<PAGE>
U.S. SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
FORM 10-QSB
(Mark One)
X Quarterly report under Section 13 or 15(d) of the Securities Exchange Act
- --- of 1934 For the quarterly period ended March 31, 1998
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___ Transition report under Section 13 or 15(d) of the Exchange Act
For the transition period from _______________ to ________________
Commission File No. 0-28280
GREATER ROME BANCSHARES, INC.
-----------------------------
(Exact Name of Small Business Issuer as Specified in its Charter)
Georgia 58-2117940
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(State of Incorporation) (I.R.S. Employer Identification No.)
P.O. Box 5271, 1490 Martha Berry Blvd., Rome, Georgia 30162-5271
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(Address of Principal Executive Offices)
(706) 295-9300
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(Issuer's Telephone Number, Including Area Code)
Not Applicable
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(Former Name, Former Address and Former Fiscal
Year, if Changed Since Last Report)
Check whether the issuer: (1) filed all reports required to be filed by
Section 13 or 15(d) of the Exchange Act during the past 12 months (or for such
shorter period that the registrant was required to file such reports), and (2)
has been subject to such filing requirements for the past 90 days.
Yes X No
___ ___
State the number of shares outstanding of each of the issuer's classes of
common equity, as of the latest practicable date:
700,000 shares of common stock, $.01 par value per share, were issued and
outstanding as of April 28, 1998.
Transitional Small Business Disclosure Format (check one): Yes ___ No X
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1
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PART I
FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS.
The unaudited financial statements of Greater Rome Bancshares, Inc. (the
"Company") are set forth on the following pages. All adjustments have been made
which, in the opinion of management, are necessary in order to make the
financial statements not misleading.
2
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GREATER ROME BANCSHARES, INC. and subsidiary
Consolidated Balance Sheets
(Unaudited)
March 31, 1998 and December 31, 1997
Assets
------
<TABLE>
<CAPTION>
1998 1997
----- -----
<S> <C> <C>
Cash and due from banks $ 742,196 1,530,896
Federal funds sold 3,912,929 1,433,528
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Cash and cash equivalents 4,655,125 2,964,424
------------ -----------
Securities available for sale 2,693,716 2,690,808
(amortized cost of $2,687,270 and $2,686,023)
Securities held to maturity 6,939,868 6,325,869
(market value $6,938,315 and $6,317,936)
Loans 32,469,669 30,202,967
Allowance for loan losses (520,148) (480,544)
------------ -----------
Net loans 31,949,521 29,722,423
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Premises and equipment, net 2,329,168 2,271,350
Accrued interest receivable and other assets 699,730 721,703
------------ -----------
$49,267,128 44,696,577
============ ===========
<CAPTION>
Liabilities and Stockholders' Equity
------------------------------------
<S> <C> <C>
Deposits:
Demand $ 4,024,985 4,414,480
Interest bearing demand 3,074,661 2,987,988
Savings 6,761,990 4,780,996
Time 24,689,791 21,382,715
------------ -----------
Total deposits 38,551,427 33,566,179
Federal Home Loan Bank advances 4,000,000 4,000,000
Securities sold under repurchase agreement - 500,000
Accrued interest payable and other liabilities 231,779 207,373
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Total liabilities 42,783,206 38,273,552
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Commitments
Stockholders' equity:
Preferred stock, par value $1.00 per share; 100,000 shares
authorized; no shares issued or outstanding
Common stock, par value $.01 per share; 10,000,000
shares authorized; 700,000 shares issued and outstanding 7,000 7,000
Additional paid-in capital 6,930,117 6,930,117
Accumulated deficit (457,150) (518,877)
Accumulated other comprehensive income:
Unrealized gain/(loss) on securities available for sale 3,955 4,785
------------ -----------
Total stockholder's equity 6,483,922 6,423,025
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$ 49,267,128 44,696,577
============ ===========
</TABLE>
See accompanying notes to consolidated financial statements.
3
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GREATER ROME BANCSHARES, INC.
Statement of Operations and Comprehensive Income
(Unaudited)
For the Three Months Ended March 31, 1998 and 1997
<TABLE>
<CAPTION>
1998 1997
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<S> <C> <C>
Interest income:
Loans, including loan fees $ 788,621 378,052
Federal funds sold and deposits with other banks 41,528 43,730
Investment securities, including dividends 140,866 107,629
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Total interest income 971,015 529,411
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Interest expense:
Interest bearing demand deposits 13,431 14,658
Savings deposits 50,725 33,127
Time deposits 346,671 175,625
Other 57,856 2,343
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Total interest expense 468,683 225,753
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Net interest income 502,332 303,658
Provision for loan losses 47,500 74,578
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Net interest income after provision 454,832 229,080
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Other income:
Service charges 33,133 16,570
Other 18,457 10,699
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Total other income 51,590 27,269
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Other expenses:
Salaries and employee benefits 234,215 170,255
Occupancy 60,662 57,250
Other operating 132,528 94,341
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Total other expenses 427,405 321,846
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Income (loss) before income taxes 79,017 (65,497)
Income tax expense 17,290 -
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Net earnings (loss) $ 61,727 (65,497)
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Other comprehensive income, before tax:
Unrealized gain/(loss) on securities available for
sale arising during period 1,660 (13,210)
Income tax expense on other comprehensive income 2,490 -
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Other comprehensive income, net of tax (830) (13,210)
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Comprehensive income $ 60,896 (78,708)
========== =========
Net earnings (loss) per share $ 0.09 (0.09)
========== =========
Diluted net earnings (loss) per share $ 0.09 (0.09)
========== =========
</TABLE>
See accompanying notes to consolidated financial statements.
4
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GREATER ROME BANCSHARES, INC. and subsidiary
Consolidated Statements of Cash Flows
(Unaudited)
For the Three Months Ended March 31, 1998 and 1997
<TABLE>
<CAPTION>
1998 1997
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<S> <C> <C>
Cash flows from operating activities:
Net earnings (loss) $ 61,727 (65,497)
Adjustments to reconcile net earnings (loss) to net cash
used by operating activities:
Depreciation, amortization and accretion 38,533 32,679
Provision for loan losses 47,500 74,578
Change in:
Interest receivable and other assets 12,739 (21,932)
Interest payable and other liabilities 24,406 (165,192)
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Net cash used in operating activities 184,905 (145,364)
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Cash flows from investing activities:
Purchases of securities available for sale - (952,414)
Purchases of securities held to maturity (1,749,063) (742,895)
Proceeds from maturities and calls of
securities held to maturity 1,135,591 250,000
Net increase in loans (2,274,598) (4,800,943)
Purchases of premises and equipment (91,382) (260,909)
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Net cash used by investing activities (2,979,452) (6,507,161)
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Cash flows from financing activities:
Net change in demand and savings deposits 1,678,172 1,685,064
Net change in time deposits 3,307,076 1,320,394
Net change in short term borrowings (500,000) 1,900,000
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Net cash provided by financing activities 4,485,248 4,905,458
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Change in cash and cash equivalents 1,690,701 (1,747,067)
Cash and cash equivalents at beginning of period 2,964,424 4,823,803
----------- ----------
Cash and cash equivalents at end of period $ 4,655,125 3,076,736
=========== ==========
Supplemental disclosures of cash flow information:
Cash paid for interest $ 453,784 219,327
Change in unrealized gain/(loss) on securities available for sale $ 1,660 (13,210)
</TABLE>
See accompanying notes to consolidated financial statements.
5
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GREATER ROME BANCSHARES, INC. and subsidiary
Notes to Consolidated Financial Statements
(Unaudited)
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Organization
- ------------
Greater Rome Bancshares, Inc. (the "Company") is a bank holding company whose
business is conducted by its wholly owned bank subsidiary, Greater Rome Bank
(the "Bank"). The Company is subject to regulation under the Bank Holding
Company Act of 1956.
The Bank is a commercial bank that serves Rome, Georgia, a community located
approximately 50 miles north of metropolitan Atlanta, and surrounding Floyd
County. The Bank is chartered and regulated by the State of Georgia Department
of Banking and Finance and is insured and subject to regulation by the Federal
Deposit Insurance Corporation.
Basis of Presentation and Reclassification
- ------------------------------------------
The accounting principles followed by Greater Rome Bancshares, Inc. and its
subsidiary, and the methods of applying these principles, conform with generally
accepted accounting principles ("GAAP") and with general practices within the
banking industry. In preparing financial statements in conformity with GAAP,
management is required to make estimates and assumptions that affect the
reported amounts in the financial statements. Actual results could differ
significantly from those estimates. Material estimates common to the banking
industry that are particularly susceptible to significant change in the near
term include, but are not limited to, the determination of the allowance for
loan losses and the valuation of real estate acquired in connection with or in
lieu of foreclosure on loans.
Cash and Cash Equivalents
- -------------------------
For presentation purposes in the consolidated statements of cash flows, cash
and cash equivalents include cash on hand, amounts due from banks, interest-
bearing deposits with banks and federal funds sold.
Investment Securities
- ---------------------
The Company classifies its securities in one of three categories: trading,
available for sale, or held to maturity. Trading securities are bought and held
principally for sale in the near term. Held to maturity securities are those
securities for which the Company has the ability and intent to hold the security
until maturity. All other securities not included in trading or held to
maturity are classified as available for sale. The Company's current investment
policy prohibits trading activity.
Held to maturity securities are recorded at cost, adjusted for the amortization
or accretion of premiums or discounts. Transfers of securities between
categories are recorded at fair value at the date of transfer. Unrealized
holding gains or losses associated with transfers of securities from held to
maturity to available for sale are recorded as a separate component of
stockholders' equity.
Available for sale securities consist of investment securities not classified as
trading securities or held to maturity securities and are recorded at fair
value. Unrealized holding gains and losses, net of the related tax effect, on
securities available for sale are excluded from earnings and are reported as a
separate component of stockholders' equity until realized.
A decline in the market value of any available for sale or held to maturity
investment below cost that is deemed other than temporary is charged to earnings
and establishes a new cost basis for the security.
Premiums and discounts are amortized or accreted over the life of the related
security as an adjustment to the yield. Realized gains and losses for securities
classified as available for sale and held to maturity are
6
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included in earnings and are derived using the specific identification method
for determining the cost of securities sold.
Loans, Loan Fees and Interest Income
- ------------------------------------
Loans that management has the intent and ability to hold for the foreseeable
future or until maturity are reported at the principal amount outstanding, net
of the allowance for loan losses and any deferred fees or costs on originated
loans. Interest on all loans is calculated principally by using the simple
interest method on the daily balance of the principal amount outstanding.
A loan is considered impaired when, based on current information and events,
it is probable that all amounts due according to the contractual terms of the
loan agreement will not be collected. Impaired loans are measured based on the
present value of expected future cash flows discounted at the loan's effective
interest rate, or at the loan's observable market price, or at the fair value of
the collateral of the loan if the loan is collateral dependent. Interest income
from impaired loans is recognized using a cash basis method of accounting during
the time within that period in which the loans were impaired.
Allowance for Loan Losses
- -------------------------
The Bank's provision for loan losses is based upon management's continuing
review and evaluation of the loan portfolio and is intended to create an
allowance adequate to absorb losses on loans outstanding as of the end of each
reporting period. For individually significant loans, management's review
consists of evaluations of the financial strength of the borrowers and the
related collateral. The review of groups of loans, which are individually
insignificant, is based upon delinquency status of the group, lending policies,
and collection experience.
Management believes that the allowance for loan losses is adequate. While
management uses available information to recognize losses on loans, future
additions to the allowance may be necessary based on changes in economic
conditions. In addition, various regulatory agencies, as an integral part of
their examination process, periodically review the allowance for loan losses.
Such agencies may require the Bank to recognize additions to the allowance based
on their judgments of information available to them at the time of their
examination.
Premises and Equipment
----------------------
Premises and equipment are stated at cost less accumulated depreciation.
Major additions and improvements are charged to the asset accounts while
maintenance and repairs that do not improve or extend the useful lives of the
assets are expensed currently. When assets are retired or otherwise disposed of,
the cost and related accumulated depreciation are removed from the accounts, and
any gain or loss is reflected in earnings for the period.
Depreciation expense is computed using the straight-line method over the
following estimated useful lives:
Buildings 40 years
Land improvements 20 years
Furniture, fixtures and equipment 3 - 7 years
Income Taxes
- ------------
Deferred tax assets and liabilities are recorded for the future tax
consequences attributable to differences between the financial statement
carrying amounts of existing assets and liabilities and their respective tax
bases. Future tax benefits, such as net operating loss carryforwards, are
recognized to the extent that realization of such benefits is more likely than
not. Deferred tax assets and liabilities are measured using enacted tax rates
expected to apply to taxable income in the years in which the assets and
liabilities are expected to be recovered or settled. The effect on deferred tax
assets and liabilities of a change in tax rates is recognized in income tax
expense in the period that includes the enactment date.
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In the event the future tax consequences of differences between the financial
reporting bases and the tax bases of the Company's assets and liabilities
results in deferred tax assets, an evaluation of the probability of being able
to realize the future benefits indicated by such asset is required. A valuation
allowance is provided for the portion of the deferred tax asset when it is more
likely than not that some portion or all of the deferred tax asset will not be
realized. In assessing the realizability of the deferred tax assets, management
considers the scheduled reversals of deferred tax liabilities, projected future
taxable income, and tax planning strategies.
Net Earnings Per Share
- ----------------------
Statement of Financial Accounting Standards (SFAS) No. 128 "Earnings Per
Share" became effective for the Company for the year-ended December 31, 1997.
This new standard specifies the computation, presentation and disclosure
requirements for earnings per share and is designed to simplify previous
earnings per share standards and to make domestic and international practices
more compatible. Earnings per share are based on the weighted average number of
common shares outstanding during the period while the effects of potential
shares outstanding during the period are included in diluted earnings per share.
All earnings per share amounts have been restated to conform to the provisions
of SFAS No. 128.
SFAS No. 128 requires the presentation on the face of the statement of
earnings of earnings per share with and without the dilutive effects of
potential common stock issuances from instruments such as options, convertible
securities and warrants. Additionally, the new statement requires the
reconciliation of the amounts used in the computation of both "earnings per
share" and "diluted earnings per share" for the periods presented in the
financial statements. For the quarter ended March 31, 1998, the per share
amounts were calculated as follows:
<TABLE>
<CAPTION>
Net Common Per Share
Earnings Share Amount
-------- ----- ------
<S> <C> <C> <C>
Earnings per share 61,727 700,000 0.09
Effect of stock options - 9,000 -
Diluted earnings per share 61,727 709,000 0.09
</TABLE>
With regard to the quarter ended March 31, 1997, the effect of the stock
options would be anti dilutive. There were 700,000 weighted average number of
shares outstanding for the quarter ended March 31, 1997.
Recent Accounting Pronouncements
- --------------------------------
During the first quarter of 1998, the Company implemented the following
pronouncements. The Financial Accounting Standards Board issued SFAS No. 130,
"Reporting Comprehensive Income" and SFAS No. 131, "Disclosures about Segments
of an Enterprise and Related Information". SFAS No. 130 establishes standards
for the reporting and display of comprehensive income and its components in a
full set of general-purpose financial statements. SFAS No. 131 specifies the
presentation and disclosure of operating segment information reported in the
annual report and interim reports issued to stockholders. The provisions of
both statements are effective for fiscal years beginning after December 15,
1997. The management of the Company believes that the adoption of these
statements has not had a material impact on the Company's financial position,
results of operations, or liquidity.
8
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Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations.
FORWARD LOOKING STATEMENTS
Certain statements contained in this Quarterly Report on Form 10-QSB and the
exhibits hereto which are not statements of historical fact constitute forward-
looking statements within the meaning of the Private Securities Litigation
Reform Act (the "Act"). In addition, certain statements in future filings by
the Company with the Securities and Exchange Commission, in press releases, and
in oral and written statements made by or with the approval of the Company which
are not statements of historical fact constitute forward-looking statements
within the meaning of the Act. Examples of forward-looking statements include,
but are not limited to: (1) projections of revenues, income or loss, earnings
or loss per share, the payment or non-payment of dividends, capital structure
and other financial items; (2) statements of plans and objectives of the Company
or its management or Board of Directors, including those relating to products or
services; (3) statements of future economic performance; and (4) statements of
assumptions underlying such statements. Words such as "believes,"
"anticipates," "expects," "intends," "targeted," and similar expressions are
intended to identify forward-looking statements but are not the exclusive means
of identifying such statements.
Forward-looking statements involve risks and uncertainties which may cause
actual results to differ materially from those in such statements. Facts that
could cause actual results to differ from those discussed in the forward-looking
statements include, but are not limited to: (1) the strength of the U.S.
economy in general and the strength of the local economies in which operations
are conducted; (2) the effects of and changes in trade, monetary and fiscal
policies and laws, including interest rate policies of the Board of Governors of
the Federal Reserve System; (3) inflation, interest rate, market and monetary
fluctuations; (4) the timely development of and acceptance of new products and
services and perceived overall value of these products and services by users;
(5) changes in consumer spending, borrowing and saving habits; (6) technological
changes; (7) acquisitions; (8) the ability to increase market share and control
expenses; (9) the effect of changes in laws and regulations (including laws and
regulations concerning taxes, banking, securities and insurance) with which the
Company and its subsidiary must comply; (10) the effect of changes in accounting
policies and practices, as may be adopted by the regulatory agencies as well as
the Financial Accounting Standards Board; (11) changes in the Company's
organization, compensation and benefit plans; (12) the costs and effects of
litigation and of unexpected or adverse outcomes in such litigation; and (13)
the success of the Company at managing the risks involved in the foregoing.
Such forward-looking statements speak only as of the date on which such
statements are made, and the Company undertakes no obligation to update any
forward-looking statement to reflect events or circumstances after the date on
which such statement is made to reflect the occurrence of unanticipated events.
FINANCIAL CONDITION
As of March 31, 1998, the Company had concluded twenty-five months of banking
operations with $49.3 million in total assets, up $4.6 million over year-end
1997. Total deposits had increased $5.0 million over year-end 1997 to $38.5
million. Total loans outstanding had increased $2.3 million over year-end 1997
to $32.5 million. The Bank's loan-to-asset ratio at March 31, 1998 was 66.4%,
as compared to 68.1% at year-end 1997.
Loan growth in the first quarter of 1998 was approximately 60% of the average
quarterly growth rate experienced in prior quarters and 47% of the loan growth
experienced in the first quarter of 1997. Three factors contributed to this
decline: 1) Management slowed new loan commitments and funding early in the
first quarter of 1998, because loan growth in the fourth quarter of 1997 had
pushed the Bank's loan-to-asset ratio to the Bank's financial management limit
of 70%; 2) The unusually wet winter weather dampened real
9
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estate lending activities; and 3) Even though the Bank had strong loan growth in
the first quarter of 1997, from a historical perspective, the winter quarter
tends to be one of the slower loan production seasons. Management expects loan
growth to continue at a rate closer to its prior quarterly average of $3.6
million for the balance of the year, assuming no economic surprises.
Deposit growth in the first quarter of 1998 was twice that of loan growth. This
is not representative of historical trends in deposit and loan growth, which
have tended to reflect loan growth greater than deposit growth. The banking
industry continues to experience stiff competition from non-banks for deposit
and investment type products. Competition for local deposit dollars continues
to put upward pressure on the cost of deposits. In the current market
environment, management has found that the Bank can borrow term funds from
wholesale resources at rates that are less than the cost of local certificates
of deposit. The Bank's Asset/Liability Management Committee has adopted
policies designed to diversify funding sources in the event that local market
deposits become even less available and more costly. Within limits, the Bank may
obtain funding from brokered certificates of deposit and other forms of
wholesale borrowing, such as the Federal Home Loan Bank and term repurchase
agreements. These policies should allow the Bank to continue to meet the local
market's credit demands and provide the flexibility to obtain funding from
various sources at optimum rates. While this policy shift provides greater
funding flexibility, in the long run the Bank will continue to place primary
funding emphasis on local deposit growth.
In the first quarter of 1998, the Bank began construction of a branch banking
facility at the East Rome site that was acquired for $211,000 in the first
quarter of 1997. The Department of Banking and Finance approved the Bank's
application in November 1997 to open a branch banking office at 800 East Second
Avenue in Rome (the "East Rome Office"), approximately two miles south of the
Bank's main office. The East Rome Office was planned in response to requests by
current customers and others in the community who have told management that an
office in East Rome would be more convenient to them. The new office will be a
full service branch, and management expects it to produce more deposits than
loans. Demographic analysis of the area indicates that it has the highest level
of bank deposits per household in the greater Rome area.
The cost of the East Rome Office building and site work is estimated to be
approximately $360 thousand. If the weather cooperates, management expects the
new office will be open for business by June 1998. Management projects that the
new office should be making a contribution to earnings after twelve months of
operations and should position the Bank to more fully service the greater Rome
market.
CAPITAL
At March 31, 1998, the Bank's capital position was in excess of FDIC guidelines
to qualify as "well capitalized". Based on the level of the Bank's risk
weighted assets at quarter end, the Bank had $3.0 million more capital than
necessary to satisfy the "well-capitalized" criteria. The Bank's capital
adequacy is monitored quarterly by the Bank's Asset/Liability Committee, as
asset and liability growth, mix and pricing strategies are developed.
LIQUIDITY
The Bank's internal and external liquidity resources are considered by
management to be adequate to handle expected growth and normal cash flow demands
from existing deposits and loans. For the quarter ended March 31, 1998, deposit
growth exceeded loan growth by $2.7 million. Securities held to maturity
increased $600 thousand over year-end to $6.9 million. Securities available for
sale were $2.7 million. Investment securities were purchased in order to improve
the yield on the Bank's internal liquidity resources. U.S. Treasury and
government agency securities with final maturities under five years were
purchased with yields 50 to 60 basis points greater than Federal funds sold at
the time of purchase. At March 31, 1998, the average life of the Bank's
securities portfolio was 3.0 years with an average yield of 6.21%. At quarter
end, the Bank
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had a commitment outstanding to purchase a Fannie Mae, 7-year balloon, mortgage
backed security with a 7.5% coupon and final maturity of October 1, 2001. The
principal to be purchased was $418,980. This security will be classified as
available for sale when the purchase is funded in April 1998.
During the first quarter of 1998, the Bank paid off the $500 thousand repurchase
agreement that was outstanding at December 31, 1997. At March 31, 1998, the
Bank had $4 million in advances from the Federal Home Loan Bank ("FHLB") of
Atlanta. These advances were obtained in 1997 to improve the Bank's cost of
funds and to improve interest rate risk exposure. One million dollars were
borrowed at a fixed rate of 5.93% for one year, maturing in July of 1998. Two
million dollars were borrowed at a fixed rate of 5.66% for five years maturing
in September 2002, with a one-time call option in September 1999. One million
dollars were borrowed at a fixed rate of 5.45% maturing in September of 2000 and
callable quarterly by the FHLB after March 8, 1998. These borrowings are
secured by first mortgage real estate loans, which are assigned to the FHLB.
Net deposit growth, federal funds sold and marketable securities provide the
primary liquidity resource for loan disbursements and Bank working capital. The
Bank's investment securities portfolio provides liquidity in the form of
financing through master repurchase agreements executed with the Bank's
correspondent banks. At quarter end the funds available for liquidity purposes
consisted of $9.1 million in securities (eligible for sale under repurchase
agreements), plus Federal funds sold of $3.9 million, for a total of $13.0
million. Under these repurchase agreements, margin requirements range from 3% to
10% of the current market value of the underlying security, and the borrowing
rate tends to have a spread of approximately 25 to 40 basis points over the
Federal funds sold rate. The repurchase agreements allow the Bank to raise
funds out of its total securities portfolio without being forced to sell the
securities and recognize gains or losses as a result of the sale. In addition
to these sources of funds, the Bank has unsecured Federal funds purchase lines
of credit totaling $3.0 million, all of which were available at quarter end.
The correspondent banks may revoke these lines at any time.
The Bank became a member of the Federal Home Loan Bank of Atlanta in June of
1997. FHLB membership provides an additional source of liquidity through credit
programs, which can provide term funding for up to 10 years and, in certain
qualified programs, up to 20 years. The Bank's first mortgage loans are
assigned as collateral for such financing. The Bank has $6.0 million in
eligible residential first mortgage loans that have been assigned to the FHLB.
These loans provide approximately $4.9 million in lendable value, $4 million of
which is already used. The Bank also has $6.6 million in commercial mortgage
loans that may qualify as collateral for advances with the FHLB.
Management monitors its liquidity position daily and the Asset Review Committee
reviews a liquidity management report on a weekly basis, which reflects the
Bank's results against policy guidelines and the Bank's unfunded commitments and
capital position. The reports reflect funding capacity projections based on
capital limits and policy limits assuming no further local market deposit growth
(a worst case scenario). As of March 31, 1998, the Bank had unfunded loan
commitments, primarily on commercial lines of credit, totaling $3.9 million.
The Bank intends to manage its loan growth such that deposit flows will provide
the primary funding for all loans as well as cash reserves for working capital
and short to intermediate term marketable investments. Management will continue
to seek cost effective alternative funding sources for both the short and long
term, in the event that local deposit growth does not keep pace with local loan
demand. Such funding sources may include institutional certificates of deposit
("CD's"), local market CD's and brokered CD's.
RESULTS OF OPERATIONS
The Company had net earnings of $61,727 ($0.09 per share) for the three months
ended March 31, 1998. This compares to a net loss of $65,497 ($0.09 per share)
for the three months ended March 31, 1997.
11
<PAGE>
Net interest income increased 65% from $303,658 for the three months ended March
31, 1997 to $502,332 for the three months ended March 31, 1998. This was
primarily due to the 71% increase in average earning assets from $25.6 million
for 1997 to $43.8 million for 1998 and the improvement in the earning asset mix.
For 1998, average loans comprised 72% of average earning assets. For 1997,
average loans were 60% of average earning assets. The net yield on average
earning assets, before the provision for loan losses, was 4.65% for 1998. This
compares to 4.81% for 1997. The lower yield for 1998 was primarily due to the
higher funding cost associated with 83% of average earning assets being funded
by interest bearing deposits. For 1997, 74% of average earning assets were
funded by interest bearing deposits.
SUMMARY OF LOAN LOSS EXPERIENCE
<TABLE>
Three months Three months
------------ ------------
ended ended
----- -----
3/31/98 3/31/97
------- -------
<S> <C> <C>
Allowance for possible loan losses at the beginning of the quarter $ 480,544 133,342
Charge-offs:
Real estate - mortgage 2,924 -
Consumer loans 7,462 4,204
-------------- -------------
Total 10,386 4,204
-------------- -------------
Recoveries:
Real estate - mortgage - -
Consumer loans 2,490 -
-------------- -------------
Total 2,490 -
-------------- -------------
Net charge-offs: 7,896 4,204
Additions charged to operations 47,500 74,578
-------------- -------------
Balance at end of quarter $ 520,148 203,716
============== =============
Average loans outstanding, net of unearned income $ 31,529,214 15,287,955
============== =============
Ratio of net charge-offs to average loans 0.03% 0.03%
============== =============
</TABLE>
Management takes a number of factors into consideration when determining the
additions to be made to the loan loss allowance. Since the Bank has just
concluded twenty-five months of operations, it does not have sufficient history
in its portfolio performance on which to base additions. Accordingly, additions
to the reserve are primarily based on maintaining a targeted ratio for the
allowance for loan losses to total loans equal to at least 1.50%. This target
is based on national peer group ratios and Georgia banking industry ratios.
Under this methodology, charge-offs will increase the amount of additions to the
allowance and recoveries will reduce additions.
In addition, management performs an on-going loan review process. All new loans
are risk rated under loan policy guidelines. On a monthly basis, the composite
risk ratings are evaluated in a model that assesses the adequacy of the current
allowance for loan losses, and this evaluation is presented to the Board of
Directors each month. On a weekly basis, loan reviews are performed on new
loans and presented in the weekly Asset Review Committee meeting. Large loans
are reviewed periodically. Risk ratings may be changed if it appears that new
loans may not have received the proper initial grading or, if on existing loans,
credit conditions have improved or worsened.
The Bank's policy is to place loans on non-accrual status when it appears that
the collection of principal and interest in accordance with the terms of the
loan is doubtful. Any loan that becomes 90 days past due
12
<PAGE>
as to principal or interest is automatically placed on non-accrual, unless
corrective action is certain and imminent.
As the Bank matures, the additions to the loan loss allowance will be based more
on historical performance, the detailed loan review and allowance adequacy
evaluation. Management expects to incur losses on loans from time to time when
borrowers' financial conditions deteriorate. Where feasible, loans charged down
or charged off will continue to be collected. Management considers the quarter
end allowance adequate to cover potential losses in the loan portfolio.
RISK ELEMENTS
<TABLE>
<CAPTION>
March 31, 1998 March 31, 1997
-------------- --------------
<S> <C> <C>
Nonaccrual, Past Due and Restructured Loans
- -------------------------------------------
Nonaccrual loans $ - 13,520
Accruing loans contractually past due 90 days or more $ 19,857 -
Troubled debt restructurings $ - -
</TABLE>
Non-interest income for the three months ended March 31, 1998 was $51,590, up
89% from $27,269 for the same period of 1997. This consists primarily of service
charges on deposit accounts totaling $33,133, up 100% from $16,570 in 1997.
Mortgage origination fees were $8,569 in the first quarter of 1998. In mid 1997
the Bank expanded its residential real estate lending program to include
mortgage loan programs available through the secondary mortgage markets. This
expands the availability of longer-term mortgage financing for our qualified
customers and produces loan origination fee income for the Bank.
Non-interest expenses were $427,404 for the three months ended March 31, 1998,
up 33% from $321,846 in the same period for 1997. The lower growth rate of non-
interest expenses relative to the earning asset growth rate of 71% indicates
that the Bank's operating efficiencies continue to improve.
Salaries and benefits for the three months ended March 31, 1998 increased 38% to
$234,214 from $170,255 for the same period in 1997. This is due to the growth in
the number of full-time-equivalent employees and increases in the costs of
employee benefits. The number of employees grew from 20 at the end of the first
quarter of 1997 to 24 at the end of the first quarter of 1998. Occupancy costs
for the three months ended March 31, 1998 increased 6% to $60,662 from $57,250
for the same period in 1997. Other operating expenses increased 40% to $132,528
from $94,340 for the same period in 1997. Most of this increase is due to the
higher volume of business associated with business development and marketing
costs, professional fees for unreimbursed loan origination expenses, collection
expenses and data processing costs. Management continues to focus on improving
operating expense efficiencies, through the use of current banking technologies,
outsourcing solutions and human resource training and development. In the first
quarter of 1998, the Bank implemented its telephone banking service, which
provides customers with access to their account information 24 hours a day,
seven days a week, and allows the customers to initiate certain transactions
such as funds transfers.
Income tax expense on other comprehensive income was $2,490 for the first
quarter of 1998. This amount reflects income tax calculated on the accumulated
unrealized gain on securities available for sale at March 31, 1998. At December
31, 1997, no income tax expense on the unrealized gain on securities available
for sale was recorded, due to immateriality. At December 31, 1997 this amount,
calculated at statutory income tax rates, was $1,816. Had it been recorded at
year-end, the income tax expense on other comprehensive income in the first
quarter of 1998 would have been $674.
13
<PAGE>
INTEREST RATE SENSITIVITY
Improvement in the earnings of the Company depends upon continued earning asset
growth, good asset quality and a relatively stable economic environment.
Management feels it is reasonable for the Bank to continue to experience steady
earning asset growth as long as interest rates remain relatively stable. The
Bank is liability sensitive out to the one year time horizon (meaning that
falling rates tend to be beneficial) and asset sensitive (meaning that rising
rates tend to be beneficial) in the long term. If interest rates were to rise
in excess of 200 basis points, the Bank could experience reduced earnings in the
near term, and such a rate increase might significantly reduce the demand for
loans in the Bank's local market, thus diminishing the prospects for improved
earnings. If interest rates were to fall in excess of 200 basis points, the
Bank could experience a short term increase in net interest margin but may have
difficulty retaining maturing certificates of deposit without having to pay
above market rates.
The Asset/Liability Committee monitors the Bank's exposure to interest rate risk
on a quarterly basis. As of its most recent review, the effect of interest rate
changes, either up or down by 200 basis points, assuming the changes occur
ratably over the next four quarters, was estimated to have less than a 10%
impact on current net interest income over the next twelve months. This
estimate assumes that all repricing assets and liabilities will be replaced by
similar term instruments.
YEAR 2000 PROCESSING RISK
The Board and management consider the Year 2000 ("Y2K") computer processing risk
to be a serious risk for the banking and financial services industry in
particular and for all businesses which depend on computer hardware and software
to perform the critical functions of their businesses. In the third quarter of
1997, the Board established a Y2K Policy and Y2K Compliance Committee. The
Committee is headed by senior management, meets monthly and regularly reports to
the Audit and Compliance Committee of the Board and to the full Board.
The Company and Bank do not use proprietary computer hardware or software.
Therefore, they depend upon outsourced data processing services and third party
software. Management has identified all mission critical hardware and software
applications and is following the general guidelines promulgated by the Federal
Financial Institutions Examination Council and the FDIC to assure that such
applications will be renovated, with testing in progress, by December 31, 1998,
or contingency plans will be in the process of implementation. At this time,
the servicing vendors appear to have completed their assessments and have
described to the Bank their time lines for renovation and testing. Management
has no reason to believe at this time, that all mission critical applications
for the Bank and Company will not be adequately addressed by our vendors' plans.
The Bank's core processing, which maintains all customer record keeping and
financial management information systems, is handled by Fiserv, Inc., an
international data processing company, which specializes in financial
institution data processing and serves 15% of the banks, credit unions and
savings institutions in the U.S. Thousands of financial institutions with over
fifty million customer accounts are processed on its systems. Accordingly,
Fiserv must satisfy all regulatory requirements imposed upon bank data
processors. The Bank's Fiserv service center has reported that it will begin
testing its program renovations in June of 1998.
Management is currently reviewing all of the Bank's significant commercial loan
relationships to determine how much Y2K risk may exist in the Bank's customer
base. To the extent that such risk is identified, management will request such
customers to develop their own compliance strategy and will require those
customers to keep us informed of their progress. Management's current plans are
to help the Bank's customers understand the risks involved, to share the Bank's
strategies and to encourage those
14
<PAGE>
customers to satisfy their compliance requirements on time lines that are
consistent with those of the Bank. The Bank's loan agreements and credit review
processes have been modified to address this risk. The Bank's contingency plans
for customers who fail to adequately address this risk may include, but will not
be limited to, requiring such customers to pay off their loans.
The costs of implementing Y2K solutions on mission critical systems have not
been fully determined as of the date of this report. The Bank's local area
computer network was already budgeted for upgrade in 1998 to workstations and
file-servers that will be Y2K ready. The budget for these upgrades is
approximately $30,000. Management expects that some of our mission critical
processing vendors will charge the Bank for conducting tests on renovated
systems. While management has requested that these vendors provide estimates of
any renovation or testing charges, none has been provided to date, citing that
such charges, if any, have not yet been determined. The Bank's core application
processor, Fiserv, has told the Bank that it will not be charged for renovation
work, however, testing charges may be assessed.
PART II
OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS.
There are no material, pending legal proceedings to which the Company or any of
its subsidiaries is a party or of which any of their property is the subject.
ITEM 2. CHANGES IN SECURITIES.
(a) Not applicable.
(b) Not applicable.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES.
Not applicable.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
None.
ITEM 5. OTHER INFORMATION.
None.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
(a) The following documents are filed as part of this report:
3.1 Articles of Incorporation (Incorporated by reference to Exhibit 3.1 to
the Company's Registration Statement No. 33-82858 on Form SB-2).
3.2 Bylaws (Incorporated by reference to Exhibit 3.2 to the Company's
Registration Statement No. 33-82858 on Form SB-2).
15
<PAGE>
4.1 Provisions of Company's Articles of Incorporation and Bylaws Defining
the Rights of Shareholders (Incorporated by reference to Exhibit 4.1 to
the Company's Registration Statement No. 33-82858 on Form SB-2).
4.2 Form of Stock Certificate (Incorporated by reference to Exhibit 4.2 to
the Company's Registration Statement No. 33-82858 on Form SB-2).
10.1 *Employment Agreement between the Company and Thomas D. Caldwell, III
dated September 1, 1997. (Incorporated by reference to Exhibit 10.1 of
the Company's Quarterly Report on Form 10-QSB for the quarter ended
September 30, 1997).
10.2 *Greater Rome Bancshares, Inc. 1996 Stock Incentive Plan (Incorporated by
reference to Exhibit 10.12 of the Company's Annual Report on Form 10-KSB
for the year-ended December 31, 1995).
10.3 *Form of Incentive Stock Option Agreement (Incorporated by reference to
Exhibit 10.13 of the Company's Annual Report on Form 10-KSB for the
year-ended December 31, 1996).
10.4 *Form of Stock Option Award to Non-employee Directors (Incorporated by
reference to Appendix A to the Company's Proxy Statement for the 1997
Annual Meeting of the Shareholders held May 15, 1997).
10.5 *Employment Agreement between the Company and E. Grey Winstead, III dated
September 1, 1997. (Incorporated by reference to Exhibit 10.5 of the
Company's Quarterly Report on Form 10-QSB for the quarter ended
September 30, 1997).
27.1 Financial Data Schedule (for S.E.C. use only).
- ---------------
* Indicates a management contract or compensatory arrangement.
(b) Reports on Form 8-K
-------------------
No reports on Form 8-K were filed during the quarter ended March 31, 1998.
16
<PAGE>
SIGNATURES
Pursuant to the requirements of the Exchange Act, the registrant caused this
report to be signed on its behalf by the undersigned, thereunto duly authorized.
GREATER ROME BANCSHARES, INC.
Date: May 6, 1998 By: /s/ Thomas D. Caldwell, III
----------------------------------
Thomas D. Caldwell, III
President, Chief Executive Officer
By: /s/ E. Grey Winstead, III
----------------------------------
E. Grey Winstead, III
Principal Financial and
Accounting Officer
17
<PAGE>
GREATER ROME BANCSHARES, INC.
Form 10-QSB for the quarterly period ended March 31, 1998
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
Exhibit Sequential
Number Description Page
- ------- ----------- ----
<S> <C> <C>
3.1 Articles of Incorporation (Incorporated by reference to Exhibit 3.1 to the Company's N/A
Registration Statement No. 33-82858 on Form SB-2).
3.2 Bylaws (Incorporated by reference to Exhibit 3.2 to the Company's Registration N/A
Statement No. 33-82858 on Form SB-2).
4.1 Provisions of Company's Articles of Incorporation and Bylaws Defining the
Rights of Shareholders (Incorporated by reference to Exhibit 4.1 to the
Company's Registration Statement No. 33-82858 on Form SB-2). N/A
4.2 Form of Stock Certificate (Incorporated by reference to Exhibit 4.2 to the
Company's Registration Statement No. 33-82858 on Form SB-2). N/A
10.1 *Employment Agreement between the Company and Thomas D. Caldwell, III dated
September 1, 1997. (Incorporated by reference to Exhibit 10.1 of the
Company's Quarterly Report on Form 10-QSB for the quarter ended September
30, 1997). N/A
10.2 *Greater Rome Bancshares, Inc. 1996 Stock Incentive Plan (Incorporated by
reference to Exhibit 10.12 of the Company's Annual Report on Form 10-KSB for
the year-ended December 31, 1995). N/A
10.3 *Form of Incentive Stock Option Agreement (Incorporated by reference to
Exhibit 10.13 of the Company's Annual Report on Form 10-KSB for the year-
ended December 31, 1996). N/A
10.4 *Form of Stock Option Award to Non-employee Directors (Incorporated by
reference to Appendix A to the Company's Proxy Statement for the 1997 Annual
Meeting of the Shareholders held May 15, 1997). N/A
10.5 *Employment Agreement between the Company and E. Grey Winstead, III dated
September 1, 1997. (Incorporated by reference to Exhibit 10.5 of the
Company's Quarterly Report on Form 10-QSB for the quarter ended September
30, 1997). N/A
27.1 Financial Data Schedule (for S.E.C. use only).
</TABLE>
- ----------------------------------------
* Indicates a management contract or compensatory arrangement.
18
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 9
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1998
<PERIOD-END> MAR-31-1998
<CASH> 742,196
<INT-BEARING-DEPOSITS> 0
<FED-FUNDS-SOLD> 3,912,929
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 2,693,716
<INVESTMENTS-CARRYING> 6,939,868
<INVESTMENTS-MARKET> 0
<LOANS> 32,469,669
<ALLOWANCE> 520,148
<TOTAL-ASSETS> 49,267,128
<DEPOSITS> 38,551,427
<SHORT-TERM> 0
<LIABILITIES-OTHER> 231,779
<LONG-TERM> 4,000,000
0
0
<COMMON> 7,000
<OTHER-SE> 6,476,922
<TOTAL-LIABILITIES-AND-EQUITY> 49,267,128
<INTEREST-LOAN> 788,621
<INTEREST-INVEST> 140,866
<INTEREST-OTHER> 41,528
<INTEREST-TOTAL> 971,015
<INTEREST-DEPOSIT> 410,827
<INTEREST-EXPENSE> 468,683
<INTEREST-INCOME-NET> 502,332
<LOAN-LOSSES> 47,500
<SECURITIES-GAINS> 0
<EXPENSE-OTHER> 427,405
<INCOME-PRETAX> 79,017
<INCOME-PRE-EXTRAORDINARY> 79,017
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 61,727
<EPS-PRIMARY> 0.09
<EPS-DILUTED> 0.09
<YIELD-ACTUAL> 4.65
<LOANS-NON> 0
<LOANS-PAST> 19,857
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 480,544
<CHARGE-OFFS> 10,386
<RECOVERIES> 2,490
<ALLOWANCE-CLOSE> 520,148
<ALLOWANCE-DOMESTIC> 0
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 520,148
</TABLE>
