<PAGE>
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
For the fiscal year ended December 31, 1998
-----------------
[_] TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the transition period from ____________ to ____________
Commission file number: 0-21498
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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)
Issuer's telephone number (770) 536-2265
--------------
Securities registered pursuant to Section 12(b) of the Exchange Act: None
Securities registered pursuant to Section 12(g) of the Exchange 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 Securities 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 the 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. $9,854,186
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:
$12,668,508 as of March 15, 1999
- ----------- --------------------
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. 1,200,000 as of March 15,
--------- ---------------
1999
- ----
Transitional Small Business Disclosure format (check one): Yes No X
--- ---
<PAGE>
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Annual Report to Shareholders for the fiscal year ended December
31, 1998 are incorporated by reference into Part II.
Portions of the Proxy Statement for the Annual Meeting of Shareholders,
scheduled to be held April 21, 1999, are incorporated by reference into Part
III.
<PAGE>
TABLE OF CONTENTS
Page
----
PART I ......................................................... 1
ITEM 1. DESCRIPTION OF BUSINESS............................... 1
ITEM 2. DESCRIPTION OF PROPERTIES............................. 20
ITEM 3. LEGAL PROCEEDINGS..................................... 20
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS... 21
PART II ........................................................ 21
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED
STOCKHOLDER MATTERS................................... 21
ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS................... 21
ITEM 7. FINANCIAL STATEMENTS.................................. 21
ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
ACCOUNTING AND FINANCIAL DISCLOSURE................... 22
PART III ....................................................... 23
ITEM 9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS, AND CONTROL
PERSONS; COMPLIANCE WITH SECTION 16(A) OF THE EXCHANGE
ACT................................................... 23
ITEM 10. EXECUTIVE COMPENSATION................................ 23
ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT............................................ 23
ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS........ 23
ITEM 13. EXHIBITS, LISTS, AND REPORTS ON FORM 10-KSB........... 24
<PAGE>
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. In addition, the holding company structure makes it
easier to raise capital for the Bank. 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. Any future acquisitions would be subject
to certain regulatory approvals and requirements. See "Business - Supervision
and 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 the following services:
official bank checks and money orders, Mastercard credit cards, safe deposit
boxes, travelers' checks, bank-by-mail, direct deposit of payroll and Social
Security checks, U.S. Savings Bonds, wire transfer of funds, and a night
depository. The Bank also offers individual retirement accounts.
1
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Philosophy
The philosophy of the Bank's 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 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 thirty-eight (38) offices of ten (10) 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, which covers maintenance fees on checking accounts, per item
processing fees on checking accounts, and returned checks charges.
Loan Portfolio
General. The Bank engages in a broad range of lending activities,
including consumer/installment loans and home equity lines of credit,
construction loans, and commercial 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. The principal economic risk
associated with each category of loans is the creditworthiness of the borrower.
General economic conditions affecting a borrower's ability to repay a loan
include interest,
2
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inflation, and employment rates, as well as other factors affecting a commercial
borrower's customers, suppliers, or employees.
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. Consumer loan repayments depend upon the
borrower's financial stability and are more likely to be adversely affected by
divorce, job loss, illness, and personal hardships.
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. As of December 31, 1998, the Bank's
commercial loan portfolio includes approximately $18,039,000 of residential
construction loans or approximately 23.37% 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. The quality of
the commercial borrower's management and its ability to both evaluate properly
changes in the supply and demand characteristics affecting its markets for
products and services and to respond effectively to such changes are significant
factors in a commercial borrower's creditworthiness.
Investments
As of December 31, 1998, investment securities comprised approximately 22%
of the Bank's assets, with net loans comprising approximately 66% 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
The Bank's objective is 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 the
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
3
<PAGE>
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, 1998, the Company and its subsidiaries employed 43 full-
time employees and one part-time employee. The Company considers its
relationship with its employees to be excellent.
Selected Statistical Information
The following statistical information is provided for the Company for the
years ended December 31, 1998 and 1997. 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.
4
<PAGE>
Average Balances. The condensed average balance sheets for the years
indicated are presented below.
<TABLE>
<CAPTION>
December 31,
------------------------
1998 1997
---- ----
(Dollars in Thousands)
------------------------
<S> <C> <C>
ASSETS
Cash and due from banks $ 4,490 $ 3,637
Taxable securities 10,694 13,328
Nontaxable securities 9,651 6,718
Federal funds sold 3,061 1,763
Loans (1) 72,614 58,177
Reserve for loan losses (931) (758)
Other assets 6,759 5,178
-------- -------
Total assets $106,338 $88,043
======== =======
Total interest-earning assets $ 96,020 $79,986
======== =======
LIABILITIES AND STOCKHOLDERS' EQUITY
Deposits
Noninterest-bearing demand $ 14,985 $12,247
Interest-bearing demand 16,297 13,007
Savings 10,562 9,363
Time 51,140 42,723
-------- -------
Total deposits $ 92,984 $77,340
======== =======
Other borrowings $ 1,172 $ 623
Other liabilities 2,201 1,302
-------- -------
Total liabilities $ 96,357 $79,265
Stockholders' equity 9,981 8,778
-------- -------
Total liabilities and stockholders' equity $106,338 $88,043
======== =======
Total interest-bearing liabilities $ 79,171 $65,716
======== =======
(1) Average loans include nonaccrual loans.
</TABLE>
5
<PAGE>
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.
<TABLE>
<CAPTION>
Year Ended December 31,
-----------------------------------------------
1998 1997
-----------------------------------------------
Average Average
Interest Rate Interest Rate
------------------------------------------------
(Dollars in Thousands)
------------------------------------------------
<S> <C> <C> <C> <C>
INTEREST INCOME:
Interest and fees on loans (1) $7,840 10.80% $6,348 10.91%
Interest on taxable securities 674 6.80 843 6.33
Interest on nontaxable securities (2) 456 4.72 329 4.90
Interest on Federal funds sold 161 5.26 84 4.76
------ ------
Total interest income 9,131 9.51 7,604 9.51
------ ------
INTEREST EXPENSE:
Interest on interest-bearing demand 616 3.78 450 3.46
Interest on savings 533 5.05 458 4.89
Interest on time deposits 3,050 5.96 2,593 6.07
Interest on other borrowings 82 7.00 46 7.38
------ ------
Total interest expense 4,281 5.41 3,547 5.40
------ ------
NET INTEREST INCOME $4,850 $4,057
====== ======
Net interest spread 4.10% 4.11%
===== =====
Net yield on average interest-earning assets 5.05% 5.07%
===== =====
</TABLE>
(1) Interest and fees on loans include $682,527 and $580,326 of loan fee income
for the years ended December 31, 1998 and 1997, respectively. There was no
income recognized on nonaccrual loans during 1997 or 1998.
(2) Yields on nontaxable securities have not been computed on a tax equivalent
basis.
6
<PAGE>
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.
<TABLE>
<CAPTION>
Year Ended December 31,
-----------------------------------------
1998 vs. 1997
-----------------------------------------
Changes Due To
Increase -------------------
(Decrease) Rate Volume
-------------- ------ ---------
(Dollars in Thousands)
-----------------------------------------
<S> <C> <C> <C>
Interest income
Interest and fees on loans $1,492 $(63) $1,555
Interest on taxable securities (169) (4) (165)
Interest on nontaxable securities 127 (12) 139
Interest on Federal funds sold 77 10 67
------ ---- ------
Total interest income 1,527 (69) 1,596
------ ---- ------
Interest expense
Interest on interest-bearing demand 166 45 121
Interest on savings 75 15 60
Interest on time deposits 457 (46) 503
Interest on other borrowings 36 (2) 38
------ ---- ------
Total interest expense 734 12 722
------ ---- ------
Net interest income $ 793 $(81) $ 874
====== ==== ======
</TABLE>
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, 1998, 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 rate sensitive
liabilities) and the cumulative 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.
7
<PAGE>
<TABLE>
<CAPTION>
After
Three After
Months One Year
Within But But
Three Within Within After
Months One Year Five Years Five Years Total
-------------- ------------- --------------- -------------- ----------
(Dollars in Thousands)
----------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Interest-earning assets:
Interest-bearing deposits in banks $ 42 $ - $ - $ - $ 42
Federal funds sold 2,600 - - - 2,600
Securities 1,297 105 7,299 16,911 25,612
Loans 19,888 25,856 31,364 65 77,173
-------- -------- ------- ------- --------
Total interest-earning assets 23,827 25,961 38,663 16,976 105,427
-------- -------- ------- ------- --------
Interest-bearing liabilities:
Interest-bearing demand deposits 19,092 - - - 19,092
Savings 11,523 - - - 11,523
Time deposits 11,152 34,919 8,028 - 54,099
Other borrowings 181 31 1,343 - 1,555
-------- -------- ------- ------- --------
Total interest-bearing liabilities 41,948 34,950 9,371 - 86,269
-------- -------- ------- ------- --------
Interest rate sensitivity gap $(18,121) $ (8,989) $29,292 $16,976 $ 19,158
======== ======== ======= ======= ========
Cumulative interest rate sensitivity gap $(18,121) $(27,110) $ 2,182 $19,158
======== ======== ======= =======
Interest rate sensitivity gap ratio 0.57 0.74 4.13 -
======== ======== ======= =======
Cumulative interest rate sensitivity gap ratio 0.57 0.65 1.03 1.22
======== ======== ======= =======
</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 59% of the loan portfolio is comprised of loans which are variable
rate terms or short-term obligations.
8
<PAGE>
Investment Portfolio
Types of Investments. The amortized cost and approximate fair value of
securities are as follows:
<TABLE>
<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, 1998:
U.S. Government and
agency securities $ 8,550 $ 37 $(16) $ 8,571
State and municipal securities 2,374 67 (3) 2,438
Mortgage-backed securities 502 - (1) 501
Equity securities 566 51 - 617
------- ---- ---- -----
$11,992 $155 $(20) $12,127
======= ==== ==== =======
Securities Held-to-Maturity
December 31, 1998:
U.S. Government and
agency securities $ 3,050 $ 6 $ (1) $ 3,055
State and municipal securities 10,169 249 (53) 10,365
Mortgage-backed securities 266 2 - 268
------- ---- ---- -------
$13,485 $257 $(54) $13,688
======= ==== ==== =======
Securities Available-for-Sale
December 31, 1997:
U.S. Government and
agency securities $ 6,240 $ 12 $ (5) $ 6,247
State and municipal securities 2,060 40 - 2,100
Equity securities 482 42 - 524
------- ---- ---- -------
$ 8,782 $ 94 $ (5) $ 8,871
======= ==== ==== =======
Securities Held-to-Maturity
December 31, 1997:
U.S. Government and
agency securities $ 2,501 $ 5 $ (6) $ 2,500
State and municipal securities 5,988 121 (2) 6,107
Mortgage-backed securities 404 - (3) 401
------- ---- ---- -------
$ 8,893 $126 $(11) $ 9,008
======= ==== ==== =======
</TABLE>
The Company does not have investments in one issuer totaling more than 10%
of equity.
9
<PAGE>
Maturities. The carrying amounts of investment securities in each
category as of December 31, 1998 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.
<TABLE>
<CAPTION>
U.S. Treasury and
State and Other U.S.
Political Government
Subdivisions Agencies
--------------------- ----------------------------
Carrying Yield Carrying Yield
Amount (1)(3) Amount (1)(2)
-------- ------ -------- --------
(Dollars in Thousands)
--------------------------------------------------------
<S> <C> <C> <C> <C>
Maturity:
One year or less $ 285 6.56% $ 500 5.35%
After one year through five years 3,776 4.46 3,254 6.07
After five years through ten years 5,512 4.66 7,867 6.21
After ten years 3,034 4.65 - -
------- -------
$12,607 4.65% $11,621 6.13%
======= =======
</TABLE>
(1) 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.
(2) The above schedule excludes the carrying amounts of mortgage-backed
securities of $766,627 which have portions that mature on a monthly basis
and equity securities totaling $617,125, which have no contractual
maturity.
(3) Yields on state and political subdivision securities have not been computed
on a tax equivalent basis.
10
<PAGE>
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,
-----------------------
1998 1997
--------- ---------
(Dollars in Thousands)
-----------------------
Commercial, financial, and agricultural $ 8,895 $ 8,284
Real estate - construction 18,039 13,275
Real estate - mortgage 39,141 36,366
Consumer instalment and others 11,098 9,909
------- -------
77,173 67,834
Allowance for loan losses (1,073) (837)
------- -------
Loans, net $76,100 $66,997
======= =======
Maturities and Sensitivity to Changes in Interest Rates. Total loans as of
December 31, 1998 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 $45,494
After one year through five years 31,365
After five years 314
-------
$77,173
=======
The following table summarizes loans at December 31, 1998 with 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 $25,643
Floating or adjustable interest rates 6,036
-------
$31,679
=======
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.
11
<PAGE>
Nonperforming Loans. The following table presents, at the dates indicated,
the aggregate of nonperforming loans for the categories indicated.
<TABLE>
<CAPTION>
December 31,
------------------------
<S> <C> <C>
1998 1997
---- ----
(Dollars in Thousands)
------------------------
Loans accounted for on a nonaccrual basis $249 $ 97
Installment loans and term loans contractually past due
ninety days or more as to interest or principal payments
and still accruing 49 172
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 - -
</TABLE>
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.
12
<PAGE>
Following is a summary of the commitments outstanding at December 31, 1998
and 1997.
1998 1997
---- ----
(Dollars in Thousands)
------------------------
Commitments to extend credit $13,313 $14,074
Standby letters of credit 129 613
------- -------
$13,442 $14,687
======= =======
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 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 $1,073,000 at December 31,
1998, representing 1.39% of year end total loans outstanding, compared with
$837,000 at December 31, 1997, representing 1.23% 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.
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, 1998.
13
<PAGE>
The following table presents an analysis of the Company's loan loss
experience for the periods indicated:
<TABLE>
<CAPTION>
December 31,
-------------------------------------
1998 1997
---- ----
(Dollars in Thousands)
-------------------------------------
<S> <C> <C>
Average amount of loans outstanding $72,614 $58,177
======= =======
Balance of reserve for possible loan losses
at beginning of period $ 837 $ 707
------- -------
Charge-offs:
Commercial, financial, and agricultural $ (13) $ -
Consumer (46) (25)
Real estate - (16)
Recoveries:
Consumer 5 1
Real estate - -
------- -------
Net charge-offs $ (54) $ (40)
======= =======
Additions to reserve charged to operating expenses $ 290 $ 170
======= =======
Balance of reserve for possible loan losses $ 1,073 $ 837
======= =======
Ratio of net loan charge-offs to average loans 0.07% 0.07%
======= =======
</TABLE>
Deposits
Average amount of deposits and average rate paid thereon, classified as to
noninterest-bearing demand deposits, interest-bearing demand deposits, savings
deposits, and time deposits, for the periods indicated are presented below.
<TABLE>
<CAPTION>
Year Ended December 31,
----------------------------------------------
1998 1997
-------------------- --------------------
Amount Rate Amount Rate
-------- -------- --------- --------
(Dollars in Thousands)
----------------------------------------------
<S> <C> <C> <C> <C>
Noninterest-bearing demand deposits $14,985 -% $12,247 -%
Interest-bearing demand 16,297 3.78 13,007 3.46
Savings deposits 10,562 5.05 9,363 4.89
Time deposits 51,140 5.96 42,723 6.07
------- -------
Total deposits $92,984 $77,340
======= =======
</TABLE>
14
<PAGE>
The amounts of time certificates of deposit issued in amounts of $100,000 or
more as of December 31, 1998 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, (3) over six months through twelve months, and (4) over twelve
months.
(Dollars in
Thousands)
-----------
Three months or less $ 5,569
Over three months through six months 6,820
Over six months through twelve months 8,042
Over twelve months 3,422
-------
Total $23,853
=======
Return on Assets and Shareholders' Equity
The following rate of return information for the periods indicated is
presented below.
Year Ended December 31,
-----------------------
1998 1997
---- ----
Return on assets (1) 1.71% 1.60%
Return on equity (2) 18.20 16.02
Dividend payout ratio (3) 18.92 17.78
Equity to assets ratio (4) 9.39 9.97
(1) Net income divided by average total assets.
(2) Net income divided by average equity.
(3) Dividends declared per share divided by diluted earnings per common share.
(4) Average equity divided by average total assets.
SUPERVISION AND REGULATION
The following discussion describes the material elements of the regulatory
framework that applies to banks and bank holding companies and provides certain
specific information related to the Company.
General
The Company is a bank holding company registered with the Board of
Governors of the Federal Reserve System under the Bank Holding Company Act of
1956, as currently in effect. As a result, the Company, the Data Corporation and
any future non-bank subsidiaries the Company establishes are and will be subject
to the supervision, examination, and reporting requirements of the Bank Holding
Company Act and the regulations of the Federal Reserve.
The Bank Holding Company Act requires every bank holding company to obtain
the Federal Reserve's prior approval before: (1) it may acquire direct or
indirect ownership or control of any voting shares of any bank if, after the
acquisition, the bank holding company will directly or indirectly own or control
more than 5% of the bank's voting
15
<PAGE>
shares; (2) it or any of its nonbank subsidiaries may acquire all or
substantially all of the assets of any bank; or (3) it may merge or consolidate
with any other bank holding company.
The Bank Holding Company Act also provides that the Federal Reserve may
not approve any transaction that would result in or tend to create a monopoly,
substantially lessen competition or otherwise function as a 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. The Federal Reserve's consideration of financial resources generally
focuses on capital adequacy, which is discussed below.
The Company and any other bank holding company located in Georgia may
acquire a bank located in any other state, and any bank holding company located
outside of Georgia may acquire any Georgia-based bank, regardless of state law
to the contrary. In either case, certain deposit-percentage, aging requirements,
and other restrictions apply. National and state-chartered banks may branch
across state lines by acquiring banks in other states. By adopting legislation
prior to June 1, 1997, a state could elect either to "opt in" and accelerate the
date after which interstate branching would be permissible or "opt out" and
prohibit interstate branching altogether. The Georgia Interstate Banking Act
provides that interstate acquisitions by or of institutions located in Georgia
are permitted in states that also allow national interstate acquisitions. The
Georgia Interstate Branching Act permits Georgia-based banks and bank holding
companies owning or acquiring banks outside of Georgia and all non-Georgia banks
and bank holding companies owning or acquiring banks in Georgia to merge any
lawfully acquired bank into an interstate branch network. The Georgia Interstate
Branching Act also allows banks to establish new branches throughout Georgia.
The Bank Holding Company Act generally prohibits the Company from engaging
in activities other than banking or managing or controlling banks or other
permissible subsidiaries. The Bank Holding Company Act also prohibits the
Company from acquiring or keeping direct or indirect control of any company
engaged in any activities other than those activities that the Federal Reserve
determines to be closely related to banking or managing or controlling banks. In
determining whether a particular activity is permissible, the Federal Reserve
must consider whether the 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, the Federal Reserve has
determined that 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 are permissible activities of bank holding companies. The Bank
Holding Company Act does not place territorial limitations on permissible non-
banking activities of bank holding companies. Despite prior approval, the
Federal Reserve may order a holding company or its subsidiaries to terminate any
activity or ownership or control of any subsidiary when it has reasonable cause
to believe that the holding company's continued activity, ownership or control
16
<PAGE>
constitutes a serious risk to the financial safety, soundness, or stability of
any bank subsidiaries.
The Bank's deposits are insured by the FDIC to the maximum extent provided
by law. The Bank is also be 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 regularly examines the
operations of the Bank and has the authority to approve or disapprove mergers,
the establishment of branches, and similar corporate actions. The Office of the
Comptroller of the Currency 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 the Bank. The
principal source of the Company's cash flow, including cash flow to pay
dividends to its shareholders, is dividends that the Bank pays to the Company.
Statutory and regulatory limitations apply to the Bank's payment of dividends to
the Company as well as to the Company's payment of dividends to its
shareholders.
If, in the opinion of the Office of the Comptroller of the Currency, the
Bank were engaged in or about to engage in an unsafe or unsound practice, the
Office of the Comptroller of the Currency could require, after notice and a
hearing, that the Bank cease and desist from its practice. The federal banking
agencies have indicated that paying dividends that deplete a depository
institution's capital base to an inadequate level would be an unsafe and unsound
banking practice. Under the Federal Deposit Insurance Corporation Improvement
Act of 1991, a depository institution may not pay any dividend if payment would
cause it to become undercapitalized or if it already is undercapitalized.
Moreover, the federal agencies have issued policy statements that provide that
bank holding companies and insured banks should generally only pay dividends out
of current operating earnings. See "--Prompt Corrective Action" below.
Under the dividend restrictions imposed by federal and state law at
December 31, 1998, the Company could declare aggregate dividends of up to
approximately $3,764,000 without first obtaining regulatory approval.
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 in the case of the Company and the
Office of the Comptroller of the Currency in the case of the Bank. The Federal
Reserve has established two basic measures of capital adequacy for bank holding
companies -- a risk-based measure and a leverage measure. A bank holding company
must satisfy all applicable capital standards to be considered in compliance.
17
<PAGE>
The risk-based capital standards are designed to make regulatory capital
requirements more sensitive to differences in risk profiles 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 of total capital to risk-weighted
assets is 8%. At least one-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.
This portion of total capital is referred to as Tier 1 Capital. The remainder
may consist of subordinated debt, other preferred stock, and a limited amount of
loan loss reserves and is referred to as Tier 2 Capital. At December 31, 1998,
the Company's consolidated ratio of total capital to risk-weighted assets was
13.93% and its consolidated ratio of Tier 1 Capital to risk-weighted assets was
12.68%.
In addition, the Federal Reserve has established minimum leverage ratio
guidelines for bank holding companies. These guidelines provide for a minimum
ratio of Tier 1 Capital to average assets, less goodwill and certain other
intangible assets, of 3% for bank holding companies that meet the 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, 1998 was 9.21%. 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 bank
holding company's Tier 1 Capital leverage ratio, after deducting all
intangibles, and other indicators of capital strength in evaluating proposals
for expansion or new activities.
The Bank is subject to risk-based and leverage capital requirements
adopted by the Office of the Comptroller of the Currency, which are
substantially similar to those adopted by the Federal Reserve for bank holding
companies.
Failure to meet capital guidelines could subject a bank to a variety of
enforcement remedies, including the issuance of a capital directive, the
termination of deposit insurance by the FDIC, a prohibition on the taking of
brokered deposits, and certain other restrictions on its business. As described
below, substantial additional restrictions can be imposed on FDIC-insured
depository institutions that fail to meet applicable capital requirements. See
"--Prompt Corrective Action."
Support of Subsidiary Institutions
Under Federal Reserve policy, the Company is expected to act as a source
of financial strength for, and to commit resources to support, the Bank. This
support may be required at times when, without this Federal Reserve policy, the
Company might not be inclined to provide it. In addition, any capital loans by a
bank holding company to its subsidiary bank will be repaid only after its
deposits and certain other indebtedness are
18
<PAGE>
repaid in full. In the event of a bank holding company's bankruptcy, any
commitment by the bank holding company to a federal bank regulatory agency to
maintain the capital of a banking subsidiary will be assumed by the bankruptcy
trustee and entitled to a priority of payment.
Prompt Corrective Action
The Federal Deposit Insurance Corporation Improvement Act of 1991
established a system of prompt corrective action to resolve the problems of
undercapitalized institutions. Under this system, the federal banking regulators
have established five capital categories (well capitalized, adequately
capitalized, undercapitalized, significantly undercapitalized and critically
undercapitalized), and are required to take certain mandatory supervisory
actions, and are authorized to take other discretionary actions, relating to
institutions in the three undercapitalized categories. The severity of the
action depends upon the capital category in which the institution is placed.
Generally, subject to a narrow exception, the banking regulator must 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.
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. A
bank holding company must guarantee that a subsidiary depository institution
meets its capital restoration plan, subject to certain limitations. The
controlling holding company's obligation 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 under an accepted capital restoration plan or with FDIC
approval. In addition, the appropriate federal banking agency may treat an
undercapitalized institution in the same manner as it treats a significantly
undercapitalized institution, if it determines that those actions are necessary.
At December 31, 1998, the Bank's capital level placed it in the well
capitalized category.
FDIC Insurance Assessments
The FDIC has adopted a 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 system assigns an
institution to one of three capital categories: (1) well capitalized; (2)
adequately capitalized; and (3) 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. The FDIC also assigns an
institution 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 that the institution's primary federal regulator provides
to the FDIC and information that the FDIC determines to be relevant to the
institution's financial condition and the risk posed to the deposit insurance
funds. The FDIC determines an institution's insurance assessment rate based on
the institution's
19
<PAGE>
capital category and supervisory category. Under the risk-based assessment
system, there are nine combinations of capital groups and supervisory subgroups
to which different assessment rates are applied. Assessments range from 0 to 27
cents per $100 of deposits, depending on the institution's capital group and
supervisory subgroup.
Effective January 1, 1997, the FDIC imposed assessments to help repay the
$780 million in annual interest payments on the $8 billion of Financing
Corporation bonds issued in the late 1980s as part of the government rescue of
the thrift industry. The FDIC will assess banks at a rate of 1.3 cents per $100
of deposits until December 31, 1999. Thereafter, it will add approximately 2.4
cents per $100 of deposits to each assessment.
The FDIC may terminate an institution's deposit insurance if it finds that
the institution has engaged in unsafe and unsound practices, is in an unsafe or
unsound condition to continue operations, or has violated any applicable law,
regulation, rule, order or condition imposed by the FDIC.
Proposed Legislation and Regulatory Action
New regulations and statutes are regularly proposed that contain wide-
ranging proposals for altering the structures, regulations and competitive
relationships of the nation's financial institutions. We cannot predict whether
or in what form any proposed regulation or statute will be adopted or the extent
to which our business may be affected by any new regulation or statute.
ITEM 2. DESCRIPTION OF PROPERTIES
The Company's corporate office, the Bank's main office, and the Data
corporation are located at 854 Washington Street, Gainesville, Georgia. The
Bank owns the building with no security liens or encumbrance. This property
consists of a two-story building which contains approximately 13,600 square feet
of heated floor space. The Bank also owns three branch offices with no security
liens or 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, and contains approximately 3,300 square
feet of heated floor space. The third branch, which opened in May 1998, is
located on Cleveland Highway in Clermont, Georgia and is a single story facility
with approximately 2,000 square feet of heated floor space. The costs of the
Clermont branch totaled approximately $457,000.
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
20
<PAGE>
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.
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 i, 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 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
(ii) 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 1998, 1997, and 1996.
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 33 through 43, and is
incorporated herein by reference.
ITEM 7. FINANCIAL STATEMENTS
The following financial statements are included in the Company's Annual
Report to Shareholders at pages 1 through 32, and are incorporated herein by
reference:
Independent Auditor's Report
Financial Statements
21
<PAGE>
Consolidated Balance Sheets dated as of December 31, 1998 and 1997
Consolidated Statements of Income for the years ended December 31, 1998
and 1997
Consolidated Statements of Comprehensive Income for the years ended
December 31, 1998 and 1997
Consolidated Statements of Stockholders' Equity for the years ended
December 31, 1998 and 1997
Consolidated Statements of Cash Flows for the years ended December 31,
1998 and 1997
Notes to Consolidated Financial Statements
ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
Not applicable.
22
<PAGE>
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 21, 1999, 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 8 through 11, and "Compliance with
Section 16(a) of the Securities Exchange Act of 1934," at page 11, 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 21, 1999, under the
heading, "Compensation of Executive Officers and Directors," at pages 4 through
7, and are incorporated herein by reference.
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 21, 1999, under the
headings, "Security Ownership of Certain Beneficial Owners," at pages 8 through
11, 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 21, 1999, 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.
23
<PAGE>
ITEM 13. EXHIBITS, LISTS, AND REPORTS ON FORM 8-K
(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 /5/
10.9* Lanier National Bank Executive Supplemental Retirement Plan -
Defined Contribution adopted March 18, 1998 and related Form
of Executive Supplemental Retirement Plan Agreement and Form
of Life Endorsement Method Split Dollar Plan Agreement
13.1 Lanier Bankshares, Inc. 1998 Annual Report to Shareholders.
Except with respect to those portions specifically
incorporated by reference into this Report, the Company's
1998 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 Form 10-KSB)
27.1 Financial Data Schedule
(b) Reports on Form 8-K filed in the fourth quarter of 1998: 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.
24
<PAGE>
/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 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.
/5/ 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, 1996.
* The indicated exhibit is a compensatory plan required to be filed as an
exhibit to this Form 10-KSB.
25
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this Report to be signed on
its behalf by the undersigned, thereunto duly authorized.
LANIER BANKSHARES, INC.
By: /s/ Joseph D. Chipman, Jr.
------------------------------
Joseph D. Chipman, Jr.
President and Chief
Executive Officer
Date: March 26, 1999
-----------------------------
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.
26
<PAGE>
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.
/s/ John W. Browning, III, M.D. Date March 26, 1999
- ---------------------------------------------- --------------
John W. Browning III, M.D., Director
/s/ Joseph D. Chipman, Jr. Date March 26, 1999
- ---------------------------------------------- --------------
Joseph D. Chipman, Director, President, and
Chief Executive Officer
/s/ Lewis W. Coker Date March 26, 1999
- ---------------------------------------------- --------------
Lewis W. Coker, Director
/s/ C. Edmondson Daniel Date March 26, 1999
- ---------------------------------------------- --------------
C. Edmondson Daniel, Director
/s/ J. Austin Edmondson Date March 26, 1999
- ---------------------------------------------- --------------
J. Austin Edmondson, Director
/s/ Jeffrey D. Hunt Date March 26, 1999
- ---------------------------------------------- --------------
Jeffrey D. Hunt, Senior Vice President
(Principal Financial and Accounting Officer)
/s/ Jerry D. Jackson Date March 26, 1999
- ---------------------------------------------- --------------
Jerry D. Jackson, Director
/s/ Ricky H. Pugh Date March 26, 1999
- ---------------------------------------------- --------------
Ricky H. Pugh, Executive Vice President
/s/ R. Thomas Jarrard Date March 26, 1999
- ---------------------------------------------- --------------
R. Thomas Jarrard, Director
/s/ Carlton W. Rogers, Sr. Date March 26, 1999
- ---------------------------------------------- --------------
Carlton W. Rogers, Sr., Director
/s/ Stewart Teaver Date March 26, 1999
- ---------------------------------------------- --------------
Stewart Teaver, Director
/s/ Mike Wilson Date March 26, 1999
- ---------------------------------------------- --------------
Mike Wilson, Director
27
<PAGE>
EXHIBIT INDEX
-------------
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 /5/
10.9* Lanier National Bank Executive Supplemental Retirement Plan -
Defined Contribution adopted March 18, 1998 and related Form
of Executive Supplemental Retirement Plan Agreement and Form
of Life Endorsement Method Split Dollar Plan Agreement
13.1 Lanier Bankshares, Inc. 1998 Annual Report to Shareholders.
Except with respect to those portions specifically
incorporated by reference into this Report, the Company's 1998
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 Form 10-KSB).
27.1 Financial Data Schedule.
28
<PAGE>
/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.
/5/ 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,
1996.
* The indicated exhibit is a compensatory plan required to be filed as
an exhibit to this Form 10-KSB.
29
<PAGE>
EXHIBIT 10.9
Lanier National Bank
Executive Supplemental Retirement
Plan - Defined Contribution
<PAGE>
LANIER NATIONAL BANK
EXECUTIVE SUPPLEMENTAL RETIREMENT
PLAN -- DEFINED CONTRIBUTION
ADOPTED MARCH 18, 1998
In an effort to attract, reward, motivate and retain the most qualified people
available, and to provide those people with a complete and reasonable
compensation package, Lanier National Bank has implemented an executive
retirement plan with an endorsement split dollar life insurance plan for the
benefit of certain executives of the Bank.
The Plan is called the Executive Supplemental Retirement Plan Defined
Contribution and was designed to provide an annual retirement benefit that will
grow on a tax-deferred basis. These benefits, when added to the retirement
benefits that will be provided by the Bank's qualified plan and social security,
will provide each officer with benefit levels comparable to other Bank employees
when measured as a percentage of salary at the time of retirement.
This Supplemental Retirement Plan is also designed to provide these benefits
with the least risk to the Bank's safety and soundness and at the least possible
cost. A portion of the benefits is determined by an indexed formula. The index
used in this plan to calculate the amount of the retirement benefit is the
earnings on a specific life insurance policy. The Bank "keeps" the opportunity
costs on the premiums paid. Any earnings in excess of the opportunity costs are
accrued to a liability reserve account for the benefit of the executive. At
retirement, this liability reserve account is paid out over a specified period
of years. In addition, the annual earnings in excess of the opportunity costs
are paid out annually after retirement. These payments will continue for the
life of the executive.
The plan has a vesting schedule that creates a "golden handcuff" effect. The
Bank's obligations under the retirement benefit portion of this plan are
unfunded; however, the Bank has purchased life insurance policies on each
insurable executive that are actuarially designed to offset the annual expenses
associated with the plan and will, given reasonable actuarial assumptions,
offset all of the plan's costs during the life of the executive and provide a
complete recovery of all plan costs at the executive's death. The Bank is the
sole owner of all policies.
The life insurance benefit for each insurable officer is being provided by an
Endorsement Split Dollar Plan whereby the Bank endorses a specified percentage
of the net-at-risk life insurance portion of a policy (total death benefit less
cash value of policy) on the life of each officer for payment to the designated
beneficiary of that officer. The Bank owns the policy and its entire surrender
value. For uninsurable officers, the bank will pay a stated death benefit.
1
<PAGE>
FORM OF
EXECUTIVE SUPPLEMENTAL RETIREMENT PLAN
AGREEMENT
This Agreement, made and entered into this ____ day of __________, 1998, by
and between Lanier National Bank, a Bank organized and existing under the laws
of the State of Georgia hereinafter referred to as "the Bank", and
___________________, a Key Employee and the Executive of the Bank, hereinafter
referred to as "the Executive".
The Executive has been in the employ of the Bank for several years and has
now and for years past faithfully served the Bank. It is the consensus of the
Board of Directors of the Bank (the Board) that the Executive's services have
been of exceptional merit, in excess of the compensation paid and an invaluable
contribution to the profits and position of the Bank in its field of activity.
The Board further believes that the Executive's experience, knowledge of
corporate affairs, reputation and industry contacts are of such value and his
continued services are so essential to the Bank's future growth and profits that
it would suffer severe financial loss should the Executive terminate his
services.
Accordingly, it is the desire of the Bank and the Executive to enter into
this Agreement under which the Bank will agree to make certain payments to the
Executive upon his retirement and, alternatively, to his beneficiary(ies) in the
event of his premature death while employed by the Bank.
It is the intent of the parties hereto that this Agreement be considered an
arrangement maintained primarily to provide supplemental retirement benefits for
the Executive, as a member of a select group of management or highly-compensated
employees of the Bank for purposes of the Employee Retirement Security Act of
1974 (ERISA). The Executive is fully advised of the Bank's financial status and
has had substantial input in the design and operation of this benefit plan.
The Participant and the Bank are aware that there is currently in Congress
a proposed change to the Federal Tax Laws as said laws relate to life insurance,
and that if the proposed change was implemented, then there could be a material
increase in the cost of this Plan to the Bank.
<PAGE>
Therefore, in consideration of the Executive's services performed in the
past and those to be performed in the future and based upon the mutual promises
and covenants herein contained, the Bank and the Executive, agree as follows:
I. DEFINITIONS
A. Effective Date:
--------------
The Effective Date of this Agreement shall be __________, 1998.
B. Plan Year:
---------
Any reference to "Plan Year" shall mean a calendar year from January 1
to December 31. In the year of implementation, the term "Plan Year"
shall mean the period from the effective date to December 31 of the
year of the effective date.
C. Retirement Date:
---------------
Retirement Date shall mean retirement from service with the Bank which
becomes effective on the first day of the calendar month following the
month in which the Executive reaches his sixty-fifth (65th) birthday
or such later date as the Executive may actually retire.
D. Termination of Service:
----------------------
Termination of Service shall mean voluntary resignation of service by
the Executive or the Bank's discharge of the Executive without cause
["cause" defined in subparagraph III (D) hereinafter], prior to the
Normal Retirement Age [described in subparagraph I (J) hereinafter].
E. Pre-Retirement Account:
----------------------
A Pre-Retirement Account shall be established as a liability reserve
account on the books of the Bank for the benefit of the Executive.
Prior to termination of service or the Executive's retirement, such
liability reserve account shall be increased or decreased each Plan
Year (including the Plan Year in which the Executive ceases to be
employed by the Bank) by an amount equal to the annual earnings or
loss for that Plan Year determined by the Index [described in
subparagraph I (G) hereinafter], less the Cost of Funds Expense for
that Plan Year [described in subparagraph I (H) hereinafter].
2
<PAGE>
F. Index Retirement Benefit:
------------------------
The Index Retirement Benefit for the Executive for any year shall be
equal to the excess of the annual earnings (if any) determined by the
Index [subparagraph I (G)] for that Plan Year over the Cost of Funds
Expense [subparagraph I (H)] for that Plan Year.
G. Index:
-----
The Index for any Plan Year shall be the aggregate annual after-tax
income from the life insurance contracts described hereinafter as
defined by FASB Technical Bulletin 85-4. This Index shall be applied
as if such insurance contracts were purchased on the effective date
hereof.
Insurance Company: Alexander Hamilton Life Insurance
Policy Form: Universal Life
Policy Name: Executive Security Plan III
Insured's Age and Sex: ____________
Riders: None
Ratings: None
Option: A
Face Amount: $___________
Premiums Paid: $___________
Number of Premium Payments: ______
Assumed Purchase Date: _____________, 1998
If such contracts of life insurance are actually purchased by the Bank
then the actual policies as of the dates they were purchased shall be
used in calculations under this Agreement. If such contracts of life
insurance are not purchased or are subsequently surrendered or lapsed,
then the Bank shall receive annual policy illustrations that assume
the above described policies were purchased from the above named
insurance company(ies) on the Effective Date from which the increase
in policy value will be used to calculate the amount of the Index.
In either case, references to the life insurance contract are merely
for purposes of calculating a benefit. The Bank has no obligation to
purchase such life insurance and, if purchased, the Executive and his
beneficiary(ies) shall have no ownership interest in such policy and
shall always have no greater interest in the benefits under this
Agreement than that of an unsecured general creditor of the Bank.
3
<PAGE>
H. Cost of Funds Expense:
---------------------
The Cost of Funds Expense for any Plan Year shall be calculated by
taking the sum of the amount of premiums set forth in the Indexed
policies described above plus the amount of any after-tax benefits
paid to the Executive pursuant to this Agreement (Paragraph III
hereinafter) plus the amount of all previous years after-tax Costs of
Funds Expense, and multiplying that sum by the average after-tax cost
of funds of the Bank's third quarter Call Report for the Plan Year as
filed with the Federal Reserve.
I. Change of Control:
-----------------
Change of control shall be deemed to be the cumulative transfer of
more than fifty percent (50%) of the voting stock of the Bank Holding
Company from the Effective Date of this Agreement. For the purposes
of this Agreement, transfers on account of deaths or gifts, transfers
between family members or transfers to a qualified retirement plan
maintained by the Bank shall not be considered in determining whether
there has been a change in control.
J. Normal Retirement Age:
---------------------
Normal Retirement Age shall mean the date on which the Executive
attains age sixty-five (65).
II. EMPLOYMENT
No provision of this Agreement shall be deemed to restrict or limit any
existing employment agreement by and between the Bank and the Executive,
nor shall any conditions herein create specific employment rights to the
Executive nor limit the right of the Employer to discharge the Executive
with or without cause. In a similar fashion, no provision shall limit the
Executive's rights to voluntarily sever his employment at any time.
III. INDEX BENEFITS
The following benefits provided by the Bank to the Executive are in the
nature of a fringe benefit and shall in no event be construed to effect nor
limit the Executive's current or prospective salary increases, cash bonuses
or profit-sharing distributions or credits.
<PAGE>
A. Retirement Benefits:
-------------------
Should the Executive continue to be employed by the Bank until his
"Normal Retirement Age" defined in subparagraph I (J), he shall be
entitled to receive the balance in his Pre-Retirement Account [as
defined in subparagraph I (E)] in ten (10) equal annual installments
commencing thirty (30) days following the Executive's Retirement Date.
In addition to these payments, commencing with the Plan Year in which
the Executive attains his Retirement Date, the Index Retirement
Benefit [as defined in subparagraph I (F) above] for each year shall
be paid to the Executive until his death.
B. Termination of Service:
----------------------
Subject to subparagraph III (D) hereinafter, should the Executive
suffer a termination of service [defined in subparagraph I (D)], he
shall be entitled to receive five percent (5%) times the number of
full years the Executive has served with the bank from the date of
first employment (to a maximum of 100%), times the balance in the Pre-
Retirement Account paid over ten (10) years in equal installments
commencing at the Retirement Date [subparagraph I (C)]. In addition
to these payments and commencing at the Retirement Date, five percent
(5%) times the number of full years the Executive has served with the
Bank from the date of first employment (to a maximum of 100%), times
the Index Retirement Benefit for each year shall be paid to the
Executive until his death.
C. Death:
-----
Should the Executive die prior to having received the full balance of
the Pre-Retirement Account, the unpaid balance of the Pre-Retirement
Account shall be paid in a lump sum to the beneficiary selected by the
Executive and filed with the Bank. In the absence of or a failure to
designate a beneficiary, the unpaid balance shall be paid in a lump
sum to the personal representative of the Executive's estate.
D. Discharge for Cause:
-------------------
Should the Executive be discharged for cause at any time prior to his
Retirement Date, all Index Benefits under this Agreement
[subparagraphs III (A), (B) or (C)] shall be forfeited. The term "for
cause" shall mean gross negligence or gross neglect or the conviction
of a felony or gross-misdemeanor involving moral turpitude, fraud,
dishonesty or willful violation of any law that results in any adverse
effect on the Bank. If a
5
<PAGE>
dispute arises as to discharge "for cause", such dispute shall be
resolved by arbitration as set forth in this Agreement.
E. Disability Benefit:
------------------
In the event the Executive becomes disabled prior to Termination of
Service, and the Executive's employment is terminated because of such
disability, he shall immediately begin receiving the benefits in
subparagraph III (A) above. Such benefit shall begin without regard
to the Executive's Retirement Date and the Executive shall be one
hundred percent (100%) vested in the entire benefit amount. If there
is a dispute regarding whether the Executive is disabled, such dispute
shall be resolved by a physician selected by the Bank and such
resolution shall be binding upon all parties to this Agreement.
F. Death Benefit:
-------------
Except as set forth above, there is no death benefit provided under
this Agreement.
IV. RESTRICTIONS UPON FUNDING
The Bank shall have no obligation to set aside, earmark or entrust any fund
or money with which to pay its obligations under this Agreement. The
Executive, his beneficiary(ies) or any successor in interest to him shall
be and remain simply a general creditor of the Bank in the same manner as
any other creditor having a general claim for matured and unpaid
compensation.
The Bank reserves the absolute right at its sole discretion to either fund
the obligations undertaken by this Agreement or to refrain from funding the
same and to determine the exact nature and method of such funding. Should
the Bank elect to fund this Agreement, in whole or in part, through the
purchase of life insurance, mutual funds, disability policies or annuities,
the Bank reserves the absolute right, in its sole discretion, to terminate
such funding at any time, in whole or in part. At no time shall the
Executive be deemed to have any lien or right, title or interest in or to
any specific funding investment or to any assets of the Bank.
If the Bank elects to invest in a life insurance, disability or annuity
policy upon the life of the Executive, then the Executive shall assist the
Bank by freely submitting to a physical exam and supplying such additional
information necessary to obtain such insurance or annuities.
6
<PAGE>
V. CHANGE OF CONTROL
Upon a Change of Control [as defined in subparagraph I (I) herein], if the
Executive's employment is subsequently terminated then he shall receive the
benefits promised in this Agreement upon attaining Normal Retirement Age,
as if he had been continuously employed by the Bank until his Normal
Retirement Age. The Executive will also remain eligible for all promised
death benefits in this Agreement. In addition, no sale, merger or
consolidation of the Bank shall take place unless the new or surviving
entity expressly acknowledges the obligations under this Agreement and
agrees to abide by its terms.
VI. MISCELLANEOUS
A. Alienability and Assignment Prohibition:
---------------------------------------
Neither the Executive, his/her surviving spouse nor any other
beneficiary under this Agreement shall have any power or right to
transfer, assign, anticipate, hypothecate, mortgage, commute, modify
or otherwise encumber in advance any of the benefits payable hereunder
nor shall any of said benefits be subject to seizure for the payment
of any debts, judgments, alimony or separate maintenance owed by the
Executive or his beneficiary, nor be transferable by operation of law
in the event of bankruptcy, insolvency or otherwise. In the event the
Executive or any beneficiary attempts assignment, commutation,
hypothecation, transfer or disposal of the benefits hereunder, the
Bank's liabilities shall forthwith cease and terminate.
B. Binding Obligation of Bank and any Successor in Interest:
--------------------------------------------------------
The Bank expressly agrees that it shall not merge or consolidate into
or with another bank or sell substantially all of its assets to
another bank, firm or person until such bank, firm or person expressly
agrees, in writing, to assume and discharge the duties and obligations
of the Bank under this Agreement. This Agreement shall be binding
upon the parties hereto, their successors, beneficiary(ies), heirs and
personal representatives.
C. Revocation:
----------
It is agreed by and between the parties hereto that, during the
lifetime of the Executive, this Agreement may be amended or revoked at
any time or times, in whole or in part, by the mutual written assent
of the Executive and the Bank.
7
<PAGE>
D. Gender:
------
Whenever in this Agreement words are used in the masculine or neuter
gender, they shall be read and construed as in the masculine, feminine
or neuter gender, whenever they should so apply.
E. Effect on Other Bank Benefit Plans:
----------------------------------
Nothing contained in this Agreement shall affect the right of the
Executive to participate in or be covered by any qualified or non-
qualified pension, profit-sharing, group, bonus or other supplemental
compensation or fringe benefit plan constituting a part of the Bank's
existing or future compensation structure.
F. Headings:
--------
Headings and subheadings in this Agreement are inserted for reference
and convenience only and shall not be deemed a part of this Agreement.
G. Applicable Law:
--------------
The validity and interpretation of this Agreement shall be governed by
the laws of the State of Georgia.
VII. ERISA PROVISION
A. Named Fiduciary and Plan Administrator:
--------------------------------------
The "Named Fiduciary and Plan Administrator" of this plan shall be
Lanier National Bank until its removal by the Board. As Named
Fiduciary and Administrator, the Bank shall be responsible for the
management, control and administration of the Salary Continuation
Agreement as established herein. The Named Fiduciary may delegate to
others certain aspects of the management and operation
responsibilities of the plan including the employment of advisors and
the delegation of ministerial duties to qualified individuals.
B. Claims Procedure and Arbitration:
--------------------------------
In the event a dispute arises over benefits under this Agreement and
benefits are not paid to the Executive (or to his beneficiary in the
case of the Executive's death) and such claimants feel they are
entitled to receive such benefits, then a written claim must be made
to the Plan Administrator
8
<PAGE>
named above within ninety (90) days from the date payments are
refused. The Plan Administrator shall review the written claim and if
the claim is denied, in whole or in part, they shall provide in
writing within ninety (90) days of receipt of such claim their
specific reasons for such denial, reference to the provisions of this
Agreement upon which the denial is based and any additional material
or information necessary to perfect the claim. Such written notice
shall further indicate the additional steps to be taken by claimants
if a further review of the claim denial is desired. A claim shall be
deemed denied if the Plan Administrator fails to take any action
within the aforesaid ninety-day period.
If claimants desire a second review they shall notify the Plan
Administrator in writing within ninety (90) days of the first claim
denial. Claimants may review this Agreement or any documents relating
thereto and submit any written issues and comments they may feel
appropriate. In its sole discretion, the Plan Administrator shall
then review the second claim and provide a written decision within
ninety (90) days of receipt of such claim. This decision shall
likewise state the specific reasons for the decision and shall include
reference to specific provisions of this Agreement upon which the
decision is based.
If claimants continue to dispute the benefit denial based upon
completed performance of this Agreement or the meaning and effect of
the terms and conditions thereof, then claimants may submit the
dispute to a Board of Arbitration for final arbitration. Said Board
shall consist of one member selected by the claimant, one member
selected by the Bank, and the third member selected by the first two
members. The Board shall operate under any generally recognized set
of arbitration rules. The parties hereto agree that they and their
heirs, personal representatives, successors and assigns shall be bound
by the decision of such Board with respect to any controversy properly
submitted to it for determination.
Where a dispute arises as to the Bank's discharge of the Executive
"for cause", such dispute shall likewise be submitted to arbitration
as above described and the parties hereto agree to be bound by the
decision thereunder.
VIII. BANK'S ABSOLUTE RIGHT OF CANCELLATION
As of the effective date hereof, and for a period of twelve (12) months
hereafter, the Bank reserves the absolute right to cancel this Agreement.
In the event the Bank exercises this right, the Executive shall have no
rights to any benefits by reason of this Agreement.
9
<PAGE>
In witness whereof, the parties hereto acknowledge that each has carefully
read this Agreement and executed the original thereof on the _____ day of
___________, 1998 and that, upon execution, each has received a conforming copy.
Lanier National Bank
By:
- ------------------------------- -------------------------------
Witness Title
- ------------------------------- -------------------------------
Witness Executive
10
<PAGE>
FORM OF
LIFE INSURANCE
ENDORSEMENT METHOD SPLIT DOLLAR PLAN
AGREEMENT
Insurer: Alexander Hamilton Life Insurance
Policy Number: ______________
Bank: Lanier National Bank
Insured: ____________________
Relationship of Insured to Bank: Executive
The respective rights and duties of the Bank and the Insured in the subject
policy shall be as defined in the following:
I. DEFINITIONS
Refer to the policy contract for the definition of all terms in this
Agreement.
II. POLICY TITLE AND OWNERSHIP
Title and ownership shall reside in the Bank for its use and for the use of
the Insured all in accordance with this Agreement. The Bank alone may, to
the extent of its interest, exercise the right to borrow or withdraw on the
policy cash values. Where the Bank and the Insured (or assignee, with the
consent of the Insured) mutually agree to exercise the right to increase
the coverage under the subject split dollar policy, then, in such event,
the rights, duties and benefits of the parties to such increased coverage
shall continue to be subject to the terms of this Agreement.
<PAGE>
III. BENEFICIARY DESIGNATION RIGHTS
The Insured (or assignee) shall have the right and power to designate a
beneficiary or beneficiaries to receive his share of the proceeds payable
upon the death of the Insured, and to elect and change a payment option for
such beneficiary, subject to any right or interest the Bank may have in
such proceeds, as provided in this Agreement.
IV. PREMIUM PAYMENT METHOD
The Bank shall pay an amount equal to the planned premiums and any other
premium payments that might become necessary to keep the policy in force.
V. TAXABLE BENEFIT
Annually the Insured will receive a taxable benefit equal to the assumed
cost of insurance as required by the Internal Revenue Service. The Bank
(or its administrator) will report to the Employee the amount of imputed
income received each year on Form W-2 or its equivalent.
VI. DIVISION OF DEATH PROCEEDS
Subject to Paragraph VII herein, the division of the death proceeds of the
policy is as follows:
A. Should the Insured be employed by the Bank at the time of his or her
death, the Insured's beneficiary(ies), designated in accordance with
Paragraph III, shall be entitled to an amount equal to eighty percent
(80%) of the net at risk insurance portion of the proceeds. The net
at risk insurance portion is the total proceeds less the cash value of
the policy.
B. Should the Insured not be employed by the Bank at the time of his or
her death, the Insured's beneficiary(ies), designated in accordance
with Paragraph III, shall be entitled to the following percentage of
the proceeds described in subparagraph VI (A) hereinabove that
corresponds to the year of service the Insured served with the Bank:
Total Years
of Employment
with the Bank Vested
-------------------- -----------------
(greater than)1 year 5% per year (to a
maximum of 100%)
C. The Bank shall be entitled to the remainder of such proceeds.
2
<PAGE>
D. The Bank and the Insured (or assignees) shall share in any interest
due on the death proceeds on a pro rata basis as the proceeds due each
respectively bears to the total proceeds, excluding any such interest.
VII. DIVISION OF THE CASH SURRENDER VALUE OF THE POLICY
The Bank shall at all times be entitled to an amount equal to the policy's
cash value, as that term is defined in the policy contract, less any policy
loans and unpaid interest or cash withdrawals previously incurred by the
Bank and any applicable surrender charges. Such cash value shall be
determined as of the date of surrender or death as the case may be.
VIII. RIGHTS OF PARTIES WHERE POLICY ENDOWMENT OR ANNUITY ELECTION EXISTS
In the event the policy involves an endowment or annuity element, the
Bank's right and interest in any endowment proceeds or annuity benefits, on
expiration of the deferment period, shall be determined under the
provisions of this Agreement by regarding such endowment proceeds or the
commuted value of such annuity benefits as the policy's cash value. Such
endowment proceeds or annuity benefits shall be considered to be like death
proceeds for the purposes of division under this Agreement.
IX. TERMINATION OF AGREEMENT
This Agreement shall terminate at the option of the Bank following thirty
(30) days written notice to the Insured if the Insured shall be discharged
from service with the Bank for cause. The term "for cause" shall mean
gross negligence or gross neglect or the commission of a felony or gross-
misdemeanor involving moral turpitude, fraud, dishonesty or willful
violation of any law that results in any adverse effect on the Bank.
Upon such termination, the Insured (or assignee) shall have a ninety (90)
day option to receive from the Bank an absolute assignment of the policy in
consideration of a cash payment to the Bank, whereupon this Agreement shall
terminate. Such cash payment shall be the greater of:
1. The Bank's share of the cash value of the policy on the date of such
assignment, as defined in this Agreement.
2. The amount of the premiums which have been paid by the Bank prior to
the date of such assignment.
Should the Insured (or assignee) fail to exercise this option within the
prescribed ninety (90) day period, the Insured (or assignee) agrees that
all of his rights,
3
<PAGE>
interest and claims in the policy shall terminate as of the date of the
termination of this Agreement.
Except as provided above, this Agreement shall terminate upon distribution
of the death benefit proceeds in accordance with Paragraph VI above.
X. INSURED'S OR ASSIGNEE'S ASSIGNMENT RIGHTS
The Insured may not, without the written consent of the Bank, assign to any
individual, trust or other organization, any right, title or interest in
the subject policy nor any rights, options, privileges or duties created
under this Agreement.
XI. AGREEMENT BINDING UPON THE PARTIES
This Agreement shall bind the Insured and the Bank, their heirs,
successors, personal representatives and assigns.
XII. NAMED FIDUCIARY AND PLAN ADMINISTRATOR
Lanier National Bank is hereby designated the "Named Fiduciary" until
resignation or removal by the board of directors. As Named Fiduciary, the
bank shall be responsible for the management, control, and administration
of this Split Dollar Plan as established herein. The Named Fiduciary may
allocate to others certain aspects of the management and operation
responsibilities of the plan, including the employment of advisors and the
delegation of any ministerial duties to qualified individuals.
XIII. FUNDING POLICY
The funding policy for this Split Dollar Plan shall be to maintain the
subject policy in force by paying, when due, all premiums required.
XIV. CLAIM PROCEDURES FOR LIFE INSURANCE POLICY AND SPLIT DOLLAR PLAN
Claim forms or claim information as to the subject policy can be obtained
by contacting The Benefit Marketing Group, Inc. (770-952-1529). When the
Named Fiduciary has a claim which may be covered under the provisions
described in the insurance policy, he should contact the office named
above, and they will either complete a claim form and forward it to an
authorized representative of the Insurer or advise the named Fiduciary what
further requirements are necessary. The Insurer will evaluate and make a
decision as to payment. If the claim is payable, a benefit check will be
issued to the Named Fiduciary.
4
<PAGE>
In the event that a claim is not eligible under the policy, the Insurer
will notify the Named Fiduciary of the denial pursuant to the requirements
under the terms of the policy. If the Named Fiduciary is dissatisfied with
the denial of the claim and wishes to contest such claim denial, he should
contact the office named above and they will assist in making inquiry to
the Insurer. All objections to the Insurer's actions should be in writing
and submitted to the office named above for transmittal to the Insurer.
XV. GENDER
Whenever in this Agreement words are used in the masculine or neuter
gender, they shall be read and construed as in the masculine, feminine or
neuter gender, whenever they should so apply.
XVI. INSURANCE COMPANY NOT A PARTY TO THIS AGREEMENT
The Insurer shall not be deemed a party to this Agreement, but will respect
the rights of the parties as herein developed upon receiving an executed
copy of this Agreement. Payment or other performance in accordance with
the policy provisions shall fully discharge the Insurer for any and all
liability.
Executed at Gainesville, Georgia this ________day of ___________, 1998.
Lanier National Bank
By:
- -------------------------------- ------------------------------
Witness Title
- -------------------------------- ------------------------------
Witness Insured
5
<PAGE>
BENEFICIARY DESIGNATION FORM
PRIMARY DESIGNATION:
Name Relationship
- -------------------------------- ------------------------------
- -------------------------------- ------------------------------
- -------------------------------- ------------------------------
CONTINGENT DESIGNATION:
- -------------------------------- ------------------------------
- -------------------------------- ------------------------------
- -------------------------------- ------------------------------
- -------------------------------- ------------------------------
Insured Date
6
<PAGE>
EXHIBIT 13.1
LANIER BANKSHARES, INC.
1998 ANNUAL REPORT
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Independent Auditor's Report............................................... 1
Consolidated Balance Sheets................................................ 2
Consolidated Statements of Income.......................................... 3
Consolidated Statements of Comprehensive Income............................ 4
Consolidated Statements of Stockholders' Equity............................ 5
Consolidated Statements of Cash Flows...................................... 6
Notes to Consolidated Financial Statements................................. 8
Management's Discussion and Analysis....................................... 33
</TABLE>
Lanier Bankshares, Inc., a Georgia corporation (the "Company"), is a
holding company engaged in commercial banking primarily in Hall County, Georgia.
The Company currently has two subsidiaries. Lanier National Bank is active in
retail and commercial banking. Lanier Data Corporation is a data processing
company and provides such services to Lanier National Bank.
The Company's common stock, $1.00 par value (the "Common Stock"), is not
traded on an established trading market. As of March 15, 1999 there were 472
holders of record of the Company's Common Stock. The Company paid a dividend of
$.14 on July 9, 1998 to shareholders of record on June 30, 1998 and a dividend
of $.15 per share on January15, 1999 to shareholders of record as of January 4,
1999. Currently, the Company's sole source of dividends is the Bank. The Bank
is subject to regulation by the Office of the Comptroller of the Currency (the
"OCC"). Statutes and regulations enforced by the OCC include parameters which
define when the Bank may or may not pay dividends. The prior approval of the
OCC is required if the total of all dividends declared by a national bank in any
calendar year exceeds the Bank's net profits, as defined, for that year combined
with its retained net profits for the preceding two calendar years, less any
required transfers to surplus or a fund for retirement of any preferred stock.
All FDIC insured institutions, regardless of their level of capitalization, are
prohibited from paying any dividend or making any other kind of distribution if,
following the payment or distribution, the institution would be
undercapitalized.
This statement has not been reviewed, or confirmed for accuracy or
relevance by the Federal Deposit Insurance Corporation.
i
<PAGE>
INDEPENDENT AUDITOR'S REPORT
- --------------------------------------------------------------------------------
TO THE BOARD OF DIRECTORS
LANIER BANKSHARES, INC. AND SUBSIDIARIES
GAINESVILLE, GEORGIA
We have audited the accompanying consolidated balance sheets of LANIER
BANKSHARES, INC. AND SUBSIDIARIES as of December 31, 1998 and 1997, and the
related consolidated statements of income, comprehensive income, stockholders'
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, 1998 and 1997, and the
results of their operations and their cash flows for the years then ended, in
conformity with generally accepted accounting principles.
/s/ MAULDIN & JENKINS, LLC
Atlanta, Georgia
February 11, 1999
<PAGE>
LANIER BANKSHARES, INC.
AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 1998 AND 1997
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
ASSETS 1998 1997
------ ----------------- ---------------
<S> <C> <C>
Cash and due from banks $ 4,788,161 $ 4,062,492
Interest-bearing deposits in banks 41,536 36,635
Federal funds sold 2,600,000 200,000
Securities available-for-sale 12,127,292 8,870,631
Securities held-to-maturity (fair value $13,687,590 and
$9,008,060) 13,485,122 8,893,071
Loans 77,172,657 67,834,287
Less allowance for loan losses 1,072,530 837,092
----------------- ---------------
Loans, net 76,100,127 66,997,195
Premises and equipment 3,507,870 3,155,562
Other assets 3,100,726 2,256,354
----------------- ---------------
TOTAL ASSETS $ 115,750,834 $ 94,471,940
================= ===============
LIABILITIES AND STOCKHOLDERS' EQUITY
------------------------------------
Deposits
Noninterest-bearing demand $ 17,032,767 $ 12,940,461
Interest-bearing demand 19,092,247 14,784,001
Savings 11,523,252 10,059,915
Time, $100,000 and over 23,852,909 19,636,268
Other time 30,245,893 25,594,145
----------------- ---------------
Total deposits 101,747,068 83,014,790
Obligation under capital lease 50,676 88,167
Other borrowings 1,504,640 724,967
Other liabilities 1,819,404 1,507,478
----------------- ---------------
TOTAL LIABILITIES 105,121,788 85,335,402
----------------- ---------------
Commitments and contingent liabilities
Stockholders' equity
Common stock, par value $1; 10,000,000 shares
authorized; 1,237,826 and 618,913 issued 1,237,826 618,913
Capital surplus 5,230,107 5,232,969
Retained earnings 4,491,175 3,641,504
Treasury stock, 37,826 and 18,913 shares (419,024) (415,486)
Accumulated other comprehensive income 88,962 58,638
----------------- ---------------
TOTAL STOCKHOLDERS' EQUITY 10,629,046 9,136,538
----------------- ---------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 115,750,834 $ 94,471,940
================= ===============
</TABLE>
SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
2
<PAGE>
LANIER BANKSHARES, INC.
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
YEARS ENDED DECEMBER 31, 1998 AND 1997
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
1998 1997
--------------- ---------------
<S> <C> <C>
INTEREST INCOME
Loans $ 7,840,034 $ 6,348,118
Taxable securities 671,393 829,361
Nontaxable securities 455,498 328,625
Federal funds sold 160,830 83,537
Deposits in banks 2,872 14,280
--------------- --------------
Total interest income 9,130,627 7,603,921
--------------- --------------
INTEREST EXPENSE
Deposits 4,199,094 3,500,330
Other borrowings 82,031 46,208
--------------- --------------
Total interest expense 4,281,125 3,546,538
--------------- --------------
Net interest income 4,849,502 4,057,383
Provision for loan losses 290,000 170,000
--------------- --------------
Net interest income after provision for loan losses 4,559,502 3,887,383
--------------- --------------
OTHER INCOME
Service charges on deposit accounts 542,720 526,571
Net realized gains on sale of securities available-for-sale - 6,052
Other operating income 180,839 121,151
--------------- --------------
Total other income 723,559 653,774
--------------- --------------
OTHER EXPENSES
Salaries and employee benefits 1,598,488 1,434,407
Equipment and occupancy expenses 420,972 400,982
Other operating expenses 691,267 652,945
--------------- --------------
Total other expenses 2,710,727 2,488,334
--------------- --------------
Income before income taxes 2,572,334 2,052,823
INCOME TAX EXPENSE 755,750 646,805
--------------- --------------
Net income $ 1,816,584 $ 1,406,018
=============== ==============
BASIC EARNINGS PER COMMON SHARE $ 1.51 $ 1.15
=============== ==============
DILUTED EARNINGS PER COMMON SHARE $ 1.48 $ 1.13
=============== ==============
</TABLE>
SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
3
<PAGE>
LANIER BANKSHARES, INC.
AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
YEARS ENDED DECEMBER 31, 1998 AND 1997
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
1998 1997
-------------------- --------------------
<S> <C> <C>
NET INCOME $ 1,816,584 $ 1,406,018
-------------------- --------------------
OTHER COMPREHENSIVE INCOME:
Unrealized gains on securities available-for-sale:
Unrealized holding gains arising during period,
net of tax of $15,622 and $35,677, respectively 30,324 69,258
Reclassification adjustment for gains realized
in net income, net of tax of $ -- and $2,058,
respectively - -3,994
-------------------- --------------------
OTHER COMPREHENSIVE INCOME 30,324 65,264
-------------------- --------------------
COMPREHENSIVE INCOME $ 1,846,908 $ 1,471,282
==================== ====================
</TABLE>
SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
4
<PAGE>
LANIER BANKSHARES, INC.
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
YEARS ENDED DECEMBER 31, 1998 AND 1997
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
COMMON STOCK
-------------------------------------
SHARES PAR VALUE
-------------- ------------------
<S> <C> <C>
BALANCE, DECEMBER 31, 1996 618,913 $ 618,913
Net income - -
Cash dividends declared, $.20 per share - -
Purchase of treasury stock - -
Sale of treasury stock - -
Other comprehensive income - -
-------------- ------------------
BALANCE, DECEMBER 31, 1997 618,913 618,913
Net income - -
Common stock split 618,913 618,913
Cash dividends declared, $.29 per share - -
Purchase of treasury stock - -
Exercise of stock options - -
Other comprehensive income - -
-------------- ------------------
BALANCE, DECEMBER 31, 1998 1,237,826 $ 1,237,826
============== ==================
</TABLE>
SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
<PAGE>
________________________________________________________________________________
<TABLE>
<CAPTION>
ACCUMULATED
OTHER TOTAL
CAPITAL RETAINED TREASURY STOCK COMPREHENSIVE STOCKHOLDERS'
------------------------------------
SURPLUS EARNINGS SHARES COST INCOME (LOSS) EQUITY
------------------- ------------------- -------------- ----------------- ---------------- --------------------
<S> <C> <C> <C> <C> <C>
$ 5,232,102 $ 2,478,038 - $ - $ (6,626) $ 8,322,427
- 1,406,018 - - - 1,406,018
- (242,552) - - - (242,552)
- - 19,780 (434,560) - (434,560)
867 - (867) 19,074 - 19,941
- - - - 65,264 65,264
------------------- ------------------- -------------- ----------------- ---------------- --------------------
5,232,969 3,641,504 18,913 (415,486) 58,638 9,136,538
- 1,816,584 - - - 1,816,584
- (618,913) 18,913 - - -
- (348,000) - - - (348,000)
- - 800 (12,400) - (12,400)
(2,862) - (800) 8,862 - 6,000
- - - - 30,324 30,324
------------------- ------------------- -------------- ----------------- ---------------- --------------------
$ 5,230,107 $ 4,491,175 37,826 $ (419,024) $ 88,962 $ 10,629,046
=================== =================== ============== ================= ================ ====================
</TABLE>
5
<PAGE>
LANIER BANKSHARES, INC.
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31, 1998 AND 1997
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------------------------------
1998 1997
---------------------- ----------------------
<S> <C> <C>
OPERATING ACTIVITIES
Net income $ 1,816,584 $ 1,406,018
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation 186,033 194,205
Provision for loan losses 290,000 170,000
Deferred income taxes (106,996) (55,154)
Net realized gains on sale of securities available-for-sale - (6,052)
Increase in interest receivable (165,541) (49,381)
Increase in interest payable 371,666 129,450
Other operating activities (77,197) 142,048
---------------------- ----------------------
Net cash provided by operating activities 2,314,549 1,931,134
---------------------- ----------------------
INVESTING ACTIVITIES
(Increase) decrease in interest-bearing deposits in banks (4,901) 16,520
Purchases of securities available-for-sale (12,280,875) (3,852,631)
Proceeds from sales of securities available-for-sale - 699,320
Proceeds from maturities of securities available-for-sale 9,070,160 3,876,688
Purchases of securities held-to-maturity (6,923,039) (2,022,880)
Proceeds from maturities of securities held-to-maturity 2,330,988 4,614,016
Net (increase) decrease in Federal funds sold (2,400,000) 1,600,000
Net increase in loans (9,392,932) (16,588,672)
Purchase of premises and equipment (538,341) (265,102)
Payment of life insurance premium (600,000) -
---------------------- ----------------------
Net cash used in investing activities (20,738,940) (11,922,741)
---------------------- ----------------------
FINANCING ACTIVITIES
Net increase in deposits 18,732,278 9,169,108
Repayment of obligations under capital lease (37,491) (34,979)
Net proceeds of other borrowings 779,673 201,797
Purchase of treasury stock (12,400) (434,560)
Proceeds from sale of treasury stock - 19,941
Proceeds from exercise of stock options 6,000 -
Dividends paid (318,000) (247,280)
---------------------- ----------------------
Net cash provided by financing activities 19,150,060 8,674,027
---------------------- ----------------------
Net increase (decrease) in cash and due from banks 725,669 (1,317,580)
Cash and due from banks at beginning of year 4,062,492 5,380,072
---------------------- ----------------------
Cash and due from banks at end of year $ 4,788,161 $ 4,062,492
====================== ======================
</TABLE>
6
<PAGE>
LANIER BANKSHARES, INC.
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31, 1998 AND 1997
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------------
1998 1997
---------------------- ----------------------
<S> <C> <C>
SUPPLEMENTAL DISCLOSURES
Cash paid for: $ 3,909,459 $ 3,546,538
Interest
Income taxes $ 891,261 $ 608,592
NONCASH TRANSACTION
Unrealized gains on securities available-for-sale $ (45,946) $ (98,883)
</TABLE>
SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
7
<PAGE>
LANIER BANKSHARES, 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 preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates
and assumptions that affect the reported amounts of assets and
liabilities and disclosures of contingent assets and liabilities at
the date of the consolidated financial statements and the reported
amounts of revenues and expenses during the reporting period. Actual
results could differ from those estimates.
CASH AND DUE FROM BANKS
Cash on hand, cash items in process of collection, and amounts due
from banks are included in cash and due from banks.
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.
8
<PAGE>
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.
This evaluation is inherently subjective as it requires material
estimates that are susceptible to significant change including the
amounts and timing of future cash flows expected to be received on
impaired loans. 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.
9
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
LOANS (CONTINUED)
The accrual of interest on 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 considered to be 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 income tax assets and liabilities are
determined using the balance sheet method. Under this method, the
net deferred tax asset or liability is determined based on the tax
effects of the differences between the book and tax bases of the
various balance sheet assets and liabilities and gives current
recognition to changes in tax rates and laws.
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 would be realized. A valuation
allowance would be recorded for those deferred tax items for which it
is more likely than not that realization would not occur.
10
<PAGE>
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
Basic earnings per common share are computed by dividing net income
by the weighted-average number of shares of common stock outstanding.
Diluted earnings per share are computed by dividing net income by the
sum of the weighted-average number of shares of common stock
outstanding and potential common shares. Potential common shares
consist of stock options. In 1998, the Company declared a two-for-
one common stock split. Earnings and dividends per common share,
weighted-average shares outstanding, and related stock option
information have been restated to reflect the common stock split.
COMPREHENSIVE INCOME
In 1998, the Company adopted Statement of Financial Standards
("SFAS") No. 130, "Reporting Comprehensive Income". This statement
establishes standards for reporting and display of comprehensive
income and its components in the financial statements. This
statement requires that all items that are required to be recognized
under accounting standards as components of comprehensive income be
reported in a financial statement that is displayed in equal
prominence with the other financial statements. The Company has
elected to report comprehensive income in a separate financial
statement titled "Consolidated Statements of Comprehensive Income".
SFAS No. 130 describes comprehensive income as the total of all
components of comprehensive income including net income. This
statement uses other comprehensive income to refer to revenues,
expenses, gains and losses that under generally accepted accounting
principles are included in comprehensive income but excluded from net
income. Currently, the Company's other comprehensive income consists
of items previously reported directly in equity under SFAS No. 115,
"Accounting for Certain Investments in Debt and Equity Securities".
As required by SFAS No. 130, the financial statements for the prior
year have been reclassified to reflect application of the provisions
of this statement. The adoption of this statement did not affect the
Company's financial position, results of operations or cash flows.
11
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
RECENT ACCOUNTING PRONOUNCEMENTS
In June 1998, the Financial Accounting Standards Board issued SFAS
No. 133, "Accounting for Derivative Instruments and Hedging
Activities". This statement is required to be adopted for fiscal
years beginning after June 15, 1999. However, the statement permits
early adoption as of the beginning of any fiscal quarter after its
issuance. The Company expects to adopt this statement effective
January 1, 2000. SFAS No. 133 requires the Company to recognize all
derivatives as either assets or liabilities in the balance sheet at
fair value. For derivatives that are not designated as hedges, the
gain or loss must be recognized in earnings in the period of change.
For derivatives that are designated as hedges, changes in the fair
value of the hedged assets, liabilities, or firm commitments must be
recognized in earnings or recognized in other comprehensive income
until the hedged item is recognized in earnings, depending on the
nature of the hedge. The ineffective portion of a derivative's
change in fair value must be recognized in earnings immediately.
Management has not yet determined what effect the adoption of SFAS
No. 133 will have on the Company's earnings or financial position.
12
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
NOTE 2. SECURITIES
The amortized cost and fair value of securities are summarized as
follows:
<TABLE>
<CAPTION>
GROSS GROSS
AMORTIZED UNREALIZED UNREALIZED FAIR
COST GAINS LOSSES VALUE
--------------- -------------- -------------- ----------------
<S> <C> <C> <C> <C>
SECURITIES AVAILABLE-FOR-SALE
DECEMBER 31, 1998:
U. S. Government and agency
securities $ 8,549,860 $ 37,843 $ (16,242) $ 8,571,461
State and municipal securities 2,373,819 67,206 (2,839) 2,438,186
Mortgage-backed securities 502,431 - (1,911) 500,520
Equity securities 566,392 50,733 - 617,125
-------------- -------------- ------------- ----------------
$ 11,992,502 $ 155,782 $ (20,992) $ 12,127,292
============== ============== ============= ================
DECEMBER 31, 1997:
U. S. Government and agency
securities $ 6,240,184 $ 11,416 $ (5,029) $ 6,246,571
State and municipal securities 2,059,711 40,455 (20) 2,100,146
Equity securities 481,892 42,022 - 523,914
-------------- -------------- ------------- ----------------
$ 8,781,787 $ 93,893 $ (5,049) $ 8,870,631
============== ============== ============= ================
SECURITIES HELD-TO-MATURITY
DECEMBER 31, 1998:
U. S. Government and agency
securities $ 3,050,000 $ 5,768 $ (782) $ 3,054,986
State and municipal securities 10,169,015 248,673 (53,544) 10,364,144
Mortgage-backed securities 266,107 2,353 - 268,460
-------------- -------------- ------------- ----------------
$ 13,485,122 $ 256,794 $ (54,326) $ 13,687,590
============== ============== ============= ================
DECEMBER 31, 1997:
U. S. Government and agency
securities $ 2,500,960 $ 4,845 $ (6,358) $ 2,499,447
State and municipal securities 5,987,856 120,726 (1,552) 6,107,030
Mortgage-backed securities 404,255 - (2,672) 401,583
-------------- -------------- ------------- ----------------
$ 8,893,071 $ 125,571 $ (10,582) $ 9,008,060
============== ============== ============= ================
</TABLE>
13
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
NOTE 2. SECURITIES (Continued)
The amortized cost and fair value of securities as of December 31,
1998 by contractual maturity are shown below. Actual maturities may
differ from contractual maturities of 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 summary.
<TABLE>
<CAPTION>
SECURITIES AVAILABLE-FOR-SALE SECURITIES HELD-TO-MATURITY
----------------------------------- -----------------------------------
AMORTIZED FAIR AMORTIZED FAIR
COST VALUE COST VALUE
---------------- ---------------- ---------------- ----------------
<S> <C> <C> <C> <C>
Due in one year or less $ 500,000 $ 500,050 $ 285,428 $ 287,068
Due from one to five years 2,719,948 2,744,117 4,287,137 4,356,005
Due from five to ten years 6,967,976 7,020,140 6,358,180 6,494,525
Due after ten years 735,755 745,340 2,288,270 2,281,532
Mortgage-backed securities 502,431 500,520 266,107 268,460
Equity securities 566,392 617,125 - -
---------------- ---------------- ---------------- ----------------
$ 11,992,502 $ 12,127,292 $ 13,485,122 $ 13,687,590
================ ================ ================ ================
</TABLE>
Securities with a carrying value of $9,251,000 and $8,709,000 at
December 31, 1998 and 1997, 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:
<TABLE>
<CAPTION>
DECEMBER 31,
---------------------------------
1998 1997
--------------- ---------------
<S> <C> <C>
Gross gains $ - $ 6,052
Gross losses - -
--------------- ---------------
Net realized gains $ - $ 6,052
=============== ===============
</TABLE>
14
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
NOTE 3. LOANS AND ALLOWANCE FOR LOAN LOSSES
The composition of loans is summarized as follows:
<TABLE>
<CAPTION>
DECEMBER 31,
---------------------------------------
1998 1997
------------------ -----------------
<S> <C> <C>
Commercial, financial, and agricultural $ 8,895,000 $ 8,284,000
Real estate - construction 18,039,000 13,275,000
Real estate - mortgage 39,141,000 36,366,000
Consumer instalment and other 11,097,657 9,909,287
------------------ -----------------
77,172,657 67,834,287
Allowance for loan losses (1,072,530) (837,092)
------------------ -----------------
Loans, net $ 76,100,127 $ 66,997,195
================== =================
</TABLE>
Changes in the allowance for loan losses are as follows:
<TABLE>
<CAPTION>
DECEMBER 31,
---------------------------------------
1998 1997
------------------ -----------------
<S> <C> <C>
BALANCE, BEGINNING OF YEAR $ 837,092 $ 706,852
Provision for loan losses 290,000 170,000
Loans charged off (59,834) (41,357)
Recoveries of loans previously charged off 5,272 1,597
------------------ -----------------
BALANCE, END OF YEAR $ 1,072,530 $ 837,092
================== =================
</TABLE>
The total recorded investment in impaired loans was $248,934 and
$96,835 at December 31, 1998 and 1997, respectively. There were no
impaired loans that had related allowances determined in accordance
with SFAS No. 114, ("Accounting by Creditors for Impairment of a
Loan") at December 31, 1998 and 1997. The average recorded investment
in impaired loans for 1998 and 1997 was $48,308 and $105,741. Interest
income recognized for cash payments received on impaired loans was not
material for the years ended December 31, 1998 and 1997.
15
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
NOTE 3. LOANS AND ALLOWANCE FOR LOAN LOSSES (Continued)
The Company has granted loans to certain directors, executive
officers, and their related entities. 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, 1998 are as follows:
<TABLE>
<S> <C>
BALANCE, BEGINNING OF YEAR $ 2,019,701
Advances 1,072,432
Repayments (1,126,583)
----------------
BALANCE, END OF YEAR $ 1,965,550
================
</TABLE>
NOTE 4. PREMISES AND EQUIPMENT
Premises and equipment are summarized as follows:
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------------------------
1998 1997
---------------- ----------------
<S> <C> <C>
Land $ 785,405 $ 785,405
Buildings and improvements 2,641,266 2,169,345
Equipment 1,206,020 1,046,169
Construction in process - 141,833
Equipment acquired under capital lease 178,810 178,810
---------------- ----------------
4,811,501 4,321,562
Accumulated depreciation, including amounts
applicable to equipment acquired under
capital lease of $107,565 and $80,329 (1,303,631) (1,166,000)
---------------- ----------------
$ 3,507,870 $ 3,155,562
================ ================
</TABLE>
16
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
NOTE 5. DEPOSITS
At December 31, 1998, the scheduled maturities of time deposits are as
follows:
<TABLE>
<S> <C>
1999 $ 46,071,641
2000 5,613,316
2001 1,987,205
2002 183,441
2003 243,199
------------------
$ 54,098,802
==================
</TABLE>
NOTE 6. 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, 1998
and 1997 was $50,576 and $88,167, respectively. Future minimum lease
payments, by year and in the aggregate, under the capital lease at
December 31, 1998 are as follows:
<TABLE>
<S> <C>
1999 $ 42,694
2000 10,673
---------------
Total minimum lease payments 53,367
Amounts representing interest (2,791)
---------------
Present value of minimum lease payments $ 50,576
===============
</TABLE>
17
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
NOTE 7. OTHER BORROWINGS
Other borrowings consist of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
-----------------------------------
1998 1997
--------------- ---------------
<S> <C> <C>
Advance from Federal Home Loan Bank, due in varying $ 984,307 $ -
monthly installments ($1,698 to $2,495) plus interest at
rates varying monthly (5.81% to 6.00%), balloon
payment of $877,768 due March 13, 2003
Advance from Federal Home Loan Bank with 350,000 350,000
interest at 7.66% due on February 28, 2000
Treasury, tax and loan note option account, with interest at 170,333 374,967
.25% less than the Federal funds rate, due on demand.
--------------- ---------------
$ 1,504,640 $ 724,967
=============== ===============
</TABLE>
The advances from the Federal Home Loan Bank are collateralized by a
blanket floating lien on qualifying first mortgage loans and the
Company's investment in Federal Home Loan Bank stock.
NOTE 8. 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, 1998 and 1997 amounted to
$70,000 and $60,000, respectively.
18
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
NOTE 9. DEFERRED COMPENSATION PLAN
The Company has a deferred compensation plan providing for death and
retirement benefits for its directors and executive officers. The
estimated amounts to be paid under the compensation plan have been
funded through the purchase of life insurance policies on the
directors and executive officers. The balance of the policy cash
surrender values included in other assets at December 31, 1998 and
1997 is $1,774,615 and $1,113,642, respectively. Income recognized on
the policies amounted to $60,973 and $61,147 for the years ended
December 31, 1998 and 1997, respectively. The balance of the deferred
compensation included in other liabilities at December 31, 1998 and
1997 is $181,518 and $119,448, respectively. Expense recognized for
deferred compensation amounted to $65,395 and $70,049 for the years
ended December 31, 1998 and 1997, respectively.
NOTE 10. EMPLOYEE STOCK OPTION PLAN
The Company has reserved 100,000 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:
19
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
NOTE 10. EMPLOYEE STOCK OPTION PLAN (Continued)
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------------------------------------------
1998 1997
--------------------------- ---------------------------
WEIGHTED- WEIGHTED-
AVERAGE AVERAGE
EXERCISE EXERCISE
NUMBER PRICE NUMBER PRICE
----------- -------------- ------------ -------------
<S> <C> <C> <C> <C>
Under option, beginning of year 52,500 $ 5.76 52,500 $ 6.31
Granted - - - -
Exercised (800) 7.50 - -
Terminated - - - -
----------- ------------
Under option, end of year 51,700 6.29 52,500 6.31
=========== ============
Exercisable, end of year 40,300 5.95 36,000 5.76
=========== ============
</TABLE>
<TABLE>
<CAPTION>
WEIGHTED-
WEIGHTED- AVERAGE
AVERAGE REMAINING
RANGE OF EXERCISE CONTRACTUAL
NUMBER PRICES PRICE LIFE IN YEARS
------------- ------------------- -------------- ------------------
<S> <C> <C> <C> <C>
UNDER OPTION, END OF YEAR 51,700 $ 5 - 7.50 $ 6.29 5
=============
OPTIONS EXERCISABLE, END OF YEAR 40,300 5 - 7.50 5.95 4
=============
</TABLE>
20
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
NOTE 10. EMPLOYEE STOCK OPTION PLAN (Continued)
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, 1998 and 1997. 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:
<TABLE>
<CAPTION>
DECEMBER 31, 1998
----------------------------------------------------
BASIC DILUTED
EARNINGS EARNINGS
NET INCOME PER SHARE PER SHARE
--------------- --------------- ----------------
<S> <C> <C> <C>
As reported $ 1,816,584 $ 1.51 $ 1.48
Stock-based compensation,
net of related tax effect (6,310) - (0.01)
--------------- --------------- ----------------
As adjusted $ 1,810,274 $ 1.51 $ 1.47
=============== =============== ================
</TABLE>
<TABLE>
<CAPTION>
DECEMBER 31, 1997
----------------------------------------------------
BASIC DILUTED
EARNINGS EARNINGS
NET INCOME PER SHARE PER SHARE
--------------- --------------- ----------------
<S> <C> <C> <C>
As reported $ 1,406,018 $ 1.15 $ 1.13
Stock-based compensation,
net of related tax effect (6,310) (0.01) (0.01)
--------------- --------------- ----------------
As adjusted $ 1,399,708 $ 1.14 $ 1.12
=============== =============== ================
</TABLE>
21
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
NOTE 11. INCOME TAXES
The components of income tax expense are as follows:
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------------------------
1998 1997
----------------- -----------------
<S> <C> <C>
Current $ 862,746 $ 701,959
Deferred (106,996) (55,154)
----------------- -----------------
Income tax expense $ 755,750 $ 646,805
================= =================
</TABLE>
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:
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------------------------------------------------
1998 1997
----------------------------- ----------------------------
AMOUNT PERCENT AMOUNT PERCENT
--------------- ---------- --------------- ----------
<S> <C> <C> <C> <C>
Income taxes at statutory rate $ 874,594 34 % $ 697,960 34 %
Tax-exempt interest (154,869) (6) (109,765) (5)
State income taxes 48,746 2 39,218 2
Other items, net (12,721) (1) 19,392 1
-------------- ---------- -------------- ----------
Income tax expense $ 755,750 29 % $ 646,805 32 %
============== ========== ============== ==========
</TABLE>
22
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
NOTE 11. INCOME TAXES (Continued)
The components of deferred income taxes are as follows:
<TABLE>
<CAPTION>
DECEMBER 31,
----------------------------------
1998 1997
--------------- ---------------
<S> <C> <C>
Deferred tax assets:
Loan loss reserves $ 364,517 $ 275,672
Deferred compensation 68,497 45,075
--------------- ---------------
433,014 320,747
--------------- ---------------
Deferred tax liabilities:
Depreciation 88,316 83,045
Securities available-for-sale 45,829 30,207
--------------- ---------------
134,145 113,252
--------------- ---------------
Net deferred tax assets $ 298,869 $ 207,495
=============== ===============
</TABLE>
NOTE 12. EARNINGS PER COMMON SHARE
The following is a reconciliation of net income and weighted-average
shares outstanding used in determining basic and diluted earnings per
common share (EPS):
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, 1998
----------------------------------------------------------
NET WEIGHTED-AVERAGE PER SHARE
INCOME SHARES AMOUNT
--------------- -------------------- ---------------
<S> <C> <C> <C>
Basic EPS $ 1,816,584 1,200,000 $ 1.51
===============
Effect of Dilutive Securities
Stock options - 29,514
--------------- --------------------
Diluted EPS $ 1,816,584 1,229,514 $ 1.48
=============== ==================== ===============
</TABLE>
23
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
NOTE 12. EARNINGS PER COMMON SHARE (Continued)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, 1997
----------------------------------------------------------
NET WEIGHTED-AVERAGE PER SHARE
INCOME SHARES AMOUNT
--------------- -------------------- ---------------
<S> <C> <C> <C>
Basic EPS $ 1,406,018 1,225,170 $ 1.15
===============
Effect of Dilutive Securities
Stock options - 22,384
--------------- --------------------
Diluted EPS $ 1,406,018 1,247,554 $ 1.13
=============== ==================== ===============
</TABLE>
NOTE 13. 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.
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:
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------------------------
1998 1997
----------------- -----------------
<S> <C> <C>
Commitments to extend credit $ 13,313,000 $ 14,074,000
Standby letters of credit 129,000 613,000
----------------- -----------------
$ 13,442,000 $ 14,687,000
================= =================
</TABLE>
24
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
NOTE 13. COMMITMENTS AND CONTINGENT LIABILITIES (CONTINUED)
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.
YEAR 2000 DISCLOSURES
The Year 2000 issue is the result of computer programs being written
using two digits rather than four to define the applicable year.
Systems that do not properly recognize the year "2000" could generate
erroneous data or cause systems to fail. The Company is heavily
dependent on computer processing and telecommunication systems in the
daily conduct of business activities. In addition, the Company must
rely on intermediaries, vendors and customers to appropriately modify
their systems in order that all may continue normal operations and
operate without significant disruptions. The Company has conducted a
review of its computer systems to identify the systems that could be
affected by the Year 2000 issue. The Company presently believes that,
with modifications to its computer systems and conversions to new
systems, the Year 2000 issue will not pose significant operational
problems for the Company or have a material adverse effect on future
operating results. However, absolute assurance cannot be given that;
(1) the modifications and conversions will remedy all deficiencies,
(2) failure of any of the Company's systems will not have a material
impact on operations, or (3) failure of any other companies' systems
with whom the Company conducts business will not have a material
impact on operations.
25
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
NOTE 14. 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-four percent 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 regulatory policy, generally may not
extend credit to any single borrower or group of related borrowers in
excess of 15% of statutory capital, or approximately $1,710,000.
NOTE 15. 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, 1998 approximately $3,764,000 in 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.
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, 1998, the Company and the Bank meet all capital adequacy
requirements to which they are subject.
26
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
NOTE 15. REGULATORY MATTERS (Continued)
As of December 31, 1998 the most recent 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 are presented
in the following table.
<TABLE>
<CAPTION>
To Be Well
For Capital Capitalized Under
Adequacy Prompt Corrective
Actual Purposes Action Provisions
------------------------ ------------------------ -----------------------
Amount Ratio Amount Ratio Amount Ratio
------------ ---------- ------------ ---------- ----------- ---------
(Dollars in Thousands)
---------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
As of December 31, 1998:
Total Capital (to Risk Weighted Assets):
Consolidated $ 11,578 13.93% $ 6,648 8.00% $ 8,310 10.00%
Bank $ 11,366 13.69% $ 6,642 8.00% $ 8,302 10.00%
Tier I Capital (to Risk Weighted Assets):
Consolidated $ 10,540 12.68% $ 3,324 4.00% $ 4,986 6.00%
Bank $ 10,328 12.44% $ 3,321 4.00% $ 4,982 6.00%
Tier I Capital (to Average Assets):
Consolidated $ 10,540 9.21% $ 4,577 4.00% $ 5,722 5.00%
Bank $ 10,328 9.03% $ 4,574 4.00% $ 5,718 5.00%
As of December 31, 1997:
Total Capital (to Risk Weighted Assets):
Consolidated $ 9,915 15.05% $ 5,270 8.00% $ 6,588 10.00%
Bank $ 9,693 14.74% $ 5,260 8.00% $ 6,576 10.00%
Tier I Capital (to Risk Weighted Assets):
Consolidated $ 9,078 13.78% $ 2,635 4.00% $ 3,953 6.00%
Bank $ 8,871 13.49% $ 2,630 4.00% $ 3,946 6.00%
Tier I Capital (to Average Assets):
Consolidated $ 9,078 9.62% $ 3,775 4.00% $ 4,718 5.00%
Bank $ 8,871 9.41% $ 3,771 4.00% $ 4,714 5.00%
</TABLE>
27
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
NOTE 16. 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 models. Those models 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, 1998
and 1997. 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.
CASH, DUE FROM BANKS, INTEREST-BEARING DEPOSITS IN BANKS,
AND FEDERAL FUNDS SOLD:
The carrying amounts of cash, due from banks, interest-bearing
deposits in banks, and Federal funds sold approximate their fair
value.
SECURITIES:
Fair values for securities are based on available 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 models, using current market interest rates
currently offered for loans with similar terms to borrowers of similar
credit quality. Fair values for impaired loans are estimated using
discounted cash flow models or based on the fair value of the
underlying collateral.
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 models, using current market interest rates
currently offered on certificates with similar remaining maturities.
28
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
NOTE 16. FAIR VALUE OF FINANCIAL INSTRUMENTS (Continued)
OBLIGATION UNDER CAPITAL LEASE AND OTHER BORROWINGS:
The fair values of the Company's obligation under capital lease and
other borrowings approximate their fair values.
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.
The carrying amounts and estimated fair values of the Company's
financial instruments are as follows:
<TABLE>
<CAPTION>
December 31, 1998 December 31, 1997
--------------------------------------- ---------------------------------
Carrying Fair Carrying Fair
Amount Value Amount Value
------------------ ------------------ --------------- ----------------
<S> <C> <C> <C> <C>
Financial assets:
Cash, due from banks, interest-
bearing deposits in banks,
and Federal funds sold $ 7,429,697 $ 7,429,697 $ 4,299,127 $ 4,299,127
Securities available-for-sale 12,127,292 12,127,292 8,870,631 8,870,631
Securities held-to-maturity 13,485,122 13,687,590 8,893,071 9,008,060
Loans 76,100,127 77,435,000 66,997,195 67,300,000
Accrued interest receivable 956,602 956,602 791,061 791,061
Financial liabilities:
Deposits 101,747,068 102,579,266 83,014,790 83,421,378
Obligation under capital
lease and other borrowings 1,555,316 1,555,316 813,134 813,134
Accrued interest payable 1,346,184 1,346,184 975,018 975,018
</TABLE>
29
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
NOTE 17. SUPPLEMENTAL FINANCIAL DATA
Components of other operating expenses in excess of 1% of total
revenue are as follows:
<TABLE>
<CAPTION>
December 31,
----------------------------------
1998 1997
--------------- ---------------
<S> <C> <C>
Stationery and supplies $ 102,897 $ 76,026
</TABLE>
NOTE 18. 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, 1998 and 1997:
CONDENSED BALANCE SHEETS
<TABLE>
<CAPTION>
1998 1997
----------------- ----------------
<S> <C> <C>
ASSETS
Cash $ 216,050 $ 207,518
Investment in subsidiaries 10,478,983 8,983,059
Securities available-for-sale 131,025 122,314
Other assets 3,252 -
----------------- ----------------
Total assets $ 10,829,310 $ 9,312,891
================= ================
LIABILITIES
Dividends payable $ 180,000 $ 150,000
Other 20,264 26,353
----------------- ----------------
200,264 176,353
----------------- ----------------
STOCKHOLDERS' EQUITY 10,629,046 9,136,538
----------------- ----------------
Total liabilities and stockholders' equity $ 10,829,310 $ 9,312,891
================= ================
</TABLE>
30
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
NOTE 18. PARENT COMPANY FINANCIAL INFORMATION (Continued)
CONDENSED STATEMENTS OF INCOME
<TABLE>
<CAPTION>
1998 1997
----------------- ----------------
<S> <C> <C>
INCOME
Dividends from bank subsidiary $ 348,000 $ 150,000
Interest on deposits in bank - 18,566
Other 3,715 7,761
----------------- ----------------
351,715 176,327
----------------- ----------------
EXPENSES, OTHER 9,732 3,085
----------------- ----------------
Income before income tax benefits and
equity in undistributed income of subsidiaries 341,983 173,242
INCOME TAX EXPENSE (BENEFITS) (3,252) 7,925
----------------- ----------------
Income before equity in undistributed income
of subsidiaries 345,235 165,317
EQUITY IN UNDISTRIBUTED INCOME OF SUBSIDIARIES 1,471,349 1,240,701
----------------- ----------------
Net income $ 1,816,584 $ 1,406,018
================= ================
</TABLE>
31
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
NOTE 18. PARENT COMPANY FINANCIAL INFORMATION (Continued)
CONDENSED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
1998 1997
----------------- -----------------
<S> <C> <C>
OPERATING ACTIVITIES
Net income $ 1,816,584 $ 1,406,018
Adjustments to reconcile net income to net
cash provided by operating activities:
Undistributed income of subsidiaries (1,471,349) (1,240,701)
Gain on sale of securities available-for-sale - (4,562)
Other operating activities (12,303) 10,697
----------------- -----------------
Net cash provided by operating activities 332,932 171,452
----------------- -----------------
INVESTING ACTIVITIES
Net decrease in interest-bearing deposits in bank - 535,000
Purchases of securities available-for-sale - (4,907)
Proceeds from sale of securities available-for-sale - 5,702
----------------- -----------------
Net cash provided by investing activities - 535,795
----------------- -----------------
FINANCING ACTIVITIES
Purchase of treasury stock (12,400) (434,560)
Proceeds from sale of treasury stock - 19,941
Proceeds from exercise of stock options 6,000 -
Dividends paid (318,000) (247,280)
----------------- -----------------
Net cash used in financing activities (324,400) (661,899)
----------------- -----------------
Net increase in cash 8,532 45,348
Cash at beginning of year 207,518 162,170
----------------- -----------------
Cash at end of year $ 216,050 $ 207,518
================= =================
</TABLE>
32
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS
CAUTIONARY STATEMENT ABOUT FORWARD-LOOKING STATEMENTS
The Annual Report, including the Management's Discussion and Analysis which
follows, contains forward-looking statements in addition to historical
information, including, but not limited to statements regarding Management's
beliefs, current expectations, estimates and projections about the financial
services industry, the economy, and about the Company and the Bank in general.
Such forward-looking statements are subject to certain factors that could cause
actual results to differ materially from historical results or anticipated
events, trends or results. These factors include, but are not limited to:
. increased competition with other financial institutions,
. lack of sustained growth in the economy in Hall County,
. rapid fluctuations in interest rates,
. the inability of the Bank to maintain regulatory capital standards, and
. changes in the legislative and regulatory environment.
These and other factors affecting the Company's future performance are further
detailed in publicly available reports filed from time to time by the Company
with the Securities and Exchange Commission, such as the Company's Annual Report
on Form 10-KSB for the year ended December 31, 1998 (the "1998 10-KSB").
The purpose of the following discussion is to address information relating to
the financial condition and results of operations of the Company that may not be
readily apparent from a review of the consolidated financial statements and
notes thereto, which are included in this Annual Report.
This discussion should be read in conjunction with information provided in the
Company's consolidated financial statements and accompanying footnotes; and with
the statistical information appearing in the 1998 10-KSB under the caption
"Selected Statistical Information."
GENERAL
Included below is a discussion of the Company's financial condition and
recent changes in its financial condition, cash flows, and the results of
operations. Management is not aware of any trends, events, or uncertainties that
have had or that are reasonably expected to have a material impact on the
revenues or income from continuing operations. Also, management is not aware of
any current recommendations by the regulatory
33
<PAGE>
authorities which, if they were to be implemented, would have a material effect
on the Company's liquidity, capital resources, or operations.
LIQUIDITY AND CAPITAL RESOURCES
Liquidity management involves the matching of the cash flow requirements of
customers who may be either depositors desiring to withdraw funds or borrowers
needing assurance that sufficient funds will be available to meet their credit
needs and the ability of the Company and the Bank to meet those needs. The
Company and the Bank seek to meet liquidity requirements primarily through
management of short-term investments (principally Federal funds sold) and
monthly amortizing loans. Another source of liquidity is the repayment of
maturing single payment loans. Also, the Bank maintains relationships with
correspondent banks which could provide funds to them on short notice, if
needed.
The liquidity and capital resources of the Company and the Bank are
monitored on a periodic basis by Federal regulatory authorities. As determined
under guidelines established by those regulatory authorities, the Bank's
liquidity ratios at December 31, 1998 were considered satisfactory. At that
date, the Bank's short-term investments were adequate to cover any reasonably
anticipated immediate need for funds. The Company and the Bank were not aware of
any events or trends likely to result in a material change in their liquidity.
At December 31, 1998, the Company's and the Bank's capital to asset ratios were
considered adequate based on guidelines established by the regulatory
authorities. During 1998, the Company increased its capital by retaining
earnings of $1,469,000 and by an increase in the accumulated other comprehensive
income of $30,000. The Company's capital decreased by $3,500 due to the purchase
of treasury stock offset by proceeds from the exercise of stock options. At
December 31, 1998, total capital of the Company amounted to $10,629,000. The
Company's Tier I Capital leverage ratio for 1998 was 9.21%. The Company's Tier I
Risk-Based Capital and Total Risk-Based Capital ratios for 1998 were 12.68% and
13.93%, respectively.
RESULTS OF OPERATIONS
GENERAL
The Company's results of operations are determined by its ability to
effectively manage interest income and expense, to minimize loan and investment
losses, to generate noninterest income, and to control noninterest expense.
Because interest rates are determined by market forces and economic conditions
beyond the control of the Company, the ability to generate net interest income
is dependent upon the Bank's ability to obtain an adequate spread between the
rate earned on earning assets and the rate paid on interest-bearing liabilities.
Thus, the key performance measure for net interest income is the interest margin
or net yield, divided by average earning assets.
The primary component of consolidated earnings is net interest income, or
the difference between interest income on earning assets and interest paid on
supporting liabilities. The net interest margin is net interest income expressed
as a percentage of average earning assets. Earning assets consist of loans,
investment securities, Federal funds sold, and interest-bearing deposits in
banks. Supporting liabilities consist of other borrowings and deposits, of which
approximately 16.5% are noninterest-bearing.
34
<PAGE>
NET INCOME
Net income for the year ended December 31, 1998, increased to $1,817,000
from the 1997 amount of $1,406,000, representing an increase of $411,000 or
29.2%. This increase is primarily attributable to an increase in net interest
income of $793,000 and an increase of $70,000 in other income, offset by a
$222,000 increase in other expenses and a $120,000 increase in the provision for
loan losses. Diluted earnings per common share increased to $1.48 from the 1997
amount of $1.13, a $0.35 increase or 31.0%.
The net interest margin decreased by .02% to 5.05% in 1998 as compared to
5.07% in 1997. The yield on average earning assets remained constant in 1998 at
9.51%, while the interest paid on average interest-bearing liabilities increased
from 5.40% in 1997 to 5.41% in 1998 or one basis point. Net interest income was
$4,850,000 in 1998 as compared to $4,057,000 in 1997, representing an increase
of $793,000.
Average earning assets increased by $16,034,000 or 20.0% to $96,020,000 in
1998 from $79,986,000 in 1997. Average loans increased by $14,437,000; average
investments and interest-bearing deposits in banks increased by $299,000; and
average Federal funds sold increased by $1,298,000. The net increase in average
earning assets of $16,034,000 was funded by an increase in average deposits of
$15,644,000 or 20.2% to $92,984,000 in 1998 from $77,340,000 in 1997.
Approximately 16.12% and 15.84% of the average deposits were noninterest-bearing
deposits in 1998 and 1997, respectively.
PROVISION FOR LOAN LOSSES
The allowance for loan losses represents a reserve for potential losses in
the loan portfolio. The adequacy of the allowance for loan losses is evaluated
periodically based on a review of all significant loans, with a particular
emphasis on nonaccruing, past due, and other loans that management believes
require attention.
The provision for loan losses is a charge to earnings in the current period
to maintain the allowance for loan losses at a level management has determined
to be adequate. The provision for loan losses charged to earnings amounted to
$290,000 in 1998 and $170,000 in 1997. The provisions resulted from management's
evaluation of the loan portfolios and the potential loan risk associated with
certain loans and a general reserve for loans not specifically identified. Net
charge-offs for 1998 increased to $54,000 as compared to $40,000 in 1997. The
allowance for loan losses as a percentage of total loans outstanding at December
31, 1998 and 1997 were 1.39% and 1.23%, respectively. Net charge-offs to total
loans outstanding at December 31, 1998 and 1997 were .07% and .06%,
respectively.
The determination of the amounts allocated for loan losses is based upon
management's judgment concerning factors affecting loan quality and assumptions
about the local and national economy. Management considers the year end
allowances adequate to cover potential losses in the loan portfolio.
35
<PAGE>
NON-INTEREST INCOME
Following is an analysis of noninterest income for 1998 and 1997.
<TABLE>
<CAPTION>
1998 1997
<S> <C> <C>
Service charges on deposit accounts $ 542,720 $ 526,571
Security transactions, net -- 6,052
Other income 180,839 121,151
------- -----------
$ 723,559 $ 653,774
======= ===========
</TABLE>
Service charges on deposit accounts increased by $16,000 or 3.1% from 1997
to 1998. The change is primarily attributable to an increase in service charges
on checking accounts of $13,000 during 1998.
NON-INTEREST EXPENSE
Following is an analysis of noninterest expense for 1998 and 1997.
<TABLE>
<CAPTION>
1998 1997
<S> <C> <C>
Salaries and employee benefits $ 1,598,488 $ 1,434,407
Occupancy and equipment expense 420,972 400,982
Data processing expense 101,276 97,943
Stationery and supplies 102,897 76,026
Other expense 487,094 478,976
---------- ---------
$ 2,710,727 $ 2,488,334
========== =========
</TABLE>
The most significant increase in noninterest expense in 1998 over 1997 was
an increase in salaries and benefits of $164,000. This 11.4% increase was due to
normal increases in salaries and employee benefits.
Average total assets increased by $18,295,000 to $106,338,000 in 1998 as
compared to $88,043,000 in 1997. The increase in average total assets was
attributable largely to the normal growth in the Bank and to the opening of the
Quillian's Corner branch. Loan demand was greater in 1998 as evidenced by an
increase of $14,437,000 in average loans from $58,177,000 in 1997 to $72,614,000
in 1998.
36
<PAGE>
NONPERFORMING LOANS
The following table presents, at the dates indicated, the aggregate of
nonperforming loans for the categories indicated.
<TABLE>
<CAPTION>
DECEMBER 31,
------------
1998 1997
(Dollars in Thousands)
----------------------
<S> <C> <C>
Loans accounted for on a nonaccrual basis $ 249 $ 97
Instalment loans and term loans contractually past
due ninety days or more as to interest or principal
payments and still accruing 49 172
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 - -
</TABLE>
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.
37
<PAGE>
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 $1,073,000 at December
31, 1998, representing 1.39% of year end total loans outstanding, compared with
$837,000 at December 31, 1997, representing 1.23% 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.
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, 1998.
38
<PAGE>
The following table presents an analysis of the Company's loan loss
experience for the periods indicated:
<TABLE>
<CAPTION>
DECEMBER 31,
------------
1998 1997
---- ----
(Dollars in Thousands)
--------------------
<S> <C> <C>
Average amount of loans outstanding $ 72,614 $ 58,177
=========== ===========
Balance of reserve for possible loan losses
at beginning of period $ 837 $ 707
----------- -----------
Charge-offs:
Commercial, financial and agricultural $ (13) $ -
Consumer (46) (25)
Real estate - (16)
Recoveries:
Consumer 5 1
Real estate - -
----------- -----------
Net Charge-offs $ (54) $ (40)
=========== ===========
Additions to reserve charged to operating expenses $ 290 $ 170
=========== ===========
Balance of reserve for possible loan losses $ 1,073 $ 837
=========== ===========
Ratio of net loan charge-offs to average loans .07% .07%
=========== ===========
</TABLE>
39
<PAGE>
DEPOSITS
Average amount of deposits and average rate paid thereon, classified as to
noninterest-bearing demand deposits, interest-bearing demand, saving deposits,
and time deposits, for the periods indicated are presented below.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
1998 1997
---- ----
AMOUNT RATE AMOUNT RATE
-------------------- -------------------
(Dollars in Thousands)
--------------------
<S> <C> <C> <C> <C>
Noninterest-bearing
demand deposits $ 14,985 --% $ 12,247 --%
Interest-bearing demand 16,297 3.78 13,007 3.46
Savings deposits 10,562 5.05 9,363 4.89
Time deposits 51,140 5.96 42,723 6.07
--------- --------
Total deposits $ 92,984 $ 77,340
========= ========
</TABLE>
The amounts of time certificates of deposit issued in amounts of $100,000
or more as of December 31, 1998, are shown below by category, which is based on
time remaining until maturity of (1) three months or less, (2) over three
through six months, (3) over six months through twelve months, and (4) over
twelve months.
<TABLE>
<CAPTION>
(Dollars in
Thousands)
<S> <C>
Three months or less $ 5,569
Over three months through six months 6,820
Over six months through twelve months 8,042
Over twelve months 3,422
--------
Total $ 23,853
========
</TABLE>
40
<PAGE>
RETURN ON ASSETS AND SHAREHOLDERS' EQUITY
The following rate of return information for the periods indicated is
presented below.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
1998 1997
<S> <C> <C>
Return on assets (1)........................... 1.71% 1.60%
Return on equity (2)........................... 18.20 16.02
Dividend payout ratio (3)...................... 18.92 17.78
Equity to assets ratio (4)..................... 9.39 9.97
</TABLE>
(1) Net income divided by average total assets.
(2) Net income divided by average equity.
(3) Dividends declared per share divided by diluted earnings per common
share.
(4) Average equity divided by average total assets.
YEAR 2000 DISCLOSURES
The Year 2000 Issue: As the end of this century draws near, there is worldwide
concern that Year 2000 technology problems may wreak havoc on global economies.
No country, government, business, or person is immune from the potential effects
of Year 2000 problems. The Year 2000 problem arose because many existing
computer systems and software programs use a two-digit year field. Because of
this, some computers will not properly recognize the turn of the century. A
computer with a two-digit year field may recognize the year 2000 as 1900. If not
corrected, many computer applications could fail or miscalculate data, creating
erroneous results.
The Company's State of Readiness: To address the Year 2000 problems, the Company
formed a "Year 2000 Project Team" made up of key employees. This team has been
charged with the responsibility of assessing the problem, overseeing corrective
action, as well as testing the Year 2000 readiness of all equipment, software,
and applications after upgrades have been made.
Critical systems, hardware, and software have received priority attention. As of
December 31, 1998, all critical systems have been upgraded or replaced and the
related software has been upgraded to meet Year 2000 standards and are presently
in the "testing phase" to ensure proper functioning in a Year 2000 environment.
These critical systems include our core bank processing hardware and Jack Henry
& Associates' CIF 20-20 software as well as Fedline communication system to the
Federal Reserve Bank, and our automated new accounts and loan document
preparation software. All critical station personal computers have been upgraded
or replaced with Year 2000 compliant hardware and software. Several other
software systems have been upgraded to be Year 2000 compliant and are currently
in the testing phase.
41
<PAGE>
In addition to our primary core processing system, the bank has a backup data
processing site at Sungard Systems in Roswell, Georgia. This backup site has
already received hardware and software upgrades to bring the core backup system
to Year 2000 compliance standards. Management anticipates the backup site will
be totally compliant by the end of March 1999.
Since the Bank is heavily reliant on outside vendors for many services such as
electricity, phone service, water, gas, ATM processing, bond accounting, and
bank related forms, we have developed a system of obtaining vendor information
to help us determine a vendor's state of Year 2000 readiness. We are in the
process of obtaining and evaluating vendor provided information related to Year
2000.
Contingency Plans: Due to the critical nature of our core processing system and
our automated platform for new accounts and loan document preparation, we have
developed contingency plans that will be put into operation should any of these
systems not pass Year 2000 readiness testing. These plans have been developed to
minimize the impact of interruptions in business resulting from problems related
to the Year 2000. These plans encompass several alternative means, including
manual processing, to meet a minimum of services necessary to facilitate our
customers' banking needs.
Cost: After our assessment phase to determine the extent of our Year 2000
problem, our Board of Directors approved a budget in the amount of $200,000 to
address the Year 2000 issue. In order to ensure adequate funds are provided to
resolve Year 2000 issues, including those that may not be presently known, our
Year 2000 budget is subject to continuous review and amendment. Management does
not expect the cost of remediation to vary significantly from our present
budget, although there can be no assurances in this regard.
As of December 31, 1998, we have experienced $20,300 in Year 2000 expenses. This
expense breaks down as follows: $9,500 for testing of hardware and software,
$8,000 for system upgrade and replacement, and $2,800 on education, training,
and customer awareness.
Consequences of Year 2000 Problems: For a bank, Year 2000 problems could be
devastating if loan or deposit interest accruals are not calculated properly. A
Year 2000- caused system crash could result in a disruption of business which in
turn could cause the bank to lose a significant portion of its customer base.
Either of which could result in material adverse consequences for the Bank.
Another area of Year 2000 concern for the Bank is customer awareness and
preparedness. In particular, loan customers who are not Year 2000 compliant
could experience business interruptions which could affect their ability to
repay debts owed to the Bank resulting in adverse bank performance. The customer
awareness and education expenses have been incurred in an effort to insure
customers are aware of the Year 2000 problem and understand the potential impact
on their business. Loan customers considered to have Year 2000 exposure and that
subject the bank to moderate potential credit risk were required to complete a
questionnaire in order to assess their Year 2000 readiness. No customers were
considered to pose a potential credit risk to the Bank.
42
<PAGE>
The foregoing are forward-looking statements reflecting management's current
assessment and estimates with respect to the Company's Year 2000 compliance
efforts and the impact of Year 2000 issues on the Company's business and
operations. Various factors could cause actual plans and results to differ
materially from those contemplated by such assessments, estimates and
forward-looking statements, many of which are beyond the control of the Company.
Some of these factors include, but are not limited to representations by the
Company's vendors and counterparties, technological advances, economic
considerations, and consumer perceptions. The Company's Year 2000 compliance
program is an ongoing process involving continual evaluation and may be subject
to change in response to new developments.
43
<PAGE>
OFFICERS OF LANIER BANKSHARES, INC.
JOSEPH D. CHIPMAN, JR., President and Chief Executive Officer
RICKY H. PUGH, Executive Vice President
JEFFREY D. HUNT, Senior Vice President
SUSAN R. BELL, Corporate Secretary
EXECUTIVE OFFICERS OF LANIER NATIONAL BANK
JOSEPH D. CHIPMAN, JR., President and Chief Executive Officer
RICKY H. PUGH, Executive Vice President
JEFFREY D. HUNT, Senior Vice President - Operations
DIRECTORS OF LANIER BANKSHARES, INC. AND LANIER NATIONAL BANK
JOHN W. BROWNING, III, M.D., Physician and Partner of Longstreet Clinic;
Chairman of Northeast Georgia Health Associates
JOSEPH D. CHIPMAN, JR., President and Chief Executive Officer of the Company and
of the Bank; Chairman of Lanier Data Corporation
LEWIS W. COKER, President and General Manager, Coker Equipment Company
C. EDMONDSON DANIEL, Chairman of the Board of the Company and of the Bank;
President and CEO of Carroll Daniel Construction Company
J. AUSTIN EDMONDSON, Principal, Georgia Chair Company; Principal, Georgia
Plastic Company
JERRY D. JACKSON, Real Estate Developer; Partner, Mundy Mill Properties;
Partner, Woodfield Properties; Partner, Lanier Car Wash
R. THOMAS JARRARD, Attorney, Carey, Jarrard and Walker
CARLTON W. ROGERS, SR., Agent, Turner, Wood & Smith Insurance Center
STEWART TEAVER, Principal, City Plumbing & Electric Company; Principal, Area
Realty Company
MIKE WILSON, Real Estate Developer; Principal, Whitmire & Wilson Properties
SHAREHOLDERS MAY OBTAIN, WITHOUT CHARGE, A COPY OF LANIER BANKSHARES, INC. 1998
ANNUAL REPORT TO THE SECURITIES AND EXCHANGE COMMISSION ON FORM 10-KSB. WRITTEN
REQUESTS SHOULD BE ADDRESSED TO SUSAN R. BELL, SECRETARY TO LANIER BANKSHARES,
INC., P.O. BOX 26, GAINESVILLE, GEORGIA 30503.
44
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 9
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> DEC-31-1998
<CASH> 4,788,161
<INT-BEARING-DEPOSITS> 41,536
<FED-FUNDS-SOLD> 2,600,000
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 12,127,292
<INVESTMENTS-CARRYING> 13,485,122
<INVESTMENTS-MARKET> 13,687,590
<LOANS> 77,172,657
<ALLOWANCE> 1,072,530
<TOTAL-ASSETS> 115,750,834
<DEPOSITS> 101,747,068
<SHORT-TERM> 0
<LIABILITIES-OTHER> 1,819,404
<LONG-TERM> 1,555,316
0
0
<COMMON> 1,237,826
<OTHER-SE> 9,391,220
<TOTAL-LIABILITIES-AND-EQUITY> 115,750,834
<INTEREST-LOAN> 7,840,034
<INTEREST-INVEST> 1,126,891
<INTEREST-OTHER> 163,702
<INTEREST-TOTAL> 9,130,627
<INTEREST-DEPOSIT> 4,199,094
<INTEREST-EXPENSE> 4,281,125
<INTEREST-INCOME-NET> 4,849,502
<LOAN-LOSSES> 290,000
<SECURITIES-GAINS> 0
<EXPENSE-OTHER> 2,710,727
<INCOME-PRETAX> 2,572,334
<INCOME-PRE-EXTRAORDINARY> 2,572,334
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 1,816,584
<EPS-PRIMARY> 1.51
<EPS-DILUTED> 1.48
<YIELD-ACTUAL> 5.05
<LOANS-NON> 249,000
<LOANS-PAST> 49,000
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 837,000
<CHARGE-OFFS> 59,000
<RECOVERIES> 5,000
<ALLOWANCE-CLOSE> 1,073,000
<ALLOWANCE-DOMESTIC> 1,073,000
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 0
</TABLE>
