UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON D.C. 20549
FORM 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
OR THE SECURITIES EXCHANGE ACT OF 1934 (FEE REQUIRED)
FOR THE FISCAL YEAR ENDED SEPTEMBER 30, 1996
Commission File Number: 1-13964
COMMUNITY FEDERAL BANCORP, INC.
(Exact name of small business issuer
as specified in its charter)
Delaware 63-086536
(State or other jurisdiction (I.R.S. Employer
of incorporation or Identification No.)
organization)
333 Court Street, Tupelo, Mississippi 38802
(Address of principal executive offices) (Zip Code)
The registrants's telephone number,
including area code: (601)842-3981
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, par value $0.01 per share
The registrant (1) filed all reports required to be filed by
Section 13 or 15(d) of the Securities Exchange Act of 1934
during the past 12 months and (2) has been subject to such
filing requirements for the past 90 days.
Disclosure of delinquent filers pursuant to Item 405 of
Regulation S-B is not contained in this form, and disclosure
will not be contained, to the best of the registrant's
knowledge, in the definitive proxy statement incorporated by
reference in
Part III of this Form 10-K.
The registrant's revenues for its most recent fiscal year were
$2,148,258.
The aggregate market value of the registrant's outstanding
common stock held by non-affiliates of the registrant at
September 30, 1996 was approximately $66,728,914 (based on
3,954,306 shares at the most recent trading price of which
management was aware $16.875 on December 17, 1996) (for this
purpose, the registrant's directors and executive officers and
stock benefit plans and trusts have not been deemed to be non-affiliates).
The total number of outstanding shares of the registrant's
common stock at September 30, 1996 was 4,628,750.
Transitional small business disclosure format: No.
DOCUMENTS INCORPORATED BY REFERENCE
(1)Portions of the Proxy Statement for the Registrant's 1996
Annual Meeting of Stockholders (the "Proxy Statement") are
incorporated by reference in Part III of this form.
(2)Portions of the Registrants's Annual Report of Stockholders
for fiscal year 1996 are incorporated by reference in Part III
of this form.
ITEM 1.--DESCRIPTION OF BUSINESS
General
The Community Federal Bancorp, Inc. (the "Company") was
incorporated under the laws of the State of Delaware in
November 1995 at the direction of management of Community
Federal Savings Bank (the "Savings Bank") for the purpose of
serving as a savings institution holding company of the
Savings Bank upon the acquisition of all of the capital stock
issued by the Savings Bank upon the consummation of its
reorganization from a mutual holding company organization to a
stock holding company organization (the "Conversion"). Before
the Conversion, the Company did not engage in any material
operations. After the Conversion, the Company's principal
assets have been the outstanding capital stock of the Savings
Bank, a portion of the net proceeds of the Conversion and a
note receivable from the Company's Employee Stock Ownership
Plan ("ESOP"), and the Company's principal business has been
the business of the Savings Bank.
The holding company structure permits the Company to expand
the financial services offered through the Savings Bank. As a
holding company, the Company has greater flexibility than the
Savings Bank to diversify its business activities through
existing or newly formed subsidiaries or through acquisition
or merger with other financial institutions. The Company is
classified as a unitary savings institution holding company
and is subject to regulation by the Office of Thrift
Supervision ("OTS"). As long as the Company remains a unitary
savings institution holding company, under current law the
Company could diversify its activities in such a manner as to
include any activities allowed by law or regulation to a
unitary savings institution holding company.
The Company's executive offices are located at 333 Court
Street, Tupelo, Mississippi 38802, and it telephone number is
(601) 842-3981.
The Savings Bank is a federally chartered savings bank that
was organized on August 25, 1994 as a subsidiary of the Mutual
Holding Company. The Savings Bank and its predecessors have
conducted business in Tupelo, Mississippi and surrounding
communities through an office in downtown Tupelo since 1933.
At September 30, 1996, the Savings Bank had $204.0 million of
total assets, $136.9 million of total liabilities, including
$131.7 million of deposits, and $67.1 million of equity.
The Savings Bank is primarily engaged in attracting deposits
from the general public and using that and other available
sources of funds to originate loans secured by one-to-four
family residences (one-to-four family units) primarily located
in Lee County, Mississippi and portions of surrounding counties
(the "Primary Market Area"). Such loans amounted to $102.0
million or 86.7% of the Savings Bank's total net loan
portfolio, at September 30, 1996. To a lesser extent, the
Savings Bank originates other mortgage loans secured by
multi-family and non-residential real estate, which amounted
to $7.2 million or 6.1% of the total net loan portfolio, at
September 30, 1996 and construction loans for one-to-four
family and multi-family residences which amounted to $3.4
million or 2.8% of the Savings Bank's total net loan portfolio
as of that same date. In addition, the Savings Bank also
offers loans to local businesses and automobile loans to
individuals. As of September 30, 1996, the commercial loans
amounted to $3.3 million or 2.8% of the Savings Bank's total
net loan portfolio. The automobile loans together with loans
secured by savings accounts and other consumer loans had a
total balance of $4.2 million or 3.6% of the Savings Bank's
total net loan portfolio as of September 30, 1996. The
Savings Bank also has an investment portfolio consisting of
mortgage-backed securities which are insured by federal
agencies, and collateralized mortgage obligations, U.S.
government and agency obligations, obligations of the State of
Mississippi and its political subdivisions, mutual funds and
Federal Home Loan Bank (" FHLB"), Federal National Mortgage
Association (" FNMA"), and Federal Home Loan Mortgage Corporation
(" FHLMC") stock. As of September 30, 1996, the
carrying value of investments that management has the intent
and ability to hold until maturity was $4.8 million and the
carrying value of investments that were available for sale was
$75.1 million. In addition, as of that same date, the Savings
Bank's aggregate cash and interest-bearing deposits in other
banks totaled $4.2 million.
Market Area
The Savings Bank generally conducts business through its main
office located in Tupelo, Mississippi, the county seat of Lee
County, Mississippi. Tupelo is located in northeastern
Mississippi, approximately 90 miles southeast of Memphis,
Tennessee. Tupelo's population was 30,685 in 1990, an
increase from 23,905 in 1980. Between 1980 and 1990, Lee
County grew from 57,061 to 65,581 people. This section of the
state has grown 13% faster in population than the remainder of
Mississippi due to its diverse economic base. A diversified
manufacturing base of over 200 companies is represented in Lee
County alone, which is considered part of the Mid-South region
that includes southern Tennessee and northeastern Alabama.
Manufacturing, product marketing and convention business,
health care, agriculture, entertainment, and recreation are
significant sectors of economic activity.
Lee County is one of three counties in Mississippi that have
shown consistent growth in the manufacturing sector from 1960
to 1991. During that period Lee County experienced a 220%
increase in manufacturing jobs, totaling 15,720 in 1991. In
Lee and the surrounding counties of Chickasaw, Itawamba,
Monroe, Pontotoc, Prentiss, and Union, manufacturing jobs
provided 54.7% of total employment in 1950 and 50.1% in 1991.
Non-manufacturing jobs increased 808% during the period of
1950 to 1991. Major employers in Lee County include Tecumseh,
a Fortune 500 company, which operates two plants in the county
producing air conditioning and refrigerator compressors,
Action Industries, a furniture manufacturer, and Cooper Tire &
Rubber Company and North Mississippi Medical Center, the
largest rural hospital in the United States. The medical
center is the largest employer in the county. Retail sales
also provide a strong component in the economy, totaling $882
million in 1992. A large shopping mall, the Mall at Barnes
Crossing, had 6.1 million visitors in 1992.
Lee County is the leading upholstered furniture manufacturing
region in the nation and Tupelo acts as host to the annual
Furniture Market, the second largest furniture exposition in
the United States. A 1.2 million square foot Market
Exhibition Space, a 9,200 seat Coliseum, and the Livestock
Arena help accommodate those attending furniture,
entertainment and agricultural activities. Moreover, Tupelo
has a modern airport capable of receiving air carrier service
from Atlanta and Memphis.
The North Mississippi Medical Center, with more than 190
doctors representing 41 medical and surgical specialties, is
located in Tupelo. The medical center is the State's largest
hospital and is one of only two hospitals in the South
affiliated with the National Cancer Institute.
In agriculture, Lee County economic activity is diversified
among forestry products (chipmills, saw mills, and plywood
products), cattle, cotton, soybean, poultry and egg
production, and milk production. Forestry represents the
largest segment of agricultural activity and represented $60.3
million in production in 1991.
In education, the Tupelo School District was the tenth largest
in the State in 1992. By comparison, in 1985, the district
was the 18th largest in the State. More than half of the
certified school system staff hold masters degrees or better.
A branch of the University of Mississippi is located in Tupelo
providing accredited business and educational degree programs
on the graduate and undergraduate level. Neighboring Itawamba
Community College provides vocational programs. It is one of
ten charter members of the National Coalition of Advanced
Technology Centers in the nation. The Tupelo-Lee County
Vocational Technical Center features modern vocational
training in electronics, business computer applications and
computer-assisted drafting. Tupelo is the home to the
Technology Center.
Lending Activities
General. As a federally chartered savings association, the
Savings Bank has general authority to originate and purchase
loans secured by real estate located throughout the United
States. Notwithstanding this nationwide lending authority,
substantially all of the mortgage loans in the Savings Bank's
portfolio are secured by properties located in its Primary
Market Area.
A savings association generally may not make loans to one
borrower and related entities in an amount which exceeds 15%
of its unimpaired capital and surplus, although loans in an
amount equal to an additional 10% of unimpaired capital and
surplus may be made to a borrower if the loans are fully
secured by readily marketable securities. At September 30,
1996, the Savings Bank's loans-to-one borrower limit was $6.8
million and its five largest loans or groups of loans-to-one
borrower, including related entities, were $1,960,000,
$1,759,000, $1,540,000, $953,000, and $839,000. Each of these
loans is secured by real estate, a substantial portion of
which is rental property. All of these loans or groups of
loans were performing in accordance with their terms at
September 30, 1996.
Loan Portfolio Composition. The following table sets forth
the composition of the Savings Bank's loan portfolio by type
of loan at the dates indicated:
<TABLE>
<CAPTION>
September 30,
1996 1995 1994
Amount % Amount % Amount %
<S> <C> <C> <C> <C> <C> <C>
Mortgage Loans:
One-to-four family
residential 102,021 86.73 86,716 88.50 75,811 89.97
Multi-family and
non-residential 7,165 6.09 5,946 6.07 6,728 7.98
Construction loans 3,337 2.84 3,310 3.38 1,120 1.33
Total mortgage loans 112,523 95.66 95,972 97.94 83,659 99.28
Commercial Loans: 3,253 2.77 1,537 1.57 0 0.00
Consumer Loans:
Automobile 1,318 1.12 1,072 1.09 720 .85
Savings accounts 1,369 1.15 1,052 1.07 1,108 1.32
Other 1,524 1.30 529 .54 0 0.00
Total consumer loans 4,211 3.57 2,653 2.71 1,828 2.17
Total loans 119,987 102.00 100,162 102.22 85,487 101.45
Less:
Loans in process 1,356 1.15 1,279 1.31 429 .51
Unearned discounts and
net deferred loan
origination fees 428 0.36 343 .35 267 .32
Allowance for loan losses 572 0.49 552 .56 522 .62
Loans receivable, net 117,631 100.00 97,988 100.00 84,269 100.00
<CAPTION>
September 30,
1993 1992
Amount % Amount %
<S> <C> <C> <C> <C>
Mortgage Loans:
One-to-four family
residential 75,246 89.13 76,248 90.07
Multi-family and
non-residential 6,675 7.91 6,154 7.27
Construction loans 686 .81 528 .62
Total mortgage loans 82,607 97.85 82,930 97.96
Commercial Loans 0 0 0 0
Consumer Loans:
Automobile 1,533 1.82 1,000 1.18
Savings accounts 1,328 1.57 1,343 1.59
Other 0 0 0 0
Total consumer loans 2,861 3.39 2,343 2.77
Total loans 85,468 101.24 85,273 100.73
Less:
Loans in process 302 .36 50 .06
Unearned discounts and
net deferred loan
origination fees 237 .28 166 .20
Allowance for loan
losses 500 .60 400 .47
Loans receivabe, net 84,429 100.00 84,657 100.00
</TABLE>
Contractual Principal Repayments and Interest Rates. The
following table sets forth certain information at
September 30, 1996 regarding the dollar amount of loans
maturing in the Savings Bank's portfolio, based on the
contractual terms to maturity, before giving effect to net
items. Demand loans, loans having no stated schedule of
repayments and no stated maturity and overdrafts are reported
as due in one year.
<TABLE>
<CAPTION>
Over Over Over Over
3 Months 6 Months 1 Year 3 Years
3 Months Through Through Through Through
Or Less 6 Months 1 Year 3 Years 5 Years
(In thousands)
<S> <C> <C> <C> <C> <C>
Mortgage Loans:
Adjustable 1 0 7 72 161
Fixed 2,427 2,176 803 1,096 1,304
Consumer: 986 1,298 308 555 898
Commercial: 20 0 0 203 693
Total 3,434 3,474 1,118 1,926 3,147
<CAPTION>
Over
Five years Total
<S> <C> <C>
(In Thousands)
Mortgage Loans:
Adjustable 56,325 56,566
Fixed 48,151 55,957
Consumer: 75 4,211
Commercial: 2,337 3,253
Total 106,888 119,987
</TABLE>
The following table sets forth the dollar amount of all loans,
before net items, due after one year from September 30, 1996
which have fixed interest rates or which have adjustable
interest rates.
Fixed Adjustable
Rates Rates Total
(In thousands)
One-to-four family residential 45,838 54,455 100,293
Multi-family and non-residential 4,713 2,103 6,816
Consumer 1,619 0 1,619
Commercial 3,233 0 3,233
Total 55,403 56,558 111,961
Scheduled contractual amortization of loans does not reflect
the actual term of the Savings Bank's loan portfolio. The
average life of loans is substantially less than their
contractual terms because of prepayments and due-on-sale
clauses, which give the Savings Bank the right to declare a
conventional loan immediately due and payable in the event,
among other things, that the borrower sells the real property
subject to the mortgage.
Originations, Purchases, Servicing, and Sales of Loans. The
lending activities of the Savings Bank are subject to written,
non-discriminatory underwriting standards and loan origination
procedures established by the Savings Bank's Board of
Directors and management. Loan originations are obtained by a
variety of sources, including referrals from real estate
brokers, developers, builders, existing customers, newspaper,
radio, periodical advertising, and walk-in customers. Loan
applications are taken by lending personnel, and the loan
processing department supervises the acquisition of credit
reports, appraisals, and other documentation involved with a
loan. Property valuations are generally prepared for the
Savings Bank by a qualified independent appraiser
selected from a list approved by the Savings Bank's Board of
Directors. The Savings Bank generally relies on an attorney's
opinion of title that each loan collateralized by real
property has been properly secured. Hazard insurance is also
required on all secured property and flood insurance is
required if the property is within a designated flood plain.
In addition, the Savings Bank requires credit life insurance
if a borrower has no or inadequate life insurance, except in
cases where such insurance is generally unavailable because of
a borrower's age.
The Savings Bank's loan approval process is intended to assess
the borrower's ability to repay the loan, the viability of the
loan and the adequacy of the value of the property that will
secure the loan. A loan application file is first reviewed by
a loan officer of the Savings Bank and then, in most cases, is
submitted for approval to the Loan Committee. In addition,
the Savings Bank's President and Chief Executive Officer has
been delegated authority to approve any loan authorized under
the Savings Bank's real estate lending policy.
The Savings Bank originates substantially all of the mortgage
loans in its portfolio and holds them until maturity. In
fiscal 1994 and 1993, the Savings Bank purchased $900,000 and
$1 million of automobile loans, respectively, to diversify its
loan portfolio and to shorten the term of its average
contractual maturity. It had no purchases of consumer or
other loans in fiscal 1996 or 1995, but has instead
established a consumer lending department which originated
$5.3 million and $3.4 million of consumer loans in fiscal 1996
and 1995, respectively. It also began offering commercial
loans during fiscal 1995 and originated $2.1 million and $1.6
million of commercial loans during fiscal 1996 and 1995,
respectively. During the three-year period ended September
30,1996, the Savings Bank had loan sales of $352,000
consisting of first mortgage loans with terms of 30 years and
secured by one-to-four family residences.
During the 1980s, the Savings Bank sold a small percentage of
the mortgage loans it originated to FNMA but retained the
servicing on such loans. The Savings Bank no longer actively
sells loans with servicing rights retained. As a result, the
servicing portfolio has decreased from $5.7 million at
September 30, 1993 to $2.2 million at September 30, 1996 due
to principal repayments. See Note 5 of the Notes to Financial
Statements.
The following table shows total loans originated, loan
reductions, and the net increase in Community's loan portfolio
during the periods indicated:
<TABLE>
<CAPTION>
Year ended September 30,
1996 1995 1994 1993 1992
(In thousands)
<S> <C> <C> <C> <C> <C>
Loan Originations:
One-to-four family
residential 34,978 19,673 20,821 22,643 28,020
Multi-family and
non-residential 635 0 2,062 544 2,766
Construction 8,199 5,478 1,346 1,137 1,397
Commercial 2,149 1,608 0 0 0
Consumer 5,345 3,425 905 1,502 2,333
Total loans originated 51,306 30,184 25,134 25,862 34,516
Purchases: 0 0 900 1,000 1,000
Total loans originated
and purchased 51,306 30,184 26,034 26,826 35,516
Sales and Loan Principal
Repayments:
Loans sold proceeds 0 220 130 0 0
Loan repayments 31,629 17,201 26,243 26,826 32,136
Total loans sold proceeds
and loan principal
repayments 31,629 17,421 26,373 26,649 32,136
Loan originations
(repayments), net 19,677 12,763 (339) 177 3,380
Increase (decrease) due
to other items, net (34) 956 179 (405) (273)
Net increase (decrease)
in net loan portfolio 19,643 13,719 (160) (228) 3,107
</TABLE>
One-to-Four Family Residential Loans. The primary lending
activity of the Savings Bank is the origination of loans
secured by first mortgage liens on one-to-four family
residences. At September 30, 1996, $102.0 million or 86.7% of
the Savings Bank's total net loan portfolio consisted of
one-to-four family first mortgage residential loans. As of
such date the average balance of the Savings Bank's
one-to-four family mortgage loans was $47,519.
The loan-to-value ratio, maturity, and other provisions of the
loans made by the Savings Bank generally have reflected the
policy of making less than the maximum loan permissible under
applicable regulations, in accordance with sound lending
practices, market conditions, and underwriting standards
established by the Savings Bank. While it has been the
Savings Bank's practice in most cases to require a
loan-to-value ratio of 80%, the Savings Bank's lending policy
on one-to-four family residential mortgage loans generally
limits the maximum loan-to-value ratio to 85% of the lesser of
the appraised value or purchase price of the property. In
cases where loan-to-value ratios exceed 85%, the Savings Bank
requires private mortgage insurance.
The Savings Bank offers fixed-rate one-to-four family
residential loans with terms up to 15 years. Such loans are
amortized on a monthly basis with principal and interest due
each month and customarily include "due-on-sale" clauses.
While the Savings Bank reserves the right to enforce such a
clause in any case, it has been its practice to waive the
clause in most cases. As of September 30, 1996, approximately
99% of all of the Savings Bank's mortgage loan portfolio
consisted of conventional loans; the remainder are loans
insured by the Federal Housing Administration or partially
guaranteed by the Department of Veterans Affairs.
The Savings Bank is aware that there are inherent risks in
originating fixed-rate one-to-four family residential loans
for its portfolio, especially during periods of historically
low interest rates, but recognized the need to respond to
market demand for fixed-rate loans. To respond to these
market demands, the Savings Bank has emphasized 15-year
fixed-rate loans with an origination fee but no points and
only minimal closing costs. The Savings Bank also generally
confines its one-to-four family residential lending to its
Primary Market Area where it is more familiar with the details
of the real estate market and its knowledge of the local
economy allows it to better assess a borrower's ability to
repay a loan.
Since 1982, the Savings Bank has been offering adjustable-rate
loans in order to decrease the vulnerability of its operations
to changes in interest rates. All of the adjustable-rate
mortgage loans in its portfolio have interest rates that
adjust on an annual basis. The demand for adjustable-rate
loans in the Savings Bank's primary market area has been a
function of several factors, including the level of interest
rates, the expectations of changes in the level of interest
rates and the difference between the interest rates offered
for fixed-rate loans and adjustable-rate loans. The relative
amount of fixed rate and adjustable-rate residential loans
that can be originated at any time is largely determined by
the demand for each in a competitive environment. As interest
rates fluctuated since 1982, the demand for fixed- and
adjustable-rate loans has changed as the Savings Bank's
customers have preferred adjustable rates in a high
interest-rate environment and fixed-rate loans as interest
rates decreased. In order to continue to increase and then to
maintain a high percentage of adjustable-rate one-to-four
family residential loans, the Savings Bank has offered various
forms of adjustable-rate loans and in some cases has purchased
mortgage-backed securities and CMOs collateralized by
adjustable-rate mortgage loans. As a result, at September 30,
1996, $56.4 million, or 55.2%, of the one-to-four family
residential loans in the Savings Bank's loan portfolio (before
net items) consisted of adjustable-rate loans.
The Savings Bank's one-to-four family residential
adjustable-rate loans are fully amortizing loans with
contractual maturities of up to 30 years. These loans have a
fixed-rate of interest for up to three years and for the
remainder of the loan's term adjust annually in accordance
with a designated index. The Savings Bank currently offers an
adjustable-rate mortgage with a 2% limit on the rate
adjustment per period and a 6% limit on the rate adjustment
over the life of the loan. The Savings Bank's underwriting
standards for adjustable-rate mortgage loans require that it
assess a potential borrower's ability to make principal and
interest payments assuming a 2% increase in the interest rate
from the rate at the time of origination. The Savings Bank's
adjustable-rate loans are not convertible by their terms into
fixed rate loans, are assumable with the Savings Bank's
approval, do not contain prepayment penalties and do not
produce negative amortization.
Due to the generally lower rates of interest prevailing in
recent periods, the Savings Bank's ability to originate
adjustable-rate loans has decreased as consumer preference for
fixed-rate loans has increased. However, the Savings Bank has
continued to originate adjustable-rate one-to-four family
residential loans during this period by offering an
adjustable-rate loan with an origination fee but no points and
only minimal closing costs. As a result, even as consumer
preference for such loans decreased, adjustable-rate mortgage
loans represented $14.2 million or 40.7% of the Savings Bank's
total originations of one-to-four family residential loans
during the year ended September 30, 1996 as compared to 65%
and 43% of such originations for the years ended September 30,
1995 and 1994, respectively.
Adjustable-rate loans decrease the risks associated with
changes in interest rates but involve other risks, primarily
because as interest rates rise, the payment by the borrower
rises to the extent permitted by the terms of the loan,
thereby increasing the potential for default. At the same
time, the marketable of the underlying property may be
adversely affected by higher interest rates. The Savings Bank
believes that these risks, which have not had a material
adverse effect on the Savings Bank to date, generally are less
than the risks associated with holding fixed-rate loans in an
increasing interest rate environment.
Non-Residential Real Estate and Multi-Family Residential
Loans.
At September 30, 1996, $7.2 million or 6.1% of the
Savings Bank's total net loan portfolio, consisted of loans
secured by existing non-residential and multi-family
residential real estate. The Savings Bank's non-residential
and multi-family real estate loans include primarily loans
secured by small office buildings, family-type business
establishments and apartment buildings. All of the Savings
Bank's non-residential and multi-family real estate loans are
secured by properties located in the Savings Bank's Primary
Market Area. The average amount of the Savings Bank's
non-residential and multi-family real estate loans are secured
by properties located in the Savings Bank's Primary Market
Area. The average amount of the Savings Bank's
non-residential and multi-family real estate loans was
$298,000 at September 30, 1996 and the largest was $1.8
million. Originations of non-residential real estate and
multi-family residential real estate amounted to .52%, 0%, and
8.2% of the Savings Bank's total loan originations in fiscal
1996, 1995, and 1994, respectively.
The Savings Bank's non-residential and multi-family loans have
terms which range up to 25 years and loan-to-value ratios of
up to 80%. The Savings Bank originates both fixed-rate and
adjustable-rate non-residential and multi-family real estate
loans. As of September 30, 1996, $2.1 million, or 29% of the
Savings Bank's non-residential and multi-family residential
real estate loans had adjustable rates of interest. A
potential borrower must demonstrate that he or she has the
ability to make principal and interest payments assuming a 2%
increase in the interest rate from the rate at the time of
origination.
The Savings Bank requires appraisals of all properties
securing non-residential and multi-family residential real
estate loans. Appraisals are performed by an independent
appraiser designated by the Savings Bank and are reviewed by
management. In originating multi-family residential and
non-residential real estate loans, the Savings Bank considers
the quality and location of the real estate, the credit of the
borrower, cash flow of the project and the quality of
management involved with the property. Corporate loans
require the personal guaranty of the entity's controlling
shareholders. Hazard insurance is required as well as flood
insurance if the property is located in a designated flood
zone.
Multi-family residential and non-residential real estate
lending is generally considered to involve a higher degree of
risk than one-to-four family residential lending. Such
lending typically involves large loan balances concentrated in
a single borrower or groups of related borrowers. In
addition, the payment experience on loans secured by
income-producing properties is typically dependent on the
successful operation of the related real estate project and
thus may be subject to a greater extent to adverse conditions
in the real estate market or in the economy generally. The
Savings Bank generally attempts to mitigate the risks
associated with multi-family residential and non-residential
real estate lending by, among other things, lending only in
its Primary Market Area and lending only to individuals who
have an established relationship with the Savings Bank and/or
who have substantial ties to the community.
Construction Loans.
The Savings Bank makes construction loans
to individuals for the construction of their residences and to
developers for the construction of one-to-four family and
multi-family residences. Construction lending is generally
limited to the Savings Bank's Primary Market Area. At
September 30, 1996, construction loans amounted to $3.3
million or 2.8% of the Savings Bank's total net loan
portfolio. Construction financing is generally considered to
involve a higher degree of risk of loss than long-term
financing on improved, owner-occupied real estate because of
the uncertainties of construction, including possible delays
in completing the structure, the possibility of costs
exceeding the initial estimates and the need to obtain a
tenant or purchaser if the property will not be owner
occupied. In the event of a delay in the completion of the
construction, the Savings Bank may grant an extension, but
such extensions are generally conditioned upon the payment of
interest in full for the initial term.
Construction loans to individuals are separate from the
permanent financing on the structure. However, a borrower
only qualifies for a construction loan if he or she has
obtained a commitment for a permanent loan from the Savings
Bank at the end of the construction phase. The term of a
construction loan to an individual generally does not exceed
the greater of 180 days or the term of the permanent loan
commitment. Loan payouts occur only after an inspection by
the Savings Bank's appraiser of the site has been made and
documented by the Savings Bank. Payouts are based on the
percentage of the construction completed as of the inspection
date. Interest rates on construction loans to individuals are
based on current local economic conditions. The loan-to-value
ratio on such loans must be 80% or less of the appraised value
of the completed structure.
The majority of construction loans to developers are to
selected local developers with whom the Bank is familiar and
are for the construction of single-family dwellings on a
pre-sold or on a speculative basis. The Bank generally limits
to two the number of unsold houses which a developer may have
under construction in a project. Construction loans to
developers are generally made for a one- to two-year term
depending on the size and scope of the project. Payment of
accrual interest generally is required on at least a
semiannual basis and the amount of a loan is generally based
on the owner's equity in the property but may not exceed 80%
of appraised value or contract price. Loan proceeds are
disbursed in stages after inspection of the project indicates
that such disbursements are for expenses which have already
been incurred and which have added to the value of the
project.
Consumer Loans. Subject to the restrictions contained in
federal laws and regulations, the Savings Bank also is
authorized to make loans for a wide variety of personal or
consumer purposes. In order to broaden the mix of the retail
financial services the Savings Bank offers to its customers,
in fiscal 1995 the Savings Bank established a new department
that, among other things, originates consumer loans. The
Savings Bank's consumer loans consist primarily of automobile
loans originated by the Savings Bank during fiscal years 1996 and 1995,
and purchased by the Savings Bank during fiscal years 1994 and 1993 and
loans secured by savings accounts. Consumer loans at
September 30, 1996 were $4.2 million, or 3.6%, of the Savings
Bank's total net loan portfolio consisted of consumer loans.
As of September 30, 1996, the Savings Bank's consumer loans
also consisted of loans secured by accounts at the Savings
Bank which amounted to $1.4 million or 1.2% of its total net
loan portfolio. Such a loan is structured to have a term that
ends on the same date as the maturity date of the certificate
securing it or if secured by a passbook account has a
six-month term with a hold on withdrawals that would result in
the balance being lower than the loan balance. Typically
these loans require quarterly payments of interest only.
Consumer loans generally involve more credit risk than
mortgage loans because of the type and nature of the
collateral. In addition, consumer lending collections are
dependent on the borrower's continuing financial stability,
and thus are more likely to be adversely affected by job loss,
divorce, illness, and personal bankruptcy. In many cases,
because of the mobile nature of the collateral, it may not be
readily available in the event of a default. In other cases,
repossessed collateral for a defaulted consumer loan will not
provide an adequate source of repayment of the outstanding
loan balance because of improper repair and maintenance or
depreciation of the underlying security. The remaining
deficiency often does not warrant further substantial
collection efforts against the borrower.
Commercial Loans. Subject to the restrictions contained in
federal laws and regulations, the Savings Bank is authorized
to make secured and unsecured commercial business loans for
corporate and agricultural purposes, including issuing letters
of credit. At September 30, 1996, $3.3 million, or 2.8%, of
the Savings Bank's total net loan portfolio consisted of
commercial business loans, all of which were secured. The
Savings Bank began originating commercial business loans in
fiscal 1995 and they accounted for 4.2% of the total loan
originations during the year ended September 30, 1996.
Commercial business loans generally are deemed to entail
significantly greater risk than that which is involved with
more traditional real estate lending. The repayment of
commercial business loans typically are dependent on the
successful operations and income stream of the borrower. Such
risks can be significantly affected by economic conditions.
In addition, commercial lending generally requires
substantially greater oversight efforts compared to
residential real estate lending.
Loan Origination and Other Fees. In addition to interest
earned on loans, the Savings Bank receives loan origination
fees or "points" for originating loans. Loan points are a
percentage of the principal amount of the mortgage loan and
are charged to the borrower in connection with the origination
of the loan.
In accordance with SFAS No. 91, which deals with the
accounting for non-refundable fees and costs associated with
originating or acquiring loans, the Savings Bank's loan
origination fees and certain related direct loan origination
costs are offset, and the resulting net amount is deferred and
amortized as interest income over the contractual life of the
related loans as an adjustment to the yield of such loans. At
September 30, 1996, the Savings Bank had $428,000 of net loan
fees which had been deferred and are being recognized as
income over the estimated maturities of the related loans.
See Notes 1 and 5 of the Notes to the Consolidated Financial
Statements.
Non-Performing Assets. Beginning as of September 30, 1993,
the Savings Bank adopted a policy under which all loans are
reviewed on a regular basis and are placed on a non-accrual
status when, in the opinion of management, the collection of
additional interest is deemed insufficient to warrant further
accrual. Generally, the Savings Bank places all loans more
than 90 days past due on non-accrual status. When a loan is
placed on non-accruing status, total interest accrued to date
is reversed. Subsequent payments are either applied to the
outstanding principal balance or recorded as interest income,
depending on the assessment of the ultimate collectability of
the loan. A loan is returned to accrual status when, in
management's judgment, the borrower's ability to make periodic
interest and principal payments is in accordance with the
terms of the loan agreement.
Real estate acquired by the Savings Bank for foreclosure is
classified as real estate owned until such time as it is sold.
When such property is acquired it is recorded at the lower of
the recorded investment in the loan or fair value, less
estimated selling costs of disposition. The recorded
investment is the sum of the outstanding principal loan
balance plus any taxes due and acquisition costs associated
with the property. Any excess of the recorded investment
in the loan over the fair value of the underlying property
is charged to the allowance for loan losses at the time of
the loan foreclosure. Costs relating to improvement of property
incurred subsequent to the acquisition are capitalized, whereas costs
relating to holding the property are expensed. Valuations are
periodically performed by management and a provision for estimated losses
on real estate owned is charged to earnings when losses are
anticipated.
As of September 30, 1996, the Savings Bank's total
non-performing loans amounted to $717,000, or 0.61% of total
net loans, compared to $838,000, or 0.86% of total net loans,
at September 30, 1995.
The following table sets forth the amounts and categories of
Community's non-performing assets at the dates indicated.
Community had no troubled debt restructuring during the
periods shown on the table below:
<TABLE>
<CAPTION>
September 30,
1996 1995 1994 1993 1992
<S> <C> <C> <C> <C> <C>
Non-Accruing Loans:
One-to-four family
residential 717 715 560 894 0
Multi-family and
non-residential real estate 0 0 0 0 0
Construction 0 0 0 0 0
Commercial 0 0 0 0 0
Consumer 0 7 0 0 0
Accruing Loans Greater
Than 90 Days Delinquent:
One-to-four family
residential 0 116 203 121 963
Multi-family and
non-residential
real estate 0 0 0 0 0
Construction 0 0 0 0 0
Commercial 0 0 0 0 0
Consumer 0 0 0 0 0
Total non-performing
loans 717 838 763 1,015 963
Real estate owned(1): 0 139 141 164 0
Total non-performing
assets 717 977 904 1,179 963
Total non-performing
loans as a percentage
of total net loans .61% .86% .91% 1.20% 1.14%
Total non-performing
assets as a percentage
of total assets .35% .60% .58% .80% .68%
</TABLE>
(1) Consists of real estate acquired by foreclosures.
Interest income foregone on non-accrual loans was not significant
for any period shown.
Classified Assets. Federal regulations require that each
insured savings association classify its assets on a regular
basis. In addition, in connection with examinations of
insured institutions, federal examiners have authority to
identify problem assets: "substandard," "doubtful," and
"loss." Substandard assets have one or more defined
weaknesses and are characterized by the distinct possibility
that the insured institution will sustain some loss if the
deficiencies are not corrected. Doubtful assets have the
weaknesses of substandard assets with the additional
characteristic that the weaknesses make collection or
liquidation in full on the basis of currently existing facts,
conditions and values questionable, and there is a high
possibility of loss. A loss classified asset is considered
uncollectible and of such little value that continuance as an
asset of the institution is not warranted. Another category
designated "special mention" also must be established and
maintained for assets which do not currently expose an insured
institution to a sufficient degree of risk to warrant
classification as substandard, doubtful or loss. Assets
classified as substandard or doubtful require the institution
to establish general allowances for loan losses. If an asset
or portion thereof is classified loss, the insured institution
must either establish specific allowances for loan losses in
the amount of 100% of the portion of the asset classified
loss, or charge-off such amount. General loss allowances
established to cover possible losses related to assets
classified substandard or doubtful may be included in
determining an institution's regulatory capital, while
specific valuation allowances for loan losses do not qualify
as regulatory capital. Federal examiners may disagree with an
insured institution's classifications and amounts reserved.
The Savings Bank's classified assets at September 30, 1996
consisted of $754,000 of loans classified as special mention,
$736,000 of loans classified as substandard and no loans
classified as doubtful or loss. As of September 30, 1996,
total classified assets amounted to 0.73% of total assets.
The following table sets forth the Savings Bank's classified
assets at the dates indicated:
September 30,
1996 1995 1994
Classification:
Special mention 754 984 507
Substandard 736 959 762
Doubtful 0 0 0
Loss 0 0 0
Total classified assets 1,490 1,943 1,269
Allowance for Loan Losses. It is management's policy to
maintain an allowance for estimated loan losses at a level
which management considers adequate to absorb losses inherent
in the loan portfolio at each reporting date. Management's
estimation of this amount includes a review of all loans for
which full collectability is not reasonably assured and
considers, among other factors, prior years' loss experience,
economic conditions, distribution of portfolio loans by risk
class and the estimated value of underlying collateral.
Although management believes the current allowance for loan
losses to be adequate, ultimate losses may vary from their
estimates; however, estimates are reviewed periodically and,
as adjustments become necessary, they are reported in earnings
in periods in which they become known.
At September 30, 1996, the Savings Bank's allowance for loan
losses was $572,000 compared to $552,000 at September 30,
1995. As of September 30, 1996, all of the Savings Bank's
allowance for loan losses was a general valuation allowance.
The following table sets forth the activity in Community's
allowance for loan losses during the periods indicated.
1996 1995 1994 1993 1992
(Dollars in thousands)
Allowance at beginning of period 552 522 500 400 210
Provisions 20 30 25 100 190
Charge-offs:
Mortgage loans:
One-to-four family residential 0 0 12 0 0
Multi-family and non-residential
real estate 0 0 0 0 0
Construction 0 0 0 0 0
Total mortgage loans 0 0 12 0 0
Commercial loans 0 0 0 0 0
Consumer loans:
Savings accounts 0 0 0 0 0
Automobile 0 0 0 0 0
Total consumer loans 0 0 0 0 0
Total charge-offs 0 0 12 0 0
Recoveries 0 0 0 0 0
Net charge-offs 0 0 3 0 0
Allowance at end of period 572 552 522 500 400
Allowance for loan losses to
total non-performing loans
at end of period 79.78% 65.87% 68.41% 49.26% 41.54%
Allowance for loan losses
to total net loans at end
of period .49% .56% .62% .60% .47%
The following table presents the allocation of the allowance
for loan losses to the total amount of net loans in each
category listed at the dates indicated.
<TABLE>
<CAPTION>
September 30,
1996 1995
% of Loans % of Loans
in Each in Each
Category to Category to
Amount Total Loans Amount Total Loans
<S> <C> <C> <C> <C>
Mortgage loans 511 95.66 509 97.94
Commercial 31 2.77 15 1.57
Consumer loans 30 3.57 28 2.71
Total allowance
for loan losses 572 102.00 552 102.22
<CAPTION>
September 30,
1994 1993
% of Loans % of Loans
in Each in Each
Category to Category to
Amount Total Loans Amount Total Loans
<S> <C> <C> <C> <C>
Mortgage loans 497 99.28 475 97.85
Commercial 0 0 0 0
Consumer loans 25 2.17 25 3.39
Total allowance
for loan losses 522 101.45 500 101.24
<CAPTION>
September 30,
1992
% of Loans
in Each
Category to
Amount Total Loans
<S> <C> <C>
Mortgage loans 385 97.96
Commercial 0 0
Consumer loans 15 2.77
Total allowance
for loan losses 400 100.73
</TABLE>
Securities
The Company adopted the SFAS No. 115, Accounting for Certain
Investments of Debt and Equity Securities on September 30,
1994. In accordance with SFAS No. 115, management determines
the appropriate classification of debt securities at the time
of purchase. Debt securities are classified as held to
maturity when the Savings Bank has the positive intent and
ability to hold the securities to maturity. Held to maturity
securities are stated at amortized cost. Debt securities not
classified as held to maturity and equity securities are
classified as available for sale. Available for sale
securities are stated at fair value. See Notes 1 through 4 of
the Notes to Consolidated Financial Statements.
The Company's securities portfolio includes mortgage-backed
securities which are insured or guaranteed by the FHLMC, GNMA,
or the FNMA and Collateralized Mortgage Obligations ("CMOs"),
all of which are backed by FHLMC, GNMA, or FNMA securities.
Mortgage-backed securities and CMOs increase the quality of
the Company's assets by virtue of the guarantees that back
them, are more liquid than individual mortgage loans and may
be used to collateralize borrowings or other obligations of
the Company. In addition, at September 30, 1996, $1.5 million
or 6.3% of the mortgage-backed securities in the Company's
mortgage-backed securities and CMOs portfolio were secured by
pools of adjustable-rate mortgages. Mortgage-backed
securities and CMOs of this type serve to reduce the interest
rate risk associated with changes in interest rates.
Investments in mortgage-backed securities and CMOs as well as
investments in other investment securities are managed by the
Company's Investment Committee in accordance with the
Company's Portfolio and Investment Policy. The Company has in
its investment portfolio seven "step up" bonds issued by the
FHLB of Dallas. The yield on each of these bonds increases at
a prescribed rate (ranging from 0.5% to 1.0%) on each
anniversary date but each is also callable by the issuer on
such dates.
The following table sets forth the carrying value of the
Company's investment portfolio at the dates indicated:
September 30,
1996 1995 1994
(In thousands)
Securities available for sale: (1)
U.S. government and federal agencies
bonds and notes 14,870 5,829 7,489
State and local bonds and notes 964 0 0
Mortgage-backed securities 23,687 6,339 6,967
Collateralized mortgage obligations 22,531 3,173 4,172
Equity securities 10,244 6,957 5,693
Mutual funds 2,816 2,827 2,785
Total securities available for sale 75,112 25,125 27,106
Securities held to maturity: (2)
U.S. government and federal agencies
bonds and notes 0 10,446 11,434
State and local bonds and notes 0 388 387
Corporate bonds and notes 0 1,444 2,358
Mortgage-backed securities 0 4,369 4,926
Collateralized mortgage obligations 4,756 17,190 17,689
Total securities available for sale 4,756 33,837 36,794
Total securities 79,868 58,962 63,900
The following table sets forth information regarding the scheduled
maturities, amortized costs, fair value and weighted average yields for the
Savings Bank's securities at September 30, 1996:
<TABLE>
<CAPTION>
1 Yr or Less 1 to 5 Yrs 5 to 10 Yrs Other
Carrying Avg Carrying Avg Carrying Avg Carrying Avg
Value Yld Value Yld Value Yld Value Yld
Dollars in Thousands
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Securities available
for sale: (1)
U.S. treasury and
government
obligations 1,501 5.92 12,369 5.97 1,000 6.15 964 6.70
Mortgage-backed
securities 362 7.66 6,280 6.25 4,768 6.35 12,277 7.61
Collateralized
mortgage
obligations 0 0.00 824 7.50 6,178 6.23 15,219 6.14
Equity securities
and mutual funds 0 0.00 0 0.00 0 0.00 13,060 5.89
Total securities
available for sale 1,863 6.26 19,473 6.13 11,946 6.27 41,830 6.51
Securities held to
maturity: (2)
Collateralized
mortgage
obligations 0 0.00 972 6.00 1,003 7.00 2,725 6.09
Total securities
held to maturity 0 0.00 972 6.00 1,003 7.00 2,725 6.09
Total securities 1,863 6.26 20,473 6.12 12,977 6.33 44,555 6.48
</TABLE>
1) The carrying value is the approximate fair value of the security at each
reporting date.
2) The carrying value is the amortized cost of the security at each reporting
date.
Cash and Interest-Bearing Deposits in Other Banks
The Savings Bank also had cash on hand and cash due from and
on deposit with other banks amounting to $3.2 million, $2.9
million, and $4.4 million at September 30, 1996, 1995, and
1994, respectively.
Sources of Funds
General. Deposits are the primary source of the Company's
funds for lending and other investment purposes. In addition
to deposits, the Company derives funds from loan principal
repayments. Loan repayments are a relatively stable source of
funds, while deposit inflows and outflows are significantly
influenced by general interest rates and money market
conditions. Borrowings may be used on a short-term basis to
compensate for reductions in the availability of funds from
other sources. They may also be used on a longer term basis
for general business purposes.
Deposits. The Company's deposits are attracted principally
from within the Company's primary market area through the
offering of a wide selection of deposit instruments, including
NOW accounts, money market accounts, regular savings accounts,
and term certificate accounts. Included among these deposit
products are individual retirement account certificates of
approximately $11.2 million at September 30, 1996. Deposit
account terms vary, with the principal differences being the
minimum balance required, the time periods the funds must
remain on deposit and the interest rate. As of September 30,
1996, the certificates of deposit with principal amounts of
$100,000 or more totaled to $33.5 million.
Interest rates paid, maturity terms, service fees and
withdrawal penalties are established by the Savings Bank on a
periodic basis. Determination of rates and terms are
predicated on funds acquisition and liquidity requirements,
rates paid by competitors, growth goals and federal
regulations. Rates on deposits of $100,000 or more are
usually negotiated with the depositor.
The following table sets forth the dollar amount of deposits
in the various types of deposit programs offered at the dates
indicated:
<TABLE>
<CAPTION>
September 30,
1996 1995 1994
Amount % Amount % Amount %
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C>
Certificates of
deposit: 112,347 85.28 116,562 86.63 108,402 82.13
Transaction
accounts:
Savings accounts 6,873 5.22 8,184 6.08 10,472 7.93
NOW accounts 12,520 9.50 9,808 7.29 13,115 9.94
Total transaction
accounts 19,393 14.72 17,992 13.37 23,587 17.87
Total deposits 131,740 100.00 134,554 100.00 131,989 100.00
</TABLE>
The following table sets forth the savings activities of Community during the
periods indicated:
Year Ended September 30,
1996 1995 1994
(In thousands)
Net increase (decrease)
before interest credited (7,893) (2,910) (3,386)
Interest credited 5,079 5,476 6,340
Net increase (decrease)
in deposits (2,814) 2,566 2,954
The following table sets forth the change in dollar and amount of deposits in
the various types of accounts offered by the savings Bank between the dates
indicated:
<TABLE>
<CAPTION>
Increase
(Decrease)
Balance at from Balance at
September 30, % of September 30, September 30, % of
1996 Deposit 1995 1995 Deposits
<S> <C> <C> <C> <C> <C>
Now Accounts 12,519,798 9.50 2,711,842 9,807,956 7.29
Savings Accounts 6,873,038 5.22 (1,311,366) 8,184,404 6.08
Certificates of
deposit 112,347,597 85.28 (4,214,547) 116,562,144 86.63
Total 131,740,433 100.00 (2,814,071) 134,554,504 100.00
<CAPTION>
Increase
(Decrease)
from Balance at
September 30, September 30, % of
1994 1994 Deposit
<S> <C> <C> <C>
Now Accounts (3,307,616) 13,115,572 9.94
Savings Accounts (2,287,224) 10,471,628 7.93
Certificates of
deposit 8,160,288 108,401,856 82.13
Total 2,565,448 131,989,056 100.00
</TABLE>
The following table sets forth the maturities of Community's certificates of
deposit having principal amounts of $100,000 or more at September 30, 1996:
Certificate of Deposit Maturing
In Quarter Ending: Amount
December 31, 1996 9,202,790
March 31, 1997 9,765,794
June 30, 1997 3,706,295
September 30, 1997 3,674,499
After September 30, 1997 7,154,959
Total certificates of deposit with
Balances of $100,000 or more 33,504,337
The following table sets forth the certificates of deposit in
the Savings Bank classified by rates at the dates indicated:
At September 30,
1996 1995
3.00% to 3.99% 0 369
4.00% to 4.99% 20,952 23,831
5.00% to 5.99% 67,348 48,748
6.00% to 6.99% 23,945 43,512
7.00% to 7.99% 102 102
112,347 1,165,621
The following table sets forth the amount and maturities of
Community's certificates of deposit at September 30, 1996.
<TABLE>
<CAPTION>
Over One Over Two
One Year Year Through Years Through
or Less Two Years Three Years
(In thousands)
<S> <C> <C> <C>
4.00% to 4.99% 20,549 213 112
5.00% to 5.99% 50,376 12,494 2,480
6.00% to 6.99% 2,841 4,198 5,873
7.00% to 7.99% 0 0 102
73,766 16,905 8,567
<CAPTION>
Over Three
Years Through Over
Four Years Four Years Totals
<S> <C> <C> <C>
4.00% to 4.99% 78 0 20,952
5.00% to 5.99% 1,643 355 67,348
6.00% to 6.99% 10,956 77 23,945
7.00% to 7.99% 0 0 102
12,677 432 112,347
</TABLE>
Deposits in the Savings Bank as of September 30, 1996 were represented by the
various programs described below.
<TABLE>
<CAPTION>
Percentage
of
Interest Minimum Minimum Total
Rate Term Category Amount Balances Savings
<S> <C> <C> <C> <C> <C>
2.75% None Passbook Savings Account 50 6,873,038 5.22
2.50% None Golden Checking 500 1,001,642 0.76
0.00% None Non-interest Checking 100 317,995 0.24
2.50% None Silver Checking 300 343,742 0.26
3.25% None Daily Money Market 2,500 6,715,120 5.09
0.00% None Student Checking 50 5,843 0.01
2.50% None Courtesy Checking 100 411,216 0.31
0.00% None Community First Checking 50 461,837 0.35
2.75% None Super Now Checking 1,500 1,744,268 1.32
5.00% None Community First Advantage 100,000 1,518,135 1.15
Certificates of Deposit
5.20% 12 Months Fixed Term, Fixed Rate,
Renewable 1,000 23,915,890 18.15
5.40% 6 Months Fixed Term, Fixed Rate,
Non-renewable 100,000 3,141,395 2.38
5.40% 30 Months Fixed Term, Fixed Rate,
Renewable 1,000 3,842,733 2.92
5.30% 24 Months Fixed Term, Fixed Rate,
Renewable 1,000 9,630,073 7.31
4.85% 182 Days Fixed Term, Fixed Rate,
Renewable 1,000 17,593,420 13.35
5.00% 9 Months Fixed Term, Fixed Rate,
Non-renewable 1,000 510,297 0.39
5.75% 12 Month Fixed Term, Negotiated
Jumbo Rate,
Non-renewable 100,000 29,050,429 22.05
4.00% 91 Days Fixed Term, Fixed Rate,
Renewable 1,000 1,482,945 1.13
5.20% 18 Months Fixed Term, Fixed Rate,
Renewable 1,000 1,893,068 1.44
5.50% 36 Months Fixed Term, Fixed Rate,
Renewable 1,000 8,154,632 6.19
5.70% 48 Months Fixed Term, Fixed Rate,
Renewable 1,000 12,991,685 9.86
5.35% 25 Months Fixed Term, Fixed Rate,
Non-renewable 1,000 139,030 0.11
131,740,433 100.00
</TABLE>
Borrowings. The Savings Bank may obtain advances from the
FHLB of Dallas upon the security of its FHLB of Dallas stock
and certain of the Savings Bank's residential mortgage loans,
provided certain standards related to creditworthiness have
been met. Such advances are made pursuant to several credit
programs, each of which has its own interest rate and range of
maturities. Such advances are generally available to meet
seasonal and other withdrawals of deposit accounts and to
permit increased lending.
The Savings Bank had no FHLB advances outstanding at
September 30, 1996.
The following table sets forth the maximum month-end balance
and average balance of Community's FHLB advances during the
periods indicated. See also, Note 11 to the Consolidated
Financial Statements.
Year Ended September 30,
1996 1995 1994
(Dollars in thousands)
Maximum balance 1,000 3,000 0
Average balance 250 2,333 0
Weighted average interest rate
of FHLB advances 5.98% 6.34% 0.00%
The following table sets forth certain information as to Community's
long-term (terms to maturity in excess of 90 days) and short-term (terms to
maturity of 90 days or less) FHLB advances at the dates indicated:
1996 1995 1994
(Dollars in thousands)
FHLB long-term advances 0 1,000 0
Weighted average interest rate 0.00% 5.98% 0.00%
FHLB short-term advances 0 0 0
Weighted average interest rate 0.00% 0.00% 0.00%
Competition
The Savings Bank faces strong competition both in attracting
deposits and making real estate loans. Its most direct
competition for deposits has historically come from other
savings associations, credit unions, and commercial banks
located in northeastern Mississippi, including many large
financial institutions which have greater financial and
marketing resources available to them. In addition, the
Savings Bank has faced additional significant competition for
investors' funds from short-term money market securities and
other corporate and government securities. The ability of the
Savings Bank to attract and retain savings deposits depends on
its ability to generally provide a rate of return, liquidity,
and risk comparable to that offered by competing investment
opportunities.
The Savings Bank experiences strong competition for real
estate loans primarily from other savings associations,
commercial banks, and mortgage banking companies. The Savings
Bank competes for loans principally through the interest rates
and loan fees it charges and the efficiently and quality of
services it provides borrowers. Competition may increase as a
result of the continuing reduction of restrictions on the
interstate operations of financial institutions.
REGULATION
The Company
General. The Company, as a savings and loan holding company
within the meaning of the Home Owners' Loan Act ("HOLA"), is
required to register with the OTS and is subject to OTS
regulations, examinations, supervision, and reporting
requirements. As a subsidiary of a savings and loan holding
company, the Savings Bank is subject to certain restrictions
in its dealings with the Company and affiliates thereof.
Activities Restrictions. There are generally no restrictions
on the activities of a savings and loan holding company which
holds only one subsidiary savings institution. However, if
the Director of the OTS determines that there is reasonable
cause to believe that the continuation by a savings and loan
holding company of an activity constitutes a serious risk to
the financial safety, soundness or stability of its subsidiary
savings institution, the Director may impose such restrictions
as deemed necessary to address such risk, including limiting
(i) payment of dividends by the savings institution; (ii)
transactions between the savings institution and its
affiliates; and (iii) any activities of the savings
institution that might create a serious risk that the
liabilities of the holding company and its affiliates may be
imposed on the savings institution. Notwithstanding the above
rules as to permissible business activities of unitary savings
and loan holding companies, if the savings institution
subsidiary of such a holding company fails to meet a Qualified
Thrift Lender "QTL" test, then such unitary holding company
also shall become subject to the activities restrictions
applicable to multiple savings and loan holding companies and,
unless the savings institution requalifies as a QTL within one
year thereafter, shall register as, and become subject to the
restrictions applicable to, a bank holding company.
If the Company were to acquire control of another savings
institution, other than through merger or other business
combination with the Savings Bank, the Company would thereupon
become a multiple savings and loan holding company. Except
where such acquisition is pursuant to the authority to approve
emergency thrift acquisitions and where each subsidiary
savings institution meets the QTL test, as set forth below,
the activities of the Company and any of its subsidiaries
(other than the Savings Bank or other subsidiary savings
institutions) would thereafter be subject to further
restrictions. Among other things, no multiple savings and
loan holding company or subsidiary thereof which is not a
savings institution shall commence or continue for a limited
period of time after becoming a multiple savings and loan
holding company or subsidiary thereof any business activity, upon
prior notice to, and no objection by the OTS, other than: (i)
furnishing or performing management services for a subsidiary
savings institution; (ii) conducting an insurance agency or
escrow business; (iii) holding, managing, or liquidating
assets owned by or acquired from a subsidiary savings
institution; (iv) holding or managing properties used or
occupied by a subsidiary savings institution; (v) acting as
trustee under deeds of trust; (vi) those activities authorized
by regulation as of March 5, 1987 to be engaged in by multiple
savings and loan holding companies; or (vii) unless the
Director of the OTS by regulation prohibits or limits such
activities for savings and loan holding companies, those
activities authorized by the Federal Reserve Board as
permissible for bank holding companies. Those activities
described in (vii) above also must be approved by the Director
of the OTS prior to being engaged in by a multiple savings and
loan holding company.
Limitations on Transactions with Affiliates. Transactions
between savings institutions and any affiliate are governed by
Sections 23A and 23B of the Federal Reserve Act. An affiliate
of a savings institution is any company or entity which
controls, is controlled by or is under common control with the
savings institution. In a holding company context, the parent
holding company of a savings institution (such as the Company)
and any companies which are controlled by such parent holding
company are affiliates of the savings institution. Generally,
Sections 23A and 23B (i) limit the extent to which the savings
institution or its subsidiaries may engage in "covered
transactions: with any one affiliate to an amount equal to 10%
of such institution's capital stock and surplus, and contain
an aggregate limit on all such transactions with all
affiliates to an amount equal to 20% of such capital stock and
surplus and (ii) require that all such transactions 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 similar other types of transactions. In addition to the
restrictions imposed by Sections 23A and 23B, no savings
institution may (i) loan or otherwise extend credit to an
affiliate, except for any affiliate which engages only in
activities which are permissible for bank holding companies,
or (ii) purchase or invest in any stocks, bonds, debentures,
notes or similar obligations of any affiliate, except for
affiliates which are subsidiaries of the savings institution.
In addition, Sections 22(h) and (g) of the Federal Reserve Act
place restrictions on loans to execute officers, directors and
principal stockholders. Under Section 22(h), loans to a
director, an executive officer and to a greater than 10%
stockholder of a savings institution, and certain affiliated
interests of either, may not exceed, together with all other
outstanding loans to such person and affiliated interests, the
institution's loan to one borrower limit (generally equal to
15% of the institution's unimpaired capital and surplus).
Section 22(h) permits loans to directors, executive officers
and principal stockholders made pursuant to a benefit or
compensation program that is widely available to employees of
a subject savings association provided that no preference is
given to any officer, director or principal shareholder or
related interest thereto over any other employee. In
addition, the aggregate amount of extensions of credit by a
savings institution to all insiders cannot exceed the
institution's unimpaired capital and surplus. Furthermore,
Section 22(g) places additional restrictions on loans to
executive officers. At September 30, 1995, the Savings Bank
was in compliance with the above restrictions.
Restrictions on Acquisitions. Except under limited
circumstances, savings and loan holding companies are
prohibited from acquiring, without prior approval of the
Director of the OTS, (i) control of any other savings
institution or savings and loan holding company or
substantially all the assets thereof or (ii) more than 5% of
the voting shares of a savings institution or holding company
thereof which is not a subsidiary. Except with the prior
approval of the Director of the OTS, no director or officer of
a savings and loan holding company or person owning or
controlling by proxy or otherwise more than 25% of such
company's stock, may acquire control of any savings
institution, other than a subsidiary savings institution, or
of any other savings and loan holding company.
The Director of the OTS may only approve acquisitions
resulting in the formation of a multiple savings and loan
holding company which controls savings institutions in more
than one state if (i) the multiple savings and loan holding
company involved controls a savings institution which operated
a home or branch office located in the state of the
institution to be acquired as of March 5, 1987; (ii) the
acquirer is authorized to acquire control of the savings
institution pursuant to the emergency acquisition provisions
of the Federal Deposit Insurance Act ("FDIA"); or (iii) the
statutes of the state in which the institution to be acquired
is located specifically permit institutions to be acquired by
the state-chartered institutions or savings and loan holding
companies located in the state where the acquiring entity is
located (or by a holding company that controls such
state-chartered savings institutions).
The Bank Holding Company Act of 1956 specifically authorizes
the Federal Reserve Board to approve an application by a bank
holding company to acquire control of a savings institution.
A bank holding company that controls a savings institution is
also authorized to merge or consolidate the assets and
liabilities to, any subsidiary bank which is a member of the
BIF with the approval of the appropriate federal banking
agency and the Federal Reserve Board. As a result of these
provisions, there have been a number of acquisitions of
savings institutions by bank holding companies in recent
years.
Federal Securities Laws. The Company is registered with the
Securities and Exchange Commission ("SEC") under the
Securities Exchange Act of 1934, as amended (the "Securities
Exchange Act"), and under OTS regulations. Generally, the
Common Stock may not be deregistered for at least three years
after the Conversion. The Company is subject to the
information, proxy solicitation, insider trading restrictions
and other requirements of the Securities Exchange Act.
The Savings Bank
General. The OTS has extensive authority over the operations
of federally chartered savings institutions. As part of this
authority savings institutions are required to file periodic
reports with the OTS and are subject to periodic examinations
by the OTS and the FDIC. The investment and lending authority
of savings institutions are prescribed by federal laws and
regulations, and such institutions are prohibited from
engaging in any activities not permitted by such laws and
regulations. Those laws and regulations generally are
applicable to all federally chartered savings institutions and
may also apply to state-chartered savings institutions. Such
regulation and supervision is primarily intended for the
protection of depositors.
The OTS has broad enforcement authority over all savings
institutions, including, among other things, the ability to
assess civil money penalties, to issue cease and desist or
removal orders and to initiate injunctive actions. In
general, these enforcement actions may be initiated for
violations of laws and regulations and unsafe or unsound
practices. Other actions or inactions may provide the basis
for enforcement action, including misleading or untimely
reports filed with the OTS.
Deposit Insurance
The deposits of the Bank are currently insured by the SAIF.
Both the SAIF and the Bank Insurance Fund ("BIF"), the federal
deposit insurance fund that covers the deposits of state and
national banks and certain state savings Banks, are required
by law to attain and thereafter maintain a reserve ration of
1.25% of insured deposits. The BIF has achieved the required
reserve rate, and as a result, the FDIC reduced the average
deposit insurance premium paid by BIF-insured banks to a level
substantially below the average premium paid by savings
institutions.
Banking legislation was enacted September 30, 1996 to
eliminate the premium differential between SAIF-insured
institutions and BIF-insured institutions. The legislation
provides that all insured depository institutions with
SAIF-assessable deposits as of March 31, 1995 pay a special
one-time assessment to recapitalize the SAIF. Pursuant to this
legislation, the FDIC promulgated a rule that established the
special assessment necessary to recapitalize the SAIF at 65.7
basis points of SAIF-assessable deposits held by effected
institutions as of March 31, 1995. Based upon its level of
SAIF deposits as of March 31, 1995, the Savings Bank will pay
a special assessment of approximately $870,000. The
assessment was accrued in the quarter ended September 30,
1996.
Another component of the SAIF recapitalization plan provided
for the merger of the SAIF and BIF on January 1, 1999, if no
insured depository institution is a savings association on
that date. If the Savings Bank is required to convert to a
bank charter, the Company would become a bank holding company
which would subject it to the more restrictive activity limits
imposed on bank holding companies unless special grandfather
provisions are included in applicable legislation or
regulation. As of September 30, 1996, the Company has no
investments or activities that would be adversely affected if
it were required to become a bank holding company.
Regulatory Capital Requirements. Federal insured savings
institutions are required to maintain minimum levels of
regulatory capital established by the OTS. These standards
generally must be as stringent as the comparable capital
requirements imposed on national banks. The OTS also is
authorized to impose capital requirements in excess of these
standards on individual institutions on a case-by-case basis.
Current OTS capital standards require savings institutions to
satisfy three different capital requirements. Under these
standards, savings institutions must maintain "tangible"
capital equal to at least 1.5% of adjusted total assets,
"core" capital equal to at least 3% of adjusted total assets
and "total" capital (a combination of core and "supplementary"
capital) equal to at least 8.0% of "risk-weighted" assets.
For purposes of the regulation, core capital generally
consists of common equity (including retained earnings),
noncummulative perpetual preferred stock and related surplus,
minority interests in the equity accounts of fully
consolidated subsidiaries, certain nonwithdrawable accounts
and pledged deposits and "qualifying supervisory goodwill."
Tangible capital is given the same definition as core capital
but does not include qualifying supervisory goodwill and is
reduced by the amount of all the savings institution's
intangible assets, with only a limited exception for purchased
mortgage servicing rights. The Savings Bank had no goodwill
or other intangible assets at September 30, 1996. Both core
and tangible capital are further reduced by an amount equal to
a savings institution's debt and equity investments in
subsidiaries engaged in activities not permissible to national
banks (other than subsidiaries engaged in activities
undertaken as agent for customers or in mortgage banking
activities and subsidiary depository institutions or their
holding companies). These adjustments do not affect the
Savings Bank's regulatory capital. Supplementary capital
generally consists of hybrid capital instruments; perpetual
preferred stock which is not eligible to be included as core
capital; subordinated debt and intermediate-term preferred
stock; and general allowances for loan losses up to a maximum
of 1.25% of risk-weighted assets.
In determining compliance with the risk-based capital
requirement, a savings institution is allowed to include both
core capital and supplementary capital in its total capital,
provided that the amount of supplementary capital included
does not exceed the savings institution's core capital. In
determining the required amount of risk-based capital, total
assets, including certain off-balance sheet items, are
multiplied by a risk weight based on the risks inherent in the
type of assets. The risk weight assigned by the OTS for
principal categories of assets are (i) 0% for cash and
securities issued by the U. S. Government or unconditionally
backed by the full faith and credit of the U. S. Government;
(ii) 20% for securities (other than equity securities) issued
by U. S. Government-sponsored agencies and mortgage-backed
securities issued by, or fully guaranteed as to principal and
interest by, the FNMA or the FHLMC, except for those classes
with residual characteristics or stripped mortgage-related
securities; (iii) 50% for prudently underwritten permanent
one-to-four family first lien mortgage loans not more than 90
days delinquent and having a loan-to-value ratio of not more
than 80% at origination unless insured to such ratio by an
insurer approved by the FNMA or the FHLMC, qualifying
residential bridge loans made directly for the construction of
one-to-four family residences and qualifying multi-family
residential loans; and (iv) 100% for all other loans and
investments, including consumer loans, commercial loans, and
single-family residential real estate loans more than 90 days
delinquent, and for repossessed assets.
At September 30, 1996, the Savings Bank exceeded all of its
regulatory capital requirements. The following table sets
forth the Savings Bank's compliance with applicable regulatory
capital requirements at September 30, 1996:
<TABLE>
<CAPTION> To Be Well
Minimum for Capitalized for
Capital Adequacy Prompt Corrective
Actual Purposes Action Provisions
Ratio Amount Ratio Amount Ratio Amount
<S> <C> <C> <C> <C> <C> <C>
Stockholders' equity and
ratio to total assets 24.2% 45,163
Unrealized gain on
available for sale
securities (3,329)
Tangible capital, and
ratio to adjusted total
assets 22.8% 41,834 1.5% 2,748
Tier 1 (core) capital,
and ratio to adjusted
total assets 22.8% 41,834 3.0% 5,496 5.0% 9,160
Tier 1 capital, and
ratio to risk-weighted
assets 50.1% 41,834 4.0% 3,339 6.0% 5,009
Tier 2 capital (general
allowance for loan losses) 572
Total risk-based capital,
and ratio to risk-weighted
assets 50.8% 42,406 8.0% 6,679 10.0% 8,349
Total assets 186,538
Adjusted total assets 183,209
Risk-weighted assets 83,487
</TABLE>
In August 1993, the OTS adopted a final rule incorporating an
interest-rate risk component into the risk-based capital
regulation. Under the rule, an institution with a greater
than "normal" level of interest rate risk is subject to a
deduction of its interest rate risk component from total
capital for purposes of calculating its risk-based capital. As
a result, such an institution is required to maintain
additional capital in order to comply with the risk-based
capital requirement. An institution with a greater than
"normal" interest rate risk is defined as an institution that
would suffer a loss of net portfolio value exceeding 2.0% of
the estimated economic value of its assets in the event of a
200 basis point increase or decrease (with certain minor
exceptions) in interest rates. The interest rate risk
component is calculated, on a quarterly basis, as one-half of
the difference between an institution's measured interest rate
risk and 2.0% multiplied by the economic value of its assets.
The rule also authorizes the Director of the OTS, or his
designee, to waive or defer an institution's interest rate
risk component on a case-by-case basis. The final rule was
effective as of January 1, 1994, subject however to a three
quarter "lag" time between the reporting date of the data used
to calculate an institution's interest rate risk and the
effective date of each quarter's interest rate risk component.
The OTS postponed the interest rate risk capital deduction in
order to provide sufficient time to implement and evaluate the
OTS appeals process as well as get a better sense of the
direction that the other federal banking agencies may take in
their implementation of Section 305 of FDICIA.
Prompt Corrective Action. Under Section 39 of the FDIA, as
added by the FDICIA, each federal banking agency was required
to implement a system of promptly corrective action for
institutions which it regulates. The federal banking
agencies, including the OTS, adopted substantially similar
regulations to implement Section 38 of the FDIA. Under the
regulations, an institution is deemed to be (i) "well
capitalized" if it has total risk-based capital of 10.0% or
more, than a Tier 1 risk-based capital ratio of 6.0% or more,
has a Tier 1 leverage capital ratio of 5.0% or more and is not
subject to any order or final capital directive to meet and
maintain a specific capital level for any capital measure,
(ii) "adequately capitalized" if it has a total risk-based
capital ratio of 8.0% or more, a Tier 1 risk-based capital
ratio of 4.0% or more and a Tier 1 leverage capital ratio of
4.0% or more (3.0% under certain circumstances) and does not
meet the definition of "well capitalized," (iii)
"undercapitalized" if it has a total risk-based capital ratio
that is less than 8.0%, a Tier 1 risk-based capital ratio that
is less than 4.0% or a Tier 1 leverage capital ratio that is
less than 4.0% (3.0% under certain circumstances), (iv)
"significantly undercapitalized" if it has a total risk-based
capital ratio that is less than 6.0%, a Tier 1 risk-based
capital ratio that is less than 3.0% or a Tier 1 leverage
capital ratio that is less than 3.0%, and (v) "critically
undercapitalized" if it has a ratio of tangible equity to
total assets that is equal to or less than 2.0%. Section 38
of the FDIA and the regulations promulgated thereunder also
specify circumstances under which a federal banking agency may
reclassify a well capitalized institution as adequately
capitalized and may require an adequately capitalized
institution or an undercapitalized institution to comply with
supervisory actions as if it were in the next lower category
(except that the FDIC may not reclassify a significantly
undercapitalized institution as critically undercapitalized).
An institution generally must file a written capital
restoration plan which meets specified requirements with an
appropriate federal banking agency with 45 days of the date
that the institution receives notice or is deemed to have
notice that it is undercapitalized, significantly
undercapitalized or critically undercapitalized. A federal
banking agency must provide the institution with written
notice of approval or disapproval with 60 days after receiving
a capital restoration plan, subject to extensions by the
agency.
An institution which is required to submit a capital
restoration plan must concurrently submit a performance
guaranty by each company that controls the institution. Such
guaranty shall be limited to the lesser of (i) an amount equal
to 5.0% of the institution's total assets at the time the
institution was notified or deemed to have notice that it was
undercapitalized or (ii) the amount necessary to restore the
relevant capital measures of the institution to the levels
required for the institution to be classified as adequately
capitalized. Such a guarantee shall expire after the federal
banking agency notifies the institution that it has remained
adequately capitalized for each of four consecutive calendar
quarters. An institution which fails to submit a written
capital restoration plan with the requisite period, including
any required performance guarantee(s), or fails in any
material respect to implement a capital restoration plan,
shall be subject to the restrictions in Section 38 of the FDIA
which are applicable to significantly undercapitalized
institutions.
Immediately upon becoming undercapitalized, an institution
shall become subject to the provisions of Section 38 of the
FDIA (i) restricting payment of capital distributions and
management fees, (ii) requiring that the appropriate federal
banking agency monitor the condition of the institution and
its efforts to restore its capital, (iii) requiring submission
of a capital restoration plan, (iv) restricting the growth of
the institution's assets and (v) requiring prior approval of
certain expansion proposals. The appropriate federal banking
agency for an undercapitalized institution also may take any
number of discretionary supervisory actions if the agency
determines that any of these actions is necessary to resolve
the problem of the institution at the least possible long-term
cost to the deposit insurance fund, subject in certain cases
to specified procedures. These discretionary supervisory
actions include requiring the institution to raise additional
capital; restricting transactions with affiliates; restricting
interest rates paid by the institution on deposits; requiring
replacement of senior executive officers and directors;
restricting the activities of the institution and its
affiliates; requiring divestiture of the institution or the
sale of the institution to a willing purchaser; and any other
supervisory action that the agency deems appropriate. These
and additional mandatory and permissive supervisory actions
may be taken with respect to significantly undercapitalized
and critically undercapitalized institutions.
At September 30, 1996, the Savings Bank was deemed a "well
capitalized" institution for purpose of the above regulations
and as such was not subject to the above mentioned
restrictions.
Safety and Soundness. On November 18, 1993, a joint notice of
proposed rulemaking was issued by the OTS, the Office of the
Comptroller of the Currency and the Federal Reserve Board
(collectively, the "agencies") concerning standards for safety
and soundness required to be prescribed by regulation pursuant
to Section 39 of the FDIA. In general, the standards relate
to (1) operational and managerial matters; (2) asset quality
and earnings; and (3) compensation. The operational and
managerial standards cover (a) internal controls and
information systems, (b) internal audit system, (c) loan
documentation, (d) credit underwriting, (e) interest rate risk
exposure, (f) asset growth, and (g) compensation, fees and
benefits. Under the proposed asset quality and earnings
standards, the Savings Bank would be required to maintain (1)
a maximum ratio of classified assets (assets classified
substandard, doubtful and to the extent that related losses
have not been recognized, assets classified loss) to total
capital of 1.0%, and (2) minimum earnings sufficient to absorb
losses without impairing capital. The last ratio concerning
market value to book value was determined by the agencies not
to be feasible. Finally, the proposed compensation standard
states that compensation will be considered excessive if it is
unreasonable or disproportionate to the services actually
performed by the individual being compensated. If an insured
depository institution or its holding company fail to meet any
of the standards promulgated by regulation, then such
institution or company will be required to submit a plan
within 30 days to the FDIC specifying the steps it will take
to correct the deficiency. In the event that an institution
or company fails to submit or fails in any material respect to
implement a compliance plan within the time allowed by the
agency, Section 39 of the FDIA provides that the FDIC must
order the institution or company to correct the deficiency and
may (1) restrict asset growth; (2) require the institution or
company to increase its ratio of tangible equity to assets;
(3) restrict the rates of interest that the institution or
company may pay; or (4) take any other action that would
better carry out the purpose of prompt corrective action. The
Savings Bank believes that it will be in compliance with each
of the standards if they are adopted as proposed.
<PAGE>
Liquidity Requirements. Each savings institution is required
to maintain an average daily balance of liquid assets equal to
a certain percentage of the sum of its average daily balance
of net withdrawable deposit accounts and borrowing payable in
one year or less. The liquidity requirement may vary from
time to time (between 4% and 10%) depending upon economic
conditions and savings flows of all savings institutions. At
the present time, the required minimum liquid asset ratio is
5%. At September 30, 1996, the Savings Bank's liquidity ratio
was in excess of the required minimum.
Capital Distributions. OTS regulations govern capital
distributions by savings institutions, which include cash
dividends, stock redemptions or repurchases, cash-out mergers,
interest payments on certain convertible debt and other
transactions charged to the capital account of a savings
institution to make capital distributions. Generally, the
regulation creates a safe harbor for specified levels of
capital distributions from institutions meeting at least their
minimum capital requirements, so long as such institutions
notify the OTS and receive no objection to the distribution
from the OTS. Savings institutions and distributions that do
not qualify for the safe harbor are required to obtain prior
OTS approval before making any capital distributions.
Generally, a savings institution that before and after the
proposed distribution meets or exceeds its fully phased-in
capital requirements (Tier 1 institutions) may make capital
distributions during any calendar year equal to the higher of
(i) 100% of net income for the calendar year-to-date plus 50%
of its "surplus capital ratio" at the beginning of the
calendar year or (ii) 75% of net income over the most recent
four-quarter period. The "surplus capital ratio" is defined
to mean the percentage by which the institution's ratio of
total capital to assets exceeds the ratio of its fully
phased-in capital requirement: is defined to mean an
institution's capital requirements under the statutory and
regulatory standards applicable on December 31, 1994, as
modified to reflect any applicable individual minimum capital
requirement imposed upon the institution. Failure to meet
fully phased-in or minimum capital requirements will result in
further restrictions on capital distributions, including
possible prohibition without explicit OTS approval.
Tier 2 institutions, which are institutions that before and
after the proposed distribution meet or exceed their minimum
capital requirements, may make capital distributions up to 75%
of their net income over the most recent four quarter period.
In order to make distributions under these safe harbors, Tier
1 and Tier 2 institutions must submit 30 days written notice
to the OTS prior to making the distribution. The OTS may
object to the distribution during that 30-day period based on
safety and soundness concerns. In addition, a Tier 1
institution deemed to be in need of more than normal
supervision by the OTS may be downgraded to a Tier 2 or Tier 3
institution as a result of such a determination.
Tier 3 institutions, which are institutions that do not meet
current minimum capital requirements, or that have capital in
excess of either their fully phased-in capital requirement or
minimum capital requirement but which have been notified by
the OTS that it will be treated as a Tier 3 institution
because they are in need of more than normal supervision,
cannot make any capital distribution without obtaining OTS
approval prior to making such distributions.
At September 30, 1996, the Savings Bank was a Tier 1
institution for purposes of this regulation.
Loans to One Borrower. OTS regulations impose limitations on
the aggregate amount of loans that a savings institution could
make to any one borrower, including related entities, that
follow the national bank standard. The regulations generally
do not permit loans to one borrower to exceed the greater of
$500,000 or 15% of unimpaired capital and surplus. Loans in
an amount equal to an additional 10% of unimpaired capital and
surplus also may be made to a borrower if the loans are fully
secured by readily marketable securities. For information
about the largest borrowers from the Savings Bank, see
"Description of Business - Lending Activities - General."
Branching by Federal Savings Institutions. Effective May 11,
1992, the OTS amended its Policy Statement on Branching by
Federal Savings Institutions to permit interstate branching to
the full extent permitted by statute (which is essentially
unlimited). Prior policy permitted interstate branching for
federal savings institutions only to the extent allowed for
state-chartered institutions in the states where the
institution's home office is located and where the branch is
sought. Prior policy also permitted healthy out-of-state
federal institutions to branch into another state, regardless
of the law in that state, provided the branch office was the
result of a purchase of an institution that was in danger of
default.
Generally, federal law prohibits federal savings institutions
from establishing, retaining or operating a branch outside the
state in which the federal institution has its home office
unless the institution meets the IRS's domestic building and
loan test (generally, 60% of a thrift's assets must be
housing-related) ("IRS Test"). The IRS Test requirement does
not apply if: (i) the branch(es) result(s) from an emergency
acquisition of a troubled savings institution (however, if the
troubled savings institution is acquired by a bank holding
company, does not have its home office in the state of the
bank holding company bank subsidiary and does not qualify
under the IRS Test, its branching is limited to the branching
laws for state-chartered banks in the state where the savings
institution is located); (ii) the law of the state where the
branch would be located would permit the branch to be
established if the federal savings institution were chartered
by the state in which its home office is located; or (iii) the
branch was operated lawfully as a branch under state law prior
to the savings institution's conversion to a federal charter.
Furthermore, the OTS will evaluate a branching applicant's
record of compliance with the Community Reinvestment Act of
1977 ("CRA"). An unsatisfactory CRA record may be the basis
for denial of a branching application.
Qualified Thrift Lender Test. All savings institutions are
required to meet a QTL test set forth in Section 10(m) of the
HOLA and regulations of the OTS thereunder to avoid certain
restrictions on their operations. A saving institution that
does not meet the QTL test set forth in the HOLA and
implementing regulations must either convert to a bank charter
or comply with the following restrictions on its operations:
(i) the institution may not engage in any new activity or make
any new investment, directly or indirectly, unless such
activity or investment is permissible for a national bank;
(ii) the branching powers of the institution shall be
restricted to those of a national bank; (iii) the institution
shall not be eligible to obtain any advances from its FHLB;
and (iv) payment of dividends by the institution shall be
subject to the rules regarding payment of dividends by a
national bank. Upon the expiration of three years from the
date the savings institution ceases to be a QTL, it must cease
any activity and not retain any investment not permissible for
a national bank and immediately repay any outstanding FHLB
advances (subject to safety and soundness considerations).
Currently, the QTL test requires that 65% of an institution's
"portfolio assets" (as defined) consist of certain housing and
consumer-related assets on a monthly average basis in nine out
of every 12 months. Assets that qualify without limit for
inclusion as part of the 65% requirement are loans made to
purchase, refinance, construct, improve or repair domestic
residential housing and manufactured housing; home equity
loans; mortgage-backed securities (where the mortgages are
secured by domestic residential housing or manufactured
housing); stock issued by the FHLB of Dallas; loans for
educational purposes, loans to small businesses and loans made
through debit cards or credit card accounts and direct or
indirect obligations of the FDIC. In addition, the following
assets, among others, may be included in meeting the test
subject to an overall limit of 20% of the savings
institution's portfolio assets: 50% of residential mortgage
loans originated and sold within 90 days of origination; 100%
of consumer and educational loans (other than loans for
personal, family or personal purposes included in the
unlimited category); and stock issued by the FHLMC or the
FNMA. Portfolio assets consist of total assets minus the sum
of (i) goodwill and other intangible assets, (ii) property
used by the savings institution to conduct its business, and
(iii) liquid assets up to 20% of the institution's total
assets. At September 30, 1996, the qualified thrift
investments of the Savings Bank were substantially in excess
of 65%.
Accounting Requirements. The Financial Institutions Reform, Recovery,
and Enforcement Act of 1989,("FIRREA") requires the OTS to establish
accounting standards to be applicable to all savings
institutions for purposes of complying with regulations,
except to the extent otherwise specified in the capital
standards. Such standards must incorporate generally accepted
account principles ("GAAP") to the same
degree as is prescribed by the federal banking agencies for
banks or may be more stringent than such requirements.
Effective October 2, 1992, the OTS amended a number of its
accounting regulations and reporting requirements to adopt the
following standards: (i) regulatory reports will incorporate
GAAP when GAAP is used by federal banking agencies; (ii)
savings institution transactions, financial condition and
regulatory capital must be reported and disclosed in
accordance with OTS regulatory reporting requirements that
will be at least as stringent as for national banks; and (iii)
the Director of the OTS may prescribe regulatory reporting
requirements more stringent than GAAP wherever the Director
determines that such requirements are necessary to ensure the
safe and sound reporting and operation of savings
institutions.
Effective February 10, 1992, the OTS adopted a statement of
policy ("Statement") set forth in Thrift Bulletin 52
concerning (i) procedures to be used in the selection of a
securities dealer, (ii) the need to document and implement
prudent policies and strategies for securities, whether held
for investment, trading or for sale, and to establish systems
and internal controls to ensure that securities activities are
consistent with the financial institution's policies and
strategies, (iii) securities trading and sales practices that
may be unsuitable in connection with securities held in an
investment portfolio, (iv) high-risk mortgage securities that
are not suitable for investment portfolio holdings for
financial institutions, and (v) disproportionately large
holdings of long-term, zero-coupon bonds that may constitute
an imprudent investment practice. The Statement applies to
investment securities, high-yield, corporate debt securities,
loans, mortgage-backed securities and derivative securities,
and provides guidance concerning the proper classification of
and accounting for securities held for investment, sale and
trading. Securities held for investment, sale or trading may
be differentiated based upon an institution's desire to earn
an interest yield (held for investment), to realize a holding
gain from assets held for indefinite periods of time (held for
sale), or to earn a dealer's spread between the bid and asked
prices (held for trading). Depository institution investment
portfolios are maintained to provide earnings consistent with
the safety factors of quality, maturity, marketability and
risk diversification. Securities that are purchased to
accomplish these objectives may be reported at their amortized
cost only when the depository institution has both the intent
and ability to hold the assets for long-term investment
purposes. Securities held for investment purposes may be
accounted for at amortized cost, securities held for sale are
to be accounted for at the lower of cost or market, and
securities held for trading are to be accounted for at market.
The Savings bank believes that its investment activities have
been and will continue to be conducted in accordance with the
requirements of OTS policies and GAAP.
Federal Home Loan Bank System. The Savings Bank is a member
of the FHLB of Dallas, which is one of 12 regional FHLBs that
administers the home financing credit function of savings
institutions. Each FHLB serves as a reserve or central bank
for its members within its assigned region. It is funded
primarily from proceeds derived from the sale of consolidated
obligations of the FHLB System. It makes loans to members
(i.e., advances) in accordance with policies and procedures
established by the Board of Directors of the FHLB.
As a member, the Savings Bank is required to purchase and
maintain stock in the FHLB of Dallas in an amount equal to at
least 1% of its aggregate unpaid residential mortgage loans,
home purchase contracts or similar obligations at the
beginning of each year. At September 30, 1996, the Savings
Bank had $1.2 million in FHLB stock, which was in compliance
with this requirement.
As a result of FIRREA, the FHLBs are required to provide funds
for the resolution of troubled savings institutions and to
contribute to affordable housing programs through direct loans
or interest subsidies on advances targeted for community
investment and low- and moderate-income housing projects.
These contributions have adversely affected the level of FHLB
dividends paid and could continue to do so in the future.
These contributions also could have an adverse effect on the
value of FHLB stock in the future.
Federal Reserve System. The Federal Reserve Board requires
all depository institutions to maintain average daily reserves
equal to various percentages against their accounts. The
percentages are subject to adjustment by the Federal Reserve
Board. At September 30, 1996, the Savings Bank met its
reserve requirement. Because required reserves must be
maintained in the form of vault cash or a non-interest-bearing
account at a Federal Reserve Bank, the effect of this reserve
requirement is to reduce an institution's earning assets.
Taxation
General. The Company and the Savings Bank are subject to the
generally applicable corporate tax provisions of the Code, and
the Savings Bank is subject to certain additional provisions
of the Code which apply to thrift and other types of financial
institutions. The following discussion of federal taxation is
intended only to summarize certain pertinent federal income
tax matters and is not a comprehensive discussion of the tax
rules applicable to the Savings Bank.
Fiscal Year. The Company and the Savings Bank file a
consolidated federal income tax return on the basis of a
fiscal year ending on September 30. Consolidated returns have
the effect of eliminating intercompany distributions,
including dividends, from the computation of consolidated
taxable income for the taxable year in which such
distributions occur.
Thrift institutions, such as the Savings Bank, generally are
subject to the provisions of the Internal Revenue Code of
1986, as amended, in the same manner as other corporations.
For tax years beginning before December 31, 1995, however, by
meeting certain definitional tests and other conditions
prescribed by the Internal Revenue Code, thrift institutions
could benefit from special deductions for annual additions to
tax bad debt reserves with respect to loans. For purposes of
the bad debt reserve deduction, loans were separated into
"qualifying real property loans," which generally were loans
secured by interests in improved real property, and
"nonqualifying loans," which were all other loans. The bad
debt reserve deduction with respect to nonqualifying loans was
based on actual loss experience. The bad debt reserve
deduction with respect to qualifying real property loans could
be based upon actual loss experience (the "experience method")
or a percentage of taxable income determined without regard to
such deduction (the "percentage of taxable income method").
The Savings Bank historically used whichever method resulted
in the highest bad debt reserve deduction in any given year.
Legislation enacted in August 1996 repealed the percentage of
taxable income method of calculating the bad debt reserve.
Savings institutions, like the Savings Bank, which have
previously used that method are required to recapture into
taxable income post-1987 reserves in excess of the reserves
calculated under the experience method over a six-year period
beginning with the first taxable year beginning after
December 31, 1995. The start of such recapture may be delayed
until the third taxable year beginning after December 31, 1995
if the dollar amount of the institution's residential loan
originations in each year is not less than the average dollar
amount of residential loan originated in each of the six most
recent years disregarding the years with the highest and
lowest originations during such period. For purposes of this
test, residential loan originations would not include
refinancing and home equity loans.
Beginning with the first taxable year beginning after
December 31, 1995, savings institutions, such as the Savings
Bank, will be treated the same as commercial banks.
Institutions with $500 million or more in assets will be able
to take a tax deduction only when a loan is actually charged
off. Institutions with less than $500 million in assets will
still be permitted to make deductible bad debt additions to
reserves, but only using the experience method. The Savings
Bank is expected to recapture approximately $1,025,000 of its
tax bad debt reserves. The recapture will not have any effect
on the Savings Bank's net income because the related tax
expense has already been accrued.
Under the experience method, the bad debt deduction to an
addition to the reserve for qualifying real property loans is
an amount determined under a formula based generally on the
bad debts actually sustained by a savings institution over a
period of years. Under the percentage of taxable income
method, the bad debt reserve deduction for qualifying real
property loans was computed as 8% of the thrift's taxable
income. The maximum deduction could be taken as long as not
less than 60% of the total dollar amount of the assets of an
institution fell within certain designated categories. If the
amount of qualifying assets fell below 60%, the institution
would get no deduction and could be required to recapture,
generally over a period of years, its existing bad debt
reserves (although net operating loss carryforwards could be
used to offset such recapture).
The bad debt deduction under the percentage of taxable income
method was limited to the extent that the amount accumulated
in the reserve for losses on qualifying real property loans
exceeded 6% of such loans outstanding at the end of the
taxable year. In addition, the amount claimed as a bad debt
deduction when added to accumulated loss reserves was limited
to the excess, if any, of 12% of total deposits or
withdrawable accounts of depositors at year-end in excess of
the sum of surplus, undivided profits and reserves at the
beginning of the year. The percentage bad debt deduction was
reduced by the deduction for losses on nonqualifying loans.
Earnings appropriated to the Savings Bank's tax bad debt
reserves and claimed as tax deductions will not be available
for the payment of cash dividends or other distributions to
the Company (including distributions made upon dissolution or
liquidation), unless the Savings Bank includes the amounts
distributed in taxable income, along with the amounts deemed
necessary to pay the resulting federal income tax. At
September 30, 1996, the Savings Bank included the amounts
distributed in taxable income, along with the amounts deemed
necessary to pay the resulting federal income tax. At
September 30, 1996, the Savings Bank had approximately $2.8 million
of accumulated bad debt reserves for which federal income
taxes have not been provided.
For taxable years beginning after September 30, 1986, the Internal
Revenue Code imposes an alternative minimum tax at a rate of
20%. The alternative minimum tax generally applies to a base
of regular taxable income plus certain tax preferences
("alternative minimum taxable income" or "AMTI") and is
payable to the extent such AMTI exceeds an exemption amount.
The Internal Revenue Code provides that an item of tax
preference is the excess of the bad debt deduction allowable
for a taxable year pursuant to the percentage of taxable
income method over the amount allowable under the experience
method. The other items of tax preference that constitute
AMTI include (a) tax-exempt interest on newly-issued
(generally qualified bonds and (b) for taxable years including
1987 through 1989, 50% of the excess of (i) the taxpayer's
pre-tax adjusted net book income over (ii) AMTI (determined
without regard to this latter preference and prior to
reduction by net operating losses). For taxable years
beginning after 1989, this latter preference has been replaced
by 75% of the excess (if any) of (i) adjusted current earnings
as defined in the Internal Revenue Code, over (ii) AMTI
(determined without regard to this preference and prior to
reduction by net operating losses). For any taxable year
beginning after 1986, net operating losses can offset no more
than 90% of AMTI. Certain payments of alternative minimum
taxes may be used as credits against regular tax liabilities
in future years. In addition, for taxable years after 1986
and before 1992, corporations, including savings institutions,
are also subject to an environmental tax equal to 0.12% of the
excess of AMTI for the taxable year (determined without regard
to net operating losses and the deduction for the
environmental tax) over $2.0 million. The Savings Bank is not
currently paying any amount of alternative minimum tax but
may, depending on future results of operations, be subject to
this tax.
The Savings Bank's federal income tax returns have not been
examined by the regulatory authorities within the past five
years. For additional information, see Note 12 of Notes to
Consolidated Financial Statements contained elsewhere herein.
Mississippi and Delaware Taxation
The Company and the Savings Bank are both subject to
Mississippi corporate income tax and franchise tax to the
extent they are engaged in business in the State of
Mississippi or have income that is generated in the State of
Mississippi.
A franchise tax is imposed and the tax rate of $2.50 per
$1,000, or fraction thereof, of the value of capital used,
invested or employed in the State of Mississippi. The
franchise tax base consists of capital stock issued and
outstanding, paid in capital, surplus, and retained earnings;
however, in no case shall the tax base be less than the
assessed value of real and tangible personal property in the
State of Mississippi. If the Company is classified as a
"holding company" then it may exclude from its franchise tax
base the stock it owns in the Savings Bank. Mississippi law
provides that the value of capital used, invested, or employed
in Mississippi by a "holding corporation" excludes that
portion of the book value of the holding corporation's
investment in stock or securities of its subsidiary
corporation determined by a formula. The formula states that
first, the ratio of (1) the holding corporation's investment
in stock or securities of its subsidiary corporation, computed
using the cost method of accounting, and (2) the holding
corporation's total assets, is computed. Second, the ratio is
then applied to the total capital stock, surplus, paid in
capital and retained earnings of the holding corporation in
order to arrive at the amount of the exclusion. For purposes
of Mississippi franchise taxes, a "holding corporation" is
defined as a corporation, (i) owning at least eighty percent
(80%) of the value and voting power of all classes of issued
and outstanding stock of a corporation, excluding non-voting
stock which is limited and preferred as to dividends, and (ii)
deriving ninety-five (95%) of its gross receipts from
dividends, interest, royalties, rents, certain services
provided to members of an affiliated group and other passive
sources of income.
An income tax is imposed in Mississippi at a rate of 3% on the
first $5,000 of taxable income, 4% on the next $5,000 of
taxable income and 5% on taxable income in excess of $10,000.
For these purposes, "taxable income" generally means federal
taxable income, subject to certain adjustments (including
exclusion of interest income on U.S. Treasury obligations).
The exclusion of income on U.S. Treasury obligations has the
effect of reducing the Mississippi taxable income of savings
institutions.
Two or more members of an affiliated group of corporations may
elect to file a consolidated Mississippi income tax return
when all the business activities of the group of affiliated
corporations included in the consolidated return are conducted
in, and are taxable solely in Mississippi. In addition, the
Commissioner of the Mississippi Tax Commission may require any
and all members of a group of affiliated corporations to file
a combined or consolidated Mississippi income tax return if he
believes such a return is necessary to clearly and equitably
reflect the Mississippi taxable income of the affiliated
group. The term "affiliated group" for Mississippi
consolidated income tax returns means one or more corporations
connected through stock ownership with a common parent
corporation where at least 80% of the voting power of all
classes of stock and at least 80% of each class of the
non-voting stock of each of the member corporations, except
the common parent corporation, is directly owned by one or
more of the other members corporations, and the common parent
directly owns stock possessing at least 80% of the voting
power of all classes of stock and at least 80% of each class
of non-voting stock of at least one of the other member
corporations.
The Company was organized in the State of Delaware, and
therefore it will be required to file a franchise tax return
with the State of Delaware. The Company will also be required
to file an income tax return in the State of Delaware if it
derives income from business activities carried on in the
State of Delaware. Currently, the Company does not have any
business activities in the State of Delaware.
Delaware law provides two methods to calculate the Delaware
Franchise Tax. One method is based on the Company's
authorized number of shares and the second method is based on
the Company's "assumed no-par capital" with respect to no par
shares and on the Company's "assumed par value capital" with
respect to par value shares. The lesser result under both
methods is then used to determine the franchise tax liability
in the State of Delaware.
Under the first method the franchise tax is calculated at a
base rate of $90 on the first 10,000 shares, plus $50.00 per
each additional 10,000 shares or part thereof.
The second method is based on "assumed no-par capital" with
respect to no-par shares and an "assumed par-value capital"
with respect to par value shares as follows:
1. The "assumed no-par capital" is the authorized number of
shares without par value multiplied by $100. The tax
on the "assumed no-par capital" is $30.00 for each
$300,000 or less and is graduated as follows: (i)
$50.00 for over $300,000 but not over $500,000;
(ii) $90.00 for over $500,000 but not over
$1,000,000; and (iii) $90 for over $1,000,000, plus
$50.00 per each additional $1,000,000 or part
thereof.
2. The tax on par value is $200 for each $1,000,000, or
fraction thereof of an "assumed par-value capital." The
"assumed par-value capital" is found as follows: (i)
ascertain average asset value per share by dividing total
gross assets by the total number of issued shares,
including shares without par value; (ii) if average asset
value is more than par value; it is multiplied by the total
number of authorized par value shares; if average assets
value is less than par value of any class of authorized
shares, such shares must be taken at their par value.
Where it is necessary to use average asset value for one
class of shares and par value of any other class or
classes, the "assumed par-value capital" is the sum of the
products of the multiplications.
If a corporation has both no-par shares and par-value shares,
the no-par shares are taxed as calculated above upon a share
basis which is added to the tax calculated above on the par
value shares.
Employees
The Savings Bank had 24 full time employees and one part-time
employee at September 30, 1996. None of the employees is
represented by a collective bargaining agreement.
ITEM 2.--DESCRIPTION OF PROPERTY
The following table sets forth information regarding the
Association's offices at September 30, 1996:
Net Book
Value at Approximate Owned
Year September 30, Square Or
Opened 1996 Footage Leased
Main Office:
333 Court Street
Tupelo, Mississippi 1969 378,502 10,000 Owned
The net book value of the Company's investment in furnishings
and equipment totaled $225,000 at September 30, 1996.
ITEM 3.--LEGAL PROCEEDINGS
From time to time, the Company is a party to various legal
proceedings incident to its business. At September 30, 1996,
there were no legal proceedings to which the Company or its
subsidiary was a party, or to which any of their property was
subject, which were expected by management to result in a
material loss.
ITEM 4.--SUBMISSION OF MATTERS TO A VOTE OF SECURITIES HOLDERS
No matters were submitted to a vote of securities holders
during the fourth quarter of fiscal 1996.
ITEM 5.--MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS
The information set forth (i) under "Dividend Restrictions" in
Item 1 of this report and (ii) in the Notes to Consolidated
Financial Statements in Item 6 of this report is incorporated
herein by reference.
The information required herein by reference from page 3 of
the Company's Annual Report to Stockholders for fiscal 1996 ("
Annual Report"), which is included herein as Exhibit 13.
The Company's common stock began trading on the NASDAQ on
March 26, 1996, under the symbol "CFTP." At September 30,
1996, there were 4,628,750 shares of the common stock
outstanding and approximately 1,082 stockholders on record.
The payment of dividends on the Common Stock is subject to
determination and declaration by the Board of Directors of the
Company. The Board of Directors has adopted a policy of
paying quarterly cash dividends on the Common Stock. In
addition, from time to time, the Board of Directors may
determine to pay special cash dividends in addition to, or in
lieu of, regular cash dividends. The payment of future
dividends will be subject to the requirements of applicable
law and the determination by the Board of Directors of the
Company that the net income, capital, and financial condition
of the Company and the Association, thrift industry trends,
and general economic conditions justify the payment of
dividends, and there can be no assurance that dividends will
be paid or, if paid, will continue to be paid in the future.
The following table sets forth information as to high and low
sales prices of the Company's common stock and cash dividends
per share of common stock for the calendar quarters indicated.
Price Per Share Dividends Per Share
High Low Regular Special
Fiscal 1996:
Second quarter 13.500 11.750 .000 .000
Third quarter 13.475 12.375 .075 .000
Fourth quarter 13.625 12.250 .075 .000
ITEM 6.--SELECTED FINANCIAL DATA
The information required herein is incorporated by reference
from page 4 of the Annual Report.
ITEM 7.--MANAGEMENTS'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS.
The information required herein is incorporated by reference
from pages 5 through 16 of the Annual Report.
ITEM 8.--FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The financial statements required herein are incorporated by
reference from pages 18 through 45 of the Annual Report.
ITEM 9.--CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
ACCOUNTING AND FINANCIAL DISCLOSURE
Not applicable.
PART III
ITEM 10.--DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS, AND
CONTROL PERSONS; COMPLIANCE WITH SECTION 16(A) OF
THE EXCHANGE ACT
Information concerning the directors and executive officers of
the Company and Transactions with Management is incorporated
herein by reference to the sections captioned "Executive
Officers Who Are Not Directors" in Item 1. of this report and
"Proposal I--Election of Directors" in the Proxy Statement.
ITEM 11.--EXECUTIVE COMPENSATION
The information required by this item is incorporated herein
by reference to the section captioned "Executive Compensation"
in the Proxy Statement.
ITEM 12.--SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT
The information required by this item is incorporated herein
by reference to the sections captioned "Voting Securities and
Security Ownership" and "Proposal I--Election of Directors" in
the Proxy Statement.
ITEM 13.--CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information required by this item is incorporated herein
by reference to the section captioned "Transactions with
Management" in the Proxy Statement.
PART IV
ITEM 14.--EXHIBITS LIST AND REPORTS ON FORM 8-K
(a) Documents filed as part of this Report
(1) The following financial statements are
incorporated by reference from item 8 hereof
(see Exhibit 13 attached hereto):
Independent Auditors's Report
Consolidated Statements of Financial Condition at
September 30, 1996 and 1995.
Consolidated Statements of Earnings for the Years
Ended September 30, 1996, 1995 and 1994.
Consolidated Statements of Changes in
Stockholders' Equity for the Years Ended
September 30, 1996, 1995, and 1994.
Consolidated Statements of Cash Flows for the
Years Ended September 30, 1996, 1995 and 1994.
Notes to Consolidated Financial Statements
(2) All Schedules for which provision is made in
the applicable accounting regulations of the
Securities and Exchange Commission are
omitted because of the absence of conditions under
which they are required or because the required
information is included in the financial
statements and related notes thereto.
(3) The following exhibits are filed as part of
this Form 10-K and this list includes the
Exhibit Index.
No. Exhibits Page
3.1 Certificate of Incorporation *
3.2 Bylaws *
4.1 Specimen Common Stock Certificate *
10.1(a) Employee Stock Ownership Plan *
13 Annual Report to Stockholders E-1
23 Consent of Independent Public
Accountants E-60
*Incorporated herein by reference to the Registration
Statement file number 33-99962 on Form S-1.
(b) Reports on Form 8-K during the quarter ended
September 30, 1996.
1. On October 30, 1996, the Company filed a current
report on Form 8-K announcing the authority to
repurchase up to 231,437 shares of common stock
and reporting its earnings and other financial
information for the quarter ended September 30,
1996.
(c) See (a)(3) above for all exhibits filed herewith and
the Exhibit Index.
(d) There are no other financial statements and financial
statements schedules which were excluded from Item 8
which are required to be included herein.
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, as of the date
indicated below:
COMMUNITY FEDERAL BANCORP, INC.
Date: December 27, 1996 By: (s)Jim Ingram
Jim Ingram
President and Chief
Executive officer
(Duly Authorized Representative)
By: (s)Sherry McCarty
Sherry McCarty
Controller
(Chief Financial and Accounting
(Officer)
(Duly Authourized Representative)
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 in the capacities
indicated below as of the date indicated above.
Date: December 26, 1996
Medford M. Leake J. Leighton Pettis
(Director) (Director)
Charles V. Imbler L. F. Sams, Jr.
(Director) (Director)
Robert R. Black, Sr. Michael R. Thomas
(Director) (Director)
Robert W. Reed, III.
(Director)
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
As independent public accountants, we hereby consent to the
incorporation by reference in this registration statement of
our report dated October 25, 1996 included in the Community
Federal Bancorp Inc.'s Form 10-K for the year ended September
30, 1996 and to all references to our Firm included in this
registration statement.
(S) Arthur Andersen
Arthur Andersen, LLP
Birmingham, Alabama
December 27, 1996
To Our Stockholders:
We are pleased to provide you with the First Annual Report of
Community Federal Bancorp, Inc. since becoming a Stock Company
as of March 25, 1996.
Net earnings for the fiscal year ended September 30, 1996,
amounted to $2.1 million, an increase of 5.4% from September
30, 1995. These earnings resulted in a 1.05% return on
assets.
Legislation was passed in 1996 to recapitalize the Savings
Association Insurance Fund ("SAIF") with a one time
assessment. This was a cost to Community Federal of $863,000
, $535,000 net of tax benefit, thus our earnings would have
been approximately $2.6 million without this assessment.
This action will have a positive effect on our future earnings
by reducing our SAIF premium by seventeen (17) basis points.
Stockholders' Equity as of September 30, 1996 was $67.1
million, an increase of 186.6% over September 30, 1995. This
growth was primarily due to the infusion of capital from our
successful stock conversion. Total assets increased during
the fiscal year 25.9% to $204 million, of which 25.6% of the
increase was due to the conversion.
Your Company is well capitalized and profitable. We look to
the future with optimism and a determination to serve this
area with personal service and dedication.
We appreciate your investment in this Company and ask for your
continued support.
Jim Ingram
Community Federal Bancorp, Inc.
President and Chief Executive Officer
COMMUNITY FEDERAL BANCORP, INC.
Community Federal Bancorp, Inc. (the "Company") was
incorporated at the direction of management of Community
Federal Savings Bank (the "Bank") for the purpose of serving
as a savings institution holding company of the Bank upon the
acquisition of all of the capital stock issued by the Bank
upon its conversion from mutual to stock form (the
"Conversion") effective March 25, 1996. The Company is
classified as a unitary savings institution holding company
and is subject to regulation by the Office of Thrift
Supervision ("OTS").
The Bank was organized in 1933 as a federally chartered mutual
savings and loan association, at which time it also became a
member of the Federal Home Loan Bank ("FHLB") System and
obtained federal deposit insurance. The Bank currently
operates through its banking office located in Tupelo,
Mississippi. At September 30, 1996, the Bank had total assets
of $204.0 million, deposits of $131.7 million, and
stockholders' equity of $67.1 million, or 32.9% of total
assets.
The Bank's business strategy has been to operate as a
profitable and independent community-oriented savings
institution dedicated to providing quality customer service.
Generally, the Bank has sought to implement this strategy by
using retail deposits as its sources of funds and maintaining
most of its assets in mortgage-backed securities issued by the
Federal Home Loan Mortgage Corporation ("FHLMC"), the
Government National Mortgage Association ("GNMA") and the
Federal National Mortgage Association ("FNMA"), loans secured
by owner-occupied one-to-four-family residential real estate
located in Lee County, Mississippi and portions of the surrounding
counties,(" the Bank's market area"), U.S. government and agency
securities, interest-earning deposits, cash and equivalents
and consumer loans. The Bank's business strategy incorporates
the following key elements: (1) remaining a
community-oriented financial institution while maintaining a
strong core customer base by providing quality service and
offering customers the access to senior management and
services that a community-based institution can offer; (2)
attracting a relatively strong retail deposit base from the
communities served by the Bank's banking offices; (3)
maintaining asset quality by emphasizing investment in local
residential mortgage loans, mortgage-backed securities, and
other securities issued or guaranteed by the U.S. government
or agencies thereof; and (4) maintaining liquidity and capital
substantially in excess of regulatory requirements.
As a federally chartered savings institution, the Bank is
subject to extensive regulation by the OTS. The lending
activities and other investments of the Bank must comply with
various federal regulatory requirements, and the OTS
periodically examines the Bank for compliance with various
regulatory requirements. The Federal Deposit Insurance
Company ("FDIC") also has the authority to conduct special
examinations. The Bank must file reports with OTS describing
its activities and financial condition and is also subject to
certain reserve requirements promulgated by the Board of
Governors of the Federal Reserve System ("Federal Reserve
Board").
MARKET FOR COMMON STOCK
AND RELATED STOCKHOLDER MATTERS
The Company's common stock began trading on the NASDAQ on
March 26, 1996, under the symbol "CFTP." At September 30,
1996, there were 4,628,750 shares of the common stock
outstanding and approximately 1082 stockholders of record.
The payment of dividends on the Common Stock is subject to
determination and declaration by the Board of Directors of the
Company. The Board of Directors has adopted a policy of
paying quarterly cash dividends on the Common Stock. In
addition, from time to time, the Board of Directors may
determine to pay special cash dividends in addition to, or in
lieu of, regular cash dividends. The payment of future
dividends will be subject to the requirements of applicable
law and the determination by the board of Directors of the
Company that the net income, capital, and financial condition
of the Company and the Association, thrift industry trends,
and general economic conditions justify the payment of
dividends, and there can be no assurance that dividends will
be paid, or, if paid, will continue to be paid in the future.
The following table sets forth information as to high and low
sales prices of the Company's common stock and cash dividends
per share of common stock for the calendar quarters indicated.
Price Per Share Dividends Per Share
High Low Regular Special
Fiscal 1996:
Second quarter $13.500 $11.750 $.000 $.000
Third quarter $13.475 $12.375 $.075 $.000
Fourth quarter $13.625 $12.250 $.075 $.000
SELECTED CONSOLIDATED FINANCIAL AND OTHER DATA
<TABLE>
<CAPTION>
Year Ended September 30,
1996 1995 1994 1993 1992
(In thousands)
<S> <C> <C> <C> <C> <C>
INCOME STATEMENT DATA:
Total interest income $13,150 $11,016 $10,011 $10,275 $11,154
Total interest expense 6,950 6,267 6,438 5,312 6,701
Net interest income 6,200 4,749 3,573 4,963 4,453
Provision for loan losses 20 30 25 100 190
Net interest income
after provision for
loan losses 6,180 4,719 3,548 4,863 4,263
Noninterest income 188 132 752 133 173
Noninterest expense 3,036 1,672 1,840 1,508 1,248
Income before income taxes 3,332 3,179 2,460 3,488 3,188
Provision for income taxes 1,184 1,144 1,012 1,171 1,060
Cumulative effect of change
in accounting principle 0 0 131 0 0
Net income $ 2,148 $ 2,035 $ 1,317 $ 2,317 $ 2,128
Earnings per share (1) $.27 N/A N/A N/A N/A
</TABLE>
<TABLE>
<CAPTION>
At September 30,
1996 1995 1994 1993 1992
(In thousands)
<S> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Total assets $204,017 $162,042 $154,600 $147,909 $141,799
Loans receivable, net 117,631 97,988 84,269 84,429 84,657
Mortgage-backed and
related securities 50,974 31,071 33,755 29,043 28,537
Securities 28,893 27,890 30,146 15,615 10,429
Deposits 131,740 134,555 131,989 129,035 125,507
Stockholders' equity 67,139 23,427 20,394 17,650 15,200
Year Ended June 30,
1996 1995 1994 1993 1992
(In thousands)
KEY OPERATING DATA:
Return on average
assets 1.1% 1.3% 0.9% 1.6% 1.6%
Return on average
equity 4.4 9.4 7.0 14.0 15.0
Average equity to
average assets 26.2 13.6 12.4 11.1 10.4
Dividend payout
ratio (1) 57.9 N/A N/A N/A N/A
Number of offices 1 1 1 1 1
</TABLE>
(1) Earnings per share and dividend payout ratio are
presented from the conversion date, March 25, 1996.
ITEM 5.--MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
General
As is the case with most savings institutions, the
profitability of the Savings Bank depends primarily on its net
interest income, which is the difference between interest and
dividend income on interest-earning assets, principally loans,
mortgage-backed securities and investment securities, and
interest expense on interest-bearing deposits. The Savings
Bank's net earnings also is dependent, to a lesser extent, on
the level of provision for loan losses, its non-interest
income and non-interest expenses, such as compensation and
benefits, occupancy and equipment, deposit insurance premiums,
and miscellaneous other expenses, as well as provisions for
federal and state income tax.
Business Strategy
The Company's goal is to continue to serve its Primary Market
Area as an independent, consumer-oriented financial
institution dedicated to financing home ownership and
providing needed financial services to its customers in an
efficient manner. The principal components of its business
strategy are discussed below.
Emphasis on Traditional Lending in its Primary Market Area.
The Savings Bank is a traditional savings bank operating in
northeastern Mississippi. The Savings Bank's primary lending
emphasis has been the origination for portfolio of one-to-four
family residential first mortgage loans. The Savings Bank
generally limits its lending activities to its Primary Market
Area. The Savings Bank believes that it has a substantial
market share in Lee County and competitive market shares in
the other counties in which it operates, both with respect to
deposits and first mortgage loans. In order to offer a
broader array of loan products to its customers, in fiscal
1995 the Savings Bank began to originate automobile and
commercial loans.
Interest Rate Risk Management. The Savings Bank has actively
sought to reduce vulnerability of its operations to changes in
interest rates by managing the imbalance between its
interest-earning assets and interest-bearing liabilities with
shorter-term and more liquid securities and other investments.
To achieve this goal, the Savings Bank has invested new funds
from deposit growth and earnings and funds from repayments of
loans and securities into mortgage-backed securities and
collateralized mortgage obligations ("CMO") and government-related
securities with a maturity or average life of five years or
less. Moreover, the automobile and commercial loans that the
Savings Bank began to originate in fiscal 1995 will add
additional shorter-term loans that will be held in the Savings
Bank's loan portfolio.
Maintain Asset Quality. Management believes that high asset
quality is a key to long-term financial success. As a result,
the loans which are emphasized by the Savings Bank and its
related policies and practices are intended to maintain a high
level of asset quality and reduced credit risk. At
September 30, 1996, the Savings Bank's non-performing assets,
which consist of non-accrual loans, accruing loans greater
than 90 days delinquent and real estate acquired through
foreclosure or by deed-in-lieu thereof, amounted to $717,000
or 0.35% of the Savings Bank's total assets.
High Levels of Regulatory Capital and Moderate Growth. The
Savings Bank seeks to maintain high levels of regulatory
capital to give it maximum flexibility in the changing
regulatory environment and to respond to changes in the market
and economic conditions. These levels of capital have been
achieved through the conversion and consistent earnings
enhanced by low levels of non-interest expenses at the Savings
Bank's single office and have been maintained at those high
levels as a result of its policies of moderate growth
generally confined to its Primary Market Area. At
September 30, 1996, the Savings Bank's tangible, core and
risk-based capital ratios amounted to 22.8%, 22.8%, and 50.8%,
respectively, which exceeded the minimum requirements of 1.5%,
3.0%, and 8.0%, respectively.
Low Non-Interest Expense. The Savings Bank's non-interest
expenses were 1.6% of average total assets for the fiscal year
ended September 30, 1996 and have averaged approximately 1.1%
of average total assets annually for each of the five fiscal
years in the period ended September 30, 1996. A principal
factor in the Savings Bank's low-level of non-interest
expenses is its single office operation.
Asset/Liability Management
The ability to maximize net interest income is largely
dependent upon the achievement of a positive interest rate
spread that can be sustained during fluctuations in prevailing
interest rates. Interest rate sensitivity is a measure of the
difference between amounts of interest-earning assets and
interest-bearing liabilities which either reprice or mature
within a given period of time. The difference, or the
interest rate repricing "gap," provides an indication of the
extent to which an institution's interest rate spread will be
affected by changes in interest rates. A gap is considered
positive when the amount of interest-rate sensitive assets
exceeds the amount of interest-rate sensitive liabilities, and
is considered negative when the amount of interest-rate
sensitive liabilities exceeds the amount of interest-rate
sensitive assets maturing or repricing within a given period.
Generally, during a period of rising interest rates, a
negative gap within shorter maturities would adversely affect
net interest income, while a positive gap within shorter
maturities would result in an increase in net interest income,
and during a period of falling interest rates, a negative gap
within shorter maturities would result in an increase in net
interest income while a positive gap within shorter maturities
would have the opposite effect.
The lending activities of savings associations have
historically emphasized long-term, fixed-rate loans secured by
one-to-four family residences, and the primary source of funds
of such institutions has been deposits. The deposit accounts
of savings associations generally bear interest rates that
reflect market rates and largely mature or are subject to
repricing within a short period of time. This factor, in
combination with substantial investments in long-term,
fixed-rate loans, has historically caused the income earned by
savings associations on their loan portfolios to adjust more
slowly to changes in interest rates than their cost of funds.
In addition, during the 1980s, the Savings Bank sold a small
percentage of the mortgage loans it originated to FNMA but
retained the servicing on such loans. The Savings Bank no
longer actively sells loans with servicing rights retained.
As a result, the servicing portfolio has decreased from $5.7
million at September 30, 1993 to $2.2 million at September 30,
1996 due to principal repayments. See Note 5 of the Notes to
Financial Statements.
The Savings Bank originates both fixed- and adjustable-rate
residential real estate loans as market conditions dictate.
In the current interest rate environment, it generally offers
fixed-rate loans up to a 15-year term and adjustable-rate
loans with a maximum term of 30 years. All of the
adjustable-rate loans in the Savings Bank's loan portfolio are
indexed to the National Average Mortgage Rate Index, published
by the FHLB System monthly and are adjusted on an annual basis
after an initial fixed-rate period of up to three years.
While the Savings Bank does not currently sell any of its
adjustable-rate one-to-four family residential loans, a
substantial portion of such loans in the Savings Bank's
portfolio would qualify for sale and securitization under
FHLMC, FNMA, and Government National Mortgage Association
("GNMA") guidelines. At September 30, 1996, $45.6 million or
44.8% of the Savings Bank's loans, before net items, were
fixed-rate one-to-four family residential mortgages, and $56.4
million or 55.2% were adjustable-rate one-to-four family
residential first mortgage loans. All of these adjustable
loans have interest rates that adjust annually after an
initial fixed-rate period of up to three years with a
substantial majority first adjusting two years after
origination.
As market demand for adjustable-rate mortgage loans has
decreased, the Savings Bank has combined origination of
shorter-term fixed-rate loans and one-year adjustable loans
with the purchase of low-risk CMOs and government-related
securities with a maturity or average life of five years or
less or with adjustable rates and investment in mutual funds.
All of the Savings Bank's CMOs are backed by U.S. government
securities and are first-tranche CMO investments to minimize
risk. The Savings Bank's mutual fund portfolio consists of
funds backed by short-term U.S. government securities and
adjustable-rate loans secured by one-to-four family
residences. In addition, during fiscal 1996 and 1995,
respectively, $1,307,000 and $845,000 of the Savings Bank's
automobile loans were originated by the Savings Bank.
Previously, during fiscal 1994, 1993, and 1992 the Savings
Bank purchased a total of $2.9 million of automobile loans
with contractual terms ranging from one to four years. During
fiscal 1995, the Savings Bank also began to originate one to four
family residential short-term Balloon mortgages, one to four family
residential bridge loans and commercial loans. Emphasis on shorter
term and adjustable-rate loans and shorter term securities helps the
Savings Bank limit its exposure to rising interest rates.
The Savings Bank anticipates continuing to follow this policy
of investing in shorter-term securities and loans for as long
as long-term interest rates remain at their current level or
lower and will reevaluate it if there is a material and
prolonged rise in interest rates. Notwithstanding the
foregoing, however, because the Savings Bank's
interest-bearing liabilities which mature or reprice within
short periods exceed its earning assets with similar
characteristics, material and prolonged increases in interest
rates generally would adversely affect net interest income,
while material and prolonged decreases in interest rates
generally, but to a lesser extent because of their
historically low levels, would have a positive effect on net
interest income.
At June 30, 1996, based on the most recent available
information provided by the OTS, it was estimated, on an
unaudited basis, that the Bank's net portfolio value ("NPV")
(the net present value of the Bank's cash flows from assets,
liabilities, and off-balance sheet items) would decrease 6%,
12%, 21%, and 29% and increase 5%, 10%, 12%, and 15% in the
event of 1%, 2%, 3%, and 4% increases and decreases in market
interest rates, respectively. These calculations indicate
that the Bank's NPV could be adversely affected by increases
in interest rates but could be favorably affected by decreases
in interest rates. Computations of prospective effects of
hypothetical interest rate changes are based on numerous
assumptions, including relative levels of market interest
rates, prepayments, and deposit run-offs and should not be
relied upon as indicative of actual results. Certain
shortcomings are inherent in such computations. In order to
mitigate its interest rate risk, the Bank maintains
substantial capital levels that management believes are
sufficient to sustain unfavorable movements in market interest
rates.
The OTS uses the NPV calculation to monitor institutions' interest rate
risk exposure ("IRR"). The OTS has promulgated regulations regarding
a required adjustment to an institution's risk-based capital based on
IRR. The application of the OTS' methodology quantifies IRR
as the change in the NPV which results from a theoretical 200
basis point increase or decrease in market interest rates. If
the NPV from either calculation would decrease by more than 2%
of the present value of the institution's assets, the
institution must deduct 50% of the amount of the decrease in
excess of such 2% in the calculation of risk-based capital.
The IRR regulations were originally effective as of January 1,
1994, subject to a two quarter "lag" time between the
reporting date of the data used to calculate an institution's
interest rate risk and the effective date of each quarter's
interest rate risk component. However, the Director of the
OTS indicated that it would waive the capital deductions for
institutions with a greater than "normal" risk until the OTS
publishes an appeals process. If implemented, the Savings
Bank would still have exceeded the regulatory requirement.
Changes in Financial Condition
At September 30, 1996, the Company's assets totaled $204.0
million, as compared to $162.0 million at September 30, 1995.
Total assets increased by $42.0 million, or 25.9%, from
September 30, 1995 to September 30, 1996. The increase in
total assets during this period was principally funded through
$41.4 million in net proceeds from the stock offering.
The increase in total assets at September 30, 1996 was due
primarily to a $19.6 million, or 20.0% increase in the Savings
Bank's loans receivable, net and a $20.6 million, or 35.5%
increase in securities. The $19.6 million increases were the
result of the Company's election to invest a substantial
portion of its new and excess funds into loans, especially
one-to-four family residential, construction and consumer
loans and securities.
During the fiscal year ended September 30, 1996, total
deposits decreased by $2.8 million, or 2.1%, to $131.7
million. This decrease was the results of withdrawals from
deposit accounts maintained with the Savings Bank for payment
of The Company's common stock during the stock offering.
Primarily, as a result ofthe stock offering
and an increase in unrealized gain on securities available for sale,
net of deferred taxes, of $642,000, the Company's equity
increased by $43.7 million to $67.1 million at September 30,
1996 compared to $23.4 million at September 30, 1995.
Results of Operations for the Years Ended September 30, 1996,
1995, and 1994
The Company had net income of $2.1 million for the year ended
September 30, 1996 compared to net income of $2.0 million for
fiscal 1995. The $100,000 increase in net income represented
a 4.9% increase over fiscal 1995. Net income for fiscal 1996 was
materially affected by a one time special assessment to recapitalize
the Savings Association Insurance Fund ("SAIF"). Net Income would
have been approximately $2.6 million for the year ended September 30,
1996, a $600,000 or 29.5% increase over fiscal year ended September 30,
1995, had the Bank not paid $863,000, $535,000 net of taxes benefit,
for this one time assessment. The Company's net income of
$2.0 million for the fiscal year ended September 30, 1995
represented an increase of $700,000 or 54% over fiscal 1994.
Net income for fiscal 1994 was materially affected by three
one-time events: (1) the $1.2 million special interest
payment, (2) the $382,000 stock offering expense, and (3) a
$744,000 gain on the sale of FHLMC stock from the Company's
available for sale portfolio sold to partially fund the
special interest payment. But for these events, the Company's
net income for fiscal 1994 would have been $1.8 million and
net income for fiscal 1995 would have increased by
approximately $200,000 or 15.4% as compared to fiscal 1994.
Net Interest Income. The Company's net interest income is
determined by its interest rate spread (i.e., the difference
between the yields earned on its interest-earning assets and
the rates paid on its interest-bearing liabilities) and the
relative amounts of interest-earning assets and
interest-bearing liabilities.
Total interest income increased by $2.1 million, or 19.4%, in
the fiscal year ended September 30, 1996 compared to fiscal
1995. The increase was due primarily to a $1.5 million or 21.6%
increase in interest and fees on loans receivable as the average
balance increased by $13.6 million or 15.0% and the average
interest rate earned on loans increased 0.44% to 8.20%. Interest
income and dividends on securities held to maturity and securities
available for sale (including, mortgage backed securities, CMO,
Mutual Funds, and government-related securities) increased $320,000
or 8.5% resulting from an increase in the average balance of $9.0
million or 15.5%, while the average yield decreased from 6.35% to
5.96%. Interest income from other interes earning assets increased
$244,000 or 110.0% as the average balance increased $5.1 million
while the average yield declined form 5.33% to 5.03%.
Total interest income increased by $1.0 million, or 10.0%, for
the fiscal year ended September 30, 1995 compared to the
fiscal year ended September 30, 1994. This increase was due
primarily to a $588,000, or 9.1%, increase in interest and
fees on loans as the average balance increased by $7.6 million
or 9.1% while the average interest rate earned on loans
remained 7.76%. Interest income on mortgage-backed and
related securities (including collateralized mortgage
obligations) increased $143,000 or 7.3%, primarily resulting
from an increase in the average yield from 5.63% to 6.45%.
Interest income and dividends on securities (including mutual
funds and mortgage-backed securities available for sale)
increased by $460,000 or 38.2% for fiscal year 1995 compared
to fiscal year 1994 as the average balance increased by $5.1
million or 23.7% and the average yield increased to 6.22% from
5.57%. Interest income from other interest-earning assets
fell $185,000, or 45.6%, to $221,000 for 1995 as a result of a
62.5% decline in the average balance to $4.1 million.
Total interest expense increased by $682,000, or 10.9%, in
fiscal year ended September 1996 compared to fiscal year ended
September 30, 1995. Such increase was primarily the result of a
a 50 basis point (1.0% equaling 100 basis points)
increase in the average rate paid on interest bearing
liabilities in response to market conditions. The increase of
$2.2 million on average balance of deposits was offset by the
decrease of $2 million in average balance of FHLB advances that
the Savings Bank obtained from FHLB of Dallas in fiscal year 1995.
Interest expense on deposits and borrowings decreased by $171,000,
or 2.7%, during the fiscal year ended September 1995 compared to
fiscal 1994. Such decrease was due primarily to a decrease in
interest paid on deposits, as a result of 22 basis point decrease
in the average rate paid. The decrease in interest paid on deposits
was partially offset by the $148,000 o finterest paid on FHLB
advances that the Savings Bank obtained from the FHLB of Dallas
during fiscal 1995. The Savings Bank borrowed from the FHLB of
Dallas to meet short-term liquidity needs at interest rate that
were lower than funds then available in its traditional deposit
market.
The Savings Bank's net interest income increased by $1.5
million, or 30.6%, in fiscal 1996 compared to fiscal 1995.
The Savings Bank's interest rate spread was 2.04% in fiscal
1996 as compared to 2.49% in fiscal 1995. The changes in the
interest rate spread during the period were primarily the
result of a slightly increasing interest rate environment in
which the Savings Bank's interest-earning assets increased
less rapidly than interest-bearing liabilities.
As a result of the foregoing, the Savings Bank's net interest
income increased by $1.2 million, or 32.9%, during the fiscal
year ended September 30, 1995 compared to fiscal 1994. The
Savings Bank's interest rate spread was 2.49% for the fiscal
year ended September 30, 1995 compared to 1.81% for the fiscal
year ended September 30, 1994. However, but for the special
interest payment in fiscal 1994, net interest income would
have been $4.8 million and the interest rate spread for fiscal
1994 would have been 2.74%.
Provision for Loan Losses. The Savings Bank's provision for
loan losses was $20,000 during the fiscal year ended
September 30, 1996 compared to $30,000 and $25,000 during
fiscal 1995 and 1994, respectively. Provisions for loan
losses are charged to earnings to bring the total allowance to
a level deemed appropriate by management based on the volume
and type of lending conducted by the Savings Bank. Provisions
in fiscal 1995 and 1996 were made in order to adjust the
allowance for the increased volume of mortgage loans as well
as the expansion of consumer and commercial lending.
Commercial and consumer loans traditionally have a higher rate
of default and are secured by collateral that often
depreciates or is less liquid than the real estate securing
mortgage loan.
The Savings Bank's methodology for evaluating the adequacy of
its allowance for loan losses, which conforms with GAAP,
considers collateral valuation, changes in the loan portfolio
mix and certain economic indicators, causing it to be a
leading indicator of inherent risk in the loan portfolio.
Accordingly, it is not necessarily reflective of past trends
in charge-offs and other factors. The methodology
incorporates economic indicators such as growth in personal
income and unemployment rates as well as other economic
indicators affecting the Savings Bank's market area and
considers higher risk loan groups, including growth in the
Savings Bank's consumer and multi-family and non-residential
loan portfolios.
Non-Interest Income. Non-interest income was $188,000 in
fiscal 1996, an increase of $56,000, or 42.4%, compared to
non-interest income of $132,000 in fiscal 1995. The primary
difference in non-interest income between fiscal 1996 and
fiscal 1995 was the $55,000 net gain on the sale of securities
in fiscal 1996 compared to a $0 net gain on the sale of
securities in fiscal 1995. Non-interest income amounted to
$132,000 for the fiscal year ended September 30, 1995 compared
to $752,000 for fiscal 1994. The decrease was due primarily
to a $646,000 decrease in net gains on sales of securities.
The gains on sales of securities in fiscal 1994 were primarily
the result of the sale of FHLMC stock from the Savings Bank's
available for sale portfolio that was sold in order to
partially fund the special interest payment.
Non-Interest Expenses. The primary reasons for the increase
in non-interest expenses in fiscal 1996 compared to fiscal
1995 were the $863,000 one-time special assessment of 65.7
basis points on SAIF insured deposits as of March 31, 1995 and
the $314,000 increase in compensation and benefits which
resulted from increased personnel, merit raises, and $220,000
in ESOP expense which was new in fiscal 1996. Non-interest
expenses amounted to $1.7 million during the fiscal year ended
September 30, 1995, a $168,000, or 9.1%, decrease over the
$1.8 million of non-interest expenses during the year ended
September 30, 1994. Non-interest expenses during the year
ended September 30, 1994 exceeded non-interest expenses in
fiscal 1993 by $332,000 or 22.0%. The primary reason for the
decrease in non-interest expenses in fiscal 1995 compared to
fiscal 1994 was the decrease of $339,000 or 45.4% in other
expenses which were partially offset by an increase of
$145,000 or 20.9% in compensation and benefits. Other
expenses decreased substantially in fiscal 1995 compared to
fiscal 1994 because of the $382,000 stock offering expense
incurred in fiscal 1994. The primary reasons for the 1995
increase in the compensation and benefits expense were a
modification in the formula used to calculate annual bonus
payments from 7% to 15% of total salaries and the addition of
two employees including Vice President Mark Burleson to head
the consumer and commercial lending department.
Income Taxes. The provision for income taxes was $1.2
million, $1.1 million, and $1.0 million in fiscal 1996, 1995,
and 1994, respectively. The changes in such respective
amounts primarily reflect the fluctuations in levels of income
before income taxes of the Company during those fiscal years
of $3.3 million, $3.2 million, and $2.5 million, respectively.
See Note 10 of the Notes to Consolidated Financial Statements.
Liquidity and Capital Resources
The Savings Bank is required under applicable federal
regulations to maintain specified levels of "liquid"
investments in qualifying types of United States Government,
federal agency, and other investments having maturities of
five years or less. Current OTS regulations require that a
savings association maintain liquid assets of not less than 5%
of its average daily balance of net withdrawable deposit
accounts and borrowings payable in one year or less, of which
short-term liquid assets must consist of not less than 1%.
Monetary penalties may be imposed for failure to meet
applicable liquidity requirements. At September 30, 1996, the
Savings Bank's liquidity, as measured for regulatory purposes,
was in excess of the minimum OTS requirement.
Cash was generated by the Savings Bank's operating activities
during the years ended September 30, 1996, 1995, and 1994,
primarily as a result of net income. The adjustments to
reconcile net income to cash provided by operating activities
during the periods presented consisted primarily of
amortization of premiums and discounts, proceeds from the sale
of loans, and increases or decreases in interest and dividends
receivable, prepaid income taxes, accrued interest payable,
and accrued expenses and other liabilities. The primary
investing activity of the Savings Bank is lending, which is
funded with cash provided by operations, as well as principal
collections and maturities of interest-bearing deposits in
banks. For additional information about cash flows from the
Savings Bank's operating, financing, and investing activities,
see the Statements of Cash Flows included in the Consolidated
Financial Statements.
At September 30, 1996, the Savings Bank had outstanding $2.1
million in commitments to originate loans and $1.4 million in
commitments under unadvanced construction loans. At the same
date, the total amount of certificates of deposit which are
scheduled to mature by September 30, 1997 was $88.4 million.
The Savings Bank believes that it has adequate resources to
fund commitments as they arise and that it can adjust the rate
on savings certificates to retain deposits in changing
interest rate environments. If the Savings Bank requires
funds beyond its internal funding capabilities, advances from
the FHLB of Dallas are available as an additional source of
funds.
The Savings Bank is required to maintain specified amounts of
capital pursuant to OTS regulations. The capital standards
generally require the maintenance of regulatory capital
sufficient to meet a tangible capital requirement, a core
capital requirement, and a risk-based requirement. At
September 30, 1996, the Savings Bank's tangible and core
capital totaled $41.8 million, or 22.8% of adjusted total
assets, which exceeded the respective minimum requirements at
that date by approximately $39.1 million and $36.3 million,
respectively, or 21.3% and 19.8% of total assets,
respectively. The Savings Bank's risk-based capital totaled
$42.4 million at September 30, 1996, or 50.8% of risk-weighted
assets, which exceeded the current requirement of 8.0% by
approximately $35.7 million, or 42.8% of risk-weighted assets.
Pending Accounting Pronouncements
In March 1995, the Financial Accounting Standards Board
("FASB") issued SFAS No. 121, Accounting for the Impairment of
Long-Lived Assets and for Long-Lived Assets to Be Disposed of.
SFAS No. 121 establishes accounting standards for the
impairment and disposal of long-lived assets and certain
identifiable intangibles. It requires that such assets be
reviewed for impairment whenever events or changes in
circumstances indicate that the carrying amount of an asset
may not be recoverable. If the review for recoverability,
based on undiscounted expected future cash flows, indicates
that impairment exists, the loss should be measured based on
the fair value of the asset. The Company adopted SFAS
No. 121, as was required, effective October 1, 1996, with no
significant impact on the Company's financial position or on
the results of its operations as long-lived assets are not
significant.
In May 1995, the FASB issued SFAS No. 122, Accounting for
Mortgage Servicing Rights, an amendment to SFAS No. 65. This
statement eliminates the accounting distinction between rights
to service mortgage loans for others that are acquired through
loan origination activities and those acquired through
purchase transactions. The Company adopted SFAS No. 122, as
was required, effective October 1, 1996 with no impact on the
financial statements as the Company is not currently
participating in the sale or securitization of any loans in
its loan portfolio.
In October 1995, the FASB issued SFAS No. 123, Accounting for
Stock-Based Compensation. SFAS No. 123 established a fair
value based method for accounting for stock based compensation
plans but still granted entities the option of accounting for
stock based compensation plans under the provisions of APB
Opinion No. 25 if they provide disclosures required by SFAS
No. 123. The Company adopted the provisions of this Standard,
as was required, effective October 1, 1996, and elected to
account for these plans under the provisions of APB No. 25 and
will provide the required disclosures in future periods.
In June 1996, the FASB issued SFAS No. 125, Accounting for
Transfers and Servicing of Financial Assets and
Extinguishments of Liabilities. SFAS No. 125 provides
accounting and reporting standards for transfers and servicing
of financial assets and extinguishments of liabilities based
on consistent application of a financial-components approach
that focuses on control. Under that approach, after a
transfer of financial assets, an entity recognizes the
financial and servicing assets it controls and the liabilities
it has incurred, derecognizes financial assets when control
has been surrendered, and derecognizes liabilities when
extinguished.
This statement is effective for transfers and servicing of
financial assets and extinguishments of liabilities occurring
after December 31, 1996, and is to be applied prospectively.
Earlier or retroactive application is not permitted.
The Company will adopt the provisions of the Standard on
January 1, 1997. Based on the Company's current operating
activities, management does not believe that the adoption of
this statement will have a material impact on the Company's
financial condition or results of operations.
Impact of Inflation and Changing Prices
The financial statements and related financial data presented
herein have been prepared in accordance with GAAP, which
requires the measurement of financial position and operating
results in terms of historical dollars, without considering
changes in relative purchasing power over time due to
inflation.
Unlike most industrial companies, virtually all of the Savings
Bank's assets and liabilities are monetary in nature. As a
result, interest rates generally have a more significant
impact on a financial institution's performance than does the
effect of inflation.
Average Balance, Interest, and Average Yields and Rates
The following table sets forth certain information relating to
the Company's average interest-earning assets and
interest-bearing liabilities and reflects the average yield on
assets and the average cost of liabilities for the periods and
at the date indicated. Such yields and costs are derived by
dividing income or expense by the average monthly balance of
assets or liabilities, respectively, for the periods
indicated.
The table also presents information for the periods indicated
and at September 30, 1996 with respect to the difference
between the weighted average yield earned on interest-earning
assets and the weighted average rate paid on interest-bearing
liabilities, or "interest rate spread," which savings
institutions have traditionally used as an indicator of
profitability. Another indicator of an institution's net
interest income is its "net yield on interest-earning assets."
which is its net interest income divided by the average
balance of interest-earning assets. Net interest income is
affected by the interest rate spread and by the relative
amounts of interest-earning assets and interest-bearing
liabilities. When interest-earning assets approximate or
exceed interest-bearing liabilities, any positive interest
rate spread will generate net interest income.
<TABLE>
<CAPTION>
As of Year Ended September 30,
September 30, 1996
1996
Weighted Average Yield/
Yield/Rate Balance Interest Rate
(Dollars in thousands)
<S> <C> <C> <C> <C>
Interest-earning
assets:
Loans receivable,
net 7.83 104,425 8,563 8.20
Mortgage-backed
and related
securities (1) 6.57 41,171 2,658 6.46
Securities (2) 6.08 27,167 1,416 5.21
Other interest-
earning assets (3 4.00 9,242 465 5.03
Total interest-
earning assets 7.25 182,005 13,102 7.20
Non-interest-earning
assets: 5,214
Total assets 187,219
Interest-bearing
liabilities:
Transaction accounts 2.99 26,507 621 2.79
Certificates of
deposit 5.41 107,848 6,309 5.84
Borrowings 0.00 250 19 7.60
Total interest-bearing
liabilities 5.08 134,605 6,949 5.16
Non-interest-bearing
liabilities 3,531
Total liabilities 138,136
Equity 49,083
Total liabilities and
equity 187,219
Net interest income;
interest rate
spread 2.17 6,153 2.04
Net interest
margin (4) 3.38
Average interest-earning
assets to average
interest-bearing
liabilities 135.21
<CAPTION>
Year Ended September 30,
1995
Average Yield/
Balance Interest Rate
<S> <C> <C> <C>
Interest-earning assets:
Loans receivable, net $ 90,778 $ 7,041 7.76%
Mortgage-backed and related securities (1) 32,422 2,092 6.45
Securities (2) 26,721 1,662 6.22
Other interest-earning assets (3) 4,149 221 5.33
Total interest-earning assets $154,070 $11,016 7.15
Non-interest-earning assets 5,288
Total assets $159,358
Interest-bearing liabilities:
Transaction accounts $ 19,823 $ 549 2.77
Certificates of deposit 112,278 5,570 4.96
Borrowings 2,333 148 6.34
Total interest-bearing liabilities $134,434 $ 6,267 4.66
Non-interest-bearing liabilities 3,209
Total liabilities $137,643
Equity 21,715
Total liabilities and equity $159,358
Net interest income; interest rate spread $ 4,749 2.49%
Net interest margin (4) 3.08%
Average interest-earning assets to average
interest-bearing liabilities 114.61%
<CAPTION>
Year Ended September 30,
1994 (5)
Average Yield/
Balance Interest Rate
<S> <C> <C> <C>
Interest-earning assets:
Loans receivable, net $ 83,178 $ 6,453 7.76%
Mortgage-backed and related secruties (1) 34,585 1,948 5.63
Securities (2) 21,598 1,203 5.57
Other interest-earning assets (3) 11,050 406 3.67
Total interest-earning assets $150,411 $10,011 6.66%
Non-interest-earning assets 2,601
Total assets $153,012
Interest-bearning liabilities:
Transaction accounts $ 26,179 $ 925 3.53%
Certificates of deposit 106,357 5,513 5.18
Borrowings 0 0 0
Total interest-bearing liabilities $132,536 $ 6,438 4.85%
Non-interest-bearing liabilities 1,527
Total liabilities $134,063
Equity: 18,949
Total liabilities and equity $153,012
Net interest income; interest rate spread $ 3,573 1.81%
Net interest margin (4) 2.37%
Average interest-earning assets to average
interest-bearing liabilities 113.49%
</TABLE>
(1) Consists of mortgage-backed and related securities
available for sale and held to maturity.
(2) Consists of securities available for sale and securities
held to maturity.
(3) Consists primarily of interest-bearing deposits.
(4) Net interest margin is net interest income divided by
average interest-earning assets.
(5) Interest expense on deposits, net interest income,
interest rate spread and the net interest margin were
adversely affected by the $1.2 million special
interest payment.
Rate/Volume Analysis
The following table describes the extent to which changes in
interest rates and changes in volume of interest-related
assets and liabilities have affected Community's interest
income and expense during the periods indicated. For each
category of interest-earning assets and interest-bearing
liabilities, information is provided on changes attributable
to (i) changes in volume (change in volume multiplied by prior
year rate), (ii) changes in rate (change in rate multiplied by
prior year volume), and (iii) total change in rate and volume.
The combined effect of changes in both rate and volume has
been allocated proportionately to the change due to rate and
the change due to volume.
<TABLE>
<CAPTION>
1996 Compared to 1995 1995 Compared to 1994
Inc Inc
Inc (Dec) Total Inc (Dec) Total
(Dec) Due to Inc (Dec) Due to Inc
Due to Vol (Dec) Due to Vol (Dec)
Rate Rate
(In Thousands)
<S> <C> <C> <C> <C> <C> <C>
Interest-Earning
Assets:
Loans 464 1,106 1,570 0 588 588
Mortgage-backed
and related
securities(1) 1 565 566 252 (108) 144
Securities (2) (274) 28 (246) (428) 887 459
Other interest-
earning assets (12) 256 244 178 (363) (185)
Total interest-
earning assets 179 1,955 2,134 2 1,004 1,006
Interest-Bearing
Liabilities:
Deposits and
borrowings (3) 675 8 683 (248) 77 (171)
Increase (decrease)
in net interest
income (3) (496) 1,947 1,451 250 927 1,177
</TABLE>
1994 Compared to 1993
Inc Inc
(Dec) (Dec) Total
Due to Due to Inc
Rate Vol (Dec)
Interest-Earning
assets:
Loans (619) 74 (545)
Mortgage-backed and
related securities (1) 6 7 13
Securities (2) 243 168 411
Other interest-
earning assets (45) (99) (144)
Total Interest-
earning assets (415) 150 (265)
Interest-Bearing
Liabilities:
Depostis and
borrowings 1,496 (370) 1,126
Increase (decrease)
in net interest
income (3) (1,911) 520 (1,391)
(1) Consists of mortgage-backed and related securities available for sale and
held to maturity.
(2) Consists of securities available for sale and securities held to maturity
for 1995 and 1994.
(3) A special interest payment of $1.2 million in fiscal 1994 increased the
rate of deposits and borrowings and decreased the net interest
during that period.
Liquidity and Capital Resources
The Company continues to maintain a high level of liquid
assets in order to meet its funding requirements. At
September 30, 1996 the Company had approximately $4.2 million
in cash on hand and interest-bearing deposits in other banks
which represented 2.06$ of total assets. At September 30,
1996, the Company's level of liquid assets, as measured for
regulatory compliance purposes was 9.47%, or $5.8 million, in
excess of the minimum liquidity requirement of 5%.
At September 30, 1996, the Company had $67 million of total
equity or 32.9% of total assets. The Company continues to
exceed its regulatory capital requirements ratios at September
30, 1996. Tangible capital and core capital were $41.8
million, which represented 22.8% of adjusted total assets and
risk-based capital was $42.4 million which represented 50.8%
of total risk-weighted assets at September 30, 1996. Such
amounts exceeded the minimum required ratios of 1.5%, 3.0%,
and 8%, respectively, by 21.3%, 19.8%, and 42.8%,
respectively. At September 30, 1996, the Company continued to
meet the definition of a "well-capitalized" institution the
highest of the five categories under the FDICIA prompt
corrective action standards.
COMMUNITY FEDERAL BANCORP, INC.
Consolidated Financial Statements
as of September 30, 1996 and 1995
Together With
Auditor's Report
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To Community Federal Bancorp, Inc.:
We have audited the accompanying consolidated statements of
financial condition of Community Federal Bancorp, Inc. (a
Delaware corporation) AND SUBSIDIARY as of September 30, 1996
and 1995 and the related consolidated statements of income,
stockholders' equity, and cash flows for the three years in
the period ended September 30, 1996. These financial
statements are the responsibility of the Company's management.
Our responsibility is to express an opinion on these financial
statements based on our audits.
We conducted our audits in accordance with generally accepted
auditing standards. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether
the financial statements are free of material misstatement.
An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting
principles used and significant estimates made by management,
as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable
basis for our opinion.
In our opinion, the financial statements referred to above
present fairly, in all material respects, the financial
position of Community Federal Bancorp, Inc. and Subsidiary at
September 30, 1996 and 1995 and the results of their
operations and their cash flows for each of the three years
ended September 30, 1996, in conformity with generally
accepted accounting principles.
Birmingham, Alabama
October 25, 1996
<TABLE>
<CAPTION>
COMMUNITY FEDERAL BANCORP, INC.
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
AS OF SEPTEMBER 30, 1996 AND 1995
ASSETS
1996 1995
<S> <C> <C>
CASH AND CASH EQUIVALENTS $ 1,764,355 $ 1,146,100
INTEREST-BEARING DEPOSITS IN BANKS 2,441,324 1,749,000
SECURITIES AVAILABLE FOR SALE, at fair value 75,111,784 25,124,584
SECURITIES HELD TO MATURITY, at amortized
Cost (estimated fair value of $4,625,305 and
$33,501,362, respectively 4,755,702 33,836,768
LOANS RECEIVABLE, net 117,630,885 97,988,023
ACCRUED INTEREST AND DIVIDENDS RECEIVABLE 1,343,947 1,159,165
REAL ESTATE OWNED 0 138,972
PREMISES AND EQUIPMENT, net 607,267 664,748
PREPAID INCOME TAXES 0 44,212
OTHER ASSETS 361,678 190,479
TOTAL ASSETS $204,016,942 $162,042,051
LIABILITIES AND STOCKHOLDER'S EQUITY
DEPOSITS $131,740,433 $134,554,504
FEDERAL HOME LOAN BANK ADVANCES 0 1,000,000
OTHER LIABILITIES:
Accrued interest payable 616,422 663,472
Advances from borrowers for taxes and insurance 444,784 392,844
Deferred income taxes payable 1,893,037 1,559,229
Income taxes payable 9,376 0
Accrued expenses and other liabilities 2,173,994 445,102
Total liabilities 136,878,046 138,615,151
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS'S EQUITY:
Preferred stock, no par value; 2,000,000
shares authorized; shares issued and
outstanding--none 0 0
Common stock, par value $.01 per share;
10,000,000 shares authorized, 4,628,750
shares issued 46,288 0
Additional paid-in capital 45,006,311 0
Retained earnings 22,511,930 21,030,744
Unearned compensation (3,464,110) 0
Unrealized gain on securities available for
sale, net 3,038,477 2,396,156
Total stockholders' equity 67,138,896 23,426,900
Total liabilities and stockholders' equity $204,016,942 $162,042,051
</TABLE>
The accompanying notes are an integral part of these statements.
<TABLE>
<CAPTION>
COMMUNITY FEDERAL BANCORP, INC.
CONSOLIDATED STATEMENTS OF INCOME
FOR THE YEARS ENDED SEPTEMBER 30, 1996, 1005, AND 1994
1996 1995 1994
<S>
INTEREST INCOME:
Interest and fees on loans: <C> <C> <C>
Mortgage loans $ 8,217,595 $ 6,706,168 $ 6,300,230
Consumer loans 262,356 290,673 152,545
Commercial loans 130,510 43,870 0
Interest and dividends on
securities held to maturity 824,987 1,432,584 3,151,376
Interest and dividends on
securities available for sale 3,249,772 2,321,642 0
Other interest income 464,598 220,885 406,429
Total interest income 13,149,818 11,015,822 10,010,580
INTEREST EXPENSE:
Deposits 6,930,124 6,119,346 6,438,131
Other borrowings 19,410 147,970 0
Total interest expense 6,949,534 6,267,316 6,438,131
Net interest income 6,200,284 4,748,506 3,572,449
PROVISION FOR LOAN LOSSES 20,000 30,000 25,000
Net interest income after
provision for loan losses 6,180,284 4,718,506 3,547,449
NONINTEREST INCOME:
Gain on sale of securities
available for sale, net 54,838 0 646,168
Loan servicing fees 67,254 62,971 62,995
Other income 65,656 69,428 43,215
Total noninterest income 187,748 132,399 752,378
NONINTEREST EXPENSES:
Compensation and benefits 1,153,133 839,466 694,431
Special SAIF assessment 863,835 0 0
Deposit insurance premium 317,896 305,811 300,881
Occupancy and equipment 134,745 118,774 100,817
Gain on real estate owned, net (15,119) (217) (3,318)
Other expenses 580,990 408,031 746,839
Total noninterest expenses 3,035,480 1,671,865 1,839,650
Income before income taxes and
cumulative effect of change in
accounting principle 3,332,552 3,179,040 2,460,177
PROVISION FOR INCOME TAXES 1,184,294 1,144,334 1,012,428
INCOME BEFORE CUMULATIVE EFFECT OF
CHANGE IN ACCOUNTING PRINCIPLE 2,148,258 2,034,706 1,447,749
CUMULATIVE EFFECT AT OCTOBER 1, 1994
OF CHANGE IN ACCOUNTING FOR
INCOME TAXES 0 0 130,800
NET INCOME $ 2,148,258 $ 2,034,706 $ 1,316,949
EARNINGS PER SHARE $.27 N/A N/A
</TABLE>
The accompanying notes are an integral part of these statements.
<TABLE>
<CAPTION>
COMMUNITY FEDERAL BANCOPR, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
FOR THE YEARS ENDED SEPTEMBER 30, 1996, 1995, AND 1994
Additional
Common Paid-In Retained
Stock Capital Earnings
<S> <C> <C> <C>
BALANCE, September 30, 1993 0 0 $17,679,089
Net income 0 0 1,316,949
Change in net unrealized depreciation
on certain marketable equity securities 0 0 0
Unrealized gain on securities available
for sale 0 0 0
BALANCE, September 30, 1994 0 0 18,996,038
Net income 0 0 2,034,706
Change in unrealized gain on securities
available for sale, net 0 0 0
BALANCE, September 30, 1995 0 0 21,030,744
Net income 0 0 2,148,258
Change in unrealized gain (loss) on
securities, due to the reclassification
of securities from held to maturity
to available for sale, net 0 0 0
Issuance of common stock 46,288 44,954,433 0
Change in unrealized gain on securities
available for sale, net 0 0 0
Amortization of unearned compensation 0 51,878 0
Dividends declared ($.15 per share) 0 0 (667,072)
BALANCE, September 30, 1996 $46,288 $45,006,311 $22,511,930
<CAPTION>
Net Unrealized
Depreciation
on Certain
Unearned Marketable
Compensation Equity Securities
<S> <C> <C>
BALANCE, September 30, 1993 0 $(28,989)
Net Income
Change in net unrealized depreciation
on certain marketable equity securities 0 0
Unrealized gain on securities available
for sale 0 28,989
BALANCE, September 30, 1994 0 0
Net income 0 0
Change in unrealized gain on securities
available for sale, net 0 0
BALANCE, September 30, 1995 0 0
Net income 0 0
Change in unrealized gain (loss) on
securities, due to the reclassification
of securities from held to maturity to
available for sale, net 0 0
Issuance of Common stock (3,632,000) 0
Change in unrealized gain on securities
available for sale, net 0 0
Amortization of unearned compensation 167,890 0
Dividends declared ($.15 per share) 0 0
BALANCE, September 30, 1996 $(3,464,110) 0
<CAPTION>
Unrealized
Gain on
Securities
Available for
Sale, Net Total
<S> <C> <C>
BALANCE, September 30, 1993 $ 0 $17,650,100
Net income 0 1,316,949
Change in net unrealized depreciation
certain marketable equity securities 0 28,989
Unrealized gain on securities available
for sale 1,398,075 1,398,075
BALANCE, September 30, 1994 1,398,075 20,394,113
Net income 0 2,034,706
Change in unrealized gain on securities
available for sale, net 998,081 998,081
BALANCE, September 30, 1995 2,396,156 23,426,900
Net income 0 2,148,258
Change in unrealized gain (loss) on
securities, due to the reclassification
of securities from held to maturity to
available for sale, net (28,115) (28,115)
Issurance of common stock 0 41,368,721
Change in unrealized gain on securities
available for sale, net 670,436 670,436
Amortization of unearned compensation 0 219,768
Dividends declared ($.15) per share) 0 (667,072)
BALANCE, September 30, 1996 $3,038,477 $67,138,896
</TABLE>
The accompanying notes are an integral part of these statements.
<TABLE>
<CAPTION>
COMMUNITY FEDERAL BANCORP, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED SEPTEMBER 30, 1996, 1995, AND 1994
1996 1995 1994
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING
ACTIVITIES:
Net income $ 2,148,258 $ 2,034,706 $1,316,949
Adjustments to reconcile
net income to net cash
provided by operating
activities:
Depreciation 63,832 55,961 43,084
Deferred income tax
provision (benefit) (281,057) 8,634 63,600
Cumulative effect of
change in accounting for
taxes 0 0 130,800
Amortization of deferred
loan fees and costs, net 47,949 44,216 30,062
Amortization of premiums
and discounts, net (84,616) (96,389) (137,354)
Amortization of unearned
compensation 219,768 0 0
Provision for losses on loans 20,000 30,000 25,000
FHLB stock dividends (72,589) (70,900) (44,700)
(Gain) loss on sale of loans 0 1,444 (200)
Loss on disposal of equipment 0 1,299 0
Gain on sale of securities
available for sale, net (54,838) 0 (646,168)
Loss on sale of interest
bearing deposits 0 558 0
Gain on sale of real estate
owned, net (15,119) 0 (4,660)
Proceeds from sale of loans 0 220,856 130,000
Changes in assets and liabilities:
Decrease (increase) in other assets (171,199) 8,727 (42,576)
Decrease (increase) in interest
and dividends receivable (184,782) (178,393) (187,098)
Decrease (increase) in prepaid
income taxes 53,588 150,299 127,771
Increase (decrease) in accrued
interest payable (47,050) 303,178 31,699
Increase (decrease) in accrued
expenses and other liabilities 1,728,892 (64,534) (20,189)
Total adjustments 1,222,779 414,956 (500,929)
Net cash provided by operating
activities 3,371,037 2,449,662 816,020
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from sale of real
estate owned 190,000 0 426,000
Proceeds from maturities
of securities held to
maturity 1,921,600 3,075,834 (5,298,025)
Proceeds from maturities,
principal collections,
and calls of securities
available for sale 13,165,134 3,595,826 0
Proceeds from sales of
securities held to maturity 2,621,913 0 2,300,005
(Purchase of) proceeds
from maturities of
interest-bearing deposits
in banks, net (692,324) 490,393 (655,932)
(Purchase of) proceeds
from sale of property and
equipment, net (6,351) (227,410) (7,766)
Net change in real estate
owned (2,031) 2,464 (39,961)
Loan (originations) and
principal repayments, net (19,744,689) (14,015,344) 535,018
Purchase of loans 0 0 (900,000)
Purchase of securities
available for sale (36,586,411) 0 0
Purchase of securities
held to maturity (559,141) 0 (13,407,706)
Net cash used by investing
activities (39,692,300) (7,078,237) (17,048,367)
CASH FLOWS FROM FINANCING
ACTIVITIES:
(Decrease) increase in
customer deposits, net (2,814,071) 2,565,448 2,953,968
Proceeds from (repayments of)
FHLB advances, net (1,000,000) 1,000,000 0
(Decrease) increase in advances
from borrowers for taxes
and insurance 51,940 28,055 (217)
Proceeds from stock offering 41,368,721 0 0
Dividends paid (667,072) 0 0
Net cash provided by financing
activities 36,939,518 3,593,503 2,953,751
Net increase (decrease) in
cash and cash equivalents 618,255 (1,035,072) (13,278,596)
CASH AND CASH EQUIVALENTS,
beginning of year 1,146,100 2,181,172 15,459,768
CASH AND CASH EQUIVALENTS,
end of year $ 1,764,355 $ 1,146,100 $ 2,181,172
SUPPLEMENTAL CASH FLOW
INFORMATION:
Cash paid for:
Interest on deposits
and other borrowings $ 7,049,843 $ 5,964,138 $ 6,406,432
Income taxes $ 1,185,000 $ 975,000 $ 1,076,599
SUPPLEMENTAL NONCASH INVESTING
AND FINANCING ACTIVITIES:
Transfer of mortgage
loans to real estate owned $ 33,878 $ 0 $ 358,884
Change in net unrealized
depreciation on certain
marketable equity securities $ 0 $ 0 $ 28,989
Transfer of securities held
for sale, securities, and
mortgage-backed and related
securities to securities
available for sale at
fair value $ 0 $ 0 $27,105,810
Change in unrealized net gain
on securities available for
sale, net of deferred taxes $ 642,321 $ 998,081 $ 1,398,075
Transfer of securities from
held to maturity to available
for sale at fair value $27,758,607 $ 0 $ 0
</TABLE>
The accompanying notes are an integral part of these statements.
COMMUNITY FEDERAL BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 1996 and 1995
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Organization, Nature of Operations, and Principles of
Consolidation Community Federal Bancorp, Inc. (the "Company")
was incorporated in the State of Delaware in November 1995,
for the purpose of becoming a holding company to own all of
the outstanding capital stock of Community Federal Savings
Bank (the "Bank") upon the Bank's conversion from a federally
chartered mutual savings association to a federally chartered
stock savings association (the "Conversion"). The Bank was
converted to a federally chartered stock organization in
November 1995, through the sale of all of its common stock to
the Company. The accounting for the conversion is in a manner
similar to that utilized in a pooling of interests (see
Note 18).
The accompanying consolidated financial statements include the
accounts of the Company and the Bank. All significant
intercompany balances and transactions have been eliminated in
consolidation.
The Bank is primarily engaged in the business of obtaining
funds in the form of various savings deposits products and
investing those funds in mortgage loans or single family real
estate and, to a lesser extent, in consumer and commercial
loans. The Bank operates from its office in Tupelo,
Mississippi, and originates the majority of its loans in its
market area.
Use of Estimates
The preparation of financial statements in conformity with
generally accepted accounting principles requires management
to make estimates and assumptions that affect the reported
amounts of assets and liabilities and disclosure of contingent
assets and liabilities at the date of the financial statements
and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those
estimates.
Cash and Cash Equivalents
Cash and cash equivalents of $1,764,355 and $1,146,100 at
September 30, 1996 and 1995, respectively, consist of cash on
hand of $155,000 and $135,000 at September 30, 1996 and 1995,
respectively, and cash due from and on deposit with other
financial institutions of $1,609,355 and $1,011,100 at
September 30, 1996 and 1995, respectively. The cash due from
and on deposit with other financial institutions primarily
consisted of an interest-bearing account with the Federal Home
Loan Bank ("FHLB").
Securities
Securities classified as securities held to maturity are
carried at amortized cost, adjusted for amortization of
premiums and accretion of discounts, using the level yield
method over the estimated remaining life. The Company has the
ability and positive intent to hold these securities to
maturity.
All securities not considered held to maturity have been
designated as available for sale and are carried at fair
value. The unrealized difference between amortized cost and
fair value on securities available for sale is exclude from
earnings and is reported, net of deferred taxes, as a
component of equity. Securities available for sale includes
securities that Management intends to use as part of its
asset/liability management strategy; or that may be sold in
response to changes in interest rates, changes in prepayment
risk, liquidity needs, or for other purposes.
Amortization of premium and accretion of discount are computed
under the interest method. The adjusted cost of the specific
security sold is used to compute gain or loss on the sale of
securities.
On September 30, 1994, the Company adopted Statement of
Financial Accounting Standards ("SFAS") No. 115, Accounting
for Certain Investments in Debt and Equity Securities. In
adopting SFAS No. 115, securities and mortgage-backed and
related securities were classified as either available for
sale or investment based on Management's current intent.
Loans Receivable
Loans receivable are stated at their unpaid principal
balances, less the allowance for loan losses and net deferred
loan origination fees and discounts.
The Bank ceases accrual of interest on substantially all loans
when payment on a loan is in excess of 90 days past due. An
allowance is established by a charge to interest income equal
to all interest previously accrued but unpaid. Interest
income is subsequently recognized only to the extent that cash
payments are received until, in management's judgment, the
borrower's ability to make periodic interest and principal
payments is in accordance with the terms of the loan
agreement; in which case the loan is returned to accrual
status.
The allowance for loan losses is increased by charges to
income and decreased by loan charge-offs, net of recoveries.
The allowance for loan losses is maintained at a level which
management considers adequate to absorb losses inherent in the
loan portfolio at each reporting date. Management's
estimation of this amount includes a review of all loans for
which full collectibility is not reasonably assured and
considers, among other factors, prior years' loss experience,
economic conditions, distribution of portfolio loans by risk
class, and the estimated value of the underlying collateral.
Though management believes the allowance for loan losses to be
adequate, ultimate losses may vary from their estimates.
However, estimates are reviewed periodically and, as
adjustments become necessary, they are reported in earnings in
periods in which they become known.
The Bank adopted SFAS No. 114, Accounting by Creditors for
Impairment of a Loan, and SFAS No. 118, Accounting by
Creditors for Impairment of a Loan--Income Recognition and
Disclosures, as of October 1, 1995. SFAS No. 114 requires
that certain impaired loans be measured based on the present
value of expected future cash flows discounted at the loans'
original effective interest rate. As a practical expedient,
impairment may be measured based on the loan's observable
market price or the fair value of the collateral if the loan
is collateral dependent. When the measure of the impaired
loan is less than the recorded investment in the loan, the
impairment is recorded through a provision added to the
allowance for loan losses. The Bank had previously measured
the allowance for loan losses using methods similar to those
prescribed in SFAS No. 114. As a result of adopting these
statements, no additional provision to the allowance for loan
losses was required as of October 1, 1995. Because the Bank's
loan portfolio consists primarily of one-to-four family
residential mortgages and consumer installment loans, which
are exempt from SFAS No. 114 when evaluated collectively for
impairment as is done by the Bank, the Bank had no loans
designated as impaired under the provisions of SFAS No. 114 at
September 30, 1996.
Loan Origination Fees and Related Costs
Loan fees and certain direct costs of loan origination are
deferred, and the net fee or cost is recognized as an
adjustment to interest income using the level yield method
over the contractual life of the loan.
Real Estate Owned
Real estate owned consists of properties sold under mortgage
loans to facilitate sales of foreclosed properties. The
recognition of gains and losses on the sale of real estate
owned is dependent upon whether the nature and terms of the
sale and future involvement of the Bank in the property meet
certain requirements. If the transaction does not meet these
requirements, income recognition is deferred and recognized
under an alternative method in accordance with SFAS No. 66,
Accounting for Sales of Real Estate.
Real estate owned is carried at the lower of the recorded
investment in the loan or the fair value of the property, less
estimated costs of disposition. The recorded investment is
the sum of the outstanding principal loan balance plus any
accrued interest which has not been received and acquisition
costs associated with the property less any write-down. Any
excess of the recorded investment in the loan over the fair
value of the underlying property is charged to the allowance
for loan losses at the time of foreclosure. Subsequent to
foreclosure, real estate owned is evaluated on an individual
basis for changes in fair value. Future declines in the fair
value of the asset, less costs of disposition below its
carrying amount, increase the valuation allowance account.
Future increases in the fair value of the asset, less costs of
disposition above its carrying amount, reduce the valuation
allowance account, but not below zero. Increases or decreases
in the valuation allowance account are charged or credited to
income. Costs relating to improvement of the property
incurred subsequent to acquisition are capitalized, whereas
costs relating to the holding of property are expensed. The
amounts expensed in fiscal years 1996, 1995, and 1994 were
$8,929, $457, and $1,140, respectively. The amounts
capitalized in 1996, 1995, and 1994, were $2,031, $0, and
$39,961, respectively.
Premises and Equipment
Land is carried at cost. Building, furniture, fixtures, and
equipment are carried at cost, less accumulated depreciation.
Building, furniture, fixtures, and equipment are depreciated
using the straight-line or accelerated methods over the
estimated useful lives of the assets. The estimated useful
lives for furniture, fixtures, and equipment range from 3 to
20 years and for buildings and improvements range from 10 to
40 years.
Income Taxes
Effective October 1, 1993, the Company adopted SFAS No. 109,
Accounting for Income Taxes. The Company had previously
recorded income tax expense following SFAS No. 96, Accounting
for Income Taxes. SFAS No. 109, as well as SFAS No. 96,
requires the application of the asset and liability method of
accounting for income taxes. The cumulative effect of
adopting SFAS No. 109 was to decrease net income by $130,800
in fiscal year 1994.
Under the asset and liability method, balance sheet amounts of
deferred income taxes are recognized on the temporary
differences between the bases of assets and liabilities as
measured by tax laws and their bases as reported in the
financial statements. Recognition of deferred tax asset
balance sheet amounts is based on management's belief that it
is more likely than not that the tax benefit associated with
certain temporary differences will be realized. Deferred tax
expense or benefit is then recognized for the change in
deferred tax liabilities or assets between periods. Under
SFAS No. 109, the effect on deferred taxes of a change in tax
rates is recognized in income in the period that includes the
enactment date.
Pending Accounting Pronouncements
In March 1995, the Financial Accounting Standards Board
("FASB") issued SFAS No. 121, Accounting for the Impairment of
Long-Lived Assets and for Long-Lived Assets to Be Disposed of.
SFAS No. 121 establishes accounting standards for the
impairment and disposal of long-lived assets and certain
identifiable intangibles. It requires that such assets be
reviewed for impairment whenever events or changes in
circumstances indicate that the carrying amount of an asset
may not be recoverable. If the review for recoverability,
based on undiscounted expected future cash flows, indicates
that impairment exists, the loss should be measured based on
the fair value of the asset. The Company adopted SFAS
No. 121, as was required, effective October 1, 1996, with no
significant impact on the Company's financial position or on
the results of its operations as long-lived assets are not
significant.
In May 1995, the FASB issued SFAS No. 122, Accounting for
Mortgage Servicing Rights, an amendment to SFAS No. 65. This
statement eliminates the accounting distinction between rights
to service mortgage loans for others that are acquired through
loan origination activities and those acquired through
purchase transactions. The Company adopted SFAS No. 122, as
was required, effective October 1, 1996 with no impact on the
financial statements as the Company is not currently
participating in the sale or securitization of any loans in
its loan portfolio.
In October 1995, the FASB issued SFAS No. 123, Accounting for
Stock-Based Compensation. SFAS No. 123 established a fair
value based method for accounting for stock based compensation
plans but still granted entities the option of accounting for
stock based compensation plans under the provisions of APB
Opinion No. 25 if they provide disclosures required by SFAS
No. 123. The Company adopted the provisions of this Standard,
as was required, effective October 1, 1996, and elected to
account for these plans under the provisions of APB No. 25 and
will provide the required disclosures in future periods.
In June 1996, the FASB issued SFAS No. 125, Accounting for
Transfers and Servicing of Financial Assets and
Extinguishments of Liabilities. SFAS No. 125 provides
accounting and reporting standards for transfers and servicing
of financial assets and extinguishments of liabilities based
on consistent application of a financial-components approach
that focuses on control. Under that approach, after a
transfer of financial assets, an entity recognizes the
financial and servicing assets it controls and the liabilities
it has incurred, derecognizes financial assets when control
has been surrendered, and derecognizes liabilities when
extinguished. This statement is effective for transfers and
servicing of financial assets and extinguishments of
liabilities occurring after December 31, 1996, and is to be
applied prospectively. Earlier or retroactive application is
not permitted. The Company will adopt the provisions of the
Standard on January 1, 1997. Based on the Company's current
operating activities, management does not believe that the
adoption of this statement will have a material impact on the
Company's financial condition or results of operations.
Earnings Per Share
Earnings per share for the period from March 25, 1996, the
date of Conversion, to September 30, 1996, has been computed
based on the earnings during that period and on the weighted
average number of shares of common stock outstanding during
that period. Common stock outstanding is comprised of issued
shares less unallocated Employee Stock Ownership Plan ("ESOP")
shares. The weighted average number of shares used for the
period from March 25, 1996 through September 30, 1996, was
4,265,638. If earnings per share had been computed on a
retroactive basis for the year ended September 30, 1996,
recognizing earnings for the entire year, earnings per share
would have been $.50 per share as compared to the $.27 per
share reported in the accompanying consolidated statements of
income.
Financial Statement Reclassification
The financial statements for prior years have been
reclassified in order to conform with the 1996 financial
statement presentation. The reclassification did not change
total assets or net income in the prior year.
2. SECURITIES AVAILABLE FOR SALE
The amortized cost, gross unrealized gains and losses, and
estimated fair value of securities available for sale at
September 30, 1996 and 1995 are summarized as follows:
<TABLE>
<CAPTION>
1996
Gross Gross
Amortized Unrealized Unrealized Estimated
Cost Gains Losses Fair Value
<S> <C> <C> <C> <C>
U.S. government
and federal agencies
bonds and notes $14,989,610 $ 1,620 $ (121,030) $14,870,200
State and local bonds
and notes 1,121,920 0 (158,380) 963,540
16,111,530 1,620 (279,410) 15,833,740
Mortgage-backed
and related securities:
GNMA certificates 1,015,328 27,161 0 1,042,489
FHLMC certificates 14,118,927 99,323 (179,651) 14,038,599
FNMA certificates 8,759,029 2,789 (156,029) 8,605,789
Collateralized mortgage
obligations 23,196,504 54 (665,451) 22,531,107
Total mortgage-backed
and related securities 47,089,788 129,327 (1,001,131) 46,217,984
Equity securities:
FNMA preferred 1,010,000 0 (10,000) 1,000,000
FHLMC preferre 500,000 7,400 0 507,400
FHLMC common 457,926 4,038,678 0 4,496,604
FNMA common 734,975 2,159,257 0 2,894,232
FHLB common 1,244,500 0 0 1,244,500
U.S. League common 55,880 45,496 0 101,376
Total Equity securities 4,003,281 6,250,831 (10,000) 10,244,112
Mutual funds: 2,828,377 0 (12,429) 2,815,948
Total $70,032,976 $6,381,778 $(1,302,970) $75,111,784
</TABLE>
<TABLE>
<CAPTION>
1995
Gross Gross
Amortized Unrealized Unrealized Estimated
Cost Gains Losses Fair Value
<S> <C> <C> <C> <C>
U.S. government and
federal agencies
bonds and notes $ 5,999,860 $ 4,910 $(175,695) $ 5,829,075
Mortgage-backed and
related securities:
GNMA certificates 1,021,720 32,770 0 1,054,490
FHLMC certificates 2,305,671 4,832 (37,522) 2,272,981
FNMA certificates 3,054,178 2,364 (44,965) 3,011,577
Collateralized mortgage
obligations 3,181,963 5,822 (14,964) 3,172,821
Total mortgage-backed
and related securities 9,563,532 45,788 (97,451) 9,511,869
Equity securities:
FHLMC preferred 500,000 18,000 0 518,000
FHLMC common 457,926 2,581,236 0 3,039,162
FNMA common 734,975 1,407,275 0 2,142,250
FHLB common 1,172,100 0 0 1,172,100
U.S. League common 55,880 29,920 0 85,800
Total equity securities 2,920,881 4,036,431 0 6,957,312
Mutual Funds 2,818,690 18,850 (11,212) 2,826,328
Total $21,302,963 $4,105,979 $(284,358) $25,124,584
</TABLE>
The amortized cost and fair value of debt securities
available for sale by contractual maturity are shown below.
Expected maturities may differ from contractual maturities
because issuers may have the right to call or prepay
obligations with or without call or prepayment penalties.
September 30, 1996
Amortized Estimated
Cost FairValue
Due in one year or less $ 2,871,274 $2,864,890
Due from one to five years 12,722,032 12,513,051
Due from five to ten years 18,117,415 17,904,412
Due after ten years 29,490,597 28,769,371
63,201,318 62,051,724
Equity securities 4,003,281 10,244,112
Mutual funds 2,828,377 2,815,948
Total $70,032,976 $75,111,784
On December 1, 1995, the Company reassessed the
appropriateness of the classification of securities held at
that time and determined that certain securities previously
classified as held to maturity should be reclassified as
available for sale in accordance with the one time
reassessment prescribed by the FASB Special Report "A Guide
to Implementation of Statement 115 on Accounting for Certain
Investments in Debt and Equity Securities." Accordingly, on
December 1, 1995, the Company transferred securities having
an estimated market value of $27,758,607 and unrealized
gains and losses of $296,193 an $341,486, respectively, from
held to maturity to available for sale.
3. SECURITIES HELD TO MATURITY
The amortized cost, gross unrealized gains and losses, and
estimated fair values of securities designated as held to
maturity at September 30, 1996 and 1995 are summarized as
follows:
1996
Gross Gross
Amortized Unrealized Unrealized Estimated
Cost Gains Gains Fair Value
Collateralized mortgage
obligations $4,755,702 $0 $(130,397) $4,625,305
Total $4,755,702 $0 $(130,397) $4,625,305
1995
Gross Gross Estimated
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
U.S. Government and
federal agencies $10,445,513 $ 50,667 $ (60,560) $10,435,620
State government 387,984 50,900 0 438,884
Corporate 1,443,904 0 (60,279) 1,383,625
Mortgage-backed and
related securities: 176,475 13,127 0 189,602
GNMA certificates 3,581,227 142,676 0 3,723,903
FHLMC certificates 611,236 0 (4,694) 606,542
FNMA certificates 17,190,429 0 (467,243) 16,723,186
Collateralized
mortgage $33,836,768 $257,370 $(592,776) $33,501,362
Total
The carrying value and fair value of debt securities held to
maturity by contractual maturity are shown below. Expected
maturities may differ from contractual maturities because
issuers may have the right to call or prepay obligations
with or without call or prepayment penalties.
September 30, 1996
Carrying Estimated
Value Fair
Value
Due from one to five years $1,002,977 $ 972,450
Due from five to ten years 1,009,033 1,003,180
Due after ten years 2,743,692 2,649,675
$4,755,702 $4,625,305
Collateralized mortgage obligations designated as held to
maturity at September 30, 1996 bear interest at fixed and
adjustable rates ranging from 5.5% to 7.0%. The
collateralized mortgage obligations contractually mature at
various dates ranging from April 2001 to July 2023. Gross
unrealized gains in this portfolio totaled $0, and gross
unrealized losses totaled $130,397, at September 30, 1996.
Gross unrealized gains in the prior year's portfolio totaled
$181,432, and gross unrealized losses totaled $497,566 at
September 30, 1995.
4. LOANS RECEIVABLE, NET
Loans receivable at September 30, 1996 and 1995 are summarized
as follows:
1996 1995
Mortgage loans:
Principal balances:
Secured by 1-4 family residences $102,020,850 $86,716,040
Secured by multifamily and
non-residential properties 7,165,559 5,946,186
Construction loans 3,336,971 3,310,293
112,523,380 95,972,519
Less:
Undisbursed portion of mortgage
loans 1,355,841 1,278,520
Unearned discounts and net deferred
loan origination fees 428,466 343,054
Total mortgage loans 110,739,073 94,350,945
Commercial loans: 3,253,228 1,536,412
Consumer loans:
Principal balances:
Loans secured by automobiles 1,318,211 1,072,415
Loans secured by savings accounts 1,369,201 1,051,703
Other 1,523,172 528,548
Total loans 118,202,885 98,540,023
Less allowance for loan losses 572,000 552,000
Loans receivable, net $117,630,885 $97,988,023
As a savings bank, the Bank has a credit concentration in 1-4
family residential real estate mortgage loans. Substantially
all of the Bank's 1-4 family residential mortgage loan
customers are located in its trade area of Lee, Itawamba,
Prentiss, and Pontotoc Counties, Mississippi, which have a
local unemployment rate at or slightly below the average for
the state. Although the Bank has generally conservative
underwriting standards, including a collateral policy calling
for low loan to collateral values, the ability of its
borrowers to meet their residential mortgage obligations is
dependent upon local economic conditions.
In the normal course of business, loans are made to officers,
directors, and employees of the Company and subsidiary. These
loans are made on substantially the same terms, including
interest rates and collateral, as those prevailing for
comparable transactions with others. Such loans do not
involve more than the normal risk of collectible, nor do they
present other unfavorable features. As of September 30, 1996
and 1995, $1,666,839 and $1,101,281, respectively, of these
loans were outstanding. During fiscal year 1996, $833,618 of
new loans were made, repayments totaled $268,060.
Activity in the allowance for loan losses is summarized as
follows:
1996 1995 1994
Balance at beginning of year $552,000 $522,000 $500,000
Provision charged to income 20,000 30,000 25,000
Charge-offs 0 0 (12,000)
Recoveries 0 0 9,000
Balance at end of year $572,000 $552,000 $522,000
The Bank had loans on nonaccrual status at September 30, 1996
and 1995 in the amounts of approximately $717,000 and
$722,000, respectively. Interest income forgone on nonaccrual
loans was approximately $38,000 and $49,000 for fiscal years
1996 and 1995, respectively.
5. LOAN SERVICING
In 1984, the Bank sold first mortgage single-family
residential loans to the Federal National Mortgage Association
("FNMA") with full recourse which are not included in the
accompanying statements of financial condition. The total
principal balances outstanding under these mortgages were
$2,212,865, $2,932,955, and $4,049,718 at September 30, 1996,
1995, and 1994, respectively. Custodial escrow balances
maintained in connection with the foregoing loan servicing
were $45,805, $106,938, and $51,717, at September 30, 1996,
1995, and 1994, respectively. In the event of default, the
Bank must pay the principal and interest under default to
FNMA. The Bank would bear the burden of foreclosure losses in
the event of default. Because of the Bank's credit policies,
foreclosure losses in the event of default have not been
significant and losses under this recourse obligation are not
expected to be significant. At September 30, 1996, none of
these loans were past due 90 days or more. Accordingly, no
provision has been made in the financial statements for any
future losses that may result from this recourse arrangement.
6. ACCRUED INTEREST AND DIVIDENDS RECEIVABLE
Accrued interest and dividends receivable at September 30,
1996 and 1995 are as follows:
1996 1995
Securities available for sale $ 641,277 $ 220,175
Securities held to maturity 2,276 348,608
Loans receivable 683,557 581,227
Other 16,837 9,155
Total $1,343,947 $1,159,165
7. PREMISES AND EQUIPMENT, NET
Premises and equipment at September 30, 1996 and 1995 are
summarized as follows:
1996 1995
Land $ 137,068 $ 137,068
Building and improvements 579,456 579,455
Furniture, fixtures, and equipment 377,146 370,796
Total 1,093,670 1,087,319
Less accumulated depreciation 486,403 422,571
Premises and equipment, net $ 607,267 $ 664,748
8. DEPOSITS
Deposits at September 30, 1996 and 1995, the related ranges of
interest rates payable for deposits at September 30, 1996, and
the weighted average rates paid during 1996 are summarized as
follows:
<TABLE>
<CAPTION>
Weighted
Average
Rate 1996 1995
1996 Amount Percent Amount Percent
<S> <C> <C> <C> <C> <C>
NOW accounts,
2.5% to 5.00% 3.14% $ 12,519,798 9.50% $9,807,956 7.29%
Savings accounts,
2.75% 2.75% 6,873,038 5.22 8,184,404 6.08
2.99 19,392,836 14.72 17,992,360 13.37
Certificates
of deposit:
3% to 3.99% 0 0.00 368,716 0.27
4% to 4.99% 20,952,130 15.90 23,830,971 17.71
5% to 5.99% 67,348,478 51.12 48,748,368 36.23
6% to 6.99% 23,945,222 18.18 43,511,762 32.34
7% to 7.99% 101,767 0.08 102,327 0.08
5.41 112,347,597 85.28 116,562,144 86.63
Total 5.04% $131,740,433 100.00% $134,554,504 100.00%
The aggregate amounts of jumbo certificates of deposit with a
minimum balance of $100,000 were approximately $33,504,337 and
$35,379,817 at September 30, 1996 and 1995, respectively.
Deposits in excess of $100,000 are not federally insured.
Scheduled maturities of certificates of deposit at
September 30, 1996 are as follows:
Year ending September 30:
1997 $ 88,355,406
1998 13,457,046
1999 7,817,520
2000 2,713,474
2001 4,151
Total $112,347,597
Interest expense on deposits for the years ended September 30,
1996, 1995, and 1994 is summarized as follows:
1996 1995 1994
Savings accounts $ 260,564 $ 246,963 $ 422,197
NOW accounts 360,598 302,300 436,873
Certificates of deposit 6,308,962 5,570,083 5,579,061
Total $6,930,124 $6,119,346 $6,438,131
During fiscal year 1995, the Bank paid a 1% interest bonus on
all active deposits as of August 5, 1994 that remained active
until September 15, 1994. The fiscal year 1994 interest
expense on deposits amount includes $1,242,274 representing
this one-time special interest payment.
9. COMPENSATION AND EMPLOYEE BENEFITS
Employee Stock Ownership Plan
In connection with the Conversion, the Bank established an
ESOP for eligible employees. The ESOP purchased 363,200
shares of the Company's common stock with the proceeds of a
$3,632,000 note payable from the Bank to the Company and
secured by the Common Stock owned by the ESOP. Interest and
principal under the note are due in quarterly installments
through June 2013; interest is payable quarterly based on the
average daily outstanding balance of principal at the rate of
8.25% per annum. Impact of this financing is eliminated in
the consolidated financial statement presentation.
Expense related to the ESOP for fiscal 1996 was approximately
$167,890. Unearned compensation related to the ESOP was
approximately $3,464,000 at September 30, 1996, and is shown
as a reduction of stockholders' equity in the accompanying
consolidated statements of financial condition. Unearned
compensation is amortized into compensation expense based on
employee services rendered in relation to shares which are
committed to be released.
Defined Benefit Pension Plan
The Bank has a qualified, noncontributory defined benefit
pension plan covering substantially all its employees.
Benefits are based on each employee's years of service up to a
maximum of 40 years and the average of that employee's
compensation for the highest five consecutive calendar years
out of the last ten years prior to retirement. An employee
becomes fully vested upon completion of five years of
qualifying service. The Bank's funding policy is to make
annual contributions equal to or greater than the required
minimum under ERISA. The funds are primarily invested in
short-term certificates of deposit with the Bank.
The following sets forth the plan's funded status and amounts
recognized in the Bank's statement of financial condition at
September 30, 1996 and 1995:
1996 1995
Actuarial present value of benefit obligations:
Accumulated benefit obligation:
Vested $1,900,209 $1,782,374
Nonvested 49,085 123,059
Total 1,949,294 1,905,433
Additional benefit based on estimated future
salary levels 472,917 410,120
Projected benefit obligation for service
rendered to date 2,422,211 2,315,553
Plan assets at fair market value 2,018,315 1,879,369
Unfunded projected benefit obligation (403,896) (436,184)
Unrecognized net (gain) loss from past
experience different from that assumed
and effects of changes in assumptions 442,654 536,968
Unrecognized net transition obligation
(asset from adoption of FASB SFAS No. 87)
being amortized over 20 years (118,279) (127,377)
(Prepaid) unfunded pension cost liability
(included in other assets or other liabilities) $ 79,521 $ 26,593
The components of net periodic pension expense for the years ended
September 30, 1996, 1995, and 1994 are as follows:
</TABLE>
<TABLE>
<CAPTION>
1996 1995 1994
<S> <C> <C> <C>
Service cost--benefits earned during
the period $ 57,591 $ 64,357 $ 62,588
Interest cost on the projected benefit
obligation 147,926 139,246 127,974
Actual return on plan assets (120,002) (71,001) (73,854)
Net asset gain (loss) during the period
deferred for later recognition 13,507 14,485 17,489
Amortization of unrecognized net obligation (9,098) (9,099) (9,099)
Net periodic pension cost $ 89,924 $137,988 $125,098
Assumptions used to develop the net
periodic pension cost were:
Weighted average discount rate 6.50% 6.50% 6.50%
Weighted average rate of compensation
increase 5.00 5.00 5.00
Weighted average expected long-term
rate of return on plan assets 4.00 4.00 4.00
Directors' Retirement Plan
During fiscal 1993, the Bank established the Directors'
Retirement Plan ("DRP") whereby directors or their
beneficiaries will be provided specific amounts of
quarterly retirement benefits for a period of ten years
following retirement. Directors are eligible under the
plan upon the completion of ten years of service. The
related compensation expense for the DRP was $52,791,
$42,177, and $49,602, for fiscal years 1996, 1995, and
1994, respectively. The related accrued compensation is
included in "accrued expenses and other liabilities" in the
accompanying statements of financial condition.
During fiscal 1994, the Company adopted the provisions of
SFAS No. 106, Accounting for Postretirement Benefits Other
Than Pensions. The unfunded DRP meets the definition of
such benefits as defined in SFAS No. 106. For fiscal 1996
and 1995, the projected benefit obligations were
approximately $483,000 and $403,000, the accumulated
benefit obligations, which were accrued for and included in
"accrued expenses and other liabilities," were
approximately $309,000 and $274,000, and the service costs
were approximately $53,000 and $42,000, respectively. The
weighted average discount rate used was 6.5% for 1996 and
1995.
10. INCOME TAXES
The provisions for income taxes for the years ended
September 30, 1996, 1995, and 1994 were as follows:
1996 1995 1994
Current:
Federal $1,324,389 $ 984,313 $ 771,429
State 140,962 151,387 177,399
1,465,351 1,135,700 948,828
Deferred (281,057) 8,634 63,600
Total $1,184,294 $1,144,334 $1,012,428
The differences between the provisions for income taxes and
the amounts computed by applying the statutory federal
income tax rate of 34% to income before income taxes at
September 30, 1996, 1995, and 1994 were as follows:
</TABLE>
<TABLE>
<CAPTION>
1996 1995 1994
<S> <C> <C> <C>
Expected income tax expense
at federal tax rate $1,133,068 $1,080,874 $836,460
Increase (decrease) resulting from:
State income tax, net 75,840 99,580 147,000
Dividend received deduction (47,997) (35,425) (36,074)
Tax-exempt interest income (5,798) (8,500) (8,500)
Other 29,181 7,805 73,542
$1,184,294 $1,144,334 $1,012,428
Effective income tax rate 35% 36% 41%
</TABLE>
Temporary differences between the financial statement carrying
amounts and tax bases of assets and liabilities that give rise
to significant portions of the net deferred tax liability as of
September 30, 1996 and 1995 relate to the following:
1996 1995
SAIF assessment $ 331,911 $ 0
Book allowance for loan loss 217,360 209,760
Retirement plan 118,640 104,128
Accrued bonuses 42,066 32,300
Deferred loan fees and
costs, net 4,848 104,269
Other 25,775 9,467
Deferred tax asset 740,600 459,924
Unrealized gain on securities
available for sale (2,040,330) (1,425,465)
Tax bad debt reserve in
excess of base year (389,734) (363,255)
FHLB dividends (101,266) (73,682)
Accretion of bond discount (20,302) (84,556)
Other (82,005) (72,195)
Deferred tax liability (2,633,637) (2,019,153)
Net deferred tax liability $ (1,893,037) $(1,559,229)
Thrift institutions, in determining taxable income, have
historically been allowed special bad debt deductions based
on specified experience formulae or on a percentage of
taxable income before such deductions. The bad debt
deduction based on the latter has been gradually reduced to
8%. On August 2, 1996, Congress passed the Small Business
Job Protection Act that, will among other things, repeal
the tax bad debt reserve method for thrifts effective for
taxable years beginning after December 31, 1995. As a
result, thrifts must recapture into taxable income the
amount of their post-1987 tax bad debt reserves over a
six-year period beginning after 1995. This recapture can
be deferred for up to two years if the thrift satisfies a
residential loan portfolio test. The Association is
expected to recapture approximately $1,025,000, $390,000
tax effected, of its tax bad debt reserves into taxable
income over six years as a result of this new law. The
recapture will not have any effect on the Bank's net income
because the related tax expense has already been accrued.
Because of such repeal, thrifts such as the Bank may only
use the same tax bad debt reserve that is allowed for
commercial banks. Accordingly, a thrift with assets of
$500 million or less may only add to its tax bad debt
reserves based upon its moving six-year average experience
of actual loan losses (i.e., the experience method).
The portion of a thrift's tax bad debt reserve that is not
recaptured under this new law is only subject to recapture
at a later date under certain circumstances. These include
stock repurchases, redemptions by the thrift or if the
thrift converts to a type of institution (such as a credit
union) that is not considered a commercial bank for tax
purposes. However, no further recapture would be required
if the thrift converted to a commercial bank charter or was
acquired by a commercial bank. The Bank does not
anticipate engaging in any transactions at this time that
would require the recapture of its pre-1988 tax bad debt
reserves of approximately $4,650,000.
11. FEDERAL HOME LOAN BANK ADVANCES
The Bank is required by its blanket floating lien agreement
with the Federal Home Loan Bank ("FHLB") to pledge its
portfolio of first mortgage collateral, demand deposit
accounts, capital stock, and certain other assets. As of
September 30, 1995, the Bank had $1,000,000 in FHLB
advances outstanding at a variable rate of 5.98%, which
were repaid in full during the year ended September 30,
1996.
12. REGULATORY MATTERS
Under regulations promulgated by the Bank's primary
regulator, the Office of Thrift Supervision ("OTS"), the
Bank must maintain capital levels to comply with the
following minimum capital requirements: (1) tangible
capital equal to 1.5% of adjusted total assets; (2)
leverage capital, or core capital, required to be
maintained at 3% of adjusted total assets (although most
institutions are required by regulators to maintain a core
capital ratio of an additional 100 to 200 basis points);
and (3) risk-based capital equal to 8% of its aggregate
assets and off-balance sheet financial instruments as
adjusted to reflect that relative credit risk.
The Bank is also subject to additional capital standards
established by the Federal Deposit Insurance Corporation
Improvement Act of 1991. These regulations established
capital standards in five categories ranging from
"critically undercapitalized" to "well capitalized", and
defined "well capitalized" as at least 5% for core
(leverage) capital, 6% for Tier 1 risk-based capital and at
least 10% for total risk-based capital. Institutions with
a core capital ratio less than 4%, a Tier 1 risk-based
capital ratio less than 4%, or a total risk-based capital
ratio less than 8% are considered "undercapitalized," and
subject to increasingly stringent prompt corrective action
measures. The Bank's capital ratios place it in the "well
capitalized" category at September 30, 1996 and 1995.
A reconciliation of the Bank's stockholders' equity to the
Bank's tangible, core, and risk-based capital available to
meet its regulatory capital requirements is as follows:
<TABLE>
<CAPTION>
Minimum for
Capital Adequacy
Actual Purposes
Ratio Amount Ratio Amount
<S> <C> <C> <C> <C>
Stockholders' equity and ratio
to total assets 24.2% $ 45,163
Unrealized gain on available
for sale securities (3,329)
Tangible capital, and ratio to
adjusted total assets 22.8% $ 41,834 1.5% $2,748
Tier I (core) capital, and ratio
to adjusted total assets 22.8% $ 41,834 3.0% $5,496
Tier I capital, and ratio to
risk-weighted assets 50.1% $ 41,834 4.0% $3,339
Tier 2 capital (general
allowance for loan losses) 572
Total risk-based capital, and ratio
to risk-weighted assets 50.8% $ 42,406 8.0% $6,679
Total assets $186,538
Adjusted total assets $183,209
Risk-weighted assets $ 83,487
<CAPTION>
To be Well
Capitalized for
Action Provisions
Ratio Amount
<S>
Stockholders' euqity and ratio to
total assets
Unrealized gain on available for
sale securities
Tangible capital, and ratio to
adjusted total assets
Tier 1 (core) capital, and ratio
to adjusted total assets 5.00% $9,160
Tier 1 capital, and ratio to
risk-weighted assets 6.00% $5,009
Tier 2 capital (general
allowance for loan losses)
Total risk-based capital, and
ratio to risk-weighted assets 10.00% $8,349
Total assets
Capital requirements continue to be under study by the OTS.
Management continues to monitor these requirements and
contemplated changes and believes that the Bank will continue
to exceed its regulatory minimum requirements.
The OTS has adopted an amendment to its risk-based capital
requirements that generally requires savings institutions with
more than a "normal" level of interest-rate risk to maintain
additional total capital. An institution will be considered
to have a "normal" level of interest-rate risk exposure if the
decline in its NPV after an immediate 200 basis point increase
or decrease in market interest rates (whichever results in the
greater decline) is less than 2% of the current estimated
economic value of its assets. An institution with a greater
than normal interest rate risk will be required to deduct from
total capital, for purposes of calculating its risk-based
capital requirement, an amount (the "interest-rate risk
component") equal to one-half the difference between the
institution's measured interest-rate risk and normal level of
interest-rate risk as determined by the OTS, multiplied by the
economic value of its total assets. The Association has been
notified by the OTS that it will be required to incorporate
the interest-rate risk component to the risk-based capital
requirement. However, the interest-rate risk component of
risk-based capital requirement has been waived until the OTS
finalizes the process under which institutions <PAGE>
may appeal such
capital requirements. Based on the Bank's capital level, management
does not expect that implementation of this requirement will cause
the Bank to fall below its capital requirements.
13. COMMITMENTS AND CONTINGENCIES
Loan Commitments
At September 30, 1996, the Bank had outstanding commitments to
originate loans in the amount of $2,082,850. Of these
outstanding amounts, commitments of $760,000 were at fixed
rates ranging between 7.50% and 9.25%; terms for these
outstanding commitments are up to 180 days. Commitments to
extend credit include exposure to some credit loss in the
event of nonperformance of the customer. The Bank's credit
policies and procedures for credit commitments are the same as
those for extensions of credit that are recorded on the
statement of financial condition.
Litigation
The Company is a defendant in certain claims and legal actions
arising in the ordinary course of business. In the opinion of
management, after consultation with legal counsel, the
ultimate disposition of these matters is not expected to have
a material adverse effect on the consolidated financial
position of the Company.
14. INTEREST RATE SENSITIVITY
A portion of the Bank's interest-earning assets are long-term
fixed rate mortgage loans and mortgage-backed and related
securities (approximately 47%), while its principal source of
funds is savings deposits with maturities of three years or
less (approximately 90%). Because of the short-term nature of
the savings deposits, their cost generally reflects returns
currently available in the market. Accordingly, the savings
deposits have a high degree of interest rate sensitivity,
while the mortgage loan portfolio, to the extent of fixed rate
loans, is relatively fixed and has much less sensitivity to
changes in current market rates. Although these conditions
are somewhat mitigated by the Bank's risk management
strategies of selling certain long-term fixed rate loans and
plans to increase amounts of short-term consumer loans
originated, changes in market interest rates tend to directly
affect the level of net interest income.
At June 30, 1996, based on the most recent available
information provided by the Office of Thrift Supervision
("OTS"), it was estimated, on an unaudited basis, that the
Bank's net portfolio value ("NPV") (the net present value of
the Bank's cash flows from assets, liabilities, and
off-balance sheet items) would decrease 6%, 12%, 21%, and 29%
and increase 5%, 10%, 12%, and 15% in the event of 1%, 2%, 3%,
and 4% increases and decreases in market interest rates,
respectively. These calculations indicate that the Bank's NPV
could be adversely affected by increases in interest rates but
could be favorably affected by decreases in interest rates.
Computations of prospective effects of hypothetical interest
rate changes are based on numerous assumptions, including
relative levels of market interest rates, prepayments, and
deposit run-offs and should not be relied upon as indicative
of actual results. Certain shortcomings are inherent in such
computations. In order to mitigate its interest rate risk,
the Bank maintains substantial capital levels that management
believes are sufficient to sustain unfavorable movements in
market interest rates.
15. FAIR VALUE OF FINANCIAL INSTRUMENTS
SFAS No. 107, Disclosures About Fair Value of Financial
Instruments, requires disclosure of fair value information
about financial instruments, whether or not recognized in the
statement of condition, for which it is practicable to
estimate that value. In cases where quoted market prices are
not available, fair values are based on estimates using
present value or other valuation techniques. Those techniques
are significantly affected by the assumptions used, including
the discount rate and estimates of future cash flows. In that
regard, the derived fair value estimates cannot be
substantiated by comparison to independent markets and, in
many cases, could not be realized in immediate settlement of
the instrument. The use of different market assumptions
and/or estimation methodologies may have a material effect on
the estimated fair value amounts. Also, the fair value
estimates presented herein are based on pertinent information
available to Management as of September 30, 1996. Such
amounts have not been comprehensively revalued for purposes of
these financial statements since those dates and, therefore,
current estimates of fair value may differ significantly from
the amounts presented herein.
The following methods and assumptions were used by the Company
in estimating its fair values disclosures for financial
instruments:
Investment Securities
Fair values for investment securities are primarily based on
quoted market prices. If a quoted market price is not
available, fair value is estimated using market prices for
similar securities.
Loans
For equity lines and other loans with short-term or variable
rate characteristics, the carrying value reduced by an
estimate for credit losses inherent in the portfolio is a
reasonable estimate of fair value. The fair value of all
other loans is estimated by discounting their future cash
flows using interest rates currently being offered for loans
with similar terms, reduced by an estimate of credit losses
inherent in the portfolio. The discount rates used are
commensurate with the interest rate and prepayment risks
involved for the various types of loans.
Deposits
The fair value disclosed for demand deposits (e.g., interest
and non-interest bearing demand, savings and money market
savings), are, as required by SFAS No. 107, equal to the
amounts payable on demand at the reporting date (i.e., their
carrying amounts). Fair values for certificates of deposits
are estimated using a discounted cash flow calculation that
applies interest rates currently being offered on certificates
to a schedule of aggregated monthly maturities.
Commitments to Extend Credit
The value of these unrecognized financial instruments is
estimated based on the fee income associated with the
commitments which, in the absence of credit exposure, is
considered to approximate their settlement value. As no
significant credit exposure exists and because such fee income
is not material to the Company's financial statements at
September 30, 1996, the fair value of these commitments is not
presented.
Many of the Company's assets and liabilities are short-term
financial instruments whose carrying amounts reported in the
statement of condition approximate fair value. These items
include cash and due from banks and interest-bearing bank
balances. The estimated fair values of the Company's
remaining on-balance sheet financial instruments as of
September 30, 1996, are summarized below:
1996
Carrying Estimated
Value Fair Value
(In thousands)
Financial Assets:
Securities available $ 75,112 $ 75,112
Securities held to maturity 4,756 4,625
Loans, net 117,631 116,996
Financial Liabilities:
Deposits 131,740 131,648
SFAS No. 107 excludes certain financial instruments and all
nonfinancial instruments from its disclosure requirements.
The disclosures also do not include certain intangible assets,
such as customer relationships, deposit base intangibles and
goodwill. Accordingly, the aggregate fair value amounts
presented do not represent the underlying value of the
Company.
16. FDIC ASSESSMENT
The deposits of the Bank are currently insured by the Savings
Association Insurance Fund ("SAIF"). Both the SAIF and the
Bank Insurance Fund ("BIF"), the federal deposit insurance
fund that covers the deposits of state and national banks and
certain state savings banks, are required by law to attain and
thereafter maintain a reserve ratio of 1.25% of insured
deposits. The BIF has achieved the required reserve rate,
and, as discussed below, during the past year the FDIC reduced
the average deposit insurance premium paid by BIF-insured
banks to a level substantially below the average premium paid
by savings institutions.
On November 4, 1995, the FDIC approved a final rule regarding
deposit insurance premiums. Beginning January 1, 1996, the
rule reduced deposit insurance premiums for BIF member
institutions to zero basis points (subject to a $2,000
minimum) for institutions in the lowest risk category, while
holding deposit insurance premiums for SAIF members at their
current levels (23 basis points for institutions in the lowest
risk category).
Banking legislation was enacted September 30, 1996 to
eliminate the premium differential between SAIF-insured
institutions and BIF-insured institutions. The FDIC Board of
Directors met October 8, 1996 and approved a rule that, except
for the possible impact of certain exemptions for de novo and
"weak" institutions, established the special assessment
necessary to recapitalize the SAIF at 65.7 basis points of
SAIF assessable deposits held by affected institutions as of
March 31, 1995. The legislation provides that all SAIF member
institutions pay a special one-time assessment to recapitalize
the SAIF, which in the aggregate is sufficient to bring the
reserve ratio in the SAIF to 1.25% of insured deposits. It is
anticipated that after recapitalization of the SAIF, premiums paid
by SAIF-insured institutions will be reduced. The legislation also
provides for the merger of the BIF and the SAIF, with such merger
being conditioned upon the prior elimination of the thrift charter.
Based upon its level of SAIF deposits as of March 31, 1995,
the Bank will pay approximately $870,000. The assessment was
accrued in the quarter ended September 30, 1996.
17. STOCK CONVERSION
On September 15, 1995, the Conversion of the Bank from a
federally-chartered mutual institution to a
federally-chartered stock savings bank through amendment of
its charter and issuance of common stock to the Company was
completed. Related thereto, the Company sold 4,628,750 shares
of common stock, par value $.01 per share, at an initial price
of $10 per share in subscription and community offerings.
Costs associated with the Conversion were approximately
$1,285,000, including underwriting fees. These conversion
costs were deducted from the gross proceeds of the sale of the
common stock.
In connection with the Offering, the Association established a
liquidation account in an amount equal to its regulatory
capital as of the latest practicable date prior to
consummation of the Offering.
The Company's ability to pay dividends will be largely
dependent upon dividends to the Company from the Association.
Pursuant to OTS regulations, the Association will not be
permitted to pay dividends on its capital stock or repurchase
shares of its stock if its stockholders' equity would be
reduced below the amount required for the liquidation account
or if stockholders' equity would be reduced below the amount
required by the OTS.
18. Parent company financial statements
Separate condensed financial statements of Community Federal
Bancorp, Inc. (the "Parent Company") as of and for the year
ended September 30, 1996 are presented below:
Statement of Financial Condition
September 30, 1996
(Dollar amounts in thousands)
ASSETS:
Cash and cash equivalents $ 1,633
Securities available for sale 17,091
Investment in subsidiary 45,163
ESOP loan receivable 3,498
Other assets 388
Total assets $67,773
LIABILITIES:
Other liabilities $ 635
STOCKHOLDERS' EQUITY:
Preferred stock 0
Common stock 46
Additional paid-in capital 45,006
Retained earnings 22,512
Unearned compensation (3,464)
Unrealized loss on securities
available for sale, net 3,038
Total stockholders' equity 67,138
Total liabilities and stockholders' equity $67,773
Statement of Income
For the Year Ended September 30, 1996
(Dollar amounts in thousands)
INTEREST INCOME:
Interest and dividends on securities
available for sale $ 561
Interest income from subsidiary 207
Total income 768
OPERATING EXPENSE 24
INCOME BEFORE INCOME TAXES AND EQUITY
IN UNDISTRIBUTED CURRENT YEAR
SUBSIDIARY EARNINGS 744
INCOME TAXES 280
INCOME BEFORE EQUITY IN UNDISTRIBUTED
CURRENT YEAR SUBSIDIARY EARNINGS 464
EQUITY IN UNDISTRIBUTED CURRENT YEAR
SUBSIDIARY EARNINGS 1,684
Net income $2,148
Statement of Cash Flows
For the Year Ended September 30, 1996
(Dollar amounts in thousands)
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 2,148
Equity in undistributed current year earnings
of subsidiary (1,684)
464
Adjustments to reconcile net income to net
cash provided by operating activities:
Increase in other assets (388)
Increase in other liabilities 635
Net cash provided by operating activities 711
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of securities available for sale (18,089)
Principal collections on mortgage-backed
and related securities 708
Net cash used by investing activities (17,381)
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from issuance of common stock 41,368
Purchase of Bank's common stock (22,532)
Payments received on ESOP loan 134
Dividends paid (667)
Net cash provided by financing activities 18,303
NET INCREASE IN CASH AND CASH EQUIVALENTS 1,633
CASH AND CASH EQUIVALENTS, beginning of year 0
CASH AND CASH EQUIVALENTS, end of year $1,633
Earnings are presented on a retroactive basis, recognizing
earnings of the subsidiary for the year ended September 30,
1996. This presentation is based on the accounting for the
Conversion at historical cost, in a manner similar to that
utilized in a pooling of interests.
Directors
Medford M. Leake Robert R. Black, Sr.
Charirman of the Board Retired - Periodontist
President - Steel City Tupelo, MS
Lumber Co.
Birmingham, AL
Jim Ingram Michael R. Thomas
President and Chief Executive President -Washington
Officer Furniture Mfg., Inc.
Community Federal Bancorp, Inc./ Houlka, MS
Community Federal Savings Bank
Tupelo, MS
Charles V. Imbler, Sr. Robert W. Reed III
President and Chief Executive Account Executive-
Officer Reed Mfg. Co
Truck Center, Inc. Tupelo, MS
Tupelo, MS
J. Leighton Pettis Officers
Ophthalmologist
Tupelo, MS Gill Simmons, Vice President
Jack Johnson, Vice President
L. F. Sams, Jr. Mark Burleson, Vice President
Partner, Law Firm Lynda Riley, Treasurer
Mitchell, McNutt, Threadgill, Judy Ballard, Secretary
Smith & Sams Sherry McCarty, Controller
Tupelo, MS
Corporate Headquarters Independent Public Accountants
333 Court Street Arthur Andersen, LLP
Tupelo, MS 38801 Birmingham, AL
601-842-3981
Special Counsel
Transfer Agent Elias, Matz, Tiernan and
Registrar and Transfer Co. Herrick, LLP
10 Commerce Drive Washington, DC
Cranford, NJ 07016
(800)368-5948 Special Counsel
Mitchell, McNutt, Threadgill, Smith
and Sams, PA
10-K Information
Listing of Common Stock This report is availabe to
Traded Over-the-Counter/ stockholders upon request to:
NASDAQ National Markert Stystem/ The Controller, P.O. Box F,
Symbol: CFTP Tupelo, MS. 38801
(601)840-0302
Annual Meeting
The 1996 Annual Meeting of the Stockholders of
Community Federal Bancorp, Inc. will be held at 5:00
p. m. on March 27, 1997, in the Lobby of Community
Federal Savings Bank, 333 Court Street, Tupelo,
Mississippi
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 9
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> SEP-30-1996
<PERIOD-END> SEP-30-1996
<CASH> 1764
<INT-BEARING-DEPOSITS> 2441
<FED-FUNDS-SOLD> 0
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 75112
<INVESTMENTS-CARRYING> 4756
<INVESTMENTS-MARKET> 4625
<LOANS> 118203
<ALLOWANCE> 572
<TOTAL-ASSETS> 204017
<DEPOSITS> 131740
<SHORT-TERM> 0
<LIABILITIES-OTHER> 5138
<LONG-TERM> 0
0
0
<COMMON> 46
<OTHER-SE> 67093
<TOTAL-LIABILITIES-AND-EQUITY> 204017
<INTEREST-LOAN> 8610
<INTEREST-INVEST> 4075
<INTEREST-OTHER> 465
<INTEREST-TOTAL> 13150
<INTEREST-DEPOSIT> 6930
<INTEREST-EXPENSE> 6950
<INTEREST-INCOME-NET> 6200
<LOAN-LOSSES> 20
<SECURITIES-GAINS> 55
<EXPENSE-OTHER> 3035
<INCOME-PRETAX> 3333
<INCOME-PRE-EXTRAORDINARY> 3333
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 2148
<EPS-PRIMARY> .270
<EPS-DILUTED> .270
<YIELD-ACTUAL> 7.250
<LOANS-NON> 717
<LOANS-PAST> 0
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 1490
<ALLOWANCE-OPEN> 552
<CHARGE-OFFS> 0
<RECOVERIES> 0
<ALLOWANCE-CLOSE> 572
<ALLOWANCE-DOMESTIC> 0
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 572
</TABLE>
