<PAGE>1
U.S. SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-KSB
Annual Report Pursuant to Section 13 or 15(d) of
the Securities Exchange Act of 1934
For the fiscal year Commission file number
ended December 31, 1998 0-29732
Georgia Bancshares, Inc.
(Name of small business issuer in its charter)
Georgia 58-2176047
(State of Incorporation) (I.R.S. Employer
Identification No.)
3333 Lawrenceville Highway
Tucker, Georgia 30084
(Address of principal executive offices) (Zip Code)
(770) 491-3333
(Issuer's telephone number)
Securities Registered pursuant to Section 12(b) of the Act: None
Securities Registered pursuant to Section 12(g) of the Act: Common stock, par
value $1.60
Check whether the issuer (1) filed all reports required to be filed by Section
13 or 15(d) of the Securities Exchange Act of 1934 during the past 12 months (or
for such shorter period that the Registrant was required to file such reports),
and (2) has been subject to such filing requirements for the past 90 days. Yes X
No
Check if disclosure of delinquent filers in response to Item 405 of Regulation
S-B is not contained in this form, and no disclosure will be contained, to the
best of Registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-KSB or any amendment to
this Form 10-KSB. [ ]
Issuer's revenues for its most recent fiscal year were $6,809,241.
The aggregate market value of the voting stock held by non-affiliates of the
Registrant at March 27, 1999 was $ 14,833,663 based on the latest quotation on
Nasdaq Smallcap market of $13.00 per share.
The number of shares outstanding of issuer's class of common stock at March 27,
1999 was 1,461,632 shares of common stock.
Page 1 of 80
Exhibit Index on Page 63
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TABLE OF CONTENTS
Page
PART I
ITEM 1. DESCRIPTION OF BUSINESS.....................................3
ITEM 2. DESCRIPTION OF PROPERTIES..................................13
ITEM 3. LEGAL PROCEEDINGS..........................................13
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF
SECURITY HOLDERS...........................................14
PART II
ITEM 5. MARKET FOR COMMON EQUITY AND
RELATED STOCKHOLDER MATTERS................................14
ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS
OR PLAN OF OPERATION.......................................15
ITEM 7. FINANCIAL STATEMENTS ......................................33
ITEM 8. CHANGES IN AND DISAGREEMENTS WITH
ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.......................................55
PART III
ITEM 9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND
CONTROL PERSONS; COMPLIANCE WITH SECTION 16(a)
OF THE EXCHANGE ACT........................................55
ITEM 10. EXECUTIVE COMPENSATION.....................................57
ITEM 11. SECURITY OWNERSHIP OF CERTAIN
BENEFICIAL OWNERS AND MANAGEMENT...........................60
ITEM 12. CERTAIN RELATIONSHIPS AND
RELATED TRANSACTIONS.......................................61
ITEM 13. EXHIBITS AND REPORTS ON FORM 8-K...........................62
SIGNATURES...................................................................63
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PART I
CAUTIONARY NOTICE REGARDING FORWARD LOOKING STATEMENTS
Certain of the matters discussed under the caption "Management's Discussion and
Analysis of Financial Condition and Results of Operations" and elsewhere in this
Annual Report on Form 10-K may constitute "forward-looking statements" within
the meaning of the Private Securities Litigation Reform Act and as such may
involve known and unknown risk, uncertainties and other factors which may cause
the actual results, performance or achievements of Georgia Bancshares, Inc. (the
"Company") to be materially different from future results described in such
forward-looking statements. Actual results may differ materially from the
results anticipated in these forward looking statements due to a variety of
factors, including, without limitation: the effects of future economic
conditions; governmental monetary and fiscal policies, as well as legislative
and regulatory changes; the risks of changes in interest rates on the level and
composition of deposits, loan demand, and the values of loan collateral, and
interest rate risks; the effects of competition from other commercial banks,
thrifts, consumer finance companies, and other financial institutions operating
in the Company's market area and elsewhere. All forward looking statements
attributable to the Company are expressly qualified in their entirety by these
Cautionary Statements. The Company disclaims any intent or obligation to update
these forward-looking statements, whether as a result of new information, future
events or otherwise.
ITEM 1. DESCRIPTION OF BUSINESS
(a) Business Development
Georgia Bancshares, Inc. (the "Company"), Tucker, Georgia, was incorporated as a
Georgia business corporation on February 15, 1995, for the purpose of becoming a
bank holding company by acquiring all of the common stock of DeKalb State Bank,
Tucker, Georgia. On September 16, 1996, the name of DeKalb State Bank was
changed to Community Bank of Georgia (the "Bank"). The Company became a bank
holding company within the meaning of the federal Bank Holding Company Act (the
"Act") and the Georgia bank holding company law (the "Georgia Act") upon the
acquisition of all of the Common Stock of the Bank on August 5, 1995.
The Bank currently is the sole operating subsidiary of the Company. The Bank was
incorporated under the laws of the State of Georgia on May 4, 1989 for the
purpose of conducting the business of commercial banking. The Bank commenced
commercial banking operations on August 5, 1991. The deposits at the Bank are
insured by the Federal Deposit Insurance Corporation (the "FDIC").
On December 30, 1998, the Company entered into a merger agreement with First
Sterling Banks, Inc. ("First Sterling") whereby First Sterling would acquire all
issued and outstanding common stock of the Company for shares of First Sterling
common stock. See "Other Events" included elsewhere in Item 1.
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(b) Business of Issuer
The Bank conducts a general commercial banking business in its primary service
area, emphasizing the banking needs of individuals and small- to medium-sized
businesses. The Company and the Bank conduct business from the main office of
the Bank located at 3333 Lawrenceville Highway, Tucker, Georgia 30084. The Bank
also conducts business from its branch located at 4794 Highway 29, Lilburn,
Georgia 30047.
The Company is authorized to engage in any activity permitted by law to a
corporation, subject to applicable Federal regulatory restrictions on the
activities of bank holding companies. The holding company structure provides the
Company with greater flexibility than the Bank. While the Company has no present
plans to engage actively in any nonbanking business activities.
The principal business of the Bank is to accept deposits from the public and to
make loans and other investments in and around DeKalb and Gwinnett Counties,
Georgia, its primary service area.
The Bank offers a full range of deposit services that are typically available
from financial institutions, including NOW accounts, demand, savings and other
time deposits. In addition, retirement accounts such as Individual Retirement
Accounts are available. All deposit accounts are insured by the FDIC up to the
maximum amount currently permitted by law.
The Bank offers a full range of commercial and personal loans. The Bank makes
loans to individuals for purposes such as home mortgage financing, personal
vehicles and various consumer purchases, and other personal and family needs.
The Bank makes commercial loans to businesses primarily in the primary service
area for purposes such as providing equipment and machinery purchases,
commercial real estate purchases and working capital.
The Bank's lending philosophy is to make loans, taking into consideration the
safety of the Bank's depositors' funds, the preservation of the Bank's
liquidity, the interest of the Company's shareholders, and the welfare of the
community. Interest income from the Bank's lending operations is the principal
component of the Bank's income, so therefore prudent lending is essential for
the prosperity of the Bank.
The Bank's loan portfolio at December 31, 1998 contains approximately 14.7% real
estate construction loans, 57.2% real estate mortgage loans, 21.8% commercial
loans and 6.3% consumer loans. The Bank's loan to deposit ratio at December 31,
1998 was approximately 75.4%.
The principal sources of income for the Bank are interest and fees collected on
loans, interest on investment securities and service charges on deposit
accounts. The principal expenses of the Bank are interest paid on deposits,
employee compensation, office expenses, and other overhead expenses.
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The Bank's business plan for its initial years of operation relies principally
upon local advertising and promotional activity and upon personal contacts by
its directors, officers and shareholders to attract business and to acquaint
potential customers with the Bank's personalized services. The Bank intends to
emphasize a high degree of personalized client service in order to be able to
provide for each customer's banking needs. The Bank's marketing approach will
emphasize the advantages of dealing with an independent, locally-owned and
managed state chartered bank to meet the particular needs of individuals,
professionals and small-to-medium-size businesses in the community. All banking
services will be continually evaluated with regard to their profitability and
efforts will be made to modify the Bank's business plan if the plan does not
prove successful. The Bank does not currently offer trust or permissible
securities services.
Supervision and Regulation
Regulation of the Bank. The operations of the Bank are subject to state and
federal statutes applicable to state chartered banks whose deposits are insured
by the FDIC and the regulations of the DBF and the FDIC. Such statutes and
regulations relate to, among other things, required reserves, investments,
loans, mergers and consolidations, issuances of securities, payment of
dividends, establishment of branches and other aspects of the Bank's operations.
Under the provisions of the Federal Reserve Act, the Bank is subject to certain
restrictions on any extensions of credit to the Company or, with certain
exceptions, other affiliates, and on the taking of such stock or securities as
collateral on loans to any borrower. In addition, the Bank is prohibited from
engaging in certain tie-in arrangements in connection with any extension of
credit or the providing of any property or service.
The Bank, as a state chartered bank, will be permitted to branch only to the
extent that banks are permitted to branch under Georgia law. In January 1996,
the Georgia legislature passed a bill designed to eliminate Georgia's current
intra-county branching restrictions. The legislation provided that after July 1,
1996, banks in Georgia, with prior approval of the DBF (and the appropriate
federal regulatory authority), may establish additional branches in up to three
new counties in the state per year. If a bank is part of a bank holding company,
all affiliates are treated as one, and the bank holding company organization is
limited to only three counties for branching. On July 1, 1998, full statewide
branching went into effect and Georgia banks may establish new branches in any
county in the state with prior approval of the appropriate regulatory
authorities.
The FDIC adopted risk-based capital guidelines that went into effect on December
31, 1990 for all FDIC insured state chartered banks that are not members of the
Federal Reserve System. Beginning December 31, 1992, all banks were required to
maintain a minimum ratio of total capital to risk weighted assets of 8 percent
(of which at least 4 percent must consist of Tier 1 capital). Tier 1 capital of
state chartered banks (as defined in regulations) generally consists of (i)
common stockholders equity; (ii) noncumulative perpetual preferred stock and
related surplus; and (iii) minority interests in the equity accounts of
consolidated subsidiaries.
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In addition, the FDIC adopted a minimum ratio of Tier 1 capital to total assets
of banks. This capital measure is generally referred to as the leverage capital
ratio. The FDIC has established a minimum leverage capital ratio of 4 percent if
the FDIC determines that the institution is not anticipating or experiencing
significant growth and has well-diversified risk, including no undue interest
rate exposure, excellent asset quality, high liquidity, good earnings and, in
general, is considered a strong banking organization, rated Composite 1 under
the Uniform Financial Institutions Rating System. Other financial institutions
are expected to maintain leverage capital at least 100 to 200 basis points above
the minimum level. At December 31, 1998, the Bank exceeded the minimum Tier 1,
risk-based and leverage capital ratios. The table which follows set forth
certain capital information for the Bank as of December 31, 1998.
Capital Adequacy
(Dollars in thousands)
December 31, 1998
Leverage Ratio: Amount Percent
Actual $7,456,935 9.7%
Minimum Required (1) $3,070,527 4.0%
Risk-Based Capital:
Tier 1 Capital
Actual $7,456,935 11.4%
Minimum Required $2,609,560 4.0%
Total Capital
Actual $8,197,552 12.6%
Minimum Required $5,219,120 8.0%
(1) Represents the regular minimum requirement. Institutions that are
contemplating acquisitions or anticipating or experiencing significant growth
may be required to maintain a substantially higher leverage ratio. See below
regarding the consequences of failing to meet specified capital standards.
The Federal Deposit Insurance Corporation Improvement Act of 1991, enacted in
December 1991 ("FDICIA"), specifies, among other things, the following five
capital standard categories for depository institutions: (i) well capitalized,
(ii) adequately capitalized, (iii) undercapitalized, (iv) significantly
undercapitalized and (v) critically undercapitalized. FDICIA imposes
progressively more restrictive constraints on operations, management and capital
distributions depending on the category in which an institution is classified.
Each of the federal banking agencies has issued final uniform regulations that
became effective December 19, 1992, which, among other things, define the
capital levels described above. Under the final regulations, a bank is
considered "well capitalized" if it (i) has a total risk-based capital ratio of
10% or greater, (ii) has a Tier 1 risk-based capital ratio of 6% or greater,
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(iii) has a leverage ratio of 5% or greater, and (iv) is not subject to any
order or written directive to meet and maintain a specific capital level for any
capital measure. An "adequately capitalized" bank is defined as one that has (i)
a total risk-based capital ratio for 8% or greater, (ii) a Tier 1 risk-based
capital ratio of 4% or greater and (iii) a leverage ratio of 4% or greater. An
"undercapitalized" bank is defined as one that has a total risk-based capital
ratio of less than 8%, (ii) a Tier I risk-based capital ratio of less than 4%,
or (iii) a leverage ratio of less than 3%, and it is "critically
undercapitalized" if the bank has a ratio of tangible equity to total assets
equal to or less than 2%. The applicable federal regulatory agency for a bank
that is "well capitalized" may reclassify it as "adequately capitalized" or
"undercapitalized" and subject the institution to the supervisory actions
applicable to the next lower capital category, if it determines that the Bank is
in an unsafe or unsound condition or deems the bank to be engaged in an unsafe
or unsound practice and not to have corrected the deficiency. As of December 31,
1998, the Bank met the definition of a "well capitalized" institution.
"Undercapitalized" depository institutions, among other things, are subject to
growth limitations, are prohibited, with certain exceptions, from making capital
distributions, are limited in their ability to obtain funding from a Federal
Reserve Bank and are required to submit a capital restoration plan. The federal
banking agencies may not accept a capital plan without determining, among other
things, that the plan is based on realistic assumptions and is likely to succeed
in restoring the depository institution's capital. In addition, for a capital
restoration plan to be acceptable, the depository institution's parent holding
company must guarantee that the institution will comply with such capital
restoration plan and provide appropriate assurances of performance. If a
depository institution fails to submit an acceptable plan, including if the
holding company refuses or is unable to make the guarantee described in the
previous sentence, it is treated as if it is "significantly undercapitalized".
Failure to submit or implement an acceptable capital plan also is grounds for
the appointment of a conservator or a receiver. "Significantly undercapitalized"
depository institutions may be subject to a number of additional requirements
and restrictions such as orders to sell sufficient voting stock to become
adequately capitalized, requirements to reduce total assets and cessation of
receipt of deposits from correspondent banks. "Critically undercapitalized"
institutions, among other things, are prohibited from making any payments of
principal and interest on subordinated debt, and are subject to the appointment
of a receiver or conservator.
Under FDICIA, the FDIC is permitted to provide financial assistance to an
insured bank before appointment of a conservator or receiver only if (i) such
assistance would be the least costly method of meeting the FDIC's insurance
obligations, (ii) grounds for appointment of a conservator or a receiver exist
or are likely to exist, (iii) it is unlikely that the bank can meet all capital
standards without assistance and (iv) the bank's management has been competent,
has complied with applicable laws, regulations, rules and supervisory directives
and has not engaged in any insider dealing, speculative practice or other
abusive activity.
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FDIC Insurance Assessments
The FDIC adopted regulations amending the deposit insurance assessments
applicable to the Banks. The regulations provide for a risk-based premium system
which requires higher assessment rates for banks which the FDIC determines pose
greater risks to the Bank Insurance Fund (the "BIF").
Under the regulations, banks pay an assessment depending upon risk
classification. Although the regulations were adopted by the FDIC as final
regulations, the Board of the FDIC will consider whether changes in economic and
industry conditions require adjustments in the range of assessment rates to be
charged in future years.
To arrive at risk-based assessments, the FDIC places each bank in one of nine
risk categories using a two step process based on capital ratios and on other
relevant information. Each bank is assigned to one of three groups (well
capitalized, adequately capitalized, or under capitalized) based on its capital
ratios. The FDIC has also assigned each bank to one of three subgroups based
upon an evaluation of the risk posed by the bank. The three subgroups include
(i) banks that are financially sound with only a few minor weaknesses, (ii)
those banks with weaknesses which, if not corrected, could result in significant
deterioration of the bank and increased risk to the BIF, and (iii) those banks
that pose a substantial probability of loss to the BIF unless corrective action
is taken. These supervisory evaluations modify premium rates within each of the
three capital groups with the result being the nine risk categories and
assessment rates based on a summary multiplier.
The Bank has been informed by the FDIC that the Bank have been classified as
well capitalized and in the lowest risk category and will be assessed
accordingly for 1999.
The Bank is also subject to, among other things, the provisions of the Equal
Credit Opportunity Act (the "ECOA") and the Fair Housing Act (the "FHA"), both
of which prohibit discrimination based on race or color, religion, national
origin, sex, and familial status in any aspect of a consumer or commercial
credit or residential real estate transaction. In April 1994, the Department of
Housing and Urban Development, the Department of Justice (the "DOJ"), and all of
the federal banking agencies issued an Interagency Policy Statement on
discrimination in Lending in order to provide guidance to financial institutions
as to what the agencies consider in determining whether discrimination exists,
how the agencies will respond to lending discrimination, and what steps lenders
might take to prevent discriminatory lending practices.
Regulation of the Company. The Company is a bank holding company within the
meaning of the Federal Bank Holding Company Act (the "Act") and the Georgia bank
holding company law (the "Georgia Act"). As a bank holding company, the Company
is required to file with the Federal Reserve Board (the "Federal Reserve") an
annual report and such additional information as the Board may require pursuant
to the Act. The Board may also make examinations of the Company and each of its
subsidiaries. Bank holding companies are required by the Act to obtain approval
from the Board prior to acquiring, directly or indirectly, ownership or control
of more than 5% of the voting shares of a bank.
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The Act also prohibits bank holding companies, with certain exceptions, from
acquiring more than 5% of the voting shares of any company that is not a bank
and from engaging in any nonbanking business (other than a business closely
related to banking as determined by the Board) or from managing or controlling
banks and other subsidiaries authorized by the Act or furnishing services to, or
performing services for, its subsidiaries without the prior approval of the
Board. The Board is empowered to differentiate between activities that are
initiated de novo by a bank holding company or a subsidiary and activities
commenced by acquisition of a going concern. The Company has no present
intention to engage in nonbanking activities.
As a bank holding company, the Company is subject to capital adequacy guidelines
as established by the Board. The Board established risk based capital guidelines
for bank holding companies effective March 15, 1989. Beginning on December 31,
1992, the minimum required ratio for total capital to risk weighted assets
became 8 percent (of which at least 4 percent must consist of Tier 1 capital).
Tier 1 capital (as defined in regulations of the Board) consists of common and
qualifying preferred stock and minority interests in equity accounts of
consolidated subsidiaries, less goodwill and other intangible assets required to
be deducted under the Board's guidelines. The Board's guidelines apply on a
consolidated basis to bank holding companies with total consolidated assets of
$150 million or more. For bank holding companies with less than $150 million in
total consolidated assets (such as the Company), the guidelines will be applied
on a bank only basis, unless the bank holding company is engaged in nonbanking
activity involving significant leverage or has significant amount of debt
outstanding that is held by the general public. The Board has stated that risk
based capital guidelines establish minimum standards and that bank holding
companies generally are expected to operate well above the minimum standards.
The Company is also a bank holding company within the meaning of the Georgia
Act, which provides that, without the prior approval of the DBF, it is unlawful
(i) for any bank holding company to acquire direct or indirect ownership or
control of more than 5% of the voting shares of any bank, (ii) for any bank
holding company or subsidiary thereof, other than a bank, to acquire all or
substantially all of the assets of a bank, or (iii) for any bank holding company
to merge or consolidate with any other bank holding company.
It also is unlawful for any company to acquire direct or indirect ownership or
control of more than 5% of the voting shares of any bank in Georgia unless such
bank has been in existence and continuously operating or incorporated as a bank
for a period of five years or more prior to the date of application to the DBF
for approval of such acquisition. Bank holding companies themselves are
prohibited from acquiring another bank until the initial bank in the bank
holding company has been incorporated for a period of twenty-four months.
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The Riegle-Neal Interstate Banking and Branching Efficiency Act of 1994 (the
"Interstate Banking Act"), subject to certain restrictions, allows adequately
capitalized and managed bank holding companies to acquire existing banks across
state lines, regardless of state statutes that would prohibit acquisitions by
out-of-state institutions. Further, since June 1, 1997, a bank holding company
may consolidate interstate bank subsidiaries into branches and a bank may merge
with an unaffiliated bank across state lines to the extent that the applicable
states have not "opted out" of interstate branching prior to that date. The
Interstate Banking Act generally prohibits an interstate acquisition (other than
the initial entry into a state by a bank holding company) that would result in
either the control of more than (i) 10% of the total amount of insured deposits
in the United States, or (ii) 30% of the total insured deposits in the home
state of the target bank, unless such 30% limitation is waived by the home state
on a basis which does not discriminate against out-of-state institutions. As a
result of the Interstate Banking Act, the Company may become a candidate for
acquisition by, or may itself seek to acquire, banking organizations located in
other states.
Bank holding companies may be compelled by bank regulatory authorities to invest
additional capital in the event a subsidiary bank experiences either significant
loan losses or rapid growth of loans or deposits. In addition, the Company may
be required to provide additional capital to any additional banks it acquires as
a condition to obtaining the approvals and consents of regulatory authorities in
connection with such acquisitions.
Federal Reserve policy requires a bank holding company to act as a source of
financial strength and to take measures to preserve and protect bank
subsidiaries in situations where additional investments in a troubled bank may
not otherwise be warranted. In addition, under the Financial Institutions
Reform, Recovery and Enforcement Act of 1989 ("FIRREA"), where a bank holding
company has more than one bank or thrift subsidiary, each of the bank holding
company's subsidiary depository institutions are responsible any losses to the
Federal Deposit Insurance Corporation ("FDIC") as a result of an affiliated
depository institution's failure. As a result, a bank holding company may be
required to loan money to its subsidiaries in the form of capital notes or other
instruments which qualify as capital under regulatory rules. However, any loans
from the holding company to such subsidiary banks likely will be unsecured and
subordinated to such bank's depositors and perhaps to other creditors of the
bank. In addition, a bank holding company may be required to provide additional
capital to any additional banks it acquires as a condition to obtaining
approvals and consents of regulatory authorities in connection with such
acquisitions.
The Company and the Bank are subject to the provisions of the Community
Reinvestment Act of 1977, as amended (the "CRA") and the federal banking
agencies' regulations issued thereunder. Under the CRA, all banks and thrifts
have a continuing and affirmative obligation, consistent with its safe and sound
operation to help meet the credit needs for their entire communities, including
low- and moderate-income neighborhoods. The CRA does not establish specific
lending requirements or programs for financial institutions, nor does it limit
an institution's discretion to develop the types of products and services that
it believes are best suited to its particular community, consistent with the
CRA. The CRA requires a depository institution's primary federal regulator, in
connection with its examination of the institution, to assess the institution's
record of assessing and meeting the credit needs of the community served by that
institution, including low- and moderate-income neighborhoods. The regulatory
<PAGE>11
agency's assessment of the institution's record is made available to the public.
In the case of a bank holding company applying for approval to acquire a bank or
other bank holding company, the Federal Reserve will assess the records of each
subsidiary depository institution of the applicant bank holding company, and
such records may be the basis for denying the application.
The evaluation system used to judge an institution's CRA performance consists of
three tests: a lending test; an investment test; and a service test. Each of
these tests will be applied by the institution's primary federal regulatory
taking into account such factors as: (i) demographic data about the community;
(ii) the institution's capacity and constraints; (iii) the institution's product
offerings and business strategy; and (iv) data on the prior performance of the
institution and similarly-situated lenders.
In addition, a financial institution will have the option of having its CRA
performance evaluated based on a strategic plan of up to five years in length
that it had developed in cooperation with local community groups. In order to be
rated under a strategic plan, the institution will be required to obtain the
prior approval of its federal regulator.
The interagency CRA regulations provide that an institution evaluated under a
given test will receive one of five ratings for the test: outstanding, high
satisfactory, low satisfactory, needs to improve, or substantial non-compliance.
An institution will receive a certain number of points for its rating on each
test, and the points are combined to produce an overall composite rating of
either outstanding, satisfactory, needs to improve, or substantial
non-compliance. Under the agencies' rating guidelines, an institution that
receives an "outstanding" rating on the lending test will receive an overall
rating of at least "satisfactory", and no institution can receive an overall
rating of "satisfactory" unless it receives a rating of at least "low
satisfactory" on its lending test. In addition, evidence of discriminatory or
other illegal credit practices would adversely affect an institution's overall
rating. Under the new regulations, an institution's CRA rating would continue to
be taken into account by its primary federal regulator in considering various
types of applications. As a result of the Bank's most recent CRA examination in
August, 1995, the Bank received a "satisfactory" CRA rating.
The Company and the Bank are subject to the Federal Reserve Act, Section 23A,
which limits a bank's "covered transactions" (generally, any extension of
credit) with any single affiliate to no more than 10% of a bank's capital and
surplus. Covered transactions with all affiliates combined are limited to no
more than 20% of a bank's capital and surplus. All covered and exempt
transactions between a bank and its affiliates must be on terms and conditions
consistent with safe and sound banking practices, and a bank and its
subsidiaries are prohibited from purchasing low quality assets from the bank's
affiliates. Finally, Section 23A requires that all of a bank's extensions of
credit to an affiliate be appropriately secured by collateral. The Company and
the Bank are also subject to Section 23B of the Federal Reserve Act, which
further limits transactions among affiliates. Sections 22(g) and 22(h) of the
Federal Reserve Act and implementing regulations also prohibit extensions of
credit by a state non-member bank (such as the Bank) to its directors, executive
officers and controlling shareholders on terms which are more favorable than
those afforded other borrowers, and impose limits on the amounts of loans to
individual affiliates and all affiliates as a group.
<PAGE>12
The United States Congress and the Georgia General Assembly periodically
consider and adopt legislation that results in, and could further result in,
deregulation, among other matters, of banks and other financial institutions.
Such legislation could modify or eliminate geographic restrictions on banks and
bank holding companies and current prohibitions with other financial
institutions, including mutual funds, securities brokerage firms, insurance
companies, banks from other states and investment banking firms. The effect of
any such legislation on the business of the Company or the Bank cannot be
accurately predicted. The Company cannot predict what legislation might be
enacted or what other implementing regulations might be adopted, and if enacted
or adopted, the effect thereof.
Competition
The banking business is highly competitive. The Bank competes with other
commercial banks that conduct operations in its primary service area.
Banks generally compete with other financial institutions through the banking
products and services offered, the pricing of services, the level of service
provided, the convenience and availability of services, and the degree of
expertise and the personal manner in which services are offered. The Bank
encounters strong competition from most of the financial institutions in the
Bank's primary service area. In the conduct of certain areas of its banking
business, the Bank also competes with credit unions, consumer finance companies,
insurance companies, money market mutual funds and other financial institutions,
some of which are not subject to the same degree of regulation and restrictions
imposed upon the Bank. Many of these competitors have substantially greater
resources and lending limits than the Bank has and offer certain services, such
as trust services, that the Bank does not provide presently.
Moreover, many of these competitors have branch offices and other facilities in
the primary service area, a competitive advantage that the Bank does not have
currently. Management believes that competitive pricing and personalized service
will provide it with a method to compete effectively in the primary service
area.
Monetary Policy
Earnings of the Company are affected by domestic and foreign economic
conditions, particularly by the monetary and fiscal policies of the United
States government and its agencies. The Federal Reserve has an important impact
on the operating results of banks and other financial institutions through its
power to implement national monetary policy. The methods used by the Board
include setting the reserve requirements of banks, establishing the discount
rate on bank borrowings and conducting open market transactions in United States
Government securities.
<PAGE>13
Employees
As of December 31, 1998, the Bank employed 24 full-time employees and 5
part-time employees. Except for the officers of the Bank who presently serve as
officers of the Company, the Company does not have any employees. Neither the
Company nor the Bank is a party to any collective bargaining agreement, and
management believes the Bank enjoys satisfactory relations with its employees.
Other Events
The Company entered into a definitive merger agreement on December 30, 1998
whereby the Company will combine with First Sterling by means of exchanging the
Company's common stock for First Sterling common stock. As a result of this
transaction, the Company's subsidiary, Community Bank of Georgia, will become a
wholly owned subsidiary of First Sterling. The shareholders of the Company voted
upon and approved the proposed merger on March 16, 1999. The transaction is
scheduled for consummation in the middle of April 1999. Reference is hereby made
to the First Sterling's Registration Statement on Form S-4 filed with the U.S.
Securities and Exchange Commission which became effective February 10, 1999.
ITEM 2. DESCRIPTION OF PROPERTIES
The operations of the Company and the Bank are conducted in a bank building
located at 3333 Lawrenceville Highway, Tucker, Georgia. The Bank owns the bank
building and the property upon which the building is located.
The Bank's building is a traditional style, two-story, brick veneer building
containing approximately 9,700 square feet on a 1.75 acre site at the
intersection of Lawrenceville Highway and Cooledge Road. The Bank's offices have
six inside teller stations, three outside drive-in teller stations, a safe
deposit vault and one outside automatic teller machine.
On October 1, 1997, the Bank opened its sole branch located at 4794 Highway 29
in Lilburn, Georgia. The branch contains approximately 2,800 square feet on a
1.4 acre site. The branch has three inside teller stations, three outside
drive-in teller stations, and one outside automatic teller machine.
ITEM 3. LEGAL PROCEEDINGS
Neither the Company nor the Bank is a party to any pending legal proceedings,
other than routine litigation incidental to the Bank's business, which
management believes after consultation with legal counsel would have a material
effect upon the operations or financial condition of the Company or the Bank.
<PAGE>14
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matter was submitted to a vote of security holders during the Company's
fourth quarter of the fiscal year ended December 31, 1998.
PART II
ITEM 5. MARKET FOR ISSUER'S COMMON EQUITY AND RELATED SOCKHOLDER MATTERS
As of December 31, 1998, there were approximately 705 shareholders of record of
the Company's common stock. The following table sets forth, for the fourth
quarter of 1998, the high and low bid information per share as reported by J.C.
Bradford & Co., one of the market makers in the Company's stock. The Company was
first listed on The Nasdaq SmallCap Market in the fourth quarter of 1998. Prior
to the fourth quarter of 1998, there was no established trading market in the
Company's stock and information for these quarters are negotiated trades which
are known to the Company or J.C. Bradford & Co. The regular cash dividends
declared for the Company is also given in the table below. All information is
adjusted for the 5-for-2 stock split effective June 23, 1998.
COMMON STOCK
NEGOTIATED
TRADES
1997 HIGH LOW DIVIDEND
First Quarter $5.20 $4.80 $0.04
Second Quarter $4.80 $4.80 -
Third Quarter $5.00 $5.00 -
Fourth Quarter $5.00 $4.60 $0.04
1998
First Quarter $6.25 $6.25 $0.04
Second Quarter - - -
Third Quarter $7.41 $7.41 -
BID
INFORMATION
1998 HIGH LOW DIVIDEND
Fourth Quarter* $9.50 $8.00 $0.05
* The Company started trading on the Nasdaq SmallCap Market in the fourth
quarter of 1998. The high and low bid information for this quarter as reported
by J.C. Bradford & Co. is set forth above. These are over-the-counter market
quotations which reflect interdealer prices without retail mark-up, markdown or
commissions and may not represent actual transactions.
<PAGE>15
ITEM 6. MANAGEMENT'S DISCUSSIONS AND ANALYSIS
OR PLAN OF OPERATION
Introduction
The Company is a one-bank holding company providing a full range of banking
services to individual and corporate customers in DeKalb and Gwinnett Counties
and surrounding areas through its wholly-owned bank subsidiary, the Bank. The
Bank operates under a state charter granted by the DBF and serves its customers
from its main banking facility in Tucker, Georgia and its branch located in
Lilburn, Georgia. The following discussion of the Company's financial condition
and results of operations should be read in conjunction with the Company's
consolidated financial statements and related notes presented in another section
of this Annual Report on Form 10-KSB.
Financial Condition - 1998 vs. 1997
Total assets increased by $3,215,794 (4.0%) from December 31, 1997 to December
31, 1998. The increase was limited because of management's decision to reduce
high interest rate deposits and invest cash and cash equivalents in higher
earning assets. During 1998, net loans increased $9,515,725 (21.3%) while cash
and cash equivalents decreased $4,878,539 (44.5%). The remaining increase in
loans was funded by reducing investments by $1,634,379 (8.6%) and borrowing
$3,000,000 from the Federal Home Loan Bank of Atlanta. The composition of the
deposit portfolio changed significantly during 1998. During the year, the
Company had significant decreases in time deposits due to management's approach
to relationship banking and decreasing deposit rates. The time deposit category
decreased $4,661,740 (11.1%) during 1998. The level of savings accounts
increased by $236,375 (3.8%) during 1998. Non-interest bearing and interest
bearing demand deposits grew by $1,101,479 (10.4%) and $2,761,025 (20.1%)
respectively during 1998. With the shift to lower interest rate deposits and the
continued growth in loans, the net interest margin was positively impacted.
The total of nonperforming assets which includes nonaccruing loans, repossessed
collateral and loans for which payments are more than 90 days past due,
increased from $547,869 at December 31, 1997 to $600,531 at December 31, 1998.
There were no related party loans, which were considered nonperforming at
December 31, 1998.
The Bank was most recently examined by its primary regulatory authority in
November 1998. There were no recommendations by the regulatory authority that in
management's opinion will have material effects on the Bank's liquidity, capital
resources or operations.
Results of Operations - 1998 vs. 1997
The results of operations of the Company is dependent on net interest income,
which is the difference between interest earned on earning assets and the
interest paid on interest-bearing liabilities, and the ability to minimize loan
losses and to control operating expenses. Net earnings before taxes increased by
$239,313 (24.9%) to $1,200,193 in 1998 from $960,888 in 1997. Net earnings after
taxes for 1998 was $844,306, an increase of $222,308 (35.7%) compared to
$621,998 in 1997. The return on average assets was 1.10% and .94% for the year
ended December 31, 1998 and 1997, respectively.
<PAGE>16
Net interest income for 1998 was $3,541,715, an increase of $601,395 (20.5%),
compared to $2,940,320 in 1997. Interest income for 1998 was $6,278,835,
representing an increase of $910,158 (17.0%) for 1997. The growth in interest
income was primarily due to the increase of funds available for loans and
investments. Interest expense for 1998 increased $308,763 (12.7%) compared to
1997. The growth in interest expense was less than the growth in interest income
primarily due to the significant change of deposit portfolio. The net interest
spread increased 6 basis points from 4.32% in 1997 to 4.38% in 1998.
The provision for loan losses for 1998 was $263,000 compared to $235,500 in
1997. The increase is primarily attributable to the growth in loans outstanding
and the increase in non-performing loans. The allowance for loan losses
represented approximately 1.3% of total loans as of December 31, 1998. The net
amount of charge-offs was $219,062 in 1998 compared to net recoveries of $1,796
in 1997. Management believes that the level of the allowance for loan losses is
appropriate based upon the Bank's portfolio and the current economic conditions.
Other income for 1998 was $530,406, an increase of $76,606 from $453,800 in
1997. The majority of the increase was due to increased gain on sales of
investment securities of $26,686, gain on sale of loans of $8,440 and income
from alternative investment activities of $9,687.
Other expenses for 1998 was $2,608,928 an increase of $411,188 (18.7%) compared
to $2,197,740 in 1997. The majority of the increase was attributed to expenses
related to increases in salaries and employee benefits of $151,288 (13.8%)
related to merit increases and hiring additional personnel. Other expense items
include expenses relating the Company's pending merger with First Sterling
Banks, Inc. of $77,834 and registration of the Company on the Nasdaq Smallcap
market of $16,014.
Liquidity
The Bank must maintain a certain portion of its assets in funds that are readily
available to pay on deposit withdrawals and to meet expected loan demands.
Additionally, the Bank maintains relationships with correspondent banks to
provide lines of credit for short-term funds on an as-needed basis. Presently,
the Bank has unsecured federal funds lines available from commercial banks of
$2,750,000. In addition, the Bank has secured federal fund lines which it can
borrow from up to the amount of unpledge investment securities. At December 31,
1998, the Bank had approximately $11,4000,000 on these secured lines.
Cash and cash equivalents totaled $6,085,026 and $10,963,565 at December 31,
1998 and 1997, respectively. Cash inflows from operations totaled $1,190,275 in
1998, while outflows from investing activity totaled $8,379,759, which were
primarily a net increase in loans. Inflows from financing activities totaled
$2,310,945, which resulted from increases in other borrowings. A complete
analysis of cash flows is presented later in the audited financial statements.
<PAGE>17
Capital Resources
The Company's ratios of stockholders' equity to total assets were 8.9% and 8.4%
at December 31, 1998 and 1997, respectively. The Company is required to maintain
minimum amounts of capital to total "risk weighted" assets, as defined by the
banking regulators. At December 31, 1998, the Company was required to have Tier
I and Total Capital to "risk weighted" assets ratios of 4% and 8%, respectively.
The Company's ratios as of December 31, 1998 were 11.5% and 12.6% for Tier I and
Total Capital ratios, respectively. Additionally, the Company is required to
maintain a leverage ratio of at least 4%. At December 31, 1998, the Company's
leverage ratio was 9.8%. While the current level of capital sufficiently meets
the regulatory requirements, and the Company's current and foreseeable needs,
management will continue to evaluate the capital needs of the Company.
Year 2000
The company is in the process of insuring that all of our computer hardware,
software, third party service providers and other systems are fully Year 2000
compliant. We have identified several computer hardware devices, computer
software systems and other systems that are not compliant. Substantially all
non-compliant systems have been upgraded. The Company has also contacted all
third party service providers and obtained data about their readiness.
Substantially all third party service providers are compliant. The Company will
continue to monitor the efforts of all third party service providers as well as
obtaining certification and test results to ensure their readiness.
The Company completed a conversion to Year 2000 compliant computer systems on
October 1, 1998. The Company's third party service providers absorbed the
majority of the costs associated with the conversion. We are projecting that
complete testing and certification of our systems will be completed by March 31,
1999.
The Company has budgeted approximately $85,000 for Year 2000 expenditures and
computer systems replacements and upgrades. To date, the Company has spent
approximately $65,000 on upgrades and customer awareness documentation and
seminars.
The Company has developed a contingency plan for backup systems and business
functions should any technical problems be encountered. Specific guidelines have
been established in case critical systems or communications interruption occur.
Assignments have been established, as well as step-by-step instructions should
any system or process malfunction.
The Company has assessed the risks associated with our loan and deposit
customers. The assessments did not disclose any significant exposure the Company
might incur associated with our customers and the Year 2000. At the present
time, management has no reasonable means to predict the potential exposure
related to the Year 2000.
<PAGE>18
Interest Rate Sensitivity
The objective of the Bank's asset-liability management policy is to minimize the
effect of interest rate changes on the Bank's net interest margin. The Bank has
an Asset-Liability Committee consisting of certain officers and directors of the
Bank. The Committee's responsibility is to monitor the policies and procedures
that have been formulated to ensure the appropriate composition of the Bank's
asset/liability mix in order to properly manage the interest rate risks of the
Bank's balance sheet and to ensure a consistent level of profitability.
The following table summarizes the amounts of interest-earning assets and
interest-bearing liabilities outstanding as of December 31, 1998 that are to
mature, prepay or reprice in each of the future time periods shown. Except as
stated below, the amount of assets or liabilities that mature or reprice in a
particular period was determined in accordance with the contractual terms of the
asset or liability. Adjustable rate loans are included in the period in which
interest rates are next scheduled to adjust rather than in the period in which
they are due. The fixed rate loans are included in the periods in which they are
anticipated to be repaid based on scheduled maturities. Estimates of projected
repayments of loans with specified characteristics and investment securities
with callable features are presented in the period of the anticipated call.
Community Bank of Georgia's savings accounts and interest-bearing demand
accounts (NOW and money market accounts), which are generally subject to
immediate withdrawal, are included in the "Three Months or Less" category.
[REMAINDER OF THIS PAGE INTENTIONALLY LEFT BLANK]
<PAGE>19
<TABLE>
<CAPTION>
At December 31, 1998
Maturing or Repricing in
Over 3 Over 1
Three Months Year
Months Through Through Over 5
or Less 1 Year 5 Years Years Total
------- ------ ------- ----- -----
(Dollars in Thousand)
Interest-earning assets:
<S> <C> <C> <C> <C> <C>
Loans $ 36,236 2,748 15,364 557 54,905
Investment securities:
Taxable 4 301 1,418 11,520 13,243
Tax-Exempt -- -- -- 3,958 3,958
Other Securities 228 228
Federal funds sold 2,776 -- -- -- 2,776
------ ----- ------ ----- ------
Total interest-earning assets $ 39,016 3,049 16,782 16,263 75,110
====== ===== ====== ====== ======
Interest-bearing liabilities:
Deposits:
Interest-bearing demand $ 16,515 -- -- -- 16,515
Savings 6,384 -- -- -- 6,384
Time 7,657 21,063 8,576 8 37,304
Other borrowings -- 3,000 -- 3,000
------- -------- ----- ---- -----
Total interest-bearing liabilities $ 30,556 21,063 11,576 8 63,203
======= ====== ====== = ======
Interest sensitive difference per
period 8,460 (18,014) 5,206 16,255
----- -------- ----- ------
Cumulative interest sensitivity
difference $ 8,460 (9,554) (4,348) 11,907
===== ======= ======= ======
Cumulative difference to total
Assets 10.25% (11.57)% (5.27)% 14.42%
====== ======== ======= ======
</TABLE>
<PAGE>20
SELECTED STATISTICAL INFORMATION
The following section presents statistical information for the Company, which
supplements the financial data discussed elsewhere herein.
Index to Selected Statistical Information
Table 1 Average Balance Sheets
Table 2 Volume-Rate Analysis
Table 3 Investment Portfolio
Table 4 Loan Portfolio
Table 5 Allowance for Loan Losses
Table 6 Allocation of the Allowance for Loan Losses
Table 7 Deposits
Table 8 Selected Financial Data
[REMAINDER OF THIS PAGE INTENTIONALLY LEFT BLANK]
<PAGE>21
Table 1
Average Balance Sheets
The table below shows the average balance sheets, including significant
categories of interest-earning assets and interest-bearing liabilities for 1998
and 1997, and the average rate of interest earned or paid thereon.
<TABLE>
<CAPTION>
1998 1997
---- ----
Interest Interest
Average Income/ Yield/ Average Income/ Yield/
Balances Expense Rate Balances Expense Rate
(Amounts are presented in Thousands)
Assets:
Interest-earning assets:
<S> <C> <C> <C> <C> <C> <C>
Loans (including loan fees) $ 48,318 5,124 10.60% $ 38,512 $ 4,108 10.67%
Investment securities:
Taxable 13,478 825 6.12% 15,200 997 6.56%
Nontaxable 2,467 124 5.02% 145 8 5.52%
Federal funds sold 3,818 206 5.40% 4,546 256 5.63%
----- ----- ------ ------ ----- -----
Total interest earning assets 68,081 6,279 9.22% 58,403 5,369 9.19%
Other non-interest earning assets
8,355 7,631
----- -----
Total assets $ 76,436 $ 66,034
====== ======
Liabilities and stockholders' equity:
Interest bearing liabilities:
Deposits:
Interest bearing demand and
savings $ 19,068 569 2.98% $ 15,713 461 2.94%
Time 36,877 2,140 5.80% 34,133 1,964 5.75%
Other borrowings 620 28 4.52% 40 3 7.50%
------- ------ ----- ------ ----- -----
Total interest bearing
liabilities: 56,565 2,737 4.84% 49,886 2,428 4.87%
Other non-interest bearing liabilities
13,257 10,180
Stockholders' equity 6,614 5,968
----- -----
Total liabilities and stockholders'
equity $ 76,436 $ 66,034
====== ======
Excess of interest earning assets over
interest bearing liabilities $ 11,516 $ 8,517
====== =====
Ratio of interest earning assets to
interest bearing liabilities 120.36% 117.07%
======= =======
Net interest income 3,542 2,941
===== =====
Net interest spread 4.38% 4.32%
===== =====
Net interest yield on interest bearing
assets 5.20% 5.04%
===== =====
</TABLE>
Nonaccrual loans and the interest which was recorded on these loans (both prior
and subsequent to the time loans were placed on nonaccrual status, if any) are
included in the yield calculation for all loans in all periods reported.
<PAGE>22
Table 2
Volume-Rate Analysis
The following table shows a summary of the changes in interest income and
interest expense resulting from changes in volume and changes in rates for each
major category of interest-earning assets and interest-bearing liabilities for
1998 over 1997.
<TABLE>
<CAPTION>
1998 over 1997
Increase(decrease) due to changes in:
(Amounts are presented in thousands)
Volume Rate Total
Interest income on:
<S> <C> <C> <C>
Loans (including loan fees) $ 1,043 (27) 1,016
Investment securities:
Taxable (105) (67) (172)
Nontaxable 116 -- 116
Federal funds sold (40) (10) (50)
Total interest-earning assets $ 1,014 (104) 910
===== ===== ===
Interest expense on:
Deposits:
Interest-bearing demand and savings $ 100 8 108
Time 159 17 176
Other borrowings 27 (2) 25
---- --- ----
Total interest-bearing liabilities $ 286 23 309
=== == ===
</TABLE>
Rate/volume variances were allocated between rate variances and volume variances
using a weighted average allocation method.
<PAGE>23
Table 2
Volume-Rate Analysis, Continued
The following table shows a summary of the changes in interest income and
interest expense resulting from changes in volume and changes in rates for each
major category of interest-earning assets and interest-bearing liabilities for
1997 over 1996.
<TABLE>
<CAPTION>
1998 over 1997
Increase(decrease) due to changes in:
(Amounts are presented in thousands)
Volume Rate Total
Interest income on:
<S> <C> <C> <C>
Loans (including loan fees) $ 1,164 (14) 1,150
Investment securities:
Taxable 49 26 75
Nontaxable 8 -- 8
Federal funds sold 13 13 26
Interest on deposits in banks (10) -- (10)
------ ---- ------
Total interest-earning assets $ 1,224 25 1,249
===== == =====
Interest expense on:
Deposits:
Interest-bearing demand and savings $ 21 (1) 20
Time 592 (14) 578
Other borrowings 2 -- 2
--- ---- ---
Total interest-bearing liabilities $ 615 (15) 600
=== ==== ===
</TABLE>
Rate/volume variances were allocated between rate variances and volume variances
using a weighted average allocation method.
<PAGE>24
Table 3
Investment Portfolio
The following table presents the investments by category at December 31, 1998
and 1997 (amounts are represented in thousands):
<TABLE>
<CAPTION>
1998 1997
---- ----
Amortized Estimated Amortized Estimated
Cost Fair Value Cost Fair Value
<S> <C> <C> <C> <C>
U.S. Treasury $ 1,196 1,199 881 891
U.S. Government agencies 3,666 3,665 10,799 10,790
Obligations of state and
political subdivisions 3,958 3,976 804 809
Mortgage-backed securities 8,413 8,361 6,372 6,345
Other Securities 228 228 -- --
----- ----- ----- ------
$17,461 17,429 18,856 18,835
====== ====== ====== ======
</TABLE>
<TABLE>
<CAPTION>
Obligations
of states and Weighted
U.S. U.S. political Mortgage Other Average
Treasury Agencies subdivision Backed Securities Yields
<S> <C> <C> <C> <C> <C> <C>
Within 1 year $ -- -- -- 305 -- 7.49%
After 1 through 5 years 200 1,150 -- 68 -- 6.38%
After 5 through 10 years 996 1,516 -- 255 -- 6.25%
After 10 years -- 1,000 3,958 7,785 228 5.96%
----- ----- ----- ----- --- ----
Totals $ 1,196 3,666 3,958 8,413 228 6.07%
===== ===== ===== ===== === ====
</TABLE>
<PAGE>25
Table 4
Loan Portfolio
The following table presents loans by type at the end of 1998 and 1997 (amounts
are presented in thousands):
<TABLE>
<CAPTION>
December 31,
1998 1997
---- ----
Commercial, financial and
<S> <C> <C>
Agricultural $ 11,993 $ 12,181
Real estate - construction 8,044 6,587
Real estate - mortgage 31,380 23,393
Installment loans to
Individuals 3,488 3,185
----- -----
$ 54,905 $ 45,346
====== ======
</TABLE>
As of December 31, 1998, the maturities of loans in the indicated
classifications were as follows (amounts are presented in thousands):
<TABLE>
<CAPTION>
Commercial,
Financial and Real Estate Real Estate
Maturity Agricultural Construction Mortgage Consumer Total
- -------- ------------ ------------ -------- -------- -----
<S> <C> <C> <C> <C> <C>
Within 1 yr $ 8,379 6,592 22,737 1,276 38,984
1 to 5 yrs 3,614 1,452 8,086 2,212 15,364
After 5 yrs -- -- 557 -- 557
-- ---- --- ----- ---
Totals $ 11,993 8,044 31,380 3,488 54,905
====== ===== ====== ===== ======
</TABLE>
<PAGE>26
Table 4
Loan Portfolio, Continued
As of December 31, 1998, the interest terms of loans in the indicated
classifications for the indicated maturity ranges are as follows (amounts are
presented in thousands):
<TABLE>
<CAPTION>
Fixed Variable
Interest Rates Interest Rates Total
Commercial, financial and agricultural:
<S> <C> <C> <C>
Less than one year $ 1,253 7,126 8,379
1 to 5 years maturity 3,256 358 3,614
After 5 years maturity -- -- --
-- -- --
4,509 7,484 11,993
----- ----- ------
Real estate - construction:
Less than one year -- 6,592 6,592
1 to 5 years maturity -- 1,452 1,452
After 5 years maturity -- -- --
---- ---- ----
-- 8,044 8,044
---- ----- -----
Real estate - mortgage:
Less than one year 2,213 20,524 22,737
1 to 5 years maturity 1,603 6,483 8,086
After 5 years maturity 557 -- 557
--- -- ---
4,373 27,007 31,380
----- ------ ------
Consumer:
Less than one year 1,222 54 1,276
1 to 5 years maturity 2,212 -- 2,212
After 5 years maturity -- -- --
---- ---- ----
3,434 54 3,488
----- -- -----
$ 12,316 42,589 54,905
====== ====== ======
</TABLE>
<PAGE>27
Table 4
Loan Portfolio, Continued
The following summarizes past due and non-accrual loans and other real estate as
of December 31, 1998 and 1997 (amounts are presented in thousands):
1998 1997
Other real estate and repossessions $ 178 310
Accruing loans 90 days or more past due 342 24
Non-accrual loans 80 214
A loan is placed on non-accrual status when, in management's judgment, the
collection of interest appears doubtful. As a result of management's ongoing
review of the loan portfolio, loans are classified as non-accrual generally when
they are past due in principal or interest payments for more than 90 days or it
is otherwise not reasonable to expect collection of principal and interest under
the original terms. Exceptions are allowed for 90-day past due loans when such
loans are well secured and in process of collection.
<PAGE>28
Table 5
Allowance for Loan Losses
The following table summarizes information concerning the allowance for loan
losses (amounts are presented in thousands):
<TABLE>
<CAPTION>
December 31,
1998 1997
---- ----
<S> <C> <C>
Balance at beginning of year $ 697 459
Charge-offs:
Commercial, financial and agricultural 125 --
Real estate 97 --
Installment loans to individuals 11 4
---- ---
233 4
----- ---
Recoveries:
Commercial, financial and agricultural 3 --
Real estate -- --
Installment loans to individuals 11 6
----- ----
14 6
----- ---
Net charge-offs 219 (2)
Additions charged to operations 263 236
--- ----
Balance at end of year $ 741 697
=== ===
Ration of net charge-offs during the period to average
loans outstanding during the period .45% .(01)%
</TABLE>
<PAGE>29
Table 6
Allocation of the Allowance for Loan Losses
The following tables summarizes information concerning the allocation of the
allowance for loan losses as of December 31, 1998:
<TABLE>
<CAPTION>
1998 1997
Percent of Loans in Each Percent of Loans in Each
Balance at End of Period Amount Category to Total Loans Amount Category to Total Loans
Applicable to :
Domestic
<S> <C> <C> <C> <C>
Commercial,financial $ 13 21.8% $ 29 26.9%
and agricultural
Real Estate - Construction -- 14.7% 39 14.5%
Real Estate - Mortgage 12 57.2% 108 51.6%
Installment loans to individuals 10 6.3% 9 7.0%
Unallocated 706 N/A 512 N/A
--- ---- --- ---
$ 741 100.0% $ 697 100.0%
==== ====== ==== ======
</TABLE>
Management's policy is to assign a risk rating based upon underlying collateral,
the borrower's ability to repay, and the economic conditions and other factors
relevant to the loan. The allowance for loan losses is provided based upon the
risk ratings assigned or specific losses identified. An assessment of the
adequacy of the allowance for loan losses is made monthly.
<PAGE>30
Table 7
Deposits
The average balance of deposits and the average rates paid on such deposits are
summarized for the periods indicated in the following table (amounts are
presented in thousands):
<TABLE>
<CAPTION>
1998 1997
---- ----
Amount Rate Amount Rate
Demand deposits:
<S> <C> <C> <C> <C>
Non-interest bearing $ 12,579 --% 9,409 --%
Interest-bearing
demand and savings 19,068 2.98% 15,713 2.94%
Time deposits 36,877 5.80% 34,133 5.75%
------ ------
Totals $ 68,524 59,255
====== ======
</TABLE>
Maturities of time certificates of deposit of $100,000 or more outstanding at
December 31, 1998 are summarized as follows (amounts are presented in
thousands):
Within 3 months $ 2,089
After 3 through 6 months 2,765
After 6 through 12 months 3,080
After 12 months 1,448
------
Totals $ 9,382
=====
<PAGE>31
Table 7
Selected Financial Data
(Dollars in thousands, except per share amounts)
The following represents selected financial data for the years ended December
31, 1998, 1997 and 1996. This information should be read in conjunction with
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" and the financial statements and related notes included elsewhere in
this report.
<TABLE>
<CAPTION>
1998 1997 1996
---- ---- ----
<S> <C> <C> <C>
Interest income $ 6,279 5,368 4,120
Interest expense $ 2,737 2,428 1,828
Net interest expense $ 3,542 2,940 2,292
Provision for loan losses $ 263 236 90
Net earnings $ 844 622 535
Net earnings per share-Basic $ .58 .43 .37
Net earnings per share-Diluted $ .57 .42 .36
Total average stockholders' equity $ 6,614 5,968 5,800
Total average assets $ 76,436 66,034 52,271
Total assets at end of year $ 82,572 79,356 58,350
Ratios:
Net earnings to average assets 1.10% .94% 1.02%
Net earnings to average
stockholders' equity 12.76% 10.42% 9.22%
Average stockholders' equity to
average assets 8.65% 9.04% 11.10%
Dividend Payout Ratio 15.52% 18.60% 16.67%
</TABLE>
<PAGE>32
ITEM 7. FINANCIAL STATEMENTS
The consolidated financial statements, notes thereto and independent auditors'
report thereon included on the following pages are incorporated herein by
reference.
Index to Consolidated Financial Statements
Page
Report of Independent Certified Public Accountants....................... F-1
Consolidated Balance Sheets - December 31, 1998 and 1997..................F-2
Consolidated Statements of Earnings for the
Years Ended December 31, 1998, 1997 and 1996..............................F-3
Consolidated Statements of Comprehensive Income for the
Years Ended December 31, 1998, 1997 and 1996..............................F-4
Consolidated Statements of Stockholders' Equity for the
Years Ended December 31, 1998, 1997 and 1996..............................F-5
Consolidated Statements of Cash Flows for the Years
Ended December 31, 1998, 1997 and 1996....................................F-6
Notes to Consolidated Financial Statements ...............................F-7
<PAGE>33
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
The Board of Directors and Stockholders
Georgia Bancshares, Inc. and Subsidiary
We have audited the accompanying consolidated balance sheets of Georgia
Bancshares, Inc. and subsidiary as of December 31, 1998 and 1997, and the
related statements of earnings, 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 Georgia 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
February 3, 1999
<PAGE>34
<TABLE>
<CAPTION>
GEORGIA BANCSHARES, INC. AND SUBSIDIARY
Consolidated Balance Sheets
December 31, 1998 and 1997
Assets
1998 1997
---- ----
<S> <C> <C>
Cash and due from banks, including reserve requirements
of $332,000 and $269,000 $ 3,309,026 3,527,565
Federal funds sold 2,776,000 7,436,000
----------- -----------
Cash and cash equivalents 6,085,026 10,963,565
Investment securities available for sale 17,200,602 18,834,981
Other investments 228,300 -
Loans, net 54,164,630 44,648,905
Premises and equipment, net 2,789,388 2,853,414
Accrued interest receivable and other assets 2,104,167 2,055,454
----------- -----------
$ 82,572,113 79,356,319
========== ==========
Liabilities and Stockholders' Equity
Deposits:
Demand $ 11,648,524 10,547,045
Interest-bearing demand 16,514,692 13,753,667
Savings 6,383,933 6,147,558
Time 37,304,489 41,966,229
---------- ----------
Total deposits 71,851,638 72,414,499
Federal Home Loan Bank advances 3,000,000 -
Accrued interest payable and other liabilities 343,351 291,043
------------ ------------
Total liabilities 75,194,989 72,705,542
---------- ----------
Commitments
Stockholders' equity:
Common stock, $1.60 par value; authorized 7,500,000 shares; 1,461,632 and
1,460,570 shares issued and outstanding
in 1998 and 1997, respectively 2,338,611 2,336,912
Additional paid-in capital 3,555,270 3,536,659
Retained earnings 1,609,093 896,291
Accumulated other comprehensive income (125,850) (119,085)
------------ ------------
Total stockholders' equity 7,377,124 6,650,777
----------- -----------
$ 82,572,113 79,356,319
========== ==========
</TABLE>
See accompanying notes to consolidated financial statements.
<PAGE>35
<TABLE>
<CAPTION>
GEORGIA BANCSHARES, INC. AND SUBSIDIARY
Consolidated Statements of Earnings
For the Years Ended December 31, 1998, 1997 and 1996
1998 1997 1996
---- ---- ----
Interest income:
<S> <C> <C> <C>
Interest and fees on loans $ 5,123,591 4,107,629 2,957,699
Interest on federal funds sold 206,532 256,095 229,793
Interest on deposits in other banks - - 10,721
Interest and dividends on investment securities:
U.S. Treasuries and Government agencies 430,414 785,352 785,191
Mortgage backed securities and collateralized
mortgage obligations 394,176 211,568 136,789
Obligations of state and political subdivisions 124,122 8,033 -
---------- --------- ---------
Total interest income 6,278,835 5,368,677 4,120,193
--------- --------- ---------
Interest expense:
Interest-bearing demand 372,091 264,759 227,149
Savings 196,471 196,754 213,720
Time 2,140,294 1,963,919 1,385,576
Other 28,264 2,925 1,367
----------- ------------ ------------
Total interest expense 2,737,120 2,428,357 1,827,812
--------- --------- ---------
Net interest income 3,541,715 2,940,320 2,292,381
Provision for loan losses 263,000 235,500 90,000
---------- --------- -----------
Net interest income after provision for losses 3,278,715 2,704,820 2,202,381
--------- --------- ---------
Other income:
Service charges and fees on deposits 304,699 305,965 296,890
Gain (loss) on sales of investment securities 23,912 (2,774) -
Other 201,795 150,609 76,360
---------- --------- -----------
Total other income 530,406 453,800 373,250
---------- --------- ----------
Other expenses:
Salaries and employee benefits 1,250,245 1,098,957 924,253
Occupancy 360,274 323,592 265,856
Other 998,409 775,191 623,957
---------- --------- ----------
Total other expenses 2,608,928 2,197,740 1,814,066
--------- --------- ---------
Earnings before income taxes 1,200,193 960,880 761,565
Income tax expense 355,887 338,882 226,108
---------- --------- ----------
Net earnings $ 844,306 621,998 535,457
========== ========= ==========
Basic earnings per share $ .58 .43 .37
=========== =========== ===========
Diluted earnings per share $ .57 .42 .36
=========== =========== ===========
</TABLE>
See accompanying notes to consolidated financial statements.
<PAGE>36
<TABLE>
<CAPTION>
GEORGIA BANCSHARES, INC. AND SUBSIDIARY
Consolidated Statements of Comprehensive Income
For the Years Ended December 31, 1998, 1997 and 1996
1998 1997 1996
---- ---- ----
<S> <C> <C> <C>
Net earnings $ 844,306 621,998 535,457
Other comprehensive income, net of tax:
Unrealized gains (losses) on securities available for sale:
Holding gains (losses) arising during period, net of tax
of $4,940, $29,504 and $50,106 8,060 48,137 (81,752)
Reclassification adjustment for (gains) losses included
in net earnings, net of tax of $9,087 and $1,054 (14,825) 1,720 -
-------- --------- -----------
Total other comprehensive income (loss) (6,765) 49,857 (81,752)
--------- -------- --------
Comprehensive income $ 837,541 671,855 453,705
======= ======= =======
</TABLE>
See accompanying notes to consolidated financial statements.
<PAGE>37
<TABLE>
<CAPTION>
GEORGIA BANCSHARES, INC. AND SUBSIDIARY
Consolidated Statements of Changes in Stockholders' Equity
For the Years Ended December 31, 1998, 1997 and 1996
Retained Accumulated
Common Stock Additional Earnings Other
Number Paid-In (Accumulated Comprehensive
of Shares Amount Deficit) Income Total
Capital
<S> <C> <C> <C> <C> <C> <C>
Balance, December 31, 1995 1,460,570 $ 2,336,912 3,536,659 (56,684) (87,190) 5,729,697
Net earnings - - - 535,457 - 535,457
Dividends paid - - - (87,634) - (87,634)
Changes in unrealized gains
(losses) on securities available
for sale, net of tax - - - - (81,752) (81,752)
--------- ---------- -------- --------- --------- --------
Balance, December 31, 1996 1,460,570 2,336,912 3,536,659 391,139 (168,942) 6,095,768
Net earnings - - - 621,998 - 621,998
Dividends paid - - - (116,846) - (116,846)
Changes in unrealized gains
(losses) on securities available
for sale, net of tax - - - - 49,857 49,857
-------- --------- --------- -------- ---------- ----------
Balance, December 31, 1997 1,460,570 2,336,912 3,536,659 896,291 (119,085) 6,650,777
Net earnings - - - 844,306 - 844,306
Dividends paid - - - (131,504) - (131,504)
Changes in unrealized gains
(losses) on securities available
for sale, net of tax - - - - (6,765) (6,765)
Stock option compensation
expense - - 15,000 - - 15,000
Exercise of stock options 1,062 1,699 3,611 - - 5,310
----------- ---------- ---------- -------- --------- ---------
Balance, December 31, 1998 1,461,632 $ 2,338,611 3,555,270 1,609,093 (125,850) 7,377,124
========= ========= ========= ========= ======= =========
</TABLE>
See accompanying notes to consolidated financial statements.
<PAGE>38
<TABLE>
<CAPTION>
GEORGIA BANCSHARES, INC. AND SUBSIDIARY
Consolidated Statements of Cash Flows
For the Years Ended December 31, 1998, 1997 and 1996
1998 1997 1996
---- ---- ----
Cash flows from operating activities:
<S> <C> <C> <C>
Net earnings $ 844,306 621,998 535,457
Adjustments to reconcile net earnings to net
cash provided by operating activities:
Depreciation, amortization and accretion 223,908 177,732 133,724
Deferred tax benefit (68,028) (91,675) 21,664
Stock option compensation expense 15,000 - -
Provision for loan losses 263,000 235,500 90,000
Provision for other real estate losses - - 32,118
Loss (gain) on sales of investment securities (23,702) 2,774 -
Loss on disposal of fixed assets - - 11,689
Loss on sales of other real estate 4,871 - -
Change in:
Accrued interest receivable and other assets (121,388) (28,956) (75,123)
Accrued interest payable and other liabilities 52,308 79,359 18,428
-------------- ------------ ------------
Net cash provided by operating activities 1,190,275 996,732 767,957
------------ ----------- -----------
Cash flows from investing activities:
Proceeds from sales, paydowns, and maturities of
investment securities-AFS 18,734,418 10,191,714 4,076,110
Purchases of investment securities-AFS (17,073,805) (13,076,772) (6,207,614)
Purchases of Federal Home Loan Bank stock (228,300) - -
Net change in interest-bearing deposits in other banks - - 299,000
Net change in loans (9,969,518) (13,912,344) (6,050,114)
Purchases of premises and equipment (149,334) (73,949) (1,183,111)
Proceeds from other real estate sales 425,859 - 66,757
Improvements to and first lien payoffs on other real estate (119,079) - -
------------ ----------- ----------
Net cash used by investing activities (8,379,759) (16,871,351) (8,998,972)
----------- ---------- ----------
Cash flows from financing activities:
Payment of dividends (131,504) (116,846) (87,634)
Net change in deposits (562,861) 20,371,474 10,576,810
Increases in Federal Home Loan Bank advances 3,000,000 - -
Proceeds from exercise of stock options 5,310 - -
---------- ----------- -----------
Net cash provided by financing activities 2,310,945 20,254,628 10,489,176
----------- ---------- ----------
Net change in cash and cash equivalents (4,878,539) 4,380,009 2,258,161
Cash and cash equivalents at beginning of year 10,963,565 6,583,556 4,325,395
---------- ----------- -----------
Cash and cash equivalents at end of year $ 6,085,026 10,963,565 6,583,556
=========== ========== ===========
Supplemental disclosures of cash flow information:
Cash paid for interest $ 2,709,264 2,369,631 1,801,418
Income taxes paid $ 450,000 448,661 175,924
Noncash investing and financing activities:
Transfers from loans to other assets $ 357,222 208,532 -
Finance sales of other real estate $ 166,429 - -
Change in unrealized gain (loss) on securities
available for sale, net of tax $ (6,765) 49,857 (81,752)
</TABLE>
See accompanying notes to consolidated financial statements.
<PAGE>39
GEORGIA BANCSHARES, INC. AND SUBSIDIARY
Notes to Consolidated Financial Statements
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Nature of Operations
Georgia Bancshares, Inc. (the "Company") is a one bank holding company
located in Tucker, Georgia. All of the Company's activities are currently
conducted by its wholly-owned subsidiary, Community Bank of Georgia (the
"Bank"). The Bank is a community oriented commercial bank with emphasis
on retail banking and offers such customary banking services as consumer
and commercial checking accounts, savings accounts, certificates of
deposit, commercial and consumer loans, money transfers and a variety of
other banking services. The Bank has two offices, one office in Tucker
(DeKalb County) and one office in Lilburn (Gwinnett County), both suburbs
of metropolitan Atlanta, Georgia, and conducts its banking activities
primarily in these counties.
Basis of Presentation
The consolidated financial statements include the accounts of the Company
and the Bank. All significant intercompany accounts and transactions have
been eliminated in consolidation.
The accounting principles followed by Georgia 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, the
valuation of real estate acquired in connection with or in lieu of
foreclosure on loans, and valuation allowances associated with deferred
tax assets, the recognition of which are based on future taxable income.
Investment Securities
The Bank classifies its securities in one of three categories: trading,
available for sale, or held to maturity. Trading securities are bought
and held principally for the purpose of selling them in the near term.
Held to maturity securities are those securities for which the Bank has
the ability and intent to hold the security until maturity. All other
securities not included in trading or held to maturity are classified as
available for sale. At December 31, 1998 and 1997, there were no trading
or held to maturity securities.
Available for sale (AFS) securities are recorded at fair value. Held to
maturity securities (HTM) are recorded at cost, adjusted for the
amortization or accretion of premiums or discounts. Unrealized holding
gains and losses, net of the related tax effect, on securities available
for sale are excluded from earnings and are reported as a separate
component of stockholders' equity until realized. 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. The unrealized holding gains
or losses included in the separate component of stockholders' equity for
securities transferred from available for sale to held to maturity are
maintained and amortized into earnings over the remaining life of the
security as an adjustment to yield in a manner consistent with the
amortization or accretion of premium or discount on the associated
security.
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.
<PAGE>40
GEORGIA BANCSHARES, INC. AND SUBSIDIARY
Notes to Consolidated Financial Statements, continued
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, continued
Other Investments
Other investments include equity securities with no readily determinable
fair market value. These investments are carried at cost.
Loans, Loan Fees and Interest Income on Loans
Loans are stated at the principal amount outstanding, net of the
allowance for loan losses. Interest on loans is calculated by using the
simple interest method on daily balances of the principal amount
outstanding.
Accrual of interest is discontinued on a loan when management believes,
after considering economic and business conditions and collection
efforts, that the borrower's financial condition is such that collection
of interest is doubtful. When a loan is placed on nonaccrual status,
previously accrued and uncollected interest is charged to interest income
on loans. Generally, payments on nonaccrual loans are applied to
principal.
Loan fees, net of certain origination costs, have been deferred and are
being amortized over the lives of the respective loans.
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 the fair value of the collateral if
the loan is collateral dependent. A loan is impaired when, based on
current information and events, it is probable that all amounts due
according to the contractual terms of the loan will not be collected. The
Bank has no material amounts of impaired loans at December 31, 1998 and
1997.
Allowance for Loan Losses
The allowance for loan losses is established through a provision for loan
losses charged to expense. Loans are charged against the allowance for
loan losses when management believes that the collection of the principal
is unlikely. The allowance represents an amount which, in management's
judgment, will be adequate to absorb probable losses on existing loans
that may become uncollectible.
Management's judgment in determining the adequacy of the allowance is
based on evaluations of the probability of collection of loans. These
evaluations take into consideration such factors as changes in the nature
and volume of the loan portfolio, current economic conditions that may
affect the borrower's ability to pay, overall portfolio quality, and
review of specific problem loans. In determining the adequacy of the
allowance for loan losses, management uses a loan grading system that
rates loans in eight different categories. Grades five through eight are
assigned allocations of loss based on standard regulatory loss
percentages used in regulatory examinations, while loans graded one
through four are allocated estimated loss ranges based on targeted peer
group percentages. The combination of these results are compared monthly
to the recorded allowance for loan losses and material differences are
adjusted by increasing or decreasing the provision for loan losses.
Management uses an external loan review program to challenge and
corroborate the internal loan grading system and provide additional
analysis in determining the adequacy of the allowance and the future
provisions for estimated loan losses.
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, regulatory agencies, as an integral
part of their examination process, periodically review the allowance for
loan losses. Such regulators may require additions to the allowance based
on their judgments of information available to them at the time of their
examination.
<PAGE>41
GEORGIA BANCSHARES, INC. AND SUBSIDIARY
Notes to Consolidated Financial Statements, continued
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, continued
Premises and Equipment
Premises and equipment are carried at cost less accumulated depreciation.
Depreciation is computed using the straight-line method over the
estimated useful lives of the related asset. When assets are retired or
otherwise disposed of, the cost and related accumulated depreciation are
removed from the accounts, and any resulting gain or loss is reflected in
income for the period. The cost of maintenance and repairs which do not
improve or extend the useful life of the respective asset is charged to
income as incurred, whereas significant renewals and improvements are
capitalized. The range of estimated useful lives for premises and
equipment are:
Buildings and improvements 31 years
Equipment, furniture and fixtures 5 - 20 years
Other Real Estate
Properties acquired through foreclosure are carried at the lower of cost
(defined as fair value at foreclosure) or fair value less estimated costs
to dispose. Accounting literature defines fair value as the amount that
is expected to be received in a current sale between a willing buyer and
seller other than in a forced or liquidation sale. Fair values at
foreclosure are based on appraisals. Losses arising from the acquisition
of foreclosed properties are charged against the allowance for loan
losses. Subsequent writedowns are provided by a charge to income through
an allowance for losses on other real estate in the period in which the
need arises.
Income Taxes
The Company uses the liability method of accounting for income taxes
which requires the recognition of deferred tax assets and liabilities for
the future tax consequences attributable to differences between the
financial statement carrying amounts of existing assets and liabilities
and their respective tax basis. Additionally, this method requires the
recognition of future tax benefits, such as net operating loss
carryforwards, 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, management evaluates the
probability of being able to realize the future benefits indicated by
such asset. 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
realization of the deferred tax assets, management considers the
scheduled reversals of deferred tax liabilities, projected future taxable
income, and tax planning strategies.
Statement of Cash Flows
For purposes of reporting cash flows, the Company includes cash and due
from banks and federal funds sold.
Net Earnings Per Common 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 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. Basic earnings per common share
are based on the weighted average number of common shares outstanding
during the period while the effects of potential common shares
outstanding during the period are included in diluted earnings per share.
<PAGE>42
GEORGIA BANCSHARES, INC. AND SUBSIDIARY
Notes to Consolidated Financial Statements, continued
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, continued
Net Earnings Per Common Share, continued
SFAS No. 128 requires the presentation on the face of the earnings
statement of earnings per common 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 "basic earnings per share" and "diluted earnings per share".
Earnings per common share amounts for the years ended December 31, 1998,
1997 and 1996 are as follows:
<TABLE>
<CAPTION>
For the Year Ended December 31, 1998
Net Earnings Common Share Per Share
(Numerator) (Denominator) Amount
<S> <C> <C> <C>
Earnings per common share $ 844,306 1,460,812 $ .58
===
Effects of dilutive stock options - 17,149
---------- -----------
Earnings per common share - assuming dilution $ 844,306 1,477,961 $ .57
======= ========= ===
</TABLE>
<TABLE>
<CAPTION>
For the Year Ended December 31, 1997
Net Earnings Common Share Per Share
(Numerator) (Denominator) Amount
<S> <C> <C> <C>
Earnings per common share: $ 621,998 1,460,570 $ .43
===
Effects of dilutive stock options - 13,670
------------ -----------
Earnings per common share - assuming dilution $ 621,998 1,474,240 $ .42
======= ========= ===
</TABLE>
<TABLE>
<CAPTION>
For the Year Ended December 31, 1996
Net Earnings Common Share Per Share
(Numerator) (Denominator) Amount
<S> <C> <C> <C>
Earnings per common share $ 535,457 1,460,570 $ .37
====
Effects of dilutive stock options - 6,988
------------ ------------
Earnings per common share - assuming dilution $ 535,457 1,467,558 $ .36
======= ========= ===
</TABLE>
Recent Accounting Pronouncements
In 1998, the Financial Accounting Standards Board issued SFAS No. 133,
"Accounting for Derivative Instruments and Hedging Activities". SFAS No.
133 establishes accounting and reporting standards for hedging activities
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 a derivative depends on the intended use
of the derivative instrument 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 No. 133 is effective for all fiscal
quarters of all fiscal years 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 No. 133 will not have a material impact on its financial
position, results of operations or liquidity.
<PAGE>43
GEORGIA BANCSHARES, INC. AND SUBSIDIARY
Notes to Consolidated Financial Statements, continued
(2) INVESTMENT SECURITIES
Investment securities available for sale at December 31, 1998 and 1997,
are as follows:
<TABLE>
<CAPTION>
December 31, 1998
Gross Gross Gross Estimated
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
U.S. Treasuries and U.S.
<S> <C> <C> <C> <C>
Government agencies $ 4,862,282 7,513 6,345 4,863,450
Mortgage-backed securities
and collateralized mortgage
obligations 8,412,144 8,861 59,860 8,361,145
State and municipal Securities 3,958,299 46,685 28,977 3,976,007
---------- ------ ------ ----------
Total $ 17,232,725 63,059 95,182 17,200,602
========== ====== ====== ==========
</TABLE>
<TABLE>
<CAPTION>
December 31, 1997
Gross Gross Gross Estimated
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
U.S. Treasuries and U.S.
<S> <C> <C> <C> <C>
Government agencies $ 11,680,106 25,782 25,049 11,680,839
Mortgage-backed securities
and collateralized mortgage
obligations 6,372,133 8,869 36,280 6,344,722
State and municipal Securities 803,961 5,459 - 809,420
------------ ------- ----------- ---------
Total $ 18,856,200 40,110 61,329 18,834,981
========== ====== ====== ==========
</TABLE>
The amortized cost and fair value of securities available for sale at
December 31, 1998, by contractual maturity, are shown below. Expected
maturities will differ from contractual maturities because borrowers have
the right to call or prepay obligations with or without call or
prepayment penalties.
<TABLE>
<CAPTION>
Amortized Estimated
Cost Fair Value
<S> <C> <C>
1 to 5 years $ 1,350,415 1,356,867
5 to 10 years 2,512,319 2,506,270
Over 10 years 4,957,847 4,976,320
Mortgage-backed securities and collateralized
mortgage obligations 8,412,144 8,361,145
----------- -----------
$ 17,232,725 17,200,602
========== ==========
</TABLE>
Proceeds from sales of securities available for sale during 1998 and 1997
were $10,294,738 and $4,510,305, respectively. Gross gains of $48,987 and
$2,587 and gross losses of $25,075 and $5,361 were realized on those
sales in 1998 and 1997, respectively. There were no sales of securities
during 1996.
Securities with a carrying value of approximately $5,781,000 and $700,000
at December 31, 1998 and 1997, respectively, were pledged to secure
public deposits and for other purposes.
At December 31, 1998 and 1997, the Bank has no outstanding derivative
financial instruments such as swaps, options, futures, or forward
contracts.
<PAGE>44
GEORGIA BANCSHARES, INC. AND SUBSIDIARY
Notes to Consolidated Financial Statements, continued
(3) LOANS
Major classifications of loans are summarized as follows:
<TABLE>
<CAPTION>
1998 1997
---- ----
<S> <C> <C>
Commercial $ 11,993,435 12,181,292
Real estate - mortgage 31,380,152 23,392,894
Real estate - construction and land development 8,044,320 6,586,647
Consumer 3,487,340 3,184,751
----------- -----------
54,905,247 45,345,584
Less: Allowance for loan losses 740,617 696,679
------------ ------------
Net loans $ 54,164,630 44,648,905
========== ==========
</TABLE>
The Bank grants loans and extensions of credit to individuals and a
variety of firms and corporations located primarily in the Georgia
counties of DeKalb and Gwinnett. Although the Bank has a diversified loan
portfolio, a substantial portion of the loan portfolio is collateralized
by improved and unimproved real estate and is dependent upon the real
estate market.
An analysis of the activity in the allowance for loan losses is presented
below:
<TABLE>
<CAPTION>
1998 1997 1996
---- ---- ----
<S> <C> <C> <C>
Balance at beginning of year $ 696,679 459,383 401,430
Provision for loan losses 263,000 235,500 90,000
Loans charged off (233,156) (4,374) (49,966)
Recoveries on loans charged off 14,094 6,170 17,919
-------- -------- --------
Balance at end of year $ 740,617 696,679 459,383
======= ======= =======
</TABLE>
(4) PREMISES AND EQUIPMENT
Premises and equipment are summarized as follows:
<TABLE>
<CAPTION>
1998 1997
<S> <C> <C>
Land $ 1,334,914 1,334,914
Buildings and improvements 1,179,164 1,157,414
Equipment, furniture and fixtures 1,172,522 1,045,461
--------- ---------
3,686,600 3,537,789
Less: Accumulated depreciation 897,212 684,375
---------- ----------
$ 2,789,388 2,853,414
========= =========
</TABLE>
Depreciation expense was approximately $213,000, $201,000 and $149,000 for the
years ended December 31, 1998, 1997 and 1996 respectively.
<PAGE>45
GEORGIA BANCSHARES, INC. AND SUBSIDIARY
Notes to Consolidated Financial Statements, continued
(5) EMPLOYEE AND DIRECTOR BENEFIT PLANS
The Bank purchased life insurance contracts to provide benefits to its
directors under Executive Supplemental Income Plan agreements. Under
these agreements, the Bank is obligated to pay death benefits to the
beneficiaries of its directors. These death benefits are funded through
the purchase of split-dollar whole life insurance policies on the lives
of each Director. The increase in cash surrender value of the contracts,
less the Bank's cost of funds, constitutes the Bank's contributions to
the plan each year. In the event the insurance contracts fail to produce
certain returns, the Bank has no obligation to contribute to the plan. At
December 31, 1998 and 1997, the cash surrender value of the insurance
contracts was approximately $890,000 and $858,000 and is included as a
component of other assets. Expenses approximating $32,200 and $19,200 in
1998 and 1997, respectively, were incurred for benefits relating to this
plan. Income related to the insurance policies of approximately $31,500,
$42,200 and $16,200 was included in other income for the years ended
December 31, 1998, 1997 and 1996, respectively.
The Company also has a defined contribution plan intended to comply with
the requirements of section 401(k) of the Internal Revenue Code, covering
substantially all employees subject to certain minimum age and service
requirements. Contributions to the plan are determined annually by the
Board of Directors. There were no Company contributions to the plan
during 1998, 1997 or 1996.
(6) DEPOSITS
At December 31, 1998, maturities of time deposits are as follows:
Maturing In:
1999 $ 28,720,109
2000 3,108,010
2001 1,329,684
2002 2,220,621
2003 1,917,818
Thereafter 8,247
----------
$ 37,304,489
==========
Deposits from related parties totaled approximately $946,000 and
$1,279,000 at December 31, 1998 and 1997. Time deposits of $100,000 or
more were approximately $9,382,000 and $16,461,000 at December 31, 1998
and 1997.
(7) FEDERAL HOME LOAN BANK ADVANCES
At December 31, 1998 had an advance outstanding from the Federal Home
Loan Bank (FHLB) of Atlanta in the amount of $3,000,000 which matures on
October 16, 2003. The interest rate on the advance was 4.41%. Investment
securities were pledged to collateralize the advance.
(8) INCOME TAXES
The consolidated income tax expense (benefit) is summarized as follows:
<TABLE>
<CAPTION>
1998 1997 1996
---- ---- ----
<S> <C> <C> <C>
Current tax expense $ 423,915 430,557 204,444
Deferred tax expense (68,028) (91,675) 56,935
Reduction in deferred tax valuation
allowance - - (35,271)
--------- --------- ---------
$ 355,887 338,882 226,108
======= ======= =======
</TABLE>
<PAGE>46
GEORGIA BANCSHARES, INC. AND SUBSIDIARY
Notes to Consolidated Financial Statements, continued
(8) INCOME TAXES, continued
Income tax expense at the statutory federal income tax rate is reconciled
to the Company's actual income tax expense as follows:
<TABLE>
<CAPTION>
1998 1997 1996
---- ---- ----
<S> <C> <C> <C>
Tax provision at statutory rate $ 408,066 326,699 258,932
Reduction in deferred tax valuation allowance - - (35,271)
Tax exempt investment income (42,100) (2,730) -
Other (10,079) 14,913 2,447
------- -------- ---------
$ 355,887 338,882 226,108
======= ======= =======
</TABLE>
The following summarizes the sources and expected tax consequences of
future taxable deductions (income) which comprise the net deferred taxes.
<TABLE>
<CAPTION>
1998 1997
---- ----
Deferred income tax assets:
<S> <C> <C>
Allowance for loan losses $ 248,861 211,182
Unrealized losses on securities available for sale 12,194 8,055
Deferred compensation 41,578 17,472
Deferred loan fees - 7,125
Other real estate writedowns 18,980 29,094
Operating loss and credit carryforwards and other 59,241 36,820
-------- --------
Total gross deferred income tax assets 380,854 309,748
------- -------
Deferred income tax liabilities consisting of
premises and equipment (37,271) (28,158)
------- --------
Net deferred income taxes $ 343,583 281,590
======= =======
</TABLE>
(9) STOCKHOLDERS' EQUITY AND DIVIDEND RESTRICTIONS
On May 21, 1998, the Company's board of directors declared a five-for-two
common stock split which was effected in the form of a stock dividend and
was distributed on June 23, 1998. Accordingly, all numbers of common
shares and per share data including par value and authorized shares have
been restated to reflect the stock split.
Dividends paid by the Bank are the primary source of funds available to
the Company for payment of dividends to its shareholders and other needs.
Banking regulations restrict the amount of dividends which the Bank may
pay without obtaining prior approval. In addition to the formal statutes
and regulations, regulatory authorities also consider the adequacy of the
Bank's total capital in relation to its assets, deposits and other such
items. Capital adequacy considerations could further limit the
availability of dividends from the Bank. At December 31, 1998, the Bank
could have declared dividends without prior approval of regulatory
authorities of approximately $477,000.
<PAGE>47
GEORGIA BANCSHARES, INC. AND SUBSIDIARY
Notes to Consolidated Financial Statements, continued
(10) STOCK OPTIONS
In May 1996, the Company adopted the Directors Stock Option Plan. This
plan provides for the issuance of stock options for up to 100,000 shares
of the Company's common stock. Options under this plan are granted at a
rate of 2,038 shares per year for each director who meets specific
attendance standards. Options under the plan are at an option price equal
to the book value per share as of December 31 of the fiscal year for
which the options are granted. The options are exercisable any time after
the date of grant, and expire ten years from date of the grant.
A summary status of the Directors' Stock Option Plan as of December 31,
1998, 1997 and 1996, and changes during the years ending on those dates,
is presented below:
<TABLE>
<CAPTION>
1998 1997 1996
Wtd. Avg. Wtd. Avg. Wtd. Avg.
Option Exercise Option Exercise Option Exercise
Shares Price Shares Price Shares Price
<S> <C> <C> <C> <C> <C> <C>
Outstanding, beginning of year 26,488 $ 4.04 14,263 $ 3.92 - -
Granted during the year 14,266 $ 4.55 12,225 $ 4.17 14,263 $ 3.92
Cancelled during the year - - - - - -
------- ------- -------
Outstanding, end of year 40,754 $ 4.22 26,488 $ 4.04 14,263 $ 3.92
====== ====== ======
Options exercisable at year end 40,754 $ 4.22 26,488 $ 4.04 14,263 $ 3.92
====== ====== ======
</TABLE>
The weighted average remaining contractual life for these options is 8.55
years at December 31, 1998.
Additionally, in May 1996, the Company adopted the Employee Incentive
Stock Option Plan. This plan provides for the issuance of stock options
for up to 100,000 shares of the Company's common stock. Options under
this plan are granted at the discretion of the Company's Board of
Directors and are at an option price not less than the fair value of the
Company's common stock at the date of grant. The options are exercisable
any time after the date of the grant, subject to restrictions determined
by the Board, and expire ten years from date of the grant.
A summary status of the Employee Incentive Stock Option Plan's activity
as of December 31, 1998 and 1997 and changes during the years ending on
those dates, is presented below:
<TABLE>
<CAPTION>
1998 1997
Wtd. Avg. Wtd. Avg.
Option Exercise Option Exercise
Shares Price Shares Price
<S> <C> <C> <C> <C>
Outstanding, beginning of year 4,750 $ 5.00 - -
Granted during the year 5,000 $ 7.40 4,750 $ 5.00
Cancelled during the year (786) $ 5.39 - -
Exercised during the year (1,062) $ 5.00 - -
----- ------ --------
Outstanding, end of year 7,902 $ 6.28 4,750 $ 5.00
====== =====
Options exercisable at year end 7,902 $ 6.28 4,750 $ 5.00
====== ======
</TABLE>
The weighted average remaining contractual life for these options is
nine years at December 31, 1998.
<PAGE>48
GEORGIA BANCSHARES, INC. AND SUBSIDIARY
Notes to Consolidated Financial Statements, continued
(10) STOCK OPTIONS, continued
SFAS No. 123, "Accounting for Stock Based Compensation," became effective
for the Company January 1, 1996. This statement encourages but does not
require entities to compute the fair value of options at the date of
grant and to recognize such costs as compensation expense immediately if
there is no vesting period or ratably over the vesting period of the
options. The Company has chosen not to adopt the cost recognition
principles of this statement. Both director and employee options are
accounted for under Accounting Principles Board Opinion No. 25 and its
related interpretations. The Company recognized $15,000 of compensation
expense in 1998 in connection with the issuance of director options. Had
compensation cost been determined based upon the fair value of the
options at the grant dates consistent with the method of SFAS No. 123,
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>
Net earnings As reported $ 844,306 621,998 535,457
Proforma $ 834,167 610,138 527,110
Basic earnings per share As reported $ .58 .43 .37
Proforma $ .57 .42 .36
Diluted earnings per share As reported $ .57 .42 .36
Proforma $ .56 .41 .36
</TABLE>
The weighted average grant-date fair value of all options granted in
1998, 1997 and 1996 was $1.64, $2.82 and $2.36, respectively.
The fair value of each option grant is estimated on the date of grant
using the minimum value method with the following weighted average
assumptions used for grants in 1998, 1997 and 1996, respectively:
dividend yield of 2%; risk free interest rates of 5.00%, 6.00% and 5.11%,
respectively, and an expected life of 5 years.
(11) RELATED PARTY TRANSACTIONS
The Bank conducts transactions with directors and officers, including
companies in which they have beneficial interest, in the normal course of
business. It is the policy of the Bank that loan transactions with
directors and officers be made on substantially the same terms as those
prevailing at the time for comparable loans to other persons. The
following is a summary of activity for related party loans for 1998:
Beginning balance $ 772,667
Loans advanced 204,422
Repayments (627,799)
--------
Ending balance $ 349,290
=======
(12) 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, standby letters of credit and financial guarantees. Those
instruments involve, to varying degrees, elements of credit risk in
excess of the amount recognized in the balance sheet. The contract
amounts of those instruments reflect the extent of involvement the Bank
has in particular classes of financial instruments.
The exposure to credit loss in the event of nonperformance by the other
party to the financial instrument for commitments to extend credit and
standby letters of credit and financial guarantees written 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.
<PAGE>49
GEORGIA BANCSHARES, INC. AND SUBSIDIARY
Notes to Consolidated Financial Statements, continued
(12) COMMITMENTS, continued
In most cases, the Bank requires collateral or other security to support
financial instruments with credit risk.
<TABLE>
<CAPTION>
December 31
Approximate
Contract Amount
1998 1997
Financial instruments whose contract amounts represent credit
risk:
<S> <C> <C>
Commitments to extend credit $ 16,268,000 16,086,000
Standby letters of credit and $ 607,000 59,000
financial guarantees written
</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 and financial guarantees written are
conditional commitments issued by the Bank to guarantee the performance
of a customer to a third party. Those guarantees are primarily issued to
local businesses. The credit risk involved in issuing letters of credit
is essentially the same as that involved in extending loan facilities to
customers. The Bank holds certificates of deposit as collateral
supporting those commitments for which collateral is deemed necessary.
The extent of collateral held for those commitments varies. All letters
of credit were collateralized at December 31, 1998 and 1997.
(13) 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 $ 77,882 58,290 55,467
Advertising and marketing $ 53,120 56,408 63,026
Stationery and supplies $ 75,807 75,190 62,065
Data processing fees $ 106,578 106,250 63,650
Postage and courier $ 48,781 46,590 47,587
Merger expenses $ 77,834 - -
</TABLE>
<PAGE>50
GEORGIA BANCSHARES, INC. AND SUBSIDIARY
Notes to Consolidated Financial Statements, continued
(14) GEORGIA BANCSHARES, INC. (PARENT COMPANY ONLY) FINANCIAL INFORMATION
<TABLE>
<CAPTION>
Balance Sheets
December 31, 1998 and 1997
Assets
1998 1997
---- ----
<S> <C> <C>
Cash $ 34,475 11,515
Investment in bank subsidiary 7,331,085 6,609,267
Other assets 51,564 29,995
----------- -----------
7,417,124 6,650,777
Liabilities and Stockholders' Equity
Accrued expenses 55,000 -
Stockholders' equity 7,362,124 6,650,777
--------- ---------
$ 7,417,124 6,650,777
========= =========
</TABLE>
<TABLE>
<CAPTION>
Statements of Earnings
For the Years Ended December 31, 1998, 1997 and 1996
1998 1997 1996
---- ---- ----
Income:
<S> <C> <C> <C>
Interest income $ 652 341 608
Dividends from bank subsidiary 225,716 116,844 87,634
Other income 300 - -
------- ------- --------
226,668 117,185 88,242
------- ------- --------
Other operating expenses 167,608 26,824 19,633
------- ------ --------
Earnings before income taxes and equity in
undistributed earnings of bank subsidiary 59,060 90,361 68,609
Income tax benefit 56,663 9,004 8,248
-------- --------- --------
Earnings before equity in undistributed earnings
of bank subsidiary 115,723 99,365 76,857
Equity in undistributed earnings of bank subsidiary 728,583 522,633 458,600
------- ------- -------
Net earnings $ 844,306 621,998 535,457
======= ======= =======
</TABLE>
<PAGE>51
GEORGIA BANCSHARES, INC. AND SUBSIDIARY
Notes to Consolidated Financial Statements, continued
(14) GEORGIA BANCSHARES, INC. (PARENT COMPANY ONLY) FINANCIAL INFORMATION,
continued
Statements of Cash Flows
For the Years Ended December 31, 1998, 1997 and 1996
<TABLE>
<CAPTION>
1998 1997 1996
---- ---- ----
Cash flows from operating activities:
<S> <C> <C> <C>
Net earnings $ 844,306 621,998 535,457
Adjustments to reconcile net earnings to net cash
provided by operating activities:
Equity in undistributed earnings of bank subsidiary (728,583) (522,633) (458,600)
Amortization and depreciation 24,295 9,892 9,382
Change in other assets (45,864) (899) (5,030)
Change in other liabilities 55,000 - -
-------- -------- --------
Net cash provided by operating activities 149,154 108,358 81,209
------- ------- -------
Cash flows from financing activities:
Payments of dividends (131,504) (116,844) (87,634)
Proceeds from exercise of stock options 5,310 - -
-------- --------- --------
Net cash used by financing activities (126,194) (116,844) (87,634)
------- ------- --------
Net change in cash 22,960 (8,486) (6,425)
Cash at beginning of the period 11,515 20,001 26,426
------ -------- --------
Cash at end of period $ 34,475 11,515 20,001
====== ======== ========
Supplemental disclosure of noncash investing activities:
Change in unrealized loss on investment securities available
for sale of bank subsidiary, net of tax $ (6,765) 49,857 (81,752)
====== ======== ========
</TABLE>
(15) REGULATORY MATTERS
The Company is subject to various regulatory capital requirements
administered by state and federal banking agencies. Failure to meet
minimum capital requirements can initiate certain mandatory -- and
possibly additional discretionary -- actions by regulators that, if
undertaken, could have a direct material effect on the Company's
financial statements. Under capital adequacy guidelines and the
regulatory framework for prompt corrective action the Company must meet
specific capital guidelines that involve quantitative measures of the
Company's assets, liabilities, and certain off-balance-sheet items as
calculated under regulatory accounting practices. The Company'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 Company to maintain minimum amounts and ratios (set
forth in the table below) of total and Tier 1 capital (as defined in the
regulations) to risk-weighted assets (as defined), and of Tier 1 capital
(as defined, to average assets (as defined). Management believes, as of
December 31, 1998 and 1997, that the Company meets all capital adequacy
requirements to which it is subject.
<PAGE>52
GEORGIA BANCSHARES, INC. AND SUBSIDIARY
Notes to Consolidated Financial Statements, continued
(15) REGULATORY MATTERS, continued
As of December 31, 1998 the most recent notification from the various
regulators categorized the Company and 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 in the table. There are
no conditions or events since that notification that management believes
have changed the institution's category.
The Company's actual capital amounts and ratios are also presented in the
table below.
<TABLE>
<CAPTION>
To Be Well
Capitalized Under
For Capital Prompt Corrective
Actual Adequacy Purposes Action Provisions
Amount Ratio Amount Ratio Amount Ratio
As of December 31, 1998
Total Capital (to Risk Weighted Assets):
<S> <C> <C> <C> <C> <C> <C>
Consolidated $ 8,228,591 12.6% 5,222,185 >8.0% N/A N/A
Bank only $ 8,197,552 12.6% 5,219,120 >8.0% 6,523,900 >10.0%
Tier 1 Capital (to Risk Weighted Assets):
Consolidated $ 7,487,974 11.5% 2,611,092 >4.0% N/A N/A
Bank only $ 7,456,935 11.4% 2,609,560 >4.0% 3,914,340 >6.0%
Tier 1 Capital (to Average Assets):
Consolidated $ 7,487,974 9.8% 3,072,059 >4.0% N/A N/A
Bank only $ 7,456,935 9.7% 3,070,527 >4.0% 3,838,159 >5.0%
As of December 31, 1997
Total Capital (to Risk Weighted Assets):
Consolidated $ 7,462,542 13.3% 4,495,694 >8.0% N/A N/A
Bank only $ 7,421,031 13.2% 4,493,360 >8.0% 5,616,700 >10.0%
- -
Tier 1 Capital (to Risk Weighted Assets):
Consolidated $ 6,769,863 12.0% 2,247,847 >4.0% N/A N/A
Bank only $ 6,728,352 12.0% 2,246,680 >4.0% 3,370,202 > 6.0%
- -
Tier 1 Capital (to Average Assets):
Consolidated $ 6,769,863 10.4% 2,615,220 >4.0% N/A N/A
Bank only $ 6,728,352 10.3% 2,613,320 >4.0% 3,266,650 >5.0%
- -
</TABLE>
(16) PROPOSED MERGER
On December 29, 1998, the Board of Directors approved an agreement to
merge with First Sterling Banks, Inc. (First Sterling), a Marietta,
Georgia based bank holding company. The agreement calls for each share of
Company stock to be exchanged for one share of First Sterling common
stock. The transaction is subject to stockholder and regulatory approval.
<PAGE>53
GEORGIA BANCSHARES, INC. AND SUBSIDIARY
Notes to Consolidated Financial Statements, continued
(17) Fair Value of Financial Instruments
SFAS No. 107, "Disclosures about Fair Value of Financial Instruments",
requires disclosure of fair value information about financial instruments,
whether or not recognized on the face of the balance sheet, for which it
is practicable to estimate that value. The assumptions used in the
estimation of the fair value of the company's financial instruments are
detailed below. Where quoted prices are not available, fair values are
based on estimates using discounted cash flows and other valuation
techniques. The use of discounted cash flows can be significantly affected
by the assumptions used, including the discount rate and estimates of
future cash flows. The following disclosures should not be considered a
surrogate of the liquidation value of the Company, but rather a good-faith
estimate of the increase or decrease in value of financial instruments
held by the Company since purchase, origination, or issuance.
Cash and Cash Equivalents
For cash and due from banks and federal funds sold, the carrying amount is
a reasonable estimate of fair value.
Investment Securities
Fair values for investment securities are based on quoted market prices.
Other Investments
The carrying value of other investments approximates fair value.
Loans
The fair value of fixed rate loans is estimated by discounting the future
cash flows using the current rates at which similar loans would be made to
borrowers with similar credit ratings. For variable rate loans, the
carrying amount is a reasonable estimate of fair value.
Deposits
The fair value of demand deposits, savings accounts, NOW accounts and
certain money market deposits is the amount payable on demand at the
reporting date. The fair value of fixed maturity certificates of deposit
is estimated by discounting the future cash flows.
FHLB Advances
The fair value of the FHLB fixed rate borrowings are estimated using
discounted cash flows, based on the current incremental borrowing rates
for similar types of borrowing arrangements.
Commitments to Extend Credit, Standby Letters of Credit and Financial
Guarantees Written Because commitments to extend credit and standby
letters of credit are made using variable rates, the contract value is a
reasonable estimate of fair value.
Limitations
Fair value estimates are made at a specific point in time, based on
relevant market information and information about the financial
instrument. These estimates do not reflect any premium or discount that
could result from offering for sale at one time the Company's entire
holdings of a particular financial instrument. Because no market exists
for a significant portion of the Company's financial instruments, fair
value estimates are based on many judgments. These estimates are
subjective in nature and involve uncertainties and matters of significant
judgment and therefore cannot be determined with precision. Changes in
assumptions could significantly affect the estimates.
Fair value estimates are based on existing on and off-balance-sheet
financial instruments without attempting to estimate the value of
anticipated future business and the value of assets and liabilities that
are not considered financial instruments. Significant assets and
liabilities that are not considered financial instruments include deferred
income taxes and premises and equipment. In addition, the tax
ramifications related to the realization of the unrealized gains and
losses can have a significant effect on fair value estimates and have not
been considered in the estimates.
<PAGE>54
GEORGIA BANCSHARES, INC. AND SUBSIDIARY
Notes to Consolidated Financial Statements, continued
(17) Fair Value of Financial Instruments, continued
The carrying amount and estimated fair values of the Company's financial
instruments as of December 31, 1998, are as follows:
<TABLE>
<CAPTION>
Carrying Estimated
Amount Fair Value
Assets:
<S> <C> <C>
Cash and cash equivalents $ 6,085,026 6,085,026
Securities available for sale $ 17,200,602 17,200,602
Other investments $ 228,300 228,300
Loans, net $ 54,164,630 54,411,982
Liabilities:
Deposits $ 71,851,638 72,108,998
Federal Home Loan Bank advances $ 3,000,000 2,909,732
Unrecognized financial instruments:
Commitments to extend credit $ 16,268,000 16,268,000
Standby letters of credit $ 607,000 607,000
</TABLE>
<PAGE>55
ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
ACCOUNTING AND FINANCIAL DISCLOSURE
There are no changes in or disagreements with accountants on accounting and
financial disclosure.
PART III
ITEM 9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS;
COMPLIANCE WITH SECTION 16(a) OF THE EXCHANGE ACT
Bank Management
The following sets forth the name, age and principal occupation of each
director of Georgia Bancshares, Inc. (the Company"):
Name Age Principal Occupation
Eugene L. Argo 66 Eugene L. Argo is President of
Stacy's Pharmacy, Inc. He also
serves as Vice President of Medical
Therapies, Inc.
James L. Armstrong, Jr. 59 James L. Armstrong, Jr. is the owner
of Jim Armstrong Insurance Agency.
Ted A. Murphy 62 Ted A. Murphy is President and Chief
Executive Officer of Community Bank
of Georgia. Mr. Murphy began his
banking career with First National
Bank of Atlanta in 1954 and worked
in several operational areas of
the bank. In 1961, he joined
The Citizens and Southern National
Bank. In 1969, Mr. Murphy helped
establish a new State Bank Charter
in Clarkston, Georgia (Citizens
Bank of Clarkston, later Citizens
DeKalb Bank). He served Citizens
DeKalb Bank in the capacity of
President, CEO and Chairman of the
Board of Directors until 1986 when
the bank was purchased by First
Union. After this acquisition, Mr.
Murphy served First Union in the
area of Branch Supervision.
H. E. Norton 67 H.E. Norton is President of Norco,
Inc. and its insurance agency
subsidiaries.
<PAGE>56
Robert C. Pittard 57 Robert C. Pittard is the President
of Tucker Concrete Company, Inc.
Larry N. Reed 52 Larry N. Reed is a partner
with the public accounting
firm of Reed, Quinn & McClure.
Dr. Dean T. Teusaw 58 Dr. Dean T. Teusaw is engaged in
the practice of dentistry.
On July 16, 1998, Mr. Thomas M. Carnes retired from the Board and was
elected Director Emeritus.
All of the Company's directors (except Mr. Pittard and Mr. Reed who was
appointed to the Board in 1996 and 1998, respectively) have served in such
capacity since its inception in 1995. The directors are elected on staggered
terms of three years each. Messrs. Argo and Murphy are incumbent directors whose
terms expire in 1998; Messrs. Norton and Teusaw are incumbent directors whose
terms expire in 1999; and Messrs. Armstrong, Reed and Pittard are incumbent
directors whose terms expire in 2000. There are no arrangements or
understandings between the Company and any person pursuant to which any of the
above persons have been or will be elected a director. There are no family
relations between any of the directors or executive officers of the Company or
the Bank.
Ted A. Murphy has been the President and Chief Executive Officer of the
Bank since its organization. Background information on Mr. Murphy is set forth
above.
Joel Taylor, Jr., age 49, joined the Bank in 1998 as Executive Vice
President and Senior Credit Officer. Mr. Taylor has been associated with the
banking and financial industries for approximately twenty-five years. Mr. Taylor
served as a Regional President for Bank South Corporation (now NationsBank) in
Lawrenceville, Georgia from May 1992 until April 1996. From May 1996 until his
employment by the Bank, he served as Chief Financial Officer and co-founder of
Assist, Inc. an entrepreneurial venture in Lexington, South Carolina.
David L. Edgar, age 36, joined the Bank in 1995 as Senior Vice
President and Chief Financial Officer. Mr. Edgar has been associated with the
banking industry for approximately thirteen years. The majority of his
experience has been with the public accounting and consulting industry. Mr.
Edgar served as Vice President-Management Advisory Services for Bricker &
Melton, P.A. in Duluth, Georgia from December 1990 until August 1994. From
August 1994 until his employment by Community Bank of Georgia, he served as Vice
President and Chief Financial Officer of a local federally chartered credit
union in Atlanta, Georgia.
<PAGE>57
Meetings of the Board of Directors
The Board of Directors of the Company had 9 meetings during the 1998
fiscal year. Each director of the Company attended at least 75% of the board
meetings and committee meetings of which such director was a member. The Board
of Directors of the Bank had 15 meetings during the 1998 fiscal year. Each
director of the Bank attended at least 75% of the total number of board meetings
of the Bank.
The Board of Directors of the Company has a Stock Option Plan
Committee. The Board of Directors of the Bank has an Executive Committee, Loan
Committee, Compensation/Personnel Committee, Audit Committee and Investment
Committee.
ITEM 10. EXECUTIVE COMPENSATION
COMPENSATION OF EXECUTIVE OFFICERS AND DIRECTORS
Executive Compensation
The Company does not separately compensate any of its directors or
executive officers. The following sets forth certain information concerning the
compensation of the Bank's chief executive officer during fiscal years 1998,
1997 and 1996. No other executive officer received annual compensation in excess
of $100,000.
<TABLE>
<CAPTION>
Summary Compensation Table
Long Term
Compensation
Annual Compensation Awards
Securities
Name and Other Annual Underlying All Other
Principal Fiscal Compensation Options Compensation
Position Year Salary ($) Bonus ($) ($)(1) (#)(2) ($)(3)
- -------- ---- ---------- --------- ------------ ------------ -----------
<S> <C> <C> <C> <C> <C> <C>
Ted A. Murphy 1998 $138,400 $0 $ - 3,288 $ 7,000
President and Chief 1997 $129,938 $37,201(4) $ * 3,288 $ 6,497
Executive Officer 1996 $118,125 $18,281 $ * 2,038 $ 5,907
</TABLE>
(1) Compensation does not include any perquisites and other personal
benefits which may be derived from business-related expenditures that
in the aggregate do not exceed the lesser of $50,000 or 10% of the
total annual salary and bonus reported for such person.
(2) The Company granted 2,038 stock options to Mr. Murphy pursuant to the
Company's Directors Stock Option Plan, all of which became exercisable
in 1998,1997 and 1996. In addition, the Company granted 1250 and 1250
stock options to Mr. Murphy pursuant to the Company's Employee Stock
Option Plan, all became exercisable in 1998 and 1997.
(3) Mr. Murphy received a 5% employee compensation bonus from the Bank
equal to $7,000, $6,497, $5,907 in 1998, 1997 and 1996 respectively.
(4) (4)Includes (a) 1996 Bank bonus of $17,719 paid in January 1997 and (b)
1997 Bank bonus of $19,491 paid in December 1997.
<PAGE>58
The following table sets forth certain information concerning each grant(1) of
stock options to purchase the Company's common stock made during the 1998 fiscal
year to the executive officer named in the Summary Compensation Table:
<TABLE>
<CAPTION>
Option Grants in Last Fiscal Year
Individual Grants
Number of % of Total
Securities Options
Underlying Granted to Exercise or Base
Options Employees in Price Expiration
Name Granted (#) Fiscal Year ($/Sh) Date
<S> <C> <C> <C> <C>
Ted A. Murphy 3,288 26% (2).. 6/1/2007
</TABLE>
(1) The Company granted 2,038 stock options to Mr. Murphy pursuant to the
Company's Directors Stock Option Plan, all of which became exercisable
in 1997. In addition, the Company granted 1,250 stock options to Mr.
Murphy pursuant to the Company's Employee Incentive Stock Option Plan,
all of which became exercisable in 1998.
(2) The exercise price of the 2,038 shares granted pursuant to the
Company's Directors Stock Option Plan is $4.55 per share. The exercise
price of the 500 shares granted pursuant to the Company's Employee
Incentive Stock Option Plan is $7.40 per share.
The following table sets forth certain information regarding the exercise of
stock options in the 1998 fiscal year by the executive officer named in the
Summary Compensation Table and the value of options held by such executive
officer at the end of such fiscal year:
<TABLE>
<CAPTION>
Aggregated Option Exercises in Last Fiscal Year
and Fiscal Year-End Option Values
Number of
Securities
Underlying
Unexercised Value of Unexercised
Options at In-the-Money Options
FY-End (#) at FY-End ($)
Shares Acquired Value Realized Exercisable/ Exercisable/
Name on Exercise (#) ($) Unexercisable Unexercisable(1)
<S> <C> <C> <C> <C>
Ted A. Murphy 0 0 0 $62,108/$0
</TABLE>
(1) Market value of shares covered by in-the-money options, less option
exercise price. Options are in the money if the market value of the
shares covered thereby is greater than the option exercise price.
Employment Agreement
Ted A. Murphy is the President and Chief Executive Officer of the Bank
pursuant to an Employment Agreement. This agreement provides for a term of
employment terminating on December 31, 2000, unless an extension thereto is
agreed to by the parties. The agreement provides that Mr. Murphy may be
terminated upon his death, disability or for "cause." Mr. Murphy may also be
terminated without cause. If terminated without cause, Mr. Murphy would be
entitled to receive severance compensation in the amount of his gross monthly
compensation at the time of said termination for a period of 24 consecutive
months or the remainder of the term of the Agreement whichever is greater.
Medical and disability benefits for Mr. Murphy and his family would be continued
during the 24-month period or the remainder of the term of the Agreement
whichever is greater at no expense to Mr. Murphy. Mr. Murphy would also be
entitled to receive severance compensation if a change of control of the Company
occurs and his duties are changed in connection therewith so that he is no
longer functioning as the Bank's Chief Executive Officer or he is no longer
given the title of President and Chief Executive Officer.
<PAGE>59
Under the Employment Agreement, Mr. Murphy will receive an annual base
salary through December 31, 1999 in the amount of $145,320. His annual base
salary will be increased by 5% for the year 2000 to $152,586. In addition, Mr.
Murphy will receive a performance bonus if certain targeted goals for the Bank's
performance are met, in an amount equal to 10% to 20% of annual base salary.
The Employment Agreement also provides for group health insurance for Mr. Murphy
and his immediate family, an allowance for country club or dining memberships in
an amount not to exceed $7,500 annually, a monthly car allowance (or in lieu
thereof a Bank-owned automobile), expenses for attendance at two trade
association conventions and four weeks paid vacation.
David L. Edgar is the Senior Vice President and Chief Financial Officer of
the Bank pursuant to an Employment Agreement. This agreement provides for a term
of employment terminating on December 31, 1999, unless an extension thereto is
agreed to by the parties. The agreement provides that Mr. Edgar may be
terminated upon his death, disability or for "cause." Mr. Edgar may also be
terminated without cause. If terminated without cause, Mr. Edagr would be
entitled to receive severance compensation in the amount of his gross monthly
compensation at the time of said termination for a period of 12 consecutive
months. Medical and disability benefits for Mr. Edgar and his family would be
continued during the 12-month period or the remainder of the term of the
Agreement whichever is greater at no expense to Mr. Edgar. Mr. Edgar has also
been provided with a Change of Control Contract, which expires July 1, 2001. Mr.
Edgar is entitled to receive severance compensation if a change of control of
the Company occurs and his duties are changed in connection therewith so that he
is no longer functioning as the Bank's Chief Executive Officer or he is no
longer given the title of Senior Vice President and Chief Financial Officer.
Under the Employment Agreement, Mr. Edgar will receive an annual base
salary through December 31, 1999 in the amount of $80,000. In addition to Mr.
Edgar's annual base salary, Mr. Edgar will receive a performance bonus if
certain targeted goals for the Bank's performance are met, in an amount equal to
12% of annual base salary. The Employment Agreement also provides for
group health insurance for Mr. Edgar and his immediate family, expenses for
attendance at one trade association conventions and three weeks paid vacation.
Director Compensation
The Company does not compensate any of its directors for their services as
directors. The directors of the Bank receive $400.00 for each board meeting and
$75.00 for each committee meeting.
<PAGE>60
ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL
OWNERS AND MANAGEMENT
PRINCIPAL SHAREHOLDERS
The following table sets forth certain information regarding the shares of
common stock of the Company owned as of the record date (i) by each person who
beneficially owns more than 5% of the shares of common stock of the Company,
(ii) by each of the Company's directors and (iii) by all directors and executive
officers of the Company as a group.
Beneficial Ownership(2)
Number Percentage
Name(1) of Shares Ownership
Eugene L. Argo(3) 144,473 9.9%
James L. Armstrong, Jr.(9) 68,404 4.6
Thomas M. Carnes(4) 26,500 1.8
Ted A. Murphy(5) 40,618 2.7
H. E. Norton(6) 56,114 3.8
Dr. Dean T. Teusaw(7) 21,814 1.5
Robert C. Pittard(8) 3,288 *
Larry Reed 0 *
All directors and executive
officers as a group (10 persons) 355,689 24.3%
* Percent share ownership is less than 1% of total shares outstanding.
(1) Except as otherwise indicated, the persons named in the above table
have sole voting and investment power with respect to all shares shown
as beneficially owned by them. The information as to beneficial
ownership has been furnished by the respective persons listed in the
above table.
(2) Based on 1,461,632 shares outstanding as of the record date plus 48,656
shares not outstanding but which are subject to options granting the
holders thereof the right to acquire the shares within 60 days through
the exercise of options.
(3) Includes 54,152 shares which are held of record by Mr. Argo's spouse
and as to which he disclaims beneficial ownership and 6,114 shares
representing unexercised options.
(4) Includes 3,489 shares which are held of record by Mr. Carnes' spouse
and 6,114 shares representing unexercised options.
(5) Includes 12,004 shares which are held of record by Mr. Murphy's spouse
and as to which he disclaims beneficial ownership and 8,614 shares
representing unexercised options.
(6) Includes 25,000 shares which are held of record by Mr. Norton's spouse
and 6,114 shares representing unexercised options.
(7) Includes (a) 250 shares which are held of record by Dr. Teusaw's spouse
and as to which he disclaims beneficial ownership, (b) 500 shares held
for Dr. Teusaw's minor children and as to which he disclaims beneficial
ownership and (c) 6,114 shares representing unexercised options.
(8) Includes 625 shares which are held of record by Mr. Pittard's spouse
and 2,038 shares representing unexercised options.
(9) Includes 6,114 shares representing unexercised options.
<PAGE> 61
Compliance with Section 16(A) of
The Securities Exchange Act of 1934
Section 16(a) of the Securities Exchange Act requires the Company's
officers and directors, and persons who own 10% or more of a registered class of
the Company's equity securities, to file with the Securities and Exchange
Commission initial reports of ownership and reports of changes in ownership of
Common Stock and other equity securities of the Company. Officers, directors and
10% or more stockholders are required by Securities and Exchange Commission
regulations to furnish the Company with copies of all Section 16(a) forms they
file.
To the Company's knowledge, based solely on review of the copies of
such reports furnished to the Company or written representations that no other
reports were required, during the fiscal year ended December 31, 1997, the
Company believes that all reports applicable to its officers, directors, and 10%
or more stockholders were complied within timely fashion.
ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Certain executive officers and directors of the Company and the Bank,
and principal shareholders of the Company and affiliates of such persons have,
from time to time, engaged in banking transactions with the Bank and are
expected to continue such relationships in the future. All loans or other
extensions of credit made by the Bank to such individuals were made in the
ordinary course of business on substantially the same terms, including interest
rates and collateral, as those prevailing at the time for comparable
transactions with unaffiliated parties and were believed by management to not
involve more than the normal risk of collectibility or to present other
unfavorable features. As of December 31, 1998, indebtedness to the Bank of
executive officers and directors of the Company and the Bank, and principal
shareholders of the Company, including affiliates of such persons, amounted to
$349,290 in the aggregate.
[REMAINDER OF THIS PAGE INTENTIONALLY LEFT BLANK]
<PAGE>62
ITEM 13. EXHIBITS AND REPORTS ON FORM 8-K
(a) 1. Financial Statements
The consolidated financial statements, notes thereto and independent
auditors' report thereon, filed as part hereof, are listed in Item 7.
2. Financial Statement Schedules
All schedules have been omitted as the required information is not
applicable.
3. Exhibits
Exhibit Numbers
3.1* Articles of Incorporation
3.2* Bylaws
10.1* Employment Contract between Ted A. Murphy and DeKalb State
Bank
10.2* Employment Contract between Ted A. Murphy and Community Bank
of Georgia dated as of January 1, 1998.
10.3 Change of Control Contract between David L. Edgar and
Community Bank of Georgia dated as of April 30, 1998.
10.4 Employment Contract between David L. Edgar and Community Bank
of Georgia dated January 1, 1999.
21.1 Subsidiaries of the Company. The sole subsidiary of the
Company is Community Bank of Georgia, Tucker, Georgia, which
is wholly-owned by the Company.
*Items 3.1 through 10.1, as listed above, were previously filed by the
Company as Exhibits (with the same respective Exhibit Numbers as
indicated herein) to the Company's Registration Statement (Registration
No. 33-90742) and such documents are incorporated herein by reference.
(b) Reports on Form 8-K
On January 14, 1999, the Company filed a Form 8-K announcing
the Company entered into a definitive agreement to merger with and into
First Sterling Banks ("First Sterling"). First Sterling would be the
surviving corporation. The consummation of the merger remains subject
to certain conditions that must be satisfied prior to closing,
including the receipt of shareholder approval of both institutions,
appropriate regulatory approvals and other customary conditions of
closing.
<PAGE>63
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this Report to be signed on
its behalf by the undersigned, thereunto duly authorized on March 29, 1999.
GEORGIA BANCSHARES, INC.
By: /s/ Ted A. Murphy
Ted A. Murphy
President
Pursuant to the requirements of the Securities Exchange Act of 1934,
this Report has been signed below by the following persons on behalf of the
Registrant and in the capacities indicated on March 29, 1999.
Signature Title
/s/ Ted A. Murphy President (Principal Executive
Ted A. Murphy Officer) and Director
/s/ Eugene L. Argo Director
Eugene L. Argo
/s/ James L. Armstrong, Jr. Director
James L. Armstrong, Jr.
/s/ Robert C.Pittard Director
Robert C. Pittard
/s/ Larry N. Reed Director
Larry N. Reed
/s/ Dr. Dean T. Teusaw Director
Dr. Dean T. Teusaw
/s/ David L. Edgar Principal Financial Officer
David L. Edgar and Principal Accounting Officer
<PAGE>64
INDEX OF EXHIBITS
Exhibit
Numbers Description of Exhibit
10.3 Change of Control Contract between David L. Edgar and
Community Bank of Georgia dated as of April 30, 1998.
10.4 Employment Contract between David L. Edgar and Community Bank
of Georgia dated January 1, 1999.
<PAGE>1
Exhibit 10.3
CHANGE OF CONTROL AGREEMENT
THIS AGREEMENT, made as of the 30th day of April, 1998, by and between
COMMUNITY BANK OF GEORGIA (hereinafter referred to as the "Bank") and DAVID L.
EDGAR (hereinafter referred to as "Executive"), establishes a severance
arrangement between the parties in the event of a change of control the Bank or
its parent bank holding company, Georgia Bancshares, Inc. ("Bancshares").
W I T N E S S E T H:
WHEREAS, Executive is currently serving as the Chief Financial Officer
and Vice President of the Bank; and
WHEREAS, the Bank desires that Executive continue to serve as the Chief
Financial Officer and Vice President of the Bank by providing Executive a
measure of security; and
WHEREAS, the Bank wants to continue to have the benefits of Executive's
full time and attention to the affairs of the Bank without diversion due to
concerns about a possible change of control;
NOW, THEREFORE, in consideration of the mutual promises contained
herein and other good and valuable consideration, receipt of which is hereby
acknowledged, the Bank and Executive agree as follows:
1. Payment of Severance Amount. If the Executive's employment by the
Bank or any successor of the Bank shall be subject to an Involuntary Termination
within the Covered Period, then the Bank shall pay to the Executive an amount
equal to the Severance Amount, payable within 15 days after the Termination Date
(the date on which Executive's employment with the Bank is discontinued). In
addition, Executive will immediately be entitled to payment of the Severance
Amount if, following a Change of Control, any successor to the Bank refuses to
acknowledge and accept the obligations of the Bank hereunder.
2. Definitions. All the terms defined in this Paragraph 2 shall
have the meaning given below throughout this Agreement.
a. An "Affiliate" shall mean any entity which owned by
controls, is owned by or is under common ownership or control with, the Bank.
b. "Base Annual Salary" shall, as determined on the
Termination Date, be equal to the greater of:
i) the Executive's annual salary excluding
bonuses on the date of the earliest Change
of Control to occur during the Covered
Period; or
<PAGE>2
ii) the Executive's annual salary excluding
bonuses on the Termination Date.
c. "Change in Duties" shall mean any one or more of the
following:
i) a significant change in the nature or scope of
the Executive's authorities or duties from those
applicable to him immediately prior to the date on which a
Change of Control occurs;
ii) a reduction in the Executive's Base Annual Salary
from that provided to him immediately prior to the date on
which a Change of Control occurs;
iii) any diminution in the Executive's eligibility to
participate or level of participation in bonus, stock option
and other compensation plans which provide opportunities to
receive compensation, from the greater of:
-the opportunities provided by the Bank for
executives with comparable duties; or
-the opportunities under any such plans
under which he was participating immediately
prior to the date on which a Change of
Control occurs;
iv) a diminution in Executive benefits (including but
not limited to medical, dental, life insurance and long-term
disability plans) and perquisites applicable to Executive,
from the greater of:
-the Executive benefits and perquisites
provided by the Bank to executives with
comparable duties; or
-the Executive benefits and perquisites to
which he was entitled immediately prior to
the date on which a Change in Control
occurs;
v) a change in the location of the Executive's
principal place of employment by the Bank (more than 50 miles
from the location where he was principally employed
immediately prior to the date on which a Change of Control
occurs) to which Executive has not agreed;
<PAGE>3
d. A "Change of Control" shall be deemed to have
occurred if:
i) any "person," including a "group" as determined in
accordance with Section 13(d)(3) of the Securities Exchange
Act of 1934 (the "Exchange Act") (other than Bancshares, or
any Executive benefit plan, as defined in ERISA, of any of the
foregoing) is or becomes the beneficial owner, directly or
indirectly, of securities of Bancshares representing 25% or
more of the combined voting power of Bancshares's then
outstanding securities;
ii) as a result of, or in connection with, any tender
offer or exchange offer, merger or other business combination,
sale of assets or contested election, or any combination of
the foregoing transactions (a "Transaction"), the persons who
were directors of the Bank and Bancshares before the
Transaction shall cease to constitute a majority of the Board
of Directors of the Bank or Bancshares or any successor to the
Bank or Bancshares;
iii) the Bank or Bancshares is merged or consolidated
with another corporation and as a result of the merger or
consolidation less than 75% of the outstanding voting
securities of the surviving or resulting corporation shall
then be owned in the aggregate by the former, shareholders of
Bancshares, other than (x) affiliates within the meaning of
the Exchange Act or (y) any party to the merger or
consolidation;
iv) a tender offer or exchange offer is made and
consummated for the ownership of securities of Bancshares
representing 50% or more of the combined voting power of
Bancshares's then outstanding voting securities; or
v) the Bank transfers substantially all of
its assets to another corporation which is not a wholly-
owned subsidiary of Bancshares.
e. "Covered Period" for the Executive shall mean two years
following the occurrence of any Change of Control, including a Change of
Control following another/other Change(s) of Control.
f. "Involuntary Termination" shall mean any termination
during the Covered Period which:
i) does not result from a resignation by the
Executive (other than a resignation pursuant to clause ii)of
this subparagraph (f)); or
ii) results from a resignation submitted to the
Employer in writing within six months following any Change in
Duties; provided, however, the term "Involuntary Termination"
shall not include:
x. a Termination for Cause, or
<PAGE>4
y. any termination as a result of death, disability,
or normal retirement pursuant to a retirement plan to
which the Executive was subject prior to any Change
in Control.
g. "Severance Amount" is equal to one hundred percent (100%)
of the Executive's then Base Annual Salary.
h. "Termination for Cause" shall mean only a termination as a
result of fraud, gross negligence, gross dereliction of duties, misappropriation
of or intentional material damage to the property or business of the Bank or
Bancshares or a commission of a felony by the Executive.
3. Notices. Notices and all other communications under this Agreement
shall be in writing and shall be deemed given when personally delivered or
mailed by United States registered or certified mail, return receipt requested,
postage prepaid, addressed as follows:
If to the Company to:
Community Bank of Georgia
3333 Lawrenceville Highway
Tucker, Georgia
Attention: Secretary of Bancshares, or its successor,
with copies to the President of Bancshares, or
its successor and the President of the Bank,
or its successor.
If to the Executive to:
Mr. David L. Edgar
Community Bank of Georgia
3333 Lawrenceville Highway
Tucker, Georgia 30084-7132
or to such other address as either party may furnish to the other in writing,
except that notice of changes of address shall be effective only upon receipt.
4. Applicable Law. This contract is entered into under, and
shall be governed for all purposes by, the laws of the State of Georgia.
5. Severability. If a court of competent jurisdiction determines that
any provision of this Agreement is invalid or unenforceable, then the invalidity
or unenforceability of that provision shall not affect the validity or
enforceability of any other provision of this Agreement and all other provisions
shall remain in full force and effect.
<PAGE>5
6. Withholding of Taxes; Set-Off. The Bank may withhold from any
benefits payable under this Agreement all federal, state, city or other taxes as
may be required pursuant to any law, governmental regulation or ruling. The
right of Executive to receive benefits under this Agreement, however, shall be
absolute and shall not be subject to any set-off, counterclaim, recoupment,
defense, duty to mitigate, or other rights the Bank may have against him or
anyone else.
7. Not An Employment Agreement; Subsequent Employment. Nothing in this
Agreement shall give the Executive any rights (or impose any obligation) to
continued employment by the Bank or any successor of the Bank or Bancshares, nor
shall it give the Bank any rights (or impose any obligations) for the continued
performance of duties by the Executive for the Bank or any subsidiary or
successor of the Bank or Bancshares. Executive's right to receive benefits under
this Agreement shall not be reduced by Executive's employment with any other
employer after terminating employment with the Bank. Any compensation for
services rendered or consulting fees earned after the date of termination shall
not diminish Executive's right to receive all amounts due hereunder.
8. No Assignment. The Executive's right to receive payments or benefits
under this Agreement shall not be assignable or transferable, whether by pledge,
creation of a security interest or otherwise, other than a transfer by will or
by the laws of descent and distribution. In the event of any attempted
assignment or transfer contrary to this paragraph, the Bank shall have no
liability to pay any amount so attempted to be assigned or transferred. This
Agreement will inure to the benefit of and be enforceable by the Executive's
personal or legal representatives, executors, administrators, successors, heirs,
distributees, devisees and legatees.
9. Successors. This Agreement shall be binding upon and inure to the
benefit of the Bank, its successors and assigns (including, without limitation,
any company into or with which the Bank or Bancshares may merge or consolidate).
10. Executive's Indemnity. Executive shall be entitled to any indemnity
provided to officers of the Bank immediately prior to the Change of Control. Any
changes to the Bank's bylaws or otherwise which reduce any indemnity granted to
officers shall not affect the rights granted hereunder. The Bank shall not
reduce any of Executive's indemnity benefits without the prior written consent
of Executive. Any references to Georgia law in the bylaws of the Bank or other
documents granting indemnity to Executive shall be deemed to be references as of
the date of this Agreement, and any amendments to Georgia law, including a
revocation thereof, shall not reduce the indemnity benefits granted hereunder.
11. Term. This Agreement shall be effective as of the date first
above-written and shall remain in effect for a period of three years.
Notwithstanding anything herein to the contrary, in the event of a Change of
Control during the initial, or any subsequent, term of this Agreement, this
Agreement shall remain in effect until the later of (a) the end of the term of
the Agreement or (b) the day after the last day in the Covered Period.
<PAGE>6
IN WITNESS WHEREOF, the parties have caused this Agreement to be
executed and delivered as of the day and year first above written.
COMMUNITY BANK OF GEORGIA
/s/ Ted A. Murphy
President and Chief Executive
Officer
EXECUTIVE
/s/ David L. Edgar
David L. Edgar
<PAGE>1
Exhibit 10.4
EMPLOYMENT AGREEMENT
THIS EMPLOYMENT AGREEMENT (the "Agreement") is made and entered into as of the
1st day of January , 1999, between DAVID L. EDGAR ("Executive"), and COMMUNITY
BANK OF GEORGIA, a state-chartered Georgia banking institution whose principal
place of business is located at 3333 Lawrenceville Highway, Tucker, Georgia,
("Employer").
RECITALS
WHEREAS, the Board of Directors of the Employer recognizing the
experience and knowledge of the Executive in the banking industry, determines
that it is in the best interests of the Employer to arrange terms of employment
for Executive so as to induce Executive to remain in his capacity with the
Employer for the term as set forth in this Employment Agreement (the
"Agreement"); and
WHEREAS, Executive is willing to provide services to Employer in
accordance with the terms and conditions hereinafter set forth.
THEREFORE, in the consideration of the mutual promises and agreements
in these premises and for other good and valuable consideration, the receipt and
sufficiency of which are hereby acknowledged by the parties, it is agreed as
follows:
SECTION 1. EMPLOYMENT
a. Employer employs Executive on the terms and conditions hereafter
stated as Employer's Vice President and Chief Financial Officer to perform such
services and duties as the Board of Directors may, from time to time, designate
during the term hereof. Executive will also serve as Chief Financial Officer of
Georgia Bancshares, Inc., ("Bancshares") Tucker, Georgia, the Employer's parent
bank holding company. Subject to the terms and conditions hereof, Executive will
perform such duties and exercise such authority as are customarily performed and
exercised by persons holding such office, subject to the direction of the Board
of Directors.
b. Executive accepts such employment and shall devote his full time,
attention, and best efforts to the diligent performance of his duties herein
specified.
SECTION 2. TERM OF EMPLOYMENT.
a. Executive's employment under this Agreement shall commence on
January 1, 1999 and continue for a period of twelve calendar months concluding
on December 31, 1999.
<PAGE>2
b. Executive's employment pursuant to this Agreement shall be
terminated by the first to occur of any of the following:
i) The death of the Executive;
ii) The Complete Disability of Executive. "Complete
Disability" as used herein shall mean the inability of Executive, due to
illness, accident, or any other physical or mental incapacity, to completely
fulfill his obligations hereunder for an aggregate of ninety (90) days within
any period of 180 consecutive days during the term hereof;
iii) The discharge of Executive by Employer for cause.
(1) "Cause" as used herein shall mean: dishonesty;
theft; conviction of a crime (other than minor traffic violations)
which is either a felony or a misdemeanor involving moral turpitude;
unethical business conduct; gross or repeated negligence in carrying
out Executive's duties. In all instances other than dishonesty, theft
or conviction of a crime, written notice of said activity, negligence
or violation shall be provided by Employer to Executive along with a
reasonable period of time, which shall be not less than ninety (90)
days, in which to correct the deficiency.
(2) Discharge for "Cause" shall require a
two-thirds majority vote of the entire Board of Directors of Employer.
iv) Thirty (30) days after Executive has given written
notice to Employer of his intent to terminate his employment hereunder.
c. Termination of Executive's employment shall constitute his
resignation as an employee of Employer (and as an executive officer of
Bancshares) effective upon acceptance by Employer of that tender.
SECTION 3. COMPENSATION.
For all services which Executive may render to Employer during the term hereof
Employer shall pay to Executive, subject to such deductions as may be required
by law, as set out below:
a. Annual Base Salary. Executive shall receive a salary based
On an annual rate of $80,000, payable in equal monthly installments.
b. Performance Bonus. In addition to the Executive's annual base
salary, the Employer shall pay to Executive a performance bonus conditioned upon
the Employer attaining certain performance criteria measured as of December 31,
1999.
<PAGE>3
The right to receive an annual performance bonus is based upon meeting
or exceeding the following three (3) established goals with respect to (i)
return on average assets ("ROAA"), (ii) return on average equity ("ROE"), and
(iii) average past due loans.
i) Return on Average Assets of 1.25% or greater;
ii) Return on Equity of 14.0% or greater; and
iii) Average past due loans not to exceed 1.25% of total loans
outstanding.
Notwithstanding the foregoing, no performance bonus shall be earned in
any year in which the Bank's composite C-A-M-E-L-S rating is less than "2".
c. Severance Compensation. If the Executive's employment is terminated
during the term of this Agreement for reasons other than those stated in
paragraph 2(b)(iii). Employer shall pay Executive as Severance Compensation,
without set off, reduction, or diminution for other compensation which Executive
may receive from sources other than Employer, a sum equal to the gross monthly
compensation which would then be payable to Executive under the terms and
conditions of this Agreement without reduction for taxes except as required by
law for twelve (12) consecutive months. ("Severance Compensation"). Said
Severance Compensation shall be payable on the first day of each month following
Executive's termination of employment. Notwithstanding the foregoing, if
mutually agreed between Employer and Executive, the Severance Compensation may
be paid in one lump sum or other equal payments. Employer shall maintain
Executive's full medical and disability benefits for Executive and his family at
no expense to Executive for twelve (12) months subsequent to said termination or
the remainder of the term of this Agreement whichever is greater. Thereafter,
Executive shall be eligible to secure such medical and dental benefits as may be
available pursuant to the Consolidated Omnibus Budget Reconciliation Act of 1985
("COBRA") at Executive's expense. Notwithstanding the foregoing, if Executive
tenders his resignation after ninety (90) days from the commencement of this
Agreement, Executive shall be paid Severance Compensation in the amount of six
(6) months compensation.
SECTION 4. OTHER BENEFITS
During the term of Executive's employment hereinafter, on and after the
effective dates, as noted, Employer shall furnish to Executive the following
benefits.
a. A group health and hospitalization and dental insurance policy
covering the Executive and immediate family.
b. A fully paid vacation of fifteen (15) working days per year for the
duration and any continuance of this contract. Time for such vacation/vacations
shall be determined solely by the Executive provided Executive shall give the
President and Chief Financial Officer of Employer, reasonable prior notice of
the Executive's scheduled vacation days.
c. All reasonable business expenses incurred for the attendance of the
Executive and his spouse at the annual meeting of the Community Bankers
Association of Georgia's Leadership Division Conference.
<PAGE>4
SECTION 5. POST TERMINATION COVENANTS.
a. Executive hereby expressly covenants and agrees that during the term
of his employment whether or not pursuant to this Agreement and for a period of
twelve (12) months following the termination of his employment with Employer, if
said termination is pursuant to Section 2(b)(iv), Executive shall not engage in
rendering or providing executive managerial services as chief financial officer
or serve as chief financial officer of or to any National Bank or State Bank
Institution located within an area of ten (10) miles of Community Bank of
Georgia's main office or its branches without the express permission of the
Employer. This covenant shall not be effective against Executive in the event of
termination of Executive for any other reason, actual, or constructive as
provided herein below.
SECTION 6. CONFLICTS OF INTEREST.
Executive shall not, while employed by Employer, accept employment with any
other individual, corporation, partnership, governmental authority or other
entity, or engage in any other venture for profit which the Employer's Board of
Directors may consider by majority vote of all of the directors then serving
with Executive abstaining to be in conflict with the Employer's best interest or
to be in competition with the performance of his duties hereunder. This
restriction does not preclude Executive from owning or being involved in real
estate or other investments, so long as such does not create a conflict of
interest on the part of the Executive as to his duties and obligations to
Employer as set forth herein. In addition, the Executive may be a Board member
of companies not in competition with the Employer. Notwithstanding the
foregoing, Executive may not be involved in any of these activities without
first making a full disclosure to the Employer of the details of each proposed
endeavor.
SECTION 7. WAIVER OF PROVISIONS.
Failure by any of the parties hereto to insist, in one or more instances, on
performance by the other in strict accordance with the terms and conditions of
this Agreement shall not be deemed a waiver or relinquishment of any right
granted hereunder or of the obligation of future performance of any such term or
condition or any other term or condition of this Agreement, unless such waiver
is contained in a writing signed by or on behalf of all the parties.
SECTION 8. GOVERNING LAW.
This Agreement shall be governed by and construed and enforced in accordance
with the laws of the State of Georgia. If for any reason any provision of this
Agreement shall be held by a court of competent jurisdiction to be void or
unenforceable, the same shall not affect the remaining provisions hereof.
<PAGE>5
SECTION 9. MODIFICATION AND AMENDMENT.
This Agreement contains the sole and entire agreement among the parties hereto
and supersedes all prior discussions and agreements among the parties, and any
such prior agreements shall, from and after the date hereof, be null and void.
This Agreement shall not be modified or amended except by an instrument in
writing signed by or on behalf of all parties hereto.
SECTION 10. NOTICE AND MAILING THEREOF.
Whenever in this Agreement notice is required to be given to either of the
parties hereto, such notice shall be effective only if delivered to the parties
as follows by hand delivery or first class United States Mail:
If to Employer: President and Chief Executive Officer
Community Bank of Georgia
3333 Lawrenceville Highway
Tucker, Georgia 30084
If to Executive: David L. Edgar
111 Fielding Ridge
Peachtree City, Georgia 30269
SECTION 11. RECITALS, COUNTERPARTS AND HEADINGS.
The Recitals appearing above are incorporated into this Agreement as fully and
completely as if set forth expressly herein and are an integral part of this
Agreement. This Agreement may be executed simultaneously in any number of
counterparts, each of which shall be deemed an original but all of which shall
constitute one and the same instrument. The headings set out herein are for
convenience of reference and shall not be deemed a part of this Agreement.
SECTION 12. SUCCESSORS.
This Agreement shall inure to the benefit of and be binding upon the Employer,
its successors and assigns and upon the Executive, and his heirs and personal
representatives. Neither this Agreement nor performance hereunder may be
assigned by Executive.
<PAGE>6
IN WITNESS WHEREOF, the parties have caused this Agreement to be executed and
delivered as of the day and year first above written.
EXECUTIVE: EMPLOYER:
COMMUNITY BANK OF GEORGIA
/s/ David L. Edgar By: /s/ Ted A. Murphy
David L. Edgar Ted A. Murphy
President and Chief Executive
Officer
ATTEST:
By: /s/ James L. Armstrong
Chairman, Compensation Committee
<TABLE> <S> <C>
<ARTICLE> 9
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-END> DEC-31-1998
<CASH> 3,309,026
<INT-BEARING-DEPOSITS> 0
<FED-FUNDS-SOLD> 2,776,000
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 17,200,602
<INVESTMENTS-CARRYING> 17,200,602
<INVESTMENTS-MARKET> 17,200,602
<LOANS> 54,164,630
<ALLOWANCE> 740,617
<TOTAL-ASSETS> 82,572,113
<DEPOSITS> 71,851,638
<SHORT-TERM> 0
<LIABILITIES-OTHER> 343,351
<LONG-TERM> 3,000,000
0
0
<COMMON> 2,338,611
<OTHER-SE> 5,038,513
<TOTAL-LIABILITIES-AND-EQUITY> 82,572,113
<INTEREST-LOAN> 5,123,591
<INTEREST-INVEST> 948,712
<INTEREST-OTHER> 206,532
<INTEREST-TOTAL> 6,278,835
<INTEREST-DEPOSIT> 2,708,856
<INTEREST-EXPENSE> 2,737,120
<INTEREST-INCOME-NET> 3,541,715
<LOAN-LOSSES> 263,000
<SECURITIES-GAINS> 23,912
<EXPENSE-OTHER> 2,608,928
<INCOME-PRETAX> 1,200,193
<INCOME-PRE-EXTRAORDINARY> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 844,306
<EPS-PRIMARY> .58
<EPS-DILUTED> .57
<YIELD-ACTUAL> 5.20
<LOANS-NON> 80,652
<LOANS-PAST> 0
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 237,878
<ALLOWANCE-OPEN> 696,679
<CHARGE-OFFS> 233,156
<RECOVERIES> 14,094
<ALLOWANCE-CLOSE> 740,617
<ALLOWANCE-DOMESTIC> 0
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 740,617
</TABLE>
