SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
_______________________
FORM 10-KSB
_______________________
Annual Report Pursuant to Section 13 or 15(d)
of the Securities Exchange Act of 1934
For the Fiscal Year Ended December 31, 2003
________________________________________________
Commission File Number 0-25929
THOMASVILLE BANCSHARES, INC.
A Georgia Corporation
(IRS Employer Identification No. 58-2175800)
301 North Broad Street
Thomasville, Georgia 31792
(229) 226-3300
________________________________________________
Securities Registered Pursuant to Section 12(b)
of the Securities Exchange Act of 1934:
None
________
Securities Registered Pursuant to Section 12(g)
of the Securities Exchange Act of 1934:
Common Stock, $1.00 par value
________________________________
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
------- --------
Check if disclosure of delinquent filers in response to Item 405 of Regulation
S-B is not contained in this form, 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-KSB or any amendment to
this Form 10-KSB. [ ]
Revenue for the fiscal year ended December 31, 2003: $12,519,111
The aggregate market value of the common stock of the Registrant held by
nonaffiliates of the Registrant (1,108,287 shares) on March 24, 2004 was
$24,936,457. As of such date, no organized trading market existed for the
common stock of the Registrant. The aggregate market value was computed by
reference to the fair market value of the common stock of the Registrant based
on recent sales of the common stock. For the purposes of this response,
directors, officers and holders of 5% or more of the Registrant's common stock
are considered the affiliates of the Registrant.
The number of shares outstanding of the Registrant's common stock, as of March
24, 2004: 1,467,352 shares of $1.00 par value common stock.
DOCUMENTS INCORPORATED BY REFERENCE
-----------------------------------
Portions of the registrant's definitive Proxy Statement to be delivered to
shareholders in connection with its 2004 Annual Meeting of Shareholders are
incorporated by reference in response to Part III of this Report.
Transitional Small Business Disclosure Format (check one) Yes No X
---- ----
PART I
SAFE HARBOR STATEMENT UNDER THE PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995
Certain statements in this Annual Report on Form 10-KSB contain "forward-
looking statements" within the meaning of the Private Securities Litigation
Reform Act of 1995, which statements generally can be identified by the use of
forward-looking terminology, such as "may," "will," "expect," "estimate,"
"anticipate," "believe," "target," "plan," "project," or "continue" or the
negatives thereof or other variations thereon or similar terminology, and are
made on the basis of management's plans and current analyses of the Company,
its business and the industry as a whole. These forward-looking statements are
subject to risks and uncertainties, including, but not limited to, economic
conditions, competition, interest rate sensitivity and exposure to regulatory
and legislative changes. The above factors, in some cases, have affected, and
in the future could affect, the Company's financial performance and could cause
actual results for 2004 and beyond to differ materially from those expressed or
implied in such forward-looking statements. The Company does not undertake to
publicly update or revise its forward-looking statements even if experience or
future changes make it clear that any projected results expressed or implied
therein will not be realized.
ITEM 1. DESCRIPTION OF BUSINESS
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GENERAL
Thomasville Bancshares, Inc., a Georgia corporation (the "Company"), was
formed in March 1995 to act as the holding company for Thomasville National
Bank (the "Bank"). The Bank opened for business in October 1995, and presently
operates two branches in Thomasville, Georgia. The Bank is a full service
commercial bank, with trust powers, and offers a full range of interest-bearing
and non-interest-bearing accounts, including commercial and retail checking
accounts, money market accounts, individual retirement and Keogh accounts,
regular interest-bearing statement savings accounts, certificates of deposit,
commercial loans, real estate loans, home equity loans and consumer/ installment
loans. In addition, the Bank provides such consumer services as U.S. Savings
Bonds, travelers checks, cashiers checks, safe deposit boxes, bank by mail
services, direct deposit and automatic teller services.
The holding company structure was adopted as a mechanism to enhance the
Bank's ability to serve its future customers' requirements for financial
services. The Company provides flexibility for expansion of the banking
business through the acquisition of other financial institutions and provision
of additional banking-related services which the traditional commercial bank
may not provide under present laws. For example, banking regulations require
that the Bank maintain a minimum ratio of capital to assets. In the event that
the Bank's growth is such that this minimum ratio is not maintained, the Company
may borrow funds, subject to the capital adequacy guidelines of the Federal
Reserve Board, and contribute them to the capital of the Bank, or raise capital
otherwise in a manner which is unavailable to the Bank under existing banking
regulations.
On July 1, 2002, the Company acquired all of the issued and outstanding
capital stock of Joseph Parker & Company, Inc. ("JPC"), a Georgia corporation
and federally registered investment advisory firm located in Thomasville,
Georgia. JPC provides investment management services primarily to individuals
and businesses located in South Georgia and managed approximately $200 million
in assets at December 31, 2003.
In September 2001, the Bank formed an operating subsidiary, TNB Financial
Services, Inc., a Georgia corporation with trust powers. This subsidiary
provides asset management services to clients located primarily in the Bank's
market area. At December 31, 2003, TNB Financial Services had approximately
$110 million in trust, agency and custody accounts.
MARKET AREA AND COMPETITION
The market area of the Bank consists of Thomas County, Georgia and is
focused on Thomasville, the county seat. Thomas County has been experiencing
steady growth in both jobs and banking deposits in recent years. Thomasville
is a regional and commercial medical center for Southwest Georgia. Thomas
County maintains a steady industrial and agricultural base, which has been
expanding in recent years. The largest employers in the county include the
John D. Archbold Memorial Hospital and Flowers Industries, Inc. Agricultural
activities in the county are supported by the second-largest fresh vegetable
market in Georgia and a daily cash market for hogs, cattle and poultry.
The populations of Thomasville and Thomas County are approximately 18,000
and 42,000, respectively. The median household income in Thomas County in 2003
was approximately $ 27,155 and the unemployment rate was 3.3% as of December
2003. Real estate values in the Bank's market area have generally appreciated
over the last five years.
Competition among financial institutions in the Bank's market area is
intense. There are three commercial banks and a total of nine branches in
Thomasville and four additional branches in smaller communities in Thomas
County. In addition, there is one savings and loan association in Thomasville.
There are also four credit unions headquartered in Thomas County.
Financial institutions primarily compete with one another for deposits.
In turn, a bank's deposit base directly affects the bank's loan activities and
general growth. Primary methods of competition include interest rates on
deposits and loans, service charges on deposit accounts and the offering of
unique financial services products. The Bank is competing with financial
institutions that have much greater financial resources, and that may be able
to offer more services and possibly better terms to their customers. However,
the management of the Bank believes that the Bank will be able to attract
sufficient deposits to enable the Bank to compete effectively with other area
financial institutions.
The Bank competes with existing area financial institutions other than
commercial banks and savings and loan associations, including insurance
companies, consumer finance companies, brokerage houses, credit unions and other
business entities which have recently been invading the traditional banking
markets. Due to the growth of the Thomasville area, it is anticipated that
additional competition will continue from new entrants to the market.
DISTRIBUTION OF ASSETS, LIABILITIES AND STOCKHOLDERS' EQUITY; INTEREST RATES
AND INTEREST DIFFERENTIAL
The following is a presentation of the average consolidated balance sheet
of the Company for the years ended December 31, 2003 and 2002. This
presentation includes all major categories of interest-earning assets and
interest-bearing liabilities:
AVERAGE CONSOLIDATED ASSETS
Year Ended Year Ended
December 31, 2003 December 31, 2002
----------------- -----------------
(In thousands)
Cash and due from banks $ 5,095 $ 4,115
-------- --------
Taxable securities $ 8,022 $ 7,636
Federal funds sold 5,405 4,443
Net loans 166,639 146,018
-------- --------
Total interest-earning assets $ 180,066 $ 158,097
Other assets 7,341 8,255
-------- --------
Total assets $ 192,502 $ 170,467
======== ========
AVERAGE CONSOLIDATED LIABILITIES AND STOCKHOLDERS' EQUITY
Non-interest-bearing deposits $ 18,031 $ 16,308
NOW and money market deposits 84,214 67,648
Savings deposits 5,298 4,425
Time deposits 51,253 53,534
Other borrowings 16,595 12,230
Other liabilities 706 1,698
-------- --------
Total liabilities $ 176,097 $ 155,843
Stockholders' equity 16,405 14,624
-------- --------
Total liabilities
and stockholders' equity $ 192,502 $ 170,467
======== ========
The following is a presentation of an analysis of the net interest
earnings of the Company for the periods indicated with respect to each
major category of interest-earning asset and each major category of
interest-bearing liability:
Year Ended December 31, 2003 Year Ended December 31, 2002
----------------------------- ---------------------------
Interest Average Interest Average
Average Earned/ Yield/ Average Earned/ Yield/
Amount Paid Rate Amount Paid Rate
------ ---- ---- ------ ---- ----
(Dollars in thousands)
Assets
------
Taxable securities $ 8,022 $ 298 3.71% $ 7,636 $ 403 5.28%
Federal funds sold 5,405 56 1.04% 4,443 78 1.76%
Net loans 166,639(1) 10,091(2) 6.06% 146,018(3) 9,628(4) 6.59%
------- ------ ------- ------
Total
earning assets $180,066 $10,445 5.80% $158,097 $10,109 6.39%
======= ====== ======= ======
Liabilities
-----------
NOW and money
market deposits $ 84,214 $ 1,180 1.40% $ 67,648 $ 1,368 2.02%
Savings deposits 5,298 53 1.00% 4,425 66 1.49%
Time deposits 51,253 1,644 3.21% 53,534 2,290 4.28%
Other borrowings 16,595 697 4.20% 12,230 522 4.27%
------- ------ ------- ------
Total interest
bearing
liabilities $157,360 $ 3,574 2.27% $137,837 $ 4,246 3.08%
======= ====== ======= ======
Net yield on
earning assets 3.82% 3.71%
______________________
(1) At December 31, 2003, $106 in loans were not accruing interest.
(2) Interest earned on net loans includes $423 in loan fees and loan service
fees.
(3) At December 31, 2002, $188 in loans were not accruing interest.
(4) Interest earned on net loans includes $373 in loan fees and loan service
fees.
RATE/VOLUME ANALYSIS OF NET INTEREST INCOME
The effect on interest income, interest expense and net interest income
during the periods indicated, of changes in average balance and rate from the
corresponding prior period is shown below. The effect of a change in average
balance has been determined by applying the average rate in the earlier period
to the change in average balance in the later period, as compared with the
earlier period. Changes resulting from average balance/rate variances are
included in changes resulting from rate. The balance of the change in interest
income or expense and net interest income has been attributed to a change in
average rate.
Year Ended Year Ended
December 31, 2003 December 31, 2002
compared with compared with
Year Ended Year Ended
December 31, 2002 December 31, 2001
----------------- -----------------
Increase (decrease) due to:
Volume Rate Total Volume Rate Total
------ ---- ----- ------ ---- -----
(In thousands)
Interest earned on:
Tax-exempt securities $ -- $ -- $ -- $ -- $ -- $ --
Taxable securities 21 (126) (105) (85) (100) (185)
Federal funds sold 25 (47) (22) (23) (90) (113)
Net loans 1,075 (612) 463 875 (1,007) (132)
----- ------ ----- ----- ------ -----
Total interest income 1,121 (785) 336 767 (1,197) (430)
----- ------ ----- ----- ------ -----
Interest paid on:
NOW deposits
and money market $ 750 $ (938) $ (188) $ 481 $(1,090) $ (690)
Savings deposits 19 (32) (13) 58 (85) (27)
Time deposits (94) (552) (646) 145 (855) (710)
Other borrowings 184 (9) 175 396 (12) 384
----- ------ ----- ----- ------ -----
Total interest expense 859 (1,531) (672) 803 (2,042) (962)
----- ------ ----- ----- ------ -----
Change in net
interest income $ 262 $ 746 $1,008 $ (313) $ 845 $ 532
===== ====== ===== ===== ===== =====
DEPOSITS
The Bank offers a full range of interest-bearing and non-interest-bearing
accounts, including commercial and retail checking accounts, money market
accounts, individual retirement and Keogh accounts, regular interest-bearing
statement savings accounts and certificates of deposit with fixed and variable
rates and a range of maturity date options. The sources of deposits are
residents, businesses and employees of businesses within the Bank's market area,
obtained through the personal solicitation of the Bank's officers and directors,
direct mail solicitation and advertisements published in the local media. The
Bank pays competitive interest rates on time and savings deposits up to the
maximum permitted by law or regulation. In addition, the Bank has implemented
a service charge fee schedule competitive with other financial institutions in
the Bank's market area, covering such matters as maintenance fees on checking
accounts, per item processing fees on checking accounts and returned check
charges.
The following table presents, for the periods indicated, the average amount
of and average rate paid on each of the following deposit categories:
Year Ended Year Ended
December 31, 2003 December 31, 2002
----------------- -----------------
Average Average Average Average
Deposit Category Amount Rate Paid Amount Rate Paid
---------------- ------ --------- ------ ---------
(Dollars in thousands)
Non-interest-bearing
demand deposits $18,031 N/A $16,308 N/A
NOW and money market deposits 84,214 1.40% 67,648 2.02%
Savings deposits 5,298 1.00% 4,425 1.49%
Time deposits 51,253 3.21% 53,534 4.28%
The following table indicates amounts outstanding of time
certificates of deposit of $100,000 or more and respective maturities at
December 31, 2003:
Time Certificates of Deposit At December 31, 2003
---------------------------- --------------------
(In thousands)
3 months or less $ 6,710
3-6 months 3,005
6-12 months 4,687
over 12 months 4,323
------
Total $18,725
======
LOAN PORTFOLIO
The Bank engages in a full complement of lending activities, including
commercial/industrial, consumer and real estate loans. As of December 31, 2003,
the Bank had a legal lending limit for unsecured loans of up to $2,690,000 to
any one person.
While risk of loss in the Bank's loan portfolio is primarily tied to the
credit quality of its various borrowers, risk of loss may also increase due to
factors beyond the Bank's control, such as local, regional and/or national
economic downturns. General conditions in the real estate market may also
impact the relative risk in the Bank's real estate portfolio. Of the Bank's
target areas of lending activities, commercial loans are generally considered
to have greater risk than real estate loans or consumer installment loans.
The Bank participates with other banks with respect to loans originated
by the Bank which exceed the Bank's lending limits. Management of the Bank does
not believe that loan participations necessarily pose any greater risk of loss
than other loans.
The following is a description of each of the major categories of loans in
the Bank's loan portfolio:
COMMERCIAL, FINANCIAL AND AGRICULTURAL LOANS. Commercial lending is
directed principally towards businesses whose demands for funds fall within the
Bank's legal lending limits and which are potential deposit customers of the
Bank. This category of loans includes loans made to individual, partnership or
corporate borrowers, and obtained for a variety of business purposes.
Particular emphasis is placed on loans to small- and medium-sized businesses.
The primary repayment risk for commercial loans is the failure of the business
due to economic or financial factors. Although the Bank typically looks to a
commercial borrower's cash flow as the principal source of repayment for such
loans, many commercial loans are secured by inventory, equipment, accounts
receivable, and other assets.
CONSUMER LOANS. The Bank's consumer loans consist primarily of installment
loans to individuals for personal, family and household purposes, including
automobile loans to individuals and pre-approved lines of credit. This category
of loans also includes lines of credit and term loans secured by second
mortgages on the residences of borrowers for a variety of purposes, including
home improvements, education and other personal expenditures. In evaluating
these loans the Bank reviews the borrower's level and stability of income and
past credit history and the impact of these factors on the ability of the
borrower to repay the loan in a timely manner. In addition, the Bank maintains
a proper margin between the loan amount and collateral value.
REAL ESTATE LOANS. The Bank's real estate loans consist of residential
first and second mortgage loans, residential construction loans and commercial
real estate loans to a limited degree. These loans are made consistent with
the Bank's appraisal policy and real estate lending policy which detail maximum
loan-to-value ratios and maturities. These loan-to-value ratios are sufficient
to compensate for fluctuations in the real estate market to minimize the risk
of loss to the Bank.
The following table presents various categories of loans contained in the
Bank's loan portfolio as of the dates indicated and the total amount of all
loans for such periods:
As of As of
Type of Loan December 31, 2003 December 31, 2002
------------ ----------------- -----------------
(In thousands)
Commercial, financial
and agricultural $ 43,179 $ 34,841
Real Estate - construction 9,834 11,588
Real Estate - mortgage 117,167 101,046
Installment and other
loans to individuals 11,531 9,147
------- -------
Subtotal 181,711 156,622
Less: allowance for possible
loan losses (1,961) (1,722)
------- -------
Total (net of allowances) $179,750 $154,900
======= =======
The following is a presentation of an analysis of maturities of
certain loans as of December 31, 2003:
Due Due
Due 1 After 1 to After
Type of Loan Year of Less 5 Years 5 Years Total
------------ ------------ ------- ------- -----
(In thousands)
Commercial, financial
and agricultural $33,652 $ 6,480 $ -- $32,525
Real Estate - construction 8,612 4,269 -- 20,488
------ ------ ----- ------
Total $42,264 $10,749 $ -- $53,013
====== ====== ===== ======
For the above loans, the following is a presentation of an analysis
of sensitivities to changes in interest rates as of December 31, 2003:
Due Due
Due 1 After 1 to After
Interest Category Year of Less 5 Years 5 Years Total
----------------- ------------ ------- ------- -----
(In thousands)
Predetermined interest rate $26,045 $ 6,480 $ -- $32,525
Floating interest rate 16,219 4,269 -- 20,488
------ ------ ----- ------
Total $42,262 $10,749 $ -- $53,013
====== ====== ===== ======
At December 31, 2003 and 2002, the total recorded investment in impaired
loans, all of which had allowances determined in accordance with FASB Statements
No. 114 and No. 118, amounted to approximately $2,922,261 and $3,650,260,
respectively. The average recorded investment in impaired loans amounted to
approximately $3,332,748 and $4,329,882 for 2003 and 2002, respectively. The
allowance related to impaired loans amounted to approximately $340,885 and
$320,451 at December 31, 2003 and 2002, respectively. The balance of the
allowance in excess of the above specific reserves is available to absorb the
inherent losses of all other loans. Interest income recognized on impaired
loans for 2003 and 2002 amounted to $184,326 and $269,985, respectively. The
amount of interest recognized on impaired loans using the cash method of
accounting was not material for 2003 and 2002. Loans on non-accrual status at
December 31, 2003 and 2002 had outstanding balances of $105,752 and $188,122,
respectively. Interest recognized on non-accruing loans at December 31, 2003
and 2002 was $4,228 and $8,112, respectively. The Bank has no commitments to
lend additional funds to borrowers whose loans have been modified.
As of December 31, 2003, there were no loans not disclosed above that are
classified for regulatory purposes as doubtful, substandard or special mention
which (i) represent or result from trends or uncertainties which management
reasonably expects will materially impact future operating results, liquidity,
or capital resources, or (ii) represent material credits about which management
is aware of any information which causes management to have serious doubts as
to the ability of such borrowers to comply with the loan repayment terms.
Accrual of interest is discontinued on a loan when management of the Bank
determines upon consideration of economic and business factors affecting
collection efforts that collection of interest is doubtful. At December 31,
2003, eight loans with an aggregate principal of $70,613 were over 90 days past
due but still accruing interest. As of December 31, 2003, one loan with an
aggregate principal balance of $151,386 was considered to be "troubled-debt
restructured," and seven loans with an aggregate balance of $105,752 were on
non-accrual status.
SUMMARY OF LOAN LOSS EXPERIENCE
An analysis of the Bank's loss experience is furnished in the following
table for the periods indicated, as well as a breakdown of the allowance for
possible loan losses:
ANALYSIS OF THE ALLOWANCE FOR POSSIBLE LOAN LOSSES
Year Ended Year Ended
December 31, 2003 December 31, 2002
----------------- -----------------
(Dollars in thousands)
Balance at beginning of period $1,722 $1,565
----- -----
Charge-offs:
Real estate loans (120) (51)
Installments and
other loans to individuals (65) (55)
Commercial loans (7) (39)
Recoveries 11 62
----- -----
Net charge-offs (181) (83)
Additions charged to operations 420 240
----- -----
Balance at end of period $1,961 $1,722
===== =====
Ratio of net charge-offs during
the period to average loans
outstanding during the period .11% .06%
==== ====
At December 31, 2003 and 2002 the allowance was allocated as follows:
At December 31, 2003 At December 31, 2002
-------------------- --------------------
Percent Percent
of loans of loans
in each in each
category category
to total to total
Amount loans Amount loans
------ -------- ------ --------
(Dollars in thousands)
Commercial, Financial
and Agricultural $ 590 23.8% $ 490 22.2%
Real Estate - Construction 150 5.4% 190 7.4%
Real Estate - Mortgage 990 64.5% 870 64.5%
Installment and Other
Loans to Individuals 220 6.3% 150 5.9%
Unallocated 11 N/A 22 N/A
----- --- ----- ---
Total $1,961 100% $1,722 100%
===== === ===== ===
LOAN LOSS RESERVE
As of December 31, 2003, 23.8% of outstanding loans were in the category
of commercial loans, which includes commercial, industrial and agricultural
loans. Although commercial loans are generally considered by management as
having greater risk than other categories of loans in the Bank's loan portfolio,
93.5% of these commercial loans at December 31, 2003 were made on a secured
basis. Management believes that the secured condition of the preponderant
portion of its commercial loan portfolio greatly reduces any risk of loss
inherently present in commercial loans.
The Bank's consumer loan portfolio is also well secured. At December 31,
2003, 88.3% of the Bank's consumer loans were secured by collateral primarily
consisting of automobiles, boats and other personal property. Management
believes that these loans involve less risk than commercial loans.
Real estate mortgage loans constituted 64.5% of outstanding loans at
December 31, 2003. The loans in this category represent residential and
commercial real estate mortgages where the amount of the original loan generally
does not exceed 85% of the appraised value of the collateral. These loans are
considered by management to be well secured with a low risk of loss.
A review of the loan portfolio by an independent firm is conducted
annually. The purpose of this review is to assess the risk in the loan
portfolio and to determine the adequacy of the allowance for loan losses.
The review includes analyses of historical performance, the level of non-
conforming and rated loans, loan volume and activity, review of loan files
and consideration of economic conditions and other pertinent information.
Upon completion, the report is approved by the Board and management of the
Bank. In addition to the above review, the Bank's primary regulator, the Office
of the Comptroller of the Currency (the "OCC"), also conducts an annual
examination of the loan portfolio. Upon completion, the OCC presents its report
of findings to the Board and management of the Bank. Information provided from
the above two independent sources, together with information provided by the
management of the Bank and other information known to members of the Board, are
utilized by the Board to monitor, on a quarterly basis, the loan portfolio.
Specifically, the Board attempts to identify risks inherent in the loan
portfolio (e.g., problem loans, potential problem loans and loans to be charged
off), assess the overall quality and collectibility of the loan portfolio, and
determine amounts of the allowance for loan losses and the provision for loan
losses to be reported based on the results of their review.
INVESTMENTS
As of December 31, 2003, investment securities comprised approximately
4.6% of the Bank's assets and net loans comprised approximately 87.5% of the
Bank's assets. The Bank invests primarily in direct obligations of the United
States, obligations guaranteed as to principal and interest by the United
States, obligations of agencies of the United States and certificates of
deposit issued by commercial banks. In addition, the Bank enters into Federal
Funds transactions with its principal correspondent banks, and acts as a net
seller of such funds. The sale of Federal Funds amounts to a short-term loan
from the Bank to another bank.
The following table presents, for the dates indicated, the book value of
the Bank's investments. All securities held at December 31, 2003 and 2002 were
categorized as available for sale.
December 31,
--------------------
2003 2002
---- ----
(In thousands)
Obligations of U.S.
Treasury and other U.S. Agencies $7,691 $6,128
Corporate equity 240 240
Other securities 400 450
Federal Reserve Bank and
Federal Home Loan Bank Stock 1,080 840
----- -----
Total $9,411 $7,658
===== =====
The following table indicates as of December 31, 2003 the amount of
investments due in (i) one year or less, (ii) one to five years, (iii) five
to ten years, and (iv) over ten years:
At December 31, 2003
--------------------
Weighted
Average
Amount Yield
------ -------
(Dollars in thousands)
Obligations of U.S.
Treasury and other U.S. Agencies:
0 - 1 year $2,364 2.1%
Over 1 through 5 years 3,920 3.5%
Over 5 through 10 years 1,407 4.4%
Other securities:
0 - 1 year --
Over 1 through 5 years --
Over 5 through 10 years 400 9.5%
Federal Reserve Bank and Federal
Home Loan Bank Stock, no maturity 1,080 4.9%
Corporate equity, no maturity 240 1.0%
----- ----
Total $9,411 3.6%
===== ====
RETURN ON EQUITY AND ASSETS
Returns on average consolidated assets and average consolidated equity
for the periods indicated were as follows:
Year Ended
December 31,
--------------------
2003 2002
---- ----
Return on average assets 1.02% 1.03%
Return on average equity 11.9 % 12.0 %
Average equity to average assets ratio 8.5 % 8.6 %
Dividend payout ratio 33.2 % 32.5 %
ASSET/LIABILITY MANAGEMENT
It is the objective of the Bank to manage assets and liabilities to provide
a satisfactory, consistent level of profitability within the framework of
established cash, loan, investment, borrowing and capital policies. Certain of
the officers of the Bank are responsible for monitoring policies and procedures
that are designed to ensure acceptable composition of the asset/liability mix,
stability and leverage of all sources of funds while adhering to prudent banking
practices. It is the overall philosophy of management to support asset growth
primarily through growth of core deposits, which include deposits of all
categories made by individuals, partnerships and corporations. Management of
the Bank seeks to invest the largest portion of the Bank's assets in commercial,
consumer and real estate loans.
The Bank's asset/liability mix is monitored on a daily basis with a monthly
report reflecting interest-sensitive assets and interest-sensitive liabilities
being prepared and presented to the Bank's Board of Directors. The objective of
this policy is to control interest-sensitive assets and liabilities so as to
minimize the impact of substantial movements in interest rates on the Bank's
earnings.
CORRESPONDENT BANKING
Correspondent banking involves the providing of services by one bank to
another bank which cannot provide that service for itself from an economic or
practical standpoint. The Bank purchases correspondent services offered by
larger banks, including check collections, purchase of Federal Funds, security
safekeeping, investment services, coin and currency supplies, overline and
liquidity loan participations and sales of loans to or participations with
correspondent banks.
The Bank sells loan participations to correspondent banks with respect to
loans which exceed the Bank's lending limit. As compensation for services
provided by a correspondent, the Bank may maintain certain balances with such
correspondents in non-interest bearing accounts. At December 31, 2003, the Bank
had outstanding participations totaling $10,311,103.
DATA PROCESSING
The Bank performs a full range of data processing services internally,
including an automated general ledger, deposit accounting, commercial, real
estate and installment lending data processing, central information file and
ATM processing.
EMPLOYEES
At March 15, 2004, the Bank employed 43 persons on a full-time basis,
including 15 officers, and 3 persons on a part-time basis.
MONETARY POLICIES
The results of operations of the Bank are affected by credit policies of
monetary authorities, particularly the Federal Reserve Board. The instruments
of monetary policy employed by the Federal Reserve Board include open market
operations in U.S. Government securities, changes in the discount rate on member
bank borrowings, changes in reserve requirements against member bank deposits
and limitations on interest rates which member banks may pay on time and savings
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 Board, 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.
REGISTRAR AND TRANSFER AGENT
SunTrust Bank, Atlanta serves as the Transfer Agent and Registrar for the
Company's common stock.
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 a complete description of those statutes and regulations.
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, which places the Company under the supervision
of the Board of Governors of the Federal Reserve. The Company must 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 and the Bank.
BANK HOLDING COMPANY REGULATION. In general, the Bank Holding Company Act
limits bank holding company business to owning or controlling banks and engaging
in other banking-related activities. Bank holding companies must obtain the
Federal Reserve Board's approval before they:
* 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;
* merge or consolidate with another bank holding company; or
* 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. Under the Gramm-Leach-Bliley Act, a bank holding company
meeting certain qualifications may apply to the Federal Reserve Board to become
a financial holding company, and thereby engage (directly or through a
subsidiary) in certain activities deemed financial in nature, such as securities
brokerage and insurance underwriting.
With certain exceptions, the Bank 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 Board determines such activities are incidental or closely
related to the business of banking.
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 Federal Reserve Board's approval before acquiring 25% (5% if the "company"
is a bank holding company) or more of the outstanding shares or otherwise
obtaining control over the Company.
FINANCIAL SERVICES MODERNIZATION. The laws and regulations that affect
banks and bank holding companies recently underwent significant changes as a
result of the Financial Services Modernization Act of 1999, also known as the
Gramm-Leach-Bliley Act of 1999. Generally, the act (i) repealed the historical
restrictions on preventing banks from affiliating with securities firms, (ii)
provided a uniform framework for the activities of banks, savings institutions
and their holding companies, (iii) broadened the activities that may be
conducted by national banks and 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 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 be owned, controlled or acquired by any company engaged in
financially related activities, so long as such company meets certain regulatory
requirements. The act also permits national banks (and certain state banks),
either directly or through operating subsidiaries, to engage in certain non-
banking financial activities.
TRANSACTIONS WITH AFFILIATES. The Company and the Bank are deemed
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, 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 either
a requirement that the customer obtain additional services provided by either
of the Company or the Bank, or 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 LAW RESTRICTIONS. As a Georgia business corporation, the Company
may be subject to certain limitations and restrictions under applicable Georgia
corporate law. In addition, although the Bank is a national bank and therefore
primarily regulated by the Office of the Comptroller of the Currency, Georgia
banking law may restrict certain activities of the Bank.
THE BANK
GENERAL. The Bank, as a national banking association, is subject to
regulation and examination by the OCC. The federal laws that apply to the
Bank regulate, among other things, the scope of its business, its investments,
its reserves against deposits, the timing of the availability of deposited funds
and the nature and amount of and collateral for loans. The laws and regulations
governing the Bank generally have been promulgated 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 Office of the Comptroller of the Currency 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 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 institutions under its authority. These standards cover internal controls,
information systems, and internal audit systems, loan documentation, credit
underwriting, interest rate exposure, asset growth, compensation, fees and
benefits, such other operational and managerial standards as the agency
determines to be appropriate, and standards for asset quality, earnings and
stock valuation. Management believes that the Bank meets all such standards.
INTERSTATE BANKING AND BRANCHING. The Riegle-Neal Interstate Banking and
Branching Efficiency Act of 1994 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. Georgia law
generally 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 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 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 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 and 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 on 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 on the category
to which they are assigned are subject to certain mandatory supervisory
corrective actions.
RECENT SIGNIFICANT CHANGES IN BANKING LAWS AND REGULATIONS
SARBANES-OXLEY ACT OF 2002. On July 30, 2002, the Sarbanes-Oxley Act of
2002 (the "Act") to address corporate and accounting fraud. The 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 Act requires the SEC, based on certain enumerated factors, to regularly
and systematically review corporate filings. To deter wrongdoing, the 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 from 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. DESCRIPTION OF PROPERTY
------- -----------------------
The Bank's main office is located at 301 North Broad Street in Thomasville,
Georgia. The building contains approximately 8,500 square feet of finished
space and also contains an additional 2,000 square feet of unfinished space
which may be built out in the future should the Bank require additional space
for expansion. The building contains a lobby, a vault, eight offices, four
teller stations, three drive-in windows, a boardroom conference facility, a loan
operations area, and an area for the Bank's bookkeeping operations.
The Bank also operates a branch office at 1320 Remington Avenue in
Thomasville, Georgia. The branch facility consists of 2,400 square feet of
space and contains of a lobby, four inside teller stations, three drive-up
windows and a drive-up ATM.
JPC leases an approximately 2,800 square foot office space located in
Thomasville, Georgia.
TNB Financial Services owns an approximately 3,000 square foot office
building located adjacent to the main office of the Bank.
The Company does not own or lease any real property.
ITEM 3. LEGAL PROCEEDINGS
------- -----------------
There are no material pending legal proceedings to which the Company or
the Bank is a party or of which any of their properties are subject; nor are
there material proceedings known to the Company to be contemplated by any
governmental authority; nor are there material proceedings known to the Company,
pending or contemplated, in which any director, officer or affiliate or any
principal security holder of the Company, or any associate of any of the
foregoing is a party or has an interest adverse to the Company or the Bank.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
------- ---------------------------------------------------
No matter was submitted during the quarter ended December 31, 2003 to a
vote of security holders of the Company.
PART II
ITEM 5. MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
------- --------------------------------------------------------
MARKET INFORMATION
The Company's common stock is quoted in the "pink sheets." The following
table sets forth the high and low bid prices for the Company's common stock
during 2002, as reported in the pink sheets. These prices reflect inter-dealer
quotations without retail mark-ups, markdowns, or commissions and may not
necessarily represent actual transactions.
High Low
---- ---
2002
----
First quarter $17.00 $14.50
Second quarter 22.00 15.00
Third quarter 21.25 18.00
Fourth quarter 22.00 18.00
2003
----
First quarter $22.00 $19.00
Second quarter 22.00 19.50
Third quarter 22.00 20.00
Fourth quarter 22.00 21.00
HOLDERS OF COMMON STOCK
As of December 31, 2003, the number of holders of record of the Company's
common stock was 675.
DIVIDENDS
The Company paid a cash dividend of $0.40 per share in June 2002 and a
cash dividend of $0.45 per share in June 2003. Future dividend policy will
depend on the Bank's earnings, capital requirements, financial condition and
other factors considered relevant by the Board of Directors of the Company.
The Bank is restricted in its ability to pay dividends under the national
banking laws and by OCC regulations. Pursuant to 12 U.S.C. Section 56, a
national bank may not pay dividends from its capital. All dividends must be
paid out of undivided profits, subject to other applicable provisions of law.
Payments of dividends out of undivided profits is further limited by 12 U.S.C.
Section 60(a), which prohibits a bank from declaring a dividend on its shares
of common stock until its surplus equals its stated capital, unless there
has been transferred to surplus not less than 1/10 of the Bank's net income
of the preceding two consecutive half-year periods (in the case of an annual
dividend). Pursuant to 12 U.S.C. Section 60(b), OCC approval is required if
the total of all dividends declared by the Bank in any calendar year exceeds
the total of its net income for that year combined with its retained net
income for the preceding two years, less any required transfers to surplus.
ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
------- ---------------------------------------------------------------
RESULTS OF OPERATIONS
---------------------
The following discussion of the Company's financial condition and results
of operations should be read in conjunction with the Company's consolidated
financial statements and related notes included elsewhere herein.
OVERVIEW
The Company's results of operations are largely dependent on interest
income, which is the difference between the interest earned on loans and
securities and interest paid on deposits and borrowings. The results of
operations are also affected by the level of income/fees from loans, deposits,
borrowings, as well as operating expenses, the provision for loan losses, the
impact of federal and state income taxes, and the relative levels of interest
rates and economic activity.
For 2003, the Company anticipated a higher net interest income as the
Bank continued to expand its base of earning assets. While it was evident
early on that interest rates would not increase, management was confident in
its ability to reduce the Bank's cost of funds faster than the reduction in
the yield on earning assets. This coupled with an expansion in earning assets
would compensate for the anticipated compression in the net yield on earning
assets.
To mitigate the impact of a declining interest rate environment, the
Company focused on non-interest income opportunities, especially fee income
from JPC and TNBF. The Company also focused on reducing its cost of funds as
rates continued to decline. Management believes that it was successful on both
fronts, as fee income increased by $709,000 to $2,075,000, and interest expense
was reduced by $672,000 to $3,574,000.
Looking ahead to 2004, the Company expects continued compression in the
net yield on earning assets. Management plans to mitigate the impact of the
continued compression with prudent asset growth, non-interest income growth
generation, and expense control. Additionally, there are a number of
initiatives that are expected to contribute to 2004 and beyond. These
initiatives include:
* combining the operations of JPC with TNBF to achieve higher productivity
and lower costs; and
* investment in additional new business development capabilities and process
improvements within the lending area.
CRITICAL ACCOUNTING POLICIES
Critical accounting policies are defined as those that are reflective of
significant judgments and uncertainties, and could potentially result in
materially different results under different assumptions and conditions. The
Company believes that the most critical accounting policies upon which its
financial condition depends, and which involve the most complex or subjective
decisions or assessments are as follows:
ALLOWANCE FOR LOAN LOSSES. Arriving at an appropriate level of allowance
for loan losses involves a high degree of judgment. The Company's allowance
for loan losses provides for probable losses based upon evaluations of known
and inherent risks in the loan portfolio. Management uses historical
information to assess the adequacy of the allowance for loan losses as well
as the prevailing business environment; as it is affected by changing economic
conditions and various external factors, which may impact the portfolio in ways
currently unforeseen. The allowance is increased by provisions for loan losses
and by recoveries of loans previously charge-off and reduced by loans charged-
off. For a full discussion of the Company's methodology of assessing the
adequacy of the allowance for loan losses, see the "Allowance for Loan Losses"
discussion below, as well as Note 2 in the Company's consolidated financial
statements included in this Report.
INCOME TAXES. The Company estimates income tax expense based on the amount
it expects to owe various tax authorities. Taxes are discussed in more detail
in Note 13 of the consolidated financial statements. Accrued taxes represent
the net estimated amount due to or to be received from taxing authorities. In
estimating accrued taxes, management assesses the relative merits and risks of
the appropriate tax treatment of transactions taking into account statutory,
judicial and regulatory guidance in the context of its tax position. Although
the Company uses available information to record accrued income taxes,
underlying estimates and assumptions can change over time as a result of
unanticipated events or circumstances such as changes in tax laws influencing
the Company's overall tax position.
VALUATION OF GOODWILL/INTANGIBLE ASSETS AND ANALYSIS FOR IMPAIRMENT. In
its endeavor to enhance shareholders' value, the Company acquired Joseph Parker
& Co., Inc. ("JPC") in July 2002. JPC is a well established money management
firm with approximately $200 million under management. The Company utilized the
purchase method to reflect the acquisition of JPC. Accordingly, the Company was
required to record assets acquired and liabilities assumed at their fair value
which is an estimate determined by the use of internal or other valuation
techniques. These valuation estimates result in goodwill and other intangible
assets. Goodwill is subject to ongoing periodic impairment tests and is
evaluated using various fair value techniques including multiples of
price/equity and price/earnings ratios.
RESULTS OF OPERATIONS
For 2003, total assets grew by $20.1 million to $205.5 million. Cash and
cash equivalents decreased by $7.0 million to $6.5 million; securities grew by
$1.8 million to $9.4 million; loans expanded by $24.8 million to $179.7 million;
and all remaining assets grew by $.5 million to $9.8 million.
To fund the growth in assets, the Company was able to increase deposits by
$11.6 million to $165.5 million; borrowings grew by $4.7 million to $19.9
million; federal funds purchased grew by $2.3 million to $2.3 million; and the
equity accounts expanded by $1.5 million to $17.3 million.
NET INTEREST INCOME
The Company's results of operations are determined by its ability to
effectively manage interest income and expense, minimize loan and investment
losses, generate non-interest income, and control non-interest expense. Since
interest rates are determined by market forces and economic conditions beyond
the control of the Company, the ability to generate net interest income is
dependent upon the Company's ability to maintain an adequate spread between the
rate earned on earning assets and the rate paid on interest-bearing liabilities,
such as deposits and borrowings. Thus, net interest income is the key
performance measure of income.
Presented below are various components of assets and liabilities, interest
income and expense as well as their yield/cost for the period indicated.
Year Ended Year Ended
December 31, 2003 December 31, 2002
----------------- -----------------
Interest Interest
Average Income/ Yield/ Average Income/ Yield/
Balance Expense Cost Balance Expense Cost
------- ------- ---- ------- ------- ----
(Dollars in thousands)
Federal funds sold $ 5,405 $ 56 1.04% $ 4,443 $ 78 1.76%
Securities 8,022 298 3.71% 7,636 403 5.28%
Loans, net 166,639 10,091 6.06% 146,018 9,628 6.59%
------- ------ ------- ------
Total earning assets $180,066 $10,445 5.80% $158,097 $10,109 6.39%
======= ====== ======= ======
Interest bearing deposits $140,765 $ 2,877 2.04% $125,607 $ 3,724 2.96%
Other borrowings 16,595 697 4.20% 12,230 522 4.27%
------- ------ ------- ------
Total interest
-bearing liabilities $157,360 $ 3,574 2.27% $137,837 $ 4,246 3.08%
======= ====== ======= ======
Net yield on earning assets 3.82% 3.71%
Net yield on interest-earning assets for 2003 and 2002 was 3.82% and 3.71%,
respectively. The Company was able to increase its net yield on earning assets
despite a general decline in the interest rate environment. This was achieved
primarily due to a robust loan demand, and management's ability to reduce the
cost of funds faster than the reduction in the yield on earning assets.
NON-INTEREST INCOME
Non-interest income for 2003 and 2002 amounted to $2,074,606 and
$1,365,950, respectively. As a percent of average assets, non-interest income
increased from .80% in 2002 to 1.07% in 2003. The increase in non-interest
income is primarily due to fee income generated by JPC for money management
services, as well as fee income generated by TNBF for financial planning,
trusts, wills, estates, and investments. The Bank was also able to increase
service charges and other fees on deposit accounts.
The following table summarizes the major components of non-interest income
for the years ended December 31, 2003 and 2002.
Year ended December 31,
-----------------------
2003 2002
---- ----
(In thousands)
Service fees on deposit accounts $ 918 $ 497
Miscellaneous, other 662 541
Miscellaneous, other 495 328
------- -------
Total non-interest income $ 2,075 $ 1,366
======= =======
NON-INTEREST EXPENSE
Non-interest expense increased from $4,388,752 in 2002 to $5,499,396 in
2003. As a percent of total average assets, non-interest expense increased
from 2.57% in 2002 to 2.86% in 2003. The increase is primarily due to costs
associated with the expansion of TNBF and JPC. Management expects these costs
to stabilize in 2004.
The following table summarizes the major components of non-interest expense
for 2003 and 2002.
2003 2002
---- ----
(In thousands)
Salaries and benefits $ 3,035 $ 2,261
Data processing, ATM 193 201
Advertising and public relations 243 204
Depreciation, amortization 430 353
Other operating expenses 1,598 1,370
------- -------
Total non-interest expense $ 5,499 $ 4,389
======= =======
ALLOWANCE FOR LOAN LOSSES
During 2003, the allowance for loan losses increased from $1,722,097 to
$1,960,822. As a percent of gross loans, the allowance for loan losses declined
from 1.10% in 2002 to 1.08% in 2003. Net charge-offs during 2003 amounted to
$181,275, or .11% of average loans. During 2002, the allowance for loan losses
increased from $1,564,769 to $1,722,097. As a percent of gross loans, the
allowance for loan losses declined from 1.15% in 2001 to 1.10% in 2002. Net
charge-offs during 2002 amounted to $83,000, or .06% of average loans. As of
December 31, 2003, management considers the allowance for loan losses to be
adequate to absorb future losses. However, there can be no assurance that
charge-offs in future periods will not exceed the allowance for loan losses or
that additional provisions to the allowance will not be required.
INTEREST RATE SENSITIVITY
Net interest income, the Company's primary source of earnings, fluctuates
with significant interest rate movements. To lessen the impact of these margin
swings, the balance sheet should be structured so that repricing opportunities
exist for both assets and liabilities in roughly equivalent amounts at
approximately the same time intervals. Imbalances in these repricing
opportunities at any time constitute interest rate sensitivity.
Interest rate sensitivity refers to the responsiveness of interest-earning
assets and interest-bearing liabilities to changes in market interest rates.
The rate sensitive position, or gap, is the difference in the volume of rate
sensitive assets and liabilities at a given time interval. The general
objective of gap management is to manage rate sensitive assets and liabilities
so as to reduce the impact of interest rate fluctuations on the net interest
margin. Management generally attempts to maintain a balance between rate
sensitive assets and liabilities as the exposure period is lengthened to
minimize the Company's overall interest rate risk.
The asset mix of the balance sheet is continually evaluated in terms of
several variables: yield, credit quality, appropriate funding sources and
liquidity. To effectively manage the liability mix of the balance sheet, there
should be a focus on expanding the various funding sources. The interest rate
sensitivity position at December 31, 2003 is presented in the following table.
The difference between rate sensitive assets and rate sensitive liabilities,
or the interest rate sensitivity gap, is shown at the bottom of the table.
Since all interest rates and yields do not adjust at the same pace, the gap
is only a general indicator of rate sensitivity.
After
three After After
months six one
but months year but
Within within but within After
three six within five five
months months one year years years Total
------ ------ -------- -------- ----- -----
(Dollars in thousands)
EARNING ASSETS
Loans $ 81,373 $ 16,005 $ 10,048 $70,646 $ 3,639 $181,711
Available-for-sale
securities -- 709 1,656 3,919 3,127 9,411
Federal funds sold 390 -- -- -- -- 390
------- ------- ------- ------ ------ -------
Total earning assets $ 81,763 $ 16,714 $ 11,704 $74,565 $ 6,766 $191,512
======= ======= ======= ====== ====== =======
SUPPORTING SOURCE OF FUNDS
Federal funds
purchased $ 2,264 $ -- $ -- $ -- $ -- $ 2,264
Interest-bearing demand
deposits and savings 93,082 -- -- -- -- 93,082
Certificates,
less than $100M 14,115 7,388 4,822 5,375 -- 31,700
Certificates,
$100M and over 6,710 3,110 4,187 4,718 -- 18,725
Borrowings 83 357 167 6,442 12,845 19,894
------- ------- ------- ------ ------ -------
Total interest-
bearing liabilities $116,254 $ 10,855 $ 9,176 $16,535 $12,845 $165,665
====== ======= ======= ====== ====== =======
Interest rate
sensitivity gap $(34,491) $ 5,859 $ 2,528 $58,030 $(6,079) $25,847
Cumulative gap $(34,491) $(28,632) $(26,104) $31,926 $25,847 $25,847
Interest rate
sensitivity gap ratio 0.70 1.54 1.28 4.51 0.53 1.16
Cumulative interest rate
sensitivity gap ratio 0.70 0.77 0.81 1.21 1.16 1.16
As evidenced by the table above, at December 31, 2003, the Company was
liability sensitive up to one year, and asset sensitive thereafter. In a
declining interest rate environment, a liability sensitive position (a gap ratio
of less than 1.0) is generally more advantageous since liabilities are repriced
sooner than assets. Conversely, in a rising interest rate environment, an asset
sensitive position (a gap ratio over 1.0) is generally more advantageous as
earning assets are repriced sooner than the liabilities. With respect to the
Company, an increase in interest rates would reduce income for one year and
increase income thereafter. Conversely, a decline in interest rates would
increase income for one year and decrease income thereafter. This, however,
assumes that all other factors affecting income remain constant.
As the Company continues to grow, management will continuously structure
its rate sensitivity position to best hedge against rapidly rising or falling
interest rates. The Bank's Asset/Liability Committee meets on a quarterly basis
and develops management's strategy for the upcoming period. This strategy
includes anticipations of future interest rate movements.
LIQUIDITY
Liquidity represents the ability to provide steady sources of funds for
loan commitments and investment activities, as well as to maintain sufficient
funds to cover deposit withdrawals and payment of debt and operating
obligations. These funds can be obtained by converting assets to cash or by
attracting new deposits. The Company's primary source of liquidity is its
ability to maintain and increase deposits through the Bank. Deposits grew by
$11.6 million during 2003 and by $21.2 million in 2002.
Below are the pertinent liquidity balances and ratios at December 31, 2003
and 2002:
December 31, 2003 December 31, 2002
----------------- -----------------
(Dollars in thousands)
Cash and cash equivalents $ 6,531 $13,542
Securities 9,411 7,658
CDs, over $100,000
to total deposits ratio 11.3% 14.1%
Loan to deposit ratio 108.6% 100.6%
Brokered deposits -- --
Cash and cash equivalents are the primary source of liquidity. At December
31, 2003, cash and cash equivalents amounted to $6.5 million, representing 3.2%
of total assets. Securities available for sale provide a secondary source of
liquidity. At December 31, 2003, total securities amounted to $9.4 million,
representing 4.6% of total assets.
At December 31, 2003, large denomination certificates accounted for 11.3%
of total deposits. As a percent of total deposits, large denomination
certificates declined from 14.1% in 2002 to 11.3% in 2003. Large denomination
CDs are generally more volatile than other deposits. As a result, management
continually monitors the competitiveness of the rates it pays on its large
denomination CDs and periodically adjusts its rates in accordance with market
demands. Significant withdrawals of large denomination CDs may have a material
adverse effect on the Bank's liquidity. Management believes that since a
majority of the large denomination CDs were obtained from Bank customers
residing in Thomas County, Georgia, the volatility of such deposits is lower
than if such deposits were obtained from depositors residing outside of Thomas
County, as outside depositors are believed to be more likely to be interest rate
sensitive.
Brokered deposits are deposit instruments, such as certificates of deposit,
deposit notes, bank investment contracts and certain municipal investment
contracts that are issued through brokers and dealers who then offer and/or sell
these deposit instruments to one or more investors. As of December 31, 2003,
the Company had no brokered deposits in its portfolio.
Management knows of no trends, demands, commitments, events or
uncertainties that should result in or are reasonably likely to result in the
Company's liquidity increasing or decreasing in any material way in the
foreseeable future.
OFF-BALANCE SHEET ARRANGEMENTS
In the normal course of business, the Bank enters into certain off-balance
sheet transactions that are connected with meeting the financing needs of its
customers. These off-balance sheet arrangements consist of letters of credit
and commitments to extend credit.
At December 31, 2003 and 2002, the Company had unused loan commitments of
approximately $21.2 million and $17.6 million, respectively. Additionally,
standby letters of credit of approximately $2,732,500 and $988,000 were
outstanding at December 31, 2003 and 2002, respectively. The majority of these
commitments are collateralized by various assets. No material losses are
anticipated as a result of these transactions.
CAPITAL ADEQUACY
There are primary measures of capital adequacy for banks and bank holding
companies: (i) risk-based capital guidelines and (ii) the leverage ratio.
Risk-based capital guidelines measure the amount of a bank's required
capital in relation to the degree of risk perceived in its assets and its off-
balance sheet items. Under the risk-based capital guidelines, capital is
divided into two "tiers." Tier 1 capital consists of common shareholders'
equity, non-cumulative and cumulative (bank holding companies only) perpetual
preferred stock and minority interest. Goodwill is subtracted from the total.
Tier 2 capital consists of the allowance for loan losses, hybrid capital
instruments, term subordinated debt and intermediate term preferred stock.
Banks are required to maintain a minimum risk-based capital ratio of 8.0%, with
at least 4.0% consisting of Tier 1 capital.
The second measure of capital adequacy relates to the leverage ratio. The
OCC has established a 3.0% minimum leverage ratio requirement. The leverage
ratio is computed by dividing Tier 1 capital by total assets.
The table below illustrates the Bank's and Company's regulatory capital
ratios at December 31, 2003:
Minimum
Regulatory
December 31, 2003 Requirement
----------------- -----------
Bank
----
Tier 1 Capital 9.9% 4.0%
Tier 2 Capital 1.3% N/A
Total risk-based capital ratio 11.2% 8.0%
Leverage ratio 8.1% 3.0%
Company - Consolidated
----------------------
Tier 1 Capital 10.5% 4.0%
Tier 2 Capital 1.2% N/A
Total risk-based capital ratio 11.7% 8.0%
Leverage ratio 8.6% 3.0%
The above ratios indicate that the capital positions of the Company and
the Bank are sound and that the Company is well positioned for future growth.
ITEM 7. FINANCIAL STATEMENTS
------- --------------------
The following financial statements are filed as Exhibit 99.1 to this report
and are incorporated herein by reference:
Independent Auditors' Report
Consolidated Balance Sheets as of December 31, 2003 and 2002
Consolidated Statements of Income for the Years Ended December 31, 2003,
2002 and 2001
Consolidated Statements of Changes in Shareholders' Equity for the Years
Ended December 31, 2003, 2002 and 2001
Consolidated Statements of Cash Flows for the Years Ended December 31,
2003, 2002 and 2001
Notes to Consolidated Financial Statements
ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
------- ---------------------------------------------------------------
FINANCIAL DISCLOSURE.
---------------------
There has been no occurrence requiring a response to this Item.
ITEM 8A. CONTROLS AND PROCEDURES
-------- -----------------------
An evaluation was performed under the supervision and with the
participation of the Company's management, including the Chief Executive Officer
(the Company's principal executive, financial and accounting officer), of the
effectiveness of the Company's disclosure controls and procedures as of
December31, 2003. Based on that evaluation, the Company's management, including
the Chief Executive Officer, concluded that the Company's disclosure controls
and procedures are effective in timely alerting them to material information
relating to the Company and its subsidiaries required to be included in the
Company's Securities and Exchange Commission's filings. Disclosure controls
and procedures are controls and procedures that are designed to ensure that
information required to be disclosed in Company reports filed or submitted under
the Securities Exchange Act of 1934 is recorded, processed, summarized and
reported within the time period specified in the Securities and Exchange
Commission's rules and forms.
There have been no significant changes in the Company's internal controls
or in other factors that could significantly affect internal controls subsequent
to the date management carried out this evaluation.
PART III
ITEM 9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS;
------- -------------------------------------------------------------
COMPLIANCE WITH SECTION 16(A) OF THE EXCHANGE ACT
-------------------------------------------------
The information relating to directors and executive officers of the Company
contained in the Company's definitive Proxy Statement to be delivered to
shareholders in connection with the 2004 Annual Meeting of Shareholders (the
"2004 Proxy Statement") is incorporated herein by reference.
ITEM 10. EXECUTIVE COMPENSATION
-------- ----------------------
The information relating to executive compensation contained in the 2004
Proxy Statement is incorporated herein by reference.
ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
-------- --------------------------------------------------------------
The information relating to security ownership of certain beneficial owners
and management contained in the 2004 Proxy Statement is incorporated herein by
reference.
With the exception of the equity compensation plan information provided
below, the information relating to this item contained in the 2004 Proxy
Statement is incorporated herein by reference.
Number of
securities
Number of remaining
securities Weighted- available
to be average for future
issued upon exercise issuance
exercise of price of under equity
outstanding outstanding compensation
Plan Category options options plans
------------- ------- ------- -----
Equity compensation plans not
approved by security holders
(employee stock options) 9,600 $16.77 0
Employee compensation plans
approved by security holders 0 - 0
Total 9,600 $16.77 0
ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
-------- ----------------------------------------------
The information relating to certain relationships and related transactions
contained in the 2004 Proxy Statement is incorporated herein by reference.
ITEM 13. EXHIBITS AND REPORTS ON FORM 8-K
-------- --------------------------------
(a) EXHIBITS. The following exhibits are filed with or incorporated by
reference into this report. The exhibits which are denominated by an asterisk
(*) were previously filed as a part of, and are hereby incorporated by reference
from (i) the Registration Statement on Form SB-2 under the Securities Act of
1933 for the Company, Registration Number 33-91536 ("SB-2"); (ii) the
Registration Statement on Form SB-2 under the Securities Act of 1933 for the
Company, Registration Number 333-58545 ("1998 SB-2"); or (iii) the Company's
Annual Report on Form 10-K for the year ended December 31, 2000 ("2000 10-K").
The exhibit numbers correspond to the exhibit numbers in the referenced
document.
EXHIBIT NO. DESCRIPTION OF EXHIBIT
----------- ----------------------
*3.1 - Articles of Incorporation of the Company (SB-2)
*3.2 - Bylaws of the Company (SB-2)
*10.1 - Employment Agreement dated January 14, 1998 between the Company
and Stephen H. Cheney (1998 SB-2)
*10.2 - Employment Agreement dated January 14, 1998 between the Company
and Charles H. Hodges, III (1998 SB-2)
*10.3 - 2000 Directors' Compensation Plan (2000 10-K)
14.1 - Code of Ethics
21.1 - Subsidiaries of the Registrant
31.1 - Certification pursuant to Section 302 of the Sarbanes-Oxley Act
of 2002
32.1 - Certification pursuant to Section 906 of the Sarbanes-Oxley Act
of 2002
99.1 - Consolidated Financial Statements
(b) REPORTS ON FORM 8-K. No reports on Form 8-K were filed by the Company
during the quarter ended December 31, 2003.
ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES
-------- --------------------------------------
The information relating to principal accountant fees and services
contained in the 2004 Proxy Statement is incorporated herein by reference.
SIGNATURES
----------
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this report to be signed
on its behalf by the undersigned, thereunto duly authorized.
THOMASVILLE BANCSHARES, INC.
Dated: March 25, 2004 By: /s/ Stephen H. Cheney
--------------------------------------
Stephen H. Cheney
President and Chief Executive Officer
(principal executive, financial and
accounting officer)
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
Registrant and in the capacities and on the dates indicated:
Signature Title Date
--------- ----- ----
/s/ Stephen H. Cheney President, Chief Executive March 25, 2004
----------------------------------- Officer and Director
Stephen H. Cheney
/s/ Charles H. Hodges, III Executive Vice President March 25, 2004
----------------------------------- and Director
Charles H. Hodges, III
/s/ Charles A. Balfour Director March 25, 2004
-----------------------------------
Charles A. Balfour
/s/ David A. Cone Director March 25, 2004
-----------------------------------
David A. Cone
/s/ Charles E. Hancock, M.D. Director March 25, 2004
-----------------------------------
Charles E. Hancock, M.D.
/s/ Harold L. Jackson Director March 25, 2004
-----------------------------------
Harold L. Jackson
/s/ David O. Lewis Director March 25, 2004
-----------------------------------
David O. Lewis
/s/ Charles W. McKinnon, Jr. Director March 25, 2004
-----------------------------------
Charles W. McKinnon, Jr.
/s/ Randall L. Moore Director March 25, 2004
-----------------------------------
Randall L. Moore
/s/ Diane W. Parker Director March 25, 2004
-----------------------------------
Diane W. Parker
/s/ Cochran A. Scott, Jr. Director March 25, 2004
-----------------------------------
Cochran A. Scott, Jr.
/s/ Richard L. Singletary, Jr. Director March 25, 2004
-----------------------------------
Richard L. Singletary, Jr.
EXHIBIT INDEX
-------------
EXHIBIT NO. DESCRIPTION
----------- -----------
*3.1 - Articles of Incorporation of the Company (SB-2)
*3.2 - Bylaws of the Company (SB-2)
*10.1 - Employment Agreement dated January 14, 1998 between the
Company and Stephen H. Cheney (1998 SB-2)
*10.2 - Employment Agreement dated January 14, 1998 between the
Company and Charles H. Hodges, III (1998 SB-2)
*10.3 - 2000 Directors' Compensation Plan (2000 10-K)
14.1 - Code of Ethics
21.1 - Subsidiaries of the Registrant
31.1 - Certification pursuant to Section 302 of the Sarbanes-Oxley
Act of 2002
32.1 - Certification pursuant to Section 906 of the Sarbanes-Oxley
Act of 2002
99.1 - Consolidated Financial Statements