FORM 10-QSB
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, 1998
--------------------
[ ] 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
FIRST GEORGIA HOLDING, INC.
---------------------------
(Name of Small Business Issuer)
Georgia 58-1781773
- - --------------------------------------------------------------------------------
(State or other jurisdiction of incorporation (IRS Employer Identification
or organization) Number)
1703 Gloucester Street, Brunswick, GA 31521
-----------------------------------------------
(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 $17,074,848 State the aggregate market value of the voting
stock held by non-affiliates of the registrant as of December 1, 1998: 4,798,972
Shares of Common Stock, $1.00 par value -- $40,791,262 based upon approximate
market value of $8.50 per share at December 1, 1998. State the number of shares
outstanding of each of the issuer's classes of common stock, as of December 1,
1998: Common Stock, $1.00 par value --4,798,972 shares
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 19, 1999 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, 1998 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 .............................. 34
Item 3. Legal Proceedings ...................................... 35
Item 4. Submission of Matters to a Vote of
Security Holders ..................................... 35
Part II
Item 5. Market for Common Equity and Related
Stockholder Matters .................................. 35
Item 6. Management's Discussion and Analysis or Plan ........... 35
Item 7. Financial Statements ................................... 35
Item 8. Changes in and Disagreements with Accountants
on Accounting and Financial Disclosure ............... 35
Part III
Item 9. Directors, Executive Officers, Promoters and
Control Persons; Compliance with
Section 16(a) of the Exchange Act .................... 36
Item 10.Executive Compensation.................................. 36
Item 11.Security Ownership of Certain
Beneficial Owners and Management ..................... 36
Item 12.Certain Relationships and Related
Transactions ......................................... 36
Item 13.Exhibits and Reports on Form 8-K 36
Signatures ..................................................... 38
Exhibit Index .................................................. 40
<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 an 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. <PAGE>
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.
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 four automated 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 $2,014,402 in 1998, an
increase of $420,737 over 1997. Net interest income after provision for
loan losses increased a total of $1,704,464, and other income increased by a
total of $354,415, and other expenses increased $1,258,764 over 1997.
Return on Average Assets and Equity
Return on average assets for the year ended September 30, 1998 was 1.21% as
compared to 1.04% for the year ended September 30, 1997. Return on average
equity for the year ended September 30, 1998 was 14.60% compared to 12.55% for
the year ended September 30, 1997. These increases were due primarily to an
increase in loan volumes and deposit balances.
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,
--------------------------
1998 1997
--------------------------
Return on Average Assets 1.21% 1.04%
Return on Average Equity 14.60% 12.55%
Average Equity to Average Assets 8.29% 8.28%
Dividend Payout Ratio 15.88% 10.22%
<PAGE>
SELECTED STATISTICAL INFORMATION (Cont'd)
AVERAGE BALANCE SHEET
September 30,
-----------------------------------
1998 1997
-----------------------------------
Cash and due from banks $ 1,584,680 3,524,884
Federal funds sold 2,548,582 -
Interest-bearing deposits in other banks 117,717 3,618,065
Investment securities held to maturity 10,191,649 10,585,567
Loans receivable, net 148,704,293 127,953,987
Real estate owned 524,438 249,500
Federal Home Loan Bank stock 1,160,300 1,160,300
Premises and equipment, net 3,761,644 3,190,698
Intangible assets, net 969,200 1,104,133
Accrued interest receivable 1,049,348 916,855
Other assets 5,765,138 1,089,037
----------- -----------
176,376,989 153,393,026
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities:
Deposits 145,008,705 124,790,096
Federal Home Loan Bank advances 12,620,310 12,491,666
Other borrowed money 659,201 88,333
Accrued expenses and other liabilities 3,750,244 3,319,512
----------- -----------
162,038,460 140,689,607
Stockholders' equity 14,338,529 12,703,419
----------- -----------
Total liabilities and stockholders equity 176,376,989 153,393,026
=========== ===========
<PAGE>
Years Ended September 30,
--------------------------------
1998 1997
--------------------------------
Interest earned on:
Loans $ 14,234,483 11,975,499
Investment securities 699,616 610,423
Other 143,615 198,010
--------------------------------
Total interest income 15,077,714 12,783,932
--------------------------------
Interest paid on:
Deposits 7,021,354 6,175,696
Federal Home Loan Bank advances
and other borrowings 810,335 763,159
--------------------------------
Total Interest expense 7,831,689 6,938,855
--------------------------------
NET INTEREST EARNED $ 7,246,025 5,845,077
================================
Average percentage earned on:
Loans 9.57% 9.36%
Taxable investment securities 6.84% 5.76%
Other 5.39% 5.47%
Total interest earning assets 9.33% 8.99%
Average percentage paid on:
Deposits 5.04% 4.95%
Federal Home Loan Bank advances
and other borrowings 6.10% 6.07%
Total interest bearing liabilities 5.13% 5.05%
NET YIELD ON INTEREST EARNING ASSETS 4.48% 4.11%
================================
"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.
<PAGE>
Lending Activities
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 $151,253,000 at
September 30, 1998, representing approximately 79% of its total assets. On that
date, approximately 68% 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. <PAGE>
LOAN ANALYSIS
September 30,
------------------------------------
1998 1997
------------------------------------
Loans by Type of Security: (In Thousands)
Real Estate Loans:
Residential:
One-four family:
Conventional $ 88,002 36.48% 77,272 56.05%
FHA-VA 245 0.10% 253 0.18%
Multi-family conventional 1,761 0.73% 462 0.33%
----------------------------------------
Total residential 90,008 37.31% 77,987 56.56%
Commercial property 24,492 10.15% 24,431 17.72%
Land development and other 15,438 6.40% 16,997 12.33%
Less loans held for sale - 0.00% - 0.00%
----------------------------------------
Total real estate loans 129,938 53.86% 119,415 86.61%
Non-real estate loans 22,423 9.29% 19,522 14.16%
Unearned interest income (56) -0.02% (73) -0.05%
Allowances for loan losses (969) -0.40% (1,012) -0.73%
Deferred loan (fees) cost (83) -0.03% 13 0.01%
----------------------------------------
Total $ 241,261 100.00% 215,852 100.00%
========================================
<PAGE>
LOAN ANALYSIS (Continued)
September 30,
-----------------------------------------
1998 1997
-----------------------------------------
Loans by Type of Loan: Thousands)
Real Estate Loans:
Loans on existing property:
Fixed rate $25,996 17.19% 21,713 15.75%
One year ARM and variable rate(1) 76,005 50.25% 79,137 57.40%
Three year ARM 828 0.55% 1,568 1.13%
Construction loans 27,109 17.92% 16,997 12.33%
Less loans held for sale - 0.00% - 0.00%
-----------------------------------------
Total real estate loans 129,938 85.91% 119,415 86.61%
Consumer loans 11,830 7.82% 10,384 7.53%
Commercial and other loans 10,593 7.00% 9,138 6.63%
Unearned interest income (56) -0.04% (73) -0.05%
Allowance for loan losses (969) -0.64% (1,012) -0.73%
Deferred loan (fees) cost (83) -0.05% 13 0.01%
-----------------------------------------
Total 151,253 100.00% 137,865 100.00%
=========================================
(1) An ARM is an adjustable rate mortgage
<PAGE>
LOAN MATURITY SCHEDULE
The following table sets forth certain information at September 30, 1998
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
1998.
Maturities during year Real Estate Real Estate Commercial
ended September 30, Mortgage Construction Consumer and other Total
- - --------------------------------------------------------------------------------
(In Thousands)
1999 $ 23,192 18,665 4,962 4,725 51,544
2000 7,407 8,444 1,970 2,298 20,119
2001 3,354 - 1,972 895 6,221
2002 2,404 - 1,852 818 5,074
2003-2007 8,408 - 815 1,527 10,750
2008-2012 13,397 - 200 330 13,927
After 2012 44,667 - 59 - 44,726
----------------------------------------------------------
Total $ 102,829 27,109 11,830 10,593 152,361
==========================================================
Less: Unearned interest income (56)
Allowance for Loan losses (969)
Deferred Loan Fees (83)
--------------
$ 151,253
==============
The next table sets forth the dollar amount of all loans due more than one
year after September 30, 1998 which have predetermined interest rates and which
have floating or adjustable interest rates.
Commercial
Real Estate Real Estate and
Mortgage Construction Consumer Other Total
---------------------------------------------------
(In Thousands)
Predetermined rates $ 25,910 129 7,910 3,939 37,888
Floating or adjustable
rates 60,260 26,839 1,179 4,810 93,088
---------------------------------------------------
$ 86,170 26,968 9,089 8,749 130,976
=========== =======================================
<PAGE>
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, 1998, the Bank
had 168% 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
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.
<PAGE>
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, 1998, approximately $27,109,000 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 $11,830,000 at
September 30, 1998.
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 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 <PAGE>
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, 1998,
the Bank had approximately $8,964,000 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.
<PAGE>
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 and
private mortgage insurance premiums.
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, 1998, the Bank was servicing loans for others
of approximately $9,050,000.
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, 1998 the Bank had
loan commitments outstanding of approximately $702,000 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.
<PAGE>
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. 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, 1998, the following amounts of loans were classified as
follows:
Special Mention $3,157,000
Substandard 3,008,000
Doubtful -
Loss -
------------------
$6,165,000
==================
Nonaccrual, Past Due and Restructured Loans
The Bank has approximately $2,364,000 of loans in nonaccrual status at September
30, 1998. The Bank had approximately $1,959,000 of loans in nonaccrual status at
September 30, 1997. 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,
1998 actually accrued interest for the full fiscal year, approximately $50,000
of additional interest income would have been added to fiscal 1998 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.
<PAGE>
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 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, 1998 and 1997 are presented in the following table.
<TABLE>
September 30, 1998 September 30, 1997
-----------------------------------------------
Percent Percent
of loans of loans
in each in each
Amount Category Amount Category
-----------------------------------------------
<S> <C> <C> <C> <C>
(In Thousands)
Balance at the end of the year applicable to:
Commercial, financial, and agricultural $ 143 6.95% $ 150 6.58%
Real estate-construction 34 17.79% 35 12.23%
Real estate-mortgage 287 67.49% 300 73.72%
Consumer 38 7.77% 40 7.47%
Unallocated 467 N/A 487 N/A
----------------------------------------------
$ 969 100.00% $1,012 100.00%
===============================================
</TABLE>
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.
Other
The Company has no foreign operations and, accordingly, there are no assets or
liabilities attributed to foreign operations.
At September 30, 1998, 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, 1998 the investment portfolio totaled approximately $11,565,000.
<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, 1998:
Investment securities:
Mortgage-backed securities and SBA's $ 10,720,230 6.25% 10,908,217
State and municipal bonds 845,000 6.95% 859,349
--------------------------------
$ 11,565,230 6.30% 11,767,566
================================
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
==================================
A summary of investment and mortgage-backed securities by maturities as of
September 30, 1998 follows:
Weighted
Amortized Average
Cost Yield Fair Value
----------------------------------------
Investment Securities:
Within 1 year $ - - -
After 1 year through 5 years 1,223,390 6.92% 1,242,008
After 5 years through 10 years 244,798 7.43% 248,348
After 10 years 10,097,042 6.20% 10,277,210
----------------------------------------
$ 11,565,230 6.30% 11,767,566
========================================
<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, 1998 vs. Year
Ended September 30, 1997
-----------------------------------
(In Thousands) Total Rate Volume
Interest income:
Loans $ 2,259 275 1,984
Investment securities 89 112 (23)
Interest-bearing deposits in other banks (54) (3) (51)
----------------------------------
Total interest-earning assets 2,294 384 1,910
----------------------------------
Interest expense:
Deposits 846 85 761
Federal Home Loan Bank advances and
other borrowings 47 4 43
----------------------------------
Total interest-bearing liabilities 893 89 804
----------------------------------
Net interest income $ 1,401 295 1,106
==================================
Year Ended September 30, 1997 vs. Year
Ended September 30, 1996
------------------------------------
(In Thousands) Total Rate Volume
Interest income:
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
=================================
<PAGE>
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, 1998 and 1997 were represented by
the various types of programs described as follows:
<PAGE>
<TABLE>
DEPOSITS AT SEPTEMBER 30, 1998
Balance
Minimum Weighted (Dollars in Percentage of
Type of Account Term Amount Average Rate Thousands) Total Deposits
- - --------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Easy Checking $ - - 4,320 2.65%
Commercial Checking - - 8,689 5.33%
NOW Accounts 750 1.25% 16,732 10.27%
Super NOW and MMDA 1,000 2.30% 8,895 5.46%
Statement Savings 100 2.35% 6,972 4.28%
Certificate of deposit accounts:
Jumbo certificates: 30 days to 5 years 100,000 5.69% 20,874 12.81%
Other time deposits:
3 months 3-5 months 1,000 4.56% 2,757 1.69%
6 months 6-11 months 1,000 5.55% 12,092 7.42%
1 year 12-17 months 500 5.98% 3,554 2.18%
1 years 18-23 months 500 5.98% 31,424 19.29%
2 years 24--29 months 500 6.15% 1,176 0.72%
2 years 30-35 months 500 6.15% 16,836 10.34%
3 years 36-41 months 500 6.09% 2,583 1.59%
3 years 42-47 months 500 6.09% 87 0.05%
4 years 48-59 months 500 5.81% 772 0.47%
5 years 60 months 500 6.39% 6,951 4.27%
18 month IRA 18 months 500 6.14% 17,972 11.03%
Other 30 days $ 500 4.63% 204 0.13%
---------------- --------------------
5.69% 162,890 100.00%
================ ====================
</TABLE>
Deposits at September 30, 1997 are represented on the next page.
<PAGE>
<TABLE>
DEPOSITS AT SEPTEMBER 30, 1997
Balance
Minimum Weighted (Dollars in Percentage of
Type of Account Term Amount Average Rate Thousands) Total Deposits
- - --------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
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 years 18-23 months 500 6.21% 433 0.33%
2 years 24--29 months 500 6.21% 6,196 4.77%
2 years 30-35 months 500 5.91% 1,303 1.00%
3 years 36-41 months 500 5.91% 6,067 4.67%
3 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.$7% 129,890 100.00%
================ ====================
</TABLE>
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.
<PAGE>
The following table sets forth the composition of deposits, excluding accrued
interest payable, by type and interest rate at the dates indicated.
September 30,
-------------------------------
1998 1997 1996
-------------------------------
Access accounts:
Commercial checking - 0.00% $ 13,011 5,992 6,266
NOW accounts - 1.25% 16,732 11,429 11,599
Money Market deposit account - varable rate 8,895 4,756 2,410
Statement savings - 2.30% 6,972 4,320 4,565
Certificates of deposits:
2.75% - 5.00% 1,975 2,564 6,408
5.01% - 7.00% 109,912 98,628 81,918
7.01% - 9.00% 5,393 2,201 8,389
-------------------------------
Subtotal 162,890 129,890 121,555
Accrued interest 573 496 548
-------------------------------
Total $ 163,463 130,386 122,103
===============================
<TABLE>
TIME DEPOSIT MATURITIES
Balances at September 30,
- - ----------------------------------------------------------------------------------------------------
Interest Rates 1999 2000 2001 2002 Thereafter Total
- - ----------------------------------------------------------------------------------------------------
(In Thousands)
<S> <C> <C> <C> <C> <C> <C> <C>
2.75% - 5.00% $ - 6 - - 47 53
5.01% - 7.00% 85,185 19,939 4,174 1,732 4,396 115,426
7.01% - 9.00% 519 880 - 201 203 1,803
9.01% - 11.00% - - - - - -
---------------------------------------------------------------------------
$ 85,704 20,825 4,174 1,933 4,646 117,282
===========================================================================
<PAGE>
JUMBO CD MATURITIES
Maturity September 30, 1998
----------- --------------------
(In Thousands)
Three months or less $ 3,905
Three to six months 4,886
Six to twelve months 4,627
Over twelve months 7,456
------------
Total $ 20,874
============
AVERAGE DEPOSITS BY TYPE
September 30, 1998 September 30, 1997
--------------------- --------------------
Weighted Weighted
Average Average Average Average
Balance Rate Balance Rate
--------------------- --------------------
(In Thousands)
Non-interest bearing deposits $ 9,873 - 6,394 -
NOW's 13,471 1.25% 11,633 1.25%
MMDA's 6,894 2.35% 3,226 2.35%
Savings 5,372 2.30% 4,384 2.30%
Time Deposits 109,398 6.00% 99,153 5.94%
----------------- -------------------
Total average deposits $ 145,008 5.04% 124,790 4.97%
================= ===================
<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:
1998 1997
-----------------------------------------------
Due During Year Ending Weighted Weighted
September 30, Amount Average Rate Amount Average Rate
- - --------------------------------------------------------------------------------
1998 $ - - 7,750,000 5.90%
1999 2,100,000 2,100,000 6.19%
2000 3,000,000 6.77% 3,000,000 6.77%
2001 500,000 7.90% 500,000 7.90%
2002 1,000,000 5.66% 1,000,000 5.66%
2008 2,000,000 5.51% - -
------------------------------------------------
$ 8,600,000 6.27% 14,350,000 5.79%
================================================
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.
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,
----------------------------------------------
1998 1997 1996
----------------------------------------------
Balance outstanding $ 8,600,000 14,350,000 11,100,000
Weighted average rate 6.27% 5.79% 6.44%
Maximum amount of short-term
borrowings outstanding at any
month end $11,600,000 10,150,000 5,198,000
Approximate average short-term
borrowings outstanding $ 7,688,427 7,100,000 4,092,000
Approximate weighted average
paid on short-term borrowings(1) 4.98% 6.47% 7.27%
- - -------------------------------------------------------------------------------
(1) The average method used is the average end of month totals
<PAGE>
Employees
At September 30, 1998, the Bank employed 101 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.
Forward Looking Statements
This Annual Report on Form 10-KSB, other periodic reports filed by the Company
under the Securities Exchange Act of 1934, as amended, and any other written or
oral statements made by or behalf of the Company may include forward looking
statements which reflect the Company's current views with respect to future
events and financial performance. Such forward looking statements are based on
general assumptions and are subject to various risks, uncertainties and other
factors that may cause actual results to differ materially from the views,
beliefs and projections expressed in such statements. These risks, uncertainties
and other factors include, but are not limited to:
(a) Possible changes in economic and business conditions that may affect the
prevailing interest rates, the prevailing rates of inflation or the amount of
growth, stagnation or recession in the global, U.S. and southeastern U.S.
economies, the value of investments, collectibility of loans, and the
profitability of business entities;
(b) Possible changes in monetary and fiscal policies, laws and regulations, and
other activities of governments, agencies and similar organizations;
(c) The effects of easing of restrictions on participants in the financial
services industry, such as banks, securities brokers and dealers, investment
companies and finance companies, and attendant changes in patterns and effects
of competition in the financial services industry.
(d) The cost and other effects of legal and administrative cases and
proceedings, claims, settlements and judgments;
(e) The ability of the Company to achieve the earnings expectations related to
the acquired operations of recently-completed and pending acquisitions, which
depends on a variety of factors, including (i) the ability of the Company to
achieve the anticipated cost savings and revenue enhancements with respect to
the acquired operations, (ii) the assimilation of the acquired operations to the
Company's corporate culture, including the ability to instill the Company's
credit practices and efficient approach to the acquired operation, (iii) the
continued growth of the markets in which the Company operates consistent with
recent historical experience, (iv) the absence of material contingencies related
to the acquired operations, including asset quality and litigation
contingencies, and (v) the Company's ability to expand into new markets and to
maintain profit margins in the fact of pricing pressures.
<PAGE>
The words "believe," "expect," "anticipate," "project" and similar expressions
signify forward looking statements. Readers are cautioned not to place undue
reliance on any forward looking statements made by or on behalf of the Company.
Any such statements speak only as of the date the statement was made. The
Company undertakes no obligation to update or revise any forward looking
statements.
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. 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 an unaffiliated savings institution or
savings and loan holding company without regulatory approval.
<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
million) 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 4.0% 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%.
OTS regulations also include an interest-rate risk in 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 requirement does not 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.
<PAGE>
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
Tier 1 Risk-Based Risk-Based
Capital Capital Capital Other
- - --------------------------------------------------------------------------------
Well capitalized 5% or more 10% or above 6% or above Not subject
to a capital
directive
Adequately capitalized 4% or more 8% or above 4% or above --
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.
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.
<PAGE>
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.
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 (i) 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 or (ii) 75% of its net income over the most recent
four-quarter period. 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 4%. 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.
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.
<PAGE>
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 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. Bank's CRA performance will be assessed pursuant to the
following criteria: (i) the Bank's loan to deposit ratio, adjusted for seasonal
variation and as appropriate, other related lending activities such as loan
originations for sale to the secondary markets, community development loans or
qualified investments; (ii) the percentage of loans and, as appropriate, other
lending related activities located in the Bank's assessment area; (iii) the
Bank's record of lending to and, as appropriate, engaging in other lending
related activities for borrowers of different income levels and businesses and
farms of different sizes; (iv) the geographic distribution of the Bank's loans;
and (v) the Bank's record of taking action if warranted in response to written
complaints about its performance in helping to meet credit needs in its
assessment area.
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 against
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.
<PAGE>
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 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 submitted a report
to Congress on the development of a common charter for all insured depository
institutions. However, no Congressional action has been taken. 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 $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.
<PAGE>
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.
Elimination of Federal Savings Association Charter
Legislation that would eliminate the federal savings bank 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.
<PAGE>
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 owned $807,491
Brunswick, GA 31520
Full Service Offices
Altama Avenue Office
4510 Altama Avenue 7/28/98 --
Brunswick, GA 31520
Demere Village
2461 Demere Road owned $242,975
St. Simons Island, GA 31522
North Brunswick Office
2001 Commercial Drive South owned $533,496
Brunswick, GA 31525
Wal-Mart Supercenter
150 Altama Connector 10/10/98 --
Brunswick, GA 31525
Waycross
1010 Plant Avenue owned $179,822
Waycross, GA 31501
Blackshear
129 Highway 82 East owned $ 21,872
Blackshear, GA 31516
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
<PAGE>
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, 1998 and 1997 and for each of the years in the three year period
ended September 30, 1998, 1997, and 1996, and the report issued on the 1998
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
recommended and approved by the Audit Committee of the Board of Directors.
4. There were no disagreements with KPMG Peat Marwick LLP on any matter of
accounting principles or practices, 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
<PAGE>
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:
No reports on Form 8-K were filed during the year ended September 30, 1998.
<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
President
Date: December 21, 1998
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.
<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 President and December 21, 1998
- - --------------- Director (principal
Henry S. Bishop executive officer)
B.W. BOWIE Director December 21, 1998
- - --------------
B.W. Bowie
M. FRANK DELOACH III Director December 21, 1998
- - -------------------
M. Frank Deloach III
TERRY DRIGGERS Director December 21, 1998
- - ---------------
Terry Driggers
ROY K. HODNETT Director December 21, 1998
- - ---------------
Roy K. Hodnett
E. RAYMOND MOCK Director December 21, 1998
- - ----------------
E. Raymond Mock
JAMES D. MOORE Director December 21, 1998
- - ---------------
James D. Moore
D. LAMONT SHELL Director December 21, 1998
- - ----------------
D. Lamont Shell
G.F. COOLIDGE III Chief Financial December 21, 1998
- - ----------------- Officer (principal
G.F. Coolidge III financial and
accounting officer)
<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
*10.5 Amend ment to the First Georgia Holding, Inc.
1995 Stock Incentive Plan. 43
13 First Georgia Holding, Inc. 1998 Annual Report 45
<PAGE>
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
23 Consent of Deloitte & Touche LLP 41
23.1 Consent of KPMG Peat Marwick LLP 42
24 A power of attorney is set forth on the
signature pages to this Form 10-KSB 37
99 Independent auditors' report -
KPMG Peat Marwick LLP 46
<PAGE>
EXHIBIT 23
Consent of Deloitte & Touche LLP
INDEPENDENT ACCOUNTANTS' CONSENT
The Board of Directors
First Georgia Holding, Inc.
We consent to incorporation by reference in the registration statements
(N0.33-62245 and No. 33-62249) on Form S-8 of First Georgia Holding, Inc. of our
report dated November 13, 1998, relating to the consolidated balance sheet of
First Georgia Holding, Inc. and subsidiary as of September 30, 1998 and 1997,
and the related consolidated statements of operations, stockholders' equity and
cash flows for the years ended September 30, 1998 and 1997, which report appears
in the September 30, 1998 annual report on Form 10-KSB of first Georgia Holding,
Inc.
December 21, 1998
<PAGE>
EXHIBIT 23.1
Consent of KPMG Peat Marwick LLP
INDEPENDENT ACCOUNTANTS' CONSENT
The Board of Directors
First Georgia Holding, Inc.
We consent to incorporation by reference in the registration statements
(N0.33-62245 and No. 33-62249) on Form S-8 of First Georgia Holding, Inc. of our
report dated November 1, 1996, relating to the consolidated statements of
operations, stockholders' equity and cash flows of First Georgia Holding, Inc.
and subsidiary as of September 30, 1998 and 1997, and the related consolidated
statements of operations, stockholders' equity and cash flows for the year ended
September 30, 1996 which report appears in the September 30, 1998 annual report
on Form 10-KSB of first Georgia Holding, Inc.
Atlanta, Georgia
December 28, 1998
<PAGE>
EXHIBIT 10.5
Amendment to the First Georgia Holding, Inc. Stock Incentive Plan
APPENDIX A
FIRST AMENDMENT TO THE FIRST GEORGIA HOLDING, INC.
1995 STOCK INCENTIVE PLAN
THIS FIRST AMENDMENT is made as of this 8th day of September, 1998, by
First Georgia Holding Inc., a corporation organized and existing under the laws
of the State of Georgia (the "Company").
W I T N E S S E T H:
WHEREAS, the Company maintains the First Georgia Holding, Inc. 1995 Stock
Incentive Plan under an indenture which was adopted as of July 17, 1995, (the
"Plan");
WHEREAS, the Company desires to amend the Plan to reflect an increase in
the number of shares authorized for issuance thereunder; and
WHEREAS, the Board of Directors of the Company has duly approved and
authorized this amendment to the Plan;
NOW, THEREFORE, the Company does hereby amend the Plan, effective as of
the date first set forth above, as follows:
1. By deleting Section 2.2 of the Plan in its entirety and by substituting
therefor the following new Plan Section 2.2:
"2.2 Stock Subject to the Plan. Subject to adjustment in accordance with Section
4.1, 688,750 shares of Stock (the `Maximum Plan Shares') are hereby reserved
exclusively for issuance pursuant to Options. At no time shall the Company have
outstanding Options and shares of Stock issued in respect of Options under the
Plan in excess of the Maximum Plan Shares, determined in accordance with Rule
16b- 3(a)(1) as promulgated under the Securities Exchange Act of 1934, as
amended from time to time."
2. Except as specifically amended hereby, the Plan shall remain in full force
and effect as prior to the adoption of this First Amendment.
3. Notwithstanding the foregoing, the adoption of this First Amendment is
subject to the approval of the stockholders of the Company and in the event that
the stockholders of the Company fail to approve such adoption within twelve
months from the date first set forth above, the adoption of this First Amendment
shall be null and void.
<PAGE>
IN WITNESS WHEREOF, the Company has caused this First Amendment to be
executed on the day and year first above written.
FIRST GEORGIA HOLDING, INC.
By: HENRY S. BISHOP
-----------------------
Title: Chairman and President
-------------------------
ATTEST:
By: G. FRED COOLIDGE
--------------------
Title: Secretary and Treasurer
--------------------------
(CORPORATE SEAL)
<PAGE>
EXHIBIT 13
First Georgia Holding, Inc. 1998 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 three 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.
- - --------------------------------------------------------------------------------
<PAGE>
PRESIDENT'S MESSAGE
- - --------------------------------------------------------------------------------
Dear Stockholders:
I am pleased to report the results of the best year in First Georgia Bank's
fourteen-year history. As you review the financial highlights in this report,
you will note that Total Assets increased $30,761,042 and Total Deposits
increased $33,000,169. Of particular importance, Net Income of $2,014,402,
represents a 26% increase over last year's earnings.
The financial climate in Coastal Georgia has changed dramatically over the past
year. It is evident by our growth that our customers appreciate doing business
with a bank that offers the latest financial products, combined with local
banking decisions and outstanding personal service.
During the past year, we introduced new products such as the MasterMoney debit
card, First Line home equity line of credit, Check Imaging, Free Checking, and
Saturday banking at our St. Simons Office. In May, we opened our permanent
Highway 341 North Office, which serves that growing area of Glynn County.
Additionally, we installed a state-of-the-art, Y2K compliant computer system
that allows our customers to enjoy the latest in banking technology.
First Georgia was recognized this past year by several organizations. In May,
First Georgia Holding Company was named to the Atlanta Journal Constitution's
Georgia Top 100 Best of Business, First Georgia Holding being the only company
headquartered in Glynn County to receive this honor. This summer, we were
awarded a five-star rating for strength, performance and safety by Bauer
Financial Reports.
In November of this year, we were all saddened by the death of our long-time
Director and friend, Hubert Lang. He had served as Director of the First Georgia
Bank and First Georgia Holding Company since its organization and was always an
enthusiastic supporter of our Company. His counsel and insight will be greatly
missed.
We look forward to the challenges of 1999 with great optimism and enthusiasm. As
always, we extend our sincere appreciation for your support.
Sincerely,
HENRY S. BISHOP
Henry S. Bishop
Chairman, President and CEO
<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, 1998 and 1997 (With Independent Auditors' Report Thereon)
- - --------------------------------------------------------------------------------
<PAGE>
CONSOLIDATED BALANCE SHEETS
- - -----------------------------
First Georgia Holding, Inc. and subsidiary
Assets September 30,
-------------------------------------
1998 1997
-------------------------------------
Cash and cash equivalents:
Cash and due from banks $ 4,433,585 $ 2,985,350
Federal funds sold 12,180,000 -
Interest bearing deposits in other banks 1,096,581 1,523,777
----------- -----------
Cash and cash equivalents 17,710,166 4,509,127
Investment securities held to maturity, fair
value approximately $11,768,000 and
$9,692,000 at September 30, 1998 and 1997,
respectively (note 2) 11,565,230 9,634,453
Loans receivable, net of allowance for loan
loss of $968,632 and $1,012,322 at
September 30, 1998 and 1997, respectively
(notes 3 and 7) 151,252,636 137,864,633
Real estate owned 644,084 423,000
Federal Home Loan Bank stock, at cost (note 7) 1,160,300 1,160,300
Premises and equipment, net (note 4) 4,502,239 3,181,618
Accrued interest receivable (note 5) 1,052,830 960,160
Intangible assets, net 917,995 1,029,715
Deferred income taxes (note 9) 157,004
Other assets 1,064,613 781,487
-------------- --------------
Total Assets $ 190,462,539 $ 159,701,497
============== ==============
Liabilities and Stockholders' Equity
Liabilities:
Deposits (note 6) $ 162,890,105 $ 129,889,936
Federal Home Loan Bank advances (note 7) 8,600,000 14,350,000
Accrued interest payable 572,581 496,305
Obligations under capital lease (note 10) 229,098 245,659
Accrued expenses and other liabilities 2,489,543 1,372,327
------------ ------------
Total liabilities 174,781,327 146,354,227
============ ============
Commitments and contingencies (notes 3, 10
and 16)
Stockholders' equity (notes 8 and 13):
Common stock, $1.00 par value; 10,000,000 shares authorized; 4,798,972 and
4,578,478 shares issued and outstanding at
September 30, 1998 and 1997, respectively 4,798,972 4,578,478
Additional paid-in capital 3,116,021 2,697,038
Retained earnings 7,766,219 6,071,754
----------- ------------
Total stockholders' equity 15,681,212 13,347,270
----------- ------------
Total Liabilities and Stockholders' Equity $190,462,539 $ 159,701,497
============ ============
<FN>
See accompanying notes to consolidated financial statements.
</FN>
<PAGE>
CONSOLIDATED STATEMENTS OF OPERATIONS
- - --------------------------------------
First Georgia Holding, Inc. and subsidiary
Years Ended September 30,
---------------------------------------
1998 1997 1996
------------ ----------- ----------
Interest Income:
Loans $ 14,234,483 11,975,499 10,986,155
Mortgage-backed securities 537,219 314,956 321,798
Investment securities 162,397 295,467 377,934
Other 143,615 198,010 108,029
------------ ----------- ----------
Total interest income 15,077,714 12,783,932 11,793,916
------------ ----------- ----------
Interest Expense:
Deposits (note 6) 7,021,354 6,175,696 5,682,330
Advances and other borrowings 810,335 763,159 867,052
------------ ----------- ----------
Total interest expenses 7,831,689 6,938,855 6,549,382
------------ ----------- ----------
Net interest income 7,246,025 5,845,077 5,244,534
Provisions for Loan Losses (note 3) 6,163 309,679 48,104
------------ ----------- ----------
Net interest income after provisions
for loan losses 7,239,862 5,535,398 5,196,430
------------ ----------- ----------
Other Income:
Loan fees 940,526 473,890 382,841
Deposit service charges 961,006 689,152 555,174
Gain on sale of branch (note 11) - 433,760 -
Other operating income 95,602 45,917 65,882
------------ ----------- ----------
Total other income 1,997,134 1,642,719 1,003,897
------------ ----------- ----------
Other Expenses:
Salaries and employee benefits 2,940,466 2,324,280 1,986,763
Net occupancy expense 1,234,569 1,064,499 952,724
Data processing expenses 172,184 13,744 10,572
Office supplies 176,128 106,899 114,241
Amortization of intangibles 111,720 119,625 131,736
Federal insurance premiums 82,971 111,267 254,944
SAIF special assessment - - 727,704
Other operating expenses 1,286,717 1,005,677 895,891
------------ ----------- ----------
Total other expenses 6,004,755 4,745,991 5,074,575
------------ ----------- ----------
Income before income taxes 3,232,241 2,432,126 1,125,752
Income tax expense (note 9) 1,217,839 838,461 364,386
------------ ----------- ----------
Net Income $ 2,014,402 $ 1,593,665 $ 761,366
============ =========== ==========
Net Income per share:
Basic $ 0.42 $ 0.35 $ 0.17
============ =========== ==========
Diluted $ 0.40 $ 0.33 $ 0.16
============ =========== ==========
<PAGE>
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
- - -----------------------------------------------
First Georgia Holding, Inc. and subsidiary
</TABLE>
<TABLE>
Years Ended September 30, 1998, 1997 and 1996
-------------------------------------------------------------
Additional Retained
Common Stock Paid-in Capital Earnings Total
--------------- --------------- ------------- ------------
<S> <C> <C> <C> <C>
Balance, September 30, 1995 $ 2,984,819 $ 4,128,689 $ 4,012,181 $ 11,125,689
Three-for-two stock split in 1998 1,492,409 (1,492,409) -- --
--------------- --------------- ------------- ------------
Balance, September 30, 1995,
as adjusted 4,477,228 2,636,280 4,012,181 11,125,689
Exercise of stock options 101,250 (16,125) -- 85,125
Income tax benefit resulting from
exercise of stock options -- 76,883 -- 76,883
Net income -- -- 761,366 761,366
Cash dividends, $0.0290 per share -- -- (132,664) (132,664)
--------------- --------------- ------------- ------------
Balance, September 30, 1996 4,578,478 2,697,038 4,640,883 11,916,399
Net income -- -- 1,593,665 1,593,665
Cash dividends, $0.0353 per share -- -- (162,794) (162,794)
--------------- --------------- ------------- ------------
Balance, September 30, 1997 4,578,478 2,697,038 6,071,754 13,347,270
Exercise of stock options 220,549 19,115 -- 239,664
Income tax benefit resulting from
exercise of stock options -- 400,762 -- 400,762
Net income -- -- 2,014,402 2,014,402
Cash dividends, $0.0667 per share -- -- (319,937) (319,937)
Fractional shares related to
stock split paid in cash (55) (894) -- (949)
--------------- --------------- ------------- ------------
Balance, September 30, 1998 $ 4,798,972 $ 3,116,021 $ 7,766,219 $ 15,681,212
=============== =============== ============= ============
</TABLE>
[FN]
See accompanying notes to consolidated financial statements.
</FN>
<PAGE>
CONSOLIDATED STATEMENTS OF CASH FLOWS
- - -------------------------------------
First Georgia Holding, Inc. and subsidiary
<TABLE>
Year Ended September 30,
---------------------------------------------
1998 1997 1996
------------- ------------ ------------
<S> <C> <C> <C>
Operating Activities
Net income $ 2,014,402 $ 1,593,665 $ 761,366
Adjustments to reconcile net income to net cash
provided by operating activities:
Provision for loan losses 6,163 309,679 48,104
Depreciation and amortization, net of accretion 571,186 418,988 381,871
Amortization of intangibles 111,720 119,625 131,736
Amortization of net deferred loan (fees) costs (96,007) (1,230) 24,672
Gain on sale of branch -- (433,760) --
Gain on sale of real estate owned (30,310) (19,837) (505)
Loss on sale of securities 3,125 -- --
Deferred income tax (benefit) expense (34,682) 81,163 (287,279)
Increase in accrued interest receivable (92,670) (107,528) (101,524)
(Increase) decrease in other assets (283,126) 93,992 154,407
Decrease in advance payments by borrowers for
property taxes and insurance (8,706) (20,078) (29,619)
Increase (decrease) in accrued expenses
and other liabilities 1,185,639 (85,156) (666,983)
------------- ------------ ------------
Net cash provided by operating activities 3,346,734 1,949,523 416,246
------------- ------------ ------------
Investing Activities
Principal payments received on mortgage-backed
securities 2,148,379 506,640 478,221
Maturities of investment securities 1,600,000 4,300,000 100,000
Proceeds from sale of investment securities 246,875 -- --
Purchase of investment securities (5,956,881) (4,114,829) (1,721,563)
Loan originations, net of principal repayments (14,143,152) (16,277,228) (12,375,532)
Purchase of premises and equipment (1,953,859) (513,544) (329,760)
Proceeds from sale of real estate owned 654,219 219,837 416,159
Proceeds from sale of premises and equipment 89,777 -- --
Proceeds from redemption of FHLB stock -- 415,400 --
------------- ------------ ------------
Net cash used in investing activities (17,314,642) (15,463,724) (13,432,475)
------------- ------------ ------------
</TABLE>
<PAGE>
CONSOLIDATED STATEMENTS OF CASH FLOWS (CONT'D)
First Georgia Holding, Inc. and subsidiary
<TABLE>
Year Ended September 30,
---------------------------------------------
1998 1997 1996
------------- ------------ ------------
<S> <C> <C> <C>
Financing Activities
Net increase in deposits $ 33,000,169 $ 14,690,319 $ 15,026,768
Net liabilities of branch assumed by purchaser,
net of gain -- (5,573,578) --
Repayment of other borrowed money -- (92,000) (100,000)
Proceeds from FHLB advances 16,350,000 14,500,000 19,600,000
Repayment of FHLB advances (22,100,000) (11,250,000) (20,448,000)
Net proceeds from exercise of stock options 239,664 -- 85,125
Dividends and fractional shares (320,886) (162,091) (132,664)
------------- ------------ ------------
Net cash provided by financing activities 27,168,947 12,112,650 14,031,229
------------- ------------ ------------
Increase (decrease) in cash and cash equivalents 13,201,039 (1,401,551) 1,015,000
Cash and cash equivalents at beginning of year 4,509,127 5,910,678 4,895,678
------------- ------------ ------------
Cash and cash equivalents at end of year $ 17,710,166 $ 4,509,127 $ 5,910,678
============= ============ =============
Supplemental disclosure of cash paid during year for:
Interest $ 7,755,000 $ 6,990,000 $ 6,529,000
Income taxes $ 1,784,145 $ 622,000 $ 828,000
</TABLE>
Supplemental disclosure of non-cash activities:
Loans receivable of approximately $782,000, $645,000 and $478,000 were
transferred to real estate owned during the years ended September 30, 1998,
1997, and 1996, respectively.
Sales of real estate owned totaling approximately $12,500 and $173,000 for the
years ended September 30, 1998 and 1996, respectively, were financed by the
Bank. No sales of real estate owned were financed by the Bank for the year ended
September 30, 1997.
See accompanying notes to consolidated financial statements.
<PAGE>
NOTES TO CONSOLIDATED INCOME STATEMENTS
- - -------------------------------------------
First Georgia Holding, Inc. and subsidiary
(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 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.
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONT'D)
First Georgia Holding, Inc. and subsidiary
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 to operations.
(f) Federal Home Loan Bank Stock
Investment in stock of the 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.
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONT'D)
First Georgia Holding, Inc. and subsidiary
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 statements of cash flows, cash and cash equivalents
include cash and due from banks, interest bearing deposits in other banks and
Federal funds sold. Generally, Federal funds sold are held for one day.
(k) Earnings Per Share
In March 1997, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards ("SFAS") No. 128, "Earnings per
Share". SFAS No. 128 establishes standards for computing and presenting earnings
per share ("EPS") and applies to all entities with publicly held common stock or
potential common stock. Basic EPS excludes dilution and is computed by dividing
earnings available to common stockholders by the weighted-average number of
common shares outstanding for the period. Diluted EPS includes the potential
dilutive securities using the treasury stock method. The Company adopted the
requirements of SFAS No. 128 in the year ended September 30, 1998 (note 14).
Prior years EPS amounts have been restated to conform to SFAS 128.
(l) Stock Options
The Company has elected to account for its stock options under the intrinsic
value based method with pro forma disclosures of net earnings and net earnings
per share, as if the fair value based method of accounting defined in SFAS No.
123, "Accounting for Stock Based Compensation" has been applied. Under the
intrinsic value based method, compensation cost is the excess, if any, of the
quoted market price of the stock at the grant date or other measurement date
over the amount an employee must pay to acquire the stock. Under the fair value
based method, compensation cost is measured at the grant date based on the value
of the award and is recognized over the service period, which is usually the
vesting period.
(m) Reclassifications
Certain reclassifications have been made to the 1997 and 1996 consolidated
financial statements to conform with the presentation adopted in 1998.
(n) Recent Accounting Pronouncements
SFAS No. 130, "Reporting Comprehensive Income" was issued in June 1997 and is
effective for the Company for the fiscal year beginning October 1, 1998. SFAS
No. 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 No. 130.
SFAS No. 131, "Disclosure about Segments of an Enterprise and Related
information" was issued in June 1997 and is effective for the Company for the
fiscal year beginning October 1, 1998. SFAS No. 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 No.
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 No. 131.
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONT'D)
First Georgia Holding, Inc. and subsidiary
SFAS No. 133, "Accounting for Derivative Instruments and Hedging Activities" was
issued in June 1998 and establishes accounting and reporting standards for
derivative instruments and hedging activities. SFAS No. 133 will be effective
for the Company's fiscal year ending September 30, 2000. The Company does not
currently have any derivative instruments nor is it involved in hedging
activities.
In March 1998, the Accounting Standards Executive Committee issued Statement of
Position 98-1, "Accounting for the Costs of Computer Software Developed or
Obtained for Internal Use" (SOP 98-1) which provides guidance for the accounting
of such costs. SOP 98-1 is effective for the Company for the fiscal year ending
September 30, 2000. This SOP is not expected to have a significant effect on the
Company.
In April 1998, the Accounting Standards Executive Committee issued Statement of
Position 98-5, "Reporting on the Costs of Start-Up Activities" (SOP 98-5) which
requires costs of start-up activities and organization costs to be expensed as
incurred. The adoption of SOP 98-5 will not have any effect on the Company.
(2) Investment Securities Held to Maturity
Investment securities held to maturity consist of the following:
<TABLE>
Amortized Unrealized Unrealized
Cost Gains Losses Fair Value
------------ ----------- ----------- ------------
<S> <C> <C> <C> <C>
September 30, 1998:
Mortgage-backed securities and SBA's $ 10,720,230 $ 192,453 $ 4,466 $ 10,908,217
State and municipal 845,000 14,349 - 859,349
------------ ----------- ----------- ------------
$ 11,565,230 $ 206,802 $ 4,466 $ 11,767,566
============= =========== =========== ============
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
============= =========== =========== ============
</TABLE>
A summary of investment and mortgage-backed securities by maturity as of
September 30, 1998 is 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
-------------------- ---------------------
Due within 1 year $ -- $ --
Due after 1 year through 5 years 1,223,390 1,242,008
Due after 5 years through 10 years 244,798 248,348
Due after 10 years 10,097,042 10,277,210
-------------------- ---------------------
$ 11,565,230 $ 11,767,566
==================== =====================
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONT'D)
First Georgia Holding, Inc. and subsidiary
During an examination of the Bank as of March 31, 1998, the Office of Thrift
Supervision (OTS) determined that one of the Bank's investment securities,
classified as held to maturity, was not a permissible investment. Accordingly,
the Company sold a corporate bond having a par value of $250,000 at a net loss
of $3,125. This change in circumstances resulting in the sale of this held to
maturity investment is not inconsistent with the Company's original
classification as prescribed in SFAS 115. The Company did not sell any
investments during 1997 or 1996.
At September 30, 1998 and 1997, the Company had pledged approximately $9,793,000
and $7,735,000, respectively, of its securities to government and municipal
depositors.
(3) Loans Receivable
Loans receivable at September 30, are summarized as follows:
1998 1997
------------------ ------------------
Real estate mortgage loans $102,828,455 $102,419,019
Real estate construction loans 27,108,632 16,996,563
Consumer loans 11,830,203 10,383,515
Commercial and other loans 10,593,354 9,137,932
------------- --------------
152,360,644 138,937,029
Less:
Deferred loan fees and
costs, net 83,035 (12,921)
Unearned interest income 56,341 72,995
Allowance for loan losses 968,632 1,012,322
------------- -------------
$151,252,636 $137,864,633
============= =============
An analysis of the activity in the allowance for loan losses is as follows:
1998 1997 1996
--------------- ---------------- --------------
Balance at beginning of year $1,012,322 $ 955,288 $1,003,569
Provision for loan losses 6,163 309,679 48,104
Recoveries 193,904 95,571 112,901
Charge-offs (243,757) (348,216) (209,286)
------------- ------------ ------------
Balance at end of year $ 968,632 $1,012,322 $ 955,288
============= ============ ============
As of September 30, 1998 and 1997, outstanding loan commitments, exclusive of
the undisbursed portion of loans in process, amounted to approximately $376,000
and $243,000, respectively, with variable interest rates and approximately
$326,000 and $316,000, respectively, with fixed interest rates. The Bank is also
committed to extend standby letters of credit amounting to approximately
$581,000 and $636,000, respectively, at September 30, 1998 and 1997. In
addition, customers of the Bank have the ability to borrow approximately
$1,390,000 and $954,000, respectively, at September 30, 1998 and 1997, under
existing credit card agreements. It is the opinion of management that such
commitments do not involve more than the normal risk of loss.
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONT'D)
First Georgia Holding, Inc. and subsidiary
(3) Loans Receivable (Cont'd)
At September 30, 1998 and 1997, the Bank had nonaccrual loans aggregating
approximately $2,364,000 and $1,959,000, respectively. The effects of carrying
nonaccrual loans during 1998, 1997, and 1996 resulted in a reduction of interest
income of approximately $50,000, $49,000, and $93,000, respectively. Impaired
loans totaled approximately $0 and $366,000 at September 30, 1998 and 1997,
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, 1998 and 1997 was
approximately $0 and $8,000, which was recorded on a cash basis.
At September 30, 1998 and 1997, 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 1998 and 1997:
1998 1997
--------------- ---------------
Balance at beginning of year $5,039,532 $5,462,436
New borrowings 5,468,991 6,712,607
Repayments (6,403,271) (6,289,703)
--------------- ---------------
Balance at end of year $4,105,252 $5,039,532
=============== ===============
As of September 30, 1998, 1997, and 1996, the Bank was servicing loans for
others aggregating approximately $9,050,000, $2,308,000, and $2,003,000,
respectively.
(4) Premises and Equipment
Premises and equipment at September 30 are summarized as follows:
1998 1997
--------------- ---------------
Land $ 566,681 $ 641,681
Buildings and improvements 2,533,916 2,008,109
Buildings under capital lease 401,931 401,931
Leasehold improvements 199,209 197,674
Construction in progress - 86,427
Furniture, equipment, and automobiles 4,041,600 2,547,004
--------------- ---------------
7,743,337 5,882,826
Less accumulated depreciation
and amortization 3,241,098 2,701,208
--------------- ---------------
Premises and equipment, net $4,502,239 $3,181,618
=============== ===============
(5) Accrued Interest Receivable
Accrued interest receivable at September 30 is summarized as follows:
1998 1997
--------------- -------------
Loans $ 969,929 $887,325
Investment securities 11,045 16,845
Mortgage-backed securities 71,856 55,990
--------------- -------------
$1,052,830 $960,160
=============== =============
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONT'D)
First Georgia Holding, Inc. and subsidiary
(6) Deposits
Deposits are summarized at September 30 as follows:
<TABLE>
1998 1997
---------------------------------- ----------------------------------
Weighted Weighted
Average Average
Balance Rate Balance Rate
------------------ ------------ ------------------ ------------
<S> <C> <C> <C> <C>
Non-interest demand deposits $ 13,008,516 - $ 5,992,232 -
Negotiable orders of withdrawal 16,731,634 1.25% 11,429,277 1.25%
Money market deposit accounts 8,895,429 2.35% 4,756,047 2.35%
Savings deposits 6,972,235 2.30% 4,319,817 2.30%
Certificates of deposits:
Certificates less than $100,000 96,408,671 5.69% 84,492,890 5.90%
Jumbo certificates 20,873,620 6.14% 18,899,673 6.10%
------------------ ------------ ------------------ ------------
$162,890,105 5.04% $129,889,936 4.97%
================== ============ ================== ============
</TABLE>
Interest expense on deposits is summarized below:
1998 1997 1996
--------------- ------------- -------------
Negotiable orders of withdrawal $ 164,909 $ 142,967 $ 219,520
Money market deposit accounts 173,482 73,629 60,966
Savings deposits 118,948 96,646 108,398
Certificates of deposit:
Certificates less than $100,000 5,276,408 4,837,654 4,382,380
Jumbo certificates 1,317,845 1,049,195 930,813
Less:
Early withdrawal penalties 30,238 24,395 19,747
--------------- ------------- -------------
Total $7,021,354 $6,175,696 $5,682,330
=============== ============= =============
At September 30, 1998, the rates on deposits were as follows:
Negotiable orders of withdrawal 1.25%
Money market deposit accounts 2.35
Savings deposits 2.30
Certificates of deposits 2.75 - 6.25
As of September 30, 1998, and 1997, the Bank had no brokered deposits.
The amount and maturities of certificates of deposits at September 30, 1998 are
as follows:
Year Ending September 30, Amount
- - ----------------------------------------------- -----------------
1999 $ 85,703,891
2000 20,825,016
2001 4,174,266
2002 1,933,251
2003 4,587,746
After 2003 58,121
-------------
$117,282,291
=============
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONT'D)
First Georgia Holding, Inc. and subsidiary
(7) Federal Home Loan Bank Advances
Advances form Federal Home Loan Bank at September 30 are summarized as follows:
1998 1997
-------------------------- -----------------------
Due During Year Ending Weighted Weighted
September 30, Amount Average Rate Amount Average Rate
- - ------------------------ --------------------------- ------------------------
1998 $ -- -- $ 7,750,000 5.90%
1999 2,100,000 6.19% 2,100,000 6.19%
2000 3,000,000 6.77% 3,000,000 6.77%
2001 -- -- 500,000 7.90%
2002 1,500,000 6.41% 1,000,000 5.66%
2008 2,000,000 5.51% -- --
-----------------------------------------------------
$ 8,600,000 6.27% $14,350,000 5.79%
=====================================================
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.
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 capital (as
defined) of 8%. The Bank is also subject to prompt corrective action
requirements set forth by the Federal Deposit Insurance Corporation ("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 core
capital (as defined). Management believes, as of September 30, 1998, that the
Bank meets all capital adequacy requirements to which it is subject.
As of September 30, 1998, the most recent notification date 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.
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONT'D)
First Georgia Holding, Inc. and subsidiary
(8) Stockholders' Equity and Regulatory Matters (Cont'd)
<TABLE>
For Capital Adequacy To Be Categorized as "Well
Purposes Capitalized" Under Prompt
Actual (For OTS Purposes) Corrective Action Provisions
---------------------------- --------------------------- -----------------------------
As of September 30, 1998 Amount Ratio Amount Ratio Amount Ratio
-------------- ------------ ------------ ----------- ------------ --------
<S> <C> <C> <C> <C> <C> <C>
Tangible Capital $14,335,000 7.58%$ 2,837,000 1.50% N/A N/A
(to tangible assets)
Core Capital 15,253,000 8.03% 7,602,000 4.00% 9,503,000 5.00%
(to adjusted tangible assets)
Total capital 16,222,000 10.22% 12,698,000 8.00% 15,872,000 10.00%
(to risk-weighted assets)
Tier 1 capital 15,253,000 9.61% N/A N/A 9,523,000 6.00%
(to risk-weighted assets)
For Capital Adequacy To Be Categorized as "Well
Purposes Capitalized" Under Prompt
Actual (For OTS Purposes) Corrective Action Provisions
---------------------------- --------------------------- -----------------------------
As of September 30, 1997 Amount Ratio Amount Ratio Amount Ratio
-------------- ------------ ------------ ----------- ------------ --------
Tangible Capital $ 12,216,000 7.7% $ 2,379,000 1.50% N/A N/A
(to tangible assets)
Core Capital 13,246,000 8.3% 6,385,000 4.00% $ 7,981,000 5.00%
(to adjusted tangible assets)
Total capital 14,258,000 10.10% 11,295,000 8.00% 14,118,000 10.00%
(to risk-weighted assets)
Tier 1 leverage Capital
(to risk-weighted assets) 13,246,000 9.38% N/A N/A 8,471,000 6.00%
</TABLE>
The following is a reconciliation of capital for the Bank under generally
accepted accounting principles (GAAP) to regulatory capital:
<TABLE>
Tangible Core Risk-Based
As of September 30, 1998 Capital Capital Capital
----------------- ---------------- -----------------
<S> <C> <C> <C>
GAAP capital $15,253,000 $15,253,000 $15,253,000
General allowance for loan losses - - 969,000
Intangible assets (918,000) - -
----------------- ---------------- -----------------
Regulatory capital 14,335,000 15,253,000 16,222,000
Minimum capital requirement 2,837,000 7,602,000 12,698,000
----------------- ---------------- -----------------
Regulatory capital excess $11,498,000 $ 7,651,000 $ 3,524,000
================= ================ =================
As of September 30, 1997
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
================= ================ =================
</TABLE>
<PAGE>
NOTES TO
(9) Income Taxes
The components of income tax expense (benefit) are as follows:
<TABLE>
1998 1997 1996
--------------- ------------- -------------
<S> <C> <C> <C>
Federal: Current $1,119,135 $733,530 $651,665
Deferred (29,200) 68,334 (287,279)
--------------- ------------- -------------
1,089,935 801,864 364,386
State: Current 133,386 23,768 -
Deferred (5,482) 12,829 -
--------------- ------------- -------------
127,904 36,597 -
--------------- ------------- -------------
$1,217,839 $838,461 $364,386
=============== ============= =============
The difference between the actual provision for income taxes and income taxes
computed at the Federal statutory rate of 34% is as follows:
1998 1997 1996
--------------- ------------- -------------
Federal taxes at statutory rate $1,098,962 $826,923 $382,756
Increase (decrease) resulting from:
State income taxes, net 88,035 24,155 -
Amortization of intangibles 9,079 9,530 12,534
Tax exempt income (8,471) (7,328) (7,957)
Other, net 30,234 (14,819) (22,947)
--------------- ------------- -------------
$1,217,839 $838,461 $364,386
=============== ============= =============
</TABLE>
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, 1998
and 1997 are presented below:
1998 1997
------------- -------------
Deferred tax assets:
Allowance for loan losses $314,365 $295,143
Deferred loan costs 31,520 -
Property cost basis differences 4,458 32,239
Accrued liability 29,486 26,572
Stock option compensation
deduction 400,762 -
------------- -------------
Total gross deferred tax assets 780,591 353,954
Less valuation allowance - -
------------- -------------
Net deferred tax assets 780,591 353,954
------------- -------------
Deferred tax liabilities:
Depreciation 11,137 15,037
FHLB stock dividends 177,008 177,008
Deferred loan fees - 4,905
------------- -------------
Total deferred tax liabilities 188,145 196,950
------------- -------------
Net deferred tax assets $592,446 $157,004
============= =============
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONT'D)
First Georgia Holding, Inc. and subsidiary
(9) Income Taxes (Cont'd)
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, 1998
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 as a liability 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
$403,466 and accumulated amortization of $202,323 and $182,557 at September 30,
1998 and 1997, respectively.
The present value of future minimum capital lease payments as of September 30,
1998, are:
Year ending September 30,
1999 $ 39,348
2000 39,348
2001 39,348
2002 39,348
2003 39,348
2004 and later years 157,392
---------
Total minimum lease payments 354,132
Less amount representing interest at 10% 125,034
---------
Present value of future minimum capital lease payments $229,098
===========
The Bank is obligated under various noncancelable operating leases, primarily
for operating facilities that expire over the next four years. The future
minimum lease payments under these operating leases as of September 30, 1998 are
as follows:
Year ending September 30,
1999 $ 25,000
2000 25,000
2001 25,000
2002 685
----------
Total minimum lease payments $ 75,685
==========
Total rent expense was approximately $94,000, $109,000, and $75,000 for the
years ended September 30, 1998, 1997, and 1996, respectively.
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Fisrt Georgia Holding, Inc. and subsidiary
(11) Sale of Branches
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 statements of operations. Effective September 30,
1998, the Bank entered into an agreement to sell its Blackshear branch ("the
Branch"). The terms of the agreement provide that the Bank will sell the
deposits, buildings and improvements, and fixed assets of the Branch. Deposits
in the Branch were approximately $9.1 million at September 30, 1998. The sale is
expected to result in a gain.
(12) Employee Benefit Plans
The Company has 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 $39,712, $29,481, and $27,376 to the Plan in 1998, 1997, and 1996,
respectively.
Also, the Company has 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 1998 and 1997, approximately 4,860 shares
and 5,710 shares, respectively, were purchased by employees. As a result of such
employee stock purchases, the Company incurred employee benefits expense of
approximately $12,000, $9,000 and $11,000 for the years ended September 30,
1998, 1997 and 1996, respectively.
(13) Stock Option Plan
During 1995, the Company adopted a nonqualified Stock Option Plan (the 1995
Option Plan). The Company has reserved 688,750 shares of common stock for
issuance under the 1995 Option Plan. The Company also has a nonqualified Stock
Option Plan (the Option Plan) adopted prior to 1995. The Company has 25,313
options outstanding under this plan.
If compensation cost for stock option grants had been determined based on the
fair value at the grant dates for 1998, 1997 and 1996 consistent with the method
prescribed by SFAS No. 123, the Company's net earnings and earnings per share on
a diluted basis would have been adjusted to the pro forma amounts indicated
below:
Outstanding options, consisting of five-year non-qualified stock options, vest
and become exercisable over a five year period from date of grant. The
outstanding options expire five years from the date of grant or upon retirement
from the Company, and are contingent upon continued employment during the
applicable five-year period.
Options for a total of 240,000 shares were granted on September 23, 1998. Under
SFAS No. 123, for pro forma disclosure purposes, the fair value of such options
of $663,722 is to be expensed over the vesting period of five years. As such
options were issued at the end of fiscal 1998, the amount of compensation
expense for the year ended September 30, 1998 for pro forma purposes was
insignificant. There were no stock options granted in 1997 or 1996. Accordingly,
the Company has omitted the pro forma financial statement disclosures required
by SFAS No. 123.
Under SFAS No. 123, the fair value of each option grant is estimated on the date
of grant using the Binomial option-pricing model with the following
weighted-average assumptions used for grants in 1998: dividend yield of 1.50%,
expected volatility of 33%, risk-free interest rate of 4.67%, and an expected
life of 5 years.
A summary of the status of fixed stock option grants under the Company's
stock-based compensation plans as of September 30, 1998, 1997 and 1996, and
changes during the years ending on those dates is presented below:
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
First Georgia Holding, Inc., and subsidiary
(13) Stock Option Plan (Cont'd)
Such amounts have been adjusted to reflect 50% stock dividends accounted for as
3-for-2 stock splits in each of the years ended September 30, 1998, 1997 and
1996.
<TABLE>
1998 1997 1996
------------------------------ ----------------------------- ---------------------------------
Weighted Average Weighted Average Weighted Average
Options Exercise Price Options Exercise Price Options Exercise Price
--------- ---------------- -------- ----------------- --------- ------------------
<S> <C> <C> <C> <C> <C> <C>
Outstanding - October 1 684,612 $ 1.72 684,612 $ 1.72 785,862 $ 1.60
Granted 240,000 9.32 - - - -
Exercised (220,549) 1.09 - - (101,250) 0.84
Cancelled - - - - - -
--------- ---------------- -------- ----------------- --------- ------------------
Outstanding - September 30 704,063 4.50 684,612 1.72 684,612 1.72
--------- ---------------- -------- ----------------- --------- ------------------
Options exercisable at year end 464,063 $ 2.01 684,612 $ 1.72 426,303 $ 1.50
Fair value of options granted
during the year $ 663,722
</TABLE>
The following table summarizes information about fixed stock options outstanding
at September 30, 1998:
Exercise Options Options Weighted Average
Price Outstanding Exercisable Remaining Life
------------ ----------- ----------- ---------------
0.99 25,313 25,313 3.63
1.93 101,250 101,250 1.79
2.12 337,500 337,500 1.79
8.88 120,000 -- 4.98
9.76 120,000 -- 4.98
------------ ----------- ----------- ---------------
704,063 464,063
=========== ==========
Remaining non-exercisable options as of September 30, 1998 become exercisable as
follows:
1999 30,000
2000 30,000
2001 70,000
2002 70,000
2003 40,000
---------
240,000
=========
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
First Georgia Holding, Inc. and subsidiary
(14) Net Income Per Share
Following is a reconciliation of the denominator used in the computation of
basic and diluted earnings per common share.
Years Ended September 30,
----------------------------------
1998 1997 1996
---------- ---------- ---------
Weighted average number of common shares
outstanding - Basic 4,742,213 4,578,478 4,529,284
Incremental shares from the assumed
conversion of stock options 249,630 268,418 205,694
---------- ---------- ---------
Total - Diluted 4,991,843 4,846,896 4,734,978
=========== ========== =========
The incremental shares from the assumed conversion of stock options were
determined using the treasury stock method under which the assumed proceeds were
equal to the amount that the Company would receive upon the exercise of the
options plus the amount of the tax benefit that would be credited to additional
paid-in capital assuming exercise of the options. The assumed proceeds are used
to purchase outstanding common shares at the average market price during the
period.
(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 1998 1997
------------- --------------
Assets
Cash $ 27,386 $ 24,617
Other assets 400,762 76,883
Investment in subsidiary 15,253,064 13,245,770
------------- --------------
Total assets $ 15,681,212 $ 13,347,270
============= ==============
Liabilities and Stockholders' Equity
Stockholders' Equity
Common stock $ 4,798,972 $ 4,578,478
Additional paid-in capital 3,116,021 2,697,038
Retained earnings 7,766,219 6,071,754
------------- --------------
Total liabilities and stockholders' equity $ 15,681,212 $ 13,347,270
============= ==============
<TABLE>
Years Ended September 30,
-----------------------------------------------
Condensed Statements of Operations 1998 1997 1996
------------ --------------- -------------
<S> <C> <C> <C>
Dividends from Bank $ 85,000 $ 260,222 $ 194,000
Expenses (1,015) (15,258) (19,500)
------------ --------------- -------------
Income before equity in undistributed income of Bank 83,985 244,964 174,500
Equity in undistributed income of Bank 2,007,300 1,348,701 586,866
Income tax expense 76,883 - -
------------ --------------- -------------
Net Income $ 2,014,402 $ 1,593,665 $ 761,366
============ =============== =============
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONT'D)
First Georgia Holding, Inc. and subsidiary
(15) Condensed Financial Information of First Georgia Holding, Inc. (Parent Only) (Cont'd)
</TABLE>
<TABLE>
Years Ended September 30,
---------------------------------------------------
Condensed Statements of Cash Flows 1998 1997 1996
--------------- --------------- -------------
<S> <C> <C> <C>
Operating Activities:
Net income $2,014,402 $1,593,665 $761,366
Adjustments to reconcile net income to net
cash provided by operating activities:
Equity in undistributed income of Bank (2,007,300) (1,348,701) (586,866)
Decrease in other assets 76,889 - -
--------------- --------------- -------------
Net cash provided by operating activities 83,991 244,964 174,500
--------------- --------------- -------------
Financing Activities:
Dividends paid on common stock (319,937) (162,794) (132,664)
Fractional shares related to stock split paid in cash (949) - -
Net proceeds from exercise of stock options 239,664 - 85,125
Repayments of other borrowed money - (92,000) (100,000)
--------------- --------------- -------------
Net cash used in financing activities (81,222) (254,794) (147,539)
--------------- --------------- -------------
Increase (decrease) in cash and cash equivalents 2,769 (9,830) 26,961
Cash and cash equivalents at beginning of year 24,617 34,447 7,486
--------------- --------------- -------------
Cash and cash equivalents at end of year $ 27,386 $ 24,617 $ 34,447
=============== =============== =============
</TABLE>
The primary source of funds available to the Company to pay stockholder
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, 1998,
approximately $2,263,000 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.
(17) Fair Value of Financial Instruments
SFAS No. 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
No. 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.
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONT'D)
First Georgia Holding, Inc. and subsidiary
(17) Fair Value of Financial Instruments (Cont'd)
Cash and due from banks, interest-bearing deposits in other banks, Federal funds
sold and 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 Receivable: 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
analyses, 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, 1998, 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.
The following is a summary of the Company's Financial instruments at September
30, 1998 and 1997:
<TABLE>
1998 1997
------------------------------------- -------------------------------------
------------------------------------- -------------------------------------
Carrying Estimated Carrying Estimated
Value Fair Value Value Fair Value
<S> <C> <C> <C> <C>
Assets
Cash and due from banks $ 4,434,000 $ 4,434,000 $ 2,985,000 $ 2,985,000
---------------- ----------------- ----------------- -----------------
---------------- ----------------- ----------------- -----------------
Interest bearing deposits in other
financial institutions 1,097,000 1,097,000 1,524,000 1,524,000
---------------- ----------------- ----------------- -----------------
---------------- ----------------- ----------------- -----------------
Federal funds sold 12,180,000 12,180,000 - -
---------------- ----------------- ----------------- -----------------
---------------- ----------------- ----------------- -----------------
Investment securities 11,565,000 11,768,000 9,635,000 9,692,000
---------------- ----------------- ----------------- -----------------
---------------- ----------------- ----------------- -----------------
Loans 151,253,000 150,353,000 137,865,000 137,315,000
---------------- ----------------- ----------------- -----------------
---------------- ----------------- ----------------- -----------------
Liabilities
Deposits:
Non-interest bearing 13,009,000 13,009,000 5,992,000 5,992,000
---------------- ----------------- ----------------- -----------------
---------------- ----------------- ----------------- -----------------
Interest-bearing demand and savings 32,599,000 32,599,000 20,505,000 20,516,000
---------------- ----------------- ----------------- -----------------
---------------- ----------------- ----------------- -----------------
Certificates of deposit 117,282,000 119,092,000 103,393,000 103,997,000
---------------- ----------------- ----------------- -----------------
---------------- ----------------- ----------------- -----------------
Federal Home Loan Bank advances 8,600,000 8,556,000 14,350,000 14,431,000
---------------- ----------------- ----------------- -----------------
---------------- ----------------- ----------------- -----------------
</TABLE>
<PAGE>
INDEPENDENT AUDITORS' REPORT
The Board of Directors and Stockholders
First Georgia Holding, Inc.
Brunswick, Georgia
We have audited the accompanying consolidated balance sheets of First Georgia
Holding, Inc. and subsidiary as of September 30, 1998 and 1997, and the related
consolidated statements of operations, stockholders' equity, and cash flows for
years 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 audits. The consolidated
financial statements of the Company for the year ended September 30, 1996 were
audited by other auditors whose report, dated November 1, 1996, expressed an
unqualified opinion on those statements.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audits 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 audits provide a reasonable basis for our
opinion.
In our opinion, the 1998 and 1997 consolidated financial statements present
fairly, in all material respects, the financial position of First Georgia
Holding, Inc. and subsidiary at September 30, 1998 and 1997, and the results of
their operations and their cash flows for the years then ended in conformity
with generally accepted accounting principles.
Deloitte & Touche LLP
Jacksonville, Florida
November 13, 1998
<PAGE>
SELECTED FINANCIAL AND OTHER DATA
- - ---------------------------------
Selected consolidated financial data is presented below as of and for each of
the years in the five-year period ended September 30, 1998.
(Dollars in thousands, except per share data)
--------------------------------------------------
September 30,
--------------------------------------------------
1998 1997 1996 1995 1994
--------------------------------------------------
Balance Sheet Data:
- - --------------------
Total assets $ 190,463 159,701 146,915 132,742 133,870
Loans receivable, net $ 151,253 137,865 122,431 110,432 113,579
Total investments $ 11,566 9,634 10,326 9,181 7,511
Deposits $ 162,890 129,890 121,554 106,528 103,407
Borrowings $ 8,600 14,350 11,192 12,140 17,988
Stockholders' equity $ 15,681 13,347 11,916 11,125 9,927
Book value per share $ 3.27 2.92 2.60 2.48 2.22
Number of shares outstanding 4,799 4,578 4,578 4,477 4,477
Year Ended
September 30,
------------------------------------------------
1998 1997 1996 1995 1994
------------------------------------------------
Income Statement Data:
Interest income $ 15,078 12,784 11,794 11,626 10,213
Interest expense 7,832 6,939 6,549 6,407 5,544
------------------------------------------------
Net interest income 7,246 5,845 5,245 5,219 4,669
Provision for loan losses 6 310 48 214 39
Other income 1,997 1,643 1,004 1,268 1,198
Other expense 6,005 4,746 4,347 4,224 4,241
SAIF special assessment - - 727 - -
------------------------------------------------
Income before income taxes and
cumulative change in accounting
principle 3,232 2,432 1,127 2,049 1,587
Income tax expense 1,218 838 364 772 525
------------------------------------------------
Income before cumulative
effect of a change in accounting
principle 2,014 1,594 763 1,277 1,062
Cumulative effect of a change
in accounting principle - - - - -
-------------------------------------------------
Net income $ 2,014 1,594 763 1,277 1,062
=================================================
Income per share before
cumulative effect of a change
in accounting pri$ciple 0.42 0.35 0.23 0.42 0.35
Cumulative effect of a change in
accounting principle - - - - -
-------------------------------------------------
Net income per share $ 0.42 0.35 0.23 0.42 0.35
=================================================
At or For
Year Ended
September 30,
----------------------------------------------
1998 1997 1996 1995 1994
----------------------------------------------
Other Data:
Net income to average assets 1.21% 1.04% 0.87% 0.95% 0.79%
Net income to average equity 14.60% 12.55% 10.32% 11.88% 11.04%
Average equity to average assets 8.29% 8.28% 8.40% 8.01% 7.41%
Number of full-service offices 7 7 8 6 7
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
- - ----------------------------------------------------------------------
First Georgia Holding, Inc. and subsidiary
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 Companys 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, 1998 of the Bank's capital
under generally accepted accounting principles to regulatory capital.
First Georgia Bank
Stockholder's equity $ 15,253,000
Less:
Intangible assets 918,000
----------
Tangible Capital 14,335,000
----------
Plus:
Qualifying intangible assets 918,000
----------
Core capital 15,253,000
----------
Plus:
General allowance for loan losses 969,000
----------
Risk-based capital $ 16,222,000
==========
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 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, 1998, the Bank was in
compliance with its minimum capital requirements.
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Cont'd)
- - ----------------------------------------------------------------------
First Georgia Holding, Inc. and subsidiary
The Bank's regulatory capital and the required minimum amounts, at September 30,
1998, are summarized in the following table.
Bank Required Excess
Capital Minimum Amount (Deficiency)
------------------- ----------------- -------------------
% $ % $ % $
------------------- ----------------- -------------------
Tangible capital 7.58 14,335,000 1.50 2,837,000 6.08 11,498,000
Core capital 8.03 15,253,000 4.00 7,602,000 4.03 7,651,000
Risk-based capital 10.22 16,222,000 8.00 12,698,000 2.22 3,524,000
As of September 30, 1998, 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, 1998, the Bank's total risk-based ratio, tier 1 risk-based
ratio and leverage ratio were 8.03%, 10.22%, and 9.61%, respectively, placing
the Bank in the well capitalized category under FDICIA for each ratio.
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 6.58% and 4.38% at September 30, 1998 and 1997, 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 1999.
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Cont'd)
- - ----------------------------------------------------------------------
First Georgia Holding, Inc. and subsidiary
Year 2000 Compliance Disclosure
As the year 2000 (Year 2000) approaches, an important business issue has emerged
regading existing software programs and hardware. Many existing application
software products were designed to accommodate a two-digit year. For example, 98
is stored on the system and represents 1998 and 00 represents 1900. The Bank has
been working on this problem since fiscal 1997. Management formed an Electronic
Data Processing (EDP) committee (the Committee) in early fiscal 1997 to address
this and many other computer-related issues that may arise. The Committee began
testing all hardware and software applications for Year 2000 readiness. Several
of the Banks computers were found to be non-compliant with Year 2000. The
Committee decided to replace these machines as they implemented a Bank wide
network to facilitate ease of information dissemination. With the installation
of the network, all computers now used in the Bank are Year 2000 compliant.
All software the Bank utilizes, including the software for the new network, is
in the process of being tested. All peripheral and specialized software has been
tested. Where needed, all non-compliant software has been updated to compliant
status or replaced. During the testing, the in-house processing software and
equipment proved to be non-compliant. The decision was made to replace the
mission critical software rather than wait for the upgrade. The Bank now has
installed the new system, a product of Jack Henry and Associates. The new
software was tested to the satisfaction of the Office of Thrift Supervision (the
OTS), the Banks primary regulator. The Bank has joined with other users of the
software to perform user group testing of the mission critical software. This
testing should be complete in early fiscal 1999 .
An additional area of concern to the Company, the Bank, and the OTS is the
effect of Year 2000 issues on its deposit and loan customers. Failure to address
Year 2000 issues could have significant implications on the ability of certain
customers to continue operations. Letters inquiring as to the readiness for Year
2000 were sent to all the Banks commercial customers. Additional information is
provided by each branch to any customer who wishes to learn more about Year
2000. Although the Bank has taken several steps to address these issues, there
can be no assurance that these customers will be Year 2000 compliant. Failure of
certain customers to adequately address these issues could result in a negative
impact on the Companys earnings.
The Company believes the mission critical systems are currently Year 2000
compliant. The Bank The EDP committee still meets regularly to discuss Year 2000
issues. Outside sources have performed several audits of the system with little
or no exceptions to report. Management understands that certain infrastructure
failures could arise due to undetected system or software errors. These
contingencies could adversely affect the Bank. The Bank is addressing these
contingencies in its Disaster Recovery Plan.
The Bank has experienced most of its costs associated with becoming Year 2000
compliant. The Company spent approximately $1,000,000 to become Year 2000
compliant. Nearly all of this expenditure was for new equipment and software, so
the cost will be capitalized rather than realized all in one period. Management
forsees any future costs associated with Year 2000 to be insignificant.
Although the Bank has taken several measures to address Year 2000 issues, there
can be no assurances that all necessary modifications will be identified and
corrected or that unforeseen difficulties or costs will not arise. Therefore,
there can be no assurance that the failure of the Banks internal systems will
not negatively impact the Banks operations.
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
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Cont'd)
- - ----------------------------------------------------------------------
First Georgia Holding, Inc. and subsidiary
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 1998, 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, 1998. The information presented, however, may not be indicative of
actual future trends of net interest income in rising or declining interest rate
environments.
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Cont'd)
- - ----------------------------------------------------------------------
First Georgia Holding, Inc. and subsidiary
(in thousands)
Over One Over Five Over
One Year Through Through Ten
or Less Five Years Ten Years Years
------------------------------------------------
Interest-earning assets (IEA's):
Investments $ - 1,223 245 10,097
Interest earning deposits and
federal funds sold 13,277 - - -
Loans 109,093 36,639 1,365 4,156
------------------------------------------
Total 122,370 37,862 1,610 14,253
------------------------------------------
Interest-bearing liabilities (IBL's):
Demand deposits $ 16,732 - - -
Savings deposits 15,867 - - -
Other time deposits 85,703 31,521 58 -
Debt 2,100 4,500 2,000 -
------------------------------------------
Total 120,402 36,021 2,058 -
------------------------------------------
Interest sensitivity gap $ 1,968 1,841 (448) 14,253
==========================================
Cumulative gap $ 1,968 3,809 3,361 17,614
==========================================
Ratio of IEA's to IBL's 1.02 1.05 0.78 -
==========================================
Cumulative ratio of IEA's to IBL's 1.02 1.02 1.02 1.11
==========================================
COMPARISON OF YEARS ENDED SEPTEMBER 30, 1998 AND 1997
Results of Operations
General
First Georgia Holding, Inc. reported net income of $2,014,402, an increase of
$420,737. This increase is due primarily to the increase in interest income of
$2,293,782. Net interest income after provision for loan losses increased a
total of $1,704,464. Other income increased and other expenses increased by
$354,415 and $1,258,764, respectively. Several factors as discussed below
contributed the increases and decreases in these areas.
Interest Income
Total interest income increased $2,293,782 for the year, or 17.94%. Interest
income on loans increased $2,258,984, or 18.86%, which was the major factor for
this increase in interest income. Average loans for the year increased by more
than $20,000,000 during the year ended September 30, 1998, resulting in higher
interest income. The Bank increased its position in mortgage backed securities,
resulting in a $222,263, or 70.57% increase. Investment income decreased by
$133,070 or 45.04% for the year ended September 30, 1998 as compared to the same
time last year. As investments matured, much of that money was shifted into
either the increased loan demand or mortgage backed securities, which had higher
yields. Because of increased deposit growth, the Bank maintained high Federal
funds sold balances. These higher balances account for an $54,395, or 27.47%
decrease in other interest income.
Interest Expense
Total interest expense increased $892,834, or 12.87% for the year. This is
attributable to an increase in average deposits of over $20,000,000. The Bank
experienced substantial deposit growth over the year,
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Cont'd)
- - ----------------------------------------------------------------------
First Georgia Holding, Inc. and subsidiary
which is attributable to the introduction of more competitive deposit products.
While most of this growth was in interest free checking accounts, the Bank
concentrated on obtaining customers' total banking business, resulting in
increased growth in interest bearing time deposits. Interest expense on advances
and other borrowings increased $47,176, or 6.18% in year ended September 30,
1998 as compared to the year ended September 30, 1997. Most of this expense was
realized early in the year through the Banks Federal funds purchased line.
However, as deposit demand increased, the Bank began selling Federal funds
rather than borrowing from the Federal funds line. This trend should continue
through the early part of fiscal 1999.
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.
At
September
Year Ended September 30, 30,
-------------------------- ---------
(in percentages)
1998 1997 1996 1998
-------------------------- ---------
Weighted average yield on:
Loans 9.57 9.36 9.35 9.65
Investment securities 6.86 7.11 7.35 6.30
Interest earning deposits in other banks 5.39 5.47 5.89 5.53
-------------------------- ---------
Total weighted average yield on all
interest earning assets 9.33 9.12 9.15 9.14
-------------------------- ---------
Weighted average rate paid on:
Deposits 5.04 5.18 5.35 4.66
Other borrowings 5.98 8.89 8.40 -
Federal Home Loan Bank advances
Short term advances 4.98 6.30 7.27 6.19
Long term advances 7.86 5.14 6.63 7.38
-------------------------- ---------
Total weighted average rate paid on all
interest-bearing liabilities 5.13 5.25 5.23 4.78
-------------------------- ---------
Weighted average interest rate spread (spread between weighted average yield on
all interest-earning assets and rate
paid on all interest-earning liabilities) 4.20 3.87 3.92 4.36
========================== =========
Net yield on average interest-earning
assets
(net interest income as a percentage of
of average interest-earning assets) 4.48 4.11 4.07 N/A
========================== =========
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Cont'd)
- - ----------------------------------------------------------------------
First Georgia Holding, Inc. and subsidiary
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. When necessary, management will take a provision from income to
apply toward the loan loss reserve. Because of the level of reserves for loan
losses coupled with the low loss experience throughout the year, management
recorded a loan loss provision of $6,163 for the year ended September 30, 1998.
At September 30, 1998, 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, 1996 through 1998 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.
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Cont'd)
- - ----------------------------------------------------------------------
First Georgia Holding, Inc. and subsidiary
ANALYSIS OF NON-ACCRUING AND PAST DUE LOANS
Table 1
As of September 30,
---------------------------------------
1998 1997 1996
---------------------------------------
Non-accruing Loans (1)
Real estate
Construction $ - - -
First mortgage 2,225,603 1,832,123 1,766,929
Second mortgage 117,619 82,517 19,764
Consumer 21,214 44,781 164,118
---------------------------------------
Total non-accruing loans 2,364,436 1,959,421 1,950,811
---------------------------------------
Past due loans (2)
Real estate
Construction - - -
First mortgage - - -
Second mortgage - - -
Consumer - - -
---------------------------------------
Total past due loans - - -
---------------------------------------
Total non-accruing and
past due loans $ 2,364,436 1,959,421 1,950,811
=======================================
Percentage of total loans 1.56% 1.42% 1.58%
=======================================
Real estate acquired through
foreclosure $ 644,084 423,000 94,200
=======================================
Total non-accruing and past due loans
and nonperforming assets. $ 3,008,520 2,382,421 2,045,011
=======================================
- - --------------------------------------------------------------------------------
(1) Non-accruing loans are loans for which unpaid interest is not recognized in
income.
(2) Past due loans are 90 days or more delinquent for which interest is still
accruing.
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Cont'd)
- - ----------------------------------------------------------------------
First Georgia Holding, Inc. and subsidiary
ANALYSIS OF ALLOWANCE FOR LOAN LOSSES
Table 2
Year Ended September 30,
----------------------------
1998 1997 1996
----------------------------
Beginning balance $ 1,012,322 955,288 1,003,569
Loans charged-off:
Real estate construction - - -
Real estate mortgage 179,995 185,696 152,684
Consumer and other 63,762 162,520 56,602
----------------------------
243,757 348,216 209,286
----------------------------
Recoveries:
Real estate construction - - -
Real estate mortgage 78,084 32,939 46,547
Consumer and other 115,820 62,632 66,354
----------------------------
193,904 95,571 112,901
----------------------------
Net charge-offs 49,853 252,645 96,385
Provision charged to operations 6,163 309,679 48,104
----------------------------
Balance at end of period $ 968,632 1,012,322 955,288
============================
Ratio of net charge-offs to
average loans outstanding 0.03% 0.20% 0.08%
============================
Ratio of allowance to total loans 0.64% 0.73% 0.77%
============================
Other Income
Other income increased $354,415, or 21.57% for the year. Loan fees increased
$466,636, or 98.47%, for the year as loan balances increased. This increased fee
income results in part from a restructuring of the loan fee structure, to obtain
an alignment with loan fee levels currently charged in the market. Deposit
service charges increased $271,854, or 39.45% for the year ended September 30,
1998. This increase is attributable to the immense increase in deposit balances
for the year. The increase in the number of deposits creates an increase in
service charges and non-sufficient funds fees.
Other Expenses
Other expenses increased $1,258,764, or 26.52% for the year. Personnel related
expenses had the largest increase, growing by $616,186, or 26.51%, for the year
ended September 30, 1998. The Bank added more employees to maintain a superior
level of customer service in response to the banks rapid growth. The hiring
trend should level off in fiscal 1999. Occupancy expense also increased by
$170,070, or 15.98%, for the year due to the opening of the permanent facility
for its North Brunswick office. Data Processing
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Cont'd)
- - ----------------------------------------------------------------------
First Georgia Holding, Inc. and subsidiary
expense increased $158,440 for the year, a significant increase of 1,152.79%
over last year. This increase in a usually stable expense category is
attributable to the installation of a new mainframe system. The Bank installed a
new graphical user interface computer technology which is certified Year 2000
compliant. The new system adds a new level of service to the customer, such as
check image statements and better automatic deposit and account drafting
capabilities.
Income Tax Expense
The Company incurred $1,217,839 in income tax expense for the year based on
applicable income tax rates at September 30, 1998.
Financial Condition
Total assets of the Company increased $30,761,042 from September 30, 1997 to
September 30, 1998. Loans were the driving force behind this increase, as the
net balances grew $13,388,033, or 9.71%. Loan demand remained strong throughout
fiscal 1998, and management took advantage of this demand by offering
competitive loan products and exceptional service. The loan growth was primarily
funded by the increased deposit balances, which also increased the Banks Federal
funds sold to $12,180,000. Premises and equipment increased, $1,320,621, or
41.51%, for the year ended September 30, 1998. The Bank completed its North
Brunswick Branchs permanent facility in fiscal 1998 and purchased a new
mainframe system which will enhance customer service and provide the Bank with
Year 2000 compliance.
As mentioned previously, total deposits increased $33,002,169, or 25.41%. Much
of this increase was in non-interest bearing deposits, as the Bank now offers
free checking to its customers. The Bank is well positioned to take advantage of
the growing local market. With the increase in deposits, the Bank was able to
pay many FHLB advances, as evidenced by a $5,750,000, or 40.07% decrease for the
year ended September 30, 1998.
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 to the
increases and decreases in these areas.
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 increased
interest income. Investment income decreased by $6,842, or 2.13% for mortgage
backed securities and $82,467, or 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
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Cont'd)
- - ----------------------------------------------------------------------
First Georgia Holding, Inc. and subsidiary
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.
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
$433,760. Loan fees increased $91,049, or 23.78%, for the year as loan balances
increased. 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. In 1996, all thrifts
had to pay a special assessment to recapitalize the national thrift insurance
fund. This assessment cost the Bank $727,704 in 1996. Because of the special
assessment, the Banks 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 Banks 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 $12,784,224 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
increased 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 Banks 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.
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.
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Cont'd)
- - ----------------------------------------------------------------------
First Georgia Holding, Inc. and subsidiary
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, markdown, or commission, and may not represent actual
transactions.
Quarterly Period High Low
October 1-December 31, 1996 4 1/8 2 3/4
January 1- March 31, 1997* 5 3 1/2
April 1 June 30, 1997 5 1/2 4 7/8
July 1 September 30, 1997 6 1/3 4 2/3
October 1 December 31, 1997 6 1/3 5 1/3
January 1 March 31, 1998 8 7/16 5 7/8
April 1 June 30, 1998** 10 1/2 8
July 1 September 30, 1998 15 1/4 8 7/8
*On February 28, 1997, the Company effected a 50% stock dividend in the form of
a 3 for 2 stock split.
**On June 15, 1998, 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 $0.0667 per share in March 1998 and $0.0353 per share in
December 1996. 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, 1998 upon regulatory approval.
<PAGE>
- - ------------------------------------------------------------------------------
OFFICES
- - ------------------------------------------------------------------------------
1703 Gloucester Street 4510 Altama Avenue
Brunswick, Georgia 31520 Brunswick, Georgia 31520
912-267-7283 912-267-0010
2461 Demere Road 129 Highway 82, East
St. Simons Island, Georgia 31522 Blackshear, Georgia
912-638-7118 912-449-4711
2001 Commercial Drive South Wal-Mart Supercenter
Brunswick, Georgia 31525 150 Altama Connector
912-262-1500 Brunswick, Georgia 31525
912-280-9020
1010 Plant Avenue
Waycross, Georgia 31501
912-287-2265
- - ------------------------------------------------------------------------------
OTHER INFORMATION
- - ------------------------------------------------------------------------------
Transfer Agent: Independent Auditors:
First Georgia Bank Deloitte & Touche LLP
1703 Gloucester Street Suite 2801, Independent Square
Brunswick, Georgia 31520 One Independent Drive
Jacksonville, Florida 32202
Legal Counsel: Special Counsel:
James A. Bishop Powell, Goldstein, Frazer & Murphy
Suite 40 Sixteenth Floor
First Federal Plaza 191 Peachtree Street, N.E.
Brunswick, Georgia 31520 Atlanta, Georgia 30303
<PAGE>
- - ------------------------------------------------------------------------------
DIRECTORS AND OFFICERS
- - ------------------------------------------------------------------------------
FIRST GEORGIA HOLDING, INC.
---------------------------
OFFICERS
HENRY S. BISHOP G. FRED COOLIDGE III
Chairman and President, Secretary and Treasurer
Chief Executive Officer
- - ------------------------------------------------------------------------------
DIRECTORS
HENRY S. BISHOP B.W. BOWIE M. FRANK DELOACH, III
Chairman of the Board, Retired Senior Vice President,
President President, General Manager, Culver & Deloach
First Georgia Bank and Director Federal Paper Board Co
TERRY DRIGGERS ROY K. HODNETT E. RAYMOND MOCK
President, Driggers President, T.H.E. Inc. President, Mock
Construction Company and The Island Inn Enterprises, Inc.
JAMES D. MOORE D. LAMONT SHELL
President, J.D. Moore, Inc. President, Glynn Electric Supply Co.
- - ------------------------------------------------------------------------------
FIRST GEORGIA BANK, BRUNSWICK
- - ------------------------------------------------------------------------------
HENRY S. BISHOP G. FRED COOLIDGE III
Chairman and President Executive Vice President,
Chief Financial Officer
CATHERINE BOYNE JUDY DIXON LAURA D. FRIEND
Assistant Vice President Assistant Vice President Vice President, Data
Processing
SHERRYL JAMES GEORGE McMANUS ELI D. MULLIS
Assistant Vice President Loan Officer Assistant Vice President
MILLEDGE SMITH ROBERT STRANGE JODI TODD
Vice President Senior Vice President Assistant Vice President,
Internal Auditor
JON TAHLIER DORIS THOMAS SUSAN USSERY
Vice President Senior Vice President Vice President
LINDSAY VINYARD MARK WESTBERRY JAN WILDSMITH
Vice President Senior Vice President Assistant Vice President
- - ------------------------------------------------------------------------------
FIRST GEORGIA BANK, ALTAMA
- - ------------------------------------------------------------------------------
ELZIE JACOBS SUSAN STOWE
Vice President Assistant Vice President
<PAGE>
- - ------------------------------------------------------------------------------
FIRST GEORGIA BANK, ST. SIMONS ISLAND
- - ------------------------------------------------------------------------------
MEL BAXTER FELICIA SALTER DIANE SHARPE
Senior Vice President Assistant Vice President, Loan Officer
Operations
- - ------------------------------------------------------------------------------
FIRST GEORGIA BANK, WAL-MART SHOPPING CENTER
- - ------------------------------------------------------------------------------
RITA BOATRIGHT
Assistant Vice President
- - ------------------------------------------------------------------------------
FIRST GEORGIA BANK, NORTH BRUNSWICK
- - ------------------------------------------------------------------------------
FRED ALEXANDER CHINITA DAVIS
Vice President Assistant Vice President
- - ------------------------------------------------------------------------------
FIRST GEORGIA BANK, WAYCROSS/BLACKSHEAR
- - ------------------------------------------------------------------------------
PAM TAYLOR LINDA WALKER
Vice President Assistant Vice President, Operations
<PAGE>
EXHIBIT 99
Independent Auditors' Report
The Board of Directors and Stockholders
First Georgia Holding, Inc.
Brunswick, Georgia
We have audited the financial statements of operations,
stockholders' equity and cash flows of First Georgia Holding, Inc. and
subsidiary for the year ended September 30, 1996. 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.
We conducted our audit in accordance with generally accepted auditing standards.
Those standards require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the results of operations and cash flows of
First Georgia Holding, Inc. and subsidiary for the year ended September 30,
1996, in conformity with generally accepted accounting principles.
KPMG PEAT MARWICK LLP
Atlanta, Georgia
November 1, 1996
<PAGE>
<TABLE> <S> <C>
<ARTICLE> 9
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> SEP-30-1998
<PERIOD-END> SEP-30-1998
<CASH> 4,434
<INT-BEARING-DEPOSITS> 1,097
<FED-FUNDS-SOLD> 12,180
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 0
<INVESTMENTS-CARRYING> 11,565
<INVESTMENTS-MARKET> 11,768
<LOANS> 151,253
<ALLOWANCE> 969
<TOTAL-ASSETS> 190,463
<DEPOSITS> 162,890
<SHORT-TERM> 2,100
<LIABILITIES-OTHER> 3,292
<LONG-TERM> 6,500
0
0
<COMMON> 4,799
<OTHER-SE> 10,822
<TOTAL-LIABILITIES-AND-EQUITY> 15,681
<INTEREST-LOAN> 14,234
<INTEREST-INVEST> 699
<INTEREST-OTHER> 144
<INTEREST-TOTAL> 15,077
<INTEREST-DEPOSIT> 7,021
<INTEREST-EXPENSE> 7,832
<INTEREST-INCOME-NET> 7,240
<LOAN-LOSSES> 6
<SECURITIES-GAINS> 0
<EXPENSE-OTHER> 6,005
<INCOME-PRETAX> 3,232
<INCOME-PRE-EXTRAORDINARY> 3,232
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 2,014
<EPS-PRIMARY> 0.42
<EPS-DILUTED> 0.40
<YIELD-ACTUAL> 4.48
<LOANS-NON> 2,364
<LOANS-PAST> 0
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 1,012
<CHARGE-OFFS> 244
<RECOVERIES> 194
<ALLOWANCE-CLOSE> 969
<ALLOWANCE-DOMESTIC> 0
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 969
</TABLE>
