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United States
Securities and Exchange Commission
Washington, D.C. 20549
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FORM 10-K
ANNUAL REPORT
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Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
For the Fiscal Year Ended December 31, 2002 Commission File No. 000-21383
APPALACHIAN BANCSHARES, INC.
(Exact Name of Registrant as Specified in Its Charter)
Georgia 58-2242407
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(State of Incorporation) (I.R.S. Employer Identification Number)
829 Industrial Boulevard
Ellijay, Georgia 30540
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(Address of Principal Executive Offices) (Zip Code)
(706) 276-8000
(Issuer's Telephone Number, Including Area Code)
Securities registered under Section 12(b) of the Exchange Act:
Title of Each Class Name of Each Exchange on Which Registered
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None None
Securities registered under Section 12(g) of the Exchange Act:
Common Stock, $0.01 par value
(Title of Class)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 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
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Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not 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-K or any amendment to this
Form 10-K. ____
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Exchange Act Rule 12b-2): Yes No X
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There is no established trading market for the registrant's capital stock. The
aggregate market value of the stock held by non-affiliates of the registrant at
June 28, 2002 was $34,008,024, based on a per share price of $15.00, which is
the price of the last trade of which management is aware on or before such date.
Although directors and executive officers of the registrant were assumed to be
"affiliates" of the registrant for purposes of this calculation, the
classification is not to be interpreted as an admission of such status.
At March 28, 2003, there were 3,245,209 shares of the registrant's Common Stock
outstanding.
Documents Incorporated by Reference
Portions of the registrant's definitive Proxy Statement for the 2003 Annual
Meeting of Shareholders are incorporated by reference into Part III of this
report.
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APPALACHIAN BANCSHARES, INC.
2002 Form 10-K Annual Report
TABLE OF CONTENTS
Item Number Page or
in Form 10-K Description Location
PART I
Item 1. Business................................................................... 2
Item 2. Properties................................................................. 8
Item 3. Legal Proceedings.......................................................... 9
Item 4. Submission of Matters to a Vote of Security Holders........................ 9
PART II
Item 5. Market for the Registrant's Common Equity and Related
Stockholder Matters........................................................ 9
Item 6. Selected Financial Data.................................................... 12
Item 7. Management's Discussion and Analysis of Financial
Condition and Results of Operations........................................ 13
Item 7A. Quantitative and Qualitative Disclosures About Market Risk................. 30
Item 8. Financial Statements....................................................... 31
Item 9. Changes in and Disagreements with Accountants on Accounting
and Financial Disclosure................................................... 67
PART III
Item 10. Directors and Executive Officers of the Registrant......................... 67
Item 11. Executive Compensation..................................................... 67
Item 12. Security Ownership of Certain Beneficial Owners and Management............. 67
Item 13. Certain Relationships and Related Transactions............................. 67
Item 14. Controls and Procedures.................................................... 67
PART IV
Item 15. Exhibits, Financial Statement Schedules, and Reports on Form 8-K........... 68
Signatures
Certification of Periodic Financial Reports
1
PART I
ITEM 1. BUSINESS
History and Development of the Company
Appalachian Bancshares, Inc. (the "Company" or "Registrant") is a bank
holding company which engages in providing a full range of banking services
through Appalachian Community Bank, its commercial bank subsidiary, which
formerly was two separate subsidiary banks, Gilmer County Bank and Appalachian
Community Bank. During 2001, Appalachian Community Bank was merged with and into
Gilmer County Bank, to become one bank. The surviving bank, Gilmer County Bank,
simultaneously changed its name to Appalachian Community Bank (the "Bank"). The
merger was consummated to facilitate greater cost efficiencies of operations,
centralized management, consistency of regulatory compliance and to provide a
stronger capital base from which to serve the communities in our market areas.
The name change of Gilmer County Bank, from Gilmer County Bank to Appalachian
Community Bank, was desired to more clearly depict the overall geographic region
which the Bank services. For the immediate future, however, those branches of
the Bank that are located in Gilmer County will continue to operate under the
trade name of "Gilmer County Bank."
On November 30, 1998, the Company completed an acquisition of First
National Bank of Union County ("First National") from Century South Banks, Inc.
("Century South"). First National, renamed as "Appalachian Community Bank" in
1999, was a state chartered bank, organized in 1981, with its main banking
office located in Blairsville, Georgia. Pursuant to the terms of the acquisition
agreement, the Company acquired First National, in a cash transaction, for a
purchase price of $6.1 million, with the assumption of certain existing
liabilities and assets of First National by Century South or certain of its
affiliates. The Company funded a portion of the purchase price with the proceeds
of a private placement of 132,500 shares of the Company's common stock to
certain accredited investors. The aggregate gross proceeds of that private
placement were $2.65 million. Purchasers of shares of the Company's common stock
in that private placement are entitled to certain registration rights with
respect to such shares and are subject to certain call rights of the Company.
The Company funded the remainder of the purchase price through a $3.6 million
loan with The Bankers Bank.
The Company was incorporated as a business corporation in May 1996 under
the laws of the State of Georgia for the purpose of acquiring 100% of the issued
and outstanding shares of common stock of Gilmer County Bank. In July 1996, the
Company received approval from the Federal Reserve Bank of Atlanta and the
Georgia Department of Banking and Finance (the "DBF") to become a bank holding
company. In August 1996, the Company and Gilmer County Bank entered into a
reorganization pursuant to which the Company acquired 100% of the outstanding
shares of Gilmer County Bank, and the shareholders of Gilmer County Bank became
the shareholders of the capital stock of the Company.
Currently, the assets of the Company consist primarily of its ownership of
the capital stock of the Bank. The Company's executive office is located at 829
Industrial Boulevard, Ellijay, Georgia, and its telephone number at such
location is (706) 276-8000.
Business of the Company
The Company is authorized to engage in any activity in which a corporation
is permitted, by law, to engage, subject to applicable federal and state
regulatory restrictions on the activities of bank holding companies. The
Company's holding company structure provides it with greater flexibility than
the Bank would otherwise have, to expand and diversify its business activities
through newly formed subsidiaries or through acquisitions.
In 2000, Appalachian Information Management, Inc. ("AIM"), a Georgia
corporation, was formed as a wholly-owned subsidiary of the Bank, to provide
in-house data services to the Bank and to offer data processing services to
other institutions. In August 2002, however, management decided to discontinue
operations of AIM, which operations ceased on November 12, 2002. Accordingly,
the Bank entered into a data processing agreement with Fiserv Solutions, Inc.,
whereby the Bank outsourced those data services previously provided in-house by
AIM. AIM has ceased offering data processing services to other institutions. The
Bank continues to provide limited, administrative services, formerly provided by
AIM, to another bank on a subcontract basis.
2
While management of the Company has no present plans to engage in any other
business activities, management may, from time to time, study the feasibility of
establishing or acquiring subsidiaries to engage in other business activities to
the extent permitted by law.
The Bank
The Bank was organized in 1994 under the laws of the State of Georgia to
conduct a commercial banking business in Gilmer County, Georgia. The Bank was
formed to meet the banking needs of individuals, small-to-medium-sized
businesses, and farmers, especially those engaged in apple and poultry
production. The Bank was organized by a group of individuals from Gilmer County
and the surrounding area and commenced business from its main office location at
829 Industrial Boulevard, Ellijay, Georgia on March 3, 1995.
As discussed previously, the former Appalachian Community Bank was
organized in 1981, as an insured national bank, chartered under the federal
banking laws of the United States of America. In 1999, Appalachian Community
Bank converted from a national bank to a state-chartered bank under the laws of
the State of Georgia, and, in 2001, was merged with and into the Bank.
The Bank conducts business from four locations in three adjacent counties
(Gilmer, Fannin and Union) and has correspondent relationships with several
banks, including The Bankers Bank, Crescent Bank and Trust Company, SunTrust
Bank, SouthTrust Bank and the Federal Home Loan Bank of Atlanta. The Bank's
deposits are insured by the Federal Deposit Insurance Corporation. The Bank's
branches located in Gilmer County currently operate under the trade name "Gilmer
County Bank."
Banking Services and Operations
The Bank performs banking services customary for full service banks of
similar size and character. Such services include the receipt of demand and time
deposit accounts, the extension of personal and commercial loans and the
furnishing of personal and commercial checking accounts. The Bank draws most of
its customer deposits, and conducts most of its lending transactions, from and
within a primary service area encompassing Gilmer County, Fannin County, Union
County, Towns County, northern Pickens County, western Dawson County and
southeastern Murray County, Georgia.
The principal business of the Bank is to attract and accept deposits from
the public and to make loans and other investments. The principal sources of
funds for the Bank's loans and investments are (i) demand, time, savings, and
other deposits (including negotiable order of withdrawal ("NOW") accounts), (ii)
amortization and prepayment of loans granted, (iii) sales to other lenders or
institutions of loans or participation in loans, (iv) fees paid by other lenders
or institutions for servicing loans sold by the Bank to such lenders or
institutions, and (v) borrowings. The principal sources of income for the Bank
are interest and fees collected on loans, including fees received for servicing
loans sold to other lenders or institutions and, to a lesser extent, interest
and dividends collected on other investments. The principal expenses of the Bank
are (a) interest paid on savings and other deposits (including NOW accounts),
(b) interest paid on borrowings by the Bank, (c) employee compensation, (d)
office expenses, and (e) other overhead expenses.
Employees
Except for the officers of the Company, who are also officers of the Bank,
the Company does not have any employees. At December 31, 2002, the Bank had a
total of 111 employees, 94 of which were full-time employees. The Company and
the Bank are not parties to any collective bargaining agreements with employees,
and management believes that employee relations are generally good.
Lending Activities
General. The Bank is authorized to make both secured and unsecured
commercial and consumer loans to individuals, partnerships, corporations and
other entities. The Bank's lending business consists principally of making
secured real estate loans, including residential and commercial construction
loans, and primary and secondary mortgage loans for the acquisition or
improvement of personal residences. In addition, the Bank makes consumer loans
to individuals and commercial loans to small and medium-sized businesses and
professional concerns. Loans to the poultry industry constituted approximately
8.6% of the Bank's total loans at December 31, 2002.
3
The Bank has engaged in secondary-market mortgage activities, obtaining
commitments, through intermediaries, from secondary mortgage purchasers to
purchase mortgage loans originated by the Bank. Based on these commitments, the
Bank originates mortgage loans on terms corresponding to such commitments and
generates fee income to supplement its interest income. No mortgage loans are
held by the Bank for resale nor are any loans held for mortgage servicing.
Real Estate Loans. Loans secured by real estate are the primary component
of the Bank's loan portfolio, constituting approximately $239 million, or 80.1%,
of the Bank's total loans at December 31, 2002. These loans consist of
commercial real estate loans, construction and development loans and residential
real estate loans, but exclude home equity loans, which are classified as
consumer loans.
Commercial Loans. The Bank makes loans for commercial purposes to various
lines of businesses. At December 31, 2002, the Bank held approximately $33
million, or 11.2% of the Bank's total loans, in commercial loans, excluding for
these purposes commercial loans secured by real estate which are included in the
real estate category above.
Consumer Loans. The Bank makes a variety of loans to individuals for
personal and household purposes, including secured and unsecured installment and
term loans, home equity loans and lines of credit, and revolving lines of credit
such as credit cards. At December 31, 2002, the Bank held approximately $20
million in consumer loans, representing 6.8% of the Bank's total loans.
Loan Approval and Review. The Bank's loan approval policies provide for
various levels of officer lending authority. When the aggregate amount of
outstanding loans to a single borrower exceeds that individual officer's lending
authority, the loan request must be considered and approved by an officer with a
higher lending limit or the officers' loan committee. Individual officers'
lending limits range from $15,000 to $150,000, depending on seniority and the
type of loan. The officers' loan committee, which consists of the president,
executive vice president and senior lending officer, has a lending limit of
$200,000 for secured loans. Loans between $200,000 and $500,000 must be approved
by a directors' loan committee, which is made up of the president, the senior
lending officer and three outside directors. Loans above $500,000 require
approval by the majority of the full board of directors.
The Bank has a continuous loan review procedure, involving multiple
officers of the Bank, that is designed to promote early identification of credit
quality problems. All loan officers are charged with the responsibility of
rating their loans and reviewing those loans on a periodic basis, the frequency
of which increases as the quality of the loan decreases. The Bank has employed
an in-house specialist to review all loans in excess of $100,000 and to
periodically sample loans of $100,000 and less.
Deposits
The Bank offers a variety of deposit programs to individuals and to small
to medium-sized businesses and other organizations at interest rates generally
consistent with local market conditions. The Bank is authorized to accept and
pay interest on deposits from individuals, corporations, partnerships and any
other types of legal entities, including fiduciaries (such as private trusts).
Qualified deposits are insured by the FDIC in an amount up to $100,000.
The following table sets forth the mix of depository accounts at the Bank
as a percentage of total deposits at December 31, 2002.
Deposit Mix
December 31, 2002
Non-interest bearing demand.............................................. 6.92%
Interest-bearing demand.................................................. 26.10%
Savings.................................................................. 13.03%
Time Deposits............................................................ 34.81%
Certificates of Deposit of $100,000 or more.............................. 19.14%
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Total.................................................................. 100.00%
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The Bank is a member of the Cirrus ATM network of automated teller
machines, which permits the Bank's customers to perform certain transactions in
numerous cities throughout Georgia and in other states. The Bank's charter
4
provides for trust powers but only upon application to the DBF. To date, the
Bank has not submitted, and has no plans to submit, such an application.
Competition and Market Area
The banking business is highly competitive. The Bank competes with other
commercial banks, thrift institutions, credit unions, and money market mutual
fund providers operating in Ellijay, Gilmer County and Blairsville, Union
County, Georgia and elsewhere. Some banks with which the Bank competes have
significantly greater resources and higher lending limits (by virtue of their
greater capitalization). Credit unions and money market mutual fund providers
with which the Bank competes may have competitive advantages as a result of
being subject to different, and possibly less stringent, regulatory
requirements.
The Bank serves the areas of Gilmer County, southwestern Fannin County,
northern Pickens County, western Dawson County, southeastern Murray County,
Union County, Towns County and Fannin County, Georgia.
As of December 31, 2002, three non-locally-owned banks had offices in
Gilmer County and two locally-owned banks had offices in Blairsville. B B & T, a
bank holding company headquartered in Winston-Salem, North Carolina, operates a
full service branch and a separate drive-thru facility in Gilmer County. Regions
Bank, an Alabama bank holding company, operates one office in Gilmer County.
United Community Bank, a branch of Peoples Bank in Fannin County, maintains a
branch office in Gilmer County. Bank of Blairsville, a branch of Bank of
Hiawassee, operates an office in Blairsville. Union County Bank, headquartered
in Blairsville, operates an office in Blairsville. In addition, many local
businesses and individuals have deposits outside the primary service areas of
the Bank.
Monetary Policies
The results of operations of the Company and the Bank are significantly
affected by the credit policies of monetary authorities, particularly the Board
of Governors of the Federal Reserve System - (the "Federal Reserve"). The
instruments of monetary policy employed by the Federal Reserve include open
market operations in U.S. government securities, changes in discount rates on
member bank borrowings, and changes in reserve requirements against bank
deposits. In view of changing conditions in the national economy and in the
money markets, as well as the effect of action by monetary and fiscal
authorities, including the Federal Reserve, no prediction can be made as to
possible future changes in interest rates, deposit levels, loan demand, or the
business and earnings of the Bank.
Supervision and Regulation
The following discussion is only intended to provide brief summaries of
significant statutes and regulations that affect the banking industry and
therefore is not complete. Changes in applicable laws or regulations, and in the
policies of regulators, may have a material effect on the Company's business and
prospects. Management cannot accurately predict the nature or extent of the
effects on the Company's business and earnings that fiscal or monetary policies,
or new federal or state laws, may have in the future.
The Company
General. As a bank holding company, the Company is subject to the Bank
Holding Company Act of 1956 (the "Holding Company Act"), which places the
Company under the supervision of the Federal Reserve. The Company must register,
and file annual reports, with the Federal Reserve and must provide it with such
additional information as it may require. In addition, the Federal Reserve
periodically examines the Company.
Bank Holding Company Regulation. In general, the Holding Company Act limits
bank holding company business to that of owning or controlling banks and
engaging in other banking-related activities. Bank holding companies must obtain
the approval of the Federal Reserve before they:
o acquire direct or indirect ownership or control of any voting shares
of any bank that results in total ownership or control, directly or
indirectly, of more than 5% of the voting shares of such bank;
o merge or consolidate with another bank holding company; or
5
o acquire substantially all of the assets of any additional banks.
Subject to certain state laws, a bank holding company that is adequately
capitalized and adequately managed may acquire the assets of both in-state and
out-of-state banks.
Generally, the Holding Company Act prohibits bank holding companies from
acquiring direct or indirect ownership or control of voting shares in any
company that is not a bank or a bank holding company, unless the Federal Reserve
determines that such activities are incidental or closely related to the
business of banking. However, under the Financial Services Modernization Act (as
discussed below under "Financial Services Modernization"), a bank holding
company meeting certain qualifications may apply to the Federal Reserve to
become a "financial holding company," and thereby engage (directly or through a
subsidiary) in certain activities deemed to be financial in nature, such as
securities brokerage and insurance underwriting.
The Change in Bank Control Act of 1978 requires a person (or group of
persons acting in concert) acquiring "control" of a bank holding company to
provide the Federal Reserve Board with 60 days' prior written notice of the
proposed acquisition. Following receipt of this notice, the Federal Reserve
Board has 60 days (or up to 90 days if extended) within which to issue a notice
disapproving the proposed acquisition. In addition, any "company" must obtain
the approval of the Federal Reserve before acquiring 25% (5% if the "company" is
a bank holding company) or more of the outstanding shares of, or otherwise
obtaining control over, the Company.
Financial Services Modernization. The laws and regulations that affect
banks and bank holding companies underwent significant changes, as a result of
the Gramm-Leach-Bliley Act of 1999 (the "GLB Act"), which became effective in
2000. Generally, the GLB Act (i) repealed the historical restrictions which
prevented banks from affiliating with securities firms, (ii) provided a uniform
framework for the activities of banks and their holding companies, (iii)
broadened the activities that may be conducted by the banking subsidiaries of
bank holding companies, (iv) provided an enhanced framework for protecting the
privacy of consumers' information and (v) addressed a variety of other legal and
regulatory issues affecting, both, day-to-day operations and long-term
activities of financial institutions.
Bank holding companies that register with the Federal Reserve as a
"financial holding company" may now engage in a wider variety of financial
activities than permitted under previous law, particularly insurance and
securities activities. In addition, in a change from previous law, a bank
holding company may, itself, be owned, controlled or acquired by any company
engaged in financially related activities, as long as such company meets certain
regulatory requirements, including its registration with the Federal Reserve as
a financial holding company. The GLB Act also permits banks, either directly or
through operating subsidiaries, to engage in certain non-banking financial
activities, subject to certain regulatory requirements.
The Company has no present intentions to register as a financial holding
company.
Transactions with Affiliates. The Company and the Bank are deemed to be
affiliates, within the meaning of the Federal Reserve Act, and transactions
between affiliates are subject to certain restrictions. Generally, the Federal
Reserve Act limits the extent to which a financial institution or its
subsidiaries may engage in "covered transactions" with an affiliate. It also
requires all transactions with an affiliate, whether or not "covered
transactions," to be on terms substantially the same, or at least as favorable
to the institution or subsidiary, as those provided to a non-affiliate. The term
"covered transaction" includes the making of loans, purchase of assets, the
issuance of a guarantee and other similar types of transactions.
Tie-In Arrangements. The Company and the Bank cannot engage in certain
"tie-in" arrangements, in connection with any extension of credit, sale or lease
of property or furnishing of services. For example, with certain exceptions,
neither the Company nor the Bank may condition an extension of credit on a
requirement that the customer obtain additional services provided by either of
the Company or the Bank, or on an agreement by the customer to refrain from
obtaining other services from a competitor. The Federal Reserve Board has
adopted exceptions to its anti-tying rules that allow banks greater flexibility
to package products with their affiliates. These exceptions were designed to
enhance competition in banking and non-banking products and to allow banks and
their affiliates to provide more efficient, lower cost service to their
customers.
State Banking Law Requirements. As a Georgia banking corporation, the
Company is subject to certain requirements under applicable Georgia banking law.
For example, the Company is required to register with the DBF and to file
periodic information with the DBF.
6
The Bank
General. The Bank, as a Georgia state-chartered bank, is subject to
regulation and examination by the DBF, as well as by the Federal Deposit
Insurance Corporation. Georgia laws regulate, among other things, the scope of
the Bank's business, its investments, its payment of dividends to the Company,
its required lending reserves and lending limits, and collateral for loans. The
laws and regulations governing the Bank generally have been promulgated by
Georgia to protect depositors and not to protect shareholders of the Company or
the Bank.
Community Reinvestment Act. The Community Reinvestment Act requires that,
in connection with examinations of financial institutions within their
jurisdiction, the Federal Deposit Insurance Corporation evaluate the record of
the financial institutions in meeting the credit needs of their local
communities, including low and moderate income neighborhoods, consistent with
the safe-and-sound operation of those banks. These factors are also considered
in evaluating mergers, acquisitions, and applications to open a branch or
facility.
Insider Credit Transactions. Banks are also subject to certain restrictions
imposed by the Federal Reserve Act of on extensions of credit to executive
officers, directors, principal shareholders, or any related interests of such
persons. Extensions of credit must be made on substantially the same terms,
including interest rates and collateral, and follow credit underwriting
procedures that are not less stringent than those prevailing at the time for
comparable transactions with persons not covered above and who are not
employees. Also, such extensions of credit must not involve more than the normal
risk of repayment or present other unfavorable features.
Federal Deposit Insurance Corporation Improvement Act. Under the Federal
Deposit Insurance Corporation Improvement Act of 1991, each federal banking
agency has prescribed, by regulation, noncapital, safety-and-soundness standards
for the financial institutions under its authority. These standards cover, among
others, internal controls, information systems, and internal audit systems, loan
documentation, credit underwriting, interest-rate exposure, asset growth, asset
quality, executive compensation, earnings and such other operational and
managerial standards as the agency determines to be appropriate. Management
believes that the Bank meets all such standards.
Interstate Banking and Branching. The Riegle-Neal Interstate Banking and
Branching Efficiency Act of 1994 (the "Interstate Act") permits nationwide
interstate banking and branching under certain circumstances. This legislation
generally authorizes interstate branching and relaxes federal law restrictions
on interstate banking. Currently, bank holding companies may purchase banks in
any state, and states may not prohibit such purchases. Additionally, banks are
permitted to merge with banks in other states as long as the home state of
neither merging bank has "opted out." The Interstate Act requires regulators to
consult with community organizations before permitting an interstate institution
to close a branch in a low-income area. Under recent Federal Deposit Insurance
Corporation regulations, banks are prohibited from using their interstate
branches primarily for deposit production. The Federal Deposit Insurance
Corporation has accordingly implemented a loan-to-deposit ratio screen to ensure
compliance with this prohibition.
Georgia has "opted in" to the Interstate Act and allows in-state banks to
merge with out-of-state banks subject to certain requirements. Generally,
Georgia banking law authorizes the acquisition of an in-state bank by an
out-of-state bank, by merger with a Georgia financial institution that has been
in existence for at least three (3) years prior to the acquisition. With regard
to interstate bank branching, out-of-state banks that do not already operate a
branch in Georgia may not establish de novo branches in Georgia.
Deposit Insurance. The deposits of the Bank are currently insured to a
maximum of $100,000 per depositor, through a deposit insurance fund administered
by the Federal Deposit Insurance Corporation. All insured banks are required to
pay semi-annual deposit insurance premium assessments to the Federal Deposit
Insurance Corporation.
Capital Adequacy. Federal bank regulatory agencies use capital adequacy
guidelines in the examination and regulation of bank holding companies and
banks. If capital falls below minimum guideline levels, the holding company or
bank may be denied approval to acquire or establish additional banks or nonbank
businesses or to open new facilities.
The Federal Deposit Insurance Corporation and Federal Reserve use
risk-based capital guidelines for banks and bank holding companies. These are
designed to make such capital requirements more sensitive to differences in risk
profiles among banks and bank holding companies, to account for off-balance
sheet exposure and to minimize
7
disincentives for holding liquid assets. Assets and off-balance sheet items are
assigned to broad risk categories, each with appropriate weights. The resulting
capital ratios represent capital as a percentage of total risk-weighted assets
and off-balance sheet items. The guidelines are minimums, and the Federal
Reserve has noted that bank holding companies contemplating significant
expansion programs should not allow expansion to diminish their capital ratios
and should maintain ratios well in excess of the minimum. The current guidelines
require all bank holding companies and federally-regulated banks to maintain a
minimum risk-based total capital ratio equal to 8%, of which at least 4% must be
Tier 1 capital. Tier 1 capital for bank holding companies includes common
shareholders' equity, certain qualifying perpetual preferred stock and minority
interests in equity accounts of consolidated subsidiaries, less intangibles
except as described above.
The Federal Reserve also employs a leverage ratio, which is Tier 1 capital
as a percentage of total assets less intangibles, to be used as a supplement to
risk-based guidelines. The principal objective of the leverage ratio is to
constrain the maximum degree to which a bank holding company may leverage its
equity capital base. The Federal Reserve requires a minimum leverage ratio of
3%. However, for all but the most highly rated bank holding companies, as well
as for bank holding companies seeking to expand, the Federal Reserve expects an
additional cushion of at least 1% to 2%.
The Federal Deposit Insurance Corporation Improvement Act created a
statutory framework of supervisory actions indexed to the capital level of the
individual institution. Under regulations adopted by the Federal Deposit
Insurance Corporation, an institution is assigned to one of five capital
categories, depending upon its total risk-based capital ratio, Tier 1 risk-based
capital ratio, and leverage ratio, together with certain subjective factors.
Institutions which are deemed to be "undercapitalized," depending upon the
category to which they are assigned, are subject to certain mandatory
supervisory corrective actions.
Recent Significant Changes in Applicable Laws and Regulations
Sarbanes-Oxley Act of 2002. On July 30, 2002, the Sarbanes-Oxley Act of
2002 (the "Sarbanes-Oxley Act") was adopted, in order to address corporate and
accounting fraud. The Sarbanes-Oxley Act establishes a new accounting oversight
board that will enforce auditing standards and restricts the scope of services
that accounting firms may provide to their public company audit clients. Among
other things, it also (i) requires chief executive officers and chief financial
officers to certify to the accuracy of periodic reports filed with the
Securities and Exchange Commission (the "SEC"); (ii) imposes new disclosure
requirements regarding internal controls, off-balance-sheet transactions, and
pro forma (non-GAAP) disclosures; (iii) accelerates the time frame for reporting
of insider transactions and periodic disclosures by certain public companies;
and (iv) requires companies to disclose whether or not they have adopted a code
of ethics for senior financial officers and whether the audit committee includes
at least one "audit committee financial expert."
The Sarbanes-Oxley Act requires the SEC, based on certain enumerated
factors, to regularly and systematically review corporate filings. To deter
wrongdoing, the Sarbanes-Oxley Act, (i) subjects bonuses issued to top
executives to disgorgement if a restatement of a company's financial statements
was due to corporate misconduct; (ii) prohibits an officer or director
misleading or coercing an auditor; (iii) prohibits insider trades during pension
fund "blackout periods"; (iv) imposes new criminal penalties for fraud and other
wrongful acts; and (v) extends the period during which certain securities fraud
lawsuits can be brought against a company or its officers.
ITEM 2. PROPERTIES
The Company's main office is located at 829 Industrial Boulevard, Ellijay,
Georgia, between the business districts of Ellijay and East Ellijay. The 9,780
square foot building is located on approximately 1.22 acres and is owned by the
Bank. The building includes five teller stations, twenty offices, three drive-in
stations and an ATM. This location houses the Company's and the Bank's offices
and storage areas. The Bank branch at this location operates under the trade
name "Gilmer County Bank."
The Bank's branch located on Highway 515 in Blairsville, Georgia has a
drive-in window, five teller stations, eleven offices, and an ATM. The building
is owned by the Bank. The second floor of this location is vacant and may be
used by the Bank for future expansion.
8
The Bank's branch located in East Ellijay, Georgia, which operates under
the trade name "Gilmer County Bank," has three teller stations, a drive-in
window and an ATM. The Bank has a long-term lease for this location and pays
annual rent of $30,600.
The Bank's branch in Blue Ridge, Georgia has a drive-in window, three
teller stations, four offices, and an ATM. The Bank has a 24-month lease (with
an additiona1 24 month renewal option) for the land on which this branch is
located and pays annual rent of $30,000.
The Bank's operations area operates out of a building owned by the Bank
located at 1068 Progress Road, Ellijay, Georgia. This location houses the Bank's
computer center, accounting, bookkeeping and data processing services. In
addition, the building includes an additional 4,600 square feet, which is leased
by the Bank to a third party for $24,000 per year.
Management believes that the physical facilities maintained by the Company
and the Bank are suitable for its current operations.
ITEM 3. LEGAL PROCEEDINGS
The Company is not aware of any material pending legal proceedings to which
the Company or the Bank are a party or of which any of their property is
subject, other than ordinary routine legal proceedings incidental to the
business of the Bank.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to a vote of shareholders of the Company during
the fourth quarter of the fiscal year covered by this report.
PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS
Market Information
There is no established trading market for the Company's common stock,
$0.01 par value per share (the "Common Stock"), which Common Stock has been
traded inactively in private transactions. Therefore, no reliable information is
available as to trades of the Common Stock or as to the prices at which Common
Stock has traded. In 1998, Wachovia Securities, Inc. was approved as a market
maker for the Company's Common Stock.
In April 2000, the Company effected a two-for-one share split of its Common
Stock (the "Stock Split") in the form of a common stock dividend, payable on or
about April 30, 2000, to shareholders of record as of the close of business on
April 12, 2000. All amounts presented in this Report and in the financial
statements are adjusted to reflect the Stock Split. The net effect of the Stock
Split did not change total shareholders' equity.
[The remainder of this page intentionally left blank]
9
Management has reviewed the limited information available as to the ranges
at which the Common Stock has been sold and is aware of trades that occurred
during 2002. To the best of management's knowledge, the last trade in December,
2002 was executed at a price of $15.00 per share. The per share price data
regarding the Common Stock is provided for information purposes only and should
not be viewed as indicative of the actual or market value of the Common Stock.
Estimated Price
Range Per Share
-------------------------------
High Low
------------- --------------
2002 (Split Adjusted):
First Quarter................................................................. $ 17.00 $ 15.00
Second Quarter................................................................ 16.00 15.00
Third Quarter................................................................. 15.00 15.00
Fourth Quarter................................................................ 15.00 15.00
2001 (Split Adjusted):
First Quarter................................................................. $ 15.00 $ 14.00
Second Quarter................................................................ 15.00 14.00
Third Quarter................................................................. 15.00 14.00
Fourth Quarter................................................................ 15.00 14.00
Holders
At March 19, 2003, the Company had 3,165,141 shares of Common Stock
outstanding held by approximately 1,411 shareholders of record.
Recent Sales of Unregistered Securities
On December 2, 2002, the Company commenced a private placement offering, to
accredited investors only, of up to 200,000 shares of Common Stock, at an
aggregate offering price of $3,000,000 ($15.00 per share) (the "Offering"). The
Company sold 52,447 shares of Common Stock through the Offering, which expired
on March 3, 2003. The Offering was made without the services of an underwriter
and without any advertising or promotion, and sales therein were solicited only
by certain of the Company's executive officers and directors, none of whom
received any commission or remuneration for their efforts. Further, the
securities sold in the Offering were exempt from registration under the
Securities Act of 1933, as amended (the "Securities Act"), based on the
exemption set forth in Rule 506 of Regulation D, promulgated under the
Securities Act, which provides that registration is not required where, among
other things, all of the purchasers in such an offering are "accredited
investors," as that term is defined in Section 2(a)(15) of the Securities Act
and Rule 501 of Regulation D. Purchasers of shares of Common Stock in the
Offering are entitled to certain registration rights with respect to such shares
and are subject to certain call rights of the Company.
Dividends
The Bank is subject to restrictions on the payment of dividends under
Georgia law and the regulations of the DBF. For the years ended December 31,
2002, 2001 and 2000, the Bank paid dividends to the Company of $-0-, $250,000
and $700,000, respectively, which were used by the Company for repayment of debt
and other expenses.
The Company is also subject to limits on payment of dividends by the rules,
regulations and policies of federal banking authorities. The primary source of
funds available for the payment of cash dividends by the Company are dividends
from the Bank. There are various statutory and regulatory limitations on the
payment of dividends by the Bank, as well as by the Company to its shareholders.
No assurance can be given that any dividends will be declared by the Company in
the future, or if declared, what amounts would be declared or whether such
dividends would continue. The Company has not paid any dividends to date.
10
Securities Authorized for Issuance Under Equity Compensation Plans
At a prior Annual Meeting, the Company's shareholders adopted a Stock
Compensation Program (the "Stock Program"). The following table reflects the
number of shares to be issued upon the exercise of options granted under the
Stock Program, the weighted-average exercise price of all such options, and the
total number of shares of Common Stock reserved for the issuance upon the
exercise of authorized, but not-yet-granted options, as of December 31, 2002.
Number of
Equity Securities
Number of Securities Remaining
to be Issued Weighted-average Available for
Upon the Exercise Exercise Price Future Issuance
of Outstanding of Outstanding Under the
Plan Category Options Options Stock Program
- ------------------------------------ ------------------ ----------------- -----------------
Equity Compensation Plans
Approved by Shareholders.................... 458,100 $ 5.64 74,000
Equity Compensation Plans
Not Approved by Shareholders................ -- -- --
------------------ ----------------- -----------------
Total....................................... 458,100 $ 5.64 74,000
================== ================= =================
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11
ITEM 6. SELECTED CONSOLIDATED FINANCIAL DATA
The following table sets forth selected consolidated financial data of the
Company for the years ended December 31, 2002, and the previous four years. All
averages are daily averages.
Years Ended December 31,
------------------------------------------------------------
2002 2001 2000 1999 1998
---------- --------- --------- ---------- ----------
(Dollars in thousands except per share data and ratios)
Earnings Summary
Interest income.................................. $ 22,914 $ 24,763 $ 21,970 $ 16,139 $ 11,271
Interest expense................................. 11,425 13,675 13,325 9,139 6,498
Net interest income.............................. 11,489 11,088 8,645 7,001 4,773
Provision for loan losses........................ 1,028 1,294 922 880 300
Non-interest income.............................. 2,915 1,538 1,159 845 529
Non-interest expense............................. 9,702 7,831 6,380 5,561 3,221
Applicable income taxes.......................... 1,006 963 872 139 572
Net income....................................... 2,668 2,538 1,629 1,266 1,208
Per Share Data
(Retroactively adjusted to give effect to stock splits)
Net income - basic............................... $ 0.90 $ 0.89 $ 0.59 $ 0.48 $ 0.52
Net income - diluted............................. 0.84 0.82 0.55 0.44 0.49
Cash dividends declared per common share......... 0.00 0.00 0.00 0.00 0.00
Selected Period End Balances
Total assets..................................... 384,024 319,679 270,943 223,315 189,745
Loans............................................ 298,063 250,569 214,124 169,106 129,831
Securities....................................... 40,375 49,394 32,541 28,536 21,940
Earning assets................................... 354,593 303,923 253,263 207,501 176,789
Deposits......................................... 316,283 264,028 214,169 186,730 163,861
Long-term borrowings............................. 34,736 29,654 34,539 16,964 11,007
Shareholders' equity............................. 25,619 20,591 17,669 12,421 11,480
Shares outstanding............................... 3,127 2,882 2,857 1,345 1,323
Selected Average Balances
Total assets..................................... 354,164 299,167 259,799 203,703 131,079
Loans............................................ 276,733 234,031 204,436 150,691 95,353
Securities....................................... 50,933 40,462 34,393 33,192 23,862
Earning assets................................... 333,777 280,884 243,038 191,540 123,663
Deposits......................................... 290,961 241,933 206,787 175,025 110,745
Long-term borrowings............................. 34,017 33,028 29,024 12,798 6,649
Shareholders' equity............................. 22,454 19,821 15,045 11,950 8,925
Shares outstanding - basic....................... 2,980 2,860 2,755 2,652 2,333
Ratios
Return on average assets......................... 0.75% 0.85% 0.63% 0.62% 0.92%
Return on average equity......................... 11.88 12.80 10.83 10.59 13.50
Net interest spread.............................. 3.32 3.75 3.39 3.52 3.76
Total capital.................................... 8.59 8.32 8.25 7.41 7.88
Tier 1 capital................................... 7.54 7.16 7.22 6.34 6.64
Leverage ratio................................... 6.07 5.87 5.72 5.22 4.99
Average equity to average assets................. 6.34 6.63 5.79 5.87 6.80
12
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The purpose of the following discussion is to address information relating
to the financial condition and results of operations of the Company that may not
be readily apparent from a review of the consolidated financial statements and
notes thereto, which begin on page 31 of this Report. This discussion should be
read in conjunction with information provided in the Company's consolidated
financial statements and notes thereto. Unless otherwise noted, the discussion
of net interest income in this financial review is presented on a taxable
equivalent basis to facilitate performance comparisons among various taxable and
tax-exempt assets.
Forward-Looking Statements
Certain of the statements made in this Report and in documents incorporated
by reference herein, including matters discussed under the caption "Management's
Discussion and Analysis of Financial Condition and Results of Operations," as
well as oral statements made by the Company or its officers, directors or
employees, may constitute forward-looking statements within the meaning of
Section 21E of the Securities Exchange Act of 1934, as amended (the "Exchange
Act"). Such forward-looking statements are based on Management's beliefs,
current expectations, estimates and projections about the financial services
industry, the economy and about the Company and the Bank in general. The words
"expect," "anticipate," "intend," "plan," "believe," "seek," "estimate" and
similar expressions are intended to identify such forward-looking statements;
however, this Report also contains other forward-looking statements in addition
to historical information. Such forward-looking statements are not guarantees of
future performance and are subject to risks, uncertainties and other factors
that may cause the actual results, performance or achievements of the Company to
differ materially from historical results or from any results expressed or
implied by such forward-looking statements. Such factors include, without
limitation, (i) increased competition with other financial institutions, (ii)
lack of sustained growth in the economy in Gilmer and Union Counties, (iii)
rapid fluctuations in interest rates, (iv) the inability of the Bank (as defined
herein) to maintain regulatory capital standards, and (v) changes in the
legislative and regulatory environment. Many of these factors are beyond the
Company's ability to control or predict, and readers are cautioned not to put
undue reliance on such forward-looking statements. The Company disclaims any
obligation to update or revise any forward-looking statements contained in this
Report, whether as a result of new information, future events or otherwise.
Summary
The Company's net income of $2,668,008 for the year ended December 31, 2002
represents an increase of $129,910 or 5.1%. The Company's net income of
$2,538,098 for the year ended December 31, 2001 represented an increase of
$908,667 or 55.8%. The Company's net income of $1,629,431 for the year ended
December 31, 2000, represented an increase of $363,657 or 28.7%. The increase in
net income for these periods relates to increased loan growth and improved
interest rate management coupled with proper management of expenses.
Earnings per share increased to $0.90 ($0.84 on a diluted basis) in 2002,
compared to $0.89 ($0.82 on a diluted basis) in 2001, $0.59 ($0.55 on a diluted
basis) in 2000, and $0.48 ($0.44 on a diluted basis) per share net income in
1999. Return on average assets, which reflects the Bank's ability to utilize its
assets, was 0.75% in 2002, compared to 0.85% in 2001, 0.63% in 2000, and 0.62%
in 1999. Return on average shareholders' equity decreased to 11.88% in 2002,
compared to 12.80% in 2001, 10.83% in 2000, and 10.59% in 1999. The decline in
this ratio is due in large part to continued growth and expansion in the
Company.
The Company plans to continue its objectives of maintaining asset quality
and providing superior service to its customers. Our strategic plan in the short
run includes controlled growth with a focus on developing banking relationships.
The Company plans to provide the best value in deposit services and loan
products to its customers.
13
Financial Condition
Earning Assets
The Bank's earning assets, which include deposits in other banks, federal
funds sold, securities and loans, averaged $333,777,000, or 94.2% of average
total assets, in 2002, compared to $280,884,000, or 93.9% of average total
assets, in 2001. The mix of average earning assets comprised the following
percentages:
December 31,
----------------------------------------------
2002 2001 2000
------------- ------------- --------------
Deposits in other banks......................................... 0.30% 0.14% 0.21%
Federal funds sold.............................................. 1.53 2.13 1.52
Investment securities........................................... 15.26 14.41 14.15
Loans........................................................... 82.91 83.32 84.12
The mix of average earning assets reflects management's attempt to maximize
interest income while maintaining acceptable levels of risk.
The management of the Company considers many criteria in managing earning
assets, including creditworthiness, diversification, maturity, and interest rate
sensitivity. The following table sets forth the Company's interest-earning
assets by category at December 31, in each of the last three years.
December 31,
----------------------------------------
2002 2001 2000
----------- ----------- -----------
(In thousands)
Interest-bearing deposits with banks.................................... $ 8,399 $ 746 $ 25
Securities.............................................................. 40,375 49,394 32,541
Federal funds sold...................................................... 7,756 3,214 6,573
Loans:
Real estate.......................................................... 238,768 202,107 158,775
Commercial and other................................................. 59,295 48,462 55,349
----------- ----------- -----------
Total loans........................................................ 298,063 250,569 214,124
----------- ----------- -----------
Interest-earning assets ................................................ $ 354,593 $ 303,923 $ 253,263
=========== =========== ===========
The Bank has intentionally avoided the growing national market in loans to
finance leveraged buy-outs, participating in no nationally syndicated leveraged
buy-out loans. Concurrently, it has avoided exposure to lesser developed country
("LDC") debt, having no LDC loans in its portfolio.
Federal Funds Sold
Management maintains federal funds sold as a tool in managing its daily
cash needs. Federal funds sold at December 31, 2002 and 2001 were $7,756,000 and
$3,214,000, respectively. Average federal funds sold for 2002 was approximately
$5,104,000, or 1.53% of average earning assets, and for 2001, was approximately
$6,004,000, or 2.13% of average earning assets. The increase in year-end federal
funds resulted from the sale of securities as well as an increase in customer
deposits related to the opening of an office in Blue Ridge, Georgia.
Securities Portfolio
In the past, the Bank has classified its securities as either
available-for-sale or held-to-maturity. However, during 2000 the Bank
reclassified all its held-to-maturity securities to the available-for-sale
portfolio. At December 31, 2001, $49,393,717 of the Bank's securities were
classified as available-for-sale, while at December 31, 2002, $40,374,902 of the
Bank's securities were classified as available-for-sale.
14
The composition of the Bank's securities portfolio reflects the Company's
investment strategy of maximizing portfolio yields subject to risk and liquidity
considerations. The primary objectives of the Company's investment strategy are
to maintain an appropriate level of liquidity, and to provide a tool with which
to control the Bank's interest rate position while, at the same time, producing
adequate levels of interest income. Management of the maturity of the portfolio
is necessary to provide liquidity and to control interest rate risk. During
2002, gross sales amounted to $12,597,325 and maturities amounted to
$34,322,603, representing 24.7% and 67.4% of the average portfolio,
respectively. Net gains associated with sales and maturities totaled $285,525 in
2002. Gross unrealized gains in the portfolio amounted to $698,255 at year-end
2002 and unrealized losses amounted to $17,876. During 2001, gross securities
sales were $7,777,064 and maturities were $19,540,135 representing 19.2% and
48.3%, respectively, of the average portfolio for the year. Net gains associated
with sales and maturities totaled $146,976 in 2001. Gross unrealized gains in
the portfolio amounted to $386,780 at year-end 2001 and unrealized losses
amounted to $294,626.
Mortgage-backed securities have varying degrees of risk of impairment of
principal, as opposed to U.S. Treasury and U.S. government agency obligations,
which are considered to contain virtually no default or prepayment risk.
Impairment risk is primarily associated with accelerated prepayments,
particularly with respect to longer maturities purchased at a premium and
interest-only strip securities. The Bank's purchases of mortgage-backed
securities during 2002 and 2001 did not include securities with these
characteristics. The recoverability of the Bank's investments in mortgage-backed
securities is reviewed periodically, and the Company intends to make appropriate
adjustments to income for impaired values.
The following table presents the carrying amounts of the securities
portfolio at December 31, in each of the last three years.
Securities Portfolio
December 31,
----------------------------------------------
2002 2001 2000
------------- ------------- --------------
(In thousands)
Securities Available-for-Sale:
U.S. treasury and government agencies........................ $ 8,579 $ 14,691 $ 16,558
Mortgage-backed securities................................... 14,759 19,340 6,149
State and municipal securities............................... 15,314 13,805 8,276
Equity securities............................................ 1,723 1,558 1,558
------------- ------------- --------------
Total...................................................... $ 40,375 $ 49,394 $ 32,541
============= ============= ==============
In 2002, average taxable securities were 68.2% of the portfolio, compared
to 69.7% in 2001 and 77.4% in 2000. The increase in tax exempt securities from
2001 to 2002 reflects the Bank's intent to reduce the effect of federal income
taxation.
The maturities and weighted average yields of the investments in the 2002
portfolio of securities are presented below. The average maturity of the
securities portfolio is 3.8 years with an average yield of 5.59%. Taxable
equivalent adjustments (using a 34 percent tax rate) have been made in
calculating yields on tax-exempt obligations.
Security Portfolio Maturity Schedule
Maturing
---------------------------------------------------------------------------------------
Within After One But After Five But After
One Year Within Five Years Within Ten Years Ten Years
------------------ ------------------ ------------------ ------------------
Amount Yield Amount Yield Amount Yield Amount Yield
-------- ------- -------- ------- -------- ------- -------- -------
(Amounts in thousands, except percentages)
Securities Available-for-Sale
U.S. Government agencies...... $ 4,614 5.39% $ 2,050 4.20% $ 1,915 6.00% $ -- 0.00%
Mortgage-backed............... 4,079 3.04 6,777 4.12 3,903 4.23 -- 0.00
State and municipal........... 104 5.30 1,732 7.10 3,019 7.28 10,459 7.53
Equity securities............. -- 0.00 -- 0.00 -- 0.00 1,723 5.22
-------- -------- -------- --------
Total Securities................. $ 8,797 4.30 $ 10,559 4.62 $ 8,837 5.66 $ 12,182 7.20
======== ======== ======== ========
15
There were no securities held by the Company of which the aggregate value
on December 31, 2002 exceeded ten percent of shareholders' equity at that date.
(Securities which are payable from and secured by the same source of revenue or
taxing authority are considered to be securities of a single issuer. Securities
of the U.S. Government and U.S. Government agencies and corporations are not
included.)
There has been no significant impact on the Company's consolidated
financial statements as a result of the provisions of Statement of Financial
Accounting Standards No. 119, Disclosure about Derivative Financial Instruments
and Fair Value of Financial Instruments.
Loan Portfolio
Loans made up the largest component of the Bank's earning assets. At
December 31, 2002, the Bank's total loans were $298,063,055, compared to total
loans of $250,569,296 at the end of 2001. In 2002, average net loans represented
82.9% of average earning assets and 78.1% of total average assets, while in 2001
average net loans represented 83.3% of average earning assets and 78.2% of total
average assets. This was the result of continued strong loan demand and the
expansion of the loan production office in Blue Ridge, Georgia. The ratio of
total loans to total deposits was 94.2% in 2002 and 94.9% in 2001.
The following table shows the classification of loans by major category at
December 31, 2002, and for each of the preceding four years.
Loan Portfolio
December 31,
--------------------------------------------------------------------------------------------------------
2002 2001 2000 1999 1998
------------------ ------------------ ------------------ ------------------ ------------------
Percent Percent Percent Percent Percent
Amount of Total Amount of Total Amount of Total Amount of Total Amount of Total
(Dollars in thousands)
Commercial, financial
and agricultural........ $ 33,449 11.2% $ 29,092 11.6% $ 36,320 17.0% $ 35,375 20.9% $ 26,883 20.7%
Real estate - construction 73,242 24.6 54,255 21.7 22,057 10.3 13,941 8.2 8,543 6.6
Real estate - other (1)... 165,526 55.5 147,852 59.0 136,718 63.8 103,413 61.2 78,965 60.8
Consumer.................. 20,296 6.8 19,370 7.7 17,254 8.1 15,026 8.9 13,743 10.6
Other loans............... 5,550 1.9 -- 0.0 1,775 0.8 1,351 0.8 1,697 1.3
--------- ------ --------- ------ --------- ------ --------- ------ --------- ------
298,063 100.0% 250,569 100.0% 214,124 100.0% 169,106 100.0% 129,831 100.0%
====== ====== ====== ====== ======
Allowance for loan losses (3,238) (2,995) (2,211) (1,849) (1,686)
--------- --------- --------- --------- ---------
Net loans................. $ 294,825 $ 247,574 $ 211,913 $ 167,257 $ 128,145
========= ========= ========= ========= =========
(1) The "real estate - other" category includes multi-family residential, home
equity, commercial real estate and undeveloped agricultural real estate
loans.
The following table shows the maturity distribution of selected loan
classifications at December 31, 2002, and an analysis of these loans maturing in
over one year.
Selected Loan Maturity and Interest Rate Sensitivity
Rate Structure for Loans
Maturity Maturing Over One Year
--------------------------------------------------- -----------------------------
Over One
One Year Over Predetermined Floating or
Year or Through Five Interest Adjustable
Less Five Years Years Total Rate Rate
----------- ----------- ----------- ----------- ------------- --------------
(Amounts in thousands)
Commercial, financial
and agricultural............ $ 17,227 $ 14,293 $ 1,928 $ 33,449 $ 8,196 $ 8,025
Real estate - construction..... 60,120 11,695 1,427 73,242 9,020 4,102
----------- ----------- ----------- ----------- ------------- --------------
Total....................... $ 77,347 $ 25,988 $ 3,355 $ 106,691 $ 17,216 $ 12,127
=========== =========== =========== =========== ============= ==============
For the purposes of this schedule, loans that have reached the fixed
contractual floor rate are treated as having a pre-determined interest rate.
16
Summary of Loan Loss Experience
The provision for loan losses, which is charged to operating results, is
based on the growth of the loan portfolio, the amount of net loan losses
incurred and management's estimation of potential future losses based on an
evaluation of the risk in the loan portfolio. Management believes that the
$3,237,898 in the allowance for loan losses at December 31, 2002, (1.09% of
total net outstanding loans at that date) was adequate to absorb known risks in
the portfolio, based upon the Bank's historical experience. No assurance can be
given, however, that increased loan volume, adverse economic conditions or other
circumstances will not result in increased losses in the Bank's loan portfolio.
The following table sets forth certain information with respect to the
Bank's loans, net of unearned income, and the allowance for loan losses for each
of the last five years:
Analysis of Loan Loss Experience
December 31,
--------------------------------------------------------------------
2002 2001 2000 1999 1998
----------- ----------- ----------- ----------- -----------
(Amounts in thousands, except ratios)
Allowance for loan losses at beginning of year $ 2,995 $ 2,211 $ 1,849 $ 1,686 $ 930
Adjustment of business acquisition.......... -- -- -- -- 557
Loans charged off:
Commercial, financial, and agricultural.. 89 240 404 461 32
Real estate-construction................. 50 -- -- -- --
Real estate - other...................... 427 134 49 22 --
Consumer................................. 250 170 138 278 104
----------- ----------- ----------- ----------- -----------
Total loans charged off................ 816 544 591 761 136
----------- ----------- ----------- ----------- -----------
Recoveries on loans previously charged off:
Commercial, financial, and agricultural.. 5 8 9 15 6
Real estate-construction................. -- -- -- -- --
Real estate-other........................ -- 6 -- -- --
Consumer................................. 26 20 22 29 29
----------- ----------- ----------- ----------- -----------
Total recoveries on loans
previously charged off............... 31 34 31 44 35
----------- ----------- ----------- ---------- -----------
Net loans charged off....................... 785 510 560 717 101
----------- ----------- ----------- ----------- -----------
Provision for loan losses................... 1,028 1,294 922 880 300
----------- ----------- ----------- ----------- -----------
Allowance for loan losses, at end of period. $ 3,238 $ 2,995 $ 2,211 $ 1,849 $ 1,686
=========== =========== =========== =========== ===========
Loans, net of unearned income, at end
of period............................... $ 298,063 $ 250,569 $ 214,124 $ 169,106 $ 129,831
=========== =========== =========== ========== ===========
Average loans, net of unearned income,
outstanding for the period.................. $ 276,733 $ 234,031 $ 204,436 $ 150,691 $ 95,353
=========== =========== =========== =========== ===========
Ratios:
Allowance at end of period to loans, net of
unearned income.......................... 1.09% 1.20% 1.03% 1.09% 1.30%
Allowance at end of period to average loans,
net of unearned income................... 1.17 1.28 1.08 1.23 1.77
Net charge-offs to average loans, net of
unearned income.......................... 0.28 0.22 0.27 0.48 0.11
Net charge-offs to allowance at end of period 24.24 17.03 25.33 38.78 5.99
Recoveries to prior year charge-offs........ 5.70 5.75 4.07 32.35 15.42
In assessing adequacy, management relies predominantly on its ongoing
review of the loan portfolio, which is undertaken both to ascertain whether
there are probable losses that must be charged off and to assess the risk
characteristics of the portfolio in the aggregate. This review takes into
consideration the judgments of the responsible lending officers and senior
management, and also those of bank regulatory agencies that review the loan
portfolio as part of the regular bank examination process. In evaluating the
allowance, management also considers the loan loss experience of the Bank, the
amount of past due and nonperforming loans, current and anticipated economic
conditions, lender requirements and other appropriate information.
17
Management allocated the allowance for loan losses to specific loan classes
as follows:
Allocation of Allowance for Loan Losses
December 31,
---------------------------------------------------------------------------------------------------------
2002 2001 2000 1999 1998
----------------- ----------------- ----------------- ----------------- -----------------
Percent Percent Percent Percent Percent
of Loans of Loans of Loans of Loans of Loans
in Each in Each in Each in Each in Each
Category Category Category Category Category
to Total to Total to Total to Total to Total
Amount Loans Amount Loans Amount Loans Amount Loans Amount Loans
-------- ------- -------- ------- -------- ------- -------- ------- -------- -------
(Dollars in Thousands)
Domestic Loans (1)
Commercial, financial
and agricultural... $ 1,615 11% $ 807 12% $ 387 17% $ 349 21% $ 421 21%
Real estate -
construction....... 85 25 193 22 199 10 152 8 118 6
Real estate - other 1,044 55 1,760 59 1,381 64 1,120 61 894 61
Consumer............. 168 7 235 7 244 8 228 9 253 11
Other................ 326 2 -- 0 -- 1 -- 1 -- 1
-------- ------- -------- ------- -------- ------- -------- ------- -------- -------
Total........... $ 3,238 100% $ 2,995 100% $ 2,211 100% $ 1,849 100% $ 1,686 100%
======== ======= ======== ======= ======== ======= ======== ======= ======== =======
(1) The Bank had no foreign loans.
Nonperforming Assets
Nonperforming assets include nonperforming loans and foreclosed real estate
held for sale. Nonperforming loans include loans classified as nonaccrual or
renegotiated. The Bank's policy is to place a loan on nonaccrual status when it
is contractually past due 90 days or more as to payment of principal or
interest, unless the collateral value is greater than both the principal due and
the accrued interest. At the time a loan is placed on nonaccrual status,
interest previously accrued but not collected is reversed and charged against
current earnings. Recognition of any interest after a loan has been placed on
nonaccrual status is accounted for on a cash basis.
The Bank had nonperforming assets at December 31, 2002, 2001, 2000, 1999,
and 1998 of approximately $6,143,000, $1,787,000, $556,000, $368,000, and
$27,000, respectively.
The following table presents information concerning outstanding balances of
nonperforming assets at December 31, 2002, and for each of the preceding four
years.
Nonperforming Assets
December 31,
--------------------------------------------------------------------
2002 2001 2000 1999 1998
----------- ----------- ----------- ----------- -----------
(Amounts in thousands, except ratios)
Nonaccruing loans .......................... $ 4,823 $ 1,642 $ 385 $ 344 $ 4
Loans past due 90 days or more.............. 334 12 24 24 23
Restructured loans.......................... -- -- -- -- --
----------- ----------- ----------- ----------- -----------
Total nonperforming loans................ 5,157 1,654 409 368 27
Nonaccruing securities...................... -- -- -- -- --
Other real estate........................... 986 133 147 -- --
----------- ----------- ----------- ----------- -----------
Total nonperforming assets............... $ 6,143 $ 1,787 $ 556 $ 368 $ 27
=========== =========== =========== =========== ===========
Ratios:
Loan loss allowance to total
nonperforming assets.................. 0.53 1.68 3.98 5.02 62.44
=========== =========== =========== =========== ===========
Total nonperforming loans to total loans
(net of unearned interest)............. 1.73% 0.66% 0.26% 0.22% 0.02%
=========== =========== =========== =========== ==========
Total nonperforming assets
to total assets....................... 1.60% 0.56% 0.21% 0.16% 0.01%
=========== =========== =========== =========== ==========
18
It is the general policy of the Bank to stop accruing interest income and
place the recognition of interest on a cash basis when any commercial,
industrial or real estate loan is past due as to principal or interest and the
ultimate collection of either is in doubt. Accrual of interest income on
consumer installment loans is suspended when any payment of principal or
interest, or both, is more than ninety days delinquent. When a loan is placed on
a nonaccrual basis, any interest previously accrued but not collected is
reversed against current income unless the collateral for the loan is sufficient
to cover the accrued interest or a guarantor assures payment of interest. For
each of the five years in the period ended December 31, 2002, the difference
between gross interest income that would have been recorded in such period, if
the nonaccruing loans had been current in accordance with their original terms,
and the amount of interest income on those loans, that was included in such
period's net income, was negligible.
There has been no significant impact on the Company's consolidated financial
statements as a result of the provisions of Statement of Financial Accounting
Standards No. 114, Accounting by Creditors for Impairment of a Loan, or
Statement of Accounting Standards No. 118, Accounting by Creditors for
Impairment of a Loan--Income Recognition and Disclosures.
Deposits
The Company's primary source of funds is derived from deposits of the
Bank's customers. Average deposits increased 20.3%, from approximately
$241,933,000 in 2001 to approximately $290,961,000 in 2002. At December 31,
2002, total deposits were $316,282,756, of which $294,385,698 (93.1%) were
interest bearing. At December 31, 2001, total deposits were $264,028,007, of
which $247,194,423 (93.6%) were interest bearing, and, at December 31, 2000,
total deposits were $214,168,823, of which $205,268,008 (95.8%) were interest
bearing. The continued growth of the Bank fueled the growth in the deposit base.
The Company intends to emphasize internal deposit growth in order to expand the
consumer bases of the Bank and to continue to fund asset growth.
The average amounts of, and the average rate paid on, each of the following
categories of deposits, for the years ended December 31, 2002, 2001 and 2000,
are as follows:
Years ended December 31,
-----------------------------------------------------------------------------
2002 2001 2000
------------------------ ------------------------ -------------------------
Amount Rate Amount Rate Amount Rate
----------- ----------- ----------- ----------- ----------- -----------
(Dollars in thousands)
Noninterest-bearing demand deposits. $ 19,549 0.00% $ 13,972 0.00% $ 10,715 0.00%
Demand.............................. 62,492 1.93 39,100 2.55 47,011 4.22
Savings............................. 41,359 1.72 35,513 3.03 28,628 4.29
Time deposits....................... 167,561 4.44 153,348 6.02 120,433 6.40
----------- ---------- -----------
Total interest-bearing deposits.. 271,412 3.45 227,961 4.95 196,072 5.57
----------- ---------- -----------
Total average deposits........... $ 290,961 3.21 $ 241,933 4.67 $ 206,787 5.28
=========== ========== ===========
The two categories of lowest cost deposits comprised the following
percentages of average total deposits during 2002: average noninterest-bearing
demand deposits, 6.72 percent; and average savings deposits, 14.21 percent. Of
average time deposits, approximately 32.95 percent were large denomination
certificates of deposit. The maturities of the time certificates of deposit of
$100,000 or more, issued by the Bank at December 31, 2002, are summarized in the
table below.
Maturities of Large Time Deposits
Time
Certificates
of Deposit
--------------
(Amounts in
thousands)
Three months or less..................................................................... $ 10,064
Over three through six months............................................................ 13,493
Over six through twelve months........................................................... 22,482
Over twelve months....................................................................... 14,494
--------------
Total............................................................................... $ 60,533
==============
19
Repurchases
Securities sold under agreements to repurchase amounted to $5,928,624 at
December 31, 2002, compared to $1,732,699 at December 31, 2001, and $2,845,355
at December 31, 2000. The weighted average rates were 1.60%, 3.20% and 3.94% for
2002, 2001 and 2000, respectively. Securities sold under agreements to
repurchase averaged $4,061,294 during 2002, $1,930,051 during 2001 and
$2,522,820 during 2000. The maximum amount outstanding at any month end during
2002 was $5,928,624, during 2001 was $3,144,208, and during 2000 was $3,117,584.
The total of securities sold under agreements to repurchase are associated with
the cash flow needs of the Bank's corporate customers who participate in
repurchase agreements. In addition, the Company had federal funds purchased that
amounted to $-0- at year-end 2002, and $1,932,000 at year-end 2001, compared to
$-0- at year-end 2000.
Long-term Debt
Borrowed funds consist primarily of long-term debt. The Bank had
$16,000,000 in available lines to purchase Federal Funds, on an unsecured basis,
from commercial banks. The Bank was approved to borrow up to approximately
$57,600,000 under various short-term and long-term programs offered by the
Federal Home Loan Bank of Atlanta. These borrowings are secured under a blanket
lien agreement on certain qualifying mortgage instruments in loan and securities
portfolios. The unused portion of these available funds amounted to
approximately $27,400,000 at year-end 2002. Long-term debt consisted of various
commitments with scheduled maturities from one to six years. In addition, the
Company has borrowed $4.6 million from another financial institution (See
"Capital Resources: Term Loan" below).
The following table sets forth the expected debt service for the next five
years based on interest rates and repayment provisions as of December 31, 2002.
Maturities of Long-term Debt
(In thousands)
2003 2004 2005 2006 2007
--------- --------- -------- ---------- -----------
Interest on indebtedness......................... $ 1,597 $ 975 $ 830 $ 568 $ 981
Repayment of principal........................... 17,100 2,900 4,857 1,857 1,357
--------- --------- -------- ---------- -----------
$ 18,697 $ 3,875 $ 5,687 $ 2,425 $ 2,338
========= ========= ======== ========== ===========
Shareholders' Equity
Shareholders' equity increased $5,028,099, from December 31, 2001 to
December 31, 2002, due in part to net earnings of $2,668,008 and the increase in
unrealized gains on securities available-for-sale totaling $388,228, net of
deferred tax liability. The increase was also a result of the issuance of 11,690
shares of the Common Stock to the Company's 401(k) plan (total purchase price
$163,660), the issuance of 180,800 shares of stock through the exercise of stock
options for $1,021,498, and the reissuance of 52,447 shares of stock out of
treasury stock for $786,705.
All amounts presented in this report and in the financial statements are
adjusted to reflect the Stock Split in April 2000. See ITEM 5, "Market
Information."
20
Return on Equity and Assets
The following table summarizes certain financial ratios for the Company for
the years ended December 31, 2002, 2001 and 2000.
Return on Equity and Assets
Year ended December 31,
----------------------------------------------
2002 2001 2000
------------- ------------- --------------
Return on average assets............................. 0.75% 0.85% 0.63%
Return on average equity............................. 11.88 12.80 10.83
Dividend payout ratio................................ 0.00 0.00 0.00
Average equity to average assets ratio............... 6.34 6.63 5.79
Capital Resources
A strong capital position is vital to the continued profitability of the
Company because it promotes depositor and investor confidence and provides a
solid foundation for future growth of the organization. A majority of the
Company's capital requirements have come from proceeds from the Bank's initial
stock offering in 1994, proceeds of $2.65 million from a private placement of
the Common Stock in November 1998, proceeds of $4.4 million from a public
offering in 2000, proceeds of $787 thousand from a private offering and $1.0
million from the exercise of options in 2002, and through the retention of
earnings and the sale of Common Stock to the Company's 401(k) plan.
Term Loan. On April 3, 2002, the Company obtained a $4.6 million term loan
under a Loan and Stock Pledge Agreement and a Promissory Note (collectively, the
"Term Loan") with Crescent Bank and Trust Company. The Company used $4.6 million
of the proceeds of the Term Loan to repay that certain loan and stock pledge
agreement, dated April 3, 2000, previously entered into by and between the
Company and Crescent Bank and Trust Company. At December 31, 2002, the balance
on the Term Loan was $4.6 million. Interest on the outstanding amounts under the
Term Loan is payable quarterly, commencing July 1, 2002, at the prime rate (as
defined in the Promissory Note) less twenty-five (25) basis points. The Company
began making interest payments on July 1, 2002. Principal is due in seven equal
annual installments, each in the amount of $657,000, beginning on March 31,
2003. The entire outstanding balance of the Term Loan, together with all accrued
and unpaid interest, is due and payable in a final installment on March 31,
2010. The Term Loan contains certain affirmative and negative covenants,
including, but not limited to, requiring the Company to cause the Bank at all
times to maintain certain minimum capital ratios, and to maintain a minimum
ratio of loan and lease losses to gross loans.
Federal Capital Standards. Regulatory authorities are placing increased
emphasis on the maintenance of adequate capital. In 1990, new risk-based capital
requirements became effective under the Federal Deposit Insurance Corporation
Improvement Act. The guidelines take into consideration risk factors, as defined
by regulators, associated with various categories of assets, both on and off the
balance sheet. Under the guidelines, capital strength is measured in two tiers,
which are used in conjunction with risk-adjusted assets to determine the
risk-based capital ratios. The Company's Tier 1 capital, which consists of
common equity, paid-in capital and retained earnings (less intangible assets),
amounted to $23.1 million at December 31, 2002. Tier 2 capital components
include supplemental capital components such as qualifying allowance for loan
losses and qualifying subordinated debt. Tier 1 capital, plus the Tier 2 capital
components, is referred to as Total Capital and was $26.3 million at year-end
2002. The Company's percentage ratios as calculated under regulatory guidelines
were 7.54% and 8.59% for Tier 1 and Total Capital, respectively, at year-end
2002. The Company's Tier 1 Capital and Total Capital exceeded the minimum ratios
of 4% and 8%, respectively.
Another important indicator of capital adequacy in the banking industry is
the leverage ratio. The leverage ratio is defined as the ratio which
shareholders' equity, minus intangibles, bears to total assets minus
intangibles. At December 31, 2002, the Company's leverage ratio was 6.07%,
exceeding the regulatory minimum requirement of 4%.
21
The table below illustrates the Company's regulatory capital ratios under
federal guidelines at December 31, 2002, 2001 and 2000:
Capital Adequacy Ratios
Statutory Years ended December 31,
----------------------------------------
Minimum 2002 2001 2000
------------ ----------- ----------- -----------
(Amounts in thousands, except percentages)
Tier 1 Capital.......................................... $ 23,089 $ 18,538 $ 15,563
Tier 2 Capital.......................................... 3,238 2,995 2,211
----------- ----------- -----------
Total Qualifying Capital................................ $ 26,327 $ 21,533 $ 17,774
=========== =========== ===========
Risk Adjusted Total Assets (including
off-balance-sheet exposures)............................ $ 306,405 $ 256,985 $ 215,521
Tier 1 Risk-Based Capital Ratio......................... 4.0% 7.54 7.16% 7.22%
Total Risk-Basked Capital Ratio......................... 8.0 8.59 8.32 8.25
Leverage Ratio.......................................... 4.0 6.07 5.87 5.72
DBF Capital Requirement. In addition to the capital standards imposed by
federal banking regulators, the DBF imposes a 6% primary capital ratio on the
Bank. The DBF's standard is calculated as the ratio of total equity to total
assets, each as adjusted for unrealized gains and losses on securities and
allowances for loan losses. At December 31, 2002, the Bank's capital ratio, as
calculated under the DBF standard, was 7.45%.
In 2001, the Bank paid dividends to the Company of $250,000, which were
used by the Company for the repayment of debt and other expenses. In 2002, the
Bank did not pay a dividend to the Company.
Liquidity Management
Liquidity is defined as the ability of a company to convert assets into
cash or cash equivalents without significant loss. Liquidity management involves
maintaining the Bank's abilities to meet the day-to-day cash flow requirements
of its customers, whether they are depositors wishing to withdraw funds or
borrowers requiring funds to meet their credit needs. Without proper liquidity
management, the Bank would not be able to perform its primary function as
financial intermediary and, therefore, would not be able to meet the production
and growth needs of the communities it serves.
The primary purpose of management of assets and liabilities is not only to
assure adequate liquidity in order for the Bank to meet the needs of its
customers, but also to maintain an appropriate balance between
interest-sensitive assets and interest-sensitive liabilities so that the Company
can also meet the investment requirements of its shareholders. Daily monitoring
of the sources and uses of funds is necessary to maintain an acceptable cash
position that meets both requirements. In the banking environment, both assets
and liabilities are considered sources of liquidity funding; therefore, both are
monitored on a daily basis.
The asset portion of the balance sheet provides liquidity primarily through
loan principal repayments or sales of investment and trading account securities.
Real estate construction and commercial, financial and agricultural loans that
mature in one year or less equaled approximately $77.3 million or 25.8% of the
total loan portfolio at December 31, 2002, and investment securities maturing in
one year or less equaled $8.8 million or 21.8% of the portfolio. Other sources
of liquidity include short-term investments such as federal funds sold.
The liability portion of the balance sheet provides liquidity through
various customers' interest-bearing and noninterest-bearing deposit accounts. At
the end of fiscal 2002, funds were also available through the purchase of
federal funds from correspondent commercial banks from available lines of up to
an aggregate of $16,000,000.
In an effort to maintain and improve the liquidity position of the Bank,
management made application for membership with the Federal Home Loan Bank of
Atlanta. As a member of the Federal Home Loan Bank, the Bank is able to improve
its ability to manage liquidity and reduce interest rate risk by having a
funding source to match longer term
22
loans. The Bank's credit line stands at $57,583,823 as of December 31, 2002.
This line is subject to collateral availability. At December 31, 2002, the
outstanding balance of the Bank's credit line was $30,135,714. See Note 12 to
the Notes to Consolidated Financial Statements herein.
Interest Rate Sensitivity Management
Interest rate sensitivity is a function of the repricing characteristics of
the Bank's portfolios of assets and liabilities. These repricing characteristics
are the time frames within which the interest-bearing assets and liabilities are
subject to changes in interest rates, either at replacement or maturity during
the life of the instruments. Sensitivity is measured as the difference between
the volume of assets and liabilities in the Bank's current portfolio that is
subject to repricing in future time periods. The differences are known as
interest rate sensitivity gaps and are usually calculated separately for
segments of time, ranging from zero to thirty days, thirty-one to ninety days,
ninety-one days to one year, one to five years, over five years and on a
cumulative basis.
The following tables show interest rate sensitivity gaps for these
different intervals as of December 31, 2002.
Interest Rate Sensitivity Analysis
0-30 31-90 90-365 1-5 Over 5
Days Days Days Years Years Total
----------- ----------- ----------- ----------- ----------- -----------
(In thousands, except ratios)
Interest-earning assets (1)
Loans............................ $ 18,574 $ 24,524 $ 101,548 $ 129,561 $ 19,033 $ 293,240
Securities:
Taxable........................ -- 2,127 6,566 8,827 7,541 25,061
Tax-exempt..................... -- -- 104 1,732 13,478 15,314
Time deposits in other banks..... 8,399 -- -- -- -- 8,399
Federal funds sold............... 7,756 -- -- -- -- 7,756
----------- ----------- ----------- ----------- ----------- -----------
34,729 26,651 108,218 140,120 40,052 349,770
----------- ----------- ----------- ----------- ----------- -----------
Interest-bearing liabilities (2)
Demand deposits (3).............. 27,513 27,512 27,512 -- -- 82,537
Savings deposits (3)............. 13,741 13,740 13,740 -- -- 41,221
Time deposits.................... 11,570 23,321 99,494 36,243 -- 170,628
Other short-term borrowings...... 5,929 -- -- -- -- 5,929
Long-term debt................... 2,100 7,150 11,793 8,343 5,350 34,736
----------- ----------- ----------- ----------- ----------- -----------
60,853 71,723 152,539 44,586 5,350 335,051
----------- ----------- ----------- ------------------------ -----------
Interest sensitivity gap............ $ (26,124) $ (45,072) $ (44,321) $ 95,534 $ 34,702 $ 14,719
=========== =========== =========== =========== =========== ===========
Cumulative interest sensitivity gap. $ (26,124) $ (71,196) $ (115,517) $ (19,983) $ 14,719
=========== =========== =========== =========== ===========
Ratio of interest-earning assets to
interest-bearing liabilities..... 0.57 0.37 0.71 3.14 7.49
=========== =========== ============ ============ ============
Cumulative ratio.................... 0.57 0.46 0.59 0.94 1.04
=========== =========== ============ ============ ============
Ratio of cumulative gap to total
interest-earning assets.......... (0.07) (0.20) (0.33) (0.06) 0.04
=========== =========== ============ ============ ============
(1) Excludes nonaccrual loans and securities.
(2) Excludes matured certificates which have not been redeemed by the customer
and on which no interest is accruing.
(3) Demand and savings deposits are assumed to be subject to movement into
other deposit instruments in equal amounts during the 0-30 day period, the
31-90 day period, and the 91-365 day period.
The above table indicates that, in a rising interest rate environment, the
Company's earnings may be adversely affected in the 0-365 day periods where
liabilities will reprice faster than assets. As seen in the preceding table, for
the first 30 days of repricing opportunity, there is an excess of earning
liabilities over interest-bearing assets of approximately $26 million. For the
first 365 days, interest-bearing liabilities exceed earning assets by
approximately
23
$116 million. During this one-year time frame, 85.1% of all interest-bearing
liabilities will reprice compared to 39.6% of all interest-earning assets.
Changes in the mix of earning assets or supporting liabilities can either
increase or decrease the net interest margin without affecting interest rate
sensitivity. In addition, the interest rate spread between an asset and its
supporting liability can vary significantly while the timing of repricing for
both the asset and the liability remain the same, thus impacting net interest
income. It should be noted, therefore, that a matched interest-sensitive
position by itself would not ensure maximum net interest income.
Management continually evaluates the condition of the economy, the pattern
of market interest rates and other economic data to determine the types of
investments that should be made and at what maturities. Using this analysis,
management from time to time assumes calculated interest rate sensitivity gap
positions to maximize net interest income based upon anticipated movements in
the general level of interest rates.
Results of Operations
Comparison of Years Ended December 31, 2002 and 2001
Net Interest Income
Net interest income is the principal source of the Bank's earnings stream
and represents the difference, or spread, between interest and fee income
generated from earning assets and the interest expense paid on deposits and
borrowed funds. Fluctuations in interest rates as well as volume and mix changes
in earning assets and interest-bearing liabilities materially impact net
interest income. Net interest income increased $531,334 or 4.7% to $11,956,632
at December 31, 2002, compared to $11,424,991 at December 31, 2001. This
increase was caused by growth in the Bank's loan portfolio, as well as the
payoff of several Federal Home Loan Bank advances.
Interest and fees earned on loans decreased 7.8% to $20,442,148 in 2002,
compared to $22,168,850 in 2001. The decrease in 2002 was primarily attributable
to the Federal Reserve's decision to lower interest rates during 2002.
Interest earned on taxable securities decreased 5.6% to $1,646,592 in
2002 from $1,743,440 in 2001, while interest earned on non-taxable securities
increased from $815,767 to $1,200,993 during the same period. The variance in
the income figures reflects a reallocation in the portfolio to maximize the
earning capacity of the portfolio.
During 2002, interest on federal funds sold decreased $287,929 or 78.5%
from 2001. This decrease in income is t