U.S. SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-KSB
(Mark One)
[ X ] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934(FEE REQUIRED)
For the fiscal year ended September 30, 1997
------------------
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934 (NO FEE REQUIRED)
For the transition period _____________ to _____________
Commission file number: 0-16657
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FIRST GEORGIA HOLDING, INC.
-------------------------------
(Name of Small Business Issuer)
Georgia 58-1781773
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(State or other jurisdiction (IRS Employer
of incorporation or organization) identification number)
1703 Gloucester Street, Brunswick, GA 31521
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(Address of principal executive offices)
Registrant's telephone number, including area code: (912) 267-7283
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, par value $1.00
Check whether the issuer (1) has filed all reports required to be filed by
section 12 or 15(d) of the Exchange Act of 1934 during the past 12 months (or
for such shorter period that the registrant was required to file such reports),
and (2) has been subject to such filing requirements for the past 60 days.
Yes [ X ] No [ ]
Check if there is no disclosure of delinquent filers in response to Item 405 of
Regulation S-B contained in this form, and no disclosure will be contained, to
the best of registrant's knowledge, in definitive proxy or information statement
incorporated by reference in Part III of this Form 10-KSB or any amendment to
this Form 10-K. [ X ]
State issuer's revenues for its most recent fiscal year $14,402,614
State the aggregate market value of the voting stock held by non-affiliates of
the registrant as of December 1, 1997:
3,052,319 Shares of Common Stock, $1.00 par value -- $25,563,172 based
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upon approximate market value of $8.375 per share at December 1, 1997.
- ----------------------------------------------------------------------
State the number of shares outstanding of each of the issuer's classes of
common stock, as of December 1, 1997:
Common Stock, $1.00 par value --3,052,319 shares
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DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Company's Proxy Statement (the "Proxy Statement") for the
Annual Meeting of Shareholders scheduled to be held January 21, 1998 are
incorporated by reference into Part I and Part III.
Portions of the Company's Annual Report (the "Annual Report") to
Shareholders for the year ended September 30, 1997 are incorporated by
reference into Part I, Part II and Part III.
<PAGE>
FIRST GEORGIA HOLDING, INC.
FORM 10-KSB
INDEX
Part I
PAGE
Item 1. Business . . . . . . . . . . . . . . . . . . . . . . . . . . . 3
Item 2. Description of Properties . . . . . . . . . . .. . . . . . . . 38
Item 3. Legal Proceedings. . . . . . . . . . . . . . . . . . . . . . . 39
Item 4. Submission of Matters to a Vote of
Security Holders. .. . . . . . . . . . . . . . . . . . . . . . . . . 39
Part II
Item 5. Market for Common Equity and Related
Stockholder Matters . . . . . . . . . . . . . . . . .. . . . . . . . 39
Item 6. Management's Discussion and Analysis or Plan . .. . . . . . . . 39
Item 7. Financial Statements . . . . . . . . . . . . . . . . . . . . .. 39
Item 8. Changes in and Disagreements with Accountants
on Accounting and Financial Disclosure . . . . . . . . . . . . . . 39
Part III
Item 9. Directors, Executive Officers, Promoters and
Control Persons; Compliance with
Section 16(a) of the Exchange Act . . . . .. . . . . . . . . . . . . .40
Item 10. Executive Compensation . . . . . . . .. . . . .. . . . . . . . 40
Item 11. Security Ownership of Certain
Beneficial Owners and Management . .. . . . . . . . . . . . . . . . 40
Item 12. Certain Relationships and Related
Transactions . . . . . . . . . . . . . . . . . . . . .. . . . . . . 40
Item 13. Exhibits and Reports on Form 8-K .. . . .. . . . . . . . . . . 40
Signatures . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .41
Exhibit Index . . . . . . . . . . . . . . . . . . . . . . . . . . . . .43
<PAGE>
PART I
Item 1. DESCRIPTION OF BUSINESS
Business of the Company
-----------------------
First Georgia Holding, Inc. (the Company), was incorporated as a
Georgia corporation on December 16, 1987, for the purpose of acquiring all of
the issued and outstanding shares of First Georgia Bank, F.S.B. (formerly
known as First Georgia Savings Bank, F.S.B.)(the Bank) pursuant to a plan of
reorganization. The reorganization of the Bank into a holding company
structure became effective on April 30, 1988, and the Bank is now a wholly-
owned subsidiary of the Company.
Besides its ownership of the Bank, the Company has not engaged in
any material operations to date and management of the Company has no
immediate plans to engage in any non-banking activities.
The holding company structure provides the Company with the ability
to expand and diversify its financial services beyond those currently offered
through the Bank. As a holding company, the Company has greater flexibility
than the Bank to diversify its business activities, through existing or newly-
formed subsidiaries, or through acquisition or merger. Commencement of non-
banking operations by subsidiaries, if they are organized, will be contingent
upon approval by the Board of Directors of the Company and by regulatory
authorities as appropriate. While the Company has no plans, arrangements,
agreements or understandings regarding diversification through acquisition or
development of other businesses, the Board of Directors believes that the
holding company structure offers significant advantages.
The Company may, in the future, enter into a management agreement
for the purpose of rendering certain services to the Bank. No proposal and no
terms of such agreement, however, have been considered as yet and it has not
been decided that such an agreement will be made. Certain restrictions on the
total compensation under management and similar agreements are imposed by
federal regulation and, under certain circumstances, regulatory approval may be
required.
Except for the officers of the Bank who presently serve as officers of
the Company, the Company does not have any employees.
The Company's executive office is located at 1703 Gloucester Street,
Brunswick, Georgia 31520. At the present time the Company does not have
any plans to establish additional offices.
Business of the Bank
--------------------
The Bank is a federal stock savings bank headquartered in Brunswick,
Georgia. It was chartered in 1983 and opened for business on January 31, 1984
with approximately $8.6 million of acquired deposits.
The Bank's business consists primarily of residential and consumer
lending and retail banking. To a lesser extent the Bank engages in commercial
real estate lending and construction lending.
3
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The Bank's retail banking operation consists of attracting deposits and
making commercial and consumer loans. It attracts deposits by offering a wide
array of banking services, including checking accounts, overdraft protection,
various savings programs, IRAs, and access to the AVAIL network of
automatic teller machines. Similarly, the Bank offers a full range of
commercial loans, including short-term loans for working capital purposes,
seasonal loans, lines of credit, accounts receivable loans and inventory loans,
as well as a full range of consumer loans, including automobile, boat, home
improvement and other similar loans.
Commercial real estate and construction lending includes construction
and permanent loans on multi-family apartment buildings, shopping centers,
office buildings and other income producing properties located mainly in the
Bank's primary market area.
The principal executive offices of the Bank are located at 1703
Gloucester Street, Brunswick, Georgia 31520 and the telephone number at that
address is (912) 267-7283.
Summary of Financial Results
- ----------------------------
First Georgia Holding, Inc. reported net income of $1,593,665 in
1997, an increase of $832,299. The lower earnings in 1996 were due primarily
to a SAIF special assessment paid last year. Net interest income after
provision for loan losses increased a total of $338,968. Other income increased
by a total of $638,822, and other expenses, exclusive of the SAIF assessment,
increased $399,120.
Return on Average Assets and Equity
- -----------------------------------
Return on average assets for the year ended September 30, 1997 was
1.04% as compared to 0.55% for the year ended September 30, 1996. Return
on average equity for the year ended September 30, 1997 was 12.55%
compared to 6.52% for the year ended September 30, 1996. These increases
were due primarily to an increase in loan volumes and the gain on sale of our
Hinesville branch.
4
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SELECTED STATISTICAL INFORMATION
The following tables set forth certain statistical information and should be
read in conjunction with the consolidated financial statements of the Company
and Bank.
Years Ended September 30,
-------------------------
1997 1996
-------------------------
Return on Average Assets 1.04% 0.55%
Return on Average Equity 12.55% 6.52%
Average Equity to Average Assets 8.28% 8.39%
Dividend Payout Ratio 10.22% 17.42%
AVERAGE BALANCE SHEETS
September 30,
-------------------------
1997 1996
-------------------------
Cash $ 3,524,884 2,711,372
Interest-bearing deposits in other banks 3,618,065 1,835,076
Investment securities 10,585,567 9,514,086
Loans receivable, net 127,953,987 117,481,323
Real estate owned 249,500 88,293
Federal Home Loan Bank stock 1,160,300 1,575,700
Premises and equipment, net 3,190,698 3,309,094
Intangible assets, net 1,104,133 1,325,933
Accrued interest receivable 916,855 855,218
Other assets 1,089,037 601,993
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$153,393,026 139,298,088
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LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities:
Deposits $124,790,096 112,422,778
Federal Home Loan Bank advances 12,491,666 12,822,012
Other borrowed money 88,333 160,493
Accrued expenses and other liabilities 3,319,512 2,209,824
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140,689,607 127,615,107
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Stockholders' equity 12,703,419 11,682,981
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Total liabilities and stockholders' equity $153,393,026 139,298,088
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5
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INTEREST EARNINGS AND YIELD
---------------------------
Years Ended September 30,
--------------------------
1997 1996
--------------------------
Interest earned on:
Loans $ 11,975,499 10,986,155
Investment securities 610,423 699,732
Interest-bearing deposits in other banks 198,010 108,029
--------------------------
Total interest income 12,783,932 11,793,916
--------------------------
Interest paid on:
Deposits 6,175,696 5,682,330
Federal Home Loan Bank advances and other
borrowings 763,159 867,052
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Total Interest expense 6,938,855 6,549,382
-------------------------
NET INTEREST EARNED $ 5,845,077 5,244,534
=========================
Average percentage earned on:
Loans 9.36% 9.35%
Taxable investment securities 5.76% 7.35%
Interest-bearing deposits in other banks 5.47% 5.89%
Total interest earning assets 8.99% 9.15%
Average percentage paid on:
Deposits 4.95% 5.05%
Federal Home Loan Bank advances and other
borrowings 6.07% 6.68%
Total interest bearing liabilities 5.05% 5.23%
NET YIELD ON INTEREST EARNING ASSETS 4.11% 4.07%
=========================
"Management's Discussion and Analysis of Financial Condition and Results of
operations - Yields Earned and Rates Paid" in the Company's Annual Report is
incorporated by reference herein.
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Lending Activities
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General
- -------
Thrift institutions are permitted to invest up to 400% of their capital in
commercial real estate loans. Thrift institutions are also permitted to invest
up to 10% of their assets in secured or unsecured loans for commercial,
corporate, business or agricultural purposes. Institutions may also invest up
to 35% of their assets in consumer loans and up to 10% of their assets in
tangible personal property in order to engage in personal property leasing.
Loan Portfolio Analysis
- -----------------------
The Bank's net loan portfolio totaled approximately $137,865,000 at
September 30, 1997, representing approximately 86% of its total assets. On
that date, approximately 74% of its total outstanding loans were secured by
mortgages on residential property. The balance of the Bank's outstanding loans
at that date consisted of commercial real estate loans, construction loans,
consumer loans and commercial loans.
The Bank extends credit to customers throughout its market area with
a concentration in real estate mortgage loans. The real estate loan portfolio
is substantially secured by properties located throughout Southeast Georgia.
Although the Bank has a diversified loan portfolio, a substantial portion of its
borrowers' ability to repay such loans is dependent upon the economy in the
Bank's market area.
Set forth on the next page is selected data relating to the composition
of the Bank's loan portfolio by type of loan and type of security on the dates
indicated.
7
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LOAN ANALYSIS
-------------
September 30,
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1997 1996
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Loans by Type of Security: (In Thousands)
Real Estate Loans:
Residential:
One-four family:
Conventional $ 77,272 56.05% 66,695 54.48%
FHA-VA 253 0.18% 259 0.21%
Multi-family conventional 462 0.33% 6,205 5.07%
----------------------------------------
Total residential 77,987 56.56% 73,159 59.75%
Commercial property 24,431 17.72% 21,283 17.38%
Land development and other 16,997 12.33% 11,654 9.52%
Less loans held for sale - 0.00% - 0.00%
----------------------------------------
Total real estate loans 119,415 86.61% 106,096 86.66%
Non-real estate loans: 19,522 14.16% 17,340 14.16%
Unearned interest income (73) -0.05% (32) -0.03%
Allowances for loan losses (1,012) -0.73% (955) -0.78%
Deferred loan (fees) cost 13 0.01% (17) -0.01%
----------------------------------------
Total $ 137,865 100.00% 122,432 100.00%
========================================
8
<PAGE>
LOAN ANALYSIS (Continued)
------------------------
September 30,
---------------------------------------
1997 1996
---------------------------------------
Loans by Type of Loan: (In Thousands)
Real Estate Loans:
Loans on existing property:
Fixed rate $ 21,713 15.75% 30,967 25.29%
One year ARM and variable rate(1) 79,137 57.40% 62,581 51.11%
Three year ARM 1,568 1.13% 1,130 0.92%
Construction loans 16,997 12.33% 11,418 9.33%
Less loans held for sale - 0.00% - 0.00%
-------------------------------------
Total real estate loans 119,415 86.61% 106,096 86.66%
Consumer loans 10,384 7.53% 9,448 7.72%
Commercial and other loans 9,138 6.63% 7,892 6.45%
Unearned interest income (73) -0.05% (32) -0.03%
Allowance for loan losses (1,012) -0.73% (955) -0.78%
Deferred loan (fees) cost 13 0.01% (17) -0.01%
-------------------------------------
Total $ 137,865 100.00% 122,432 100.00%
=====================================
(1) An ARM is an adjustable rate mortgage
9
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LOAN MATURITY SCHEDULE
The following table sets forth certain information at September 30,
1997 regarding the dollar amounts of loans maturing in the Bank's portfolio
based on their contractual terms to maturity. Demand loans, loans having no
stated schedule of repayments and no stated maturity , and overdrafts, are
reported as due in one year or less. This table does not consider the repricing
of loans to be maturities. Interest rate sensitivity is incorprated herein by
reference from the Management's Discussion and Analysis of Financial
Condition and Results of Operations - Asset/Liability Management in the
Annual Report to Shareholders for 1997.
Maturities during
year ended Real Estate Real Estate Commercial
September 30, Mortgage Construction Consumer and other Total
- --------------------------------------------------------------------------------
(In Thousands)
1998 $ 18,072 15,022 4,444 4,954 42,492
1999 8,620 1,205 2,928 1,437 14,190
2000 7,436 770 1,586 992 10,784
2001 3,310 0 844 655 4,809
2002-2006 5,683 0 527 815 7,025
2007-2011 13,619 0 29 285 13,933
After 2011 45,678 0 26 0 45,704
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Total $ 102,418 16,997 10,384 9,138 138,937
============================================================
Less: Unearned interest income (73)
Allowance for loan losses (1,012)
Deferred loan fees 13
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$ 137,865
========
10
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The next table sets forth the dollar amount of all loans due more than
one year after September 30, 1997 which have predetermined interest rates and
which have floating or adjustable interest rates.
Real estate Real estate Commercial
mortgage contruction Consumer and other Total
--------------------------------------------------------
(In Thousands)
Predetermined rates $ 19,126 12 5,824 1,840 26,802
Floating or
adjustable rates 65,220 1,963 116 2,344 69,643
-------------------------------------------------------
$ 84,346 1,975 5,940 4,184 96,445
=======================================================
11
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Lending Policies
- ----------------
Federal regulations limit the amount which federally chartered thrift
institutions may lend in relation to the appraised value of the real estate
securing the loan, as determined by an appraisal at the time of loan
origination. Those regulations permit a maximum loan-to-value ratio of 100% for
real estate loans. The Bank's lending policies generally limit the maximum
loan-to-value ratio on residential mortgage loans to 95% of the lesser of the
appraised value or purchase price. Multi-family residential and commercial real
estate loans and unimproved real estate loans generally do not exceed 90% of
value. The loan-to-value ratio, maturity and other provisions of the loans made
by the Bank generally reflect the policy of making less than the maximum loan
permissible under applicable regulations in accordance with sound lending
practices, market conditions and underwriting standards established by the
Bank.
In an effort to keep the yields on its loan portfolio and investments
more interest rate sensitive, the Bank has implemented a number of measures
including: (a) generally originating long-term fixed rate mortgage loans for
brokerage to other financial institutions; (b) emphasizing origination of ARMs
on residential and commercial properties when market conditions permit; (c)
originating construction loans secured by residential properties generally for a
12-month period at interest rates determined by reference to the Bank's prime
rate; and (d) originating consumer and commercial loans having either
adjustable rates or relatively short maturities.
Single Family Residential Loans
- -------------------------------
One of the lending activities of the Bank has been the origination of
single family residential loans through its mortgage lending operation.
Through an arrangement with another financial institution, the Bank brokers
substantially all of its fixed rate single family residential loans. This
allows the Bank to offer a broader base of financing alternatives than would be
possible if the Bank were structuring all of its loans to sell to the Federal
Home Loan Mortgage Corporation (FHLMC) or the Federal National Mortgage
Association (FNMA).
Federally chartered thrift institutions are authorized to make home
loans on which the interest rate, loan balance or maturity may be adjusted,
provided that the adjustments are tied to specified indices. The rate
adjustments are determined by reference to cost of funds and Treasury
securities indices and are limited generally to 1.5-2.0% per adjustment period
and 5-6% over the life of the loan.
Commercial Real Estate Loans
- -----------------------------
Current regulations permit federal institutions to invest up to 400% of
their capital in commercial real estate loans. At September 30, 1997, the Bank
had 201% of its capital invested in commercial real estate loans. The
commercial real estate loans originated by the Bank are primarily secured by
multi-family apartment buildings, shopping centers, office buildings and other
income-producing properties. The interest rates on commercial real estate
loans presently offered by the Bank generally adjust every one to three years.
The rate is generally determined by reference to money center banks' prime
rates. The Bank's commercial real estate loans have various terms, with the
payments based on a 15 to 25 year amortization schedule, and have balloon
maturities of 5 to 7 years. The Bank generally requires that such loans have a
minimum debt service coverage of 1.15 and a loan-to-value ratio of not more
than 90%.
Commercial real estate lending entails significant additional risks
compared to residential lending. Commercial real estate loans typically involve
large loan balances to single borrowers or groups of related borrowers. The
payment experience of such loans typically depends upon the successful
operation of the real estate project. These risks can be significantly affected
by supply and demand conditions in the market for office and retail space and
for apartments, and as such may be subject, to a greater extent than residential
real estate loans, to adverse conditions in the economy. In dealing with these
risk factors, the Bank generally limits itself to a real estate market or to
12
<PAGE>
borrowers with which it is familiar and sells a portion of its commercial real
estate loans. The Bank concentrates on originating commercial real estate loans
secured by properties generally located within its primary market area,
although the Bank will continue, on a limited basis, to originate commercial
real estate loans secured by properties located in other parts of Georgia and in
other states.
Construction Loans
- -------------------
The Bank originates construction loans on single family residences.
Such construction loans generally have a term of 12 months or less. The
interest rates charged by the Bank on construction loans are determined by
reference to the prime rate charged by money center banks and vary depending
upon the type of property, the loan amount and the credit worthiness of the
borrower. The Bank generally requires personal guarantees of payment from
the principals of the borrowing entities for the full amount of the loan, and it
is the policy of the Bank to enforce guarantees in the event of non-payment of
the loan.
The Bank also originates construction loans on multi-family and
commercial real estate. The interest rates on such loans presently offered by
the Bank are also determined by reference to the prime rate charged by money
center banks. Multi-family and commercial real estate construction financing
generally exposes the lender to a greater risk of loss than long-term financing
on improved, occupied real estate, due in part to the fact that the loans are
underwritten on projected rather than historical income and rental results. The
Bank's risk of loss on such loans depends largely upon the accuracy of the
initial appraisal of the property's value at completion of construction and the
estimated cost (including interest) of completion. If either estimate proves to
have been inadequate and the borrower is unable to provide additional funds
pursuant to his or her guarantee, the Bank either may be required to advance
funds beyond the amount originally committed to permit completion of the
development or be confronted at the maturity of the loan with a project whose
value is insufficient to assure full repayment.
The Bank's underwriting criteria are designed to evaluate and to
minimize the risks of each commercial real estate construction loan. The Bank
considers evidence of the financial stability and reputation of both the
borrower and the contractor, the amount of the borrower's cash equity in the
project, independent evaluation and review of the building costs, local market
conditions, pre-construction sales and leasing information based upon
evaluation of similar projects, the use of independent engineers to examine
plans and monitor construction and the borrower's cash flow projections upon
completion. The Bank may require a performance bond in the amount of the
construction contract based on management's evaluation of the project and the
financial strength of the contractor and also requires personal guaranties of
payment by the principals of any borrowing entity. At September 30, 1997,
approximately $16,997,000 of the Bank's loan portfolio consisted of
construction loans.
Consumer Loans
- --------------
Current regulations permit federal savings institutions to invest up to
35% of their assets in consumer loans. The Bank currently offers a wide
variety of consumer loans including secured and unsecured personal loans
(such as home improvement loans and loans secured by savings accounts),
automobile, boat and other loans. Total consumer loans amounted to
approximately $10,386,000 at September 30, 1997.
The Bank markets consumer loans in order to provide a full range of
retail banking services to its customers and because of the shorter term and
normally higher interest rates on such loans. The Bank's underwriting
standards for consumer loans include a determination of the applicant's
payment history on other debts and an assessment of his or her ability to meet
existing obligations and to make payments on the proposed loan. Loan-to-
value, cash equity and debt service-to-income ratios are also generally
considered. Risks associated with consumer loans include, but are not limited
13
<PAGE>
to, fraud, deteriorated or non-existing collateral, general economic downturn,
and customer financial problems.
Commercial Loans
- ----------------
Current regulations authorize federal thrift institutions to make
secured and unsecured loans for commercial, corporate, business and
agricultural purposes, including issuing letters of credit. The aggregate
amount of such loans outstanding generally may not exceed 10% of the
institution's assets.
The Bank makes commercial loans primarily on a secured basis.
Substantially all of such loans to date have interest rates which adjust with
changes in the prime rate charged by money center banks. The Bank's
commercial loans primarily consist of short-term loans for working capital
purposes, seasonal loans, lines of credit, accounts receivable loans and
inventory loans. The Bank customarily requires personal guaranties of
payment by the principals of any borrowing entity and reviews the financial
statements and income tax returns of the guarantors generally on an annual
basis. At September 30, 1997, the Bank had approximately $8,214,000
outstanding in commercial loans. Risks associated with these loans can be
significant. Risks include, but are not limited to, fraud, bankruptcy,
deteriorated or non-existing collateral, general economic downturn, and
changes in interest rates.
Loan Solicitation and Processing
- --------------------------------
The Bank actively solicits mortgage loan applications from existing
customers, walk-ins, referrals, builders and real estate brokers. Commercial
real estate loan applications are also obtained through direct solicitation.
Detailed loan applications are obtained to determine the borrower's
ability to repay, and the more significant items on these applications are
verified through the use of credit reports, financial statements and
confirmations. After analysis of the loan applications and property or
collateral involved, including an appraisal of the property by independent
appraisers approved by the Bank's management, the lending decision is made in
accordance with the underwriting guidelines of the Bank. With respect to
commercial loans, the Bank also reviews the capital adequacy of the business,
the ability of the borrower to repay the loan and honor its other obligations,
and general economic and industry conditions. All applications for loans
greater than $250,000 but less than $500,000 require the approval of the Bank's
Loan Committee, which consists of the Bank's president and three outside
directors. All loan applications in excess of $500,000 must be approved by the
full Board of Directors.
Loan applicants are promptly notified of the decision of the Bank,
together with the terms and conditions of the decision. In this regard, the
Bank seeks to handle loan processing and origination faster than its
competition. If approved, these terms and conditions include the amount of the
loan, interest rate basis, amortization term, a brief description of the real
estate to be mortgaged to the Bank, notification that insurance coverage must be
maintained to protect the Bank's interest and any other special conditions.
It is the Bank's policy to obtain a title insurance policy insuring that
the Bank has a valid first lien on the mortgaged real estate and that the
property is free of encumbrances. Borrowers are also to obtain paid hazard
insurance policies prior to closing and, when the property is in a flood plain
as designated by the Department of Housing and Urban Development, paid flood
insurance policies. It is the Bank's policy to require flood insurance for the
full insurable value of the improvements for any such loan located in a
designated flood hazard area. In certain coastal areas, however, there are
limits on the amount of insurance available. Substantially all borrowers are
also required to advance funds on a monthly basis, together with each payment of
principal and interest, to a mortgage escrow account from which the Bank makes
disbursements for items such as real estate taxes, hazard insurance premiums
14
<PAGE>
and private mortgage insurance premiums. See "Lending Activities - General"
regarding the Bank's recent efforts to ensure compliance with federal
regulations pertaining to flood insurance, Truth-In-Lending, and the
Community Reinvestment Act.
Loan Originations, Sales and Purchases
- --------------------------------------
It is a policy of the Bank not to originate for its own portfolio any
long term fixed rate mortgage loans. The Bank instead originates long term
fixed rate mortgages to be brokered out to various mortgage lenders. The Bank
may sell its commercial real estate and construction loans, generally retaining
a percentage of the loans in its own portfolio. Loan sales provide additional
funds for lending, generate income for the Bank and generally reduce exposure
to interest rate risk. The Bank generally continues to collect payments on the
loans and otherwise to service the loans sold. The Bank retains a portion of
the interest paid by the borrower on these loans as consideration for its
servicing loans sold to others. At September 30, 1997, the Bank was servicing
loans for others of approximately $2,308,000.
The Bank has purchased a number of loans in the past, and intends to
consider future purchases of residential mortgage loans as market conditions
warrant. The Bank has also sold loans as discussed above and, similarly,
intends to consider future sales as conditions warrant.
It is the current intention of management to continue offering
residential fixed rate mortgage loans through the Bank's brokerage lending
arrangement and to continue offering adjustable rate instruments to be held in
the Bank's portfolio.
Loan Commitments
- ----------------
Upon loan approval, short-term commitments of 45 days are issued to
the applicant and in most cases provide for the loan to be closed at the
prevailing rate of interest as of the date of approval. At September 30, 1997
the Bank had loan commitments outstanding of approximately $243,000 excluding
the undisbursed portion of loans in process.
Loan Origination Fees
- ---------------------
The Bank defers and amortizes loan origination fees, net of certain
direct origination costs incurred, and recognizes such fees over the life of the
related loan as a yield adjustment.
The Bank also receives other fees and charges relating to existing
loans along with late charges and fees collected in connection with a change in
borrower or other loan modifications.
Delinquencies and Asset Classifications
- ---------------------------------------
The Bank's collection procedures provide that when a loan is 15 days
past due, the borrower will be contacted by mail and payment requested. If the
delinquency continues, subsequent efforts will be made to contact the
delinquent borrower. In certain instances, the Bank may modify the loan or
grant a limited moratorium on loan payments to enable the borrower to
reorganize his or her financial affairs. If the loan continues in a delinquent
status for 90 days or more, the Bank generally will initiate foreclosure
proceedings, but there is no requirement that the Bank defer foreclosure
proceedings or other enforcement action. Any property acquired as the result of
foreclosure is classified as real estate acquired in settlement of loans until
such time as it is sold or otherwise disposed of by the Bank to recover its
investment.
As a measure of the soundness of a thrift institution's loans, federal
regulatory authorities have developed the concept of asset classification and
have established four categories of problem assets: "Special Mention,"
"Substandard," "Doubtful" and "Loss". Assets designated Special Mention do
not require that a bank take any specific action. For assets classified
Substandard or Doubtful, a bank's examiner is authorized to direct the
establishment of a general allowance for loan losses based on the assets
classified and the overall quality of the bank's asset portfolio.
15
<PAGE>
This valuation allowance must be established in accordance with generally
accepted accounting principles. For assets or portions of assets classified
Loss, a bank is required either to establish specific allowances of 100% of the
amount so classified, or to charge off such amount. These specific allowances
or charge offs must also be established in accordance with generally accepted
accounting principles.
The Bank is responsible for determining the valuation and classification of
its assets, subject to review by regulatory authorities. Portions
of an asset may be classified in more than one category.
An asset will be designated Special Mention if it does not justify a
classification of Substandard but does constitute undue and unwarranted credit
risk to the Bank. An asset will be classified Substandard if it is determined
to involve a distinct possibility that the Bank may sustain some loss if
deficiencies associated with the loan, such as inadequate documentation, are not
corrected. An asset will be classified as Doubtful if full collection is highly
questionable or improbable. An asset will be classified as Loss if it is
considered uncollectible, even if a partial recovery may be expected in the
future.
The Bank closely monitors its classified loans and actively attempts to
dispose of real estate acquired in settlement of loans. Real estate acquired
through foreclosure is appraised when acquired and is recorded at the lower of
cost or fair market value.
At September 30, 1997, the following amounts of loans were classified
as follows:
Special Mention $2,474,000
Substandard 1,959,000
Doubtful -
Loss -
------------------
$4,433,000
==================
Nonaccrual, Past Due and Restructured Loans
- -------------------------------------------
The Bank has approximately $1,959,000 of loans in nonaccrual status
at September 30, 1997. The Bank had approximately $1,951,000 of loans in
nonaccrual status at September 30, 1996. The Bank has had no restructured
loans. ("Management's Discussion and Analysis of Financial Condition and
Results of Operations - Provision for Loan Losses" in the Company's Annual
Report is incorporated by reference herein.) Had all nonaccrual loans at
September 30, 1997 actually accrued interest for the full fiscal year,
approximately $49,000 of additional interest income would have been added to
fiscal 1997 earnings.
Accrual of interest is discontinued when either principal or interest
become 90 days past due unless, in management's opinion, the loan is well
secured and in the process of collection.
Allowance for Loan Losses
- -------------------------
For a detailed analysis of the allowance for loan losses, Management's
Discussion and Analysis of Financial Condition and Results of Operations -
Provision for Loan Losses is incorporated by reference from the Annual Report
to Shareholders herein.
The Company has allocated the allowance for possible 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,
adequacy and nature of collateral, and such factors which, in the judgment of
management, deserve recognition in estimating loan losses. Regulatory
16
<PAGE>
agencies, as an integral part of their examination process, periodically review
the Company's allowances for possible losses on loans and real estate acquired
through foreclosure and other nonperforming assets. Such agencies may
require the Company to make additions to the allowance 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
charge-offs may occur.
The allocation of the allowance for possible loan losses to the various
loan categories and the ratio of each loan category to total loans outstanding
at September 30, 1997 and 1996 are presented in the following table.
September 30, 1997 September 30, 1996
---------------------------------------------------
Percent of Percent of
loans in each loans in each
(In Thousands) category to category to
Amount total loans Amount total loans
---------------------------------------------------
Balance at the end of the
year applicable to:
Commercial, financial,
and agricultural $ 150 6.58% 89 6.40%
Real estate-construction 35 12.23% 28 9.25%
Real estate-mortgage 300 73.72% 272 76.70%
Consumer 40 7.47% 20 7.65%
Unallocated 487 N/A 546 N/A
---------------------------------------------------
$ 1,012 100.00% 955 100.00%
===================================================
Other
- ------
The Company has no foreign operations and, accordingly, there are no
assets or liabilities attributed to foreign operations.
At September 30, 1997, the Company had no concentration of loans
exceeding 10% of total loans to borrowers engaged in any single industry.
Investment Activities
- ---------------------
The Bank is required under federal regulations to maintain a
minimum amount of liquid assets and is also permitted to make certain other
securities investments. It is the intention of management to hold securities
with short maturities in the Bank's investment portfolio in order to enable the
Bank to match more closely the interest rate sensitivities of its assets and
liabilities. All of the Bank's investments are subject to interest rate risk.
Since some securities have fixed interest rates, as interest rates rise the
value of the securities falls and as rates decline the value increases. In
addition, mortgage-backed securities are subject to prepayment risk. As rates
fall, prepayments increase and the amount of the security earning the coupon
rate declines.
Investment decisions are made by senior officers of the Bank. The
actions of the officers are within policies established by the Board of
Directors. At September 30, 1997 the investment portfolio totaled approximately
$9,634,000.
17
<PAGE>
The following table sets forth the amortized cost, approximate fair
value, and weighted average yield of the investment portfolio. The weighted
average yield with respect to maturities is also presented.
INVESTMENT SECURITIES ANALYSIS
Weighted
Amortized Average
Cost Yield Fair Value
------------------------------------------
September 30, 1997:
Investment securities:
U.S. Government agencies $ 1,500,000 3.80% 1,471,809
Mortgage-backed securities
and SBA's 7,314,453 6.93% 7,403,565
State and municipal bonds 570,000 4.12% 566,483
Corporate bonds 250,000 8.50% 250,000
------------------------------------------
$ 9,634,453 6.32% 9,691,857
==========================================
Weighted
Amortized Average
Cost Yield Fair Value
-----------------------------------------
September 30, 1996:
Investment securities:
U.S. Government agencies $ 5,500,683 4.71% 5,423,659
Mortgage-backed securities
and SBA's 3,704,854 7.62% 3,688,295
State and municipal bonds 870,000 4.12% 866,790
Corporate bonds 250,000 8.50% 230,000
-----------------------------------------
$ 10,325,537 5.80% 10,208,744
=========================================
A summary of investment and mortgage-backed securities by
maturities as of September 30, 1997 follows:
Weighted
Amortized Average
Cost Yield Fair Value
----------------------------------------------
Investment securities:
Within 1 year $ 1,600,000 3.78% 1,571,606
After 1 year through 5 years 480,611 6.02% 484,125
After 5 years through 10 years 1,102,271 7.18% 1,113,487
After 10 years 6,451,571 6.83% 6,522,639
---------------------------------------------
$ 9,634,453 6.32% 9,691,857
=============================================
18
<PAGE>
INTEREST DIFFERENTIAL
The following table describes the extent to which changes in volume of
interest-earning assets and interest-bearing liabilities and changes in interest
rates have affected the Bank's interest income and expense during the periods
indicated. For each category of interest-earning asset and interest-bearing
liability, information is provided on changes attributable to (a) change in
volume (change in volume multiplied by old rate) and (b) change in rate
(change in rate multiplied by old volume). The net change attributable to the
combined impact of volume and rate has been allocated to both components in
proportion to the relationship of the absolute dollar amounts of the change in
each.
Year Ended September 30, 1997 vs.
Year Ended September 30, 1996
-----------------------------------
Increase (Decrease) due to
-----------------------------------
Total Rate Volume
Interest income:
(In Thousands)
Loans $ 989 12 977
Investment securities (89) (162) 73
Interest-bearing deposits in other banks 90 (8) 98
-----------------------------------
Total interest-earning assets 990 (158) 1,148
-----------------------------------
Interest expense:
Deposits 493 (115) 608
Federal Home Loan Bank advances
and other borrowings (104) (78) (26)
-----------------------------------
Total interest-bearing liabilities 389 (193) 582
-----------------------------------
Net interest income $ 601 35 566
===================================
19
<PAGE>
INTEREST DIFFERENTIAL (Cont'd)
Year Ended September 30, 1997 vs.
Year Ended September 30, 1996
-----------------------------------
Increase (Decrease) due to
-----------------------------------
Total Rate Volume
Interest income:
(In Thousands)
Loans $ 114 (37) 151
Investment securities 193 101 92
Interest-bearing deposits in other banks (139) (40) (99)
-----------------------------------
Total interest-earning assets 168 24 144
-----------------------------------
Interest expense:
Deposits 337 113 224
Federal Home Loan Bank advances
and other borrowings (195) 19 (214)
-----------------------------------
Total interest-bearing liabilities 142 132 10
-----------------------------------
Net interest income $ 26 (108) 134
===================================
Retail Banking Activities and Sources of Funds
- -------------------------------------------------
General
- -------
The Bank's retail banking activities consist of attracting deposits and
making consumer and commercial loans. A principal objective of the Bank is
to establish a total banking relationship, including a deposit relationship as
well as a lending relationship, between the Bank and the customer.
Savings accounts and other types of deposits generated by the Bank's
retail banking division are the primary source of the Bank's funds for use in
lending and for other general business purposes. In addition to savings
accounts, the Bank derives funds from loan repayments, FHLB advances, other
borrowings and operations. Loan repayments are a relatively stable source of
funds while deposit inflows and outflows vary widely and are influenced by
prevailing interest rates and money market conditions. Borrowings may be
used on a short-term basis to compensate for reductions in normal sources of
funds such as deposit inflows at less than projected levels and may be used on a
longer-term basis to support expanded lending activities. The Bank's sources of
borrowings have been advances from the FHLB of Atlanta and obligations
under repurchase agreements.
Deposits
- --------
Savings deposits in the Bank at September 30, 1997 and 1996 were
represented by the various types of programs described as follows:
DEPOSITS AT SEPTEMBER 30, 1997
Type Weighted Balance Percentage
of Minimum Average (Dollars in of Total
Account Term Amount Rate thousands) Deposits
- -------------------------------------------------------------------------------
Easy Checking $ -- -- $ 1,937 1.49%
Commercial Checking -- -- 4,055 3.12%
NOW Accounts 750 1.25% 11,429 8.80%
Super NOW and MMDA 1,000 2.30% 4,756 3.66%
Statement Savings 100 2.35% 4,320 3.33%
Certificate of deposit accounts:
Jumbo certificates 30 days
to 5 years 100,000 6.10% 18,900 14.55%
Other time deposits:
3 months 3-5 months 1,000 4.57% 358 0.28%
6 months 6-11 months 1,000 5.26% 4,284 3.30%
1 year 12-17 months 500 5.66% 37,863 29.15%
1.5 years 18-23 months 500 6.21% 433 0.33%
2 years 24--29 months 500 6.21% 6,196 4.77%
2.5 years 30-35 months 500 5.91% 1,303 1.00%
3 years 36-41 months 500 5.91% 6,067 4.67%
3.5 years 42-47 months 500 6.10% 101 0.08%
4 years 48-59 months 500 6.10% 1,514 1.17%
5 years 60 months 500 6.10% 9,028 6.95%
18 month IRA 18 months 500 5.94% 16,043 12.35%
Other 30 days 500 4.57% 1,303 1.00%
-------- -------- --------
4.97% $ 129,890 100.00%
======== ======== ========
Deposits at September 30, 1996 are represented on the next page.
21
<PAGE>
DEPOSITS AT SEPTEMBER 30, 1996
Type Weighted Balance Percentage
of Minimum Average (Dollars in of Total
Account Term Amount Rate thousands) Deposits
- -------------------------------------------------------------------------------
Easy Checking $ -- -- $ 1,632 1.34%
Commercial Checking -- -- 4,635 3.81%
NOW Accounts 750 1.25% 11,598 9.54%
Super NOW and MMDA 1,000 2.35% 2,410 1.98%
Statement Savings 100 2.30% 4,565 3.76%
Certificate of deposit accounts:
Jumbo certificates 30 days
to 5 years 99,000 4.48% 18,298 15.05%
Other time deposits:
3 months 3-5 months 1,000 4.32% 649 0.54%
6 months 6-11 months 1,000 6.35% 6,281 5.17%
1 year 12-17 months 500 5.25% 21,470 17.66%
1.5 years 18-23 months 500 5.27% 199 0.16%
2 years 24--29 months 500 5.30% 11,025 9.07%
2.5 years 30-35 months 500 5.31% 2,524 2.08%
3 years 36-41 months 500 5.35% 5,032 4.14%
3.5 years 42-47 months 500 5.36% 100 0.08%
4 years 48-59 months 500 5.40% 3,853 3.17%
5 years 60 months 500 5.45% 10,954 9.00%
18 month IRA 18 months 500 5.29% 15,747 12.96%
Other 30 days 500 2.78% 593 0.49%
-------- -------- --------
4.49% $ 121,555 100.00%
======== ======== ========
22
<PAGE>
The Bank has a number of different programs designed to attract both
short-term and long-term savings of the general public. The programs include
commercial demand deposits (checking), NOW accounts, money market
deposits accounts (MMDA), traditional passbook savings, time deposits in a
minimum amount of $100,000 (Jumbo Certificates), other certificates of
deposits and individual retirement accounts (IRAs).
The minimum amount required to open a certificate of deposit for
other than retirement accounts varies from $500 to $100,000, depending on the
type of deposit. Rates on certificates of deposit are determined weekly by the
Bank, based upon local market rates, national money market rates and yields on
assets of the same maturity.
The variety of deposit accounts offered by the Bank allows it to be
competitive in obtaining new funds, although the threat of disintermediation
(the flow of funds away from the Bank into direct investment vehicles, such as
mutual funds and government and corporate securities) still exists. The ability
of the Bank to attract and retain deposits and the Bank's cost of funds have
been, and will continue to be, significantly affected by capital and money
market conditions.
The Bank attempts to control the flow of deposits by pricing its
accounts to remain generally competitive with other financial institutions in
its market area.
The Bank has generated Jumbo Certificates from both local
individuals and businesses and from out-of-town individuals and businesses
who have ties to its market area. In addition, the Bank accepts public
deposits. The Bank responds to requests for rate information but does not
accept deposits for which a broker's commission must be paid. As with other
deposits, rates on Jumbo Certificates are set in a manner to be competitive in
the Bank's market area.
The following table sets forth the composition of deposits, excluding
accrued interest payable, by type and interest rate at the dates indicated.
23
<PAGE>
DEPOSITS BY TYPE
------------------
September 30,
---------------------------------
1997 1996 1995
---------------------------------
Access accounts: (In thousands)
Commercial checking - 0.00% $ 5,992 6,266 4,602
NOW accounts - 1.25% 11,429 11,599 11,607
Money Market deposit account - varable rate 4,756 2,410 2,345
Statement savings - 2.30% 4,320 4,565 4,713
Certificates of deposits:
2.75% - 5.00% 2,564 6,408 10,134
5.01% - 7.00% 98,628 81,918 52,078
7.01% - 9.00% 2,201 8,389 20,993
9.01% - 11.00% -- -- 56
---------------------------------
Subtotal 129,890 121,555 106,528
Accrued interest 496 548 527
---------------------------------
Total $ 130,386 122,103 107,055
=================================
TIME DEPOSIT MATURITIES
-----------------------
Balances at September 30,
- -------------------------------------------------------------------------------
Interest Rates 1998 1999 2000 2001 Thereafter Total
- -------------------------------------------------------------------------------
(In thousands)
2.75% - 5.00% $ 2,547 - 17 - - 2,564
5.01% - 7.00% 85,305 9,651 1,524 1,262 885 98,627
7.01% - 9.00% 795 518 889 - - 2,202
9.01% - 11.00% - - - - - -
------------------------------------------------------------
$ 88,647 10,169 2,430 1,262 885 103,393
============================================================
24
<PAGE>
JUMBO CD MATURITIES
-------------------
Maturity September 30, 1997
-------- ------------------
(In thousands)
Three months or less $ 3,970
Three to six months 8,065
Six to twelve months 3,699
Over twelve months 3,166
---------------
Total $ 18,900
===============
AVERAGE DEPOSIT BY TYPE
-----------------------
September 30, 1997 September 30, 1996
------------------ -------------------
Average Weighted Average Weighted
Balance Average Rate Balance Average Rate
---------------------------- -------------------------
(In thousands)
Non-interest bearing
deposits $ 6,394 -- 5,804 --
NOW's 11,633 1.25% 12,509 1.84%
MMDA's 3,226 2.35% 2,471 2.47%
Savings 4,384 2.30% 4,747 2.28%
Time Deposits 99,153 5.94% 86,891 6.11%
--------------------------- ------------------------
Total average deposits $ 124,790 4.97% 112,422 5.05%
--------------------------- ------------------------
Loan Repayments
- ---------------
In addition to regularly scheduled repayments, loans are prepaid in full
as properties are sold, or are refinanced by the Bank or other lenders, or are
satisfied in full by the borrower. Loan repayments constitute a major source of
funding for the Bank.
25
<PAGE>
Borrowings
- ----------
Savings deposits are the primary source of funds for the Bank's
lending and investment activities and for its general business purposes. The
Bank has, however, used advances from the FHLB of Atlanta and other
borrowings to supplement its supply of lendable funds. Advances from the
FHLB are typically secured by a portion of the Bank's first mortgage loans. A
summary of the Bank's borrowings from the FHLB is set forth below:
Due during
year ending
September 30, Interest Rates 1997 1996
- -------------------------------------------------------------------------------
1997 4.93% to 8.45% $ - 4,000,000
1998 5.32% to 7.27% 7,750,000 4,500,000
1999 5.68% to 6.76% 2,100,000 2,100,000
2000 6.77% 3,000,000 -
2001 7.90% 500,000 500,000
2002 5.66% 1,000,000 -
------------------------------
$ 14,350,000 11,100,000
==============================
The FHLB System functions as a central reserve bank providing credit
for savings institutions. As a member of the FHLB of Atlanta, the Bank is
required to own capital stock in the FHLB of Atlanta and is authorized to apply
for advances on the security of its home mortgage loans and other assets
(primarily, securities which are obligations of, or are guaranteed by, the
United States) provided certain standards related to creditworthiness have been
met.
The FHLB offers several different credit programs each with its own
interest rate and term. It prescribes the acceptable uses for advances as well
as size limitations. The FHLB periodically reviews its credit limitations and
standards. Under its current policies, the FHLB limits its advances based on a
member institution's net worth or the FHLB's assessment of the institution's
creditworthiness.
26
<PAGE>
The following table sets forth certain information regarding
borrowings by the Bank at the end of and during the periods indicated:
FEDERAL HOME LOAN BANK ADVANCES
-------------------------------
At September 30,
------------------------------------
1997 1996 1995
------------------------------------
Balance outstanding $ 14,350,000 11,100,000 11,948,000
Weighted average rate 5.79% 6.44% 7.10%
Maximum amount of short-term
borrowings outstanding at any
month end 10,150,000 5,198,000 4,448,000
Approximate average short-term
borrowings outstanding 7,100,000 4,092,000 2,157,000
Approximate weighted average paid
on short-term borrowings(1) 6.47% 7.27% 5.90%
- --------------------------------------------------------------------------------
(1) The average method used is the average end of month totals
Employees
- ---------
At September 30, 1997, the Bank employed 86 full-time equivalent
employees. Management considers relations with its employees to be excellent.
The Bank currently maintains a comprehensive employee benefits program
including, among other benefits, hospitalization and major medical insurance,
life insurance, dental insurance, long term disability, a 401(k) plan and
educational assistance. Management considers these benefits to be generally
competitive with those offered by competing financial institutions in its
market area. The Bank's employees are not represented by any collective
bargaining group.
Competition
- -----------
The Bank's primary market area is southeastern Georgia. The Bank
competes for loans primarily through referrals and quality of the services it
provides to borrowers and home builders. It competes for savings by offering
depositors a wide variety of savings accounts, checking accounts, NOW
accounts, convenient office locations, tax-deferred retirement programs and
other services.
Federal deregulation of financial institutions has contributed to the
dramatic increase in competition for savings dollars between savings
institutions and other types of investment vehicles, such as money market
mutual funds, U.S. Treasury securities and municipal bonds, as well as an
increase in competition with commercial banks for loans, checking accounts
and other types of financial services. In addition, large conglomerates and
investment banking firms have entered the market for financial services.
Accordingly, the Bank, like other institutions, faces increased competition in
the future in attracting and retaining customers for the services it offers.
Supervision and Regulation
--------------------------
Savings and loan holding companies and federal savings banks are
extensively regulated under both Federal and state law. The following is a
brief summary of certain statutes and rules and regulations that affect or will
affect the Company and the Bank. This summary is qualified in its entirety by
reference to the particular statute and regulatory provision referred to below
and is not intended to be an exhaustive description of the statutes or
regulations applicable to the business of the Company and the Bank.
28
<PAGE>
Supervision, regulation and examination of the Company and the Bank by the
regulatory agencies are intended primarily for the protection of depositors
rather than shareholders of the Company. The terms savings association, federal
savings bank and thrift are used interchangeably in this section.
Savings and Loan Holding Company Regulation
The Company is a registered holding company under both the Savings
and Loan Holding Company Act (the "SLHCA") set forth in Section 10 of the
Home Owners Loan Act ("HOLA") and the Financial Institutions Code of
Georgia ("FICG"). The Company is regulated under such acts by the Office of
Thrift Supervision (the "OTS") and by the Department of Banking and Finance
(the "Georgia Department"), respectively. As a savings and loan holding
company, the Company is required to file with the OTS an annual report and
such additional information as the OTS may require pursuant to the SLHCA.
The OTS also conducts examinations of the Company and each of its
subsidiaries.
Savings and loan holding companies and their subsidiaries are
prohibited from engaging in any activity or rendering any services for or on
behalf of their savings institution subsidiaries for the purpose or with the
effect of evading any law or regulation applicable to the institution. This
restriction is designed to prevent the use of holding company affiliates to
evade requirements of the SLHCA that are designed to protect the holding
company's savings institution subsidiaries. A unitary holding company, that is,
a holding company that owns only one insured institution whose subsidiary
institution satisfies the qualified thrift lender test (discussed below), is not
restricted to any statutorily prescribed list of permissible activities, and the
SLHCA and the FICG impose no limits on direct or indirect non-savings
institution subsidiary operations.
The SLHCA and the FICG makes it unlawful for any savings and loan
holding company, directly or indirectly, or through one or more subsidiaries or
one or more transactions, to acquire control of another savings association or
another savings and loan holding company without prior approval from the
OTS and the Georgia Department, respectively. An acquisition by merger,
consolidation or purchase of assets of such an institution or holding company or
of substantially all of the assets of such an institution or holding company is
also prohibited without prior OTS or Georgia Department approval. When
considering an application for such an acquisition, the OTS and the Georgia
Department take into consideration the financial and managerial resources and
future prospects of the prospective acquiring company and the institution
involved. This includes consideration of the competence, experience and
integrity of the officers, directors and principal shareholders of the acquiring
company and savings institution. In addition, the OTS and the Georgia
Department consider the effect of the acquisition on the institution, the
insurance risk to the Savings Association Insurance Fund ("SAIF") and the
convenience and needs of the community to be served.
The OTS may not approve an acquisition that would result in the
formation of certain types of interstate holding company networks. The OTS is
precluded from approving an acquisition that would result in the formation of a
multiple holding company controlling institutions in more than one state unless
the acquiring company or one of its savings institution subsidiaries is
authorized to acquire control of an institution or to operate an office in the
additional state pursuant to a supervisory acquisition authorized under Section
13(k) of the Federal Deposit Insurance Act or unless the statutes of the state
in which the institution to be acquired is located permits such an acquisition.
Savings and loan holding companies are allowed to acquire or to
retain as much as 5% of the voting shares of a savings institution or savings
and loan holding company without regulatory approval.
28
<PAGE>
Bank Regulation
- ---------------
General. The Bank is a federal savings bank organized under the laws
of the United States subject to examination by the OTS. The OTS regulates all
areas of the Bank's banking operations including reserves, loans, mergers,
payment of dividends, interest rates, establishment of branches, and other
aspects of operations. OTS regulations generally provide that federal savings
banks must be examined no less frequently than every 12 months, unless the
federal savings bank (i) has assets of less than $250 million; (ii) is well
capitalized; (iii) was found to be well managed and its composite condition was
found to be outstanding (or good, if the bank had total assets of not more than
$100,000) during its last examination; (iv) is not subject to a formal
enforcement proceeding or an order from the Federal Deposit Insurance
Corporation ("FDIC") or another banking agency; and (v) has not undergone a
change of control during the previous 12-month period. Federal savings banks
must be examined no less frequently than every 18 months. The Bank also is
subject to assessments by the OTS to cover the costs of such examinations.
The Bank is also insured and regulated by the FDIC. The major
functions of the FDIC with respect to insured federal savings banks include
paying depositors to the extent provided by law in the event an insured bank is
closed without adequately providing for payment of the claims of depositors
and preventing the continuance or development of unsound and unsafe banking
practices.
Subsidiary institutions of a savings and loan holding company, such as
the Bank, are subject to certain restrictions imposed by the Federal Reserve Act
on any extension of credit to the holding company or any of its subsidiaries, on
investment in the stock or other securities thereof, and on the taking of such
stock or securities as collateral for loans to any borrower. In addition, a
holding company and its subsidiaries are prohibited from engaging in certain
tying arrangements in connection with any extension of credit or provision of
any property or services.
Capital Requirements. OTS regulations require that federal savings
banks maintain (i) "tangible capital" in an amount of not less than 1.5% of
total assets, (ii) "core capital" in an amount not less than 3.0% of total
assets, and (iii) a level of risk-based capital equal to 8% of risk-weighted
assets. Under OTS regulations, the term "core capital" generally includes
common stockholders' equity, noncumulative perpetual preferred stock and related
surplus, and minority interests in the equity accounts of consolidated
subsidiaries less unidentifiable intangible assets (other than certain amounts
of supervisory goodwill) and certain investments in certain subsidiaries plus
90% of the fair market value of readily marketable purchased mortgage servicing
rights ("PMSRs") and purchased credit card relationships (subject to certain
conditions). "Tangible capital" generally is defined as core capital minus
intangible assets and investments in certain subsidiaries, except PMSRs.
In determining total risk-weighted assets for purposes of the risk-based
requirement, (i) each off-balance sheet asset must be converted to its
on-balance sheet credit equivalent amount by multiplying the face amount of each
such item by a credit conversion factor ranging from 0% to 100% (depending upon
the nature of the asset), (ii) the credit equivalent amount of each off-balance
sheet asset and each on-balance sheet asset must be multiplied by a risk factor
ranging from 0% to 200% (again depending upon the nature of the asset) and
(iii) the resulting amounts are added together and constitute total
risk-weighted assets. "Total capital," for purposes of the risk-based capital
requirement equals the sum of core capital plus supplementary capital (which, as
defined, includes the sum of, among other items, perpetual preferred stock not
counted as core capital, limited life preferred stock, subordinated debt, and
general loan and lease loss allowances up to 1.25% of risk-weighted assets) less
certain deductions. The amount of supplementary capital that may be counted
towards satisfaction of the total capital requirement may not exceed 100% of
core capital, and OTS regulations require the maintenance of a minimum ratio of
core capital to total risk-weighted assets of 4%.
29
<PAGE>
OTS regulations have been amended to include an interest-rate risk
component to the risk-based capital requirement. Under this regulation, an
institution is considered to have excess interest rate-risk if, based upon a
200-basis point change in market interest rates, the market value of an
institution's capital changes by more than 2%. This new requirement is not
expected to have any material effect on the ability of the Bank to meet the
risk-based capital requirement. The OTS also revised its risk-based capital
standards to ensure that its standards provide adequately for concentration of
credit risk, risk from nontraditional activities and actual performance and
expected risk of loss on multi-family mortgages.
Capital requirements higher than the generally applicable minimum
requirement may be established for a particular savings association if the OTS
determines that the institution's capital was or may become inadequate in view
of its particular circumstances.
Additionally, the Georgia Department requires that savings and loan
holding companies, such as the Company, must maintain a 5% Tier 1 leverage
ratio on a consolidated basis.
Prompt Corrective Action. The Federal Deposit Insurance
Corporation Improvement Act of 1991 (the "FDIC Act") imposes a regulatory
matrix which requires the federal banking agencies, which include the OTS,
the FDIC, the Office of the Comptroller of Currency (the "OCC"), and the
Federal Reserve Board, to take prompt corrective action to deal with depository
institutions that fail to meet their minimum capital requirements or are
otherwise in a troubled condition. The prompt corrective action provisions
require undercapitalized institutions to become subject to an increasingly
stringent array of restrictions, requirements and prohibitions, as their capital
levels deteriorate and supervisory problems mount. Should these corrective
measures prove unsuccessful in recapitalizing the institution and correcting its
problems, the FDIC Act mandates that the institution be placed in receivership.
Pursuant to regulations promulgated under the FDIC Act, the
corrective actions that the banking agencies either must or may take are tied
primarily to an institution's capital levels. In accordance with the framework
adopted by the FDIC Act, the banking agencies have developed a classification
system, pursuant to which all banks and thrifts will be placed into one of five
categories: well-capitalized institutions, adequately capitalized institutions,
undercapitalized institutions, significantly undercapitalized institutions and
critically undercapitalized institutions. The capital thresholds established
for each of the categories are as follows:
Tier 1
Risk-Based Risk-Based
Capital Category Tier 1 Capital Capital Capital Other
- -------------------------------------------------------------------------------
Well-Capitalized 5% or more 10% or more 6% or more Not subject
to a capital
directive
Adequately
Capitalized 4% or more 8% or more 4% or more ---
Undercapitalized less than 4% less than 8% less than 4% ---
Significantly
Undercapitalized less than 3% less than 6% less than 3% ---
Critically
Undercapitalized 2% or less --- --- ---
tangible equity
The undercapitalized, significantly undercapitalized and critically
undercapitalized categories overlap; therefore, a critically undercapitalized
institution would also be an undercapitalized institution and a significantly
undercapitalized institution. This overlap ensures that the remedies and
restrictions prescribed for undercapitalized institutions will also apply to
institutions in the lowest two categories.
30
<PAGE>
The down-grading of an institution's category is automatic in two
situations: (i) whenever an otherwise well-capitalized institution is subject
to any written capital order or directive, and (ii) where an undercapitalized
institution fails to submit or implement a capital restoration plan or has its
plan disapproved. The federal banking agencies may treat institutions in the
well-capitalized, adequately capitalized and undercapitalized categories as if
they were in the next lower capital level based on safety and soundness
considerations relating to factors other than capital levels.
The FDIC Act prohibits all insured institutions regardless of their
level of capitalization from paying any dividend or making any other kind of
capital distribution or paying any management fee to any controlling person if
following the payment or distribution the institution would be undercapitalized.
While the prompt corrective action provisions of the FDIC Act contain no
requirements or restrictions aimed specifically at adequately capitalized
institutions, other provisions of the FDIC Act and the agencies' regulations
relating to deposit insurance assessments, brokered deposits and interbank
liabilities treat adequately capitalized institutions less favorably than those
that are well-capitalized.
A depository institution that is not well capitalized is prohibited from
accepting deposits through a deposit broker. However, an adequately
capitalized institution can apply for a waiver to accept brokered deposits.
Institutions that receive a waiver are subject to limits on the rates of
interest they may pay on brokered deposits.
Capital Distributions. An OTS rule imposes limitations on all capital
distributions by savings associations (including dividends, stock repurchases
and cash-out mergers). Under the current rule, a savings association is
classified based on its level of regulatory capital both before and after givinG
effect to a proposed capital distribution. Under a proposed rule, the OTS woulD
conform its three classifications to the five capital classifications set forth
under the prompt corrective action regulations. Under the proposal,
institutions that are at least adequately capitalized would still be required to
provide prior notice. Well capitalized institutions could make capital
distributions without prior regulatory approval in specified amounts in any
calendar year.
An institution that both before and after a proposed capital distribution
has net capital equal to or in excess of its capital requirements may, subject
to any otherwise applicable statutory or regulatory requirements or agreements
entered into with the regulators, make capital distributions in any calendar
year up to 100% of its net income to date during the calendar year plus the
amount that would reduce by one-half its "surplus capital ratio" (i.e., the
percentage by which the association's capital-to-assets ratio exceeds the ratio
of its fully phased-in capital requirement to its assets) at the beginning of
the calendar year. No regulatory approval of the capital distribution is
required, but prior notice must be given to the OTS.
An institution that either before or after a proposed capital distribution
fails to meet its then applicable minimum capital requirement or that has been
notified that it needs more than normal supervision may not make any capital
distributions without the prior written approval of the OTS. In addition, the
OTS may prohibit a proposed capital distribution, which would otherwise be
permitted by the regulation, if the OTS determines that such distribution would
constitute an unsafe or unsound practice.
Liquidity. Under applicable federal regulations, savings associations
are required to maintain an average daily balance of liquid assets (including
cash, certain time deposits, certain bankers' acceptances, certain corporate
debt securities and highly rated commercial paper, securities of certain mutual
funds and specified United States government, state or federal agency
obligations) equal to a monthly average of not less than a specified percentage
of the average daily balance of the savings association's net withdrawable
deposits plus short-term borrowings. Under HOLA, this liquidity requirement may
be changed from time to time by the OTS to any amount within the range of 4% to
10% depending upon economic conditions and the deposit flows of member
institutions, and currently is 5%. Savings institutions also are required to
maintain an average daily balance of short-term liquid assets at a specified
percentage (currently 1%) of the total of the average daily balance of its net
withdrawable deposits and short-term borrowings.
31
<PAGE>
Equity Investments. The OTS has revised its risk-based capital
regulation to modify the treatment of certain equity investments and to clarify
the treatment of other equity investments. Equity investments that are
permissible for both savings banks and national banks will no longer be
deducted from savings associations' calculations of total capital over a
five-year period. Instead, permissible equity investments will be placed in the
100% risk-weight category, mirroring the capital treatment prescribed for those
investments when made by national banks under the regulations of the OCC.
Equity investments held by savings associations that are not permissible for
national banks must still be deducted from assets and total capital.
Qualified Thrift Lender Requirement. A federal savings bank is
deemed to be a "qualified thrift lender" ("QTL") as long as its "qualified
thrift investments" equal or exceed 65% of its "portfolio assets" on a monthly
average basis in nine out of every 12 months. Qualified thrift investments
generally consist of (i) various housing related loans and investments (such as
residential construction and mortgage loans, home improvement loans, mobile home
loans, home equity loans and mortgage-backed securities), (ii) certain
obligations of the FDIC and (iii) shares of stock issued by any FHLB, the
FHLMC or the FNMA. In addition, the following assets may be categorized as
qualified thrift investments in an amount not to exceed 20% in the aggregate of
portfolio assets: (i) 50% of the dollar amount of residential mortgage loans
originated and sold within 90 days of origination; (ii) investments in
securities of a service corporation that derives at least 80% of its income from
residential housing finance; (iii) 200% of loans and investments made to
acquire, develop or construct starter homes or homes in credit needy areas
(subject to certain conditions); (iv) loans for the purchase or construction of
churches, schools, nursing homes and hospitals; and (v) consumer loans (in an
amount up to 20% of portfolio assets). For purposes of the QTL test, the term
"portfolio assets" means the savings institution's total assets minus goodwill
and other intangible assets, the value of property used by the savings
institution to conduct its business, and liquid assets held by the savings
institution in an amount up to 20% of its total assets.
OTS regulations provide that any savings association that fails to meet
the definition of a QTL must either convert to a national bank charter or limit
its future investments and activities (including branching and payments of
dividends) to those permitted for both savings associations and national banks.
Further, within one year of the loss of QTL status, a holding company of a
savings association that does not convert to a bank charter must register as a
bank holding company and will be subject to all statutes applicable to bank
holding companies. In order to exercise the powers granted to federally
chartered savings associations and maintain full access to FHLB advances, the
Bank must meet the definition of a QTL.
Loans to One Borrower Limitations. HOLA generally requires savings
associations to comply with the loans to one borrower limitations applicable to
national banks. National banks generally may make loans to a single borrower
in amounts up to 15% of their unimpaired capital and surplus, plus an
additional 10% of capital and surplus for loans secured by readily marketable
collateral. HOLA provides exceptions under which a savings association may
make loans to one borrower in excess of the generally applicable national bank
limits. A savings association may make loans to one borrower in excess of such
limits under one of the following circumstances: (i) for any purpose, in any
amount not to exceed $500,000; or (ii) to develop domestic residential housing
units, in an amount not to exceed the lesser of $30 million or 30% of the
savings association's unimpaired capital and unimpaired surplus, provided
other conditions are satisfied. The Federal Institutions Reform, Recovery, and
Enforcement Act of 1989 provided that a savings association could make loans
to one borrower to finance the sale of real property acquired in satisfaction of
debts previously contracted in good faith in amounts up to 50% of the savings
association's unimpaired capital and unimpaired surplus. The OTS, however,
has modified this standard by limiting loans to one borrower to finance the sale
of real property acquired in satisfaction of debts to 15% of unimpaired capital
and surplus. That rule provides, however, that purchase money mortgages
32
<PAGE>
received by a savings association to finance the sale of such real property do
not constitute "loans" (provided no new funds are advanced and the savings
association is not placed in a more detrimental position holding the note than
holding the real estate) and, therefore, are not subject to the loans to one
borrower limitations.
Commercial Real Property Loans. HOLA limits the aggregate amount
of commercial real estate loans that a federal savings association may make to
an amount not in excess of 400% of the savings association's capital.
Community Reinvestment. Under the Community Reinvestment Act
(the "CRA") and the implementing OTS regulations, federal savings banks
have a continuing and affirmative obligation to help meet the credit needs of
its local community, including low and moderate-income neighborhoods,
consistent with the safe and sound operation of the institution. The CRA
requires the board of directors of financial institutions, such as the Bank, to
adopt a CRA statement for each assessment area that, among other things,
describes its efforts to help meet community credit needs and the specific types
of credit that the institution is willing to extend. The regulations
promulgated pursuant to CRA contain three evaluation tests: (i) a lending test
which will compare the institution's market share of loans in low- and
moderate-income areas to its market share of loans in its entire service area
and the percentage of a bank's outstanding loans to low- and moderate-income
areas or individuals, (ii) a services test which will evaluate the provision of
services that promote the availability of credit to low- and moderate-income
areas, and (iii) an investment test, which will evaluate an institution's record
of investments in organizations designed to foster community development, small-
and minority-owned businesses and affordable housing lending, including state
and local government housing or revenue bonds.
Fair Lending. Congress and various federal agencies (including, in
addition to the bank regulatory agencies, the Department of Housing and Urban
Development, the Federal Trade Commission and the Department of Justice)
(collectively the "Federal Agencies") responsible for implementing the nation's
fair lending laws have been increasingly concerned that prospective home
buyers and other borrowers are experiencing discrimination in their efforts to
obtain loans. In recent years, the Department of Justice has filed suit a
gainst financial institutions that it determined had discriminated, seeking
fines and restitution for borrowers who allegedly suffered from discriminatory
practices. Most, if not all, of these suits have been settled (some for
substantial sums) without a full adjudication on the merits.
On March 8, 1994, the Federal Agencies, in an effort to clarify what
constitutes lending discrimination and to specify the factors the agencies will
consider in determining if lending discrimination exists, announced a joint
policy statement detailing specific discriminatory practices prohibited under
the Equal Credit Opportunity Act and the Fair Housing Act. In the policy
statement, three methods of proving lending discrimination were identified:
(i) overt evidence of discrimination, when a lender blatantly discriminates on a
prohibited basis, (ii) evidence of disparate treatment, when a lender treats
applicants differently based on a prohibited factor even where there is no
showing that the treatment was motivated by prejudice or a conscious intention
to discriminate against a person, and (iii) evidence of disparate impact, when a
lender applies a practice uniformly to all applicants, but the practice has a
discriminatory effect, even where such practices are neutral on their face and
are applied equally, unless the practice can be justified on the basis of
business necessity.
FDIC Insurance Assessments. Federal deposit insurance is required
for all federally chartered savings associations. Deposits at the Bank are
insured to a maximum of $100,000 for each depositor by Savings Association
Insurance Fund (the "SAIF"). As a SAIF-insured institution, the Bank is
subject to regulation and supervision by the FDIC, to the extent deemed
necessary by the FDIC to ensure the safety and soundness of the SAIF. The
FDIC is entitled to have access to reports of examination of the Bank made by
the OTS and all reports of condition filed by the Bank with the OTS. The
FDIC also may require the Bank to file such additional reports as it determines
to be advisable for insurance purposes. Additionally, the FDIC may determine
33
<PAGE>
by regulation or order that any specific activity poses a serious threat to the
SAIF and that no SAIF member may engage in the activity directly.
Insurance premiums are paid in semiannual assessments. Under a
risk-based assessment system, the FDIC is required to calculate a savings
association's semiannual assessment based on (i) the probability that the
insurance fund will incur a loss with respect to the institution (taking into
account the institution's asset and liability concentration), (ii) the potential
magnitude of any such loss, and (iii) the revenue and reserve needs of the
insurance fund. The semiannual assessment imposed on the Bank may be
higher depending on the SAIF revenue and expense levels, and the risk
classification applied to the Bank.
The deposit insurance assessment rate charged to each institution
depends on the assessment risk classification assigned to each institution.
Under the risk-classification system, each SAIF member is assigned to one of
three capital groups: "well capitalized," "adequately capitalized," or "less
than adequately capitalized," as such terms are defined under the OTS's prompt
corrective action regulation (discussed above), except that "less than
adequately capitalized" includes any institution that is not well capitalized or
adequately capitalized. Within each capital group, institutions are assigned to
one of three supervisory subgroups "healthy" (institutions that are financially
sound with only a few minor weaknesses), "supervisory concern" (institutions
with weaknesses which, if not corrected could result in significant
deterioration of the institution and increased risk to the SAIF) or "substantial
supervisory concern" (institutions that pose a substantial probability of loss
to the SAIF unless corrective action is taken). The FDIC will place each
institution into one of nine assessment risk classifications based on the
institution's capital group and supervisory subgroup classification.
Historically, SAIF premiums had been equivalent to deposit insurance
premiums paid by banks on deposits to the Bank Insurance Fund ("BIF").
Deposit insurance premiums were set to facilitate each fund achieving its
designated reserve ratios. As each fund achieves its designated reserve ratio,
however, the FDIC has the authority to lower the premium assessments for that
fund to a rate that would be sufficient to maintain the designated reserve
ratio. In August 1995, the FDIC determined that the BIF had achieved its
designated reserve ratio and approved lower BIF premium rates for deposit
insurance by the BIF for all but the riskiest institutions. On November 14,
1995, the FDIC determined that BIF deposit insurance premiums for well
capitalized banks would be further reduced to the then-statutory minimum of
$2,000 per institution per year, effective January 1, 1996. Because the SAIF
remained significantly below its designated reserve ratio, insurance premiums
for assessable SAIF deposits were not reduced in either FDIC action.
The financial condition of the SAIF resulted in the adoption of the
Deposit Insurance Funds Act of 1996 ("DIFA"), which was enacted on
September 30, 1996 as part of the Omnibus Consolidated Appropriations Act.
Under DIFA, a special one-time assessment of 65.7 cents per $100 of assessable
SAIF deposits was collected on November 27, 1996 and applied retroactively to
SAIF deposits as of March 31, 1995. DIFA provides that special assessments
are deductible under Section 162 of the Internal Revenue Code in the year in
which the assessment is paid. After collection of the special assessment, the
SAIF achieved its designated reserve ratio and SAIF premium rates became the
same as BIF rates. DIFA further provides that BIF and SAIF are to be merged,
creating the "Deposit Insurance Fund," on January 1, 1999, provided that bank
and savings association charters are combined by that date. The Treasury
Department has submitted a report to Congress on the development of a
common charter for all insured depository institutions. See "Supervision and
Regulation - Elimination of Federal Savings Charter."
DIFA further assesses premiums for Financing Corporation Bond debt
service ("FICO"). Beginning January 1, 1997, FICO premiums for BIF and
SAIF became 1.3 and 6.4 basis points, respectively. Full pro rata sharing of
FICO will begin no later than January 1, 2000.
Effective January 1, 1997, SAIF members had the same risk-based
assessment schedule as BIF members, which is 0 to 27 cents per $100 of
deposits. FICO assessments of 1.3 cents for BIF deposits and 6.4 cents per
34
<PAGE>
$100 of deposits for SAIF deposits will be added to the BIF-assessable base and
SAIF assessable base, respectively, until December 31, 1999. Thereafter,
approximately 2.4 cents per $100 of deposits would be added to each regular
assessment for all insured depositors, thereby achieving full pro rata FICO
sharing.
Insurance of deposits may be terminated by the FDIC after notice and
hearing, upon a finding by the FDIC that the savings association has engaged
in unsafe or unsound practices, is in an unsafe or unsound condition to continue
operations, or has violated any applicable law, rule, regulation, order or
condition imposed by, or written agreement with, the FDIC. Additionally, if
insurance termination proceedings are initiated against a savings association,
the FDIC may temporarily suspend insurance on new deposits received by an
institution under certain circumstances.
Federal Home Loan Bank System. The FHLB System consists of 12
regional FHLBs, each subject to supervision and regulation by the Federal
Housing Finance Board (the "FHFB"). The FHLBs provide a central credit
facility for member savings associations. The maximum amount that the FHLB
of Atlanta will advance fluctuates from time to time in accordance with
changes in policies of the FHFB and the FHLB of Atlanta, and the maximum
amount generally is reduced by borrowings from any other source. In addition,
the amount of FHLB advances that a savings association may obtain will be
restricted in the event the institution fails to constitute a QTL.
Federal Reserve System. The Federal Reserve Board has adopted
regulations that require savings associations to maintain nonearning reserves
against their transaction accounts (primarily NOW and regular checking
accounts). These reserves may be used to satisfy liquidity requirements
imposed by the OTS. Because required reserves must be maintained in the
form of cash or a non-interest-bearing account at a Federal Reserve Bank, the
effect of this reserve requirement is to reduce the amount of the Bank's
interest-earning assets.
Savings institutions also have the authority to borrow from the Federal
Reserve "discount window." Federal Reserve Board regulations, however,
require savings associations to exhaust all FHLB sources before borrowing from
a Federal Reserve bank.
Transactions with Affiliates Restrictions. Transactions engaged in by
a savings association or one of its subsidiaries with affiliates of the savings
association generally are subject to the affiliate transaction restrictions
contained in Sections 23A and 23B of the Federal Reserve Act in the same
manner and to the same extent as such restrictions apply to transactions
engaged in by a member bank or one of its subsidiaries with affiliates of the
member bank. Section 23A of the Federal Reserve Act imposes both
quantitative and qualitative restrictions on transactions engaged in by a
member bank or one of its subsidiaries with an affiliate, while Section 23B of
the Federal Reserve Act requires, among other things that all transactions with
affiliates be on terms substantially the same, and at least as favorable to the
member bank or its subsidiary, as the terms that would apply to, or would be
offered in, a comparable transaction with an unaffiliated party. Exemptions
from, and waivers of, the provisions of Sections 23A and 23B of the Federal
Reserve Act may be granted only by the Federal Reserve Board. The HOLA
and OTS regulations promulgated thereunder contain other restrictions on
loans and extension of credit to affiliates, and the OTS is authorized to impose
additional restrictions on transactions with affiliates if it determines such
restrictions are necessary to ensure the safety and soundness of any savings
association. Current OTS regulations are similar to Sections 23A and 23B of
the Federal Reserve Act.
Future Requirements. Statutes and regulations are regularly
introduced which contain wide-ranging proposals for altering the structures,
regulations and competitive relationships of financial institutions. It cannot
be predicted whether or what form any proposed statute or regulation will be
adopted or the extent to which the business of the Company and the Bank may
be affected by such statute or regulation.
35
<PAGE>
Elimination of Federal Savings Association Charter
- --------------------------------------------------
Legislation that would eliminate the federal savings association
charter is under discussion. If such legislation is enacted, the Bank would be
required to convert its federal savings bank charter to either a national bank
charter or to a state depository institution charter. Various legislative
proposals also may result in the restructuring of federal regulatory oversight,
including, for example, consolidation of the OTS into another agency, or
creation of a new Federal banking agency to replace the various such agencies
which presently exist. The Bank is unable to predict whether such legislation
will be enacted or, if enacted, whether it will contain relief as to bad debt
deductions previously taken.
Item 2. DESCRIPTION OF PROPERTIES
The executive office of the Company and Bank is located at 1703
Gloucester Street, Brunswick, Georgia 31520, and its telephone number at that
office is (912) 267-7283. The Bank also has six full-service branch offices.
The following table sets forth the addresses of the aforementioned offices,
their net book value and the expiration dates of the leases applicable to the
offices not owned by the Bank.
Office Lease Expiration Date Net Book Value
- -------------- --------------------- --------------
Executive Office
- ----------------
1703 Gloucester Street
Brunswick, GA 31520 owned $904,694
Full Service Offices
- --------------------
Altama Avenue Office
4510 Altama Avenue
Brunswick, GA 31520 7/28/2007 ---
Demere Village
2461 Demere Road
St. Simons Island, GA 31522 owned $241,218
North Brunswick Office
2001 Commercial Drive South
Brunswick, GA 31525 6/27/97 ---
Wal-Mart SuperCenter
150 Altama Connector
Brunswick, Georgia 31525 10/10/06 ---
Waycross-Plant
1010 Plant Avenue
Waycross, GA 31501 owned $206,429
Blackshear
129 Highway 82 East
Blackshear, GA 31516 owned $30,354
36
<PAGE>
Item 3. LEGAL PROCEEDINGS
Neither the Company nor the Bank is a party to, nor is any of their
property the subject of, any material pending legal proceedings, other than
ordinary routine litigation incidental to their business, and no such
proceedings are known to be contemplated by governmental authorities.
Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY
HOLDERS
Not applicable
PART II
Item 5. MARKET FOR COMMON EQUITY AND RELATED
STOCKHOLDER MATTERS
Information concerning common stock, shareholders and dividends
appears in the Annual Report under the heading "Shareholder Information"
and is incorporated by reference herein.
Item 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF
OPERATION
Management's discussion and analysis of the Company's financial
condition and its results of operations appears in the Annual Report under the
heading "Management's Discussion and Analysis of Financial Condition and
Results of Operations" and is incorporated by reference herein.
Item 7. FINANCIAL STATEMENTS
The consolidated financial statements of the Company and the Bank as
of September 30, 1997 and 1996 and for each of the years in the three year
period ended September 30, 1997, 1996, and 1995, and the report issued on the
1997 financials by the Company's independent certified public accountant,
appear in the Annual Report and are incorporated herein by reference.
Item 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS
ON ACCOUNTING AND FINANCIAL DISCLOSURE
On May 21, 1997, the Company filed a Form 8-K to disclose a change
in auditor for the Company.
On May 1, 1997, the Company's Board of Directors elected to dismiss
KPMG Peat Marwick LLP as the independent auditors of the Company. On
May 1, 1997, the Company engaged Deloitte & Touche LLP to replace KPMG
Peat Marwick LLP. Pursuant to Item 304 of the Regulation S-B, the Company
discloses the following information.
1. KPMG Peat Marwick LLP was dismissed on May 1, 1997.
2. The report prepared by KPMG Peat Marwick LLP on the consolidated
financial statements of the Company for the fiscal years ended September 30,
1996 and 1995 did not contain an adverse opinion or disclaimer of opinion, nor
was the report qualified or modified as to uncertainty, audit scope or
accounting principles.
3. The decision to dismiss KPMG Peat Marwick Llp was reccommended
and approved by the Audit Committee of the Board of Directors.
37
<PAGE>
4. There were no disagreements with KPMG Peat Marwick LLP on any
matter of accounting princoples or prectices, financial statement disclosure,
auditing scope or procedure or any other matter requiring disclosure pursuant
to Item 304 of Regulation S-B.
PART III
Item 9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND
CONTROL PERSONS; Compliance with Section 16(a)
of the Exchange Act
Information concerning the Company's and the Bank's Directors and
Executive Officers appears in the Proxy Statement under the heading "Election
of Directors", "Executive Officers", "Ownership of Stock", and "Compliance
with Section 16(a) of the Securities Exchange Act of 1934" and is incorporated
by reference herein.
Item 10. EXECUTIVE COMPENSATION
Information concerning the compensation of the Company's and the
Bank's Management appears in the Proxy Statement under the heading
"Executive Compensation" and is incorporated by reference herein.
Item 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS
AND MANAGEMENT
Information concerning beneficial owners of more than 5% of the
Company's common stock appears in the Proxy Statement under the heading
"Ownership of Stock - Principal Holders of Stock" and is incorporated by
reference herein.
Information concerning the common stock owned by the Company's
management appears in the Proxy Statement under the heading "Ownership of
Stock - Stock Owned by Management" and is incorporated by reference herein.
Item 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Information concerning certain relationships and related transactions
appears in the Proxy Statement under the heading "Executive Compensation -
Certain Other Transactions" and is incorporated by reference herein.
Item 13. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
The list of documents set forth on the Exhibit Index that
immediately follows the last signature page hereof is incorporated herein by
reference, and such documents are filed as exhibits to this report on Form 10-
KSB.
(b) Reports on Form 8-K:
The Form 8-K filed on May 21, 1997 regarding the change
in our independent accountants is incorporated herein by reference.
38
<PAGE>
SIGNATURES
In accordance with 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.
FIRST GEORGIA HOLDING, INC.
(Registrant)
BY: HENRY S. BISHOP
-------------------
Henry S. Bishop
Chairman
Date: December 15, 1997
-----------------
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS, that each person whose
signature appears below constitutes and appoints Henry S. Bishop and G.F.
Coolidge III, and each of them, the person's attorneys-in-fact, each with full
power of substitution, for the person in his or her name, place and stead, in
any and all capacities, to sign any amendment to this Report on form 10-KSB,
and to file the same, with exhibits thereto, and other documents in connection
therewith, with the Securities and Exchange Commission and hereby ratifies
and confirms all that each of said attorneys-in-fact, or his or her substitute
or substitutes, may do or cause to be done by virtue hereof.
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<PAGE>
In accordance with the Securities Exchange Act of 1934, this report has been
signed by the following persons on behalf of the Registrant in the capacities
and on the dates indicated.
Signatures Title Date
- ------------- ----- ----
HENRY S. BISHOP Chairman and Director December 15, 1997
Henry S. Bishop (principal executive officer)
B.W. BOWIE
B.W. Bowie Director December 15, 1997
TERRY DRIGGERS
Terry Driggers Director December 15, 1997
M. FRANK DeLOACH
M. Frank DeLoach Director December 15, 1997
ROY K. HODNETT
Roy K. Hodnett Director December 15, 1997
HUBERT W. LANG
Hubert W. Lang, Jr. Director December 15, 1997
E. RAYMOND MOCK
E. Raymond Mock Director December 15, 1997
JAMES D. MOORE
James D. Moore Director December 15, 1997
D. LAMONT SHELL
D. Lamont Shell Director December 15, 1997
G.F. COOLIDGE III Chief Financial Officer
G.F. Coolidge III (principal financial and
accounting officer) December 15, 1997
40
<PAGE>
EXHIBIT INDEX
Exhibit No. Document Page
3.(I) Articles of Incorporation of First Georgia
Holding, Inc. incorporated by reference
herein By reference to Appendix B to the
Proxy Statement and Prospectus included in the
Registration statement on Form S-4
(SEC No. 33-19150), filed December 18, 1987
("Form S-4"), as amended on December 31, 1987
("Amendment No. 1") First Georgia Savings
Bank, F.S.B. is now known as First Georgia Bank,
F.S.B. N/A
3.(ii) Amended By-Laws of First Georgia Holding, Inc.
incorporated by reference to Exhibit 3(ii) of
the Form 10-KSB for the year ended September 30,
1994 (the "1994 10-KSB") N/A
*10.1 First Georgia Holding, Inc. 1995 Stock Incentive
Plan incorporated by reference to Exhibit 10.1
of the Form 10-KSB for the year ended September 30,
1995 (the "1995 10-KSB") N/A
*10.2 First Georgia Holding, Inc. Employee Stock
Purchase Plan incorporated by reference to
Exhibit 10.2 of the 1995 10-KSB N/A
*10.3 Qualified 401 (k) Standardized Profit Sharing
Plan, Adoption Agreement, First Georgia Savings
Bank, F.S.B., incorporated herein by reference to
Exhibit 10.3 of the Form 10-K for the year ended
September 30, 1992 (the "1992 10-K") N/A
*10.4 Qualified Retirement Plan, Basic Plan Document,
First Georgia Savings Bank, F.S.B., incorporated
herein by reference to Exhibit 10.4 of the
1992 10-K N/A
13 First Georgia Holding, Inc. 1997 Annual Report 45
21 Subsidiaries of First Georgia Holding, Inc.
incorporated by reference to Exhibit 21.6 of the
Form 10-KSB for the year ended September 30, 1993
(the "1993 10-KSB) N/A
41
<PAGE>
23 Consent of Deloitte & Touche LLP 46
24 A power of attorney is set forth
on the signature pages to this Form 10-KSB 41
42
<PAGE>
EXHIBIT 13.0
FIRST GEORGIA HOLDING, INC.
1996 ANNUAL REPORT
ANNUAL REPORT
First Georgia:
Its Mission and Markets
First Georgia Holding, Inc. owns 100% of the stock of First Georgia Bank,
F.S.B. The Bank is federally chartered and began operations in January 1984.
First Georgia develops and provides a full range of financial services
encompassing retail banking, real estate, commercial and consumer lending,
and a host of related financial products. The Bank currently operates eight
full service offices in four Georgia counties.
First Georgia's PRIMARY MISSION is to maximize stockholder value in a
prudent manner. We will concentrate on the following principles.
We will maintain high levels of asset quality through conservative lending
policies, a vigorous comprehensive credit administration system and a
diversified portfolio of earning assets. Interest rate risk will be thoroughly
evaluated and controlled.
Our long-term goals for return on equity and assets will be set at the upper
levels of peer bank comparisons. We will strive to maintain a strong capital
base supported by adequate loan loss reserves.
We will continue to attract and retain exceptional people. We will deliver the
best quality customer service available in the banking industry. This high
level of personal service is what separates us from our competitors.
Our officers and employees will be encouraged to provide leadership and
support in civic and economic development activities. We will also strive to
assess and serve the credit needs of each community in which we are located.
We are committed to the overall success of First Georgia. The proper
implementation of these principles will continue to maximize the value of the
Company.
1
<PAGE>
PRESIDENT'S MESSAGE
Dear Stockholders:
The year 1997 was a record one for our Company with unprecedented
gains on earnings as well as significant gains in loans, deposits, and total
assets. Because of these substantial gains in earnings, our capital also
increased by a significant amount making our Company an even stronger
financial entity. The consummation of the sale of First Federal Savings Bank
to Nationsbank this past year also provided us with significant
opportunities in 1997 as well as for the future. We believe that we are
now situated as the premier community bank in Glynn County, and as such,
will continue to enjoy growth in earnings and deposits.
The strongest asset we have is our people. We have assembled the
most capable, caring, and qualified staff of any financial institution in
Southeast Georgia. These employees are committed to the common goal of
giving the best personal service to our customers that is humanly possible.
With this strong work ethic in place and the vibrant economy of Coastal
Georgia, the opportunities we have are virtually endless.
We look forward to 1998 with great optimism; and as always, thank
you for your support and your business.
Sincerely,
Henry S. Bishop
Chairman
2
<PAGE>
FIRST GEORGIA HOLDING, INC.
C O N S O L I D A T E D
F I N A N C I A L
S T A T E M E N T S
September 30, 1997 and 1996 (With Independent Auditors' Report Thereon)
<PAGE>
CONSOLIDATED BALANCE SHEETS
First Georgia Holding, Inc. and subsidiary
Assets
September 30
--------------------------
1997 1996
--------------------------
Cash and cash equivalents $ 2,985,350 2,956,328
Interest bearing deposits in other banks 1,523,777 2,954,350
Investment securities held to maturity,
fair value approximately $9,692,000
and $10,209,000 at September 30, 1997
and 1996, respectively (note 2) 9,634,453 10,325,537
Loans receivable, net of allowance for loan
loss of $1,012,322 and $955,288 at September
30, 1997 and 1996, respectively
(notes 3 and 7) 137,864,633 122,431,469
Real estate owned 423,000 94,200
Federal Home Loan Bank stock, at cost (note 7) 1,160,300 1,575,700
Premises and equipment, net (note 4) 3,181,618 3,334,879
Accrued interest receivable (note 5) 960,160 852,632
Intangible assets, net 1,029,715 1,276,532
Deferred income taxes (note 9) 157,004 238,167
Other assets 781,487 875,479
-------------------------
Total Assets $159,701,497 146,915,273
=========================
Liabilities and Stockholders' Equity
Liabilities:
Deposits (note 6) $129,889,936 121,554,457
Federal Home Loan Bank advances (note 7) 14,350,000 11,100,000
Other borrowed money - 92,000
Accrued interest payable 496,305 547,939
Obligations under capital lease (note 10) 245,659 261,904
Accrued expenses and other liabilities
(note 9) 1,372,327 1,442,574
-------------------------
Total liabilities 146,354,227 134,998,874
-------------------------
Commitments and contingencies (notes 3 and 10)
Stockholders' Equity (notes 8 and 13):
Common stock, $1.00 par value; 10,000,000
shares authorized; 3,052,319 shares issued
and outstanding at September 30,1997 and 1996 3,052,319 3,052,319
Additional paid-in capital 4,223,197 4,223,197
Retained earnings 6,071,754 4,640,883
-------------------------
Total stockholders' equity 13,347,270 11,916,399
-------------------------
Total Liabilities and Stockholders' Equity $159,701,497 146,915,273
=========================
See accompanying notes to consolidated financial statements.
3
<PAGE>
CONSOLIDATED STATEMENTS OF OPERATIONS
First Georgia Holding, Inc. and subsidiary
Years Ended September 30,
----------------------------------
1997 1996 1995
----------------------------------
Interest Income:
Loans $11,975,499 10,986,155 10,871,713
Mortgage-backed securities 314,956 321,798 211,136
Investment securities 295,467 377,934 295,873
Other 198,010 108,029 247,615
----------------------------------
Total interest income 12,783,932 11,793,916 11,626,337
----------------------------------
Interest Expense:
Deposits (note 6) 6,175,696 5,682,330 5,345,453
Advances and other borrowings 763,159 867,052 1,061,904
----------------------------------
Total interest expense 6,938,855 6,549,382 6,407,357
----------------------------------
Net interest income 5,845,077 5,244,534 5,218,980
Provision for Loan Losses (note 3) 309,679 48,104 214,142
----------------------------------
Net interest income after provision
for loan losses 5,535,398 5,196,430 5,004,838
----------------------------------
Other Income:
Loan fees 473,890 382,841 451,199
Deposit service charges 689,152 555,174 601,059
Gain on sale of branch (note 11) 433,760 - 122,043
Other operating income 45,917 65,882 94,515
----------------------------------
Total other income 1,642,719 1,003,897 1,268,816
----------------------------------
Other Expenses:
Salaries and employee benefits 2,324,280 1,986,763 1,932,837
Net occupancy expense 1,064,499 952,724 904,659
Amortization of intangibles 119,625 131,736 143,304
Federal insurance premiums 111,267 254,944 281,033
SAIF special assessment - 727,704 -
Other operating expenses 1,126,320 1,020,704 962,418
----------------------------------
Total other expenses 4,745,991 5,074,575 4,224,251
----------------------------------
Income before income taxes 2,432,126 1,125,752 2,049,403
Income Tax Expense (note 9) 838,461 364,386 772,315
----------------------------------
Net Income $ 1,593,665 761,366 1,277,088
==================================
Net income per share and common share
equivalent (note 14) $ 0.48 0.23 0.42
Weighted average common shares
outstanding and common share
equivalents 3,354,499 3,250,772 3,065,851
----------------------------------
See accompanying notes to consolidated financial statements.
4
<PAGE>
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
First Georgia Holding, Inc. and subsidiary
Years Ended September 30, 1997, 1996, and 1995
----------------------------------------------------
Additional
Common Stock Paid-in Capital Retained
Earnings Total
----------------------------------------------------
Balance,
September 30, 1994 $ 1,989,962 5,122,843 2,814,691 9,927,496
Three for two stock
split effected as a
50% stock dividend
in 1997 (fractional
shares paid in cash) 994,857 (994,154) - 703
-----------------------------------------------------
Balance,
September 30, 1994,
as adjusted 2,984,819 4,128,689 2,814,691 9,928,199
Net income - - 1,277,088 1,277,088
Cash dividends, $.027
per share - - (79,598) (79,598)
-----------------------------------------------------
Balance,
September 30, 1995 2,984,819 4,128,689 4,012,181 11,125,689
Exercise of stock
options 67,500 17,625 - 85,125
Income tax benefit
resulting from exercise
of stock options - 76,883 - 76,883
Net income - - 761,366 761,366
Cash dividends,$.045
per share - - (132,664) (132,664)
-----------------------------------------------------
Balance,
September 30, 1996 3,052,319 4,223,197 4,640,883 11,916,399
Cash dividends,
$0.053 per share - - (162,794) (162,794)
Net income 1,593,665 1,593,665
-----------------------------------------------------
Balance,
September 30, 1997 $ 3,052,319 4,223,197 6,071,754 13,347,270
=====================================================
See accompanying notes to consolidated financial statements.
5
<PAGE>
CONSOLIDATED STATEMENTS OF CASH FLOWS
First Georgia Holding, Inc. and subsidiary
Years Ended September 30,
-------------------------------------
1997 1996 1995
-------------------------------------
Operating Activities
Net income $ 1,593,665 761,366 1,277,088
Adjustments to reconcile net
income to net cash provided by
operating activities:
Provision for loan losses 309,679 48,104 214,142
Depreciation and amortization,
net of accretion 418,988 381,871 425,849
Amortization of intangibles 119,625 131,736 143,304
Amortization of net deferred loan
costs (fees) (1,230) 24,672 (106,755)
Gain on sale of branch (433,760) - (122,043)
(Gain) loss on sale of real estate
owned (19,837) (505) 17,969
Deferred income tax (benefit) expense 81,163 (287,279) 29,959
Increase in accrued interest receivable (107,528) (101,524) (20,244)
Decrease (increase) in other assets 93,992 154,407 (205,076)
(Decrease) increase in advance payments
by borrowers for property taxes
and insurance (20,078) (29,619) 8,237
Increase (decrease)in accrued
expenses and other liabilities (85,156) (666,983) 364,447
------------------------------------
Net cash provided by operating
activities 1,949,523 416,246 2,026,877
------------------------------------
Investing Activities
Principal payments received on
mortgage-backed securities 506,640 478,221 311,364
Maturities of investment securities 4,300,000 100,000 1,000,000
Purchase of investment securities (4,114,829) (1,721,563) (3,030,598)
Loan originations, net of
principal repayments (16,277,228) (12,375,532) (1,575,594)
Purchase of premises and equipment (513,544) (329,760) (260,405)
Proceeds from sale of real estate
owned 219,837 416,159 1,380,599
Proceeds from sale of premises
and equipment - - 21,008
Proceeds from redemption of
FHLB stock 415,400 - -
---------------------------------------
Net cash used in investing activities(15,463,724) (13,432,475) (2,153,626)
---------------------------------------
6
<PAGE>
1997 1996 1995
---------------------------------------
Financing Activities
Net increase in deposits $ 14,690,319 15,026,768 9,780,378
Net liabilities of branch
assumed by purchaser,
net of gain (5,573,578) - (2,868,419)
Repayments of other borrowed money (92,000) (100,000) (1,048,000)
Proceeds from FHLB advances 14,500,000 19,600,000 4,000,000
Repayment of FHLB advances (11,250,000) (20,448,000) (8,800,000)
Net proceeds from exercise of
stock options - 85,125 -
Dividends paid (162,091) (132,664) (79,598)
---------------------------------------
Net cash provided by financing
activities 12,112,650 14,031,229 984,361
---------------------------------------
(Decrease) increase in cash
and cash equivalents (1,401,551) 1,015,000 857,612
Cash and cash equivalents at
beginning of year 5,910,678 4,895,678 4,038,066
-------------------------------------
Cash and cash equivalents at
end of year $ 4,509,127 5,910,678 4,895,678
======================================
Supplemental disclosure of cash paid
during year for:
Interest $ 6,990,000 6,529,000 6,252,000
Income taxes $ 622,000 828,000 538,000
Supplemental disclosure of non-cash activities:
Loans receivable of approximately $645,000, $478,000, and $1,365,000
were transferred to real estate owned during the years ended September
30, 1997, 1996, and 1995, respectively.
No sales of real estate owned were financed by the Bank for September
30, 1997. Sales of real estate owned totaling approximately $173,000
and $127,000 for the years ended September 30, 1996 and 1995,
respectively, were financed by the Bank.
See accompanying notes to consolidated financial statements.
7
<PAGE>
(1) Summary of Significant Accounting Policies
First Georgia Holding, Inc. (the Company) was incorporated on December 16,
1987 for the purpose of acquiring all of the issued and outstanding stock of
First Georgia Bank, F.S.B. (the Bank). The accounting and reporting policies
of First Georgia Holding, Inc. and subsidiary conform to generally accepted
accounting principles. The following is a description of the more
significant of those policies which the Company follows in preparing
and presenting its consolidated financial statements.
(a) Basis of Financial Statement Presentation
The 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.
The consolidated financial statements include the accounts of the Company and
the Bank. All significant intercompany balances and transactions have been
eliminated in consolidation.
(b) Investment Securities Held to Maturity
The Company has classified all its investments in securities as held to
maturity based upon positive intent and ability to hold those securities
until maturity.
Held to maturity securities are recorded at amortized cost adjusted for the
amortization or accretion of premiums and discounts. Premiums and discounts
are amortized or accreted over the life of the related investment security
using a method which approximates level yield. Purchase premiums and
discounts on mortgage-backed securities are amortized and accreted to
interest income using a method which approximates the interest method,
over the remaining lives of the securities taking into consideration
assumed prepayment patterns.
(c) Loans and the Allowance for Loan Losses
Loans are reported at principal amounts outstanding, less unearned income and
the allowance for loan losses. Interest income on loans is recognized on a
level-yield basis.
Loans are placed on a nonaccrual basis when reasonable doubt exists as to the
full, timely collection of interest and principal or they become
contractually in default for 90 days or more as to either interest or
principal unless they are both well secured and in the process of collection.
Additions to the allowance for loan losses are charged to operations based upon
management's evaluation of the potential losses in its loan portfolio. This
evaluation considers the estimated value of the underlying collateral and such
other factors as, in management's judgment, deserve recognition under existing
economic conditions. While management uses the best information available to
make evaluations, future adjustments to the allowance may be necessary if
conditions differ substantially from the assumptions used in making the
evaluations. In addition, various regulatory agencies, as an integral part of
their examination process, periodically review the Bank's allowances for losses
on loans and real estate owned. Such agencies may require the Bank to
recognize additions to the allowances based on their judgments of information
available to them at the time of their examination.
8
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONT'D)
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. The Bank's impaired loans include nonaccrual loans,
troubled debt restructurings, and large loans more than 90 days delinquent
in which full payment of principal and interest is not expected. Cash
receipts on impaired loans are used to reduce principal balances.
Impairment losses are included in the allowance for loan losses through a
charge to the provision for loan losses.
Impairment losses are measured by the present value of expected future cash
flows discounted at the loan's effective interest rate, or at either the loan's
observable market price or the fair value of the collateral. Adjustment to
impairment losses due to changes in the fair value of an impaired loan's
underlying collateral are included in the provision for losses. Upon
disposition of an impaired loan, any related valuation allowance is
reversed through a chargeoff to the allowance for loan losses.
The Bank extends credit to customers throughout its market area with a
concentration in real estate mortgage loans. The real estate loan portfolio is
substantially secured by properties located throughout Southeast Georgia.
Although the Bank has a diversified loan portfolio, a substantial portion
of its borrowers' ability to repay such loans is dependent upon the economy
in the Bank's market area.
(d) Loan Origination and Commitment Fees
Loan origination fees, net of certain direct origination costs, are
deferred and amortized on a basis that approximates level yield over the
contractual lives of the underlying loans. In addition, fees for a
commitment to originate or purchase loans are offset against direct loan
origination costs incurred to make such commitments. The net amounts are
deferred and, if the commitment is exercised, recognized over the life of
the related loan as a yield adjustment or, if the commitment expires
unexercised, recognized as income upon expiration of the commitment.
(e) Real Estate Owned
Real estate owned represents real estate acquired through foreclosure or deed
in lieu of foreclosure and is reported at 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 is recorded as a loan loss. Gain or loss on sale and
any subsequent permanent decline in fair value is recorded in income.
(f) Federal Home Loan Bank Stock
Investment in stock of a Federal Home Loan Bank is carried at cost and is
required of those institutions who utilize its services. No ready market
exists for the stock, and it has no quoted value.
(g) Premises and Equipment
Premises and equipment are carried at cost less accumulated depreciation.
Depreciation is provided on a straight-line basis over the estimated useful
lives of the related assets.
(h) Intangible Assets
Intangible assets consist of core deposit premiums and cost in excess of net
assets acquired resulting from the Company's branch acquisitions in 1987.
Such amounts are amortized using the straight-line method over the estimated
life (19 years) of the customer deposit base. The Company writes off the
unamortized balance of the intangible assets upon the disposition of the
related branches. Intangible assets are reviewed for impairment whenever
events or changes in circumstances indicate that the carrying amount of any
such asset may not be recoverable. In the event that facts and
circumstances indicate that the carrying value of the intangible asset may
be impaired, an evaluation of their recoverability would be performed and
any resulting impairment loss recorded.
(i) Income Taxes
The Company files consolidated income tax returns with its subsidiary.
9
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONT'D)
Deferred tax assets and liabilities are recognized for temporary differences
between the financial reporting basis of assets and liabilities and their
respective tax bases. Deferred 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 tax assets and liabilities of a change in tax rates is
recognized in income in the period that includes the enactment date. A
valuation allowance is established for the portion of a deferred tax asset
for which it is more likely than not that a tax benefit will not be realized.
(j) Cash and Cash Equivalents
For the purposes of the statement of cash flows, the Company considers cash on
hand and in banks and investments with a maturity of ninety days or less, at
purchase, to be cash equivalents.
(k) Reclassifications
Certain reclassifications have been made to the 1996 and 1995 consolidated
financial statements to conform with the presentation adopted in 1997.
(l) Recent Accounting Pronouncements
In March 1995, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 121, Accounting for the Impairment of
Long-Lived Assets and for Long-Lived Assets to be Disposed Of (SFAS 121),
which is effective for fiscal years beginning after December 15, 1995. SFAS
121 establishes accounting standards for the impairment of long-lived assets.
The implementation of SFAS 121 did not materially impact the Company's
financial position or results of operations because the Company periodically
evaluates its assets for impairment using independent appraisals, cash flow
analyses and other relevant information. The Company has not experienced
any significant impairment losses.
In October 1995, Statement of Financial Accounting Standards No. 123 (SFAS
123), Accounting for Stock-Based Compensation was issued. SFAS 123
established a fair value method of accounting for stock based compensation
plans. SFAS 123 allows companies to either measure stock based
compensation using the fair value method, or to continue to apply existing
accounting standards and include footnote disclosure of pro forma net income
and earnings per share calculated as if the fair value had been applied. Stock
options outstanding at September 30, 1996 are not subject to the requirements
of SFAS 123 since the option grant date is prior to the effective date of
the pro forma disclosure. The Company expects to continue to apply existing
accounting standards for stock based compensation and to include disclosure
required by SFAS 123 for stock options granted in the future.
Statement of Financial Accounting Standards No. 128, Earnings per Share
(SFAS 128), was issued in February 1997 and is effective for the Company for
the quarter ending December 31, 1997. SFAS 128 requires presentation of
earnings per share based on a basic computation and a diluted computation.
The basic computation divides net income by only the weighted average
number of common shares outstanding for the year and the diluted computation
gives effect to all dilutive potential common shares that were outstanding
during the year. Had the Company used the provisions of SFAS 128 in
computing earnings per share for the year ended September 30, 1997, the
Company would have reported basic earnings per share of $0.52 and diluted
earnings per share of $0.48.
Statement of Financial Accounting Standards No. 130, Reporting
Comprehensive Income (SFAS 130) was issued in June 1997 and is effective
for the Company for the fiscal year beginning October 1, 1998. SFAS 130
establishes standards for reporting and displaying comprehensive income and
its components in a full set of general-purpose financial statements. The
Company does not expect any material changes to its current reporting format
in response to SFAS 130.
10
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONT'D)
Statement of Financial Accounting Standards No. 131, Disclosure about
Segments of an Enterprise and Related information (SFAS 131) was issued in
June 1997 and is effective for the Company for the fiscal year beginning
October 1, 1998. SFAS 131 establishes standards for reporting operating
segments by
public business enterprises in annual financial statements and requires that
those enterprises report selected information about operating segments in
interim financial reports issued to shareholders. SFAS 131 also establishes
standards for related disclosures about products and services, geographic
areas, and major customers. The Company does not expect any significant
changes to its current reporting format in response to SFAS 131.
(2) Investment Securities Held to Maturity
Investment securities held to maturity consist of the following:
Amortized Unrealized Unrealized
Cost Gains Losses Fair Value
-----------------------------------------------------
September 30, 1997:
U.S. Government
agencies $ 1,500,000 - 28,191 1,471,809
Mortgage-backed
securities and SBA's 7,314,453 89,112 - 7,403,565
State and municipal 570,000 - 3,517 566,483
Corporate bonds 250,000 - - 250,000
----------------------------------------------------
$ 9,634,453 89,112 31,708 9,691,857
====================================================
September 30, 1996:
U.S. Government
agencies $ 5,500,683 3,107 80,131 5,423,659
Mortgage-backed
securities and SBA's 3,704,854 64,441 81,000 3,688,295
State and municipal 870,000 - 3,210 866,790
Corporate bonds 250,000 - 20,000 230,000
----------------------------------------------------
$ 10,325,537 67,548 184,341 10,208,744
====================================================
A summary of investment and mortgage-backed securities by maturity as of
September 30, 1997 are shown below. The entire principal amount of
mortgage-backed securities is shown in the year of contractual maturity.
Expected maturities will differ from the maturities shown because borrowers
have the right to prepay obligations without prepayment penalties, and
principal is paid down over the contractual life of the mortgage-backed
securities.
Amortized Cost Fair Value
----------------------------------
Within 1 year $ 1,600,000 1,571,606
After 1 year through 5 years 480,611 484,125
After 5 years through 10 years 1,102,271 1,113,487
After 10 years 6,451,571 6,522,639
----------------------------------
$ 9,634,453 9,691,857
==================================
The Company did not sell any investments during 1997, 1996, or 1995.
At September 30, 1997 and 1996, the Company had pledged approximately
$7,735,000 and $8,245,000, respectively, of its securities to government and
municipal depositors.
11
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONT'D)
(3) Loans Receivable
Loans receivable at September 30, are summarized as follows:
1997 1996
------------------------------
Real estate mortgage loans $ 102,419,019 94,679,525
Real estate construction loans 16,996,563 11,417,553
Consumer loans 10,383,515 9,447,481
Commercial and other loans 9,137,932 7,891,541
-----------------------------
138,937,029 123,436,100
Less:
Deferred loan origination fees and costs - net (12,921) 17,264
Unearned interest income 72,995 32,079
Allowance for loan losses 1,012,322 955,288
-----------------------------
$ 137,864,633 122,431,469
=============================
An analysis of the activity in the allowance for loan losses is as follows:
1997 1996 1995
----------------------------------------
Balance at beginning of year $ 955,288 1,003,569 983,058
Provision for loan losses 309,679 48,104 214,142
Recoveries 95,571 112,901 84,482
Chargeoffs (348,216) (209,286) (278,113)
----------------------------------------
Balance at end of year $ 1,012,322 955,288 1,003,569
========================================
As of September 30, 1997 and 1996, outstanding loan commitments, exclusive
of the undisbursed portion of loans in process amounted to approximately
$243,000 and $142,000 respectively, with variable interest rates and
approximately $316,000 and $739,000, respectively, in fixed interest rates.
The Bank is also committed to extend standby letters of credit amounting to
approximately $636,000 and $622,000, respectively, at September 30, 1997
and 1996. In addition, customers of the Bank have the ability to borrow
approximately $954,000 and $992,000, respectively at September 30, 1997 and
1996, under existing credit card agreements. It is the opinion of management
that such commitments do not involve more than the normal risk of loss.
At September 30, 1997 and 1996, the Bank had nonaccrual loans aggregating
approximately $1,959,000 and $1,951,000, respectively. The effects of
carrying nonaccrual loans during 1997, 1996, and 1995 resulted in a reduction
of interest income of approximately $49,000, $93,000, and $91,000,
respectively.
12
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONT'D)
(3) Loans Receivable (Cont'd)
Impaired loans totalled approximately $366,000 and $447,000 at September 30,
1997 and 1996, respectively. Based upon the fair value of the related
collateral there is no specific allowance required on these impaired loans.
The interest income recognized on impaired loans for the years ended
September 30, 1997 and 1996 was approximately $8,000 and $17,000, which was
recorded on a cash basis.
At September 30, 1997 and 1996, the Bank had no loans held for sale.
The Bank has direct and indirect loans outstanding to certain directors and
executive officers. 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 1997:
Balance at September 30, 1996 $ 5,462,436
Repayments (6,712,607)
New borrowings 6,289,703
-------------------------
Balance at September 30, 1997 $ 5,039,532
=========================
As of September 30, 1997, 1996, and 1995, the Bank was servicing loans for
others aggregating approximately $2,308,000, $2,003,000, and $7,346,000,
respectively.
(4) Premises and Equipment
Premises and equipment at September 30 are summarized as follows:
1997 1996
--------------------------------
Land $ 641,681 730,464
Buildings and improvements 2,008,109 2,144,940
Building under capital lease 401,931 372,902
Leasehold improvements 197,674 177,851
Construction in process 86,427 -
Furniture, equipment, and automobiles 2,547,004 2,276,280
-------------------------------
5,882,826 5,702,437
Less accumulated depreciation and
amortization 2,701,208 2,367,558
-------------------------------
Premises and equipment, net $ 3,181,618 3,334,879
===============================
13
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONT'D)
(5) Accrued Interest Receivable
Accrued interest receivable at September 30 is summarized as follows:
1997 1996
-----------------------------
Loans $ 887,325 768,080
Investment securities 16,845 51,913
Mortgage-backed securities 55,991 32,639
-----------------------------
$ 960,161 852,632
=============================
(6) Deposits
Deposits are summarized at September 30 as follows:
1997 1996
-------------------------------------------------
Weighted Weighted
Average Average
Balance Rate Balance Rate
------------------------------------------------
Non-interest demand
deposits $ 5,992,232 - 6,266,901 -
Negotiable orders of
withdrawal 11,429,277 1.25% 11,598,046 1.25%
Money market deposit
accounts 4,756,047 2.35% 2,410,008 2.35%
Savings deposits 4,319,817 2.30% 4,564,993 2.30%
Certificates of deposits:
Certificates less than
$100,000 84,492,890 5.90% 78,416,333 6.12%
Jumbo certificates 18,899,673 6.10% 18,298,176 4.48%
--------------------------------------------------
$129,889,936 4.97% 121,554,457 4.49%
==================================================
Interest expense on deposits is summarized below:
1997 1996 1995
-----------------------------------------
Negotiable orders of withdrawal $ 142,967 219,520 329,557
Money market deposit accounts 73,629 60,966 86,840
Savings deposits 96,646 108,398 132,734
Certificates deposits:
Certificates less than $100,000 4,837,654 4,382,380 4,114,455
Jumbo certificates 1,049,195 930,813 710,217
Less:
Early withdrawal penalties 24,395 19,747 28,350
------------------------------------------
$ 6,175,696 5,682,330 5,345,453
==========================================
At September 30, 1997, the rates on deposits were as follows:
Negotiable orders of withdrawal 1.25 %
Money market deposit accounts 2.35
Savings deposits 2.30
Time deposits 2.75 - 6.25
14
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONT'D)
(6) Deposits (cont'd)
As of September 30, 1997, and 1996, the Bank had no brokered deposits.
The amount and maturities of certificates of deposits at September 30, 1997 are
as follows:
Year ending September 30, Amount
- --------------------------- -----------------
1998 $ 88,646,925
1999 10,168,031
2000 2,430,050
2001 1,262,357
2002 866,040
After 2002 19,160
------------------
$ 103,392,563
==================
(7) Federal Home Loan Bank Advances
Advances from the Federal Home Loan Bank at September 30 are summarized
as follows:
1997 1996
----------------------------------------
Due during year ending Weighted Weighted
September 30, Amount Average Rate Amount Average Rate
- ----------------------------------------------------------------------------
1997 $ - - 4,000,000 7.08%
1998 7,750,000 5.90% 4,500,000 5.83%
1999 2,100,000 6.19% 2,100,000 6.19%
2000 3,000,000 6.77% - -
2001 500,000 7.90% 500,000 7.90%
2002 1,000,000 5.66% - -
-----------------------------------------
$14,350,000 5.79% 11,100,000 6.44%
=========================================
The Bank has the ability to borrow additional funds from the Federal Home
Loan Bank. The advances and any future borrowings are collateralized by
certain qualifying real estate loans under a security agreement with the
Federal Home Loan Bank. Additionally, all stock of the Federal Home Loan
Bank is pledged as collateral for the advances.
(8) Stockholders' Equity and Regulatory Matters
The Bank is subject to various regulatory capital requirements administered by
the federal banking agencies. Failure to meet minimum capital requirements
can initiate certain mandatory, and possible additional discretionary,
actions by regulators that, if undertaken, could have a direct material
effect on the Bank's financial statements. Under capital adequacy
guidelines and the regulatory framework for prompt corrective action, the
Bank must meet specific capital guidelines that involve quantitative
measures of the Bank's assets, liabilities, and certain off-balance-sheet
items as calculated under regulatory accounting practice. The Bank's
capital amounts and classification are also subject to qualitative
judgements by the regulators about components, risk weightings,
and other factors.
15
<PAGE>
(8) Stockholders' Equity and Regulatory Matters (Cont'd)
Quantitative measures established by regulation to ensure capital adequacy
require the Bank to maintain minimum capital amounts and ratios (set forth in
the table below). The Bank's primary regulatory agency, the OTS, requires the
Bank to maintain minimum ratios of tangible capital (as defined in the
regulations) of 1.5%, core capital (as defined) of 4%, and total risk-based
capital (as defined) of 8%. The Bank is also subject to prompt corrective
action requirements set forth by the FDIC. The FDIC requires the Bank to
maintain minimum total and Tier 1 capital (as defined in the regulations)
to risk-weighted assets (as defined), and Tier 1 capital (as defined) to
average assets (as defined). Management believes, as of September 30, 1997,
that the Bank meets all capital adequacy requirements to which it is subject.
As of December 31, 1996, the most recent notification from the OTS, the Bank
was categorized as "Well Capitalized" under the regulatory framework for
prompt corrective action. To be categorized as "Well Capitalized," the Bank
must maintain minimum tangible, core, and risk-based capital ratios of at least
6%, 5%, and 10%, respectively. There are no conditions or events since that
notification that management believes have changed the institution's category.
To Be Categorized
"Well Captalized"
For Capital Under Prompt
Actual Adequacy Purposes Corrective Action
(For OTS Purposes) Provisions
----------------------------------------------------------
As of September 30, 1997 Amount Ratio Amount Ratio Amount Ratio
Tangible Capital $ 12,216,000 7.70% $2,379,000 1.50% N/A N/A
Core Capital 13,246,000 8.30% 6,385,000 4.00% N/A N/A
Total risk-based capital
(to risk-weighted
assets) 14,258,000 10.10% 11,295,000 8.00% $14,118,000 10.00%
Tier 1 risk-based
capital (to risk-
weighted assets) 13,246,000 9.38% N/A N/A 8,471,000 6.00%
Tier 1 leverage
capital (to
average assets) 13,246,000 8.64% N/A N/A 7,666,000 5.00%
To Be Categorized
"Well Capitalized"
Under Prompt
For Captial Corrective Action
Actual Adequacy Purposes Provisions
(For OTS Purposes)
-----------------------------------------------------------
As of
September 30, 1996 Amount Ratio Amount Ratio Amount Ratio
-----------------------------------------------------------------------------
Tangible Capital $ 10,619,000 7.31% $ 2,180,000 1.50% N/A N/A
Core Capital 11,896,000 8.12% 5,863,000 4.00% N/A N/A
Total risk-based
capital (to risk-
weighted assets) 12,851,000 10.51% 9,780,000 8.00% $12,225,000 10.00%
Tier 1 risk-based
capital (to risk-
weighted assets) 11,896,000 9.73% N/A N/A 7,335,000 6.00%
Tier 1 leverage
capital (to
average assets) 11,896,000 8.54% N/A N/A 6,961,000 5.00%
16
<PAGE>
(8) Stockholders' Equity and Regulatory Matters (Cont'd)
The following is a reconciliation of capital for the Bank under generally
accepted accounting principles (GAAP) to regulatory capital:
As of September 30, 1997 Tangible Core Risk-Based
Capital Captial Capital
--------------------------------------------------
GAAP capital $ 13,246,000 13,246,000 13,246,000
General allowance for
loan losses - - 1,012,000
Intangible assets (1,030,000) - -
--------------------------------------------------
Regulatory capital 12,216,000 13,246,000 14,258,000
Minimum capital requirement 2,379,000 6,385,000 11,295,000
--------------------------------------------------
Regulatory capital
excess $ 9,837,000 6,861,000 2,963,000
==================================================
As of September 30, 1996
GAAP capital $ 11,896,000 11,896,000 11,896,000
General allowance for
loan losses - - 955,000
Intangible assets (1,277,000) - -
--------------------------------------------------
Regulatory capital 10,619,000 11,896,000 12,851,000
Minimum capital requirement 2,180,000 5,863,000 9,780,000
-------------------------------------------------
Regulatory capital excess $ 8,439,000 6,033,000 3,071,000
17
<PAGE>
(9) Income Taxes
The components of income tax expense (benefit) are as follows:
1997 1996 1995
--------------------------------------------------
Federal: Current $ 733,530 651,665 742,356
Deferred 68,334 (287,279) 29,959
--------------------------------------------------
801,864 364,386 772,315
State: Current 23,768 - -
Deferred 12,829 - -
--------------------------------------------------
36,597 - -
--------------------------------------------------
$ 838,461 364,386 772,315
==================================================
The difference between the actual provision for income taxes and income taxes
computed at the Federal statutory rate of 34% is as follows:
1997 1996 1995
-----------------------------------------------
Federal taxes at statutory
rate $ 826,923 382,756 696,797
Increase (decrease)
resulting from:
State income taxes, net 24,155 - -
Amortization of intangibles 9,530 12,534 10,574
Tax exempt income (7,328) (7,957) (8,298)
Other, net (14,819) (22,947) 73,242
-----------------------------------------------
$ 838,461 364,386 772,315
===============================================
18
<PAGE>
(9) Income Taxes (cont'd)
The tax effects of temporary differences that give rise to significant
portions of the deferred tax assets and deferred tax liabilities as of
September 30, 1997 and 1996 are presented below:
1997 1996
-------------------------------------------
Deferred tax assets:
Allowance for loan losses $ 295,143 267,021
Deferred loan fees - 6,553
Property cost basis differences 32,239 -
Accrued liability 26,572 -
SAIF assessment accrual - 276,237
------------------------------------------
Total gross deferred tax assets 353,954 549,811
------------------------------------------
Less valuation allowance - -
------------------------------------------
Net deferred tax assets 353,954 549,811
------------------------------------------
Deferred tax liabilities:
Depreciation 15,037 71,265
FHLB stock dividend 177,008 240,379
Deferred loan fees 4,905 -
------------------------------------------
Total deferred tax liabilities 196,950 311,644
------------------------------------------
Net deferred tax assets $ 157,004 238,167
==========================================
Prior to January 1, 1996, under the Internal Revenue Code ("Code") the
Company was allowed a special bad debt deduction related to additions to tax
bad debt reserves established for the purpose of absorbing losses. The
provisions of the Code permitted the Company to deduct from taxable income
an allowance for bad debts based on the greater of a percentage of taxable
income before such deductions or actual loss experience. Retained earnings at
September 30, 1997 include approximately $248,000 for which no deferred
Federal income tax liability has been recognized. The amounts represent an
allocation of income for bad debt deductions for tax purposes only. Reduction
of amounts so allocated for purposes other than tax bad debt losses or
adjustments arising from carry back of net operating losses would create
income for tax purposes only, which would be subject to the then current
corporate income tax rate.
(10) Leases
On September 28, 1987, the Bank entered into a sale-leaseback of one of its
branches. The facility has been capitalized and the related obligation is
recorded in other liabilities in the accompanying financial statements based on
the present value of future minimum lease payments. The lease term expires
August 28, 2007. Premises and equipment includes buildings under capital
leases of $401,931 and accumulated amortization of $182,557 and $163,428 at
September 30, 1997 and 1996, respectively.
19
<PAGE>
(10) Leases (cont'd)
The present value of future minimum capital lease payments as of September
30, 1997, are:
Year ending September 30,
1998 $ 39,348
1999 39,348
2000 39,348
2001 39,348
2002 39,348
2003 and later years 196,740
-----------
Total minimum lease payments 393,480
Less amount representing interest at 10% 147,821
----------
Present value of future minimum
capital lease payments $ 245,659
=========
The Bank is obligated under various noncancelable operating leases, primarily
for operating facilities that expire over the next fifteen years. The future
minimum lease payments under these operating leases as of September 30,
1997 are as follows:
Year ending September 30,
1998 $ 25,000
1999 25,000
2000 25,000
2001 25,000
2002 685
------------
Total future minimum lease
payments $ 100,685
===========
Total rent expense was approximately $109,000, $75,000, and $16,000 for the
years ended September 30, 1997, 1996, and 1995, respectively.
(11) Sale of Branch
Effective March 7, 1997, the Bank completed the sale of its Hinesville branch,
which had deposits of $6,354,840 and net premises and equipment of $162,099.
This transaction resulted in a gain of $433,760 which is reported separately in
the accompanying consolidated statement of operations.
(12) Employee Benefit Plans
Effective October 1, 1992, the Company adopted a 401(k) Profit Sharing Plan,
(the Plan) which covers substantially all of its employees. The Company
matches 50% of employee contributions to the Plan, up to 3% of an employee's
salary. The Company contributed $29,481, $27,376, and $28,852 to the Plan
in 1997, 1996, and 1995, respectively.
20
<PAGE>
(12) Employee Benefit Plans (cont'd)
Effective September 30, 1995, the Company adopted an Employee Stock
Purchase Plan which covers substantially all of its employees. Employees pay
85% of the price at which the Company buys its stock in the open market.
During 1997 and 1996, approximately 5,710 shares and 6,500 shares, respectively,
were purchased by employees. As a result of such employee stock purchases, the
Company incurred employee benefits expense of approximately $9,000 and $11,000
for the years ended September 30, 1997 and 1996, respectively.
(13) Stock Option Plan
The Company has a nonqualified Stock Option Plan (the Option Plan). The
Company has reserved 456,408 shares of common stock for issuance under the
Option Plan. The following is a summary of activity in the Option Plan for the
periods indicated.
Such amounts have been adjusted to reflect 50% stock dividends accounted for
as 3 for 2 stock splits declared in each of fiscal 1997 and 1996.
1997 1996 1995
---------------------------------------
Options outstanding at beginning
of period 456,408 523,908 231,408
Options granted - - 292,500
Options cancelled - - -
Options exercised - (67,500) -
---------------------------------------
Options outstanding at end of period 456,408 456,408 523,908
=======================================
Option prices per share:
Options granted during period - - $2.89 - 3.18
Options canceled - - -
Options exercised - $0.96 - 1.63 -
Options outstanding at end of period $1.48 - 3.18 $1.48 - 3.18 $0.96 - 1.63
All options issued are exercisable.
(14) Net Income Per Share
Net income per share is based on weighted average shares and share
equivalents of 3,354,499, 3,250,772, and 3,065,851 during the years ended
September 30, 1997, 1996 and 1995, respectively. The dilutive effect of stock
options has been considered in the computation of equivalent shares. Net
income per share and weighted average shares and equivalent shares
outstanding have been retroactively restated to reflect the 50% stock dividends
accounted for as 3 for 2 stock splits that occurred during each of
fiscal 1997 and 1996.
21
<PAGE>
(15) Condensed Financial Information of First Georgia Holding, Inc. (Parent
Only)
First Georgia Holding, Inc., was organized December 16, 1987. The following
represents parent company only condensed financial information.
September 30,
Condensed Balance Sheets 1997 1996
---------------------------------
Assets
Cash $ 24,617 34,447
Other assets 76,883 76,883
Investment in subsidiary 13,245,770 11,897,069
----------------------------------
Total assets $13,347,270 12,008,399
==================================
Liabilities and Stockholders' Equity
Liabilities
Other borrowed money $ - 92,000
Stockholders' Equity
Common stock 3,052,319 3,052,319
Additional paid-in capital 4,223,197 4,223,197
Retained earnings 6,071,754 4,640,883
----------------------------------
Total liabilities and stockholders'
equity $13,347,270 12,008,399
==================================
Years Ended September 30,
----------------------------------
Condensed Statements of Operations 1997 1996 1995
----------------------------------
Dividends from Bank $ 260,222 194,000 215,000
Expenses (15,258) (19,500) (27,807)
Income before equity in undistributed ----------------------------------
income of Bank 244,964 174,500 187,183
Equity in undistributed income of Bank 1,348,701 586,866 1,089,895
-----------------------------------
Net Income $ 1,593,665 761,366 1,277,088
===================================
22
<PAGE>
(15) Condensed Financial Information of First Georgia Holding, Inc. (Parent
Only)
Year ended September 30,
Condensed Statements of Cash Flows 1997 1996 1995
----------------------------------------
Operating Activities:
Net income $ 1,593,665 761,366 1,277,088
Adjustments to reconcile net
income to net cash provided by
operating activities:
Equity in undistributed income
of Bank (1,348,701) (586,867) (1,089,895)
Decrease in accounts payable - - (79,725)
----------------------------------------
Net cash provided by operating
activities 244,964 174,499 107,468
----------------------------------------
Financing Activities:
Dividends paid on common stock (162,794) (132,664) (79,598)
Net proceeds from exercise of
stock options - 85,125 -
Repayments of other borrowed money (92,000) (100,000) (48,000)
-----------------------------------------
Net cash used in financing
activities (254,794) (147,539) (127,598)
-----------------------------------------
Increase (decrease) in cash
and cash equivalents (9,830) 26,960 (20,130)
Cash and cash equivalents at
beginning of year 34,447 7,486 27,616
-----------------------------------------
Cash and cash equivalents
at end of year $ 24,617 34,446 7,486
=========================================
The primary source of funds available to the Company to pay shareholder
dividends and other expenses is dividends from its Bank. Regulatory agencies
impose restrictions on the amounts of dividends that may be declared by the
Bank and requires maintenance of minimum capital amounts. At September
30, 1997, approximately $1,749,000 of retained earnings were available for
dividend declaration without prior regulatory approval.
(16) Commitments and Contingencies
The Bank is involved in a claim arising in the ordinary course of business. In
the opinion of management, the ultimate disposition of this matter will not
have a material adverse effect on the Bank's or the Company's financial
position or results of operations.
23
<PAGE>
(17) Fair Value of Financial Instruments
SFAS 107, Disclosures About Fair Value of Financial Instruments, requires
disclosure of fair value of financial instruments, whether or not recognized on
the face of the balance sheet, for which it is practicable to estimate that
value. In cases where quoted market prices are not available, fair values
are based on estimates using present value or other valuation techniques.
Those techniques are significantly affected by the assumptions used,
including the discount rate and estimates of future cash flows. In that
regard, the derived fair value estimates cannot be substantiated by
comparison to independent markets and, in many cases, could not be realized
in immediate settlement of the instrument. These estimates are subjective
in nature and involve uncertainties and matters of significant judgment and,
therefore, cannot be determined with precision. Changes in assumptions
would significantly affect the estimates. SFAS 107 excludes certain
financial instruments and all nonfinancial instruments from its
disclosure requirements. 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. 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. Accordingly, the aggregate fair value amounts
presented do not represent the underlying value of the Company.
The following methods and assumptions were used by the Company in
estimating its fair value disclosures for financial instruments.
Cash and due from banks, interest-bearing deposits in other financial
institutions, accrued interest receivable: The carrying amounts approximate
those assets' fair values because of their short-terms to maturity.
Investment securities: Fair values for investment securities are based on
quoted market prices, where available. If quoted market prices are not
available, fair values are based on quoted market prices of comparable
instruments.
Loans: For variable-rate loans that reprice frequently and are of normal credit
risk, fair values are considered to approximate carrying values. The fair
values for all other loans are estimated using discounted cash flow analysis,
using interest rates currently being offered for loans with similar terms to
borrowers of similar credit quality.
Off-balance sheet instruments: Fair values for the Company's off-balance sheet
instruments are based on a comparison with terms, including interest rate and
commitment periods currently being offered in similar agreements, taking into
account credit worthiness of the counter parties. The carrying and fair values
of off-balance-sheet instruments at September 30, 1997, are the same 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.
Deposits: Fair values for fixed-rate certificates of deposits are estimated
using a discounted cash flow calculation that considers interest rates
currently being offered on certificates of similar terms to maturity. The
carrying amounts of all other deposits, due to their nature, approximate
their fair value.
Federal Home Loan Bank advances: Fair values for fixed-rate borrowings from
the Federal Home Loan Bank are estimated using a discounted cash flow
calculation that considers interest rates currently being offered on
advances of similar terms to maturity.
24
<PAGE>
(17) Fair Value of Financial Instruments (Cont'd)
The following is a summary of the Company's financial instruments at
September 30, 1997 and 1996:
1997 1996
------------------------- -----------------------
Carrying Estimated Carrying Estimated
Value Fair Value Value Fair Value
Assets
Cash and due from banks $ 2,985,000 2,985,000 2,956,000 2,956,000
----------------------- ---------------------
Interest bearing deposits
in other financial
institutions 1,524,000 1,524,000 2,954,000 2,954,000
----------------------- -----------------------
Investment securities 9,635,000 9,692,000 10,326,000 10,209,000
----------------------- -----------------------
Loans 137,865,000 137,315,000 122,431,000 125,115,000
------------------------- -----------------------
Liabilities
Deposits:
Noninterest bearing 5,992,000 5,992,000 6,267,000 6,267,000
------------------------- ------------------------
Interest bearing demand
and savings 20,516,000 20,516,000 18,573,000 18,573,000
------------------------- ------------------------
Time certificates 103,393,000 103,997,000 96,715,000 97,988,000
------------------------- ------------------------
Federal Home Loan Bank
advances 14,350,000 14,431,000 11,100,000 11,084,000
------------------------- ------------------------
Other borrowed money - - 92,000 92,000
---------------------------------------------------
25
<PAGE>
INDEPENDENT AUDITORS' REPORT
The Board of Directors and Stockholders
First Georgia Holding, Inc.
Brunswick, Georgia
We have audited the accompanying consolidated balance sheet of First Georgia
Holding, Inc. and subsidiary as of September 30, 1997, and the related
consolidated statements of operations, stockholders' equity, and cash flows for
year then ended. 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
audit. The consolidated financial statements of the Company for the years
ended September 30, 1996 and 1995 were audited by other auditors whose
report, dated November 1, 1996, expressed an unqualified opinion on those
statements.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the consolidated financial
statements. An audit also includes assessing the accounting principles used
and significant estimates made by management, as well as evaluating the
overall financial statement presentation. We believe that our audit provides a
reasonable basis for our opinion.
In our opinion, the 1997 consolidated financial statements present fairly,
in all material respects, the financial position of First Georgia Holding,
Inc. and subsidiary at September 30, 1997, and the results of their
operations and their cash flows for the year then ended in conformity with
generally accepted accounting principles.
Deloitte & Touche LLP
Jacksonville, Florida
November 14, 1997
26
<PAGE>
SELECTED FINANCIAL AND OTHER DATA
First Georgia Holding, Inc.
Selected consolidated financial data is presented below as of and for each
of the years in the five-year period ended September 30, 1997.
(Dollars in thousands, except per share data)
September 30,
------------------------------------------------------
1997 1996 1995 1994 1993
------------------------------------------------------
Balance
Sheet
Data:
Total
Assets $ 159,699 146,915 132,742 133,870 133,105
Loans receivable,
net $ 137,865 122,431 110,432 113,579 113,420
Total Investments $ 9,635 10,326 9,181 7,511 7,070
Deposits $ 129,890 121,554 106,528 103,407 106,736
Borrowings $ 14,350 11,192 12,140 17,988 15,748
Stockholders'
equity $ 13,347 11,916 11,125 9,927 8,899
Book value per
share $ 4.37 3.90 3.73 3.33 3.00
Number of shares
outstanding 3,052,319 3,052,319 2,984,819 2,984,819 2,968,068
Years Ended September 30,
---------------------------------------------
Income Statement Data: 1997 1996 1995 1994 1993
---------------------------------------------
Interest income $ 12,784 11,794 11,626 10,213 10,807
Interest expense 6,939 6,549 6,407 5,544 6,039
---------------------------------------------
Net interest income 5,845 5,245 5,219 4,669 4,768
Provision for loan losses 310 48 214 39 171
Other Income 1,619 1,004 1,268 1,198 1,051
Other expense 4,722 4,347 4,224 4,241 4,551
SAIF special assessment - 727 - - -
---------------------------------------------
Income before taxes 2,432 1,127 2,049 1,587 1,097
Income tax expense 838 364 772 525 435
---------------------------------------------
Income before cumulative
effect of a change in
accounting principle 1,594 763 1,277 1,062 662
Cumulative effect of a
change in accounting
principle - - - - 216
---------------------------------------------
Net Income $ 1,594 763 1,277 1,062 878
=============================================
Income per share before
cumulative effect of a
change in accounting
principle $ 0.48 0.23 0.42 0.35 0.22
Cumulative effect of a
change in accounting
principle - - - - 0.08
---------------------------------------------
Net Income per share $ 0.48 0.23 0.42 0.35 0.30
=============================================
At or For Years Ended September 30,
---------------------------------------------
Other Data: 1997 1996 1995 1994 1993
---------------------------------------------
Net income to average assets 1.04% 0.87% 0.95% 0.79% 0.64%
Net income to average equity 12.55% 10.32% 11.88% 11.04% 10.36%
Average equity to average
assets 8.28% 8.40% 8.01% 7.41% 6.53%
Number of full-service offices 7 8 6 7 7
27
<PAGE>
General
First Georgia Holding, Inc. (the Company) was organized in 1987 to acquire
the outstanding common stock of First Georgia Bank, F.S.B. (the Bank or First
Georgia). On April 30, 1988, the Company became the sole shareholder of the
Bank and issued its stock to the former Bank shareholders. Management's
Discussion and Analysis which follows, relates primarily to the Bank since the
Company has not had material operations since it was organized.
First Georgia's net income depends on (a) its net interest income, which is the
difference between its interest income from loans and investments and its
interest expense on deposits and borrowings, (b) its non-interest income, which
consists principally of fee income generated by First Georgia's retail banking
operations, and (c) its non-interest expenses, such as employee salaries and
benefits. Interest income on loans and investments (yield) is a function of
the average balances outstanding during the period and the average rates
earned. Interest expense (cost of funds) is a function of the average
amount of deposits and borrowings outstanding during the period and average
rates paid on such deposits and borrowings. Retail banking fee income,
consisting mainly of recurring fees collected for deposit-related services
rendered by the Bank, varies with the volume of the Bank's retail banking
business. Non-interest expenses vary primarily with the number of employees,
expansion of facilities and inflation.
The Company has begun an internal evaluation of the Company's computer
information systems and has identified the systems which will require program
modifications or new software installations in order to be "Year 2000"
compliant. The Company expects to incur costs over the next three years as the
Company addresses these problems. Costs to modify existing information
systems to be Year 2000 compliant will be expensed as incurred and costs
related to new software or hardware installation will be capitalized.
Capital Resources
The following is a reconciliation at September 30, 1997 of the Bank's capital
under generally accepted accounting principles to regulatory capital.
First Georgia Bank
Stockholders' Equity $ 13,246,000
Less:
Intangible Assets 1,030,000
-------------
Tangible Capital 12,216,000
Plus: -------------
Qualifying intangible assets 1,030,000
-------------
Core Capital 13,246,000
-------------
Plus:
General allowance for loan losses 1,012,000
-------------
Risk-based Capital $ 14,258,000
=============
Current regulations require financial institutions to have minimum regulatory
tangible capital equal to 1.5% of adjusted assets, minimum core capital to
adjusted assets of 4% (the leverage ratio), and risk-based capital to risk-
adjusted assets of 8.0%. The minimum core capital or leverage ratio also may
28
<PAGE>
be increased by the Office of Thrift Supervision (the OTS) based on its
assessment of the institution's risk management systems and the level of
overall risk in the individual institution. At September 30, 1997, the
Bank was in compliance with its minimum capital requirements.
The Bank's regulatory capital and the required minimum amounts, at
September 30, 1997, are summarized in the following table.
Required Minimum
Bank Capital Amount Excess(Deficiency)
------------ ----------------- ------------------
% $ % $ % $
----- ----- ----- ---------- ------- ---------
Tangible Capital 7.70 12,216,000 1.50 2,379,000 6.20 9,837,000
Core Capital 8.30 13,246,000 4.00 6,385,000 4.30 6,861,000
Risk-Based Capital 10.10 14,258,000 8.00 11,295,000 2.10 2,963,000
As of September 30, 1997, the Bank exceeded all the required minimum capital
amounts as demonstrated by the chart above. The Bank had strong earnings
during the year which helped to strengthen its capital position.
The Federal Deposit Insurance Corporation Improvement Act (FDICIA)
requires Federal banking agencies to take "prompt corrective action" with
respect to institutions that do not meet minimum capital requirements. In
addition to the ratios described above, FDICIA introduced an additional
capital measurement, the Tier 1 risk-based capital ratio. The Tier 1 ratio
is the ratio of Tier 1 or core capital to total risk-adjusted assets.
FDICIA establishes five
capital tiers: "well capitalized," "adequately capitalized,"
"undercapitalized," "significantly undercapitalized," and "critically
undercapitalized." The five capital tiers established by FDICIA and the
regulator's minimum requirements for each are summarized below.
Total Tier 1
Risk-Based Risk-Based
Capital Ratio Capital Ratio Leverage Ratio
------------- ------------- --------------
Well capitalized 10% or above 6% or above 5% or above
Adequately capitalized 8% or above 4% or above 4% or above
Undercapitalized Less than 8% Less than 4% Less than 4%
Significantly undercapitalized Less than 6% Less than 3% Less than 3%
Critically undercapitalized - - 2% or less
An institution may be deemed to be in a capitalization category lower than is
indicated by its capital position based on safety and soundness considerations
other than capital levels.
At September 30, 1997, the Bank's total risk-based ratio, tier 1 risk-based
ratio and leverage ratio were 10.10%,9.38%, and 8.64%, respectively,
placing the Bank in the well capitalized category under FDICIA for each
ratio.
29
<PAGE>
Liquidity
First Georgia has traditionally maintained levels of liquidity in excess of
levels required by regulatory authorities. As a member of the Federal Home
Loan Bank system, the Bank is required to maintain a daily average balance
of cash and eligible liquidity investments in an amount equal to a monthly
average of 5% of withdrawable savings and short term borrowings. The Bank's
liquidity level was 4.38% and 3.94% at September 30, 1997 and 1996,
respectively.
The Bank's operational needs, demand for loan disbursements and savings
withdrawals can be met by loan principal and interest payments, new deposits
and excess liquid assets. While significant loan demand, deposit withdrawal,
increased delinquencies and increased foreclosed properties could alter this
condition, the Bank has sufficient borrowing capacity through Federal Home
Loan Bank advances and other short term borrowings to manage such an
occurrence. Management does not foresee any liquidity problems for fiscal
1998.
Asset/Liability Management
First Georgia has implemented a program of asset/liability management to limit
the Bank's vulnerability to material and prolonged increases in interest rates
(interest rate risk). The principal determinant of the exposure of the Bank's
earnings to interest rate risk is the difference in the time between interest
rate adjustments or maturities on interest-earning assets and interest rate
adjustments or maturities of interest-bearing liabilities. If the maturities
of the Bank's assets and liabilities were perfectly matched and if the
interest rates earned on its assets and paid on its liabilities moved
concurrently, which is not the case, the impact on net interest income of
rapid increases or decreases in interest rates would be minimized. The
Bank's asset/liability management policy seeks to increase the adjustability
of the interest rates earned on its assets and paid on its liabilities and
to match the maturities of its interest-earning assets and interest-bearing
liabilities so that the Bank will be able to restructure and reprice its
asset portfolio in a relatively short period to correspond to
changes in its cost and flow of funds. The Bank's policy also seeks to
encourage the flow of deposits into longer term certificates during periods of
lower interest rates and to emphasize shorter term accounts during periods of
high rates. During fiscal 1997, the Bank actively managed its interest rate
risk by limiting its lending to short-term fixed rate balloon notes or
adjustable rate loans and shortening the maturity on its deposits.
It is a policy of First Georgia not to originate for its own portfolio any long
term fixed rate mortgage loans. This allows First Georgia to better match the
maturities of its assets and liabilities, thereby limiting interest rate risk.
Similarly, the Bank emphasizes the origination of commercial real estate loans,
construction loans, consumer loans and commercial loans with either adjustable
rates or short maturities.
The interest rate sensitivity of the Bank's assets and liabilities provides an
indication of the extent to which the Bank's net interest income may be
affected by interest rate movements. The concept of interest rate
sensitivity recognizes that certain assets and liabilities have interest
rates that are subject to change prior to maturity. 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
rate sensitive liabilities from interest rate sensitive assets. A gap is
considered positive when the amount of interest rate sensitive assets
exceeds the amount of interest rate sensitive liabilities, and is
considered negative when the amount of interest rate sensitive liabilities
exceeds the amount of interest rate sensitive assets. Generally, during a
period of rising interest rates, a negative gap would adversely affect net
interest income while a positive gap would result in an increase in net
interest income, while conversely during a period of falling interest rates,
a negative gap would result in an increase in net interest income and a
positive gap would negatively affect net interest income. To the extent
that the gaps are close to zero, net interest income can be considered to
be relatively immune from interest rate movements. The following table sets
forth the Bank's interest-earning assets and interest-bearing liabilities at
September 30, 1997. The information presented, however, may not be
indicative of actual future trends of net interest income in rising or
declining interest rate environments.
30
<PAGE>
(in thousands)
Over One Over Five Over Ten Over
One Year Through Through Through Twenty
or Less Five Years Ten Years Twenty Years Years
--------------------------------------------------------
Interest-earning
assets (IEA's):
Investments $ 3,276 2,992 897 - 2,470
Interest earning
deposits 1,523 - - - -
Loans 97,904 33,939 1,613 3,246 2,235
----------------------------------------------------------
Total 102,703 36,931 2,510 3,246 4,705
----------------------------------------------------------
Interest-bearing
liabilities
(IBL's):
Demand deposits $ 11,429 - - - -
Savings deposits 9,076 - - - -
Other time deposits 88,647 14,726 19 - -
Debt 7,750 6,600 - - -
----------------------------------------------------------
Total 116,902 21,326 19 - -
----------------------------------------------------------
Interest
sensitivity gap $ (14,199) 15,605 2,491 3,246 4,705
==========================================================
Cumulative gap $ (14,199) 1,406 3,897 7,143 11,848
==========================================================
Ratio of IEA's
to IBL's 0.88 1.73 132.11 - -
==========================================================
Cumulative ratio
of IEA's to IBL's 0.88 1.01 1.03 1.05 1.09
==========================================================
COMPARISON OF YEARS ENDED SEPTEMBER 30, 1997 AND 1996
Results of Operations
General
First Georgia Holding, Inc. reported net income of $1,593,665, an increase of
$832,299. This increase is due primarily to the increase in interest income
of $990,016. Net interest income after provision for loan losses increased
a total of $338,968. Other income increased by a total of $638,822, and other
expenses decreased $328,584. Several factors as discussed below contributed
the increases and decreases in these areas.
31
<PAGE>
Interest Income
Total interest income increased $990,016 for the year, or 8.39%. Interest
income on loans increased $989,344, or 9.01%, which was the major factor for
this increase in interest income. Average loans for the year increased by more
than $10,000,000 during the year ended September 30, 1997, resulting in
higher interest income. Investment income decreased by $6,842 (2.13%) for
mortgage backed securities and $82,467 (21.82%) for the year ended September
30, 1997 as compared to the same time last year. As investments matured,
much of that money was shifted into the increased loan demand. Because of
increased deposit balances and the need to fund the sale of the Hinesville
branch, the Bank maintained high cash balances in its interest-bearing deposit
accounts. These higher balances account for an $89,981, or 83.29% increase in
other interest income.
Interest Expense
Total interest expense increased $389,473, or 5.95% for the year. This is
attributable to an increase in average deposits of over $12,000,000. The Bank
experienced substantial deposit growth over the year, which is attributable to
the offering of competitive interest rates and attractive deposit products
for the market area. Interest expense on advances and other borrowings fell
$103,893, or 11.98%, as several high-interest advances were paid off and
replaced by much lower-rate advances. The weighted average yield on advances
dropped by 65 basis points for the year ended September 30, 1997 as compared
to 1996.
Yields Earned and Rates Paid
Net interest income is affected by (a) the difference between rates of interest
earned on interest-earning assets and rates of interest paid on interest-
bearing liabilities (interest rate spread) and (b) the relative amounts of
interest-earning assets and interest-bearing liabilities. When interest-
earning assets approximate or exceed interest-bearing liabilities, any
positive interest rate spread will generate net interest income. Financial
institutions have traditionally used interest rate spreads as a measure of
net interest income. Another indication of an institution's net interest
income is its "net yield on interest-earning assets" which is net interest
income divided by average interest- earning assets. The following table
sets forth information with respect to weighted average contractual yields
on loans, yields on investments and the cost of funds on deposits and
borrowings for and as of the end of the periods indicated.
32
<PAGE>
Year Ended September 30, At September 30,
--------------------------------------------
(in percentages)
1997 1996 1995 1997
--------------------------------------------
Weighted average yield on:
Loans 9.36 9.35 9.77 9.45
Investment securities 7.11 7.35 6.22 6.29
Interest earning deposits
in other banks 5.47 5.89 7.24 4.61
--------------------------------------------
Total weighted average yield
on all interest-earning
assets 9.12 9.15 9.46 9.21
--------------------------------------------
Weighted average rate paid on:
Deposits 5.18 5.35 4.95 4.57
Other borrowings 8.89 8.40 9.14 -
Federal Home Loan Bank
advances
Short term advances 6.30 7.27 5.90 7.00
Long term advances 5.14 6.63 6.82 5.44
-------------------------------------------
Total weighted average rate
paid on all interest-bearing
liabilities 5.25 5.23 5.29 4.72
-------------------------------------------
Weighted average interest rate
spread
(spread between weighted average
yield on all interest-earning
assets and rate paid on all
interest-earning liabilities) 3.87 3.92 4.17 4.49
============================================
Net yield on average interest-
earning assets
(net interest income as a
percentage of average
interest-earning assets) 4.11 4.07 4.04 N/A
===========================================
Provision for Loan Losses
The provision for loan losses is based on management's evaluation of the risk
elements inherent in the loan portfolio. The elements include possible
declines in the value of collateral due to changing economic conditions and
depreciation over time, size and composition of the loan portfolio,
current economic conditions that might affect a borrower's ability to pay,
review of impaired loans, findings and recommendations from regulatory
examinations, historical charge-off experience, and levels of non-performing
and past due loans. Management reviews these elements and determines the
level of allowance for loan losses needed. The $309,679 provision for loan
losses recorded in 1997 represents management's desire to maintain a prudent
33
<PAGE>
level of coverage. At September 30, 1997, the Bank believes its allowance
for loan losses is adequate to provide for future losses. Table 1 sets
forth an analysis of non-accruing and past due loans as of September 30,
1995 through 1997 while Table 2 provides an analysis of the allowance for
loan losses, showing charge-offs and recoveries by type of loan as well as
the addition to the allowance.
Table 1
ANALYSIS OF NON-ACCRUING AND PAST DUE LOANS
As of September 30,
--------------------------------------
1997 1996 1995
--------------------------------------
Non-accruing loans (1)
Real Estate
Construction $ - - -
First Mortgage 1,832,123 1,766,929 1,876,110
Second Mortgage 82,517 19,764 82,918
Consumer 44,781 164,118 101,974
-------------------------------------
Total non-accruing loans 1,959,421 1,950,811 2,061,002
-------------------------------------
Past Due Loans (2)
Real Estate
Construction $ - - -
First Mortgage - - 107,140
Second Mortgage - - -
Consumer - - 21,990
--------------------------------------
Total past due loans - - 129,130
--------------------------------------
Total non-accruing and past due loans $ 1,959,421 1,950,811 2,190,132
======================================
Percentage of total loans 1.41% 1.58% 1.98%
======================================
Real estate owned $ 423,000 94,200 206,334
======================================
Total non-accruing and past due
loans and nonperforming assets $ 2,382,421 2,045,011 2,396,466
======================================
(1) Non-accruing loans are loans for which unpaid interest is non recognized
in income.
(2) Past due loans are 90 days or more delinquent for which interest is still
accruing.
34
<PAGE>
Table 2
ANALYSIS OF ALLOWANCE FOR LOAN LOSSES
Years Ended September 30,
-------------------------------------
1997 1996 1995
-------------------------------------
Beginning balance $ 955,288 1,003,569 983,058
Loans charged off:
Real estate construction - - -
Real estate mortgage 185,696 152,684 177,417
Consumer and other 162,520 56,602 100,696
------------------------------------
Total charge-offs 348,216 209,286 278,113
------------------------------------
Recoveries:
Real estate construction - - -
Real estate mortgage 32,939 46,547 22,632
Consumer and other 62,632 66,354 61,850
------------------------------------
Total charge-offs 95,571 112,901 84,482
------------------------------------
Net charge offs 252,645 96,385 193,631
Provision charged to operations 309,679 48,104 214,142
------------------------------------
Balance at end of period: $ 1,012,322 955,288 1,003,569
====================================
Ratio of net charge-offs to average
loans outstanding 0.20% 0.08% 0.17%
====================================
Ratio of allowance to total loans 0.73% 0.77% 0.87%
====================================
Other Income
Other income increased $638,822, or 63.63% for the year. The main factor for
this increase is the gain on the sale of the Hinesville branch, which netted
appoximately $434,000. Loan fees increased $91,049, or 23.78%, for the year
as loan balances increased. The Bank is also implementing a new fee structure
to increase fees to levels currently charged in the market. Deposit service
charges increased $133,978, or 24.13% for the year ended September 30, 1997.
This increase is attributable to an emphasis by Management to collect non-
sufficient funds fees, which increased $123,359. The increase in deposit
balances also contributed to the increase.
Other Expenses
Other expenses decreased $328,584, or 6.48% for the year. Last year, all
thrifts had to pay a special assessment to recapitalize the national thrift
35
<PAGE>
insurance fund. This assessment cost the Bank $727,704 last year. Because
of the special assessment, the Bank's federal insurance premiums were
significantly lower for the year ended September 30, 1997. Federal insurance
premiums decreased $143,677, or 56.36%, not including the special assessment.
Personnel expense offset these notable decreases because salary expense
increased $337,517, or 16.99%. An increased staff is necessary to handle
the Bank's rapid growth. Occupancy expense also increased by $111,775, or
11.73%, for the year due to the opening of the new Wal-Mart supercenter
branch, which has higher occupancy costs than the Hinesville branch did at
the time of its sale.
Income Tax Expense
The Company incurred $838,461 in income tax expense for the year based on
applicable income tax rates at September 30, 1997.
Financial Condition
Total assets of the Company increased $12,783,227 from September 30, 1996
to September 30, 1997. Loans were the driving force behind this increase, as
the net balances grew $15,433,164, or 12.61%. Loan demand remained strong
throughout fiscal 1997, and Management took advantage of this demand by
offering competitive loan products and exceptional service. Interest bearing
deposits in other banks decreased by $1,430,573, or 48.42% for the year ended
September 30, 1997 as compared to September 30, 1996. At the end of fiscal
1996, the Bank was increasing its cash balances to help fund the sale of the
Hinesville branch, which was sold in March 1997. Investments decreased by
$691,084, or 6.69% as investments matured and the funds were used to fund
loans. Real estate owned increased $328,800, or 349.04% as of September 30,
1997. The Bank was able to foreclose on several pieces of real estate which
were in nonaccrual status in the year ended September 30, 1996. The Federal
Home Loan Bank (FHLB) redeemed $415,400, or 26.36%, of the Bank's FHLB
stock during fiscal year ended September 30, 1997.
As mentioned previously, total deposits increased $8,335,479, or 6.86%. This
increase represents an increase in the local market for deposits, leading to
more attractive rates for depositors. With the increase in deposits, the
Bank was able to pay off some high interest FHLB advances, but due to
substantial loan demand, the Bank had to increase its outstanding FHLB
advances by $3,250,000 or 29.28%. These advances carry a much lower
interest rate than the maturing advances they replaced. Other borrowed
money decreased $92,000 during the year as Management decided to close a
line of credit held with another institution.
COMPARISON OF YEARS ENDED SEPTEMBER 30, 1996 AND 1995
Results of Operations
General
First Georgia Holding, Inc. reported net income of $761,366 in 1996, a
decrease of $515,722. This decrease is due primarily to the special one time
SAIF assessment of $727,704. Net income before this one time assessment is
$1,212,833. Net interest income after provision for loan losses increased a
total of $191,592. Other income decreased by a total of $264,919, and other
expenses, exclusive of the SAIF assessment, increased $122,620. Several
factors as discussed below contributed the increases and decreases in these
areas.
Interest Income
Total interest income increased $167,579 for the year, or 1.44%. The major
portion of this rise in interest income was in loans where interest income from
loans increased $114,442 or 1.05%. Average loans increased $1,610,772
during the year ended September 30, 1996, resulting in higher interest
36
<PAGE>
income. Mortgage-backed securities interest income increased $110,662, or
52.41% and investment securities income increased by a total of $82,061 or
27.74%. Because of increased deposit balances and the maturing of some
investments, the Bank was able to shift funds to higher yielding investments.
These investments carry a variable rate of interest that will tend to move
slower than other rates. Management feels that such investments are prudent
because they tend to protect the Bank from wide interest rate swings.
Other Interest Income
decreased by $139,586, or 56.37%, as the Bank shifted funds from its interest
earning deposits to the higher earning investment securities.
Interest Expense
Total interest expense increased $142,025, or 2.22% for the year. The increase
is attributable to an increase in average deposits of $4,453,923. In
anticipation of the sale of the Hinesville branch, the Bank offered
competitive rates to attract more deposits, which also increased interest
expense. Interest expense on advances and other borrowings fell $194,852,
or 18.35% as the Bank was able to pay down the principal on its line of
credit by $100,000. The Bank also paid several advances, as indicated by
the drop in the average balance of advances outstanding by $2,577,660.
Other Income
Other income decreased $264,919, or 20.88% for the year. The previous year's
gain from the sale of the Alma Branch, totaling $122,043, was absent this year,
causing a portion of the decrease. The Bank opened a new branch in Glynn
county upon the sale of the Alma office, so the loss of fee income was not
immediately offset as the new branch gained business. Consequently, loan fees
were down $68,358 or 15.15% and deposit fees were down $45,885 or 7.63%.
The new branch is growing steadily and should soon generate fee income to
replace that lost on the sale of the Alma branch. The Bank continued its
efforts to bank only high quality accounts where non-sufficient fund fees were
minimal.
Other Expenses
Other expenses increased $122,620, or 2.90% for the year, not including the
one time SAIF assessment. The FDIC assessed each thrift institution an amount
equal to 65.70 basis points of the institutions deposits at March 31, 1995 in
order to recapitalize the SAIF Insurance Fund. The assessment charged to this
institution was $727,704. The Bank's North Brunswick office opened in late
October of 1995. While the branch has seen excellent growth, its income has
not reached a level to offset the expense incurred in the organization of the
branch. Consequently, salaries expense increased $53,926 or 2.79% and net
occupancy expense increased $48,065 or 5.31%. Loss on the sale of real estate
owned was down $17,969 because the Bank was able to keep its foreclosed real
estate to a minimum for most of the year. Amortization of intangibles
decreased by $11,568, or 8.07% resulting from the write off of the intangible
associated with the Alma branch, which was sold last year. The Bank
continued to look for opportunities to reduce its other operating expenses
through better management of its people and the use of new technology. The
Bank continually examines each phase of its operation for opportunities to
reduce expenses.
Income Tax Expense
The Company incurred $364,386 in income tax expense for the year based on
applicable income tax rates at September 30, 1996.
Financial Condition
Total Assets of the Company increased $14,175,876 from September 30, 1995
to September 30, 1996. Loans were the driving force behind this increase, as
the net balances grew $11,999,236, or 10.87%. Loan demand remained strong
throughout fiscal 1996, and Management took advantage of this demand by
offering competitive loan products and exceptional service. Interest bearing
deposits in other Banks increased $602,167, or 25.60% during 1996. An
increase in deposits caused these short term investments to grow. Because of
high cash balances, the Bank increased its investment securities by $1,144,559
37
<PAGE>
or 12.47%. The objective is to earn a return on this money while protecting
the Bank from adverse interest rate risk. The real estate owned decreased
$112,134, or 54.35%. This continued decrease in real estate owned is
representative of Management's commitment to maintain higher quality loan
business and quick turnaround of its foreclosed property.
As mentioned previously, total deposits increased $15,026,768, or 14.11%.
This increase represents an increase in the local market for deposits,
leading to more attractive rates for depositors. With the increase in
deposit balances, the Bank was able to decrease its Federal Home Loan Bank
advances by $848,000 or 7.10%. Other borrowed money decreased $100,000
during the year due to increased liquidity.
Effect of Inflation and Changing Prices
First Georgia's consolidated financial statements and related data presented
herein have been prepared in accordance with generally accepted accounting
principles, which require the measurement of financial position and operating
results in terms of historical dollars, without considering changes in the
relative purchasing power of money over time due to inflation. Unlike
industrial companies, virtually all of the assets and liabilities of a
financial institution are monetary in nature. As a result, interest rates
have a more significant impact on a financial institution's performance than
the effects of general levels of inflation. Interest rates do not
necessarily move in the same direction or in the same magnitude as the
prices of goods and services. Non-interest expenses, however, do reflect
general levels of inflation.
Shareholder Information
A limited trading market has developed in the Company's common stock which
is quoted on the NASDAQ (National Association of Securities Dealers
Automated Quotation) National Market System under the symbol "FGHC." Set
forth below are the high and low sales prices of the Company's common stock
for each full quarterly period since October 1992. Such prices reflect inter-
dealer prices, without retail mark-up, mark-down, or commission, and may not
represent actual transactions.
Quarterly Period
High Low
October 1 - December 31, 1995 8 1/8 5 3/4
January 1 - March 31, 1996* 7 5/8 5 3/4
April 1 - June 30, 1996 7 1/4 6
July 1 - September 30, 1996 7 1/4 6
October 1 - December 31, 1996 9 1/4 6 1/4
January 1 - March 31, 1997** 7 5/8 7
April 1 - June 30, 1997 8 3/8 7
July 1 - September 30, 1997 9 3/4 7
*On February 29, 1996, the Company effected a 50% stock dividend in the
form of a 3 for 2 stock split.
**On February 28, 1997, the Company effected a 50% stock dividend in the
form of a 3 for 2 stock split.
At November 1, 1997, the Company had 257 shareholders of record. The
Company paid cash dividends of $0.053 per share in December 1996 and $0.043
per share in December 1995. The primary source of funds available to the
Company is the payment of dividends by the Bank. Banking regulations limit
the amount of dividends that may be paid without prior approval of the Bank's
regulators. Approximately $1,749,000 was available to be paid as dividends by
the Bank to the Company at September 30, 1997 upon regulatory approval.
38
<PAGE>
OFFICES
1703 Gloucester Street
Brunswick, Georgia 31520
912-267-7283
4510 Altama Avenue
Brunswick, Georgia 31520
912-267-0010
2461 Demere Road
St. Simons Island, Georgia 31522
912-638-7118
129 Highway 82, East
Blackshear, Georgia
912-449-4711
2001 Commercial Drive South
Brunswick, Georgia 31525
912-262-1500
Wal-Mart Supercenter
150 Altama Connector
Brunswick, Georgia 31525
912-280-9020
1010 Plant Avenue
Waycross, Georgia 31501
912-287-2265
OTHER INFORMATION
Transfer Agent:
First Georgia Bank
1703 Gloucester Street
Brunswick, Georgia 31520
Independent Auditors:
Deloitte & Touche LLP
Suite 2801, Independent Square
One Independent Drive
Jacksonville, Florida 32202
Legal Counsel:
James A. Bishop
Suite 40
First Federal Plaza
Brunswick, Georgia 31520
Special Counsel:
Powell, Goldstein, Frazer & Murphy
Sixteenth Floor
191 Peachtree Street, N.E.
Atlanta, Georgia 30303
39
<PAGE>
DIRECTORS AND OFFICERS
FIRST GEORGIA HOLDING, INC.
OFFICERS
HENRY S. BISHOP
Chairman and President, Chief Executive Officer
G. FRED COOLIDGE III
Secretary and Treasurer
DIRECTORS
HENRY S. BISHOP
Chairman of the Board, President, First Georgia Bank
B.W. BOWIE
Retired Senior Vice President, General Manager, and Director Federal Paper
Board Co.
M. FRANK DeLOACH, III
President, Culver & Deloach
TERRY DRIGGERS
President, Driggers Construction Company
ROY K. HODNETT
President, T.H.E., Inc. And The Island Inn
HUBERT W. LANG
President and Manager, Lang Building Supply, Inc.
E. RAYMOND MOCK
President, Mock Enterprises, Inc., Rayette Foods, Inc., KTP, Inc.
JAMES D. MOORE
President, J.D. Moore, Inc.
D. LAMONT SHELL
President, Glynn Electric Supply Co.
FIRST GEORGIA BANK, ALTAMA
ELZIE JACOBS
Vice President
FIRST GEORGIA BANK, BRUNSWICK
HENRY S. BISHOP
Chairman and President
G. FRED COOLIDGE III
Executive Vice President, Chief Financial Officer
DIANE A. BLAKEBROUGH
Vice President, Internal Auditor
CATHERINE BOYNE
Assistant Vice President
LAURA D. FRIEND
Vice President, Data Processing
SHERRYL JAMES
Assistant Vice President
JUDY DIXON
Assistant Vice President
ELI D. MULLIS
Assistant Vice President, Accounting
DIANE SHARPE
Loan Officer
GEORGE McMANUS
Loan Officer
JODI TODD
Assistant Vice President
SUSAN USSERY
Vice President
DORIS THOMAS
Senior Vice President
ROBERT STRANGE
Senior Vice President
MARK WESTBERRY
Vice President, Credit
FIRST GEORGIA BANK, NORTH BRUNSWICK
FRED ALEXANDER
Vice President
CHINITA DAVIS
Assistant Vice President
FIRST GEORGIA BANK, ST. SIMONS ISLAND
MEL BAXTER
Senior Vice President
PAUL SANDERS
Assistant Vice President
JAN WILDSMITH
Assistant Vice President, Operations Manager
FIRST GEORGIA BANK, WAYCROSS/BLACKSHEAR
JON TAHLIER
President
PAM TAYLOR
Vice President
LINDA WALKER
Assistant Vice President, Operations Manager
FIRST GEORGIA BANK, WAL-MART SHOPPING CENTER
RITA BOATRIGHT
Assistant Vice President
40
<PAGE>
43
<PAGE>
EXHIBIT 23.0
- --------------
INDEPENDENT ACCOUNTANTS' CONSENT
- --------------------------------
The Board of Directors
First Georgia Holding, Inc.
We consent to incorporation by reference in the registration statements (No. 33-
62245 and No. 33-62249) on Form S-8 of First Georgia Holding, Inc. of our
report dated November 14, 1997, relating to the consolidated balance sheet of
First Georgia Holding, Inc. and subsidiary as of September 30, 1997, and the
related consolidated statements of operations, stockholders' equity and cash
flows for the year ended September 30, 1997, which report appears in the
September 30, 1997 annual report on Form 10-KSB of First Georgia Holding,
Inc.
Deloitte & Touche LLP
Jacksonville, Florida
December 1, 1997
44
<PAGE>
EXHIBIT 23.1
- -------------
Independent Accountant's Consent
--------------------------------
The Board of Directors
First Georgia Holding, Inc.
We consent to incorporation by reference in the registration statements (No.
33-62245 and No. 33-62249) on Form S-8 of First Georgia Holding, Inc. of our
report dated November 1, 1996, relating to the consolidated balance sheet of
First Georgia Holding, Inc. and subsidiary as of September 30, 1996, and the
related consolidated statements of operation, stockholders' equity and cash
flows for the years ended September 30, 1996 and 1995 which report appears in
the September 30, 1997 annual report on Form 10-KSB of First Georgia Holding,
Inc.
KPMG PEAT MARWICK LLP
---------------------
KPMG PEAT MARWICK LLP
Atlanta, Georgia
December 23, 1997
45
<PAGE>
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 8-K/A
CURRENT REPORT
Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934.
Date of Report (Date of earliest event reported) May 1, 1997
First Georgia Holding, Inc.
(Exact Name of Registrant as
Specified in its charter)
Georgia 0-16657 58-
1781773
(State or jurisdiction (Commission (I.R.S. Employer
or incorporation or organization) File number) Identification
Number)
1703 Gloucester Street
Brunswick, GA 31520
(Address of principal
executive offices)
Registrant's telephone number, including area code: (912) 267-7283
45
<PAGE>
Item 4. Changes in Registrant's Certifying Accountant.
A. Effective May 1, 1997, First Georgia Holding, Inc. ("First
Georgia") dismissed its prior certifying accountants, KPMG Peat Marwick LLP
("KPMG") and retained as its new accountants, Deloitte & Touche LLP.
KPMG's report on First Georgia's consolidated financial statements during the
two most recent fiscal years contained no adverse opinion or a disclaimer of
opinions, and was not qualified as to uncertainty, audit scope or accounting
principles. The decision to change accountants was approved by First Georgia's
Board of Directors.
During the last two fiscal years and the subsequent interim
periods to the date hereof, there were no disagreements between First Georgia
and KPMG on any matters of accounting principles or practices, financial
statement disclosure, or auditing scope or procedure, which disagreements, if
not resolved to the satisfaction of KPMG, would have caused it to make a
reference to the subject matter of the disagreements in connection with its
reports.
None of the "reportable events" described in Item 304(a)(1)(v)
occurred with respect to First Georgia within the last two fiscal years and the
subsequent interim periods to the date hereof.
B. Effective May 1, 1997, First Georgia engaged Deloitte &
Touche LLP as its principal accountants. During the last two fiscal years and
the subsequent interim periods to the date hereof, First Georgia did not consult
Deloitte & Touche LLP regarding any of the matters or events set forth in Item
304(a)(2)(i) and (ii) of Regulation S-K.
Pursuant to the requirements of the Securities Exchange Act
of 1934, the registrant has duly caused this report to be signed on its behalf
by the undersigned hereunto duly authorized.
First Georgia Holding, Inc.
May 21, 1997 By: G. FRED COOLIDGE III
- ------------ G. FRED COOLIDGE, III
Secretary and Treasurer
<PAGE>
EXHIBIT 99
- ----------
Independent Auditors' Report
-----------------------------
The Board of Directors and Stockholders
First Georgia Holding, Inc.
Brunswick, Georgia
We have audited the consolidated balance sheet of First Georgia Holding, Inc.
and subsidiary as of September 30, 1996 and the related consolidated statements
of operations, stockholders' equity and cash flows for the years ended September
30, 1996 and 1995. These consolidated financial statements are the
responsibility of the Company's management. Our responsibility is to express
an opinion on these consolidated 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 our
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 First Georgia
Holding, Inc. and subsidiary at September 30, 1996 and the results of their
operations and their cash flows for the years ended September 30, 1996 and 1995,
conformity with generally accepted accounting principles.
KPMG PEAT MARWICK LLP
---------------------
KPMG PEAT MARWICK LLP
Atlanta, Georgia
November 1, 1996
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<FISCAL-YEAR-END> SEP-30-1997
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