U.S. SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-KSB
Annual report under Section 13 or 15(d) of the Securities Exchange Act of 1934
For the fiscal year ended December 31, 1998
Commission File No. 0-28280
GREATER ROME BANCSHARES, INC.
-----------------------------
(Name of Small Business Issuer in Its Charter)
Georgia 58-2117940
--------- ----------
(State or Other Jurisdiction (I.R.S. Employer
of Incorporation or Organization) Identification No.)
1490 Martha Berry Blvd.
Rome, Georgia 30162-5271
---------------------- ----------
(Address of Principal Executive Offices) (Zip Code)
(706) 295-9300
--------------
(Issuer's Telephone Number, Including Area Code)
Securities registered under Section 12(b) of the Exchange Act: None
Securities registered under Section 12(g) of the Exchange Act: Common
Stock, $.01 par value
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
--- ---
Check if there is no disclosure of delinquent filers in response to Item 405 of
Regulation S-B contained in this Form, and no disclosure will be contained, to
the best of registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-KSB or any
amendment to this Form 10-KSB. [ X ]
State issuer's revenues for its most recent fiscal year. $4,740,651
----------
The aggregate market value of the voting stock as of March 26, 1999, held by
non-affiliates computed by reference to the price at which the stock was sold is
$5,879,616.
Seven hundred thousand (701,600) shares of the issuer's common stock were issued
and outstanding as of March 26, 1999.
Portions of the following documents are incorporated by reference: (1) 1998
Annual Report to Shareholders, into Part II; (2) Proxy Statement (the "Proxy
Statement") for the Annual Meeting of Shareholders to be held May 13, 1999, into
Part III.
Transitional Small Business Disclosure Format (check one). Yes No X
--- ---
<PAGE>
PART I
Item 1. Description of Business
- --------------------------------
FORWARD LOOKING STATEMENTS
Certain statements contained in this Annual Report which are not statements of
historical fact constitute forward-looking statements. 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) Year 2000
issues and 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.
GENERAL
Greater Rome Bancshares, Inc. (the "Registrant" or the "Company") was
incorporated as a Georgia corporation on June 17, 1994, primarily to own and
control all of the capital stock of Greater Rome Bank (the "Bank"). The Company
acquired the Bank on February 26, 1996, and the Bank opened for business on the
same date. The Bank is chartered under the laws of the State of Georgia and
engages in the commercial banking business.
LOCATION AND SERVICE AREA
The Bank provides general commercial banking services within Floyd County,
emphasizing the needs of individuals and small- to medium-sized businesses.
Floyd County is located in northwest Georgia, almost directly in the center of
what is referred to as the "ABC" (Atlanta, Birmingham, and Chattanooga)
triangle. Rome, the county seat of Floyd County, and the only major incorporated
area of the County, is located 60 miles northwest of Atlanta, 62 miles south of
Chattanooga, Tennessee and 123 east of Birmingham, Alabama. The 1990 census
indicated Floyd County had a population of 81,251. Recent estimates indicate
that Floyd County has a current population of approximately 84,009 with a median
family income of $30,743 per household. Rome is reached via U.S. 411, which
connects to Interstate 75 just 25 miles southeast of Rome at Cartersville. It is
also served by major rail carriers and by the Richard B. Russell Airport, which
is located just 7 miles north of the Bank and maintains a 6,000-foot instrument
runway with ILS and VOR approaches. Rome is home to
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several institutes of higher learning including Berry Colleg (undergraduate and
graduate), Shorter College (private) and Floyd College (a two-year unit of the
University System of Georgia). Technical training is available through one of
Georgia's most advanced training schools, Coosa Valley Technical Institute.
Rome is also home to one of the state's most prestigious private schools, The
Darlington School, which offers kindergarten through 12th grade and attracts
students from throughout the United States and many foreign countries.
BANKING SERVICES
The Bank offers a full range of deposit services that are typically available in
most banks and savings and loan associations, including checking accounts, NOW
accounts, savings accounts, money market accounts and time deposits. The
transaction accounts and time certificates of deposit are tailored to the Bank's
principal market area at rates intended to be competitive to those offered in
the area. In addition, the Bank offers Individual Retirement Accounts (IRAs).
All deposit accounts are insured by the FDIC up to the maximum amount allowed by
law (generally, $100,000 per depositor subject to aggregation rules). The Bank
solicits these accounts from individuals, businesses, associations and
organizations, and governmental entities.
The Bank offers a full range of short-to-medium term commercial and personal
loans. Commercial loans include both secured and unsecured loans for working
capital (including inventory and receivables), business expansion (including
acquisition of real estate and improvements), and purchase of equipment and
machinery. Consumer loans include secured and unsecured loans for financing
automobiles, other consumer goods, home improvements, education and personal
investments. Additionally, the Bank offers loans for the purpose of community
development and/or improvement. The Bank also originates and holds or sells into
the secondary market fixed and variable rate mortgage loans and real estate
construction and acquisition loans. The Bank's lending activities are subject to
a variety of lending limits imposed by state law. All loans to directors or
executive officers of the Bank are approved by the Bank's board of directors and
are made on terms not more favorable than would be available to a person not
affiliated with the Bank. See "Lending Activities."
The Bank may also engage in investment activities. It is authorized to invest
without limit in obligations of the United States or any state or territorial
government or any agency of such governments or in any securities that are
guaranteed as to principal and interest by such governments. Subject to
limitations, the Bank may also invest in investment grade securities issued by
political subdivisions, in deposits in other financial institutions, and in
certain types of commercial paper. The Bank concentrates its investment
activities primarily in intermediate term government and agency securities.
Other bank services include cash management services, safe deposit boxes,
travelers' checks, direct deposit of payroll and social security checks, and
automatic drafts for various accounts. The Bank is a member of a shared network
of automated teller machines that may be used by Bank customers throughout
Georgia and other regions.
The Bank does not plan to exercise trust powers during its initial years of
operation. The Bank may in the future offer a full-service trust department, but
cannot do so without prior regulatory approval.
LENDING ACTIVITIES
General
The Bank offers a range of lending services, including real estate, commercial
and consumer loans, to individuals and small- to medium-sized businesses and
professional concerns that are located in or conduct a substantial portion of
their business in the Bank's market area.
3
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Credit Risk
There are certain risks inherent in making all loans. A principal economic risk
inherent in making loans is the creditworthiness of the borrower. Other risks
inherent in making loans include the following:
- risks with respect to the period of time over which loans may be repaid,
- risks resulting from changes in economic and industry conditions,
- risks inherent in dealing with individual borrowers and,
- in the case of a collateralized loan, risks resulting from uncertainties
as to the future value of the collateral.
Management maintains an allowance for loan losses based on, among other things,
an evaluation of economic conditions and regular reviews of delinquencies and
loan portfolio quality. Based upon such factors, management makes various
assumptions and judgments about the ultimate collectibility of the loan
portfolio and provides an allowance for potential loan losses based upon a
percentage of the outstanding balances and for specific loans when their
ultimate collectibility is considered questionable. Certain specific risks with
regard to each category of loans are described under the separate subheading for
each type of loan below.
Real Estate Loans
Loans secured generally by first or second mortgages on real estate are one of
the primary components of the Bank's loan portfolio. These loans consist of
commercial real estate loans, construction and development loans, residential
real estate loans and home equity loans. Loan terms generally are limited to
five years and often do not exceed three years, although installment payments
may be structured up to a fifteen-year amortization basis. Interest rates may be
fixed or adjustable, and tend to be fixed in the case of three-year term loans
and adjustable in the case of five-year term loans. The Bank generally charges
an origination fee. Management attempts to reduce credit risk in the commercial
real estate portfolio by emphasizing loans on owner-occupied office and retail
buildings where the loan-to-value ratio, established by qualified appraisals,
will generally not exceed 80%. In addition, the Bank typically requires personal
guarantees of the principal owners of the property backed with a review by the
Bank of the principal owner's personal financial statements. A number of the
loans that are classified as commercial real estate loans are actually
commercial loans for which a security interest in real estate is taken as
additional collateral. These loans are subject to underwriting as commercial
loans as described below. The principal economic risk associated with each
category of loans, including real estate loans, is the creditworthiness of the
Bank's borrowers. The risk associated with real estate loans varies with many
factors including employment levels and fluctuations in the value of real
estate.
In 1997, the Bank began originating one-to-four family residential real estate
loans for sale into the secondary market. This provides long term home financing
for qualified customers and generates origination fee income to the Bank. The
Bank limits interest rate and credit risk on these loans by locking in the
interest rate for each loan with the secondary market investor and receiving the
investor's underwriting approval prior to closing the loan.
Commercial Loans
The Bank makes loans for commercial purposes in various lines of businesses.
Equipment loans are typically made for a term of up to five years (more
typically three years) at fixed or variable rates, with the loan fully amortized
over the term and secured by the financed equipment with a loan-to-value ratio
of 80% or less. Working capital loans are made for a term typically not
exceeding one year, and are usually secured by accounts receivable, inventory
and/or personal guarantees of the principals of the business, and bear interest
at floating rates which are payable monthly, or less typically, quarterly. In
the case of the loans secured by accounts receivable or inventory, principal is
repaid as the assets securing the loan are converted into cash, and in other
4
<PAGE>
cases, principal is due at maturity. The principal economic risk associated with
each category of loans, including commercial loans, is the creditworthiness of
the Bank's borrowers. The risk associated with commercial loans varies with many
factors including the economy in the Bank's lending area. In addition many of
the Bank's commercial loans are made to small- to medium-sized businesses and
professionals who may be less able to withstand competitive, economic and
financial conditions than larger borrowers.
Consumer Loans
The Bank makes a variety of loans to individuals for personal and household
purposes, including secured and unsecured installment and term loans, home
equity loans and lines of credit and revolving lines of credit. These loans
typically carry balances of less than $35,000 and, in the case of non-revolving
loans, are either amortized over a period not exceeding 60 months or are
ninety-day term loans, and in each case bear interest at a fixed rate. The
revolving loans bear interest at a fixed or variable rate and require monthly
payments of interest and a portion of the principal balance (typically 2-3% of
the outstanding balance). The underwriting criteria in the case of home equity
loans and lines of credit, is the same as applied by the Bank when making a
first mortgage loan, as described above, and home equity lines of credit
typically expire ten years after their origination. As with the other categories
of loans, the principal economic risk associated with consumer loans is the
creditworthiness of the Bank's borrowers.
Loan Approval and Review
The Bank's loan approval policies provide for various levels of officer lending
authority. When the aggregate outstanding loans to a single borrower exceed that
individual officer's lending authority, the loan request requires prior approval
of the President or senior loan officer. Any loan in excess of the President's
or senior loan officer's authority requires prior approval by the loan committee
of the Bank's board of directors. The Bank has a continuous loan review
procedure involving several Bank officers. The procedures are designed to
provide early identification of credit quality problems. All loan officers are
charged with the responsibility of rating each of their loans and reviewing
those loans on a periodic basis, the frequency of which will increase as the
quality of the loans decreases.
Lending Limit
Under the Financial Institutions Code of Georgia, the Bank is limited in the
amount it can loan to a single borrower (including the borrower's related
interests) by the amount of the Bank's statutory capital base. The limit is 15%
of the statutory capital base unless each loan in excess of 15% is approved by
the Bank's board of directors and the entire amount of the loan is secured by
good collateral or other ample security. In no event may the amount loaned to
any borrower exceed 25% of the Bank's statutory capital base.
The statutory method of calculating the Bank's lending limits is based on its
initial capitalization level of $6.5 million. Under this method, the Bank's
lending limit is approximately $975,000 for loans not fully secured plus an
additional $650,000 (or an aggregate of approximately $1.625 million) for loans
on which the entire amount is properly secured. These limits will increase and
decrease as the Bank's statutory capital base increases and decreases. Most of
the Bank's expected loan demand will be from borrowers who will not require
loans in excess of these limits. If a borrower's credit needs exceeds these
limits, the Bank seeks to sell participations in the loan to the extent
necessary to maintain these lending limits.
COMPETITION
The Bank competes with other commercial banks, savings and loan associations,
credit unions and money market mutual funds operating in Floyd County and
elsewhere. As of June 1998, nine FDIC-insured institutions
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were operating in Floyd County. A number of these competitors are well
established in the Floyd County area. Most of them have substantially greater
resources and lending limits and may have a lower cost of funds than the Bank.
These banks offer certain services, such as extensive and established branch
networks and trust services, which the Bank does not expect to provide in the
foreseeable future. As a result of these competitive factors, the Bank may have
to pay higher rates of interest and provide superior customer service in order
to attract deposits. Management believes that the Bank can compete effectively
with these institutions but cannot assure that it will do so.
EMPLOYEES
The Bank commenced operations on February 26, 1996 with 14 full-time employees
and had 30 equivalent full-time employees on December 31, 1998. The Bank's
employees are not subject to a collective bargaining agreement. The Company has
no employees other than its officers, none of whom receive remuneration for
their services to the Company. The Company reimburses the Bank for certain
management services performed by the Bank's officers. The Company conducts no
business other than that of the being a bank holding company. The Company
currently has three officers:
- Thomas D. Caldwell, III, President and Chief Executive Officer,
- Robert L. Berry, Secretary, and
- E. Grey Winstead, III, Chief Financial Officer and Principal
Accounting Officer.
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STATISTICAL INFORMATION
The following tables set forth certain statistical information and should be
read in conjunction with the financial statements of Greater Rome Bancshares,
Inc.
I. Distribution of Assets, Liabilities, and Stockholders' Equity; Interest
Rates and Interest Differential
<TABLE>
<CAPTION>
1998 1997 1998 1997 1998 1997
Average Average Income/ Income/ Yield Yield
Balance Balance (Expense) (Expense) (Rate Paid) (Rate Paid)
------- ------- --------- --------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C>
Loans $ 36,596,138 22,517,410 3,659,279 2,255,079 10.00% 10.01%
Taxable investment securities 10,247,085 7,791,229 625,781 482,641 6.11% 6.19%
Non-taxable investment
securities 294,164 - 12,183 - 4.14% 0.00%
Interest bearing deposits
in other banks 706,613 - 37,611 - 5.32% 0.00%
Federal funds sold 2,118,499 1,858,945 114,510 100,499 5.41% 5.41%
------------------------------------------------------------------------------------
Average earning assets $ 49,962,499 32,167,584 4,449,364 2,838,219 8.91% 8.82%
------------------------------------------------------------------------------------
Cash & due from banks 1,140,369 872,616
Premises and
equipment 2,569,013 2,274,665
Other assets 699,190 317,356
------------------------------
Average total assets $ 54,371,072 35,632,221
------------------------------
Interest bearing demand deposits 3,381,823 2,810,804 (64,355) (55,224) -1.90% -1.96%
Savings and money market
deposits 6,736,847 4,424,565 (261,753) (160,563) -3.89% -3.63%
Time deposits 27,189,134 16,518,978 (1,573,504) (963,689) -5.79% -5.83%
Borrowed funds 4,399,260 1,367,814 (247,622) (79,841) -5.63% -5.84%
------------------------------------------------------------------------------------
Average interest bearing
liabilities $ 41,707,065 25,122,161 (2,147,234) (1,259,317) -5.15% -5.01%
------------------------------------------------------------------------------------
Non-interest bearing deposits 5,261,746 3,733,515
Other liabilities 293,186 158,381
Stockholders' equity 6,618,419 6,320,840
------------------------------
Average total liabilities
and equity $ 53,880,416 35,334,897
------------------------------
------------------------------------------------------------------------------------
Net interest income yield on
average earning assets $ 49,962,499 32,167,584 2,302,131 1,578,902 4.61% 4.91%
------------------------------------------------------------------------------------
</TABLE>
Notes:
1. Non-accruing loans are included in the average balances. Average non-accruing
loans were $88,014 in 1998 and were $38,547 in 1997.
2. Loan fees are included in the interest income computation and were $187,642
in 1998 and $123,908 in 1997.
7
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The following table sets forth a summary of the changes in interest income and
interest expense resulting from changes in volume and rates from 1997 to 1998.
<TABLE>
<CAPTION>
Increase/(Decrease)
-------------------
Net Due to Due to
Change Rate (1) Volume (1)
------ -------- ----------
<S> <C> <C> <C>
Interest Earning Assets
Loans $ 1,404,200 (3,550) 1,407,750
Taxable investment securities 143,140 (6,930) 150,070
Non-taxable investment securities 12,183 - 12,183
Interest bearing deposits in other banks 37,611 - 37,611
Federal funds sold 14,011 (19) 14,030
--------- ------- ---------
Total Interest Income 1,611,145 (10,499) 1,621,644
--------- ------- ---------
Interest Bearing Liabilities
Interest bearing demand deposits 9,131 (1,782) 10,913
Savings and money market deposits 101,190 12,055 89,135
Time deposits 609,815 (7,755) 617,570
Borrowed funds 167,781 (2,951) 170,732
--------- ------- ---------
Total Interest Expense 887,917 (433) 888,350
--------- ------- ---------
Net Interest Income $ 723,228 (10,066) 733,294
========= ======= =========
</TABLE>
(1) The changes in interest income and expense not due solely to rate or
volume have been allocated proportionately to the rate and volume amounts
calculated before allocation.
II. Investment Portfolio
Refer to note (2) Investment Securities of the Notes to Consolidated Financial
Statements included in the 1998 Annual Report, which is incorporated herein by
reference.
The weighted average yield of investment securities maturing in one year or less
as of December 31, 1998 was 5.77%. The weighted average yield of investment
securities maturing from one to five years as of December 31, 1998 was 6.03%.
The weighted average yield of investment securities maturing in greater than
five years as of December 31, 1998 was 5.26%
8
<PAGE>
III. Loan Portfolio
<TABLE>
<CAPTION>
12/31/98 12/31/97
Loan types Balance Balance
---------- ------- -------
<S> <C> <C>
Commercial $ 11,518,652 $ 7,527,458
Real estate - construction 1,226,296 475,431
Real estate - mortgage 19,271,316 14,976,035
Consumer loans 9,960,566 7,310,351
--------- ---------
Total $ 41,976,830 $ 30,289,275
========== ==========
</TABLE>
<TABLE>
<CAPTION>
Maturity and repricing by type
due in 1 year due from 1 through 5 years due after 5 years
-------------------------- -------------------------- -----------------------
Fixed rate Variable rate Fixed rate Variable rate Fixed rate Variable rate
---------- ------------- ---------- ------------- ---------- -------------
<S> <C> <C> <C> <C> <C> <C>
Commercial $ 3,752,034 1,557,219 4,416,786 1,714,897 77,719 -
Real estate -
construction 925,995 300,302 - - - -
Real estate -
mortgage 3,604,413 1,965,045 12,923,461 722,965 4,472 -
Consumer loans 4,670,940 58,491 4,895,879 124,256 111,357 -
--------- ------ --------- ------- ------- -------
Total $ 12,953,382 3,881,057 22,236,126 2,562,118 193,548 -
========== ========= ========== ========= ======= =======
</TABLE>
The maturity distribution is less than the total at year-end by the amount of
non-accrual loans totaling $150,599.
Risk Elements
<TABLE>
<CAPTION>
1998 1997
---- ----
<S> <C> <C>
Nonaccrual, Past Due and Restructured Loans
- -------------------------------------------
Nonaccrual loans $ 150,599 30,805
Accruing loans contractually past due 90 days or more $ - -
Troubled debt restructurings $ - -
</TABLE>
The amount of interest that would have been included in income on the above
non-accrual loans if they had been current in accordance with their original
terms was $9,434 in 1998 and $1,127 in 1997. The amount of interest that was
included in interest income on the above loans was $8,572 in 1998 and $1,994 in
1997.
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 as to principal or
interest is automatically placed on non-accrual, unless corrective action is
certain and imminent.
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Potential Problem Loans
- -----------------------
At year end, management had identified loans totaling $106,000 that were not
past due 90 days or more, but in which management has serious doubts as to the
ability of the borrowers to comply with the present loan repayment terms.
Potential losses are not currently expected on these loans given their
collateral positions and the ability of the borrowers to continue servicing the
debt, albeit on more favorable terms than originally agreed. Of these loans,
$96,806 was restructured as troubled debt in the first quarter of 1999.
IV. Summary of Loan Loss Experience
<TABLE>
<CAPTION>
Allowance for possible loan losses 1998 1997
---------------------------------- ---- ----
<S> <C> <C>
Balance at the beginning of the period $ 480,544 133,342
Charge-offs:
Commercial 107,607 -
Real estate - mortgage 2,924 -
Consumer loans 77,925 87,254
--------------- ---------------
Total 188,456 87,254
--------------- ---------------
Recoveries:
Consumer loans 21,457 762
--------------- ---------------
Total 21,457 762
--------------- ---------------
Net charge-offs: 166,998 86,492
Additions charged to operations 255,640 433,694
--------------- ---------------
Balance at end of period $ 569,185 480,544
=============== ===============
Average loans outstanding $ 36,596,138 22,517,410
Ratio of net charge-offs to average loans 0.46% 0.38%
</TABLE>
The provision for loan losses was $255,640 for 1998, down 178,054 from 1997. In
1997, the $433,694 provision expense was primarily determined by reference to a
target ratio. The ratio of the loss reserve to total loans was targeted to be
1.50% by the end of 1997, when the Bank would be almost two years old.
Management adopted this methodology, by reference to peer information, in order
to build the loss reserve for the Bank's new loan portfolio. More traditional
methods of determining loan loss provisions are based on historical loan
portfolio performance, including analysis of historical charge-offs and
recoveries, detail loan reviews and portfolio reviews, loan growth and changing
economic conditions. Since the Bank had only limited history, the target ratio
method was determined to be more appropriate for the first two years.
In the fourth quarter of 1998, management evaluated the history of the Bank's
loan charge-offs and reviewed the credit risk in the Bank's loan portfolio.
Futhermore, an independent credit review was conducted in early January 1999, to
validate the credit risk classifications as of December 31, 1998. Based on the
results of these reviews, management and the board modified the loan loss
reserve policy to eliminate the target balance ratio method. Under the revised
policy, management and the board will evaluate the adequacy of the loan loss
reserve on a quarterly basis. This evaluation considers historical loan losses
by risk grade under each major category of loans, i.e., commercial, real estate
and consumer. It also considers current portfolio risk, industry concentrations
and the uncertainty associated with changing economic conditions.
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<PAGE>
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 for
compliance with underwriting policy 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.
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 year end allowance
adequate to cover potential losses in the loan portfolio.
Allocation of the Allowance for Loan Losses
- -------------------------------------------
Under the Bank's credit risk Loan Grading Policy, each loan in the portfolio is
assigned one of the following risk grades:
<TABLE>
<CAPTION>
Grade Short Definition
----- ----------------
<S> <C>
1 Total absence of credit risk
2 Minimal credit risk
3 Average credit risk
4 Acceptable, but more than average credit risk
5 Greater than normal credit risk
6 Excessive credit risk
7 Potential loss
8 Uncollectable
</TABLE>
The policy provides more explicit guidance on the application of risk grades. On
a monthly basis, loan balances are aggregated for each grade and a loan loss
allowance is calculated using factors that represent management's estimate of
the allowance applicable to each grade. These factors are compared to historical
charge-offs for reasonableness and adjusted, as necessary.
At December 31, 1998 the allowance for loan losses was allocated by grade as
follows:
<TABLE>
<CAPTION>
Number of Loan Calculated
Grade Loans Balance Factor Reserve
----- ----- ------- ------ -------
<S> <C> <C> <C> <C>
1 5 146,778 0.00% -
2 16 223,661 0.10% 224
3 1,173 29,489,735 0.33% 97,316
4 672 11,322,704 0.75% 84,920
5 34 636,840 5.00% 31,842
6 13 157,112 15.00% 23,567
7 - - 50.00% -
8 - - 100.00% -
------ ---------- -------
Total 1,913 41,796,830 237,869
===== ==========
Unallocated 331,316
-------
Total loss reserve 569,185
=======
</TABLE>
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<PAGE>
At December 31, 1997 the allowance for loan losses was allocated by grade as
follows:
<TABLE>
<CAPTION>
Number of Loan Calculated
Grade Loans Balance Factor Reserve
----- ----- ------- ------ -------
<S> <C> <C> <C> <C>
1 2 5,640 0.00% -
2 8 163,052 0.10% 163
3 771 20,833,144 0.33% 68,749
4 523 9,210,791 0.75% 69,081
5 6 53,250 5.00% 2,663
6 4 23,398 15.00% 2,340
7 - - 50.00% -
8 - - 100.00% -
------ ---------- -------
Total 1,314 30,289,275 142,996
===== ==========
Unallocated 337,548
-------
Total loss reserve 480,544
=======
</TABLE>
The approximate anticipated amount of charge-offs by risk grade for 1999 is:
<TABLE>
<CAPTION>
Projected
Grade Charge-offs
----- -----------
<S> <C>
1 $ -
2 107
3 46,639
4 40,699
5 15,260
6 11,295
7 -
8 -
--------
Total $ 114,000
========
</TABLE>
12
<PAGE>
V. Deposits
<TABLE>
<CAPTION>
Average Average Average Average
Balance Balance Rate Rate
1998 1997 1998 1997
---- ---- ---- ----
<S> <C> <C> <C> <C>
Non-interest bearing deposits $ 5,261,746 3,733,515
Interest bearing demand deposits 3,381,823 2,810,804 1.90% 1.96%
Savings and money market deposits 6,736,847 4,424,565 3.89% 3.63%
Time deposits 27,189,134 16,518,978 5.79% 5.83%
--------------------------------------------------
Total average deposits $ 42,569,551 27,487,862 4.46% 4.29%
==================================================
</TABLE>
As of December 31, 1998 the amount outstanding of time certificates of deposit
of $100,000 or more was $6,704,185. Amounts by time remaining until maturity on
time deposits of $100,000 or more were:
<TABLE>
<S> <C>
3 months or less $ 1,090,508
over 3 through 6 months 1,273,635
over 6 through 12 months 3,285,532
over 12 months 1,054,510
-----------------
$ 6,704,185
=================
</TABLE>
VI. Return on Equity and Assets
<TABLE>
<CAPTION>
1998 1997
---- ----
<S> <C> <C>
Return on average assets 0.69% 0.12%
Return on average equity 5.65% 0.66%
Dividend payout ratio 0.00% 0.00%
Average equity to average asset ratio 12.17% 17.74%
</TABLE>
13
<PAGE>
SUPERVISION AND REGULATION
The following discussion sets forth the material elements of the regulatory
framework applicable to banks and bank holding companies and provides certain
specific information related to the Company.
General
The Company is a bank holding company registered with the Board of Governors of
the Federal Reserve System (the "Federal Reserve") under the Bank Holding
Company Act of 1956, as amended (the "BHC Act"). As such, the Company and, if
applicable, its non-bank subsidiaries are subject to the supervision,
examination, and reporting requirements of the BHC Act and the regulations of
the Federal Reserve.
The BHC Act requires every bank holding company to obtain the prior approval of
the Federal Reserve before: (a) it may acquire direct or indirect ownership or
control of any voting shares of any bank if, after such acquisition, the bank
holding company will directly or indirectly own or control more than 5% of the
voting shares of the bank; (b) it or any of its subsidiaries, other than a bank,
may acquire all or substantially all of the assets of any bank; or (c) it may
merge or consolidate with any other bank holding company.
The BHC Act further provides that the Federal Reserve may not approve any
transaction that would result in a monopoly or would be in furtherance of any
combination or conspiracy to monopolize or attempt to monopolize the business of
banking in any section of the United States, or the effect of which may be
substantially to lessen competition or to tend to create a monopoly in any
section of the country, or that in any other manner would be in restraint of
trade, unless the anticompetitive effects of the proposed transaction are
clearly outweighed by the public interest in meeting the convenience and needs
of the community to be served. The Federal Reserve is also required to consider
the financial and managerial resources and future prospects of the bank holding
companies and banks concerned and the convenience and needs of the community to
be served. Consideration of financial resources generally focuses on capital
adequacy, which is discussed below.
The BHC Act, as amended by the interstate banking provisions of the Riegle-Neal
Interstate Banking and Branching Efficiency Act of 1994 (the "Interstate Banking
Act"), which became effective on September 29, 1995, repealed the prior
statutory restrictions on interstate acquisitions of banks by bank holding
companies, such that the Company, and any other bank holding company located in
Georgia may now acquire a bank located in any other state, and any bank holding
company located outside Georgia may lawfully acquire any Georgia-based bank,
regardless of state law to the contrary, in either case subject to certain
deposit-percentage, aging requirements, and other restrictions. The Interstate
Banking Act also generally provides that, after June 1, 1997, national and
state-chartered banks may branch interstate through acquisitions of banks in
other states. By adopting legislation prior to that date, a state had the
ability either to "opt in" and accelerate the date after which interstate
branching is permissible or "opt out" and prohibit interstate branching
altogether.
In response to the Interstate Banking Act, the Georgia General Assembly adopted
the Georgia Interstate Banking Act, which was effective on July 1, 1995. The
Georgia Interstate Banking Act provides that (a) interstate acquisitions by
institutions located in Georgia will be permitted in states that also allow
national interstate acquisitions and (b) interstate acquisitions of institutions
located in Georgia will be permitted by institutions in states that allow
national interstate acquisitions.
Additionally, on January 26, 1996, the Georgia Assembly adopted the Georgia
Interstate Branching Act which 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
14
<PAGE>
banks to establish de novo branches on a limited basis as of July 1, 1996.
Beginning July 1, 1998, the number of de novo branches which may be established
will no longer be limited.
The BHC Act generally prohibits the Company from engaging in activities other
than banking or managing or controlling banks or other permissible subsidiaries
and from acquiring or retaining direct or indirect control of any company
engaged in any activities other than those activities determined by the Federal
Reserve to be so closely related to banking or managing or controlling banks as
to be a proper incident thereto. In determining whether a particular activity is
permissible, the Federal Reserve must consider whether the performance of such
an activity reasonably can be expected to produce benefits to the public, such
as greater convenience, increased competition, or gains in efficiency, that
outweigh possible adverse effects, such as undue concentration of resources,
decreased or unfair competition, conflicts of interest, or unsound banking
practices. For example, factoring accounts receivable, acquiring or servicing
loans, leasing personal property, conducting discount securities brokerage
activities, performing certain data processing services, acting as agent or
broker in selling credit life insurance and certain other types of insurance in
connection with credit transactions, and performing certain insurance
underwriting activities all have been determined by the Federal Reserve to be
permissible activities of bank holding companies. The BHC Act does not place
territorial limitations on permissible non-banking activities of bank holding
companies. Despite prior approval, the Federal Reserve has the power to order a
holding company or its subsidiaries to terminate any activity or to terminate
its ownership or control of any subsidiary when it has reasonable cause to
believe that continuation of such activity or such ownership or control
constitutes a serious risk to the financial safety, soundness, or stability of
any bank subsidiary of that bank holding company.
The bank subsidiary of the Company is a member of the Federal Deposit Insurance
Corporation (the "FDIC"), and as such, its deposits are insured by the FDIC to
the maximum extent provided by law. Such subsidiary is also subject to numerous
state and federal statutes and regulations that affect its business, activities,
and operations, and it is supervised and examined by one or more state or
federal bank regulatory agencies.
The FDIC and the Georgia Department of Banking and Finance (the "Georgia
Department") regularly examine the operations of the Bank and is given authority
to approve or disapprove mergers, consolidations, the establishment of branches,
and similar corporate actions. The FDIC and the Georgia Department also have the
power to prevent the continuance or development of unsafe or unsound banking
practices or other violations of law.
Payment of Dividends
The Company is a legal entity separate and distinct from its banking subsidiary.
The principal sources of cash flow of the Company, including cash flow to pay
dividends to its shareholders, are dividends by the Bank. There are statutory
and regulatory limitations on the payment of dividends by the Bank to the
Company as well as by the Company to its shareholders.
If, in the opinion of the federal banking regulator, a depository institution
under its jurisdiction is engaged in or is about to engage in an unsafe or
unsound practice (which, depending on the financial condition of the depository
institution, could include the payment of dividends), such authority may
require, after notice and hearing, that such institution cease and desist from
such practice. The federal banking agencies have indicated that paying dividends
that deplete a depository institution's capital base to an inadequate level
would be an unsafe and unsound banking practice. Under the Federal Deposit
Insurance Corporation Improvement Act of 1991 ("FDICIA"), a depository
institution may not pay any dividend if payment would cause it to become
undercapitalized or if it already is undercapitalized. See "-- Prompt Corrective
Action." Moreover, the federal agencies have issued policy statements that
provide that bank holding companies and insured banks should generally only pay
dividends out of current operating earnings.
15
<PAGE>
At December 31, 1998, under dividend restrictions imposed under federal and
state laws, and the conditions included in the Georgia Department's approval of
the Bank's charter application, the Bank could not declare dividends to the
Company.
The payment of dividends by the Company and the Bank may also be affected or
limited by other factors, such as the requirement to maintain adequate capital
above regulatory guidelines.
Capital Adequacy
The Company and the Bank are required to comply with the capital adequacy
standards established by the Federal Reserve and the appropriate federal banking
regulator in the case of Bank. There are two basic measures of capital adequacy
for bank holding companies that have been promulgated by the Federal Reserve: a
risk-based measure and a leverage measure. All applicable capital standards must
be satisfied for a bank holding company to be considered in compliance.
The risk-based capital standards are designed to make regulatory capital
requirements more sensitive to differences in risk profile among banks and bank
holding companies, to account for off-balance-sheet exposure, and to minimize
disincentives for holding liquid assets. Assets and off-balance-sheet items are
assigned to broad risk categories, each with appropriate weights. The resulting
capital ratios represent capital as a percentage of total risk-weighted assets
and off-balance-sheet items.
The minimum guideline for the ratio (the "Total Risk-Based Capital Ratio") of
total capital ("Total Capital") to risk-weighted assets (including certain
off-balance-sheet items, such as standby letters of credit) is 8%. At least half
of Total Capital must comprise common stock, minority interests in the equity
accounts of consolidated subsidiaries, noncumulative perpetual preferred stock,
and a limited amount of cumulative perpetual preferred stock, less goodwill and
certain other intangible assets ("Tier 1 Capital"). The remainder may consist of
subordinated debt, other preferred stock, and a limited amount of loan loss
reserves ("Tier 2 Capital"). At December 31, 1998, the Company's consolidated
Total Risk-Based Capital Ratio and its Tier 1 Risk-Based Capital Ratio (i.e.,
the ratio of Tier 1 Capital to risk-weighted assets) were 16% and 14%,
respectively.
In addition, the Federal Reserve has established minimum leverage ratio
guidelines for bank holding companies. These guidelines provide for a minimum
ratio (the "Leverage Ratio") of Tier 1 Capital to average assets, less goodwill
and certain other intangible assets, of 3% for bank holding companies that meet
certain specified criteria, including having the highest regulatory rating. All
other bank holding companies generally are required to maintain a Leverage Ratio
of at least 3%, plus an additional cushion of 100 to 200 basis points. The
Company's Leverage Ratio at December 31, 1998 was 11%. The guidelines also
provide that bank holding companies experiencing internal growth or making
acquisitions will be expected to maintain strong capital positions substantially
above the minimum supervisory levels without significant reliance on intangible
assets. Furthermore, the Federal Reserve has indicated that it will consider a
"tangible Tier 1 Capital Leverage Ratio" (deducting all intangibles) and other
indicia of capital strength in evaluating proposals for expansion or new
activities.
The Bank is subject to risk-based and leverage capital requirements adopted by
the FDIC, which are substantially similar to those adopted by the Federal
Reserve for bank holding companies.
The Bank was in compliance with applicable minimum capital requirements as of
December 31, 1998. The Company has not been advised by any federal banking
agency of any specific minimum capital ratio requirement applicable to it or its
subsidiary depository institution.
16
<PAGE>
Failure to meet capital guidelines could subject a bank to a variety of
enforcement remedies, including issuance of a capital directive, the termination
of deposit insurance by the FDIC, a prohibition on the taking of brokered
deposits, and certain other restrictions on its business. As described below,
substantial additional restrictions can be imposed upon FDIC-insured depository
institutions that fail to meet applicable capital requirements. See "-- Prompt
Corrective Action."
The federal bank regulators continue to indicate their desire to raise capital
requirements applicable to banking organizations beyond their current levels. In
this regard, the Federal Reserve and the FDIC have, pursuant to FDICIA, recently
adopted final regulations, which will become mandatory on January 1, 1998,
requiring regulators to consider interest rate risk (when the interest rate
sensitivity of an institution's assets does not match the sensitivity of its
liabilities or its off-balance-sheet position) in the evaluation of a bank's
capital adequacy. The bank regulatory agencies' methodology for evaluating
interest rate risk requires banks with excessive interest rate risk exposure to
hold additional amounts of capital against such exposures. The market risk rules
apply to any bank or bank holding company whose trading activity equals 10% or
more of its total assets, or whose trading activity equals $1 billion or more.
Support of Subsidiary Institutions
Under Federal Reserve policy, the Company is expected to act as a source of
financial strength for, and to commit resources to support, each of its banking
subsidiaries. This support may be required at times when, absent such Federal
Reserve policy, the Company may not be inclined to provide it. In addition, any
capital loans by a bank holding company to any of its banking subsidiaries are
subordinate in right of payment to deposits and to certain other indebtedness of
such banks. In the event of a bank holding company's bankruptcy, any commitment
by the bank holding company to a federal bank regulatory agency to maintain the
capital of a banking subsidiary will be assumed by the bankruptcy trustee and
entitled to a priority of payment.
Under the Federal Deposit Insurance Act ("FDIA"), a depository institution
insured by the FDIC can be held liable for any loss incurred by, or reasonably
expected to be incurred by, the FDIC after August 9, 1989, in connection with
(a) the default of a commonly controlled FDIC-insured depository institution or
(b) any assistance provided by the FDIC to any commonly controlled FDIC-insured
depository institution "in danger of default." "Default" is defined generally as
the appointment of a conservator or receiver, and "in danger of default" is
defined generally as the existence of certain conditions indicating that a
default is likely to occur in the absence of regulatory assistance. The FDIC's
claim for damages is superior to claims of shareholders of the insured
depository institution or its holding company, but is subordinate to claims of
depositors, secured creditors, and holders of subordinated debt (other than
affiliates) of the commonly controlled insured depository institution. The
subsidiary depository institutions of the Company are subject to these
cross-guarantee provisions. As a result, any loss suffered by the FDIC in
respect of these subsidiaries would likely result in assertion of the
cross-guarantee provisions, the assessment of such estimated losses against the
depository institution's banking affiliates, and a potential loss of the
Company's investment in such other subsidiary depository institutions.
Prompt Corrective Action
FDICIA establishes a system of prompt corrective action to resolve the problems
of undercapitalized institutions. Under this system, which became effective in
December 1992, the federal banking regulators are required to establish five
capital categories (well capitalized, adequately capitalized, undercapitalized,
significantly undercapitalized, and critically undercapitalized) and to take
certain mandatory supervisory actions, and are authorized to take other
discretionary actions, with respect to institutions in the three
undercapitalized categories, the severity of which will depend upon the capital
category in which the institution is placed. Generally, subject to a narrow
exception, FDICIA requires the banking regulator to appoint
17
<PAGE>
a receiver or conservator for an institution that is critically
undercapitalized. The federal banking agencies have specified by regulation the
relevant capital level for each category.
The capital levels established for each of the categories are as follows:
<TABLE>
<CAPTION>
========================== ==================== ========================= ====================== ===================
Total Tier 1 Risk-
Capital Category Tier 1 Capital Risk-Based Capital Based Capital Other
========================== ==================== ========================= ====================== ===================
<S> <C> <C> <C> <C>
Well Capitalized 5% or more 10% or more 6% or more Not subject to a
capital directive
========================== -------------------- ------------------------- ---------------------- ===================
Adequately Capitalized 4% or more 8% or more 4% or more --
========================== -------------------- ------------------------- ---------------------- ===================
Undercapitalized less than 4% less than 8% less than 4% --
========================== -------------------- ------------------------- ---------------------- ===================
Significantly less than 3% less than 6% less than 3% --
Undercapitalized
========================== ==================== ========================= ====================== ===================
Critically 2% or less -- -- --
Undercapitalized tangible equity
========================== ==================== ========================= ====================== ===================
</TABLE>
For purposes of the regulation, the term "tangible equity" includes core capital
elements counted as Tier 1 Capital for purposes of the risk-based capital
standards, plus the amount of outstanding cumulative perpetual preferred stock
(including related surplus), minus all intangible assets with certain
exceptions. A depository institution may be deemed to be in a capitalization
category that is lower than is indicated by its actual capital position if it
receives an unsatisfactory examination rating.
An institution that is categorized as undercapitalized, significantly
undercapitalized, or critically undercapitalized is required to submit an
acceptable capital restoration plan to its appropriate federal banking agency.
Under FDICIA, a bank holding company must guarantee that a subsidiary depository
institution meets its capital restoration plan, subject to certain limitations.
The obligation of a controlling holding company under FDICIA to fund a capital
restoration plan is limited to the lesser of 5% of an undercapitalized
subsidiary's assets or the amount required to meet regulatory capital
requirements. An undercapitalized institution is also generally prohibited from
increasing its average total assets, making acquisitions, establishing any
branches, or engaging in any new line of business, except in accordance with an
accepted capital restoration plan or with the approval of the FDIC. In addition,
the appropriate federal banking agency is given authority with respect to any
undercapitalized depository institution to take any of the actions it is
required to or may take with respect to a significantly undercapitalized
institution as described below if it determines "that those actions are
necessary to carry out the purpose" of FDICIA.
At December 31, 1998, the Bank had the requisite capital levels to qualify as
well capitalized.
FDIC Insurance Assessments
Pursuant to FDICIA, the FDIC 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: (a) well capitalized;
(b) adequately capitalized; and (c) undercapitalized. These three categories are
substantially similar to the prompt corrective action categories described
above, with the "undercapitalized" category including institutions that are
18
<PAGE>
undercapitalized, significantly undercapitalized, and critically
undercapitalized for prompt corrective action purposes. An institution is also
assigned by the FDIC to one of three supervisory subgroups within each capital
group. The supervisory subgroup to which an institution is assigned is based on
a supervisory evaluation provided to the FDIC by the institution's primary
federal regulator and information which the FDIC determines to be relevant to
the institution's financial condition and the risk posed to the deposit
insurance funds (which may include, if applicable, information provided by the
institution's state supervisor). An institution's insurance assessment rate is
then determined based on the capital category and supervisory category to which
it is assigned. Under the risk-based assessment system there are nine assessment
risk classifications (i.e., combinations of capital groups and supervisory
subgroups) to which different assessment rates are applied. Assessment rates for
members of both the Bank Insurance Fund ("BIF") and the Savings Association
Insurance Fund ("SAIF") for the first half of 1995 ranged from 23 basis points
(0.23% of deposits) for an institution in the highest category (i.e., "well
capitalized" and "healthy") to 31 basis points (0.31% of deposits) for an
institution in the lowest category (i.e., "undercapitalized" and "substantial
supervisory concern"). These rates were established for both funds to achieve a
designated ratio of reserves to insured deposits (i.e., 1.25%) within a
specified period of time.
Once the designated ratio for the BIF was reached in May 1995, the FDIC reduced
the assessment rate applicable to BIF deposits in two stages, so that, beginning
in 1996, the deposit insurance premiums for 92% of all BIF members in the
highest capital and supervisory categories were set at $2,000 per year,
regardless of deposit size. The FDIC elected to retain the existing assessment
rate range of 23 to 31 basis points for SAIF members for the foreseeable future
given the undercapitalized nature of that insurance fund.
Recognizing that the disparity between the SAIF and BIF premium rates had
adverse consequences for SAIF-insured institutions and other banks with SAIF
assessed deposits, the Deposit Insurance Funds Act of 1996 (the "Funds Act") was
enacted by Congress as part of the omnibus budget legislation and signed into
law on September 30, 1996. As directed by the Funds Act, the FDIC implemented a
special one-time assessment of approximately 65.7 basis points (0.657%) on a
depository institution's SAIF-insured deposits held as of March 31, 1995 (or
approximately 52.6 basis points on SAIF deposits acquired by banks in certain
qualifying transactions).
In addition, the FDIC has implemented a revision in the SAIF assessment rate
schedule that effected, as of October 1, 1996 (a) a widening in the assessment
rate spread among institutions in the different capital and risk assessment
categories, (b) an overall reduction of the assessment rate range assessable on
SAIF deposits of from 0 to 27 basis points, and (c) a special interim assessment
rate range for the last quarter of 1996 of from 18 to 27 basis points on
institutions subject to Financing Corporation ("FICO") assessments. Effective
January 1, 1997, assessments to help pay off the $780 million in annual interest
payments on the $8 billion FICO bonds issued in the late 1980's as part of the
government rescue of the thrift industry were imposed on both BIF- and
SAIF-insured deposits in annual amounts presently estimated at 1.29 basis points
and 6.44 basis points, respectively. Beginning in January 2000, BIF- and SAIF-
insured institutions will share the FICO interest costs at equal rates currently
estimated at 2.43 basis points.
Under the FDIA, insurance of deposits may be terminated by the FDIC upon a
finding that the institution has engaged in unsafe and unsound practices, is in
an unsafe or unsound condition to continue operations, or has violated any
applicable law, regulation, rule, order, or condition imposed by the FDIC.
19
<PAGE>
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. It cannot be predicted whether or what
form any proposed regulation or statute will be adopted or the extent to which
the business of the Company may be affected by such regulation or statute.
Item 2. Description of Property
- --------------------------------
The principal place of business of both the Company and the Bank is located at
1490 Martha Berry Blvd., Rome, Georgia 30165-1618. Construction of a new
one-story, 9,000 square foot brick, traditional bank building was completed in
October 1996. It includes office space for administration, lending, customer
service and new accounts, operations facilities, four drive-through teller
lanes, six stand-up teller windows, and a security vault with safe deposit
boxes. The Bank owns the building and the 2.29 acres of graded land on which the
building sits. Prior to completion and occupancy of the building, the Bank
operated out of two temporary office units on the bank site, which provided
2,608 square feet of office space and banking facilities.
In the second quarter of 1998, the Bank finished construction of a 1,820 square
foot branch banking facility 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 opened for business in the first week of June 1998. It is a full service
branch office with three drive-up banking lanes and has a drive-up ATM.
The East Rome site was acquired for $211 thousand in the first quarter of 1997.
The cost of the facility, including site work, furniture, fixtures and equipment
was $523 thousand. 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. Deposit growth at the
East Rome Office was $4.2 million through December 31, 1998, which was ahead of
budget.
Item 3. Legal Proceedings
- --------------------------
There are no material legal proceedings to which the Company or the Bank or any
of their properties are subject.
Item 4. Submission of Matters to a Vote of Security Holders
- ------------------------------------------------------------
No matter was submitted to a vote of security holders during the fourth
quarter of the fiscal year covered by this report.
Part II
Item 5. Market for Registrant's Common Equity and Related Stockholder Matters
- -------------------------------------------------------------------------------
The information set forth under the caption "Market for Common Equity and
Related Stockholder Matters" in the 1998 Annual Report is incorporated herein by
reference.
On May 26, 1998, an employee of the Company, a Georgia resident, exercised
options to purchase 400 shares of the Company's Common Stock. As a result, the
Company issued 400 shares of its Common Stock at $10.00 per share for a total
purchase price of $4,000.00. On December 10, 1998, an employee of the Company, a
Georgia resident, exercised options to purchase 1,200 shares of the Company's
Common Stock. As a result, the Company issued 1,200 shares of its Common Stock
at $10.00 per share for a total purchase price of $12,000.00.
20
<PAGE>
Based primarily on these facts, the Company relied on Section 3(a)(11) and
Section 4(2) of the Securities Act of 1933, as amended, in issuing the 1,600
shares.
Item 6. Management's Discussion and Analysis of Financial Condition and Results
- -------------------------------------------------------------------------------
of Operations
-------------
The information set forth under the caption "Management's Discussion and
Analysis of Financial Condition and Results of Operations" in the 1998 Annual
Report is incorporated herein by reference.
Item 7. Financial Statements
- ------------------------------
The consolidated balance sheets of the Company as of December 31, 1998 and 1997,
and the related consolidated statements of operations, changes in stockholders'
equity, and cash flows, and notes to the consolidated financial statements for
each of the three years in the period ended December 31, 1998, and the report
issued thereon by the Company's independent public accountants, which appear in
the 1998 Annual Report are incorporated herein by reference.
Item 8. Changes in and Disagreements with Accountants on Accounting and
- -----------------------------------------------------------------------
Financial Disclosure
--------------------
No change in accountants has taken place in any period subsequent to the date of
the most recent financial statements. The Company had no disagreement with
accountants with respect to accounting principles or practices or financial
statement disclosures or auditing scope or procedure, or disagreements with
regard to reportable events. The Company has had the same independent accounting
firm since its inception.
Part III
Item 9. Directors, Executive Officers, Promoters and Control Persons;
- ---------------------------------------------------------------------
Compliance with Section 16(a) of the Exchange Act
-------------------------------------------------
The information set forth under the caption "Election of Directors" in the Proxy
Statement is incorporated herein by reference.
Item 10. Executive Compensation
- --------------------------------
The information set forth under the caption "Executive Compensation" in the
Proxy Statement is incorporated herein by reference.
Item 11. Security Ownership of Certain Beneficial Owners and Management
- ------------------------------------------------------------------------
The information set forth under the caption "Security Ownership of Certain
Beneficial Owners and Management" in the Proxy Statement is incorporated herein
by reference.
Item 12. Certain Relationships and Related Transactions
- --------------------------------------------------------
The information set forth under the caption "Certain Relationships and Related
Transactions" in the Proxy Statement is incorporated herein by reference.
21
<PAGE>
Item 13. Exhibits, List 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).
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).
13.1 1998 Annual Report to Shareholders.
21.1 Subsidiaries of the Registrant (Incorporated by reference to Exhibit
21.1 of the Company's Annual Report on Form 10-KSB for the year ended
December 31, 1996).
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 fourth quarter of the year
ended December 31, 1998.
22
<PAGE>
SIGNATURES
In accordance with the requirements of Section 13 or 15(d) 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.
By:/s/ Thomas D. Caldwell, III
---------------------------
Thomas D. Caldwell, III, President
Date: March 26, 1999
In accordance with the Exchange Act, this report has been signed below by the
following persons on behalf of the registrant and in the capacities and on the
dates indicated.
<TABLE>
<CAPTION>
Signature Title Date
--------- ----- ----
<S> <C> <C>
/s/ Robert L. Berry Director March 26, 1999
- ----------------------------
Robert L. Berry
/s/ Frank A. Brown, Jr. Director March 26, 1999
- ----------------------------
Frank A. Brown, Jr.
/s/ Thomas D. Caldwell, III Chairman, CEO and President March 26, 1999
- ---------------------------- (Principal Executive Officer)
Thomas D. Caldwell, III
/s/ Gene G. Davidson Director March 26, 1999
- ---------------------------
Gene G. Davidson
/s/ Henry Haskell Perry Director March 26, 1999
- ---------------------------
Henry Haskell Perry
/s/ Bradford Lee Riddle Director March 26, 1999
- ---------------------------
Bradford Lee Riddle
/s/ M. Wayne Robinson Director March 26, 1999
- ---------------------------
M. Wayne Robinson
/s/ Dale G. Smith Director March 26, 1999
- ---------------------------
Dale G. Smith
/s/ Paul E. Smith Director March 26, 1999
- ---------------------------
Paul E. Smith
/s/ W. Fred Talley Director March 26, 1999
- ---------------------------
W. Fred Talley
/s/ Martha Berry Walstad Director March 26, 1999
- ---------------------------
Martha Berry Walstad
/s/ E. Grey Winstead, III Chief Financial Officer March 26, 1999
- --------------------------- (Principal Financial and
E. Grey Winstead, III Accounting Officer)
</TABLE>
23
<PAGE>
GREATER ROME BANCSHARES, INC.
Form 10-KSB Annual Report for the Fiscal Year ended December 31, 1998
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
Exhibit
Number Description Sequential Page
------ ----------- ---------------
<S> <C> <C>
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). N/A
3.2 Bylaws (Incorporated by reference to Exhibit 3.2 to the Company's
Registration Statement No. 33-82858 on Form SB-2). N/A
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
13.1 1998 Annual Report to Shareholders. N/A
21.1 Subsidiaries of the Registrant (Incorporated by reference to Exhibit 21.1
of the Company's Annual Report on Form 10-KSB for the year ended December
31, 1996). N/A
27.1 Financial Data Schedule (for S.E.C. use only). N/A
</TABLE>
- ----------
* Indicates a management contract or compensatory arrangement.
24
GREATER ROME BANCSHARES, INC.
AND SUBSIDIARY
Consolidated Financial Statements
December 31, 1998, 1997 and 1996
(with Independent Accountants' Report thereon)
<PAGE>
[LOGO OF PORTER KEADLE MOORE, LLP APPEARS HERE]
Porter Keadle Moore, LLP
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
To the Board of Directors and Stockholders
Greater Rome Bancshares, Inc.
Rome, Georgia
We have audited the accompanying consolidated balance sheets of Greater Rome
Bancshares, Inc. and subsidiary as of December 31, 1998 and 1997, and the
related consolidated statements of operations and comprehensive income, changes
in stockholders' equity and cash flows for each of the three years in the period
ended December 31, 1998. 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 Greater Rome
Bancshares, Inc. and subsidiary as of December 31, 1998 and 1997, and the
results of their operations and their cash flows for each of the three years in
the period ended December 31, 1998, in conformity with generally accepted
accounting principles.
/s/ Porter Keadle Moore, LLP
Atlanta, Georgia
January 15, 1999
<PAGE>
GREATER ROME BANCSHARES, INC.
Consolidated Balance Sheets
December 31, 1998 and 1997
Assets
------
<TABLE>
<CAPTION>
1998 1997
---- ----
<S> <C> <C>
Cash and due from banks, including reserve
requirements of $108,000 in 1998 and $65,000 in 1997 $ 1,240,284 1,530,896
Federal funds sold 2,132,000 1,433,528
Interest bearing deposits 1,137,526 -
--------- ---------
Cash and cash equivalents 4,509,810 2,964,424
Securities available for sale 4,834,617 2,200,608
Securities held to maturity 6,307,534 6,325,869
Loans, net 41,352,500 29,722,423
Premises and equipment, net 2,726,188 2,271,350
Accrued interest receivable 462,949 356,295
Federal Home Loan Bank Stock 509,200 490,200
Other assets 739,044 365,408
---------- ----------
$ 61,441,842 44,696,577
========== ==========
Liabilities and Stockholders' Equity
------------------------------------
Deposits:
Demand $ 6,009,623 4,414,480
Interest - bearing demand 3,579,780 2,987,988
Savings 7,733,706 4,780,996
Time 24,830,666 15,799,484
Time, over $100,000 6,704,185 5,583,231
---------- ----------
Total deposits 48,857,960 33,566,179
Federal Home Loan Bank borrowings 5,000,000 4,000,000
Securities sold under repurchase agreement - 500,000
Federal funds purchased 500,000 -
Accrued interest payable 101,204 76,586
Other liabilities 170,725 130,787
---------- ----------
Total liabilities 54,629,889 38,273,552
---------- ----------
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;
701,600 and 700,000 shares issued and outstanding 7,016 7,000
Additional paid-in capital 6,946,101 6,930,117
Accumulated deficit (144,640) (518,877)
Accumulated other comprehensive income 3,476 4,785
---------- ----------
Total stockholders' equity 6,811,953 6,423,025
---------- ----------
$ 61,441,842 44,696,577
========== ==========
</TABLE>
See accompanying notes to consolidated financial statements.
3
<PAGE>
GREATER ROME BANCSHARES, INC.
Consolidated Statements of Operations and Comprehensive Income
For the Years Ended December 31, 1998, 1997 and 1996
<TABLE>
<CAPTION>
1998 1997 1996
---- ---- ----
<S> <C> <C> <C>
Interest income:
Interest and fees on loans $ 3,659,279 2,255,079 605,126
Interest and dividends on investments 637,964 482,641 280,826
Interest on federal funds sold and deposits with other banks 152,121 100,499 175,449
--------- --------- ---------
Total interest income 4,449,364 2,838,219 1,061,401
--------- --------- ---------
Interest expense:
Time deposits 1,573,504 963,689 211,831
Savings deposits 261,753 160,563 75,701
Interest bearing demand deposits 64,355 55,224 26,066
Other 247,622 79,841 26
--------- --------- ---------
Total interest expense 2,147,234 1,259,317 313,624
--------- --------- ---------
Net interest income 2,302,130 1,578,902 747,777
Provision for loan losses 255,640 433,694 134,000
--------- --------- ---------
Net interest income after provision for loan losses 2,046,490 1,145,208 613,777
--------- --------- ---------
Other income:
Service charges 147,718 97,380 26,254
Other 143,569 61,484 22,487
--------- --------- ---------
Total other income 291,287 158,864 48,741
--------- --------- ---------
Other expenses:
Salaries and employee benefits 953,984 834,413 544,925
Occupancy 308,027 255,629 167,716
Other operating 604,323 420,370 346,351
--------- --------- ---------
Total other expenses 1,866,334 1,510,412 1,058,992
--------- --------- ---------
Income (loss) before income taxes 471,443 (206,340) (396,474)
Income tax (expense) benefit (97,206) 248,283 -
--------- --------- ---------
Net earnings (loss) $ 374,237 41,943 (396,474)
========= ========= ==========
Other comprehensive income before tax:
Unrealized gains (losses) on securities available for sale
arising during the period, net of tax of $2,127, $0 and $0 $ (1,309) 3,125 1,660
--------- --------- ----------
Comprehensive income (loss) $ 372,928 45,068 (394,814)
========= ========= ==========
Net earnings (loss) per share $ 0.53 0.06 (0.57)
========= ========= ==========
Diluted net earnings (loss) per share $ 0.53 0.06 (0.57)
========= ========= ==========
</TABLE>
See accompanying notes to consolidated financial statements.
4
<PAGE>
GREATER ROME BANCSHARES, INC.
Consolidated Statements of Changes in Stockholders' Equity
For the Years Ended December 31, 1998, 1997 and 1996
<TABLE>
<CAPTION>
Accumulated
Additional Other
Common Paid-In Accumulated Comprehensive
Stock Capital Deficit Income Total
----- ------- ------- ------ -----
<S> <C> <C> <C> <C> <C>
Balance, December 31, 1995 $ 7,000 6,930,117 (164,346) - 6,772,771
Change in unrealized gain on
investment securities available - - - 1,660 1,660
for sale
Net loss - - (396,474) - (396,474)
--------- --------- -------- ----- ----------
Balance December 31, 1996 7,000 6,930,117 (560,820) 1,660 6,377,957
Change in unrealized gain on
investment securities available - - - 3,125 3,125
for sale
Net earnings - - 41,943 - 41,943
--------- --------- --------- ----- ----------
Balance, December 31, 1997 7,000 6,930,117 (518,877) 4,785 6,423,025
Exercise of stock options 16 15,984 - - 16,000
Change in unrealized gain on
investment securities available - - - (1,309) (1,309)
for sale
Net earnings - - 374,237 - 374,237
---------- --------- --------- ----- ---------
Balance, December 31, 1998 $ 7,016 6,946,101 (144,640) 3,476 6,811,953
========== ========= ========= ===== =========
</TABLE>
See accompanying notes to consolidated financial statements.
5
<PAGE>
GREATER ROME BANCSHARES, INC.
Consolidated Statements of Cash Flows
For the Years Ended December 31, 1998, 1997 and 1996
<TABLE>
<CAPTION>
1998 1997 1996
---- ---- ----
<S> <C> <C> <C>
Cash flows from operating activities:
Net earnings (loss) $ 374,237 41,943 (396,474)
Adjustments to reconcile net earnings (loss) to net cash used by
operating activities:
Depreciation, amortization and accretion 174,806 147,050 59,725
Provision for loan losses 255,640 433,694 134,000
Provision for deferred income taxes (3,758) (248,283) -
Change in:
Interest receivable (106,654) (163,493) (192,803)
Other assets (345,830) (65,471) (8,034)
Interest payable 24,618 38,071 38,574
Other liabilities 13,764 (116,846) 157,994
------------ ------------ ------------
Net cash provided (used) by operating activities 386,823 66,665 (207,018)
------------ ------------ ------------
Cash flows from investing activities:
Proceeds from maturities and calls of securities available for sale 1,104,440 249,709 500,000
Proceeds from maturities and calls of securities held to maturity 5,304,286 801,890 -
Purchases of securities available for sale (3,742,598) (952,453) (1,986,289)
Purchases of securities held to maturity (5,284,954) (2,377,684) (3,748,672)
Purchase of FHLB stock (19,000) (490,200) -
Net increase in loans (11,885,717) (17,060,516) (13,229,601)
Purchases of premises and equipment (625,675) (318,433) (1,772,659)
------------ ------------ ------------
Net cash used by investing activities (15,149,218) (20,147,687) (20,237,221)
------------ ------------ ------------
Cash flows from financing activities:
Net change in demand and savings deposits 5,139,645 4,004,854 8,178,610
Net change in time deposits 10,152,136 9,716,789 11,665,926
Federal Home Loan Bank advances 1,000,000 4,000,000 -
Securities sold under repurchase agreements (500,000) 500,000 -
Proceeds from federal funds purchased 500,000 - -
Proceeds from stock options exercised 16,000 - -
------------ ----------- -----------
Net cash provided by financing activities 16,307,781 18,221,643 19,844,536
------------ ----------- -----------
Net change in cash and cash equivalents 1,545,386 (1,859,379) (599,703)
Cash and cash equivalents at beginning of year 2,964,424 4,823,803 5,423,506
------------ ----------- -----------
Cash and cash equivalents at end of year $ 4,509,810 2,964,424 4,823,803
============ =========== ===========
Supplementary disclosures of cash flow information:
Cash paid during the year for:
Interest $ 2,053,095 1,221,246 275,050
Taxes 78,000 - -
Non cash investing and financing activities:
Change in unrealized gain on securities available for sale $ (1,309) 3,125 1,660
</TABLE>
See accompanying notes to consolidated financial statements.
6
<PAGE>
GREATER ROME BANCSHARES, INC.
Notes to Consolidated Financial Statements
(1) 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 consolidated financial statements include the accounts of the Company
and the Bank. All intercompany accounts and transactions have been
eliminated in consolidation. Certain 1997 and 1996 amounts have been
reclassified to conform to the 1998 presentation.
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 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 on securities
available for sale are excluded from earnings and are reported as a
separate component of stockholders' equity until realized.
7
<PAGE>
GREATER ROME BANCSHARES, INC.
Notes to Consolidated Financial Statements, continued
(1) Summary of Significant Accounting Policies, continued
Investment Securities, continued
--------------------------------
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
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:
Building 40 years
Land improvements 20 years
Furniture, fixtures and equipment 2-7 years
8
<PAGE>
GREATER ROME BANCSHARES, INC.
Notes to Consolidated Financial Statements, continued
(1) Summary of Significant Accounting Policies, continued
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.
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
operations 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 statement requires
the reconciliation of the amounts used in the computation of both
"earnings per share" and "diluted earnings per share" for the year ended
December 31, 1998 and 1997:
<TABLE>
<CAPTION>
For the year ended December 31, 1998 Net Common Per Share
Earnings Share Amount
-------- ----- ------
<S> <C> <C> <C>
Earnings per share $ 374,237 700,309 0.53
Effect of stock options - 10,529 -
------- ------- ----
Diluted earnings per share $ 374,237 710,838 0.53
======= ======= ====
For the year ended December 31, 1997 Net Common Per Share
Earnings Share Amount
-------- ----- ------
Earnings per share $ 41,943 700,000 0.06
Effect of stock options - 5,713 -
------ ------- ----
Diluted earnings per share $ 41,943 705,713 0.06
====== ======= ====
</TABLE>
With regard to 1996, the effects of the stock options were anti-dilutive.
There were 700,000 weighted average shares outstanding for the year ended
December 31, 1996.
9
<PAGE>
GREATER ROME BANCSHARES, INC.
Notes to Consolidated Financial Statements, continued
(1) Summary of Significant Accounting Policies, continued
Recent Accounting Pronouncements
--------------------------------
In 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 133 ("SFAS 133"), Accounting for
Derivative Instruments and Hedging Activities". SFAS 133 establishes
accounting and reporting standards for hedging derivatives and for
derivative instruments including derivative instruments embedded in other
contracts. It requires the fair value recognition of derivatives as assets
or liabilities in the financial statements. The accounting for the changes
in the fair value of derivatives depends on the intended use of the
derivative instruments at inception. Instruments used as fair value hedges
account for the change in fair value in the earnings of the period
simultaneous with accounting for the fair value change of the item being
hedged. Cash flow hedges account for the change in fair value of the
effective portion in comprehensive income rather than earnings and foreign
currency hedges are accounted for in comprehensive income as part of the
translation adjustment. Derivative instruments that are not intended as a
hedge account for the change in fair value in the earnings of the period
of the change. SFAS 133 is effective for all fiscal quarters beginning
after June 15, 1999, but initial application of the statement must be made
as of the beginning of the quarter. At the date of initial application, an
entity may transfer any held to maturity security into the available for
sale or trading categories without calling into question the entity's
intent to hold other securities to maturity in the future. The Company
believes the adoption of SFAS 133 will not have a material impact on its
financial position, results of operations or liquidity.
(2) Investment Securities
Investment securities at December 31, 1998 and 1997 are summarized as
follows:
<TABLE>
<CAPTION>
Securities Held to Maturity December 31, 1998
-----------------
Gross Gross Estimated
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
---- ----- ------ -----
<S> <C> <C> <C> <C>
U.S. Government agencies $ 4,649,962 33,074 125 4,682,911
State, county, and municipals 1,384,299 6,119 2,713 1,387,705
Mortgage-backed securities 273,273 1,362 - 274,635
--------- -------- ------- ---------
$ 6,307,534 40,555 2,838 6,345,251
========= ======== ======= =========
<CAPTION>
December 31, 1997
-----------------
Gross Gross Estimated
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
---- ----- ------ -----
<S> <C> <C> <C> <C>
U.S. Government agencies $ 5,865,453 5,292 14,305 5,856,440
Mortgage-backed securities 460,416 1,306 226 461,496
--------- -------- -------- ---------
$ 6,325,869 6,598 14,531 6,317,936
========= ======== ======== =========
</TABLE>
10
<PAGE>
GREATER ROME BANCSHARES, INC.
Notes to Consolidated Financial Statements, continued
(2) Investment Securities, continued
<TABLE>
<CAPTION>
Securities Available for Sale December 31, 1998
-----------------
Gross Gross Estimated
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
---- ----- ------ -----
<S> <C> <C> <C> <C>
U.S. Treasuries $ 1,699,949 5,973 - 1,705,922
Mortgage-backed securities 3,129,066 5,874 6,245 3,128,695
--------- ------- ------- ---------
$ 4,829,015 11,847 6,245 4,834,617
========= ======= ======= =========
<CAPTION>
December 31, 1997
-----------------
Gross Gross Estimated
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
---- ----- ------ -----
<S> <C> <C> <C> <C>
U.S. Treasuries $ 2,195,823 5,771 986 2,200,608
========= ===== === =========
</TABLE>
The amortized cost and estimated fair value of investment securities at
December 31, 1998, by contractual maturity, are shown below. Expected
maturities of certain securities will differ from contractual maturities
because borrowers may have the right to call or prepay certain obligations
with or without call or prepayment penalties.
<TABLE>
<CAPTION>
Securities Available Securities Held
for Sale to Maturity
-------- -----------
Amortized Estimate Amortized Estimated
Cost Fair Value Cost Fair Value
---- ---------- ---- ----------
<S> <C> <C> <C> <C>
U.S. Treasuries
Within 1 year $ 1,699,949 1,705,922 - -
--------- --------- --------- ---------
U.S. Government agencies
1 to 5 years - - 4,649,962 4,682,911
---------- --------- --------- ---------
State, county, and municipals
5 to 10 years - - 1,384,299 1,387,705
---------- --------- --------- ---------
Total securities other than mortgage-back securities:
Within 1 year 1,699,949 1,705,922 - -
1 to 5 years - - 4,649,962 4,682,911
5 to 10 years - - 1,384,299 1,387,705
Mortgage-backed securities 3,129,066 3,128,695 273,273 274,635
--------- --------- --------- ---------
$ 4,829,015 4,834,617 6,307,534 6,345,251
========= ========= ========= =========
</TABLE>
11
<PAGE>
GREATER ROME BANCSHARES, INC.
Notes to Consolidated Financial Statements, continued
(3) Loans
Major classifications of loans at December 31, 1998 and 1997 are presented
below.
<TABLE>
<CAPTION>
1998 1997
---- ----
<S> <C> <C>
Commercial $ 11,518,652 7,527,458
Real estate - mortgage 19,271,316 14,976,036
Real estate - construction 1,226,296 475,430
Installment and other consumer 9,960,566 7,310,351
---------- ----------
Total loans 41,976,830 30,289,275
Less: Unearned fees 55,145 86,308
Allowance for loan losses 569,185 480,544
---------- ----------
Total net loans $ 41,352,500 29,722,423
========== ==========
</TABLE>
The Bank grants loans and extensions of credit to individuals and a
variety of firms and corporations located primarily in Floyd County,
Georgia. Although the Bank has a diversified loan portfolio, a substantial
portion of the loan portfolio is collateralized by improved and unimproved
real estate. FHLB advances are secured by the FHLB stock with a value of
$509,200 in addition to qualifying first mortgage loans totalling
$6,778,077.
An analysis of the activity in the allowance for loan losses for the years
ended December 31, 1998, 1997 and 1996 is presented below:
<TABLE>
<CAPTION>
1998 1997 1996
---- ---- ----
<S> <C> <C> <C>
Balance at beginning of year $ 480,544 133,342 -
Provision charged to operations 255,640 433,694 134,000
Loans charged off (188,456) (87,254) (658)
Recoveries 21,457 762 -
------- ------- -------
Balance at end of year $ 569,185 480,544 133,342
======= ======= =======
</TABLE>
(4) Premises and Equipment
Premises and equipment at December 31, 1998 and 1997 are summarized as
follows:
<TABLE>
<CAPTION>
1998 1997
---- ----
<S> <C> <C>
Land $ 589,669 524,669
Land improvements 235,065 133,506
Buildings and improvements 1,472,842 1,268,270
Furniture, fixtures and equipment 735,292 482,265
Construction in progress - 5,066
--------- ---------
3,032,868 2,413,776
Less: Accumulated depreciation 306,680 142,426
--------- ---------
$ 2,726,188 2,271,350
========= =========
</TABLE>
Depreciation expense was $170,881, $146,118 and $49,318 for the years
ended December 31, 1998, 1997 and 1996, respectively.
12
<PAGE>
GREATER ROME BANCSHARES, INC.
Notes to Consolidated Financial Statements, continued
(5) Time Deposits
The scheduled maturities of time deposits as of December 31, 1998 are as
follows:
1999 26,469,385
2000 3,786,949
2001 551,202
2002 727,315
-----------
$ 31,534,851
===========
(6) Income Taxes
The components of income tax expense (benefit) for the years ended
December 31, 1998 and 1997 are as follows:
<TABLE>
<CAPTION>
1998 1997
---- ----
<S> <C> <C>
Currently payable $ 100,964 -
Deferred tax benefit (3,758) (30,988)
Change in valuation allowance - (217,295)
------- -------
$ 97,206 (248,283)
======= =======
</TABLE>
The differences between the income tax expense or benefit and the amount
computed by applying the statutory federal income tax rate to the income
or loss before income taxes for the years ended December 31, 1998, 1997
and 1996 relate primarily to the benefit of net operating loss
carryforwards not recognized and changes in the valuation allowance.
The following summarizes the sources and expected tax consequences of
future taxable deductions which comprise the net deferred taxes:
<TABLE>
<CAPTION>
1998 1997
---- ----
<S> <C> <C>
Deferred tax assets:
Deferred pre-opening expenses $ 44,987 54,046
Allowance for loan losses 176,609 159,640
Operating loss carryforwards 29,924 53,951
Deferred compensation 28,470 -
Other 12,505 1,712
------- -------
Total gross deferred tax assets 292,495 269,349
Deferred tax liability:
Premises and equipment (40,454) (21,066)
Net unrealized gains on securities available for sale (2,127) -
------- -------
(42,581) (21,066)
Net deferred taxes $ 249,914 248,283
======= =======
</TABLE>
At December 31, 1998, the Company had a state net operating loss
carryforward for tax purposes of approximately $838,000 which will begin
to expire in 2009 if not previously utilized.
13
<PAGE>
GREATER ROME BANCSHARES, INC.
Notes to Consolidated Financial Statements, continued
(7) Lines of Credit
At December 31, 1998, the Bank had fixed rate advances outstanding from
the Federal Home Loan Bank (FHLB) of Atlanta amounting to $5,000,000. The
following advances required monthly or quarterly interest payments:
<TABLE>
<CAPTION>
Advance Interest Rate Maturity Call Feature
------- ------------- -------- ------------
<S> <C> <C> <C>
$ 2,000,000 5.66% 9/24/02 Callable September 24, 1999
1,000,000 5.45% 9/08/00 Callable quarterly after March 8, 1998
1,000,000 5.40% 6/18/03 Callable June 18, 2000
1,000,000 4.97% 10/16/00 -
</TABLE>
At December 31, 1997, the Bank had fixed rate advances outstanding from
the Federal Home Loan Bank (FHLB) of Atlanta amounting to $4,000,000. The
following advances required monthly or quarterly interest payments:
<TABLE>
<CAPTION>
Advance Interest Rate Maturity Call Feature
------- ------------- -------- ------------
<S> <C> <C> <C>
$ 1,000,000 5.93% 7/16/98 -
2,000,000 5.66% 9/24/02 Callable September 24, 1999
1,000,000 5.45% 9/8/00 Callable quarterly after March 8, 1998
</TABLE>
The FHLB advances are secured by the Bank's stock in the FHLB and its 1-4
family first mortgage loans. As of December 31, 1998 and 1997 the Bank
pledged $6,778,077 and $5,613,148, respectively, as collateral to the FHLB
borrowings. If called, the advances will be converted into a three month
LIBOR-based floating rate advance at three month LIBOR flat.
(8) Stockholders' Equity
Dividends paid by the Bank are the primary source of funds available to
the Company. Banking regulations limit the amount of dividends that may be
paid without prior approval of the regulatory authorities. These
restrictions are based on the level of regulatory capital and retained net
earnings in prior years. At December 31, 1998, the Bank could not pay the
Company a dividend without obtaining prior regulatory approval.
Shares of preferred stock may be issued from time to time in one or more
series as may be established by resolution of the board of directors of
the Company. Each resolution shall include the number of shares issued,
preferences, dividend provisions, special rights and limitations as
determined by the board.
(9) Stock Incentive Plan
The Company has a Stock Incentive Plan whereby 105,000 shares of common
stock have been reserved for issuance pursuant to the plan, which may
include options, stock appreciation rights, stock awards, dividend
equivalent rights, performance unit awards, or phantom shares. Incentive
stock options are granted to employees at exercise prices not less than
fair market value at the date of grant. The options vest evenly over four
and five year periods and are exercisable no later than ten years from the
date of grant. At December 31, 1998, 33,000 options were available for
distribution.
14
<PAGE>
GREATER ROME BANCSHARES, INC.
Notes to Consolidated Financial Statements, continued
(9) Stock Incentive Plan, continued
During 1997 the Board of Directors of the Company granted options to
purchase shares of common stock in the Company to the non-employee
directors of the Company and the Bank. Each of the ten non-employee
directors was awarded an option to purchase 3,500 shares at an exercise
price of $10, which was equal to the fair market value at the date of
grant. The options vest evenly over a four year period and are
exerciseable no later than ten years from the date of grant.
A summary status of the Company's stock plans as of December 31, 1998,
1997 and 1996, and changes during the years, are presented below:
<TABLE>
<CAPTION>
1998 1997 1996
---------------------- --------------------- -----------------------
Weighted Weighted Weighted
Average Average Average
Exercise Exercise Exercise
Shares Price Shares Price Shares Price
------ ----- ------ ----- ------ -----
<S> <C> <C> <C> <C> <C> <C>
Outstanding, beginning of year 99,000 $ 10.00 63,000 $10.00 -
Granted during the year 14,000 $ 11.00 37,000 $10.00 63,000 $10.00
Exercised during the year (1,600) $ 10.00
Forfeited during the year (4,400) $ 10.00 (1,000) $10.00 -
------- ------
Outstanding, end of year 107,000 $ 10.13 99,000 $10.00 63,000 $10.00
======= ====== ======
Options exercisable at year end 35,000 $ 10.00 17,200 $10.00 - -
====== ====== ======
Weighted average fair value of
options granted during the year $4.98 $3.79 $4.12
======== ===== =====
Range of exercise prices $10 to $11
Weighted average remaining
contractual lives (years) 8.23
</TABLE>
The Company is encouraged, but not required, to compute the fair value of
options at the date of grant and to recognize such costs as compensation
expense over the vesting period or immediately if only subject to a
service requirement and the award is expected to vest. The Company has
chosen not to adopt these cost recognition principles. No compensation
expense has been recognized in 1998, 1997 and 1996 related to the stock
option plan. Had compensation cost been determined based upon the fair
value of the options at the grant dates, the Company's net earnings and
net earnings per share would have been reduced to the proforma amounts
indicated below:
<TABLE>
<CAPTION>
1998 1997 1996
---- ---- ----
<S> <C> <C> <C> <C>
Net earnings (loss) As reported $ 374,237 41,943 (396,474)
Proforma $ 304,525 (42,649) (557,401)
Earnings (loss) per share As reported $ 0.53 .06 (.57)
Proforma $ 0.47 (.06) (.80)
Diluted earnings (loss) per share As reported $ 0.53 .06 (.57)
Proforma $ 0.47 (.06) (.79)
</TABLE>
The fair value of each option is estimated on the date of grant using the
Minimum Value pricing model with the following weighted average
assumptions used for grants in 1998 and 1997: no dividend yield, a risk
free interest rate of 4.7% and 5%, respectively, and an expected life of
10 years for both years. For disclosure purposes, the Company immediately
recognized the expense assuming that all awards will vest.
15
<PAGE>
GREATER ROME BANCSHARES, INC.
Notes to Consolidated Financial Statements, continued
(10) Defined Contribution Plan
The Company adopted a 401(k) profit sharing plan, effective January 1,
1997, covering substantially all employees subject to certain minimum age
and service requirements. Employer contributions to the plan are
determined annually by the Board of Directors. There were contributions
totalling $6,093 for the year ended December 31, 1998. No contributions to
the plan were made in previous years.
(11) Related Party Transactions
The Bank conducts transactions with directors and executive officers,
including companies in which they have beneficial interest, in the normal
course of business. It is the policy of the Bank that loan and deposit
transactions with directors and executive officers be made on
substantially the same terms as those prevailing at the time for
comparable loans and deposits to other persons.
During 1998, the Company made payments to a related party totalling
approximately $101,500 in connection with the construction of the East
Rome branch.
Additionally, the following table summarizes related party loan activity
during 1998:
Beginning balance $ 549,827
New loans 1,522,417
Repayments (870,694)
---------
Ending balance $ 1,201,550
=========
(12) Regulatory Matters
The Bank is subject to various regulatory capital requirements
administered by the federal banking agencies. Failure to meet minimum
requirements can initiate certain mandatory and possibly additional
discretionary actions by regulators that, if undertaken, could have a
direct material effect on the Bank's financial statements. Under certain
adequacy guidelines and the regulatory framework for prompt corrective
action, the Bank must meet specific capital guidelines that involve
quantitative measures of the Bank's assets, liabilities, and certain
off-balance-sheet items as calculated under regulatory accounting
practices. The Bank's 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 Bank to maintain minimum amounts and ratios of total and Tier
1 capital to risk-weighted assets and of Tier 1 capital to average assets.
Management believes, as of December 31, 1998, that the Bank meets all
capital adequacy requirements to which it is subject.
As of December 31, 1998, the most recent notification from the Federal
Deposit Insurance Corporation 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 1 risk-based, Tier 1 leverage ratios as set forth below.
There are no conditions or events since that notification that management
believes have changed the institution's category.
16
<PAGE>
GREATER ROME BANCSHARES, INC.
Notes to Consolidated Financial Statements, continued
(12) Regulatory Matters, continued
The Bank's actual capital amounts and ratios are also presented below.
Risk weighted assets are as of December 31. Average assets are for the
fourth quarter of the year. Consolidated amounts do not materially differ
from Bank only capital amounts and ratios:
<TABLE>
<CAPTION>
To Be Well
Capitalized Under
For Capital Prompt Corrective
Actual Adequacy Purposes Action Provisions
------ ----------------- -----------------
Amount Ratio Amount Ratio Amount Ratio
------ ----- ------ ----- ------ -----
<S> <C> <C> <C> <C> <C> <C>
As of December 31, 1998:
Total Capital
(to Risk Weighted Assets) $7,074,000 16% $ 3,607,000 8% $ 4,509,000 10%
Tier 1 Capital
(to Risk Weighted Assets) $ 6,510,000 14% $ 1,804,000 4% $ 2,706,000 6%
Tier 1 Capital
(to Average Assets) $ 6,510,000 11% $ 2,386,000 4% $ 2,983,000 5%
As of December 31, 1997:
Total Capital
(to Risk Weighted Assets) $ 6,456,000 20% $2,534,000 8% $ 3,167,000 10%
Tier 1 Capital
(to Risk Weighted Assets) $ 6,059,000 19% $1,267,000 4% $ 1,900,000 6%
Tier 1 Capital
(to Average Assets) $ 6,059,000 14% $1,691,000 4% $ 2,114,000 5%
</TABLE>
As a condition to the Bank's charter approval, the Georgia Department of
Banking and Finance has also required that the Bank maintain a ratio of
equity capital to adjusted assets of not less than 8% during the first
three years of the Bank's operation and that the Bank not declare
dividends to the Company until the Bank is cumulatively profitable.
(13) Commitments
The Bank is a party to financial instruments with off-balance-sheet risk
in the normal course of business to meet the financing needs of its
customers. These financial instruments include commitments to extend
credit and standby letters of credit. Those instruments involve, to
varying degrees, elements of credit and interest rate risk in excess of
the amount recognized on the consolidated balance sheets. The contractual
amounts of those instruments reflect the extent of involvement the Bank
has in particular classes of financial instruments.
The Bank's exposure to credit loss in the event of non-performance 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. The Bank uses the same credit policies in making
commitments and conditional obligations as it does for on-balance-sheet
instruments.
In most cases, the Bank requires collateral or other security to support
financial instruments with credit risk.
17
<PAGE>
GREATER ROME BANCSHARES, INC.
Notes to Consolidated Financial Statements, continued
(13) Commitments, continued
The following summarizes commitments as of December 31, 1998 and 1997.
<TABLE>
<CAPTION>
Approximate
Contract Amount
---------------
1998 1997
---- ----
<S> <C> <C>
Financial instruments whose contract amounts represent credit
risk:
Commitments to extend credit $ 4,192,000 3,949,000
Standby letters of credit $ 30,000 182,000
Credit card guarantees $ 129,650 80,500
</TABLE>
Commitments to extend credit are agreements to lend to a customer as long
as there is no violation of any condition established in the contract.
Commitments generally have fixed expiration dates or other termination
clauses and may require payment of a fee. Since many of the commitments
may expire without being drawn upon, the total commitment amounts do not
necessarily represent future cash requirements. The Bank evaluates each
customer's creditworthiness on a case by case basis. The amount of
collateral obtained, if deemed necessary by the Bank, upon extension of
credit is based on management's credit evaluation. Collateral held varies
but may include unimproved and improved real estate, certificates of
deposit or personal property.
Standby letters of credit are conditional commitments issued by the Bank
to guarantee the performance of a customer to a third party. The credit
risk involved in issuing letters of credit is essentially the same as that
involved in extending loan facilities to customers.
(14) Supplemental Financial Data
Components of other operating expenses in excess of 1% of total interest
and other income for the years ended December 31, 1998, 1997 and 1996 are
as follows:
<TABLE>
<CAPTION>
1998 1997 1996
---- ---- ----
<S> <C> <C> <C>
Professional fees $ 109,381 87,142 55,098
Advertising and marketing $ 72,122 50,156 64,861
Processing fees $ 150,500 96,508 71,417
Supplies $ 43,685 36,156 43,819
</TABLE>
18
<PAGE>
GREATER ROME BANCSHARES, INC.
Notes to Consolidated Financial Statements, continued
(15) Greater Rome Bancshares, Inc. (Parent Company Only) Financial Information
<TABLE>
<CAPTION>
Balance Sheets
December 31, 1998 and 1997
Assets
------
1998 1997
---- ----
<S> <C> <C>
Cash $ 3,555 5,863
Federal funds sold 70,000 70,000
Securities available for sale 201,156 200,844
Investment in Bank 6,514,416 6,077,548
Other assets 30,526 70,834
---------- ---------
$ 6,819,653 6,425,089
========= =========
Liabilities and Stockholders' Equity
------------------------------------
Other liabilities $ 7,700 2,064
Stockholders' equity 6,811,953 6,423,025
--------- ---------
$ 6,819,653 6,425,089
========= =========
</TABLE>
<TABLE>
<CAPTION>
Statements of Operations
For the Years Ended December 31, 1998, 1997 and 1996
1998 1997 1996
---- ---- ----
<S> <C> <C> <C>
Interest income $ 15,877 15,852 15,742
------- ------- -------
Other operating expenses 72,912 31,653 9,624
------- ------- -------
(Loss) earnings before income tax benefit and
undistributed earnings (loss) of Bank (57,035) (15,801) 6,118
Income tax (expense) benefit (5,155) 46,072 -
------- -------- --------
Earnings (losses) before equity in undistributed
earnings (losses) of Bank (62,190) 30,271 6,118
Equity in undistributed earnings (losses) of Bank 436,427 11,672 (402,592)
------- ------- --------
Net earnings (loss) $ 374,237 41,943 (396,474)
======= ======= ========
</TABLE>
19
<PAGE>
GREATER ROME BANCSHARES, INC.
Notes to Consolidated Financial Statements, continued
(15) Greater Rome Bancshares, Inc. (Parent Company Only) Financial Information,
continued
<TABLE>
<CAPTION>
Statements of Cash Flows
For the Years Ended December 31, 1998, 1997 and 1996
1998 1997 1996
---- ---- ----
<S> <C> <C> <C>
Cash flows from operating activities:
Net earnings (loss) $ 374,237 41,943 (396,474)
Adjustments to reconcile net earnings (loss) to net
cash used in operating activities:
Equity in undistributed earnings (losses) of Bank (436,427) (11,672) 402,591
Depreciation and amortization 20,542 7,490 7,448
Other 23,340 (48,292) (60,489)
--------- -------- ---------
Net cash used in operating activities (18,308) (10,531) (46,924)
--------- --------- ---------
Cash flows from investing activities, consisting of
purchase of securities available for sale - (200,188) -
--------- --------- ---------
Cash flows from financing activities, consisting of
proceeds from exercise of stock options 16,000 - -
--------- --------- ---------
Net change in cash and cash equivalents (2,308) (210,719) (46,924)
Cash and cash equivalents at beginning of period 75,863 286,582 333,506
--------- --------- ---------
Cash and cash equivalents at end of period $ 73,555 75,863 286,582
========= ========= ========
Noncash investing and financing activities:
Change in unrealized gain on securities available
for sale $ (1,309) 3,125 1,660
</TABLE>
20
<PAGE>
MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
The Company's Articles of Incorporation authorize it to issue up to 10,000,000
shares of Common Stock, par value $.01 per share, of which 701,600 shares have
been issued. The Company has not declared or paid any dividends. All shares of
the Company's Common Stock are entitled to share equally in dividends when, as
and if declared by the Company's board of directors. The Company does not plan
to declare any dividends in the immediate future. The source of funds for the
payment of dividends by the Company is the payment of dividends by the Bank to
the Company. A condition to the approval by the Georgia Department of Banking
and Finance (the "DBF") of the Bank's charter application and the Company's
application for approval to become a bank holding company is that the Bank will
not pay any dividends without the DBF's prior approval until the Bank has made a
cumulative profit.
There is currently no market for the Common Stock and there are no present plans
for the Company's Common Stock to be traded on any stock exchange or in the over
the counter market. As a result, investors who need or wish to dispose of all or
part of their Common Stock may be unable to do so except in private, directly
negotiated sales. The Company has approximately 680 shareholders.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
FORWARD LOOKING STATEMENTS
Certain statements contained in this Annual Report which are not statements of
historical fact constitute forward-looking statements. 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) Year 2000
issues and 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.
21
<PAGE>
FINANCIAL CONDITION
As of December 31, 1998, the Company had concluded almost three years of banking
operations with $61.4 million in total assets, up $16.6 million over year-end
1997. Total deposits increased $15.3 million over year-end 1997 to $48.9
million. Net loans outstanding increased $11.6 million over year-end 1997 to
$41.4 million. The Bank's loan-to-asset ratio at December 31, 1998 was 68.7%,
compared to 68.1% at year-end 1997. All of the Bank's growth in deposits and
loans has come from the local market. Management attributes this growth to a
relatively stable local economy combined with competitive banking services
delivered by a locally owned and operated community bank. The Bank has
established itself as one of only two locally owned and operated community banks
in its market, which has been dominated by regional banks and fragmented by
credit unions over the past several years.
In the second quarter of 1998, the Bank finished construction of a branch
banking facility 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
opened for business in the first week of June 1998. It is a full service branch
office with three drive-up banking lanes and has a drive-up ATM.
The East Rome site was acquired for $211 thousand in the first quarter of 1997.
The cost of the facility, including site work, furniture, fixtures and equipment
was $523 thousand. 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. Deposit growth at the
East Rome Office was $4.2 million through December 31, 1998, which was ahead of
budget.
The banking industry continues to experience 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 competitive with 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 less available and even 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 provides greater funding
flexibility, the Bank continues to place primary funding emphasis on local
deposit growth. As of December 31, 1998, the Bank had no brokered deposits.
Capital
At December 31, 1998, the Bank's capital position was in excess of FDIC minimum
guidelines to qualify as "well capitalized". Based on the level of the Bank's
risk weighted assets at quarter end, the Bank had $2.5 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.
Assuming the Bank continues to grow with a risk-weighted asset mix consistent
with its historical experience, and that it has reasonable earnings and
maintains asset quality, the Bank's capital will approach the minimum limits for
well-capitalized when its assets are approximately $100 million. While there are
no assurances that the Bank will continue to experience rapid growth, management
must anticipate such growth and make plans for sufficient capital to support it.
Management and the Board are currently developing capital growth strategies.
22
<PAGE>
Liquidity
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 December 31, 1998, the Bank had unfunded loan
commitments, primarily on commercial lines of credit, totaling $4.4 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.
Management considers the Bank's internal and external liquidity resources to be
adequate to handle expected growth and normal cash flow demands from existing
deposits and loans. For 1998, deposit growth exceeded loan growth by $3.7
million. Securities held to maturity remained at $6.3 million, and the
securities available for sale increased $2.6 million to $4.8 million. Investment
securities were purchased in order to improve the yield on the Bank's internal
liquidity resources. The available for sale classification was increased in
order to enhance the financial flexibility of the Bank's investment portfolio.
At December 31, 1998, the weighted average life of the Bank's security portfolio
was 3.5 years with a weighted average tax equivalent yield of 5.95%. All of the
Bank's investment securities, except for $1.4 million in municipal bonds, are
available as collateral for borrowings under either repurchase agreements with
its correspondent banks or advances from the Federal Home Loan Bank ("FHLB").
At December 31, 1998, the Bank had $5.0 million in advances from the FHLB of
Atlanta. These advances were obtained to improve the Bank's cost of funds and to
improve interest rate risk exposure. They are secured by the Bank's investment
in first mortgage real estate loans and FHLB stock.
The FHLB has call options on $4.0 million of these advances. If call options are
exercised on any of the advances, they will be converted into a three-month
LIBOR-based floating rate advance at three-month LIBOR flat. The most likely
reason for the advances to be called would be if interest rates rose
sufficiently to present better investment alternatives for the FHLB. In the
event of a call, management will evaluate its funding alternatives, given its
interest rate risk profile at the time.
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 year end the funds available for liquidity purposes
consisted of $9.8 million in securities (eligible for sale under repurchase
agreements), plus Federal funds sold and other short-term bank deposits of $3.3
million, for a total of $13.1 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 $4.5 million, $4.0 million of which were
available at year end. The correspondent banks may revoke these lines at any
time.
23
<PAGE>
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 $6.3 million in eligible
residential first mortgage loans that have been assigned to the FHLB. These
loans provide approximately $5.1 million in lendable value. The Bank also has
$7.8 million in commercial mortgage loans that may qualify as collateral for
advances with the FHLB.
RESULTS OF OPERATIONS
The Company had net earnings of $374,237 ($0.53 per share) for 1998 as compared
to net earnings of $41,943 ($0.06 per share) for 1997.
Net Interest Income
Net interest income increased $723,228 in 1998 to $2,302,130. This was primarily
due to the increase in average earning assets from $32.2 million for 1997 to
$50.0 million for 1998. The net yield on average earning assets, before the
provision for loan losses, was 4.61% for 1998. This compares to 4.91% for 1997.
The lower yield for 1998 was primarily due to the increase in funding costs
attributable to the increase in interest bearing deposits as a percent of
earning assets. In 1998 average interest bearing funding was 83% of average
earning assets. In 1997 average interest bearing funding was 78% of average
earning assets.
Summary of Loan Loss Experience
<TABLE>
<CAPTION>
Allowance for possible loan losses 1998 1997
---------------------------------- ---- ----
<S> <C> <C>
Balance at the beginning of the period $ 480,544 133,342
Charge-offs:
Commercial 107,607 -
Real estate - mortgage 2,924 -
Consumer loans 77,925 87,254
---------------- ---------------
Total 188,456 87,254
---------------- ---------------
Recoveries:
Consumer loans 21,457 762
---------------- ---------------
Total 21,457 762
---------------- ---------------
Net charge-offs: 166,998 86,492
Additions charged to operations 255,640 433,694
---------------- ---------------
Balance at end of period $ 569,185 480,544
================ ===============
Average loans outstanding $ 36,596,138 22,517,410
Ratio of net charge-offs to average loans 0.46% 0.38%
</TABLE>
The provision for loan losses was $255,640 for 1998, down 178,054 from 1997. In
1997, the $433,694 provision expense was primarily determined by reference to a
target ratio. The ratio of the loss reserve to total loans was targeted to be
1.50% by the end of 1997, when the Bank would be almost two years old.
Management adopted this methodology, by reference to peer information, in order
to build the loss reserve for the Bank's new loan portfolio. More traditional
methods of determining loan loss provisions are based on historical loan
portfolio performance, including analysis of historical charge-offs and
recoveries, detailed loan reviews and portfolio
24
<PAGE>
reviews, loan growth and changing economic conditions. Since the Bank had only
limited history, the target ratio method was determined to be more appropriate
for the first two years.
In the fourth quarter of 1998, management evaluated the history of the Bank's
loan charge-offs and reviewed the credit risk in the Bank's loan portfolio.
Furthermore, an independent credit review was conducted in early January 1999,
to validate the credit risk classifications as of December 31, 1998. Based on
the results of these reviews, management and the board modified the loan loss
reserve policy to eliminate the target balance ratio method. Under the revised
policy, management and the board will evaluate the adequacy of the loan loss
reserve on a quarterly basis. This evaluation considers historical loan losses
by risk grade under each major category of loans, i.e., commercial, real estate
and consumer. It also considers current portfolio risk, industry concentrations
and the uncertainty associated with changing economic conditions.
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 for
compliance with underwriting policy 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.
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 year end allowance
adequate to cover potential losses in the loan portfolio.
Allocation of the Allowance for Loan Losses
- -------------------------------------------
Under the Bank's credit risk Loan Grading Policy, each loan in the portfolio is
assigned one of the following risk grades:
Grade Short Definition
----- ----------------
1 Total absence of credit risk
2 Minimal credit risk
3 Average credit risk
4 Acceptable, but more than average credit risk
5 Greater than normal credit risk
6 Excessive credit risk
7 Potential loss
8 Uncollectable
The policy provides more explicit guidance on the application of risk grades. On
a monthly basis, loan balances are aggregated for each grade and a loan loss
allowance is calculated using factors that represent management's estimate of
the allowance applicable to each grade. These factors are compared to historical
charge-offs for reasonableness and adjusted, as necessary.
25
<PAGE>
At December 31, 1998 the allowance for loan losses was allocated by grade as
follows:
<TABLE>
<CAPTION>
Number of Loan Calculated
Grade Loans Balance Factor Reserve
----- ----- ------- ------ -------
<S> <C> <C> <C> <C>
1 5 146,778 0.00% -
2 16 223,661 0.10% 224
3 1,173 29,489,735 0.33% 97,316
4 672 11,322,704 0.75% 84,920
5 34 636,840 5.00% 31,842
6 13 157,112 15.00% 23,567
7 - - 50.00% -
8 - - 100.00% -
------ ---------- -------
Total 1,913 41,796,830 237,869
===== ==========
Unallocated 331,316
-------
Total loss reserve 569,185
=======
</TABLE>
At December 31, 1997 the allowance for loan losses was allocated by grade as
follows:
<TABLE>
<CAPTION>
Number of Loan Calculated
Grade Loans Balance Factor Reserve
----- ----- ------- ------ -------
<S> <C> <C> <C> <C>
1 2 5,640 0.00% -
2 8 163,052 0.10% 163
3 771 20,833,144 0.33% 68,749
4 523 9,210,791 0.75% 69,081
5 6 53,250 5.00% 2,663
6 4 23,398 15.00% 2,340
7 - - 50.00% -
8 - - 100.00% -
------ ---------- -------
Total 1,314 30,289,275 142,996
===== ==========
Unallocated 337,548
-------
Total loss reserve 480,544
=======
</TABLE>
The approximate anticipated amount of charge-offs by risk grade for 1999 is:
<TABLE>
<CAPTION>
Projected
Grade Charge-offs
----- -----------
<S> <C>
1 $ -
2 107
3 46,639
4 40,699
5 15,260
6 11,295
7 -
8 -
--------
Total $ 114,000
========
</TABLE>
26
<PAGE>
Risk Elements
<TABLE>
<CAPTION>
1998 1997
---- ----
<S> <C> <C>
Nonaccrual, Past Due and Restructured Loans
- -------------------------------------------
Nonaccrual loans $ 150,599 30,805
Accruing loans contractually past due 90 days or more $ - -
Troubled debt restructurings $ - -
</TABLE>
The amount of interest that would have been included in income on the above
non-accrual loans if they had been current in accordance with their original
terms was $9,434 in 1998 and $1,127 in 1997. The amount of interest that was
included in interest income on the above loans was $8,572 in 1998 and $1,994 in
1997.
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 as to principal or
interest is automatically placed on non-accrual, unless corrective action is
certain and imminent.
Potential Problem Loans
- -----------------------
At year end, management had identified loans totaling $106,000 that were not
past due 90 days or more, but in which management has serious doubts as to the
ability of the borrower to comply with the present loan repayment terms.
Potential losses are not currently expected on these loans given their
collateral positions and the ability of the borrowers to continue servicing the
debt, albeit on more favorable terms than originally agreed. Of these loans,
$96,806 was restructured as troubled debt in the first quarter of 1999.
Non-interest Income and Expenses
Non-interest income increased $132,423 (83%) in 1998 to $291,287 from 1997.
Service charges on deposit accounts increased $50,338 (52%) to $147,718.
Mortgage origination fees were $103,229 in 1998 and $23,374 in 1997.
Service charges on deposit accounts are evaluated annually against service
charges from other banks in the local market and against the Bank's own cost
structure in providing the deposit services. This income continues to grow with
the growth in the Bank's demand deposit account base.
Mortgage fee income was greater in 1998 due to a favorable interest rate
environment and because the secondary market mortgage program was fully
operational for all of 1998 compared to half of 1997. The mortgage origination
fee income is less stable than the other service income. It will tend to
diminish with rising interest rates and can also be reduced by competition from
mortgage sources that are not local.
Non-interest expenses increased $355,922 or 24% to $1,866,334 for 1998 over
1997. Average earning assets for 1998 increased $17.8 million or 55% to $50.0
million over 1997. The Bank's operating efficiencies continue to improve.
Salaries and benefits for 1998 increased $119,571 or 14% to $953,984 over 1997.
This is due primarily to the growth in the number of full-time-equivalent
employees from 23 in the fourth quarter of 1997 to 30 in the fourth quarter of
1998. This increase is primarily due to the addition of the East Rome office.
Occupancy costs for 1998 increased by $52,398 or 21% to $308,027 over 1997.
This increase is primarily due to the addition of the East Rome office.
27
<PAGE>
Other operating expenses increased in 1998 by $183,953 or 44% to $604,323. The
more significant items of other operating expenses were: 1) account processing
expenses, which increased 55% to $150,500; 2) advertising and marketing
expenses, which increased 44% to $72,122; 3) professional fees, which increased
26% to $109,381; and 4) supplies, which increased 21% to $43,685. Most of these
increases are due to the higher volume of business associated with the Bank's
growth. 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. A drive-up ATM was installed at the East Rome office in the third
quarter of 1998.
Income before income taxes improved over 1997 by $677,783 to $471,443 in 1998.
The Company's earnings became fully taxable for federal income tax purposes in
1998, as a result of fully utilizing its federal net operating loss during the
year. In 1997, the Company recognized an income tax benefit of $248,283
attributable to its deferred tax assets.
Interest Rate Sensitivity
Improvement in the Company's earnings 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 uses a third party interest rate risk analysis product, which
quantifies the amount of risk to the net interest margin and to the current
market value of equity. It produces a composite analysis of several approaches
including GAP analysis, rate shocks in 100 point increments, up and down 400
basis points and simulation modeling.
As with any model, many assumptions have to be made about the repricing
attributes of the Bank's assets and liabilities. Where industry experience seems
appropriate, such assumptions are used. Given the extremely competitive market
for the public's investing and savings dollars, the "basis risk", or lack of
correlation between changes in the yields on U.S. Treasury securities and
customer deposit rates, seems to be getting greater. In simpler terms, if the
one-year T-bill falls in yield by 100 basis points, it is unlikely that one-year
time deposits will roll down by 100 basis points at maturity. Management,
throughout the banking industry, is continually challenged by the changing
nature of financial services and the investing public's quest for greater
returns. Such uncertainty increases the uncertainty about the conclusiveness of
the interest rate risk models.
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 an immediate
and simultaneous change in interest rates, either up or down by 200 basis
points, on the Bank's net interest income and on its economic value of equity
was calculated to be within policy limits. The net interest income policy limit
specifies that the amount of adverse impact to net interest income due to
interest rate risk is limited to no more than 10% of projected net interest
income for the following 12 months, assuming a 200 basis point change in
interest rates. The economic value of equity policy limit specifies that the
adverse effect of a similar rate change on the economic value of equity is
limited to no more than 25% of the Bank's current capital.
YEAR 2000 PROCESSING RISK
The Board and management consider the Year 2000 ("Y2K") computer processing risk
to be a serious risk for all businesses that depend on computer hardware and
software to perform the critical functions of their businesses. Year 2000
computer processing risk is defined as the risk associated with computer
hardware or software that fails
28
<PAGE>
to process data or operate in the manner for which it was designed as a result
of century date changes. This risk encompasses hardware and software owned,
leased, licensed or otherwise used (1) by the Company or (2) by vendors upon
which the Company depends for its mission critical functions or (3) by
customers with which the Company has a material relationship. In the third
quarter of 1997, the Board established a Y2K Policy and Y2K Compliance
Committee to address this risk. The Committee is headed by senior management,
meets monthly, and reports monthly to the full Board.
The Company's State of Readiness
The Company and Bank do not use proprietary computer hardware or software. (The
Company has no hardware or software dependencies other than through the Bank;
hence, all further corporate references in this section will be to the Bank.)
The Bank depends upon outsourced data processing services, third party software
and PC hardware technology. Management has identified all mission critical
hardware and software applications and is following the general guidelines
promulgated by the Federal Financial Institutions Examination Council ("FFIEC")
to assure that such applications will be renovated and tested before prescribed
deadlines or contingency plans will be in the process of implementation.
The Bank has replaced all non-compliant hardware and software associated with
the basic operation of its local area networks, wide area network and
workstations and has completed testing and documentation of compliance for these
systems. Additionally, the Bank's phone system has been tested and documented to
be Y2K ready.
Various software is licensed to the Bank and maintained at its offices. It is
used for new account platforms, teller transactions, network administration,
office administration, ACH settlement reporting, cash letter settlement
reporting, wire transfers, accounts receivable financing, accounts payable and
telephone banking. Ten vendors provide this software and periodic updates. To
date, all versions of this software currently used at the Bank have been
reported by the vendors as Y2K compliant. All except for the new loan platform
software and the accounts receivable financing software have been validated
through tests performed by the Bank, or performed by other (proxy test) banks
with operating environments similar to the Bank. The new loan platform software
and the accounts receivable financing software are new releases that have been
recently installed. Testing on these is scheduled for completion by the end of
April 1999. Other than these two applications, which are warranted by the
vendors as compliant, the Bank has completed testing and documenting compliance
on its licensed software maintained at the Bank's offices.
The Bank's core processing, which maintains all customer record keeping, general
ledger accounting 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 all 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, the Bank expects Fiserv to satisfy all regulatory requirements
imposed upon bank data processors.
The Bank's Fiserv service center has reported that it has concluded its
renovations and has implemented Y2K compliant software. Proxy tests, as defined
by the FFIEC, have been concluded by representative client banks, and Fiserv
delivered independently reviewed reports to the Bank in the fourth quarter of
1998. These reports were used to limit the scope, extent and cost of integrated
testing expected to be performed by the Bank. Members of the Y2K Committee
attended training conducted by Fiserv for the purpose of designing integrated
test plans and test scripts with Fiserv. Integrated tests were conducted in the
fourth quarter of 1998 and substantially completed by December 31, 1998, with
all issues satisfactorily resolved.
At December 31, 1998, only one Fiserv application in current use remained to be
tested and documented, and that was the item processing interface between Fiserv
Atlanta, the Bank's item capture center, and Fiserv Bowling
29
<PAGE>
Green, the Bank's data service center. This interface was tested in March 1999
and the results are currently being evaluated and documented. At this stage of
the evaluation, the test results appear to be without exception.
In the second quarter of 1999, the Bank will be converting its ATM and debit
card processor to Fiserv EFT. Fiserv EFT has reported that its software and
network interfaces will have testing completed by June 30, 1999. Its most recent
status report provides no reason to expect that such dates will not be
satisfactorily met.
Fiserv Bowling Green has reported that it will keep the test environment
available throughout 1999 to allow clients to refine test scripts and
trouble-shoot product interfaces.
Based on the results of tests performed to date by the Bank and representations
from the servicing vendors, substantially all of the Bank's mission critical
hardware and software applications are Y2K ready. Except for the ATM and debit
card processing, the Bank expects to conclude its integrated testing and
compliance documentation in April 1999. The ATM and debit card processing tests
are scheduled to be completed by the end of the second quarter of 1999.
Management has completed its assessment 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 has been identified, management is
requiring those customers to keep the Bank 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 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.
Other third parties with which the Bank has material relationships that may be
adversely impacted by Y2K risks include its correspondent banks and the utility
companies.
The Bank's primary correspondent bank provides numerous services, including cash
letter settlements, federal funds sold and purchase lines, securities
safekeeping services, securities settlements, wire settlements, ACH settlements,
and ATM/debit card settlements. The Federal Home Loan Bank of Atlanta provides
overnight investments and secured term financing. Two other correspondent banks
provide federal funds sold and purchase lines. Written communications from these
banks indicate that they have substantially completed the testing and
implementation of all mission critical systems and their efforts in early 1999
appear to be shifting focus toward customer awareness and contingency planning.
The Bank's electric, gas, phone, water and sewer utility companies have provided
limited information on their Y2K efforts. The electric, gas and phone vendors
have indicated that they have assessed their systems and are implementing plans
for renovation and testing. The electric and phone companies have indicated
target dates for substantial completion of their plans by June 30, 1999. Their
disclosures recognize the significant interdependencies on business
relationships over which they have no direct control.
The Costs to Address the Company's Year 2000 Issues
The resource commitments and costs of implementing Y2K solutions on mission
critical systems are currently estimated to be approximately $118,000.
Approximately $94,000 of this was incurred in 1998, and the balance will be
incurred in 1999. These costs include the cost of an independent consultant, who
has been engaged to review the Bank's test plans, test results and contingency
plans. At this time, the costs of implementing Y2K solutions on mission critical
hardware and software are not expected to have a material impact on the results
of operations.
30
<PAGE>
The Risks of the Company's Year 2000 Issues
There can be no assurances that all hardware and software that the Bank will
use, or that the Bank's customers, other vendors and utility companies will use,
will be Year 2000 compliant. The Bank's customers, other vendors and utility
companies may be negatively affected by the Year 2000 issue, and any
difficulties incurred by them in solving Year 2000 issues could negatively
affect their ability to perform their agreements with the Bank.
Currently, the most reasonably likely worst case Year 2000 scenario for the Bank
appears to be one in which electrical service or phone service were disrupted to
the community for an extended period. As noted above, the management of the risk
associated with the Bank's computer hardware and software, its commercial
customer risk and its correspondent bank risk is progressing as planned. The
most likely source of problems currently appears to be with the utility
companies, whose communications offer some limited assurances but are very broad
and categorical. Electrical service is the most critical of the utilities. While
the Bank cannot operate its systems without a continuous supply of electricity,
short-term disruptions, such as occur with electrical storms, can be managed in
the ordinary course of business.
Even if the Bank does not incur significant direct costs in connection with
responding to the Year 2000 issue, there can be no assurance that the failure or
delay of the Bank's customers, vendors or other third parties in addressing the
Year 2000 issue or the costs involved in such process will not have a material
adverse effect on the Bank's business, financial condition and results of
operations.
The Company's Contingency Plans
The Board of Directors has approved a Disaster Recovery Policy and a Y2K
Contingency Plan (collectively, the "Plans"). The Disaster Recovery Policy is
designed to achieve a level of emergency preparedness that is broad in its
scope, encompassing the risk of loss or business disruption resulting from
unexpected events ranging from equipment failure to natural disasters. It is
designed to: enable management continuity, designate alternative facilities,
provide for alternative administrative, communication and data processing
support, establish policies for data backup, record retention and retrieval,
reinforce security policies, require reasonable levels of insurance, reinforce
financial risk management policies, and establish organizational responsibility.
The Y2K Contingency Plan is limited in scope to the Bank's computer hardware and
software alternatives in the event that the Y2K efforts do not meet time-line
expectations. Management believes that the Plans provide adequate guidance for
most emergency circumstances that might be reasonably expected for the Bank's
geographic location.
In an effort to more specifically address contingency planning related to
possible Y2K disruptions, management is developing a Business Resumption
Contingency Plan ("BRCP") under the framework of the Plans. The BCRP will
address the evaluation of most reasonably likely worst case scenarios and the
action plans required to limit the adverse consequences on the Bank's services.
The BRCP will also address liquidity contingency planning. This will include use
of the Federal Reserve discount window, the Federal Home Loan Bank's Y2K advance
programs, and cash planning with the Bank's armored courier service. Validation
plans will be included to test for effectiveness and viability. The Bank's
independent Y2K consultant will review the BRCP. The BRCP is scheduled for
substantial completion in June 1999.
31
<PAGE>
<TABLE>
<CAPTION>
DIRECTORS OF DIRECTORS OF
GREATER ROME BANCSHARES, INC. GREATER ROME BANK
----------------------------- -----------------
<S> <C>
Thomas D. Caldwell, III Thomas D. Caldwell, III
Chairman of the Board Chairman of the Board
President and Chief Executive Officer President and Chief Executive Officer
Bradford Lee Riddle Bradford Lee Riddle
Vice Chairman of the Board Vice Chairman of the Board
President and Director of Riddle, Inc. President and Director of Riddle, Inc.
(Office Supplies) (Office Supplies)
Robert L. Berry Robert L. Berry
Corporate Secretary Partner of Brinson, Askew, Berry, Seigler,
Partner of Brinson, Askew, Berry, Seigler, Richardson & Davis
Richardson & Davis (attorneys)
(attorneys)
Frank A. Brown, Jr. Frank A. Brown, Jr.
Chairman of the Board and President of Chairman of the Board and President of
Cooper, Brown & Currie, Inc. Cooper, Brown & Currie, Inc.
(insurance agency) (insurance agency)
Gene G. Davidson, M.D. Gene G. Davidson, M.D.
President of Northwest Georgia Internal Medicine President of Northwest Georgia Internal Medicine
Associates, P.C. Associates, P.C.
Henry Haskell Perry Henry Haskell Perry
CEO of North Georgia Equipment Co. CEO of North Georgia Equipment Co.
(Heating and air contractor) (Heating and air contractor)
M. Wayne Robinson M. Wayne Robinson
President of M. Wayne Robinson Builder Developer, Inc. President of M. Wayne Robinson Builder Developer, Inc.
Dale G. Smith Dale G. Smith
Accountant, Whittington, McLemore, Land, Accountant, Whittington, McLemore, Land,
Davis, White and Givens, P.C. Davis, White and Givens, P.C.
(public accounting) (public accounting)
Paul E. Smith Paul E. Smith
Representative, District 12, Georgia Legislature Representative, District 12, Georgia Legislature
W. Fred Talley W. Fred Talley
President, Fred Talley's Parkview Chapel Funeral Home President, Fred Talley's Parkview Chapel Funeral Home
Martha B. Walstad Martha B. Walstad
Partner, Lake Toccoa Development Company Partner, Lake Toccoa Development Company
(real estate development and management) (real estate development and management)
</TABLE>
32
<PAGE>
<TABLE>
<CAPTION>
EXECUTIVE OFFICERS OF EXECUTIVE OFFICERS OF
GREATER ROME BANCSHARES, INC. GREATER ROME BANK
----------------------------- -----------------
<S> <C>
Thomas D. Caldwell, III Thomas D. Caldwell, III
Chairman of the Board Chairman of the Board
President and Chief Executive Officer President and Chief Executive Officer
Bradford Lee Riddle Bradford Lee Riddle
Vice Chairman of the Board Vice Chairman of the Board
President and Director of Riddle, Inc. President and Director of Riddle, Inc.
(Office Supplies) (Office Supplies)
Robert L. Berry E. Grey Winstead, III
Corporate Secretary Senior Vice President
Partner of Brinson, Askew, Berry, Seigler, Chief Financial Officer
Richardson & Davis Corporate Secretary
(attorneys)
E. Grey Winstead, III John W. Branam
Chief Financial Officer and Senior Vice President
Principal Accounting Officer Senior Lending Executive
</TABLE>
Shareholders may obtain, without charge, a copy of Greater Rome Bancshares,
Inc. 1998 Annual Report to the Securities and Exchange Commission on Form
10-KSB. Written requests should be addressed to: Robert L. Berry, Corporate
Secretary, Greater Rome Bancshares, Inc., P.O. Box 5271, Rome, Georgia
30162-5271.
33
<TABLE> <S> <C>
<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> 1,240,284
<INT-BEARING-DEPOSITS> 1,137,526
<FED-FUNDS-SOLD> 2,132,000
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 4,834,617
<INVESTMENTS-CARRYING> 6,307,534
<INVESTMENTS-MARKET> 0
<LOANS> 41,976,830
<ALLOWANCE> 569,185
<TOTAL-ASSETS> 61,441,842
<DEPOSITS> 48,857,960
<SHORT-TERM> 500,000
<LIABILITIES-OTHER> 271,929
<LONG-TERM> 5,000,000
0
0
<COMMON> 7,016
<OTHER-SE> 6,804,953
<TOTAL-LIABILITIES-AND-EQUITY> 61,441,842
<INTEREST-LOAN> 3,659,279
<INTEREST-INVEST> 637,964
<INTEREST-OTHER> 152,121
<INTEREST-TOTAL> 4,449,364
<INTEREST-DEPOSIT> 1,899,612
<INTEREST-EXPENSE> 2,147,234
<INTEREST-INCOME-NET> 2,302,130
<LOAN-LOSSES> 255,640
<SECURITIES-GAINS> 0
<EXPENSE-OTHER> 1,866,334
<INCOME-PRETAX> 471,443
<INCOME-PRE-EXTRAORDINARY> 471,443
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 374,237
<EPS-PRIMARY> .53
<EPS-DILUTED> .53
<YIELD-ACTUAL> 4.61
<LOANS-NON> 150,599
<LOANS-PAST> 0
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 106,000
<ALLOWANCE-OPEN> 480,544
<CHARGE-OFFS> 188,456
<RECOVERIES> 21,457
<ALLOWANCE-CLOSE> 569,185
<ALLOWANCE-DOMESTIC> 0
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 569,185
</TABLE>
