,689
--------- --------- --------
Net increase (decrease) in cash and cash equivalents.............................. (13,826) 3,169 (17,782)
Cash and cash equivalents at beginning of year....................................... 81,970 78,801 96,583
--------- --------- --------
Cash and cash equivalents at end of year............................................. $ 68,144 $ 81,970 $ 78,801
========= ========= ========
Supplemental disclosures of cash paid during the year for:
Interest........................................................................... $ 40,965 $ 42,797 $ 43,370
========= ========= ========
Income taxes....................................................................... $ 8,758 $ 7,184 $ 5,762
========= ========= ========
Supplemental schedule of noncash investing and financing activities:
Real estate acquired through foreclosure........................................... $ 1,924 $ 7,180 $ 4,034
========= ========= ========
Real estate sold and financed by the Company....................................... $ 766 $ 2,031 $ 1,784
========= ========= ========
</TABLE>
See accompanying notes to consolidated financial statements.
35
<PAGE>
Century South Banks, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
December 31, 1999, 1998, and 1997
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, Tennessee, and
Alabama and as of February 2000, in North Carolina. 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 thirteen 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 and 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 and 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.
Available for sale securities transferred into the held to maturity category
are recorded at fair value at the 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.
36
<PAGE>
Century South Banks, Inc. and Subsidiaries
Notes to Consolidated Financial Statements - (Continued)
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, 1999, 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,
southwestern North Carolina, and eastern Alabama. 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.
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, southwestern North Carolina, and eastern Alabama. 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.
37
<PAGE>
Century South Banks, Inc. and Subsidiaries
Notes to Consolidated Financial Statements - (Continued)
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 business.
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.
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.
38
<PAGE>
Century South Banks, Inc. and Subsidiaries
Notes to Consolidated Financial Statements - (Continued)
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
supercedes 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 100,000, 196,000, and
264,000 potential shares in 1999, 1998, and 1997, 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. In June 1999, the FSB issued SFAS No. 137 which defers the
effective date of SFAS No. 133. The provisions of SFAS No. 133 are effective
for all fiscal quarters of fiscal years beginning after June 15, 2000. The
Company has not yet determined the impact of SFAS No. 133 on the Company's
financial statements upon adoption.
39
<PAGE>
Century South Banks, Inc. and Subsidiaries
Notes to Consolidated Financial Statements - (Continued)
Note 2. Business Combinations
On April 13, 1999, the Company completed the merger with Independent Bancorp,
Inc. ("IBC") and its subsidiary bank, The Independent Bank of Oxford ("IBO")
with branches in Oxford and Anniston, Alabama. The Company issued approximately
699,108 shares of its common stock in exchange for all of the issued and
outstanding shares of IBC. This merger 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 IBO. The Company's consolidated financial statements for the
years ended December 31, 1999, 1998, and 1997 have been restated for the merger
with IBC as follows (amounts in thousands):
<TABLE>
<CAPTION>
1999 1998 1997
<S> <C> <C> <C>
Interest income:
Century South Banks, Inc.
exclusive of pre-acquisition
amounts........................ $ 98,474 $91,933 $90,807
Independent Bancorp, Inc. and
subsidiary (a)................. 1,965 7,545 6,510
-------- ------- -------
Total interest income......... $100,439 $99,478 $97,317
======== ======= =======
Net interest income:
Century South Banks, Inc.
exclusive of pre-acquisition
amounts........................ $ 58,087 $53,394 $50,459
Independent Bancorp, Inc. and
subsidiary (a)................. 918 3,473 3,145
-------- ------- -------
Total net interest income..... $ 59,005 $56,867 $53,604
======== ======= =======
Noninterest income:
Century South Banks, Inc.
exclusive of pre-acquisition
amounts........................ $ 11,938 $15,209 $10,409
Independent Bancorp, Inc. and
subsidiary (a)................. 219 615 524
-------- ------- -------
Total noninterest income...... $ 12,157 $15,824 $10,933
======== ======= =======
Net income:
Century South Banks, Inc.
exclusive of pre-acquisition
amounts........................ $ 14,078 $14,681 $ 9,632
Independent Bancorp, Inc. and
subsidiary (a)................. 212 697 1,337
-------- ------- -------
Total net income.............. $ 14,290 $15,378 $10,969
======== ======= =======
</TABLE>
(a) The 1999 balances reflect the results of operations for the three months
ended March 31, 1999. The results from March 31, 1999 to April 13, 1999
are immaterial.
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 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.
40
<PAGE>
Century South Banks, Inc. and Subsidiaries
Notes to Consolidated Financial Statements - (Continued)
The acquisition of BCGA 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 year ended December
31, 1997 have been restated for the merger with BCGA as follows (amounts in
thousands):
<TABLE>
<CAPTION>
1997
<S> <C>
Net interest income:
Century South Banks, Inc. exclusive of
pre-acquisition amounts................ $34,818
Bank Corporation of Georgia and
subsidiaries (a)..................... 15,641
-------
Total............................... $50,459
=======
Net income:
Century South Banks, Inc. exclusive of
pre-acquisition amounts................ $ 4,761
Bank Corporation of Georgia and
subsidiaries (a)..................... 4,871
-------
Total............................... $ 9,632
=======
</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.
A significant subsequent event will occur with the pooling of interests of
Lanier National Bank and its parent company, Lanier Bankshares, Inc. 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 is to be
accounted for as a pooling of interests. The Company's consolidated financial
statements on a pro-forma basis as if the merger with LBI had been consummated
at December 31, 1999 are as follows (amounts in thousands, except per share
data):
<TABLE>
<CAPTION>
1999 1998 1997
<S> <C> <C> <C>
Interest income............ $109,992 $108,609 $104,921
Net interest income......... $ 64,189 $ 61,717 $ 57,661
Net income.................. $ 15,780 $ 17,195 $ 12,375
Diluted earnings per share.. $ 1.16 $ 1.26 $ 0.91
</TABLE>
On February 15, 2000, the Company also completed a merger with Haywood
Bancshares, Inc. ("Haywood"), a one-bank holding company in western North
Carolina. The Company issued approximately 626,000 shares of its common stock
and approximately $13,266,000 in cash in exchange for all of the issued and
outstanding shares of Haywood. The acquisition is to be accounted for as a
purchase. Upon completion of the merger with Haywood, the assets of the Company
will increase by approximately $155,500,000.
Note 3. Restricted Cash
Aggregate reserves (in the form of deposits with the Federal Reserve Bank and
vault cash) of approximately $6,858,000 and $6,018,000 were maintained to
satisfy regulatory requirements as of December 31, 1999 and 1998, respectively.
41
<PAGE>
Century South Banks, Inc. and Subsidiaries
Notes to Consolidated Financial Statements - (Continued)
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 are
as follows (in thousands):
<TABLE>
<CAPTION>
December 31, 1999
--------------------------------------------------
Gross Gross
Amortized Unrealized Unrealized Market
Cost Gains Losses Value
--------- ---------- ---------- --------
<S> <C> <C> <C> <C>
Available for sale:
U.S. Treasury and U.S. Government agencies.. $ 98,041 $ 65 $3,543 $ 94,563
State, county and municipal securities...... 22,048 433 277 22,204
Mortgage-backed securities.................. 13,787 62 226 13,623
Other debt securities....................... 49,912 19 2,005 47,926
Equity securities........................... 7,174 23 74 7,123
-------- ------ ------ --------
Totals................................... $190,962 $ 602 $6,125 $185,439
======== ====== ====== ========
Held to maturity:
U.S. Treasury and U.S. Government agencies.. $ 337 $ 10 $ - $ 347
State, county and municipal securities...... 19,168 305 48 19,425
Mortgage-backed securities.................. 315 5 2 318
Other debt securities....................... 1,955 66 - 2,021
-------- ------ ------ --------
Totals................................... $ 21,775 $ 386 $ 50 $ 22,111
======== ====== ====== ========
December 31, 1998
--------------------------------------------------
Gross Gross
Amortized Unrealized Unrealized Market
Cost Gains Losses Value
--------- ---------- ---------- --------
Available for sale:
U.S. Treasury and U.S. Government agencies.. $ 54,747 $1,048 $ 59 $ 55,736
State, county and municipal securities...... 11,865 394 146 12,113
Mortgage-backed securities.................. 20,882 266 16 21,132
Other debt securities....................... 35,703 55 373 35,385
Equity securities........................... 7,295 528 5 7,818
-------- ------ ------ --------
Totals................................... $130,492 $2,291 $ 599 $132,184
======== ====== ====== ========
Held to maturity:
U.S. Treasury and U.S. Government agencies.. $ 1,711 $ 33 $ 10 $ 1,734
State, county and municipal securities...... 35,016 1,792 - 36,808
Mortgage-backed securities.................. 708 17 2 723
Other debt securities....................... 1,947 59 - 2,006
-------- ------ ------ --------
Totals................................... $ 39,382 $1,901 $ 12 $ 41,271
======== ====== ====== ========
</TABLE>
42
<PAGE>
Century South Banks, Inc. and Subsidiaries
Notes to Consolidated Financial Statements - (Continued)
Included as a component of amortized cost is 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 $60,000 and $196,000 at December 31, 1999 and 1998, respectively.
The amortized cost and estimated fair values of investment securities at
December 31, 1999, by contractual maturity are shown below (in thousands).
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>
Available for sale Held to maturity
Amortized Estimated Amortized Estimated
cost fair value cost fair value
--------- ---------- --------- ----------
<S> <C> <C> <C> <C>
Due in one year or less................. $ 22,157 $ 22,265 $ 2,056 $ 2,071
Due after one year through five years... 56,437 55,254 12,894 13,074
Due after five years through ten years.. 39,579 36,346 5,636 5,759
Due after ten years..................... 65,615 64,451 1,189 1,207
Equity securities....................... 7,174 7,123 - -
-------- -------- ------- -------
Totals.............................. $190,962 $185,439 $21,775 $22,111
======== ======== ======= =======
</TABLE>
Proceeds from sales of securities available for sale during 1999, 1998, and
1997 were $8,018,000, $1,059,000, and $10,971,000, respectively. Securities
gains, net for 1999, 1998, and 1997 included gross realized gains of
approximately $474,000, $396,000, and $56,000, and gross realized losses of
approximately $0, $3,000, and $32,000, respectively.
Securities with a carrying value of approximately $153,695,500 in 1999 and
$104,821,000 in 1998, respectively, were pledged to secure public funds on
deposit and for other purposes as required by law.
Note 5. Loans
Loans outstanding, by classification, at December 31, 1999 and 1998 are
summarized as follows (in thousands):
1999 1998
-------- --------
Commercial, financial, and agricultural.. $133,827 $129,497
Real estate - construction............... 140,069 97,350
Real estate - mortgage................... 574,657 522,672
Consumer installment..................... 103,231 97,990
-------- --------
Gross loans......................... 951,784 847,509
-------- --------
Less:
Unearned income........................ 575 621
Allowance for loans losses............. 14,030 13,035
-------- --------
Net loans........................... $937,179 $833,853
======== ========
At December 31, 1999 and 1998, the Company was servicing commercial loans for
others totaling $7,490,000 and $5,912,000, respectively.
At December 31, 1999, outstanding commitments included commitments to fund
commercial, consumer, real estate - construction, and real estate - mortgage
loans of approximately $114,922,000. It is the opinion of management that such
commitments do not involve more than the normal credit risk.
43
<PAGE>
Century South Banks, Inc. and Subsidiaries
Notes to Consolidated Financial Statements - (Continued)
Transactions in the allowance for loan losses are summarized as follows for
the years ended December 31, 1999, 1998, and 1997 (in thousands):
<TABLE>
<CAPTION>
1999 1998 1997
-------- -------- --------
<S> <C> <C> <C>
Balance at beginning of year........................... $13,035 $12,853 $10,861
Provision charged to operating expense................. 2,443 3,135 5,397
Loans charged off...................................... (2,751) (3,193) (3,908)
Recoveries............................................. 1,303 798 503
Allowance for loan losses of loans of bank subsidiary
sold.................................................. - (558) -
------- ------- -------
Balance at end of year................................. $14,030 $13,035 $12,853
======= ======= =======
</TABLE>
Nonaccrual loans amounted to $5,144,000 at December 31, 1999 and $4,631,000 at
December 31, 1998. The approximate effect on interest income of nonaccrual
loans for the years ended December 31, 1999, 1998, and 1997 is summarized as
follows (in thousands):
<TABLE>
<CAPTION>
1999 1998 1997
------ ------ ------
<S> <C> <C> <C>
Interest at contractual rate...... $1,444 $1,465 $1,681
Less interest recorded as income.. 1,106 1,194 1,459
------ ------ ------
Reduction of interest income...... $ 338 $ 271 $ 222
====== ====== ======
</TABLE>
Impaired loans and related amounts included in the allowance for loan losses
at December 31, 1999 and 1998 are as follows (in thousands):
<TABLE>
<CAPTION>
1999 1998
------- ---------
Principal Principal
Balance Allowance Balance Allowance
------- --------- --------- ---------
<S> <C> <C> <C> <C>
Impaired loans, with a related allowance.. $3,571 $ 353 $4,796 $219
Impaired loans, without allowance......... - - - -
------ ----- ------ ----
Total impaired loans................... $3,571 $ 353 $4,796 $219
====== ===== ====== ====
</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, 1999 was $3,520,000. Interest income of approximately $269,000 was
recognized on impaired loans for the year ended December 31, 1999.
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. The interest income on impaired loans for the year
ended December 31, 1997 was approximately $765,000.
44
<PAGE>
Century South Banks, Inc. and Subsidiaries
Notes to Consolidated Financial Statements - (Continued)
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 1999 (in thousands):
Balance at December 31, 1998.................. $ 48,321
Adjustment due to changes in related parties.. 287
--------
Adjusted balance at December 31, 1998......... 48,608
--------
New loans..................................... 35,048
Repayments.................................... (33,435)
--------
Balance at December 31, 1999.................. $ 50,221
========
Note 6. Premises, Equipment, and Leasehold Improvements
Premises, equipment, and leasehold improvements at December 31, 1999 and 1998
are summarized as follows (in thousands):
1999 1998
------- -------
Land............................................ $ 4,871 $ 4,663
Buildings and improvements...................... 21,694 19,285
Furniture and equipment......................... 20,002 18,129
Leasehold improvements.......................... 471 417
Construction in progress........................ 331 508
------- -------
47,369 43,002
Less accumulated depreciation and amortization.. 20,481 17,702
------- -------
Premises, equipment, and leasehold
improvements, net............................ $26,888 $25,300
======= =======
Note 7. Real Estate Acquired Through Foreclosure
Real estate acquired through foreclosure, in the net amount of $2,596,000 and
$4,773,000 at December 31, 1999 and 1998, respectively, is included in other
assets.
Note 8. Interest Bearing Deposits
A summary of interest bearing deposits at December 31, 1999 and 1998 is as
follows (in thousands):
<TABLE>
<CAPTION>
1999 1998
-------- --------
<S> <C> <C>
Interest bearing demand deposits................... $152,480 $156,460
Money market accounts.............................. 158,555 121,533
Savings deposits................................... 50,875 55,636
Certificates of deposit and individual retirement
accounts of $100 or more........................ 190,175 155,967
Other individual retirement accounts............... 52,143 53,115
Other certificates of deposit...................... 332,999 307,589
-------- --------
Total deposits.................................. $937,227 $850,300
======== ========
</TABLE>
45
<PAGE>
Century South Banks, Inc. and Subsidiaries
Notes to Consolidated Financial Statements - (Continued)
Interest expense on certificates of deposit and individual retirement accounts
of $100,000 or more was approximately $9,004,000, $9,190,000, and $7,131,000,
for the years ended December 31, 1999, 1998, and 1997, respectively.
Note 9. Long-Term Debt
A summary of long-term debt at December 31, 1999 and 1998 is as follows (in
thousands):
<TABLE>
<CAPTION>
1999 1998
------ ------
<S> <C> <C>
Credit facilities with Federal Home Loan Banks with maximum borrowings
of up to $96,000, secured by qualified real estate loans:
Fixed rate of 7.74%, with monthly principal payments of $8,
maturing September 1, 2006....................................... $ 680 $ 780
Fixed rate of 5.16%, maturing November 20, 2000..................... 5,000 5,000
Variable rate based on monthly LIBOR maturing on
January 13, 1999................................................. - 2,000
Fixed rate of 5.11%, maturing November 20, 2000..................... 5,000 5,000
Fixed rate of 5.86%, maturing February 18, 2000..................... 15,000 -
Fixed rate of 5.86%, maturing February 18, 2000..................... 10,000 -
Fixed rate of 5.51%, maturing June 23, 2008......................... 3,500 3,500
Other notes payable with a fixed rate of 8.75%, maturing on May 4, 2005.. 31 35
------- -------
Total long-term debt................................................ $39,211 $16,315
======= =======
</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, 1999, 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, 1999 are: 2000 - $35.1 million; 2001 - $0.1 million; 2002 - $0.1 million;
2003 - $0.1 million; 2004 - $0.1 million; and thereafter $3.7 million.
Note 10. Income Taxes
The components of the provision for income tax expense (benefit) consist of
the following for the years ended December 31, 1999, 1998, and 1997 (in
thousands):
1999 1998 1997
------- ------- -------
Current:
Federal......................... $7,482 $7,038 $4,831
State........................... 232 664 278
------ ------ ------
Total current expense........ 7,714 7,702 5,109
------ ------ ------
Deferred:
Federal......................... (673) (254) (762)
State........................... (117) (36) (128)
------ ------ ------
Total deferred benefit....... (790) (290) (890)
------ ------ ------
Total provision for income taxes.. $6,924 $7,412 $4,219
====== ====== ======
46
<PAGE>
Century South Banks, Inc. and Subsidiaries
Notes to Consolidated Financial Statements - (Continued)
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 1999,
1998, and 1997 to income before income taxes (in thousands):
1999 1998 1997
-------- ------- --------
Computed "expected" tax expense.................... $ 7,425 $7,977 $ 5,316
Increase (decrease) resulting from:
Tax-exempt interest............................... (1,010) (947) (1,124)
Amortization of goodwill and other intangibles.... 106 197 154
Acquisition costs................................. 51 12 83
State income tax, net of federal income tax
benefit.......................................... 75 408 149
Tax-exempt portion of gain on sale of subsidiary.. - (238) -
Other, net........................................ 277 3 (359)
------- ------ -------
Total provision for income taxes................... $ 6,924 $7,412 $ 4,219
======= ====== =======
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, 1999 and 1998 are presented below (in thousands):
<TABLE>
<CAPTION>
1999 1998
------ -------
<S> <C> <C>
Deferred income tax assets:
Allowance for losses on real estate acquired through
foreclosure......................................... $ 51 $ 72
Deferred compensation................................. 225 227
Allowance for loan losses............................. 5,058 4,520
Unearned income....................................... 186 107
Net operating losses.................................. 1,155 1,155
Tax credits........................................... 124 124
Net unrealized losses on investment securities........ 2,092 -
Other................................................. 254 202
------ -------
Total gross deferred income tax assets.............. 9,145 6,407
------ -------
Deferred income tax liabilities:
Net unrealized gains on investment securities......... - 551
Depreciation.......................................... 730 867
Other, net............................................ 100 107
------ -------
Total gross deferred income tax liabilities......... 830 1,525
------ -------
Net deferred income tax assets................... $8,315 $ 4,882
====== =======
</TABLE>
There was no valuation allowance for deferred tax assets at December 31, 1999
or 1998.
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.
47
<PAGE>
Century South Banks, Inc. and Subsidiaries
Notes to Consolidated Financial Statements - (Continued)
Consolidated Federal tax net operating losses of approximately $2,600,000 and
Georgia tax net operating losses of approximately $4,300,000 at December 31,
1999 and 1998 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 to the Company's 401(k) plan for 1999 totaled
approximately $593,000. In prior years, aggregate contributions and
compensation expense relating to the plans were approximately $530,000 and
$524,000 in 1998 and 1997, 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.
(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 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 of the Company 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
Executive Stock Plan. In October 1998, 4,000 shares were granted to become
effective in 1999 subject to the attainment of certain performance measures. In
1999, 39,000 shares of restricted stock were granted under the Executive Stock
Plan and 36,000 shares were forfeited. Shares granted under the Executive Stock
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.
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.
48
<PAGE>
Century South Banks, Inc. and Subsidiaries
Notes to Consolidated Financial Statements - (Continued)
A summary of the status of the Company's ISOP and other fixed stock option
plans as of December 31, 1999, 1998, and 1997 and changes during the years ended
on those dates is presented below:
<TABLE>
<CAPTION>
1999 1998 1997
------------------ ------------------- -------- ------------
Weighted Weighted Weighted
Average Average Average
Exercise Exercise Exercise
Shares Price Shares Price Shares Price
-------- -------- --------- -------- -------- ------------
<S> <C> <C> <C> <C> <C> <C>
Fixed Stock Options:
Outstanding at beginning of year.... 277,488 $13.52 372,471 $ 7.00 375,318 $ 5.72
Granted............................. 145,941 23.82 65,000 30.23 33,375 18.30
Exercised........................... (77,345) 7.28 (159,983) 5.11 (36,222) 4.31
Canceled............................ (5,000) 19.25 - - - -
------- ------ -------- ------ ------- ------------
Outstanding at end of year.......... 341,084 $19.28 277,488 $13.52 372,471 $ 7.00
======= ====== ======== ====== ======= ============
Options exercisable at end of year.. 159,618 $15.93 231,963 $12.89 296,065 $ 5.22
======= ====== ======== ====== ======= ============
</TABLE>
The following table summarizes information about fixed stock options
outstanding at December 31, 1999:
<TABLE>
<CAPTION>
Weighted
Weighted Average Weighted
Range of Average Remaining Average
Number Exercise Exercise Contractual Number Exercise
Outstanding Prices Price Life Exercisable Price
------------- ------------ -------- ----------- ----------- --------
<S> <C> <C> <C> <C> <C>
86,918 4.76-5.68 $ 5.02 2.42 86,918 $ 5.02
14,850 9.63-12.78 11.95 6.64 2,700 9.63
171,316 17.22-23.875 22.88 9.52 5,000 23.00
68,000 26.00-33.00 30.04 8.41 65,000 30.23
</TABLE>
The per share weighted-average fair value of stock options granted during
1999, 1998, and 1997 was $11.09, $14.29, and $7.23, respectively, using the
Black Scholes option-pricing model with the following weighted-average
assumptions: expected life of nine years, expected dividend yield of 2.02% in
1999, 2.32% in 1998, and 2.55% in 1997, risk free interest rate of 6.875% in
1999, 6.25% in 1998, and 6.00% in 1997, and an expected volatility of 37.90%,
36.58%, and 31.14%, for each of the years ended December 31, 1999, 1998, and
1997, respectively.
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, 1999, 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 (in thousands, except per share data):
1999 1998 1997
------- ------- -------
Net income:
As reported.................. $14,290 $15,378 $10,969
Pro forma.................... 14,200 14,743 10,918
Diluted net income per share:
As reported.................. $ 1.21 $ 1.30 $ 0.93
Pro forma.................... 1.20 1.25 0.93
Pro forma amounts reflect only compensation cost for options granted in 1999,
1998, 1997, and 1996. 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.
49
<PAGE>
Century South Banks, Inc. and Subsidiaries
Notes to Consolidated Financial Statements - (Continued)
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 $5,970,000 under
standby letters of credit at December 31, 1999. 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 value 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, and Federal
Funds Sold and Purchased
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 at December 31, 1999 and 1998 (in thousands):
<TABLE>
<CAPTION>
1999 1998
-------------------- --------------------
Carrying Estimated Carrying Estimated
Amount Fair Value Amount Fair Value
-------- ---------- -------- ----------
<S> <C> <C> <C> <C>
Investment securities available for sale.. $185,439 $185,439 $132,184 $132,184
Investment securities held to maturity.... 21,775 22,111 39,382 41,271
-------- -------- -------- --------
Total investment securities............. $207,214 $207,550 $171,566 $173,455
======== ======== ======== ========
</TABLE>
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 at on the fair value of derivatives
at December 31, 1999 and 1998 (in thousands):
<TABLE>
<CAPTION>
1999 1998
-------------------- --------------------
Carrying Estimated Carrying Estimated
Amount Fair Value Amount Fair Value
-------- ----------- -------- ----------
<S> <C> <C> <C> <C>
Interest rate swap agreements... $ - $(41) $ - $ 44
Purchased interest rate floors.. 218 5 235 185
----- ---- ---- ----
Total derivatives............ $ 218 $(36) $235 $229
===== ==== ==== ====
</TABLE>
50
<PAGE>
Century South Banks, Inc. and Subsidiaries
Notes to Consolidated Financial Statements - (Continued)
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 at
December 31, 1999 and 1998 (in thousands):
<TABLE>
<CAPTION>
1999 1998
--------------------- ---------------------
Carrying Estimated Carrying Estimated
Amount Fair Value Amount Fair Value
--------- ----------- --------- -----------
<S> <C> <C> <C> <C>
Commercial and consumer real estate related.. $714,727 $709,317 $588,944 $589,302
All other loans.............................. 237,058 237,015 258,565 259,236
Unearned income.............................. (576) (576) (621) (621)
-------- -------- -------- --------
Total loans............................... $951,209 $945,756 $846,888 $847,917
======== ======== ======== ========
</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 present information on the fair value of deposits at
December 31, 1999 and 1998 (in thousands):
<TABLE>
<CAPTION>
1999 1998
--------------------- -------------------
Carrying Estimated Carrying Estimated
Amount Fair Value Amount Fair Value
---------- ---------- -------- ----------
<S> <C> <C> <C> <C>
Noninterest bearing demand deposits........... $ 147,726 $ 147,726 $143,008 $143,008
Savings and interest bearing demand accounts.. 203,355 203,355 212,096 212,096
Money market accounts......................... 158,555 158,555 121,533 121,533
Certificates of deposit and individual
retirement accounts:
Maturing within twelve months or less... 437,048 437,947 403,244 405,241
Maturing beyond one year................ 138,269 139,396 113,427 115,916
---------- ---------- -------- --------
Total deposits.................... $1,084,953 $1,086,979 $993,308 $997,794
========== ========== ======== ========
</TABLE>
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,
1999 and 1998 (in thousands) (unaudited), 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.
1999 1998
------- -------
Core deposit intangible........ $38,778 $28,382
Less: recorded amounts........ 786 1,287
------- -------
Net increase in fair value.. $37,992 $27,095
======= =======
51
<PAGE>
Century South Banks, Inc. and Subsidiaries
Notes to Consolidated Financial Statements - (Continued)
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, 1999 and 1998, the fair value of the long-term debt was $39,969,000 and
$16,827,000, respectively. At December 31, 1999 and 1998, the carrying amount
of long-term debt was $39,211,000 and $16,315,000, 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, 1999 and 1998, 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 (in thousands):
<TABLE>
<CAPTION>
1999 1998 1997
------ ------ ------
<S> <C> <C> <C>
Income:
Income associated with originating, and selling
mortgage loans................................. $2,265 $2,662 $1,428
Expenses:
Merger integration special charges............... $2,804 $ - $ -
Computer services................................ 1,959 1,634 1,054
Stationery and supplies.......................... 759 948 1,028
</TABLE>
Rental expense on computers, buildings and office equipment, including
cancelable leases, was $1,059,000, $816,000, and $600,000 for the years ended
December 31, 1999, 1998, 1997, respectively.
The merger integration special charges were recorded in the fourth quarter of
1999. These expenses were associated with the consolidation of the Company's two
headquarters into one location and the costs associated with building a single
identity for its thirteen affiliates.
52
<PAGE>
Century South Banks, Inc. and Subsidiaries
Notes to Consolidated Financial Statements - (Continued)
Note 15. Condensed Financial Information of Century South Banks, Inc. (Parent
Only)
Condensed Balance Sheets
(Amounts in thousands)
<TABLE>
<CAPTION>
1999 1998
Assets:
<S> <C> <C>
Cash..................................................... $ 14,777 $ 3,659
Investment in consolidated bank subsidiaries, at equity.. 102,768 109,463
Investment securities.................................... 1,055 1,212
Loans, net............................................... 1,616 6,540
Premises and equipment, net.............................. 2,064 917
Goodwill, net............................................ 2,928 3,247
Other intangible assets, net............................. 292 159
ORE, net................................................. 898 1,478
Other assets............................................. 1,346 1,411
-------- --------
Total assets.......................................... $127,744 $128,086
======== ========
Liabilities:
Other liabilities........................................ $ 2,994 $ 2,034
-------- --------
Total liabilities..................................... 2,994 2,034
-------- --------
Shareholders' equity:
Common stock............................................. 11,796 11,787
Additional paid-in capital............................... 36,122 36,106
Retained earnings........................................ 86,916 78,219
Common stock in treasury, at cost........................ (5,872) (1,051)
Unearned compensation - restricted stock awards.......... (721) -
Accumulated other comprehensive income (loss)............ (3,491) 991
-------- --------
Total shareholders' equity............................ 124,750 126,052
-------- --------
Total liabilities and shareholders' equity.......... $127,744 $128,086
======== ========
</TABLE>
Condensed Statements of Income
(Amounts in thousands)
<TABLE>
<CAPTION>
1999 1998 1997
<S> <C> <C> <C>
Income:
Dividends received from bank subsidiaries............................. $19,959 $10,893 $ 6,263
Interest income....................................................... 343 46 -
Other income.......................................................... 6,610 9,124 4,618
------- ------- -------
Total income....................................................... 26,912 20,063 10,881
------- ------- -------
Expenses:
Interest expense...................................................... 8 27 114
Salaries and employee benefits........................................ 5,280 5,338 4,296
Other expenses........................................................ 6,331 5,200 2,994
------- ------- -------
Total expenses..................................................... 11,619 10,565 7,404
------- ------- -------
Income before income taxes and equity in undistributed income of
subsidiaries..................................................... 15,293 9,498 3,477
Income tax benefit - allocated from consolidated income tax return...... 1,531 532 162
------- ------- -------
Income before equity in undistributed income (dividends in excess
of income) of subsidiaries....................................... 16,824 10,030 3,639
Equity in undistributed income (dividends in excess of income) of
subsidiaries..................................................... (2,543) 5,348 7,330
------- ------- -------
Net income.............................................................. $14,290 $15,378 $10,969
======= ======= =======
</TABLE>
53
<PAGE>
Century South Banks, Inc. and Subsidiaries
Notes to Consolidated Financial Statements - (Continued)
Condensed Statements of Cash Flows
(Amounts in thousands)
<TABLE>
<CAPTION>
1999 1998 1997
<S> <C> <C> <C>
Cash flows from operating activities:
Net income............................................................. $ 14,290 $15,378 $10,969
Adjustments to reconcile net income to net cash provided by operating
activities:
(Equity in undistributed income) dividends in excess of income of
subsidiaries....................................................... 2,535 (5,027) (6,676)
Gain on sale of bank subsidiary..................................... - (670) -
Depreciation........................................................ 293 186 93
Amortization........................................................ 381 631 543
Provision for loan losses........................................... (300) - -
(Increase) decrease in other assets................................. (1,883) (2,187) 550
Increase (decrease) in other liabilities............................ 3,436 1,287 (728)
-------- ------- -------
Net cash provided by operating activities......................... $ 18,752 $ 9,598 $ 4,751
-------- ------- -------
Cash flows from investing activities:
Purchase of investment securities...................................... (1,035) (1,188) -
Proceeds from sale of investment securities............................ 687 665 -
Purchase of premises and equipment..................................... (1,531) (762) (270)
Net decrease (increase) in loans....................................... 5,224 (6,540) -
Proceeds from sale of premises and equipment........................... 83 131 5
Proceeds from sale of bank subsidiary.................................. - 6,100 -
-------- ------- -------
Net cash provided by (used in) investing activities............... 3,428 (1,594) (265)
-------- ------- -------
Cash flows from financing activities:
Proceeds from issuance of long-term debt............................... - 1,500 -
Payments on long-term debt............................................. - (1,500) (1,304)
Proceeds from issuance of short-term borrowings........................ - - 1,925
Payments on short-term borrowings...................................... - (1,500) (425)
Proceeds from issuance of common stock................................. 590 836 156
Dividends paid......................................................... (5,435) (5,074) (3,646)
Purchase of treasury stock............................................. (6,217) (745) -
-------- ------- -------
Net cash used in financing activities............................. (11,062) (6,483) (3,294)
-------- ------- -------
Net increase in cash.............................................. 11,118 1,521 1,192
Cash at beginning of year................................................ 3,659 2,138 946
-------- ------- -------
Cash at end of year...................................................... $ 14,777 $ 3,659 $ 2,138
======== ======= =======
Supplemental disclosures of cash paid during year for:
Interest............................................................... $ 8 $ 27 $ 114
======== ======= =======
Income taxes........................................................... $ 8,758 $ 7,184 $ 5,762
======== ======= =======
</TABLE>
54
<PAGE>
Century South Banks, Inc. and Subsidiaries
Notes to Consolidated Financial Statements - (Continued)
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 2000 without prior approval from
the banking regulatory agencies, is approximately $7,939,800, subject to
maintenance of required capital.
As a result of these regulatory limitations, at December 31, 1999,
approximately $94,828,200 of the Company's investment in net assets of
subsidiary banks of $102,768,000 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 possible 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, 1999, that the Company meets all capital
adequacy requirements to which it is subject.
As of December 31, 1999, 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, 1999, which
would affect the Company's or the subsidiaries' well-capitalized classification.
55
<PAGE>
Century South Banks, Inc. and Subsidiaries
Notes to Consolidated Financial Statements - (Continued)
The Company's actual capital amounts and ratios are presented below on a
consolidated basis and for each significant subsidiary (in thousands):
<TABLE>
<CAPTION>
To Be Well Capitalized
For Capital Under Prompt
Adequacy Corrective
Actual Purposes Action Provisions
Amount Ratio Amount Ratio Amount Ratio
-------- ----- ------- ------ ------- ---------
(Greater Than or Equal To)
<S> <C> <C> <C> <C> <C> <C>
As of December 31, 1999:
Total Capital (to Risk
Weighted Assets):
Consolidated.......... $136,271 14.7 $74,273 8.0% N/A N/A
AmeriBank, N.A........ 16,240 11.3 11,542 8.0% $14,427 10.0%
Bank of Dahlonega..... 13,474 13.6 7,928 8.0% 9,910 10.0%
First South Bank, N.A. 17,939 11.8 12,191 8.0% 15,239 10.0%
Georgia First Bank,
N.A.................. 18,186 10.3 14,063 8.0% 17,578 10.0%
Tier 1 Capital (to Risk
Weighted Assets):
Consolidated.......... $124,626 13.4 $37,136 4.0% N/A N/A
AmeriBank, N.A........ 14,764 10.2 5,771 4.0% $ 8,656 6.0%
Bank of Dahlonega..... 12,231 12.3 3,964 4.0% 5,946 6.0%
First South Bank, N.A. 16,086 10.6 6,096 4.0% 9,143 6.0%
Georgia First Bank,
N.A.................. 15,986 9.1 7,031 4.0% 10,547 6.0%
Tier 1 Capital (to
Average Assets):
Consolidated.......... $124,626 9.9 $50,262 4.0% N/A N/A
AmeriBank, N.A........ 14,764 7.7 7,673 4.0% $ 9,591 5.0%
Bank of Dahlonega..... 12,231 8.7 5,618 4.0% 7,022 5.0%
First South Bank, N.A. 16,086 8.2 7,894 4.0% 9,868 5.0%
Georgia First Bank,
N.A.................. 15,986 8.0 7,990 4.0% 9,987 5.0%
As of December 31, 1998:
Total Capital (to Risk
Weighted Assets):
Consolidated.......... $131,126 15.9 $65,831 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,
N.A.................. 12,747 12.6 8,088 8.0% 10,110 10.0%
Tier 1 Capital (to Risk
Weighted Assets):
Consolidated.......... $120,570 14.7 $32,916 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,
N.A.................. 11,483 11.4 4,044 4.0% 6,066 6.0%
Tier 1 Capital (to
Average Assets)
Consolidated.......... $120,570 10.5 $46,007 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,
N.A.................. 11,483 8.9 5,372 4.0% 6,714 5.0%
</TABLE>
56
<PAGE>
Century South Banks, Inc. and Subsidiaries
Notes to Consolidated Financial Statements - (Continued)
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, 1999 (in thousands):
<TABLE>
<CAPTION>
Net Average Weighted Weighted
Notional Unrealized Months to Average Pay Average Receive
Amount Gain (Loss) Maturity Rate (a) Rate
<S> <C> <C> <C> <C> <C>
Pay variable - Federal funds rate.. $10,000 ($41) 12 5.51% 5.76%
------- ---- -- ---- ----
Total............................ $10,000 ($41) 12 5.51% 5.76%
======= ==== == ==== ====
</TABLE>
(a) Weighted-average variable rates represent variable rates in effect at
December 31, 1999.
In addition, the Company has purchased interest rate floor contracts with
aggregate notional amounts of $180,000,000 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 $218,000, $235,000, and $219,000 at December 31, 1999,
1998, and 1997, respectively. Related premium amortization expense was
approximately $134,000, $130,000, and $61,000 for 1999, 1998, and 1997,
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.
57
<PAGE>
Century South Banks, Inc. and Subsidiaries
Notes to Consolidated Financial Statements - (Continued)
<TABLE>
<CAPTION>
Pretax Tax (Expense) Net of Tax
Amount Benefit Amount
<S> <C> <C> <C>
(Amounts in thousands)
1999:
Net unrealized holding losses on investment securities
available for sale arising during the year............. $(6,723) $2,536 $(4,187)
Reclassification adjustment for net gains realized in
net income............................................. 474 (179) 295
------- ------ -------
Other comprehensive loss................................ $(7,197) $2,715 $(4,482)
======= ====== =======
1998:
Net unrealized holding gains on investment securities
available for sale arising during the years............ $ 815 $ (307) $ 508
Reclassification adjustment for net gains realized in
net income............................................. 393 (148) 245
------- ------ -------
Other comprehensive income.............................. $ 422 $ (159) $ 263
======= ====== =======
1997:
Net unrealized holding gains on investment securities
available for sale arising during the year............. $ 849 $ (320) $ 529
Reclassification adjustment for net gains realized in
net income............................................. 24 (9) 15
------- ------ -------
Other comprehensive income.............................. $ 825 $ (311) $ 514
======= ====== =======
</TABLE>
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.
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 no
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 I, Item 1 under the heading "Executive Officers".
58
<PAGE>
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 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.
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.
<TABLE>
<CAPTION>
Page Number
Consolidated Financial Statements in Section
<S> <C>
Independent Auditors' Report............................................................ 31
Consolidated Balance Sheets as of December 31, 1999 and 1998............................ 32
Consolidated Statements of Income for the Years Ended December 31, 1999, 1998, and 1997. 33
Consolidated Statements of Shareholders' Equity and Comprehensive Income for the Years
Ended December 31, 1999, 1998, and 1997............................................... 34
Consolidated Statements of Cash Flows for the Years Ended December 31, 1999, 1998, and
1997.................................................................................. 35
Notes to Consolidated Financial Statements.............................................. 36-58
</TABLE>
(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
59
<PAGE>
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.
10.4 Employee Compensation Agreements. 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, 1999 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, N.A. - Gainesville, Georgia
Fannin County Bank, N.A. - Blue Ridge, 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
The Independent Bank of Oxford - Oxford, Alabama
Haywood Savings Bank - Waynesville, North Carolina
Lanier National Bank - Gainesville, Georgia
23.1 Consent of KPMG LLP
27.1 Financial Data Schedule as of and for the year ended December
31, 1999 (for SEC use only).
27.2 Financial Data Schedule as of and for the year ended December
31, 1998 (for SEC use only).
(b) Reports on Form 8-K.
No reports on Form 8-K were filed during the quarter ended December 31,
1999.
60
<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, on this 29thday of March,
2000.
CENTURY SOUTH BANKS, INC.
(Registrant)
/s/ James A. Faulkner
-------------------------------------------
James A. Faulkner
Vice Chairman and Director
/s/ Joseph W. Evans
-------------------------------------------
Joseph W. Evans
President, Chief Executive Officer, Chief
Operating Officer, Chief Financial Officer,
and Director
/s/ Susan J. Anderson
-------------------------------------------
Susan J. Anderson
Senior Vice President, Corporate Controller
and Corporate Secretary
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.
<TABLE>
<CAPTION>
Name Title Date
<S> <C> <C> <C>
By: /s/ William H. Anderson, II Chairman of the Board and Director March 29, 2000
----------------------------
William H. Anderson, II
By: /s/ James A. Faulkner Vice Chairman of the Board and
---------------------------- Director March 29, 2000
James A. Faulkner
By: /s/ J. Russell Ivie Vice Chairman of the Board and
---------------------------- Director March 29, 2000
J. Russell Ivie
By: /s/ James R. Balkcom, Jr. Director March 29, 2000
-----------------------------
James R. Balkcom, Jr.
By: /s/ William L. Chandler Director March 29, 2000
-----------------------------
William L. Chandler
By: /s/ Joseph W. Evans President, Chief Executive Officer, Chief
----------------------------- Operating Officer, Chief Financial Officer
Joseph W. Evans and Director March 29, 2000
By: /s/ Thomas T. Folger, Jr. Director March 29, 2000
-----------------------------
Thomas T. Folger, Jr.
By: /s/ Quill O. Healey Director March 29, 2000
-----------------------------
Quill O. Healey
By: /s/ Frank C. Jones Director March 29, 2000
-----------------------------
Frank C. Jones
By: /s/ John B. McKibbon, III Director March 29, 2000
------------------------------
John B. McKibbon, III
By: /s/ E. Paul Stringer Director March 29, 2000
------------------------------
E. Paul Stringer
</TABLE>
61
<PAGE>
Exhibit 13.1
CHIEF EXECUTIVE OFFICER'S MESSAGE
Dear Shareholder:
We are pleased to report net earnings for Century South Banks, Inc. for the
fourth quarter of 1999. Net income for the quarter, exclusive of special merger
integration charges, was $4,278,000 or $0.37 per diluted share. Fourth quarter
1998 earnings, exclusive of nonrecurring net gains of approximately $670,000
related to the sale of an affiliate bank and approximately $149,000, net of
related taxes, related to the sale of a branch, were $2,774,000 or $0.24 per
diluted share. The special charges recorded in the fourth quarter of 1999 of
approximately $1,784,000, net of related taxes, are associated with the
consolidation of the Company's two headquarters into one location in Alpharetta,
Georgia, and costs associated with building a single identity for our eleven
affiliates. Year-to-date earnings for 1999, exclusive of the merger integration
charges and other nonrecurring charges of approximately $247,300, net of related
taxes, taken in the first quarter associated with the acquisition of Independent
Bancorp, Inc., were $16,321,000 or $1.38 per diluted share. Earnings for the
year ended December 31, 1998, excluding the nonrecurring fourth quarter
affiliate bank and branch sales and an after-tax gain of $355,000 recorded in
the first quarter for the sale of a branch, were $14,204,000 or $1.20 per
diluted share.
Actual net earnings were $2,494,000 or $0.21 per diluted share for the
fourth quarter of 1999, as compared to $3,593,000 or $0.31 per diluted share for
the fourth quarter of 1998. Year-to-date actual net earnings were $14,290,000 or
$1.21 per diluted share for the year ended December 31, 1999 as compared to
$15,378,000 or $1.30 per diluted share for the year ended December 31, 1998.
The quarterly cash dividend of $0.12 per share paid on January 6, 2000
represents a 7.9% increase over the same quarter of 1998 dividend.
The fourth quarter results reflect continued growth in earnings and assets,
as well as continued improvement in our asset quality. Total assets at December
31, 1999 were approximately $1,272,460,000, reflecting an 11.0% increase as
compared to total assets at December 31, 1998. Total loans, net of unearned and
reserve, at December 31, 1999 were approximately $937,139,000, reflecting a
12.4% increase as compared to total loans at December 31, 1998. At December 31,
1999, our allowance for loan loss was very strong, at approximately 1.47% of
total loans outstanding. Our nonperforming assets continue to trend downward,
and were at 0.66% as a percentage of total assets. These results were obtained
while maintaining a net interest margin of 5.35% and while reducing noninterest
expense, net of nonrecurring items, by 1.3% on a year-to-year basis.
We continue to move forward with our previously announced acquisitions of
Haywood Bancshares, Inc., Waynesville, North Carolina, and Lanier Bankshares,
Inc., Gainesville, Georgia. We expect to complete these mergers in first quarter
2000, which will add approximately $270 million in assets to our Company.
We appreciate the dedication of our committed staff of professional
bankers, and encourage your continued support of your Company.
Sincerely,
James A. Faulkner
Vice Chairman and
Chief Executive Officer
<PAGE>
Century South Banks, Inc. and Subsidiaries
Condensed Consolidated Balance Sheets (Unaudited)
<TABLE>
<CAPTION>
December 31, December 31,
1999 1998
-----------------------------
(amounts in thousands)
<S> <C> <C>
Assets
Cash and due from banks $ 60,004 $ 51,420
Federal funds sold 8,140 30,550
Interest-earning deposits in other banks 2,761 4,949
Investment securities 207,214 171,566
Loans, net of unearned income 951,209 846,888
Allowance for loan losses (14,030) (13,035)
Premises and equipment, net 26,888 25,300
Other assets 30,274 29,082
-----------------------------
Total assets $1,272,460 $1,146,720
=============================
Liabilities
Noninterest-bearing deposits $ 147,726 $ 143,008
Interest-bearing deposits 937,227 850,300
Other short-term borrowings 10,522 -
Federal Home Loan Bank advances 39,180 16,280
Long-term debt 31 35
Other liabilities 13,024 11,045
-----------------------------
Total liabilities 1,147,710 1,020,668
-----------------------------
Shareholders' Equity
Common stock 11,796 11,787
Additional paid-in capital 36,122 36,106
Retained earnings 86,916 78,219
Unearned compensation-restricted stock awards (721) -
Common stock in treasury, at cost (5,872) (1,051)
Accumulated other comprehensive income (loss) (3,491) 991
-----------------------------
Total shareholders' equity 124,750 126,052
-----------------------------
Total liabilities and shareholders' equity $1,272,460 $1,146,720
=============================
</TABLE>
CONDENSED CONSOLIDATED STATEMENTS OF INCOME (Unaudited)
<TABLE>
<CAPTION>
Three months ended Twelve months ended
December 31,* December 31,*
1999 1998 1999 1998
-----------------------------------------------
(amounts in thousands, except per share data)
<S> <C> <C> <C> <C>
Interest income $ 26,332 $ 24,536 $100,439 $ 99,478
Interest expense 11,016 10,347 41,434 42,611
-----------------------------------------------
Net interest income 15,316 14,189 59,005 56,867
Provision for loan losses 700 1,408 2,443 3,135
Noninterest income 2,931 5,801 12,157 15,824
Noninterest expense 14,039 13,531 47,505 46,766
Income tax expense 1,014 1,458 6,924 7,412
-----------------------------------------------
Net income $ 2,494 $ 3,593 $ 14,290 $ 15,378
===============================================
Weighted average common shares outstanding
Assuming dilution 11,686 11,861 11,824 11,860
Net income per share assuming dilution $ 0.21 $ 0.31 $ 1.21 $ 1.30
Dividends declared per share $0.12000 $0.11125 $0.48000 $0.43750
</TABLE>
. Fourth quarter of 1999 included an after-tax expense of approximately
$1,784,000 related to the relocation of the headquarters and move to a
single company identity. First quarter of 1999 included an after-tax
expense of 247,300 associated with the acquisition of Independent Bancorp,
Inc. Fourth quarter 1998 included a $670,000 net gain related to the sale
of an affiliate bank and approximately $149,000, net of related taxes,
related to the sale of a branch. First quarter of 1998 included an
after-tax gain totaling $355,000 recognized on the sale of a branch. 1998
numbers have also been restated to reflect the acquisition of Independent
Bancorp, Inc.
<PAGE>
CenturySouthbanks
- -----------------------------------------------------------------
Inc.
Executive Officers
- --------------------------------------------------------------------------------
William H. Anderson, II Chairman
J. Russell Ivie Vice Chariman
James A. Faulkner Vice Chairman & CEO
Joseph W. Evans President, COO & CFO
Tony E. Collins Executive Vice President & CAO
Stephen W. Doughty Executive Vice President & CCO
E. Max Crook Executive Vice President
J. Perry Hendrix Executive Vice President
J. Thomas Wiley, Jr. Executive Vice President
Sidney J. Wooten Executive Vice President
Directors
- --------------------------------------------------------------------------------
William H. Anderson, II, Chairman Thomas T. Folger, Jr.
J. Russell Ivie, Vice Chairman Quill O. Healey
James A. Faulkner, Vice Chairman Frank C. Jones
James R. Balkcom, Jr. John B. McKibbon, III
William L. Chandler E. Paul Stringer
Joseph W. Evans
Affiliates
- --------------------------------------------------------------------------------
Bank of Dahlonega Peoples Bank
60 Main Street West 13321 Jones Street
Dahlonega, GA 30533 Lavonia, GA 30553
John L. Lewis, President J. Douglas Cleveland, President
706-864-3314 706-356-8040
The Bank of Ellijay Bank of Danielsville
53 Sand Street Courthouse Square
Ellijay, GA 30540 Danielsville, GA 30633
Britt H. Henderson, President L. Banister Sexton, President
706-276-3400 706-795-2121
First Bank of Polk County First South Bank, N.A.
40 Ocoee Street 4951 Forsyth Road
Copperhill, TN 37317 Macon, GA 31210
James R. Quintrell, President E. Max Crook, President
Sidney J. Wooten, Chief Executive Officer 912-757-2000
423-496-3261
Georgia First Bank, N.A. AmeriBank, N.A.
455 Jesse Jewell Parkway 7393 Hodgson Memorial Drive
Gainesville, GA 30501 Savannah, GA 31406
James A. Faulkner, Interim President Heys E. McMath, III, President
and Chief Executive Officer 912-232-3800
770-535-8000
Fannin County Bank, N.A. The Independent Bank of Oxford
480 W. First Street 402 Main Street
Blue Ridge, GA 30513 Oxford, AL 36203
Steve M. Eaton, President Joel B. Carter, President
706-632-2075 256-835-1776
First Community Bank of Dawsonville
136 Highway 400 South
Dawsonville, GA 30534
Gary L. Evans, President
706-216-5050
<PAGE>
Financial Highlights (Unaudited)
<TABLE>
<CAPTION>
Selected Balances
- ----------------------------------------------------------------------------------------------
As of and for the year
ended December 31,*
1999 1998 Percentage Change
-----------------------------------------------
(amounts in thousands, except per share data)
<S> <C> <C> <C>
Loans, net $ 937,179 $ 833,853 12.39%
Deposits 1,084,953 993,308 9.23
Total assets 1,272,460 1,146,720 10.97
Shareholders' equity 124,750 126,052 (1.03)
Net income 14,290 15,378 (7.08)
Book value per share 10.80 10.77 0.28
Net income per share assuming dilution 1.21 1.30 (6.92)
Weighted average common shares outstanding
assuming dilution 11,824 11,860 (0.30)
Nonperforming loans 5,144 4,631 11.08
Other nonperforming assets 3,270 5,614 (41.75)
Financial Ratios
- ----------------------------------------------------------------------------------------------
Return on average assets 1.19% 1.33% (10.53)%
Return on average shareholders' equity 11.17 12.69 (11.98)
Net interest margin (taxable equivalent) 5.35 5.34 0.19
Allowance for loan losses to loans 1.47 1.54 (4.55)
Nonperforming assets to total assets 0.66 0.89 (25.84)
</TABLE>
. Fourth quarter of 1999 included an after-tax expense of approximately
$1,784,000 related to the relocation of the headquarters and move to a
single company identity. First quarter of 1999 included an after-tax
expense of 247,300 associated with the acquisition of Independent Bancorp,
Inc. Fourth quarter 1998 included a $670,000 net gain related to the sale
of an affiliate bank and approximately $149,000, net of related taxes,
related to the sale of a branch. First quarter of 1998 included an
after-tax gain totaling $355,000 recognized on the sale of a branch. 1998
numbers have also been restated to reflect the acquisition of Independent
Bancorp, Inc.
<PAGE>
SHAREHOLDER INFORMATION
- --------------------------------------------------------------------------------
Stock Information
Century South Banks, Inc. ("CSBI") lists its stock for trading on the Nasdaq
National Market tier of The Nasdaq Stock Market under the Symbol "CSBI". Market
prices for the quarter ended December 31, 1999 are as follows:
Three month high ......................... $ 25.00
Three month low .......................... $ 20.125
Closing price ............................ $ 22.375
- --------------------------------------------------------------------------------
Shareholder Services
Shareholders wishing to change the name or address on their stock, to report
lost certificates or to consolidate accounts should contact:
Registrar and Transfer Company
Attn: Investor Relations
10 Commerce Drive
Cranford, New Jersey 07016
(800) 368-5948
- --------------------------------------------------------------------------------
Dividend Reinvestment Plan/Cash Contributions
Shareholders wishing to automatically reinvest quarterly dividends into Century
South Banks, Inc. common stock or make voluntary cash contributions should
contact:
Registrar and Transfer Company
Attn: Investor Relations
10 Commerce Drive
Cranford, New Jersey 07016
(800) 368-5948
- --------------------------------------------------------------------------------
Investor Relations
Shareholders, analysts, and others seeking financial information on Century
South Banks, Inc. should contact one of the following:
James A. Faulkner Susan J. Anderson Joseph W. Evans
Vice Chairman & CEO Senior Vice President & Controller President, COO & CFO
(706) 864-3915 (706) 864-3915 (678) 624-1366
<PAGE>
EXHIBIT 23.1
Accountants' Consent
The Board of Directors
Century South Banks, Inc.:
We consent to the 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 21, 2000,
relating to the consolidated balance sheets of Century South Banks, Inc. and
subsidiaries as of December 31, 1999 and 1998, 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, 1999,
which report is included in the December 31, 1999 Annual Report on Form 10-K of
Century South Banks, Inc.
Atlanta, Georgia
March 29, 2000
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 9
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> DEC-31-1999
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0
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