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 fiscal year ended December 31, 1996
Transition report under Section 13 or 15(d) of the Securities
Exchange Act of 1934 [No fee required]
For the transition period from ___________ to ____________
Commission file number 0-21498
LANIER BANKSHARES, INC.
(Name of Small Business Issuer in Its Charter)
Georgia 58-1814713
(State or Other Jurisdiction of (I.R.S. Employer
Incorporation or Organization) Identification No.)
854 Washington Street, Gainesville, Georgia 30501
(Address of Principal Executive Offices) (Zip Code)
(770) - 536-2265
(Issuer's Telephone Number, Including Area Code)
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 Per Share
Check whether the issuer: (1) filed all reports required to be filed by
Section 13 or 15(d) of the Exchange Act 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
past 90 days. Yes X No
Check if disclosure of delinquent filers in response to Item 405 of
Regulation S-B is not contained in this form, and no disclosure will be
contained, to the best of registrant's knowledge, in definitive proxy or
information statements incorporated by reference in Part III of this
Form 10-KSB or any amendment to this Form 10-KSB.
State issuer's revenues for its most recent fiscal year: $7,210,694
Aggregate market value of the voting stock held by non-affiliates computed
by reference to the price at which the stock was sold, or the average bid
and asked prices of such stock, as of a specified date within the past 60
days: $8,862,860 as of March 25, 1997
APPLICABLE ONLY TO CORPORATE REGISTRANTS
State the number of shares outstanding of each of the issuer's classes
of common equity, as of the latest practicable date.
618,013 as of March 25, 1997
Transitional Small Business Disclosure format (check one): Yes No X
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Annual Report to Shareholders for the fiscal year ended
December 31, 1996 are incorporated by reference into Part II.
Portions of the Proxy Statement for the Annual Meeting of Shareholders,
scheduled to be held April 23, 1997, are incorporated by reference into
Part III.
TABLE OF CONTENTS
Page
PART I . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5
ITEM 1. DESCRIPTION OF BUSINESS . . . . . . . . . . . . 5
ITEM 2. DESCRIPTION OF PROPERTIES . . . . . . . . . . . 24
ITEM 3. LEGAL PROCEEDINGS . . . . . . . . . . . . . . . 24
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS 24
PART II. . . . . . . . . . . . . . . . . . . . . . . . . . . . 25
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND
RELATED STOCKHOLDER MATTERS . . . . . . . . . . 25
ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS . . . . . . 25
ITEM 7. FINANCIAL STATEMENTS. . . . . . . . . . . . . . 26
ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
ACCOUNTING AND FINANCIAL DISCLOSURE . . . . . . 26
PART III . . . . . . . . . . . . . . . . . . . . . . . . . . . 26
ITEM 9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND
CONTROL PERSONS; COMPLIANCE WITH SECTION 16(a) OF THE
EXCHANGE ACT. . . . . . . . . . . . . . . . . . 26
ITEM 10. EXECUTIVE COMPENSATION. . . . . . . . . . . . . 26
ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT. . . . . . . . . . . . . . . . . . . 27
ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS. 27
ITEM 13. EXHIBITS, LISTS AND REPORTS ON FORM 10-KSB. . . 28
page 4
PART I
ITEM 1. DESCRIPTION OF BUSINESS
The Company
The Company was incorporated as a Georgia business corporation on
November 3, 1988, and became a bank holding company by acquiring all
of the Common Stock of Lanier National Bank (the "Bank") upon
the Bank's formation. On July 31, 1991, the Company purchased shares
representing 51% ownership in a data processing company, Lanier Data
Corporation (the "Data Corporation"). The Company currently owns all of
the stock of the Data Corporation. The Bank and the Data Corporation
are presently the only operating subsidiaries of the Company.
The Company was organized to facilitate the Bank's ability to serve its
customers' requirements for financial services. The holding company
structure provides flexibility for expansion of the Company's banking
business through the possible acquisition of other financial institutions
and the provision of additional banking-related services that a traditional
commercial bank may not provide under present laws. For example,
banking regulations require the Bank to maintain a minimum ratio of capital
to assets. In the event that the Bank's growth prevents it from maintaining
this minimum ratio, the Company may borrow funds, subject to
capital adequacy guidelines of the Federal Reserve and contribute them to
the capital of the Bank and otherwise raise capital in a manner unavailable
to the Bank under the existing banking regulations.
The Company has no present plans to acquire any additional operating
subsidiaries. The Company may, however, make additional acquisitions in
the future in the event that the acquisitions are deemed to be in the
best interests of the Company and its shareholders. Such acquisitions, if
any, will be subject to certain regulatory approvals and requirements.
See "Business - Bank Holding Company Regulation."
The Bank
General
The Bank opened for business on August 1, 1989 as a full-service
commercial bank without trust powers. The Bank offers personal and
business checking accounts, interest-bearing checking accounts,
savings accounts and various types of certificates of deposit. The Bank
also offers consumer/installment loans, construction loans, commercial loans
and home equity lines of credit. In addition, the Bank provides such
services as official bank checks and money orders, Mastercard credit cards,
safe deposit box, traveler's checks, bank-by-mail, direct deposit of payroll
and Social Security check, U.S. Savings Bonds, wire transfer of funds
and a night depository. The Bank also offers individual retirement accounts.
Philosophy
The philosophy of the Bank's management (the "Management") is to
emphasize prompt and responsive personal service to residents of
Gainesville, Georgia, as well as other Hall County communities, in order to
attract customers and acquire market share controlled by other financial
institutions in the Bank's market area. Management conducts an active call
program, by which officers and directors promote these efforts by
personally describing the products, services and philosophy of the Bank to
both existing and new business prospects. In addition, the Bank President
page 5
has substantial banking experience in Hall County which gives the
Bank an important asset in its efforts to provide products and services
designed to meet the needs of the Bank's customer base. All of the Bank's
directors are active members of the business communities in Gainesville and
other cities located in Hall County, and their continued active community
involvement provides them with an opportunity to promote the Bank and its
products and services.
Market Area and Competition
The Bank is located near the center of the Gainesville retail district,
which is anchored by the Lakeshore Mall. In 1995, the Bank opened a full
service branch on Thompson Bridge Road located in Gainesville,
Georgia. The Bank's primary market area is Hall County, Georgia, from which
the Bank draws approximately 95% of its business, and the Bank's marketing
efforts are focused in the cities of Gainesville, Oakwood and
Flowery Branch. The Bank competes for deposits and loan customers with
other financial institutions whose resources are equal to or greater than
those available to the Bank and the Company. There are twenty-eight (28)
offices of eight (8) commercial banks located in Hall County.
These financial institutions offer all of the services that the Bank offers.
Deposits
The Bank offers a wide range of commercial and consumer deposit accounts,
including noninterest-bearing checking accounts, money market checking
accounts (consumer and commercial), negotiable order of withdrawal ("NOW")
accounts, individual retirement accounts, time certificates of deposit
and regular savings accounts. Sources of deposits are typically residents,
businesses and business employees within the Bank's market area and are
obtained through personal solicitation by the Bank's officers and
directors, direct mail solicitation and advertisements published in the
local media. The Bank pays competitive interest rates on time and savings
deposits and has implemented a service charge fee schedule competitive with
other financial institutions in the Bank's market area, covering such matters
as maintenance fees on checking accounts, per item processing fees on
checking accounts and returned checks charges.
Loan Portfolio
General. The Bank engages in a full complement of lending activities,
including consumer/installment loans and home equity lines of credit,
commercial loans and construction loans, with particular emphasis on
small business loans. Management believes that the origination of short-term
fixed rate loans and loans tied to floating interest rates is the most
desirable method of conducting its lending activities.
Consumer Loans. The Bank's consumer loans consist primarily of
installment loans to individuals for personal, family and household
purposes, including loans for automobiles, home improvement and
investments. Also included as consumer loans are those loans secured by
second priority mortgages on the residences of borrowers.
Commercial Loans. The Bank's commercial lending is directed principally
toward businesses which are existing deposit customers of the Bank, and
whose demands for funds fall within the Bank's legal lending limits. This
category of loans includes loans made for a variety of business purposes to
individual, partnership or corporate borrowers. The Bank's commercial loan
portfolio includes approximately $5,276,000 of residential construction loans
or approximately 10.3% of the Bank's loan portfolio. Management has limited
this category of loans because, to a greater extent than other commercial
loans, residential construction loans are sensitive to changes in the
economy, and therefore present greater risk to the Bank.
page 6
Investments
As of December 31, 1996, investment securities comprised approximately
25% of the Bank's assets, with net loans comprising approximately 60% of
assets. The Bank invests primarily in obligations of the United States,
obligations guaranteed as to principal and interest by the United States,
other taxable securities and certain obligations of states and
municipalities. The Bank also engages in Federal funds transactions with its
principal correspondent banks and anticipates it will primarily act as a net
seller of such funds. The sale of Federal funds amounts to a short-term
loan from the Bank to another bank.
Asset/Liability Management
It is the Bank's objective to manage its assets and liabilities to
provide a satisfactory and consistent level of profitability within the
framework of established cash, loan, investment, borrowing and capital
policies. Certain Bank officers are responsible for developing and
monitoring policies and procedures that ensure acceptable composition of the
asset/liability mix. Management's overall philosophy is to support asset
growth primarily through growth of core deposits, which include deposits of
all categories made by individuals, partnerships and corporations.
Management seeks to invest the largest portion of the Bank's assets in
consumer/installment, commercial and construction loans.
The Bank's asset/liability mix is monitored daily, and a report
reflecting interest-sensitive assets and interest-sensitive liabilities is
prepared and presented to the Bank's Board of Directors monthly. The
objective of this regular review is to control interest-sensitive assets
and liabilities so as to minimize the impact of substantial movements in
interest rates on the Bank's earnings.
The Data Corporation
The Data Corporation was incorporated as a Georgia business corporation
on July 31, 1991. The Data Corporation rents space from the Bank and
presently provides data processing services to the Bank.
Employees
At December 31, 1996, the Company and its subsidiaries employed 36
full-time employees and 2 part-time employees. The Company considers its
relationship with its employees to be excellent.
page 7
Selected Statistical Information
The following statistical information is provided for Lanier
Bankshares, Inc. for the years ended December 31, 1996 and 1995. The data
is presented using daily average balances. This data should be read
in conjunction with the financial statements appearing elsewhere in this
Annual Report.
Average Balances and Net Income Analysis
The following tables set forth the amount of the Company's interest
income or interest expense for each category of interest-earning assets
and interest-bearing liabilities and the average interest rate for total
interest-earning assets and total interest-bearing liabilities, net interest
spread and net yield on average interest-earning assets.
Average Balances. The condensed average balance sheets for the years
indicated are presented below.
December 31,
1996 1995
(Dollars in Thousands)
Assets
Cash and due from banks $ 3,336 $ 2,956
Taxable securities 12,800 8,787
Nontaxable securities 5,254 4,320
Federal funds sold 2,969 1,859
Loans(1) 49,599 44,597
Reserve for loan losses (676) (584)
Other assets 4,995 5,339
---------- ----------
Total assets $ 78,277 $ 67,274
---------- ----------
Total interest-earning assets $ 70,622 $ 59,563
========== ==========
Liabilities and Shareholders' Equity
Deposits
Noninterest-bearing demand $ 10,538 $ 8,051
Interest-bearing demand 10,762 9,067
Savings 8,021 6,447
Time 39,730 35,209
----------- ----------
Total deposits $ 69,051 $ 58,774
----------- ----------
Other borrowings $ 494 $ 619
Other liabilities 1,211 1,437
----------- ----------
Total liabilities $ 70,756 $ 60,830
Shareholders' equity 7,521 6,444
----------- ----------
Total $ 78,277 $ 67,274
=========== ==========
Total interest-bearing liabilities $ 59,007 $ 51,342
=========== ==========
(1)Average loans include nonaccrual loans.
page 8
Interest Income and Interest Expense
The following table sets forth the Company's interest income and
interest expense for each category of interest-earning assets and
interest-bearing liabilities and the average interest rate for total
interest-earning assets and total interest-bearing liabilities,
net interest spread and net yield on average interest-earning assets.
Year Ended December 31,
1996 1995
Interest Rate Interest Rate
(Dollars in Thousands)
Interest income
Interest and fees on loans (1) $ 5,426 10.94% $ 4,858 10.89%
Interest on taxable securities 843 6.59 595 6.77
Interest on nontaxable securities(2) 234 4.45 202 4.68
Interest on Federal funds sold 160 5.39 106 5.70
$ 6,663 9.43% $ 5,761 9.67%
------- ----- ------- ----
Interest expense
Interest on interest-bear demand $ 405 3.76% $ 329 3.63%
Interest on savings 383 4.77 338 5.24
Interest on time deposits 2,412 6.07 2,126 6.04
Interest on other borrowing 43 8.70 44 7.11
$ 3,243 5.50% $ 2,837 5.53%
------- ----- ------- -----
Net interest income $ 3,420 $ 2,924
======= =======
Net interest spread 3.93% 4.14%
===== =====
Net yield on average interest-earning assets 4.84% 4.91%
===== =====
(1) Interest and fees on loans include $513,712 and $401,579 of loan fee
income for the years ended December 31, 1996 and 1995, respectively.
There was approximately $2,000 in income recognized on nonaccrual
loans in 1996 and none in 1995.
(2) Yields on nontaxable securities have not been computed on a tax
equivalent basis.
page 9
Rate and Volume Analysis. The following table reflects the changes in
net interest income resulting from changes in interest rates and from asset
and liability volume. The change in interest attributable to rate has been
determined by applying the change in rate between years to average balances
outstanding in the later year. The change in interest due to volume has been
determined by applying the rate from the earlier year to change in average
balances outstanding between years. Thus, changes that are not solely due
to volume have been consistently attributed to rate.
Year Ended December 31,
1996 vs. 1995
(Dollars in Thousands)
Increase Change Due To
(Decrease) Rate Volume
Interest income
Interest and fees on loans $ 568 $ 21 $ 547
Interest on taxable securities 248 (8) 256
Interest on nontaxable securities 32 (10) 42
Interest on Federal funds sold 54 (6) 60
$ 902 $ (3) $ 905
Interest expense
Interest on interest-bearing demand $ 76 $ 12 $ 64
Interest on savings 45 (31) 76
Interest on time deposits 286 11 275
Interest on other (1) 9 (10)
$ 406 $ 1 $ 405
Net interest income $ 496 $ (4) $ 500
Asset/Liability Management. The following table sets forth the
distribution of the repricing of the Company's earning assets and
interest-bearing liabilities as of December 31, 1996 the interest rate
sensitivity gap (i.e., interest rate sensitive assets less interest rate
sensitive liabilities), the cumulative interest rate sensitivity gap,
the interest rate sensitivity gap ratio (i.e., interest rate sensitive assets
divided by interest rates sensitive liabilities) and the cumulated sensitivity
gap ratio. The table also sets forth the time periods in which earning assets
and liabilities will mature or may reprice in accordance with their
contractual terms. However, the table does not necessarily indicate the
impact of general interest rate movements on the net interest margin since
the repricing of various categories of assets and liabilities is subject to
competitive pressures and the needs of the Bank's customers. In addition,
various assets and liabilities indicated as repricing within the same period
may in fact reprice at different times within such period and at different
rates.
page 10
<TABLE>
<CAPTION>
After After
Three One
Months Year
Within But But After
Three Within Within Five
Months One Five Years
Total
Year Years
(Dollars in Thousands)
<S> <C> <C> <C> <C>
<C>
Interest earnings assets:
Interest-bear deposits in banks 53 -- -- --
53
Federal funds sold 1,800 -- -- --
1,800
Securities 1,369 300 9,121 10,183
20,973
Loans 26,093 9,689 14,842 661
51,285
Total interest-earnings assets 29,315 9,989 23,963 10,844
74,111
Interest-bearing liabilities:
Interest-bearing demand deposits 11,380 -- -- --
11,380
Savings 9,525 -- -- --
9,525
Time deposits 10,456 17,509 12,527 --
40,492
Other borrowings 173 -- 350 --
523
Total interest-bear liabilities 31,534 17,509 12,877 0
61,920
Interest rate sensitivity gap (2,219) (7,520) 11,086 10,844
12,191
Cumulative interest rate
sensitivity gap (2,219) (9,739) 1,347 12,191
Interest rate sensitivity
gap ration 0.93 0.57 1.86 --
Cumulative interest rate
sensitivity gap ratio 0.93 0.80 1.02 1.20
</TABLE>
The Company actively manages the mix of asset and liability maturities
to control the effects of changes in the general level of interest rates
on net interest income. Except for its effect on the general level of
interest rates, inflation does not have a material impact on the Company due
to the rate variability and short-term maturities of its earning assets. In
particular, approximately 70% of the loan portfolio is comprised of loans
which are variable rate terms or short-term obligations.
page 11
Investment Portfolio
<TABLE>
Types of Investments. The amortized cost and approximate fair value of
securities are as follows:
<CAPTION>
Gross Gross
Amortized Unrealized Unrealized
Fair
Cost Gains Losses
Value
(Dollars in Thousands)
<S> <C> <C> <C> <C>
Securities Available for Sale
December 31, 1996:
U.S. Government and
agency securities 6,283 7 (37)
6,253
State and municipal securities 2,060 23 (21)
2,062
Mortgage-backed securities 708 -- --
708
Equity securities 448 18 --
466
9,499 48 (58)
9,489
Securities Held for Investment
December 31, 1996:
U.S. Government and
agency securities 6,532 17 (58)
6,491
State and municipal securities 4,469 37 (30)
4,476
Mortgage-backed securities 483 -- (8)
475
11,484 54 (96)
11,442
Securities Available for Sale
December 31, 1995:
U.S. Government and agency
securities 3,640 47 (17)
3,670
State and municipal securities 1,855 16 (11)
1,860
Mortgage-backed securities 815 1 (9)
807
Equity securities 448 -- --
448
6,758 64 (37)
6,785
Securities Held for Investment
December 31, 1995:
U.S. Government and agency
securities 3,886 37 (5)
3,918
State and municipal securities 2,857 36 (14)
2,879
Mortgage-backed securities 240 -- --
240
6,983 73 (19)
7,037
</TABLE>
The Company does not have investments to one issuer totaling more
than 10% of equity.
page 12
<TABLE>
Maturities. The amounts of investment securities in each category as of
December 31, 1996 are shown in the following table according to maturity
classifications (1) one year or less, (2) after one year through five years
and (3) after five years through ten years.
<CAPTION>
State and U.S.
Treasury
Political and Other
U.S.
Subdivisions Government
Agencies
Amount Amount
(Dollars in Yield (Dollars in
Yield
Thousands) <F1><F3> Thousands)
<F1><F2>
<S> <C> <C> <C>
<C>
Maturity:
One year or less $ -- -- % $ 549
6.89%
After one yr through five yrs 1,854 4.82 7,214
6.20
After five yrs through ten yrs 3,696 4.67 5,022
6.69
After ten yrs 981 5.44 --
--
$ 6,531 4.83% $12,785
6.42%
<FN>
<F1>
Yields were computed using coupon interest, adding discount accretion or
subtracting premium amortization, as appropriate, on a ratable basis over
the life of each security. The weighted average yield for each maturity
range was computed using the acquisition price of each security in that range.
<F2>
The above schedule excludes mortgage-backed securities of $1,191,000 which
have portions that mature on a monthly basis and equity securities which have
no contractual maturity.
<F3>
Yields on state and political subdivision securities have not been computed
on a tax equivalent basis.
</FN>
</TABLE>
Loan Portfolio
Types of Loans. The amount of loans outstanding at the indicated dates
is shown in the following table according to type of loans. Management is
not aware of any additional concentrations.
December 31,
1996 1995
(Dollars in Thousands)
Commercial, financial and agricultural $ 7,693 $ 7,326
Real estate-construction 5,276 7,503
Real estate-mortgage 30,693 27,454
Consumer instalment and others 7,623 7,506
--------- ---------
$ 51,285 $ 49,789
Allowance for loan losses (707) (634)
--------- ---------
Loans, net $ 50,578 $ 49,155
========= =========
page 13
Maturities and Sensitivity to Changes in Interest Rates. Total loans as
of December 31, 1996 are shown in the following table according to maturity
classifications (1) one year or less, (2) after one year through five years
and (3) after five years.
(Dollars in
Thousands)
Maturity
One year or less $ 31,313
After one year through five years $ 19,311
After five years 661
----------
$ 51,285
==========
The following table summarizes loans at December 31, 1996 with the due
dates after one year which (1) have predetermined interest rates and (2) have
floating or adjustable interest rates.
(Dollars in
Thousands)
Predetermined interest rates $ 15,503
Floating or adjustable interest rates 4,469
----------
$ 19,972
==========
Records were not available to present the above information in each
category listed in the first paragraph above and could not be reconstructed
without undue burden.
Nonperforming Loans. The following table presents, at the dates
indicated, the aggregate of nonperforming loans for the categories indicated.
December 31,
1996 1995
(Dollars in Thousands)
Loans accounted for on a nonaccrual basis $ 127 $ 126
Installment loans and term loans
contractually past due ninety days or
more as to interest or principal payments
and still accruing 75 14
Loans, the terms of which have been
renegotiated to provide a reduction or
deferral of interest or principal because
of deterioration in the financial position
of the borrower -- --
Loans now current about which there are
serious doubts as to the ability of the
borrower to comply with present loan
repayment terms -- --
page 14
Effective January 1, 1995, the Company adopted Statement of Financial
Accounting Standards No. 114 and, as amended, No. 118, "Accounting by
Creditors for Impairment of a Loan". The statement prescribes that impaired
loans be measured on the present value of expected future cash flows discounted
at the loan's effective interest rate or, as a practical expedient, at the
loan's observable market price or the fair value of the collateral if the
loan is collateral dependent. The statement had no material effect on the
financial statements of the Company as of December 31, 1996.
In the opinion of management, any loans classified by regulatory
authorities as doubtful, substandard or special mention that have not been
disclosed above do not (i) represent or result from trends or uncertainties
which management reasonably expects will materially impact future operating
results, liquidity or capital resources, or (ii) represent material credits
about which management is aware of any information which causes management to
have serious doubts as to the ability of such borrowers to comply with the
loan repayment terms. Any loans classified by regulatory authorities as
loss have been charged off.
Commitments and Lines of Credit. In the ordinary course of business,
the Bank has granted commitments to extend credit to approved customers.
Generally, these commitments to extend credit have been granted on a
temporary basis for seasonal or inventory requirements and have been approved
by the Bank's Board of Directors. The Bank has also granted commitments
to approved customers for standby letters of credit. These commitments are
recorded in the financial statements when funds are disbursed or the
financial instruments become payable. The Bank uses the same credit and
collateral policies for these off balance sheet commitments as they do for
financial instruments that are recorded in the consolidated financial
statements. Commitments generally have fixed expiration dates or other
termination clauses and may require payment of a fee. Since many of the
commitment amounts expire without being drawn upon, the total
commitment amounts do not necessarily represent future cash requirements.
Following is a summary of the commitments outstanding at
December 31, 1996 and 1995.
1996 1995
(Dollars in Thousands)
Commitments to extend credit $ 6,194 $ 8,408
Standby letters of credit 816 534
-------- --------
$ 7,010 $ 8,942
======== ========
Summary of Loan Loss Experience
The provision for possible loan losses is created by direct charges to
operations. Losses on loans are charged against the allowance in the period
in which such loans, in management's opinion, become uncollectible.
Recoveries during the period are credited to this allowance. The factors that
influence management's judgment in determining the amount charged to operating
expense are past loan loss experience, composition of the loan portfolio,
evaluation of possible future losses, current economic conditions and other
relevant factors. The Company's allowance for loan losses was approximately
$707,000 at December 31, 1996, representing 1.38% of year end total loans
outstanding, compared with $634,000 at December 31, 1995, representing 1.27%
of year end total loans outstanding. The allowance for loan losses is
reviewed continuously based on management's evaluation of current risk
characteristics of the loan portfolio, as well as the impact of prevailing
and expected economic business conditions.
page 15
Management considers the allowance for loan losses adequate to cover possible
loan losses on the loans outstanding.
Management has not allocated the Company's allowance for loan losses to
specific categories of loans. Based on management's best estimate,
approximately 50% of the allowance should be allocated to real estate
loans, 37% to commercial loans and 13% to consumer loans as of
December 31, 1996.
The following table presents an analysis of the Company's loan loss
experience for the periods indicated:
Year Ended December 31,
1996 1995
(Dollars in Thousands)
Average amount of loans outstanding $ 49,599 $ 44,597
======== ========
Balance of reserve for possible loan losses
at beginning of period $ 634 $ 535
======== ========
Charge-offs:
Commercial, financial and agricultural $ (27) $ -
Consumer (24) (21)
Recoveries:
Consumer 4 8
Real estate -- 2
--------- ---------
Net Charge-offs $ (47) $ (11)
========= =========
Additions to reserve charged to
operating expenses $ 120 $ 110
======== ========
Balance of reserve for possible
loan losses $ 707 $ 634
======== ========
Ratio of net loan charge-offs to average loans .09% .02%
Deposits
Average amount of deposits and average rate paid thereon, classified as
to noninterest-bearing demand deposits, interest-bearing demand and saving
deposits and time deposits, for the periods indicated are presented
below.
page 16
--- Year Ended December 31, ---
1996 1995
Amount Rate Amount Rate
(Dollars in Thousands)
Noninterest-bearing
demand deposits $ 10,538 --% $ 8,051 --%
Interest-bearing demand 10,762 3.76 9,067 3.63
Savings deposits 8,021 4.77 6,447 5.24
Time deposits 39,730 6.07 35,209 6.04
-------- --------
Total deposits $ 69,051 $ 58,774
======== ========
The amounts of time certificates of deposit issued in amounts of
$100,000 or more as of December 31,1996, are shown below by category,
which is based on time remaining until maturity of (1) three months or
less, (2) over three through twelve months and (3) over twelve months.
(Dollars in
Thousands)
Three months or less $ 6,457
Over three through twelve months 7,174
Over twelve months 4,516
----------
Total $ 18,147
==========
Return on Assets and Shareholders' Equity
The following rate of return information for the periods indicated is
presented below.
Year Ended December 31,
1996 1995
Return on assets (1) 1.39% 1.20%
Return on equity (2) 14.46 12.52
Dividend payout ratio (3) 13.09 15.71
Equity to assets ratio (4) 9.61 9.58
(1) Net income divided by average total assets.
(2) Net income divided by average equity.
(3) Dividends declared per share divided by net income per share.
(4) Average equity divided by average total assets.
Supervision and Regulation
The following discussion sets forth the material elements of the
regulatory framework applicable to banks and bank holding companies and
provides certain specific information related to the Company.
page 17
General
The Company is a bank holding company registered with the Board of
Governors of the Federal Reserve System (the "Federal Reserve") under the
Bank Holding Company Act of 1956, as amended (the "BHC Act"). As such, the
Company and its non-bank subsidiaries are subject to the supervision,
examination, and reporting requirements of the BHC Act and the regulations
of the Federal Reserve.
The BHC Act requires every bank holding company to obtain the prior
approval of the Federal Reserve before: (a) it may acquire direct or indirect
ownership or control of any voting shares of any bank if, after such
acquisition, the bank holding company will directly or indirectly own
or control more than 5% of the voting shares of the bank; (b) it or any of
its subsidiaries, other than a bank, may acquire all or substantially all
of the assets of any bank; or (c) it may merge or consolidate with any other
bank holding company.
The BHC Act further provides that the Federal Reserve may not approve
any transaction that would result in a monopoly or would be in furtherance
of any combination or conspiracy to monopolize or attempt to monopolize the
business of banking in any section of the United States, or the effect of which
may be substantially to lessen competition or to tend to create a monopoly
in any section of the country, or that in any other manner would be in
restraint of trade, unless the anticompetitive effects of the proposed
transaction are clearly outweighed by the public interest in meeting the
convenience and needs of the community to be served. The Federal Reserve is
also required to consider the financial and managerial resources and future
prospects of the bank holding companies and banks concerned and the
convenience and needs of the community to be served. Consideration of
financial resources generally focuses on capital adequacy, which is
discussed below.
The BHC Act, as amended by the interstate banking provisions of the
Riegle-Neal Interstate Banking and Branching Efficiency Act of 1994
(the "Interstate Banking Act"), which became effective on September 29, 1995,
repealed the prior statutory restrictions on interstate acquisitions of banks
by bank holding companies, such that the Company, and any other bank holding
company located in Georgia may now acquire a bank located in any other state,
and any bank holding company located outside Georgia may lawfully acquire
any Georgia-based bank, regardless of state law to the contrary, in either
case subject to certain deposit-percentage, aging requirements, and other
restrictions. The Interstate Banking Act also generally provides that, after
June 1, 1997, national and state-chartered banks may branch interstate through
acquisitions of banks in other states. By adopting legislation prior to that
date, a state has the ability either to "opt in" and accelerate the date
after which interstate branching is permissible or "opt out" and prohibit
interstate branching altogether.
In February 1996, the Georgia Legislature adopted the "Georgia Interstate
Branching Act" effective June 1, 1997. The Georgia Interstate Branching Act
will permit Georgia-based banks and bank holding companies owning or
acquiring banks outside of Georgia and all non-Georgia banks and bank holding
companies owning or acquiring banks in Georgia to merge any lawfully acquired
bank into an interstate branch network. The Georgia Interstate Branching Act
also allows banks to establish de novo branches on a limited basis beginning
July 1, 1996. Beginning July 1, 1998, the number of de novo branches which may
be established will no longer be limited.
The BHC Act generally prohibits the Company from engaging in activities
other than banking or managing or controlling banks or other permissible
subsidiaries and from acquiring or retaining direct or indirect control of
any company engaged in any activities other than those activities determined
by the Federal Reserve to be so closely related to banking or managing or
controlling banks as to be a proper incident thereto. In determining whether
a particular activity is permissible, the Federal Reserve must
page 18
consider whether the performance of such an activity reasonably can be
expected to produce benefits to the public, such as greater convenience,
increased competition, or gains in efficiency, that outweigh possible adverse
effects, such as undue concentration of resources, decreased or unfair
competition, conflicts of interest, or unsound banking practices. For
example, factoring accounts receivable, acquiring or servicing loans, leasing
personal property, conducting discount securities brokerage activities,
performing certain data processing services, acting as agent or broker in
selling credit life insurance and certain other types of insurance in connection
with credit transactions, and performing certain insurance underwriting
activities all have been determined by the Federal Reserve to be permissible
activities of bank holding companies. The BHC Act does not place territorial
limitations on permissible non-banking activities of bank holding companies.
Despite prior approval, the Federal Reserve has the power to order a holding
company or its subsidiaries to terminate any activity or to terminate its
ownership or control of any subsidiary when it has reasonable cause to believe
that continuation of such activity or such ownership or control constitutes a
serious risk to the financial safety, soundness, or stability of any bank
subsidiary of that bank holding company.
The bank subsidiary of the Company is a member of the Federal Deposit
Insurance Corporation (the "FDIC"), and as such, its deposits are insured by
the FDIC to the maximum extent provided by law. Such subsidiary is also
subject to numerous state and federal statutes and regulations that affect its
business, activities, and operations, and it is supervised and examined by
one or more state or federal bank regulatory agencies.
The Office of the Comptroller of the Currency (the "OCC") regularly
examines the operations of the Bank and is given authority to approve or
disapprove mergers, consolidations, the establishment of branches,
and similar corporate actions. The OCC also has the power to prevent the
continuance or development of unsafe or unsound banking practices or other
violations of law.
Payment of Dividends
The Company is a legal entity separate and distinct from its banking
and other subsidiaries. The principal sources of cash flow of the Company,
including cash flow to pay dividends to its shareholders, are dividends by
the Bank. There are statutory and regulatory limitations on the payment of
dividends by the Bank to the Company as well as by the Company to its
shareholders.
If, in the opinion of the federal banking regulator, a depository
institution under its jurisdiction is engaged in or is about to engage in an
unsafe or unsound practice (which, depending on the financial condition
of the depository institution, could include the payment of dividends), such
authority may require, after notice and hearing, that such institution cease
and desist from such practice. The federal banking agencies have indicated
that paying dividends that deplete a depository institution's capital base to
an inadequate level would be an unsafe and unsound banking practice. Under
the Federal Deposit Insurance Corporation Improvement Act of 1991 ("FDICIA"),
a depository institution may not pay any dividend if payment would cause it to
become undercapitalized or if it already is undercapitalized. See "-- Prompt
Corrective Action." Moreover, the federal agencies have issued policy
statements that provide that bank holding companies and insured banks
should generally only pay dividends out of current operating earnings.
At December 31, 1996, under dividend restrictions imposed under federal
and state laws, the Bank, without obtaining governmental approvals, could
declare aggregate dividends to the Company of approximately $2,217,000.
page 19
The payment of dividends by the Company and the Bank may also be
affected or limited by other factors, such as the requirement to maintain
adequate capital above regulatory guidelines.
Capital Adequacy
The Company and the Bank are required to comply with the capital
adequacy standards established by the Federal Reserve and the appropriate
federal banking regulator in the case of Bank. There are two basic
measures of capital adequacy for bank holding companies that have been
promulgated by the Federal Reserve: a risk-based measure and a leverage
measure. All applicable capital standards must be satisfied for a bank
holding company to be considered in compliance.
The risk-based capital standards are designed to make regulatory capital
requirements more sensitive to differences in risk profile among banks and
bank holding companies, to account for off-balance-sheet exposure, and to
minimize disincentives for holding liquid assets. Assets and off-balance-
sheet items are assigned to broad risk categories, each with appropriate
weights. The resulting capital ratios represent capital
as a percentage of total risk-weighted assets and off-balance-sheet items.
The minimum guideline for the ratio (the "Total Risk-Based Capital Ratio")
of total capital ("Total Capital") to risk-weighted assets (including certain
off-balance-sheet items, such as standby letters of credit) is 8%. At least
half of Total Capital must comprise common stock, minority interests in the
equity accounts of consolidated subsidiaries, noncumulative perpetual
preferred stock, and a limited amount of cumulative perpetual preferred stock,
less goodwill and certain other intangible assets ("Tier 1 Capital"). The
remainder may consist of subordinated debt, other preferred stock, and a
limited amount of loan loss reserves ("Tier 2 Capital"). At
December 31, 1996, the Company's consolidated Total Risk-Based Capital Ratio
and its Tier 1 Risk-Based Capital Ratio (i.e., the ratio of Tier 1 Capital to
risk-weighted assets) were 13.82% and 12.74%, respectively.
In addition, the Federal Reserve has established minimum leverage ratio
guidelines for bank holding companies. These guidelines provide for a
minimum ratio (the "Leverage Ratio") of Tier 1 Capital to average assets,
less goodwill and certain other intangible assets, of 3% for bank holding
companies that meet certain specified criteria, including having the highest
regulatory rating. All other bank holding companies generally are required
to maintain a Leverage Ratio of at least 3%, plus an additional cushion of 100
to 200 basis points. The Company's Leverage Ratio at December 31, 1996 was
10.12%. The guidelines also provide that bank holding companies experiencing
internal growth or making acquisitions will be expected to maintain strong
capital positions substantially above the minimum supervisory levels without
significant reliance on intangible assets. Furthermore, the Federal Reserve
has indicated that it will consider a "tangible Tier 1 Capital Leverage
Ratio" (deducting all intangibles) and other indicia of capital strength in
evaluating proposals for expansion or new activities.
The Bank is subject to risk-based and leverage capital requirements
adopted by the OCC, which are substantially similar to those adopted by the
Federal Reserve for bank holding companies.
The Bank was in compliance with applicable minimum capital requirements as
of December 31, 1996. The Company has not been advised by any federal banking
agency of any specific minimum capital ratio requirement applicable to it or
its subsidiary depository institution.
Failure to meet capital guidelines could subject a bank to a variety of
enforcement remedies, including issuance of a capital directive, the
termination of deposit insurance by the FDIC, a prohibition on the taking
of brokered deposits, and certain other restrictions on its business. As
described below,
page 20
substantial additional restrictions can be imposed upon FDIC-insured
depository institutions that fail to meet applicable capital requirements.
See "-- Prompt Corrective Action."
The federal bank regulators continue to indicate their desire to raise
capital requirements applicable to banking organizations beyond their current
levels. In this regard, the Federal Reserve and the FDIC have,
pursuant to FDICIA, recently adopted final regulations, which will become
mandatory on January 1, 1998, requiring regulators to consider interest rate
risk (when the interest rate sensitivity of an institution's assets does
not match the sensitivity of its liabilities or its off-balance-sheet
position) in the evaluation of a bank's capital adequacy. The bank
regulatory agencies have concurrently proposed a methodology for evaluating
interest rate risk which would require banks with excessive interest rate
risk exposure to hold additional amounts of capital against such exposures.
The market risk rules will apply to any bank or bank holding company whose
trading activity equals 10% or more of its total assets, or whose trading
activity equals $1 billion or more.
Support of Subsidiary Institutions
Under Federal Reserve policy, the Company is expected to act as a source
of financial strength for, and to commit resources to support, each of its
banking subsidiaries. This support may be required at times when,
absent such Federal Reserve policy, the Company may not be inclined to
provide it. In addition, any capital loans by a bank holding company to any
of its banking subsidiaries are subordinate in right of payment to
deposits and to certain other indebtedness of such banks. In the event of
a bank holding company's bankruptcy, any commitment by the bank holding
company to a federal bank regulatory agency to maintain the capital of a
banking subsidiary will be assumed by the bankruptcy trustee and entitled to a
priority of payment.
Under the Federal Deposit Insurance Act ("FDIA"), a depository institution
insured by the FDIC can be held liable for any loss incurred by, or reasonably
expected to be incurred by, the FDIC after August 9, 1989, in connection with
(a) the default of a commonly controlled FDIC-insured depository institution
or (b) any assistance provided by the FDIC to any commonly controlled
FDIC-insured depository institution "in danger of default." "Default" is
defined generally as the appointment of a conservator or receiver, and "in
danger of default" is defined generally as the existence of certain
conditions indicating that a default is likely to occur in the absence of
regulatory assistance. The FDIC's claim for damages is superior to claims of
shareholders of the insured depository institution or its holding company,
but is subordinate to claims of depositors, secured creditors, and holders of
subordinated debt (other than affiliates) of the commonly controlled insured
depository institution. The subsidiary depository institutions of the Company
are subject to these cross-guarantee provisions. As a result, any loss
suffered by the FDIC in respect of these subsidiaries would likely result in
assertion of the cross-guarantee provisions, the assessment of such estimated
losses against the depository institution's banking affiliates, and a
potential loss of the Company's investment in such other subsidiary
depository institutions.
Prompt Corrective Action
FDICIA establishes a system of prompt corrective action to resolve the
problems of undercapitalized institutions. Under this system, which became
effective in December 1992, the federal banking regulators are required to
establish five capital categories (well capitalized, adequately capitalized,
undercapitalized, significantly undercapitalized, and critically
undercapitalized) and to take certain mandatory supervisory actions, and are
authorized to take other discretionary actions, with respect to institutions
in the three undercapitalized categories, the severity of which will depend
upon the capital category in which the institution is placed. Generally,
subject to a narrow exception, FDICIA requires
page 21
the banking regulator to appoint a receiver or conservator for an institution
that is critically undercapitalized. The federal banking agencies have
specified by regulation the relevant capital level for each category.
The capital levels established for each of the categories are as follows:
TIER 1 TOTAL RISK- TIER 1 RISK
Capital Category CAPITAL BASED CAPITAL BASED CAPITAL OTHER
- ---------------- --------- ------------- ------------- -----------
Well Capitalized 5% or more 10% or more 6% or more Not subject
to a capital
directive
Adequately
Capitalized 4% or more 8% or more 4% or more -
Undercapitalized less than 4% less than 8% less than 4% -
Significantly
Undercapitalized less than 3% less than 6% less than 3% -
Critically
Undercapitalized 2% or less - - -
tangible equity
For purposes of the regulation, the term "tangible equity" includes core
capital elements counted as Tier 1 Capital for purposes of the risk-based
capital standards, plus the amount of outstanding cumulative perpetual
preferred stock (including related surplus), minus all intangible assets
with certain exceptions. A depository institution may be deemed to be in a
capitalization category that is lower than is indicated by its actual capital
position if it receives an unsatisfactory examination rating.
An institution that is categorized as undercapitalized, significantly
undercapitalized, or critically undercapitalized is required to submit an
acceptable capital restoration plan to its appropriate federal banking
agency. Under FDICIA, a bank holding company must guarantee that a
subsidiary depository institution meets its capital restoration plan,
subject to certain limitations. The obligation of a controlling holding
company under FDICIA to fund a capital restoration plan is limited to the
lesser of 5% of an undercapitalized subsidiary's assets or the amount
required to meet regulatory capital requirements. An undercapitalized
institution is also generally prohibited from increasing its average total
assets, making acquisitions, establishing any branches, or engaging in any
new line of business, except in accordance with an accepted capital
restoration plan or with the approval of the FDIC. In addition, the
appropriate federal banking agency is given authority with respect to any
undercapitalized depository institution to take any of the actions it is
required to or may take with respect to a significantly undercapitalized
institution as described below if it determines "that those actions are
necessary to carry out the purpose" of FDICIA.
At December 31, 1996, the Bank had the requisite capital levels to
qualify as well capitalized.
FDIC Insurance Assessments
Pursuant to FDICIA, the FDIC adopted a new risk-based assessment system
for insured depository institutions that takes into account the risks
attributable to different categories and concentrations of assets and
liabilities. The new system, which went into effect on January 1, 1994,
assigns an institution to one
page 22
of three capital categories: (a) well capitalized; (b) adequately
capitalized; and (c) undercapitalized. These three categories are
substantially similar to the prompt corrective action categories described
above, with the "undercapitalized" category including institutions that are
undercapitalized, significantly undercapitalized, and critically
undercapitalized for prompt corrective action purposes. An institution is
also assigned by the FDIC to one of three supervisory subgroups within each
capital group. The supervisory subgroup to which an institution is assigned
is based on a supervisory evaluation provided to the FDIC by the institution's
primary federal regulator and information which the FDIC determines to be
relevant to the institution's financial condition and the risk posed to the
deposit insurance funds (which may include, if applicable, information
provided by the institution's state supervisor). An institution's insurance
assessment rate is then determined based on the capital category and
supervisory category to which it is assigned. Under the final risk-based
assessment system, as well as the prior transitional system, there are nine
assessment risk classifications (i.e., combinations of capital groups and
supervisory subgroups) to which different assessment rates are applied.
Assessment rates for members of both the Bank Insurance Fund ("BIF") and the
Savings Association Insurance Fund ("SAIF") for the first half of 1995, as
they had during 1994, ranged from 23 basis points (0.23% of deposits) for an
institution in the highest category (i.e., "well capitalized" and "healthy")
to 31 basis points (0.31% of deposits) for an institution in the lowest
category (i.e., "undercapitalized" and "substantial supervisory concern").
These rates were established for both funds to achieve a designated ratio of
reserves to insured deposits (i.e., 1.25%) within a specified period of time.
Once the designated ratio for the BIF was reached in May 1995, the FDIC
reduced the assessment rate applicable to BIF deposits in two stages, so
that, beginning 1996, the deposit insurance premiums for 92% of all BIF
members in the highest capital and supervisory categories were set at
$2,000 per year, regardless of deposit size. The FDIC elected to retain
the existing assessment rate range of 23 to 31 basis points for SAIF
members for the foreseeable future given the undercapitalized nature of that
insurance fund.
Recognizing that the disparity between the SAIF and BIF premium rates had
adverse consequences for SAIF-insured institutions and other banks with SAIF
assessed deposits, including reduced earnings and an impaired ability to
raise funds in capital markets and to attract deposits, on July 28, 1995,
the FDIC, the Treasury Department, and the Office of Thrift Supervision
released statements outlining a proposed plan to recapitalize the SAIF, the
principal feature of which was a special one-time assessment on depository
institutions holding SAIF-insured deposits, which was intended to
recapitalize the SAIF at a reserve ratio of 1.25%. This proposal
contemplated elimination of the disparity between the assessment rates on
BIF and SAIF deposits following recapitalization of the SAIF.
A variation of this proposal designated the Deposit Insurance Funds Act
of 1996 (the "Funds Act") was enacted by Congress as part of the omnibus
budget legislation and signed into law on September 30, 1996. As directed by
the Funds Act, the FDIC implemented a special one-time assessment of
approximately 65.7 basis points (0.657%) on a depository institution's
SAIF-insured deposits held as of March 31, 1995 (or approximately 52.6 basis
points on SAIF deposits acquired by banks in certain qualifying transactions).
In addition, the FDIC proposed a revision in the SAIF assessment rate
schedule that effected, as of October 1, 1996 (a) a widening in the
assessment rate spread among institutions in the different capital and risk
assessment categories, (b) an overall reduction of the assessment rate range
assessable on SAIF deposits of from 0 to 27 basis points, and (c) a special
interim assessment rate range for the last quarter of 1996 of from 18 to
27 basis points on institutions subject to FICO assessments. Effective
January 1, 1997, FICO assessments will be imposed on both BIF- and
SAIF-insured deposits in annual amounts presently estimated at 1.29 basis
points and 6.44 basis points, respectively. Beginning in January, 2000,
page 23
BIF- and SAIF- insured institutions will share the FICO interest costs at
equal rates currently estimated 2.43 basis points. The Funds Act 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.
Under the FDIA, insurance of deposits may be terminated by the FDIC upon
a finding that the institution has engaged in unsafe and unsound practices,
is in an unsafe or unsound condition to continue operations, or has violated
any applicable law, regulation, rule, order, or condition imposed by the FDIC.
Proposed Legislation and Regulatory Action
New regulations and statutes are regularly proposed which contain
wide-ranging proposals for altering the structures, regulations and
competitive relationships of the nation's financial institutions. It
cannot be predicted whether or what form any proposed regulation or
statute will be adopted or the extent to which the business of the Company
may be affected by such regulation or statute.
ITEM 2. DESCRIPTION OF PROPERTIES
The Company's corporate office, the Bank and the Data Corporation are
located at 854 Washington Street, Gainesville, Georgia. The building is
owned by the Bank without encumbrance. This property consists of a two-story
building which contains approximately 13,600 square feet of heated floor
space. The Bank also owns two branch offices without encumbrance. The first
branch office is located on Mundy Mill Road in south Hall County, and is a
single story facility with approximately 3,000 square feet of heated floor
space. The second branch office is located on Thompson Bridge Road in
Gainesville, which opened as a branch office in February 1995, and
contains approximately 3,300 square feet of heated floor space.
Other than normal real estate commercial lending activities of the Bank,
the Company generally does not invest in real estate, interests in real
estate, real estate mortgages, or securities of or interests in persons
primarily engaged in real estate activities.
ITEM 3. LEGAL PROCEEDINGS
There are no material pending legal proceedings to which the Company is
a party or of which any of its properties are subject; nor are there
material proceedings known to the Company to be contemplated by any
governmental authority; nor are there material proceedings known to the
Company, pending or contemplated, in which any director, officer or affiliate
or any principal security holder of the Company or any associate of
any of the foregoing, is a party or has an interest adverse to the Company.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
page 24
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND
RELATED STOCKHOLDER MATTERS
The response to this item is partially included in the Company's Annual
Report to shareholders at page 1, and is incorporated herein by reference.
The Company issued and sold (without payment of any selling commission
to any person) unregistered shares of its Common Stock, $1.00 par value,
pursuant to the exemption provided by Section 4(2) of the Securities Act
of 1933, as amended, as follows:
(i) On January 3, 1995, the Company issued 1,000 shares to an organizing
director upon exercise of a warrant to purchase shares of the
Company's Common Stock at an exercise price of $10.00 per share;
(ii) On May 5, 1996, the Company issued 1,300 shares to an organizing
director upon the exercise of a warrant to purchase shares of the
Company's Common Stock at an exercise price of $10.00 per
share; and
(iii) On July 31, 1996, the Company issued 84,374 shares to organizing
directors pursuant to a Warrant Exchange Plan. The Warrant
Exchange Plan provided that organizing directors could exchange
warrants for cash, stock or a combination of cash and stock. All
warrants not otherwise exchanged or exercised expired on
July 31, 1996.
Other than as described above, the Company did not have any sales of
unregistered securities during 1996, 1995 and 1994.
ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
The response to this item is included in the Company's Annual Report to
Shareholders under the heading, "Management's Discussion and Analysis of
Financial Condition and Results of Operations" at pages 29 through 34,
and is incorporated herein by reference.
page 25
ITEM 7. FINANCIAL STATEMENTS
The following financial statements are included in the Company's Annual
Report to Shareholders at pages 2 through 28, and are incorporated herein
by reference:
Independent Auditors' Report
Financial Statements
Consolidated Balance Sheets dated as of December 31, 1996 and 1995
Consolidated Statements of Income for the years ended
December 31, 1996, 1995, and 1994.
Consolidated Statements of Stockholders' Equity for the years ended
December 31, 1996, 1995 and 1994.
Consolidated Statements of Cash Flows for the years ended
December 31, 1996, 1995 and 1994.
Notes to Consolidated Financial Statements
ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING
AND FINANCIAL DISCLOSURE
Not Applicable.
PART III
ITEM 9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS;
COMPLIANCE WITH SECTION 16(a) OF THE EXCHANGE ACT
The responses to this Item are included in the Company's proxy statement for
the Annual Meeting of Shareholders to be held April 23, 1997, under the
headings, "Directors and Executive Officers - Election of Directors -
Nominees and Continuing Directors," at pages 2 through 4, "Security Ownership
of Certain Beneficial Owners and Management," at pages 7 through 10, and are
incorporated herein by reference.
ITEM 10. EXECUTIVE COMPENSATION
The responses to this Item are included in the Company's Proxy Statement
for the Annual Meeting of Shareholders to be held April 23, 1997, under the
heading, "Compensation of Executive Officers and Directors," at pages 4
through 7, and are incorporated herein by reference.
page 26
ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The responses to this item are included in the Company's Proxy Statement
for the Annual Meeting of Shareholders to be held April 23, 1997, under the
heading, "Security Ownership of Certain Beneficial Owners," at pages 7
through 10, and are incorporated herein by reference.
ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The responses to this Item are included in the Company's Proxy Statement
for the Annual Meeting of Shareholders to be held April 23, 1997, under the
headings, "Certain Relationships and Related Transactions," at page 11,
and "Compensation of Executive Officers and Directors," at pages 4
through 7, and are incorporated herein by reference.
page 27
ITEM 13. EXHIBITS, LISTS AND REPORTS ON FORM 10-KSB
(a) Exhibits
Exhibit Number Exhibit
-------------- -------
3.1 Articles of Incorporation. 1/
3.2 Bylaws. 1/
4.1 Instruments Defining the Rights of Security Holders.
See Articles of Incorporation at Exhibit 3.1 hereto
and Bylaws at Exhibit 3.2 hereto.
10.2* Lanier Bankshares, Inc. 1990 Stock Option Plan. 2/
10.3 Form of Organizer's Stock Warrant Agreement. 1/
10.6 Form of Lanier Bankshares, Inc. Stock Option Agreement. 2/
10.7 Lanier National Bank Director's Indexed Fee Continuation
Program, effective March 13, 1995, and related form of
Director Indexed Fee Continuation Program, Director
Agreement, and related form of Flexible Premium Life
Insurance Endorsement Method Split Dollar Plan
Agreement. 3/
10.8 Lanier Bankshares, Inc. Warrant Exchange Plan dated
July 11, 1996.
13.1 Lanier Bankshares, Inc. 1996 Annual Report to Shareholders.
Except with respect to those portions specifically
incorporated by reference into this Report, the Company's
1996 Annual Report to Shareholders is not deemed to be
filed as part of this Report.
21.1 Subsidiaries of Lanier Bankshares, Inc. 4/
24.1 Power of Attorney (appears on the signature pages to this
Annual Report on 10-KSB).
27 Financial Data Schedule.
(b) Reports on Form 8-K filed in the fourth quarter of 1995: None.
1/ Incorporated herein by reference to exhibit of same number in the
Company's Registration Statement on Form S-18, registration
No. 33-25402-A.
2/ Incorporated herein by reference to exhibit of same number in the
Company's Annual Report on form 10-K for the year ended
December 31, 1989.
3/ Incorporated herein by reference to an exhibit of the same number in
the Company's Annual Report on Form 10-KSB for the year ended
December 31, 1995.
4/ Incorporated herein by reference to exhibit of same number in the
Company's Annual Report on Form 10-KSB for the year ended
December 31, 1994.
page 28
* The indicated exhibit is a compensatory plan required to be filed
as an exhibit to this Form 10-KSB.
page 29
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this Report to be
signed on its behalf by the undersigned, thereunto duly authorized.
LANIER BANKSHARES, INC.
By: /s/ Joseph D. Chipman, Jr.
President and Chief
Executive Officer
Date: March 18, 1997
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS, that each person whose signature appears
on the signature page to this Report constitutes and appoints Joseph D.
Chipman, Jr. and Jeffrey D. Hunt, and each of them, his true and lawful
attorneys-in-fact and agents, with full power of substitution and
resubstitution, for him and in his name, place, and stead, in any and all
capacities, to sign any and all amendments to this Report, and to file
the same, with all exhibits hereto, and other documents in connection
herewith with the Securities and Exchange Commission, granting unto said
attorneys-in-fact and agents and each of them, full power and authority to
do and perform each and every act and thing requisite and necessary to be
done in and about the premises, as fully to all intents and purposes as he
might or could do in person, hereby ratifying and confirming all that said
attorneys-in-fact and agents or any of them, or their or his substitute or
substitutes, may lawfully do or cause to be done by virtue hereof.
page 30
Pursuant to the requirements of the Securities Exchange Act of 1934, this
Report has been signed below by the following persons on behalf of the
Registrant and in the capacities and on the dates indicated.
Signature Title Date
/s/ John W. Browning, III, M.D. Director March 19, 1997
John W. Browning III, M.D.
/s/ Joseph D. Chipman Director, President and March 19, 1997
Joseph D. Chipman Chief Executive Officer
/s/ Lewis W. Coker Director March 19, 1997
Lewis W. Coker
/s/ C. Edmondson Daniel Director March 19, 1997
C. Edmondson Daniel
/s/ J. Austin Edmondson Director March 19, 1997
J. Austin Edmondson
/s/ Jeffrey D. Hunt Senior Vice President March 19, 1997
Jeffrey D. Hunt and Secretary (Principal
Financial and Accounting
Officer)
/s/ Jerry D. Jackson Director March 19, 1997
Jerry D. Jackson
/s/ R. Thomas Jarrard Director March 19, 1997
R. Thomas Jarrard
/s/ Carlton W. Rogers, Sr. Director March 19, 1997
Carlton W. Rogers, Sr.
/s/ Stewart Teaver Director March 19, 1997
Stewart Teaver
/s/ Mike Wilson Director
Mike Wilson
page 31
EXHIBIT INDEX
Page Number in
Exhibit Sequentially
Number Exhibit Numbered Copy
------ -------
3.1 Articles of Incorporation. 1/ N/A
3.2 Bylaws. 1/ N/A
4.1 Instruments Defining the Rights of Security
Holders. See Articles of Incorporation at Exhibit
3.1 hereto and Bylaws at Exhibit 3.2 hereto. N/A
10.2* Lanier Bankshares, Inc. 1990 Stock Option
Plan. 2/ N/A
10.3 Form of Organizer's Stock Warrant Agreement 1/ N/A
10.6 Form of Lanier Bankshares, Inc. Stock Option
Agreement 2/ N/A
10.7 Lanier National Bank Director's Indexed Fee
Continuation Program, effective March 13, 1995,
and related form of Director Indexed Fee
Continuation Program, Director Agreement, and
related form of Flexible Premium Life Insurance
Endorsement Method Split Dollar Plan
Agreement. 3/
10.8 Lanier Bankshares, Inc. Warrant Exchange Plan,
dated July 11, 1996
13.1 Lanier Bankshares, Inc. 1996 Annual Report to
Shareholders. Except with respect to those
portions specifically incorporated by reference
into this Report, the Company's 1996 Annual
Report to Shareholders is not deemed to be filed
as part of this Report.
21.1 Subsidiaries of Lanier Bankshares, Inc. 4/ N/A
24.1 Power of Attorney (appears on the signature
pages to this Annual Report on 10-KSB).
27 Financial Data Schedule.
1/ Incorporated herein by reference to exhibit of same number in the
Company's Registration Statement on Form S-18, registration
No. 33-25402-A.
2/ Incorporated herein by reference to exhibit of same number in the
Company's Annual Report on form 10-K for the year ended
December 31, 1989.
3/ Incorporated herein by reference to exhibit of same number in the
Company's Annual Report on Form 10-KSB for the year ended
December 31, 1995.
4/ Incorporated herein by reference to exhibit of same number in the
Company's Annual Report on Form 10-KSB for the year ended
December 31, 1994.
* The indicated exhibit is a compensatory plan required to be
filed as an exhibit to this Form 10-KSB.
EXHIBIT 10.8
Lanier Bankshares, Inc.
Warrant Exchange Plan July 11, 1996
OFFERING OF LANIER BANKSHARES, INC.
COMMON STOCK IN EXCHANGE FOR OUTSTANDING WARRANTS
TO PURCHASE COMMON STOCK
July 11, 1996
I. Background Information
II. Features of the Exchange Plan
A. Methods for Exchange of Warrants
B. Election of Method of Exchange
C. Section 16 Implications
III. Copies of Exchange Documents
A. Stock Warrant Worksheet
B. Warrant Cancellation Agreement
C. Qualified Purchaser Questionnaire
IV. Information about the Company
A. Documents Previously Furnished and Available Upon Request
B. Risk Factors
page 1
I. BACKGROUND INFORMATION
Introduction. As of June 1, 1996, 526,239 shares of common stock, $1.00
par value ("Common Stock") of the Company were issued and outstanding.
Additionally, 128,570 shares were subject to warrants to purchase Common
Stock (the "Warrants"). The Warrants expire on July 31, 1996. The
holders of the Warrants presently have an incentive to exercise their
Warrants because the fair market value of the Common Stock (approximately
$17.65 per share as determined by the Board of Directors based on an
independent valuation described below) is higher than the exercise price of
the Warrants ($10.00 per share).
Effect on Capital and Earnings. If all of the Warrants were exercised,
the Company would experience an influx of cash resulting from the payment of
the exercise prices of these securities. Because the Company is already
fully capitalized, the additional cash payments would provide the Company
with additional excess capital. Additionally, the issuance of additional
shares upon exercise of the Warrants would have a dilutive effect on
existing shareholders and would decrease earnings per share.
Consideration of the Exchange Plan. The Board of Directors met with the
Company's independent accountants, counsel and analysts to determine the best
means of addressing the effect of exercising the Warrants on the capital and
earnings of the Company. The Board also engaged Southard Financial to
perform a valuation study in order to determine the fair market value of the
Common Stock and the Warrants. Based on Southard's valuation, the Board has
determined that, as of May 31, 1996, the fair market value of the Common
Stock was $17.65 per share and that the fair market value of each Warrant
was $7.65, representing the $17.65 fair market value of the Common Stock less
the $10.00 per share exercise price of the Warrants. The Board has determined
that these amounts continue to represent the fair market value of the Common
Stock and Warrants, respectively.
After considering various courses of action, management and the Board
agreed that giving Warrant holders the following choices with respect to the
treatment of their Warrants would allow the Company to eliminate some of the
concerns presented by the exercise of the Warrants in a manner that would be
fair to the Warrant holders and to the Company's shareholders.
II. FEATURES OF THE EXCHANGE PLAN
A. Methods for Exchange of Warrants
1. Exercising Warrants Upon Maturity.
The Warrant holders may choose to simply exercise the Warrants to
purchase stock upon maturity of the Warrants on July 31, 1996. If the
Warrants are exercised, there will be no immediate tax consequence because
they will be treated as investment warrants. The Warrant holder would pay
the full warrant exercise price, $10.00, multiplied by the number of
Warrants held. The Warrant holder's basis in the shares of Common Stock
obtained upon exercise will be equal to the exercise price, $10.00 per
share.
If the Warrant holder chooses this method, then the Common Stock
issued on the exercise of the Warrants will be considered to be acquired on
the date of the exercise. Accordingly, a new holding period starts on
that date, and the stock will have to be held for one year until it
will be eligible for long-term capital gain treatment. Additionally,
because the Common Stock to be issued upon exercise of the Warrants will
not be registered with the Securities and Exchange Commission (the "SEC"),
a two-year holding period will apply to such Common Stock before it may be
resold to the public under Rule 144 promulgated under the Securities
Act of 1933, as amended. The SEC is considering a reduction of the
two-year holding period to a one-year period, and we will keep the Company
apprised of developments in this regard. There is no "tacking" of the
holding period of the Warrants.
page 2
2. Exchanging Warrants for Cash or Shares Having a Value Equal to the
Value of the Warrant.
The Warrant holders may exchange the Warrants for either cash or stock
having a value equal to the Warrants exchanged. The exercise price for the
Warrants is $10.00 per share, and the fair market value of the Common Stock
is $17.65 per share. Thus, each Warrant has a present value of $7.65.
Under this option, the Warrant holder may exchange his or her Warrants for
(i) either $7.65 in cash for each share subject to the Warrant; or
(ii) Common Stock having a value of $7.65 for each share subject to the
Warrant.
In either event, exchanging for stock or cash, the $7.65 will be
treated as long term capital gain because the Warrants have been held for
more than a year. The basis in any newly acquired shares of Common Stock
would be $17.65 going forward. As is the case for an exercise for cash as
described in subparagraph 1 above, a two-year holding period will apply to
any Common Stock obtained in the exchange.
3. Exercising Warrants by Tendering Existing Shares of the Company's
Common Stock.
This method involves an actual exercise of the Warrants; however, the
aggregate exercise price will be paid in shares of Common Stock of the
Company. Thus (ignoring fractional shares), if someone held a Warrant for
100 shares of Common Stock requiring an exercise price of $1,000, the
Company could agree to accept payment of the exercise price in the form of
56.65 currently outstanding shares of the Company's stock, representing a
value of $17.65 per share. Because the Company's shares are being
exchanged, in effect, for additional shares of the Company, the
transaction qualifies as a tax-free exchange.
Thus, if a Warrant holder desired to exercise Warrants to acquire
100 shares of Common Stock at an exercise price of $1,000, the Warrant
holder would tender 57 shares and, in return, receive a new certificate
for 100 shares of Common Stock, plus the value of the fractional share
in cash. Only the cash would be taxable.
Of the new shares received, 56.65 shares would have the same tax
basis as the 56.65 shares tendered and would have the same holding period.
The remaining 43.35 new shares receives upon exercise would have a "zero"
basis and would have to be held for one year in order to qualify for long-
term capital gains treatment when sold. The same restrictions on resale
of the shares acquired upon exercise discussed in subparagraphs 1 and 2
above would also apply to all of the shares received in this case.
B. Election of Method of Exchange
Warrant holders should review the attached Stock Warrant Worksheet
and choose the method by which they would like to exercise the Warrants.
Warrant holders must deliver to the Company the Warrant holder's existing
Warrant Agreement and the Stock Warrant Worksheet indicating which method
of exchange they choose no later than 5:00 p.m. on July 31, 1996. Failure
to deliver the Stock Warrant Worksheet to the Company prior to this
deadline will result in expiration of the Warrant.
C. Section 16 Implications
This section applies only to directors, executive officers and
10% shareholders of the Company who are required to file reports under
Section 16 of the Securities Exchange Act of 1934 ("Section 16").
Because the Board has approved the Exchange Plan, the exercise or
exchange of the Warrants and any resulting acquisition of Common Stock
will be exempt from the short-swing liability provisions of Section 16.
Such transactions must, however, be reported on a Form 4 prior to the
tenth day of the month following the month in which the exercise or
exchange occurs. Representatives of the Company will assist you in
preparing and filing your Form 4 report with the SEC.
page 3
IV. INFORMATION ABOUT THE COMPANY
A. Documents Previously Furnished and Available Upon Request
Each of you has received a copy of the Company's 1995 Annual Report to
Shareholders, 1996 Proxy Statement and Quarterly Report to Shareholders for
the quarter ended March 31, 1996. Additional copies of these documents may
be obtained from Lanier Bankshares, Inc., P.O. Box 26, Gainesville,
Georgia 30503, Attn: Secretary or by calling the Company's Corporate
Secretary at (770) 536-2265.
B. Risk Factors
An investment in Common Stock of the Company involves various risks.
Please consider the following risks among others, before making a decision
to acquire Common Stock.
1. Restrictions on Dividends.
Dividends are payable on Common Stock only when, as and if declared
by the Company's Board of Directors from funds available therefor. The
Company must also maintain adequate capital. The principal source of the
Company's income is dividends and other payments by its subsidiaries. The
Company's banking subsidiary, Lanier National Bank (the "Bank") is subject
to statutory and regulatory restrictions on the payment of dividends and
must maintain adequate capital, which reduces the amount available for
dividends.
2. Competition.
The Bank operates in highly competitive markets with other banks and
financial institutions, many of which have greater financial and other
resources than are available to the Bank and its parent Company. The Bank
competes with institutions affiliated with much larger institutions
operating on a statewide and regional basis. The Company's long term
success will depend on the ability of the Bank to compete successfully in
its service area.
3. Local Economic Conditions
The success of the Company is dependent to a certain extent upon the
general economic conditions in the geographic markets served by the Bank.
Although the Company expects that economic conditions will continue to be
favorable in the Bank's market, no assurance can be given that these
economic conditions will continue. Adverse changes in economic conditions
in the geographic market that the Bank serves would likely impair the
Bank's ability to collect loans and could otherwise have a negative effect
on the financial condition of the Company.
4. Credit Risk
The greatest risk facing lenders generally is credit risk, that is,
the risk of losing principal and interest due to a borrower's failure to
perform according to the terms of the loan agreement. In addition, the
Bank may experience larger period-to-period fluctuations in its level of
nonperforming loans as a result of changes in circumstances of individual
borrowers on larger loans.
5. Supervision and Regulation
Bank holding companies and banks operate in a highly regulated
environment and are subject to the supervision and examination by several
federal and state regulatory agencies. The Company is subject to the Bank
Holding Company Act ("BHCA") and to regulation and supervision by the
Federal Reserve Board ("FRB"). The Bank is also subject to the regulation
and supervision of the FDIC and the Office of the Comptroller of the
Currency. Federal and state laws and regulations govern matters ranging
from the regulation of certain debt obligations, changes in control of bank
holding companies, and the maintenance of adequate capital for the general
business operations and financial condition of the Bank, including
permissible types, amounts and terms of loans and investments, the amount
of reserves against deposits, restrictions or dividends, establishment of
branch offices, and the
page 4
maximum rate of interest that may be charged by law. The FRB also
possesses cease and desist powers over bank holding companies to prevent
or remedy unsafe or unsound practices or violations of law. These and
other restrictions limit the manner by which the Company and the Bank may
conduct their business and obtain financing. Furthermore, the commercial
banking business is affected not only by general economic conditions, but
also by the monetary policies of the FRB. These monetary policies have
had and are expected to continue to have significant effects on the
operating results of commercial banks. Changes in monetary or legislative
policies may affect the ability of the Bank to attract deposits and make
loans.
page 5
EXHIBIT 13.1
1996 Annual Report to Shareholders
LANIER BANKSHARES, INC.
AND SUBSIDIARIES
CONSOLIDATED FINANCIAL REPORT
DECEMBER 31, 1996
Table of Contents
-----------------
Page
INDEPENDENT AUDITOR'S REPORT 1
FINANCIAL STATEMENTS
Consolidated balance sheets 2
Consolidated statements of income 3
Consolidated statements of stockholders' equity 4
Consolidated statements of cash flows 5 and 6
Notes to consolidated financial statements 7-28
INDEPENDENT AUDITOR'S REPORT
To the Board of Directors
Lanier Bankshares, Incr. and Subsidiaries
Gainesville, Georgia
We have audited the accompanying consolidated balance sheets of
Lanier Bankshares, Inc. and Subsidiaries as of December 31, 1996 and 1995,
and the related consolidated statements of income, stockholder's equity, and
cash flows for the years then ended. These financial statements are the
responsibility of the Company's management. Our responsibility is to
express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements.
An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of Lanier
Bankshares, Inc. and Subsidiaries as of December 31, 1996 and 1995, and the
results of their operations and their cash flows for the years then ended,
in conformity with generally accepted accounting principles.
/s/ Mauldin & Jenkins, LLC
Atlanta, Georgia
January 24, 1997
page 1
LANIER BANKSHARES, INC.
AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 1996 AND 1995
Assets 1996 1995
------------ -----------
Cash and due from banks $ 5,380,072 $ 2,927,598
Interest-bearing deposits in banks 53,155 69,005
Federal funds sold 1,800,000 3,000,000
Securities available-for-sale 9,489,072 6,784,994
Securities held-to-maturity
(fair value $11,441,995 and $7,037,195) 11,484,207 6,982,745
Loans 51,285,375 49,788,391
Less allowance for loan losses 706,852 633,732
---------- ----------
Loans, net 50,578,523 49,154,659
Premises and equipment 3,084,665 3,003,011
Other assets 2,068,933 1,906,846
------------ ------------
Total assets $ 83,938,627 $ 73,828,858
============ ============
Liabilities and Stockholders' Equity
Deposits
Noninterest-bearing demand $ 12,447,966 $ 9,899,041
Interest-bearing demand 11,380,481 9,242,619
Savings 9,525,019 6,978,574
Time, $100,000 and over 18,147,088 16,088,589
Other time 22,345,128 22,567,433
------------ -----------
Total deposits 73,845,682 64,776,256
Obligation under capital lease 123,146 155,779
Other borrowings 523,170 873,506
Other liabilities 1,124,202 1,128,001
------------ -----------
Total liabilities 75,616,200 66,933,542
------------ -----------
Commitments and contingent liabilities
Stockholders' equity
Common stock, par value $1;
10,000,000 shares authorized;
618,913 and 533,239 issued and outstanding 618,913 533,239
Capital surplus 5,232,102 4,799,151
Retained earnings 2,478,038 1,545,531
Unrealized gains (losses) on securities
available-for-sale, net of tax (6,626) 17,395
-------------- ------------
Total stockholders' equity 8,322,427 6,895,316
-------------- ------------
Total liabilities and
stockholders' equity $ 83,938,627 $ 73,828,858
============= ============
See Notes to Consolidated Financial Statements.
page 2
LANIER BANKSHARES, INC.
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
YEARS ENDED DECEMBER 31, 1996 AND 1995
1996 1995
Interest income
Loans $ 5,425,852 $ 4,858,412
Taxable securities 842,850 594,930
Nontaxable securities 234,485 201,488
Federal funds sold 160,236 106,432
------------ ------------
Total interest income 6,663,423 5,761,262
------------ ------------
Interest expense
Deposits 3,199,278 2,793,093
Other borrowings 43,847 44,305
------------ ------------
Total interest expense 3,243,125 2,837,398
------------ ------------
Net interest income 3,420,298 2,923,864
Provision for loan losses 120,000 110,000
------------ ------------
Net interest income after
provision for loan losses 3,300,298 2,813,864
Other income
Service charges on deposit accounts 430,655 300,997
Net realized gains on securities
available-for-sale 0 2,623
Gains on sale of premises and equipment 0 10,449
Other operating income 116,616 98,662
----------- ---------
Total other income 547,271 412,731
----------- ---------
Other expenses
Salaries and employee benefits 1,292,945 1,135,227
Equipment and occupancy expenses 375,101 389,324
Other operating expenses 606,360 565,276
Total other expenses 2,274,406 2,089,827
Income before income taxes 1,573,163 1,136,768
Income tax expense 485,928 330,000
------------ -----------
Net income $ 1,087,235 $ 806,768
Net Income per share
of common stock $ 1.91 $ 1.40
============ ===========
Weighted average shares outstanding 569,053 576,632
============ ===========
page 3
<TABLE>
LANIER BANKSHARES, INC.
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
YEARS ENDED DECEMBER 31, 1996 AND 1995
<CAPTION>
Unrealized
Gains
(Losses)
Securities
Available- Total
Common Stock Capital Retained
for-Sale, Stckhldrs'
Shares Par Value Surplus Earnings Net
of Tax Equity
------- --------- -------- --------
- ---------- ---------
<S> <C> <C> <C> <C> <C>
<C>
Balance, 12/31/94 525,239 525,239 4,727,151 856,225
(252,783) 5,855,832
Net income 0 0 0 806,768
0 806,768
Cash dividends declared,
$.25 per share 0 0 0 (117,462)
0 (117,462)
Exercise of stock warrants 8,000 8,000 72,000 0
0 80,000
Net change in unrealized
gain (loss) on securities
avail-for-sale,net of tax 0 0 0 0
270,178 270,178
------- ------- --------- ---------
- --------
Balance, 12/31/95 533,239 533,239 4,799,151 1,545,531
17,395 6,895,316
Net income 0 0 0 1,087,235
0 1,087,235
Cash dividends declared,
$.25 per share 0 0 0 (154,728)
0 (154,728)
Exercise and redemption
of stock warrants 85,674 85,674 432,951 0
0 518,625
Net change in unrealized
gain (loss) on securities
avail-for-sale,net of tax 0 0 0 0
(24,021) (24,021)
------- ------- --------- ---------
- --------
Balance, 12/31/96 618,913 618,913 5,232,102 2,478,038
(6,626) 8,322,427
</TABLE>
See Notes to Consolidated Financial Statements.
page 4
LANIER BANKSHARES, INC.
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31, 1996 AND 1995
1996 1995
OPERATING ACTIVITIES
Net income $ 1,087,235 $ 806,768
Adjustments to reconcile net income
to net cash provided by operating
activities:
Depreciation 186,157 190,446
Provision for loan losses 120,000 110,000
Deferred income taxes (5,370) (57,105)
Net realized gains on
securities available-for-sale 0 (2,623)
Gain on sale of premises and equipment 0 (10,449)
Increase in interest receivable (122,189) (128,136)
Increase in interest payable 57,613 339,711
Other operating activities (120,833) (189,218)
----------- -----------
Net cash provided by operating activities 1,202,613 1,059,394
----------- -----------
INVESTING ACTIVITIES
Purchase of securities available-for-sale (4,798,042) (1,258,369)
Proceeds from sales of securities
available-for-sale 0 645,002
Proceeds from maturities of securities
available-for-sale 2,057,570 1,234,043
Purchases of securities held-to-maturity (6,669,405) (1,499,623)
Proceeds from maturities of securities
held-to-maturity 2,167,943 665,167
Net(increase) decrease in Fed funds sold 1,200,000 (2,300,000)
Net increase in loans (1,543,864) (8,851,343)
Purchase of premises and equipment (267,811) (264,774)
Proceeds from sale of premises and equipment 0 13,636
----------- ------------
Net cash used in investing activities (7,853,609) (11,616,261)
----------- ------------
FINANCING ACTIVITIES
Net increase in deposits 9,069,426 11,582,534
Repayment of obligations under capital lease (32,633) (23,031)
Net repayment of other borrowings (350,336) (812,477)
Net proceeds from exercise and redemption
of stock warrants 518,625 80,000
Dividends paid (117,462) (78,786)
Net cash provided by financing activities 9,087,620 10,748,240
----------- ----------
See Notes to Consolidated Financial Statements.
page 5
LANIERBANKSHARES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31, 1996 AND 1995
1996 1995
Net increase in cash and cash equivalents $ 2,436,624 $ 191,373
Cash and cash equivalents at beg. of year 2,996,603 2,805,230
------------ -----------
Cash and cash equivalents at end of year $ 5,433,227 $ 2,996,603
============ ===========
SUPPLEMENTAL DISCLOSURES
Cash paid for:
Interest $ 3,185,512 $ 2,497,687
Income taxes $ 602,887 $ 376,611
NONCASH TRANSACTIONS
Unrealized (gains) losses on securities
available-for-sale $ 36,395 $ (409,362)
Principal balances of loans transferred
to other real estate $ 0 $ 749,362
Advance on lease obligation to finance
purchase of equipment $ 0 $ 178,810
See Notes to Consolidated Financial Statements.
page 6
LANIER BANKSAHRES, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Nature of Business
Lanier Bankshares, Inc. (the Company) is a bank holding company whose business
is conducted by its wholly-owned subsidiaries, Lanier National Bank (the Bank)
and Lanier Data Corporation. The Bank is a commercial bank located in
Gainesville, Hall County, Georgia. The Bank provides a full range of banking
services in its primary market area of Hall County and the surrounding
counties. Lanier Data Corporation provides data processing services to the
Bank.
Basis of Presentation
The consolidated financial statements include the accounts of the Company
and its subsidiaries. Significant intercompany transactions and accounts
are eliminated in consolidation.
The accounting and reporting policies of the Company conform to generally
accepted accounting principles and general practices within the financial
services industry. In preparing the financial statements, management is
required to make estimates and assumptions that affect the reported amounts
of assets and liabilities as of the date of the balance sheet and revenues
and expenses for the period. Actual results could differ from those
estimates.
Cash and Cash Equivalents
Cash on hand, cash items in process of collection, and amounts due
from banks including short-term interest-bearing deposits in banks, are
included in cash and cash equivalents.
The Company maintains amounts due from banks which, at times, may exceed
Federally insured limits. The Company has not experienced any losses in
such accounts.
page 7
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
Securities
Securities are classified based on management's intention on the date of
purchase. Securities which management has the intent and ability to hold to
maturity are classified as held-to-maturity and reported at amortized cost.
All other debt securities are classified as available-for-sale and carried at
fair value with net unrealized gains and losses included in stockholders'
equity net of tax. Marketable equity securities are carried at fair value with
net unrealized gains and losses included in stockholders' equity. Other
equity securities without a readily determinable fair value are carried
at cost.
Interest and dividends on securities, including amortization of premiums and
accretion of discounts, are included in interest income. Realized gains and
losses from the sales of securities are determined using the specific
identification method.
Loans
Loans are carried at their principal amounts outstanding less the allowance for
loan losses. Interest income on loans is credited to income based on the
principal amount outstanding.
Loan origination fees and certain direct costs of loans are recognized at the
time the loan is recorded. Because net origination loan fees and costs are not
material, the results of operations are not materially different than the
results which would be obtained by accounting for loan fees and costs in
accordance with generally accepted accounting principles.
The allowance for loan losses is maintained at a level that management believes
to be adequate to absorb potential losses in the loan portfolio. Management's
determination of the adequacy of the allowance is based on an evaluation of
the portfolio, past loan loss experience, current economic conditions, volume,
growth, composition of the loan portfolio, and other risks inherent in the
portfolio. In addition, regulatory agencies, as an integral part of their
examination process, periodically review the Company's allowance for loan
losses, and may require the Company to record additions to the allowance
based on their judgment about information available to them at the time of
their examinations.
page 8
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
Loans (Continued)
The accrual of interest on impaired loans is discontinued when, in management's
opinion, the borrower may be unable to meet payments as they become due.
Interest Income is subsequently recognized only to the extent cash payments
are received.
A loan is impaired when it is probable the Company will be unable to collect all
principal and interest payments due in accordance with the terms of the loan
agreement. Individually identified impaired loans are measured based on the
present value of payments expected to be received, using the contractual
loan rate as the discount rate. Alternatively, measurement may be based on
observable market prices or, for loans that are solely dependent on the
collateral for repayment, measurement may be based on the fair value of the
collateral. If the recorded investment in the impaired loan exceeds the
measure of fair value, a valuation allowance is established as a component of
the allowance for loan losses. Changes to the valuation allowance are recorded
as a component of the provision for loan losses.
Premises and Equipment
Premises and equipment are stated at cost less accumulated depreciation.
Depreciation is computed principally by the straight-line method over the
estimated useful lives of the assets.
Income Taxes
Income tax expense consists of current and deferred taxes. Current income tax
provisions approximate taxes to be paid or refunded for the applicable year.
Deferred tax assets and liabilities are recognized for the temporary
differences between the bases of assets and liabilities as measured by tax
laws and their bases as reported in the financial statements. Deferred tax
expense or benefit is then recognized for the change in deferred tax assets
or liabilities between periods.
Recognition of deferred tax balance sheet amounts is based on management's
belief that it is more likely than not that the tax benefit associated with
certain temporary differences, tax operating loss carryforwards and tax
credits will be realized. A valuation allowance is recorded for those
deferred tax items for which it is more likely than not that realization will
not occur.
page 9
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
Income Taxes (Continued)
The Company and the subsidiaries file a consolidated income tax return. Each
entity provides for income taxes based on its contribution to income taxes
(benefits) of the consolidated group.
Earnings Per Common Share
Earnings per common share are computed by dividing net income by the weighted
average number of shares of common stock and common stock equivalents
outstanding. Stock options are common stock equivalents for purposes of
calculating net income per share. Common stock equivalents that are
anti-dilutive are excluded from weighted average shares outstanding.
NOTE 2. SECURITIES
<TABLE>
The amortized cost and fair value of securities are summarized as follows:
<CAPTION>
Gross Gross
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
--------- ---------- ----------
- ------
<S> <C> <C> <C> <C>
Securities Avail-for-Sale
December 31, 1996:
U. S. Government and agency
securities 6,283,022 6,511 (37,008)
6,252,525
State and municipal securities 2,060,559 23,295 (21,492)
2,062,362
Mortgage-backed securities 707,706 420 -
708,126
Equity securities 447,824 18,235 -
466,059
--------- -------- --------
- ---------
9,499,111 48,461 (58,500)
9,489,072
========= ======== ========
=========
December 31, 1995:
U. S. Government and agency
securities 3,640,651 47,642 (17,425)
3,670,868
State and municipal securities 1,854,531 15,972 (10,990)
1,859,513
Mortgage-backed securities 815,097 711 (9,325)
806,483
Equity securities 448,359 - (229)
448,130
--------- ------ --------
- ---------
6,758,638 64,325 (37,969)
6,784,994
========= ====== ========
=========
</TABLE>
page 10
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 2. SECURITIES (Continued)
<TABLE>
<CAPTION>
Gross Gross
Amortized Unrealized Unrealized
Fair
Cost Gains Losses
Value
--------- ---------- ----------
- ------
<S> <C> <C> <C> <C>
Securities Held-to-Maturity
December 31, 1996:
U. S. Gov't and agency
securities 6,531,696 16,593 (58,147)
6,490,142
State and municipal securities 4,468,953 37,590 (30,175)
4,476,368
Mortgage-backed securities 483,558 - (8,073)
475,485
---------- ------ --------
- ----------
11,484,207 54,183 (96,395)
11,441,995
========== ====== ========
==========
December 31, 1995:
U. S. Gov't and agency
securities 3,886,042 36,915 (4,551)
3,918,406
State and municipal securities 2,856,426 36,498 (14,078)
2,878,846
Mortgage-backed securities 240,277 - (334)
239,943
--------- ------ -------
- ---------
6,982,745 73,413 (18,963)
7,037,195
========= ====== ========
=========
</TABLE>
The amortized cost and fair value of securities as of December 31, 1996 by
contractual maturity are shown below. Maturities may differ from contractual
maturities in mortgage-backed securities because the mortgages underlying the
securities may be called or prepaid with or without penalty. Therefore, these
securities and equity securities are not included in the maturity categories
in the following maturity summary.
Securities
Available-for-Sale Held-to-Maturity
Amortized Fair Amortized Fair
Cost Value Cost Value
---------- --------- ----------- ------
Due in one year or less 299,894 299,774 249,658 254,607
Due from one year to
five years 5,588,098 5,547,027 6,140,367 6,106,354
Due from five to ten
years 2,249,090 2,250,402 4,482,469 4,478,681
Due after ten years 206,499 217,684 128,155 126,868
Mortgage-backed
securities 707,706 708,126 483,558 475,485
Equity securities 447,824 466,059 - -
---------- ---------- ---------- ----------
9,499,111 9,489,072 11,484,207 11,441,995
========= ========== ========== ==========
page 11
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 2. SECURITIES (Continued)
Securities with a carrying value of $8,003,0000 and $9,376,000 at
December 31, 1996 and 1995, respectively, were pledged to secure public
deposits and for other purposes.
Gains and losses on sales of securities available-for-sale consist of the
following:
December 31,
1996 1995
------- -------
Gross gains on sales of securities $ - $ 2,940
Gross losses on sales of securities - (317)
------- -------
Net realized gains on sales of securities $ - $ 2,623
======= =======
Under special provisions adopted by the Financial Accounting Standards Board in
October 1995, the Company transferred $157,543 from securities held-to-
maturity to securities available-for-sale on December 31, 1995, resulting in
a net unrealized gain of $2,764 which was included in stockholders' equity at
$1,824 net of related taxes of $940.
NOTE 3. LOANS AND ALLOWANCE FOR LOAN LOSSES
The composition of loans is summarized as follows:
December 31,
1996 1995
Commercial, financial, and agricultural $ 7,693,000 $ 7,326,000
Real estate - construction 5,276,000 7,503,000
Real estate - mortgage 30,693,000 27,454,000
Consumer instalment and other 7,623,375 7,505,391
------------ ------------
51,285,375 49,788,391
Allowance for loan losses (706,852) (633,732)
------------ ------------
Loans, net $ 50,578,523 $ 49,154,659
============ ============
page 12
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 3. LOANS AND ALLOWANCE FOR LOAN LOSSES (Continued)
Changes in the allowance for loan losses for the years ended
December 31 were as follows:
1996 1995
Balance, beginning of year $ 633,732 $ 535,187
Provision for loan losses 120,000 110,000
Loans charged off (50,080) (21,715)
Recoveries of loans previously
charged off 3,200 10,260
Balance, end of year $ 706,852 $ 633,732
The total recorded investment in impaired loans was $127,210 and $126,418 at
December 31, 1996 and 1995, respectively. There were no impaired loans that had
related allowances determined in accordance with Statement of Financial
Accounting Standard No. 114, ("Accounting by Creditors for Impairment of a
Loan") at December 31, 1996 and 1995. The average recorded investment in
impaired loans for 1996 and 1995 was $165,509 and $253,226.
Interest income recognized for cash payments received on impaired loans was
not material for the years ended December 31, 1996 and 1995.
The Company has granted loans to certain directors, executive officers, and
related entities of the Company and the Bank. The interest rates on these
loans were substantially the same as rates prevailing at the time of the
transaction and repayment terms are customary for the type of loan
involved. Changes in related party loans for the year ended
December 31, 1996 are as follows:
Balance, beginning of year $ 2,039,414
Advances 166,320
Repayments (316,670)
---------------
Balance, end of year $ 1,889,064
===============
page 13
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 4. PREMISES AND EQUIPMENT
Premises and equipment are summarized as follows:
December 31,
1996 1995
Land $ 724,965 $ 724,965
Buildings and improvements 2,169,345 2,169,345
Equipment 1,041,187 809,727
Equipment acquired under
capital lease 178,810 178,810
------------ ------------
4,114,307 3,882,847
Accumulated depreciation,
including amounts applicable
to equipment acquired under
capital lease of $52,639
and $25,175 (1,029,642) (879,836)
-------------- --------------
$ 3,084,665 $ 3,003,011
============== ==============
NOTE 5. OBLIGATION UNDER CAPITAL LEASE
Obligation under capital lease consists of an equipment lease due in quarterly
instalments, including imputed interest at 6%, of $10,673 through March 2000.
The balance of the obligation at December 31, 1996 and 1995 was $123,146 and
$155,779, respectively. Future minimum lease payments, by year and in the
aggregate, under the capital lease at December 31, 1996 are as follows:
1997 $ 42,694
1998 42,694
1999 42,694
2000 10,673
-----------
Total minimum lease payments 138,755
Amounts representing interest (15,609)
-----------
Present value of minimum lease payments $ 123,146
===========
page 14
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 6. OTHER BORROWINGS
Other borrowings consist of the following:
December 31,
1996 1995
Advance from Federal Home Loan Bank with $ 350,000 $ 350,000
interest at 7.66% due on February 28, 2000,
collateralized by a blanket floating lien on
qualifying first mortgage loans with a balance
of $15,909,000 at December 31, 1996.
Advance from Federal Home Loan Bank, - 350,000
paid off in 1996.
Treasury, tax and loan note option account,
with interest at 25% less than the Federal
funds rate, due on demand. 173,170 173,500
------------ ------------
$ 523,170 $ 873,500
============ ============
NOTE 7. EMPLOYEE BENEFIT PLAN
The Company has a noncontributory profit-sharing plan covering substantially
all employees. Contributions to the plan charged to expense for the years
ended December 31, 1996 and 1995 amounted to $50,000 and $45,000,
respectively.
NOTE 8. DEFERRED COMPENSATION PLAN
The Company has a deferred compensation plan providing for death and retirement
benefits for its directors. The estimated amounts to be paid under the
compensation plan have been funded through the purchase of life insurance
policies on the directors. The balance of the policy cash
surrender values included in other assets at December 31, 1996 and 1995
is $1,052,495 and $1,023,480, respectively. The balance of the deferred
compensation included in other liabilities at December 31, 1996 and 1995
is $52,199 and $25,204, respectively.
page 15
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 9. STOCK WARRANTS AND EMPLOYEE STOCK OPTION PLAN
Each director involved in the organization of the Company was granted one
warrant to purchase one share of the Company's common stock for each
share purchased at inception. The warrants were exercisable at any time
within seven years following the first issuance of the common stock of
the Company, or by July 1996, at a price equal to the original issue price
of $10. During 1996, 57,600 of the warrants were exercised at $10, 64,770
of the warrants were redeemed for 28,074 shares of common stock and 7,500 of
the warrants were redeemed for $57,375 in cash. During 1995, 8,000 of the
warrants were exercised at $10. As of December 31, 1996, all warrants have
been exercised or redeemed.
The Company has reserved 50,000 shares of common stock to be awarded to key
employees under an Employee Stock Option Plan. This Plan is administered by
a committee of the Board of Directors and provides for the granting of
options to purchase shares of the common stock to officers and key employees
of the Company and the Bank. The exercise price of each option
granted under the Plan is not to be less than the fair market value of
the shares of common stock subject to the option on the date of grant as
determined by the Board of Directors. Options are exercisable in whole or
in part upon such terms as may be determined by the committee. Options
will not be exercisable later than ten years after the date of grant.
These options vest in equal increments over a five year period. The
exercise price of each option granted was equivalent to the fair market
value on the date of the grant. Other pertinent information related to the
options is as follows:
December 31,
1996 1995
Weighted- Weighted-
average average
Exercise Excercise
Number Price Number Price
-------- --------- ------ ---------
Under option,
beginning of year 26,850 12.61 13,100 10.09
Granted - - 13,750 15.00
Exercised - - - -
Terminated (600) 12.00 - -
------- ----- ------ ------
Under option,
end of year 26,250 12.62 26,850 12.61
======= ===== ====== ======
Exercisable,
end of year 15,250 10.90 13,100 10.09
======= ====== ====== ======
page 16
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 9. STOCK WARRANTS AND EMPLOYEE STOCK OPTION PLAN (Continued)
Weighted-
Weighted- average
average Remaining
Range of Excercise Contractual
Number Prices Price Life in Yrs
------- ------------- ----- ------------
Under Option,
End of Year 26,250 10.00 - 15.00 12.62 7
Options Exercisable,
End of Year 15,250 10.00 - 15.00 10.90 5
As permitted by SFAS No. 123 ("Accounting for Stock-Based Compensation"),
the Company recognizes compensation cost for stock-based employee
compensation awards in accordance with APB Opinion No. 25,
("Accounting for Stock Issued to Employees"). The Company recognized
no compensation cost for stock-based employee compensation awards for
the year ended December 31, 1996. If the Company had recognized
compensation cost in accordance with SFAS No. 123, net income and earnings
per share would have been reduced as follows:
December 31,
1996 1995
Earnings Earnings
Net Income per Share Net Income per Share
----------- -------- ----------- ---------
As reported $ 1,087,235 $ 1.91 $ 806,768 $ 1.40
Stock-based
compensation,net of
related tax effect (6,310) (0.01) - -
------------- --------- ---------- -------
As adjusted $ 1,080,925 $ 1.90 $ 806,768 $ 1.40
============ ========= ========== =========
page 17
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 9. STOCK WARRANTS AND EMPLOYEE STOCK OPTION PLAN (Continued)
The fair value of the options granted or vested during the year was based
upon the discounted value of future cash flows of the options using the
following assumptions:
Risk-free interest rate 6.50%
Expected life of the options 7 Years
Expected dividends (as a percent of the
fair value of the stock) 1.43%
NOTE 10. INCOME TAXES
The components of income tax expense are as follows:
December 31,
1996 1995
Current $ 491,298 $ 387,105
Deferred (5,370) (57,105)
------------ ------------
Income tax expense $ 485,928 $ 330,000
============ ============
The Company's income tax expense differs from the amounts computed by
applying the Federal income tax statutory rates to income before income
taxes. A reconciliation of the differences is as follows:
December 31,
1996 1995
Amount Percent Amount Percent
--------- ------- --------- -------
Income taxes at
statutory rate $ 534,875 34 % $ 386,501 34 %
Tax-exempt interest (87,540) (6) (68,506) (6)
State income taxes 26,191 2 16,900 2
Other items, net 12,402 1 (4,895) (1)
--------- ------ ---------- ----
Income tax expense $ 485,928 31 % $ 330,000 29 %
========= ====== ========== =====
page 18
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 10. INCOME TAXES (Continued)
The components of deferred income taxes are as follows:
December 31,
1996 1995
Deferred tax assets: ---------- ------------
Loan loss reserves $ 226,525 $ 201,489
Deferred compensation 19,698 9,512
Securities available-for-sale 3,413 -
Other 5,000 15,788
----------- ------------
254,636 226,789
----------- ------------
Deferred tax liabilities:
Depreciation 68,675 49,611
Securities available-for-sale - 8,961
------------ ------------
68,675 58,572
------------ ------------
Net deferred tax assets $ 185,961 $ 168,217
------------- ------------
NOTE 11. COMMITMENTS AND CONTINGENT LIABILITIES
In the normal course of business, the Company has entered into off-balance-
sheet financial instruments which are not reflected in the financial
statements. These financial instruments include commitments to extend
credit and standby letters of credit. Such financial instruments are
included in the financial statements when funds are disbursed or the
instruments become payable. These instruments involve, to varying degrees,
elements of credit risk in excess of the amount
recognized in the balance sheet.
page 19
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 11. COMMITMENTS AND CONTINGENT LIABILITIES (Continued)
The Company's exposure to credit loss in the event of nonperformance by the
other party to the financial instrument for commitments to extend credit and
standby letters of credit is represented by the contractual amount of those
instruments. A summary of the Company's commitments is as
follows:
December 31,
1996 1995
-------------- --------------
Commitments to extend credit $ 6,194,000 $ 8,408,000
Standby letters of credit 816,000 533,904
-------------- --------------
$ 7,010,000 $ 8,941,904
============== ==============
Commitments to extend credit generally have fixed expiration dates or other
termination clauses and may require payment of a fee. Since many of the
commitments are expected to expire without being drawn upon, the total
commitment amounts do not necessarily represent future cash
requirements. The credit risk involved in issuing these financial
instruments is essentially the same as that involved in extending loans
to customers. The Company evaluates each customer's creditworthiness on
a case-by-case basis. The amount of collateral obtained, if deemed
necessary by the Company upon extension of credit, is based on management's
credit evaluation of the customer. Collateral held varies but may include
real estate and improvements, crops, marketable securities, accounts
receivable, inventory, equipment, and personal property.
Standby letters of credit are conditional commitments issued by the Company
to guarantee the performance of a customer to a third party. Those
guarantees are primarily issued to support public and private borrowing
arrangements. The credit risk involved in issuing letters of credit is
essentially the same as that involved in extending loan facilities to
customers. Collateral held varies as specified above and is required in
instances which the Company deems necessary.
In the normal course of business, the Company is involved in various legal
proceedings. In the opinion of management of the Company, any liability
resulting from such proceedings would not have a material effect on the
Company's financial statements.
page 20
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 12. CONCENTRATIONS OF CREDIT
The Company originates primarily commercial, residential, and consumer
loans to customers in Hall County and surrounding counties. The ability
of the majority of the Company's customers to honor their contractual
loan obligations is dependent on the economy in these areas.
Seventy percent (70%) of the Company's loan portfolio is concentrated in
loans secured by real estate, of which a substantial portion is secured by
real estate in the Company's primary market area. Accordingly, the ultimate
collectibility of the loan portfolio is susceptible to changes in
market conditions in the Company's primary market area. The other
significant concentrations of credit by type of loan are set forth in Note 3.
The Company, as a matter of policy, does not generally extend credit to any
single borrower or group of related borrowers in excess of 15% of statutory
capital, or approximately $750,000.
NOTE 13. REGULATORY MATTERS
The Bank is subject to certain restrictions on the amount of dividends that
may be declared without prior regulatory approval. At December 31, 1996,
approximately $2,217,000 of retained earnings were available for dividend
declaration without regulatory approval.
The Company and the Bank are subject to various regulatory capital
requirements administered by the federal banking agencies. Failure to meet
minimum capital requirements can initiate certain mandatory - and possibly
additional discretionary - actions by regulators that, if undertaken, could
have a direct material effect on the financial statements. Under capital
adequacy guidelines and the regulatory framework for prompt corrective
action, the Company and Bank must meet specific capital guidelines that
involve quantitative measures of the assets, liabilities, and certain
off-balance-sheet items as calculated under regulatory accounting practices.
The Company and Bank capital amounts and classification are also subject to
qualitative judgments by the regulators about components, risk weightings,
and other factors.
page 21
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 13. REGULATORY MATTERS (Continued)
Quantitative measures established by regulation to ensure capital
adequacy require the Company and the Bank to maintain minimum amounts
and ratios of total and Tier I capital to risk-weighted assets and of
Tier I capital to average assets. Management believes, as of
December 31, 1996, the Company and the Bank meet all capital adequacy
requirements to which they are subject.
As of December 31, 1996 and 1995, notification from the FDIC categorized
the Bank as well capitalized under the regulatory framework for prompt
corrective action. To be categorized as well capitalized, the Bank must
maintain minimum total risk-based, Tier I risk-based, and Tier I
leverage ratios as set forth in the table. There are no conditions or
events since that notification that management believes have changed the
Bank's category.
The Company and Bank's actual capital amounts and ratios at December 31, 1996
are presented in the following table.
To be well
For Capital Capitalized Under
Adequacy Prompt Corrective
Actual Purposes Action Provisions
Amount Ratio Amount Ratio Amount Ratio
------ ----- ------ ----- ------ -----
(Dollars in Thousands)
-------------------------------------------------------
Total Capital(to Risk
Weighted Assets):
Consolidated $ 9,036 13.82% $ 5,231 8% $ 6,491 10%
Bank $ 8,352 12.79% $ 5,224 8% $ 6,530 10%
Tier I Capital (to
Risk Weighted Assets):
Consolidated $ 8,329 12.74% $ 2,615 4% $ 3,923 6%
Bank $ 7,645 11.71% $ 2,611 4% $ 3,917 6%
Tier I Capital (to
Average Assets):
Consolidated $ 8,329 10.12% $ 3,292 4% $ 4,115 5%
Bank $ 7,645 9.31% $ 3,285 4% $ 4,106 5%
page 22
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 14. FAIR VALUE OF FINANCIAL INSTRUMENTS
The following methods and assumptions were used by the Company in
estimating its fair value disclosures for financial instruments. In cases
where quoted market prices are not available, fair values are based on
estimates using discounted cash flow methods. Those methods are
significantly affected by the assumptions used, including the discount rates
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. The use of different methodologies may have a material effect
on the estimated fair value amounts. Also, the fair value estimates
presented herein are based on pertinent information available to management
as of December 31, 1996 and 1995. Such amounts have not been revalued for
purposes of these financial statements since those dates and, therefore,
current estimates of fair value may differ significantly from the amounts
presented herein.
The following methods and assumptions were used by the Company in estimating
fair values of financial instruments as disclosed herein:
Cash, Due From Banks, and Federal Funds Sold:
The carrying amounts of cash, due from banks, and Federal funds sold
approximate their fair value.
Available-For-Sale and Held-To-Maturity Securities:
Fair values for securities are based on quoted market prices. The carrying
values of equity securities with no readily determinable fair value
approximate fair values.
Loans:
For variable-rate loans that reprice frequently and have no significant
change in credit risk, fair values are based on carrying values. For other
loans, the fair values are estimated using discounted cash flow methods,
using interest rates currently being offered for loans with similar terms to
borrowers of similar credit quality. Fair values for impaired loans are
estimated using discounted cash flow methods or underlying collateral values.
page 23
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 14. FAIR VALUE OF FINANCIAL INSTRUMENTS (Continued)
Deposits:
The carrying amounts of demand deposits, savings deposits, and variable-
rate certificates of deposit approximate their fair values. Fair values
for fixed-rate certificates of deposit are estimated using discounted cash
flow methods, using interest rates currently being offered on certificates.
Obligation Under Capital Lease and Other Borrowings:
The fair values of the Company's obligation under capital lease and other
borrowings are estimated using discounted cash flow methods based on the
Company's current incremental borrowing rates for similar types of
borrowing arrangements.
Accrued Interest:
The carrying amounts of accrued interest approximate their fair values.
Off-Balance-Sheet Instruments:
Fair values of the Company's off-balance-sheet financial instruments are
based on fees charged to enter into similar agreements. However,
commitments to extend credit and standby letters of credit do not represent
a significant value to the Company until such commitments are funded.
The Company has determined that these instruments do not have a
distinguishable fair value and no fair value has been assigned.
page 24
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 14. FAIR VALUE OF FINANCIAL INSTRUMENTS (Continued)
<TABLE>
The estimated fair values of the Company's financial instruments were
as follows:
<CAPTION>
December 31, 1996 December 31,
1995
Carrying Fair Carrying
Fair
Amount Value Amount
Value
------------ ----------- ------------
----------- ---------
<S> <C> <C> <C>
<C>
Financial assets:
Cash, due from banks
and Federal funds sold $ 7,233,227 $ 7,233,227 $ 5,996,603
$ 5,996,603
Securities available-for-sale 9,489,072 9,489,072 6,784,994
6,784,994
Securities held-to-maturity 11,484,207 11,441,995 6,982,745
7,037,195
Loans 50,578,523 51,100,000 49,154,659
49,400,000
Accrued interest receivable 741,680 741,680 619,491
619,491
Financial liabilities:
Deposits 73,845,682 74,418,467 64,776,256
65,220,234
Obligation under capital
lease and other borrowings 646,316 646,316 1,029,285
1,028,285
Accrued interest payable 845,567 845,567 787,954
787,954
</TABLE>
NOTE 15. SUPPLEMENTAL FINANCIAL DATA
Components of other operating expenses in excess of 1% of total revenue are
as follows:
December 31,
1996 1995
Stationery and supplies $ 80,913 $ 71,464
FDIC insurance 2,000 62,998
page 25
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 16. PARENT COMPANY FINANCIAL INFORMATION
The following information presents the condensed balance sheets,
statements of income, and cash flows of Lanier Bankshares, Inc. as of
and for the years ended December 31, 1996 and 1995:
CONDENSED BALANCE SHEETS
1996 1995
------------ ------------
Assets
Cash $ 162,170 $ 322,233
Interest-bearing deposits in bank 535,000 35,000
Investment in subsidiaries 7,692,794 6,641,925
Securities available-for-sale 94,759 14,172
Other assets 188 -
-------------- --------------
Total assets $ 8,484,911 $ 7,013,330
============== ==============
Liabilities
Dividends payable $ 154,728 $ 117,462
Other 7,756 552
-------------- --------------
162,484 118,014
-------------- --------------
Stockholders' equity 8,322,427 6,895,316
-------------- --------------
Total liabilities and
stockholders' equity $ 8,484,911 $ 7,013,330
============== ==============
page 26
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 16. PARENT COMPANY FINANCIAL INFORMATION (Continued)
CONDENSED STATEMENTS OF INCOME
1996 1995
------------- ------------
Income
Dividends from bank subsidiary $ - $ 120,000
Interest on deposits in bank 11,307 1,904
Other 838 9,661
------------- ------------
12,145 131,565
------------- ------------
Expenses, other 12,022 1,515
------------- ------------
Income before income tax benefits
and equity in undistributed
income of subsidiaries 123 130,050
Income tax benefits (188) -
------------- ------------
Income before equity in undistributed
income of subsidiaries 311 130,050
Equity in undistributed income of
subsidiaries 1,086,924 676,718
-------------- ------------
Net income $ 1,087,235 $ 806,768
============== ============
page 27
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 16. PARENT COMPANY FINANCIAL INFORMATION (Continued)
CONDENSED STATEMENTS OF CASH FLOWS
1996 1995
OPERATING ACTIVITIES -------------- ------------
Net income $ 1,087,235 $ 806,768
Adjustments to reconcile net income to net
cash provided by operating activities:
Decrease in dividends receivable - 80,000
Undistributed income of subsidiaries (1,086,924) (676,718)
Other operating activities 815 1,110
--------------- ------------
Net cash provided by operating activities 1,126 211,160
--------------- ------------
INVESTING ACTIVITIES
Net increase in interest-bearing
deposits in bank (500,000) -
Purchases of securities available-for-sale (62,352) (755)
--------------- ------------
Net cash used in investing activities (562,352) (755)
--------------- ------------
FINANCING ACTIVITIES
Net proceeds from exercise and redemption
of stock warrants 518,625 80,000
Dividends paid (117,462) (78,786)
Net cash provided by financing activities 401,163 1,214
--------------- ------------
Net increase (decrease) in cash 401,163 1,214
Cash at beginning of year 322,233 110,614
--------------- ------------
Cash at end of year $ 723,396 $ 111,828
=============== ============
page 28
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