UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON D.C. 20549
FORM 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15 (d)
OF THE SECURITIES EXCHANGE ACT OF 1934 (FEE REQUIRED)
FOR THE FISCAL YEAR ENDED SEPTEMBER 30, 1997
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
$3,036,523.
The aggregate market value of the registrant's outstanding common
stock held by non-affiliates of the registrant at December 12,
1997 was approximately $75,698,000 (based on 3,784,918 shares at the most
recent trading price of which management was aware ($20.00 on
December 12, 1997) (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, 1997 was 4,628,750.
Transitional small business disclosure format: No.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Proxy Statement for the Registrant's 1997 Annual
Meeting of Stockholders (the "Proxy Statement") 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 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 its 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 and a
new branch office located on West Main Street in Tupelo, since
September 1997. At September 30, 1997, the Company had $215.9
million of total assets, $157.4 million of total liabilities,
including $132.7 million of deposits, and $58.6 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 its
Primary Market Area. Such loans amounted to $108.2 million or
85% of the Savings Bank's total net loan portfolio, at
September 30, 1997. To a lesser extent, the Savings Bank
originates other mortgage loans secured by multi-family and
non-residential real estate, which amounted to $7 million or 5.5%
of the total net loan portfolio, at September 30, 1997 and
construction loans for one-to-four family and multi-family
residences which amounted to $3 million or 2.3% of the Savings
Bank's total net loan portfolio as of that same date. In
addition, the Savings Bank also originates loans to local
businesses and automobile loans to individuals. As of
September 30, 1997, the commercial loans amounted to $7 million
or 5.5% 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 $4.5 million or
3.6% of the Savings Bank's total net loan portfolio as of
September 30, 1997. 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 FHLB, FNMA, and FHLMC stock. As of
September 30, 1997, the carrying value of investments that
management has the intent and ability to hold until maturity was
$4.2 million and the carrying value of investments that were
available for sale was $74 million. In addition, as of that same
date, the Savings Bank's aggregate cash and interest-bearing
deposits in other banks totaled $5.4 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.
Since the enactment of FIRREA in 1989, 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, 1997, the Savings Bank's loans-to-one borrower
limit was $6.9 million and its five largest loans or groups of
loans-to-one borrower, including related entities, were $1.9
million, $1.7 million, $1.4 million, $1.3 million, and $956,000.
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, 1997.
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:
September 30,
1997 1996 1995
Amount % Amount % Amount %
Mortgage Loans:
One-to-four family res. 108,628 85.31 102,021 86.73 86,716 88.50
Multi-family and non-res. 6,082 4.77 7,165 6.09 5,946 6.07
Construction loans 3,148 2.47 3,337 2.84 3,310 3.38
Total mortgage loans 117,858 92.55 112,523 95.66 95,972 97.94
Commercial Loans 7,332 5.76 3,253 2.77 1,537 1.57
Consumer Loans:
Automobile 815 .64 1,318 1.12 1,072 1.09
Savings accounts 982 .77 1,369 1.15 1,052 1.07
Other 2,764 2.17 1,524 1.30 529 0.54
Total consumer loans 4,561 3.58 4,211 3.57 2,653 2.71
Total loans 129,751 101.89 119,987 102.00 100,162 102.22
Less:
Loans in process 1,388 1.09 1,356 1.15 1,279 1.31
Unearned discounts
and net deferred
loan origination fees 438 .34 428 0.36 343 0.35
Allowance for loan losses 590 .46 572 0.49 552 0.56
Loans receivable, net 127,335 100.00 117,631 100.00 97,988 100.00
September 30,
1994 1993
Amount % Amount %
Mortgage Loans:
One-to-four family res. 75,811 89.97 75,246 89.13
Multi-family and non-res. 6,728 7.98 6,675 7.91
Construction loans 1,120 1.33 686 0.81
Total mortgage loans 83,659 99.28 82,607 97.85
Commercial Loans 0 0.00 0 0.00
Consumer Loans
Automobile 720 0.85 1,533 1.82
Savings accounts 1,108 1.32 1,328 1.57
Other 0 0.00 0 0.00
Total consumer loans 1,828 2.17 2,861 3.39
Total loans 85,487 101.45 85,468 101.24
Less:
Loans in process 429 0.51 302 0.36
Unearned discounts and
net deferred loan
origination fees 267 0.32 237 0.28
Allowance for loan losses 522 0.62 500 0.60
Loans receivable, net 84,269 100.00 84,429 100.00
Contractual Principal Repayments and Interest Rates. The
following table sets forth certain information at September 30,
1997 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.
Over Over Over Over
3 Months 6 Months 1 Year 3 Years
3 Months Through Through Through Through Over
or Less 6 Months 1 Year 3 Years 5 Years 5 Years Total
(In thousands)
Mortgage Loans
Adjustable 11 26 479 59,977 60,493
Fixed 1,559 1,185 1,004 1,424 2,557 49,636 57,365
Consumer 819 917 736 1,142 854 93 4,561
Commercial 334 1,087 254 515 1,861 3,281 7,332
Total 2,712 3,189 2,005 3,107 5,751 112,987 129,751
The following table sets forth the dollar amount of all loans,
before net items, due after one year from September 30, 1997
which have fixed interest rates or which have adjustable interest
rates.
Fixed Adjustable
Rates Rates Total
(In thousands)
One-to-four family residential 49,130 58,887 108,017
Multi-family and non-residential 4,487 1,595 6,082
Consumer 2,089 0 2,089
Commercial 4,834 823 5,657
Total 60,540 61,305 121,845
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 1997, 1996, or 1995, but has instead established a
consumer lending department which originated $5.6 million and
$5.3 million of consumer loans in fiscal 1997 and 1996,
respectively. It also began offering commercial loans during
fiscal 1996 and originated $6.0 million and $2.1 million of
commercial loans during 1997 and 1996, respectively. During this
three-year period, the Savings Bank had loan sales of $697,975
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 $1.5 million at September 30, 1997 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:
Year Ended September 30,
1997 1996 1995
(In thousands)
Loan Originations:
One-to-four family residential $27,320 $34,978 $19,673
Multi-family and nonresidential 49 263 0
Construcion 4,554 8,199 5,478
Commercial 5,968 2,149 1,608
Consumer 5,642 5,345 3,425
Total loans originated 43,533 50,934 30,184
Purchases 0 372 0
Total loans originated and purchased 43,533 51,306 30,184
Sales and Loan Principal Repayments:
Loans sold proceeds 1,060 0 220
Loan repayments 32,580 31,629 17,201
Total loans sold proceeds and loan
principal repayments 33,640 31,629 17,421
Loan originations (repayments), net 9,893 0 12,763
Increase (decrease) due to other items, net (189) (34) 956
Net increase (decrease) in net loan portfolio $9,704 $19,643 $13,719
Year Ended September 30,
1994 1993
(In thousands)
Loan Originations:
One-to-four family residential $20,821 $22,643
Multi-family and nonresidential 2,062 544
Construction 1,346 1,137
Commercial 0 0
Consumer 905 1,502
Total loans originated 25,134 25,862
Purchases 900 1,000
Total loans originated and purchased 26,034 26,826
Sales and Loan Principal Repayments:
Loans sold proceeds 130 0
Loan repayments 26,243 26,826
Total loans sold proceeds and loan
principal repayments 26,373 26,649
Loan originations (repayments), net (339) 177
Increase (decrease) due to other items, net 179 (405)
Net increase (decrease) in net loan portfolio $ (160) $ (228)
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, 1997, $108.2 million or 85% 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
$106.5 million.
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, 1997, approximately 99.7% of all of the Savings
Bank's mortgage loan portfolio consisted of conventional loans;
the remainder is 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,
1997, $60 million, or 55.5%, 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 $12 million or 44% of
the Savings Bank's total originations of one-to-four family
residential loans during the year ended September 30, 1997 as
compared to 41% and 65% of such originations for the years ended
September 30, 1996 and 1995, 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, 1997, $7 million or 5.5% 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 was $370,000
at September 30, 1997 and the largest was $1.7 million.
Originations of non-residential real estate and multi-family
residential real estate amounted to .11%, 52%, and 0% of the
Savings Bank's total loan originations in fiscal 1997, 1996, and
1995, 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- and
adjustable-rate non-residential and multi-family real estate
loans. As of September 30, 1997, $1.6 million, or 26% 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
floor 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, 1997, construction loans amounted to $7 million or
5.5% 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 and purchased by the Savings Bank during
fiscal 1994 and 1993 and loans secured by savings accounts.
Consumer loans at September 30, 1997 were $4.5 million, or 3.6%,
of the Savings Bank's total net loan portfolio consisted of
consumer loans.
As of September 30, 1997, the Savings Bank's consumer loans also
consisted of loans secured by accounts at the Savings Bank which
amounted to $965,000 or .75% 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 semi-annual 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, 1997, $7 million, or 5.5%, 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 14% of the total loan originations during the
year ended September 30, 1997.
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, 1997, the Savings
Bank had $437,937 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 collectibility 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 accrued
interest which has not been received 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, 1997, the Savings Bank's total non-performing
loans amounted to $969,000, or .76% of total net loans, compared
to $717,000, or .61% of total net loans, at September 30, 1996.
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:
September 30,
1997 1996 1995 1994 1993
Non-Accruing Loans:
One-to-four family res. $969 $717 $715 $560 $894
Multi-family and non-res. 0 0 0 0 0
Construction 0 0 0 0 0
Commercial 0 0 0 0 0
Consumer 0 0 0 0 0
Accruing Loans Greater
Than 90 Days Delinquent:
One-to-four family res. 0 0 116 203 121
Multi-family and non-res. 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 $969 $717 838 763 1,015
Real estate owned (1) 117 0 139 141 164
Total non-performing assets $1,086 $717 $977 $904 $1,179
Total non-performing loans
as a percentage of
total net loans .76% .61% .86% .91% 1.20%
Total non-performing assets
as a percentage of
total assets .50% .35% .60% .58% .80%
(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, 1997
consisted of $167,000 of loans classified as special mention,
$806,000 of loans classified as substandard, $162,000 of loans
classified as doubtful and no loans classified as loss. As of
September 30, 1997, total classified assets amounted to .56% of
total assets.
The following table sets forth the Savings Bank's classified
assets at the dates indicated:
September 30,
1997 1996 1995
Classification:
Special mention $ 167 $ 754 $ 984
Substandard 806 736 959
Doubtful 162 0 0
Loss 0 0 0
Total classified assets $1,135 $1,490 $1,943
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
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 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, 1997, the Savings Bank's allowance for loan
losses was $590,000 compared to 572,000 at September 30, 1996.
As of September 30, 1997 and 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.
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.
1997 1996 1995 1994 1993
Allowance at beginning
of period $572 $552 $522 $500 $400
Provisions 20 20 30 25 100
Charge-offs:
Mortgage loans:
One-to-four family res. 0 0 0 12 0
Multi-family and nonres. 0 0 0 0 0
Construction 0 0 0 0 0
Total mortgage loans 0 0 0 12 0
Commercial loans 0 0 0 0 0
Consumer loans:
Savings accounts 0 0 0 0 0
Automobile 2 0 0 0 0
Total consumer loans 2 0 0 0 0
Total charge-offs 2 0 0 12 0
Recoveries 0 0 0 0 0
Net charge-offs 2 0 0 3 0
Allowance at end of period $590 $572 $552 $522 $500
Allowance for loan losses
to total non-performing
loans at end of period 60.89% 79.78% 65.87 68.41% 49.26%
Allowance for loan losses
to total net loans at
end of period .46% .49% .56% .62% .60%
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.
September 30,
1997 1996 1995
% of Loans % of Loans % of Loans
in Each in Each in Each
Category to Category to Category to
Amount Total Loans Amount Total Loans Amount Total Loans
Mortgage loans 501 92.55% $511 95.66% $509 97.94%
Commercial 54 5.76 31 2.77 15 1.57
Consumer loans 35 3.58 30 3.57 28 2.71
Total allowance
for loan losses 590 101.89% $572 102.00% $552 102.22%
September 30,
1994 1993
% of Loans % of Loans
in Each in Each
Category to Category to
Amount Total Loans Amount Total Loans
Mortgage loans $497 99.28% $475 97.85%
Commercial 0 0.00 0 0.00
Consumer loans 25 2.17 25 3.39
Total allowance
for loan losses $522 101.45% $500 101.24%
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 CMOs, all of which are backed by FHLMC, GNMA, and
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, 1997, $2.2 million
or 4.04% 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 following table sets forth the carrying value of the
Company's investment portfolio at the dates indicated:
September 30,
1997 1996 1995
Securities available for sale:(1)
U.S. government and federal
agencies bonds and notes $ 7,978 $14,870 $ 5,829
State and local bonds and notes 609 964 0
Mortgage-backed securities 23,643 23,687 6,339
Collateralized mortgage obligations 26,225 22,531 3,173
Equity securities 12,685 10,244 6,957
Mutual funds 2,836 2,816 2,827
Total securities available for sale $73,976 $75,112 $25,125
Securities held to maturity: (2)
U.S. government and federal
agencies bonds and notes $ 0 $ 0 $10,446
State and local bonds and notes 0 0 388
Corporate bonds and notes 0 0 1,444
Mortgage-backed securities 0 0 4,369
Collateralized mortgage obligations 4,157 4,756 17,190
Total securities available for sale $ 4,157 $ 4,756 $33,837
Total securities $78,133 $79,868 $58,962
The following tables set forth information regarding the
scheduled maturities, amortized costs, fair value and weighted
average yields for the Company's securities at September 30,
1997:
One Year or Less One to Five Years
Carrying Average Carrying Average
Value Yield Value Yield
Securities available for sale:(1)
U.S. treasury and government
obligations $3,974 4.66% $ 4,004 6.71%
Mortgage-backed securities 0 0.00 9,129 6.76
Collateralized mortgage
obligations 0 0.00 939 7.00
Equity securities and mutual
funds 0 0.00 0 0.00
Total securities available for sale $3,974 4.66 $14,072 6.76%
Securities held to maturity:(2)
Collateralized mortgage
obligations $ 0 0.00% $ 1,002 6.00%
Total securities held to maturity 0 0.00 1,002 6.00
Total securities $3,974 4.66% $15,074 6.71%
Five to Ten Years Other
Carrying Average Carrying Average
Value Yield Value Yield
Securities available for sale:(1)
U.S. treasury and government
obligations $ 0 0.00% $ 609 6.70%
Mortgage-backed securities 4,072 6.35 10,442 7.39%
Collateralized mortgage
obligations 5,202 5.84 20,084 6.46
Equity securities and mutual
funds 0 0.00 15,521 7.26
Total securities available for sale $ 9,274 6.06% $46,656 6.93%
Securities held to maturity:(2)
Collateralized mortgage
obligations $ 1,782 6.17% $ 1,372 6.46%
Total securities held to maturity 1,782 6.17 1,372 6.46
Total securities $11,056 6.08% $48,028 6.92%
(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 $5.4 million, $4.2 million,
and $2.9 million at September 30, 1997, 1996, and 1995,
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
million at September 30, 1997. 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, 1997, the certificates of deposit with
principal amounts of $100,000 or more totaled to $37.4 million,
as compared to $33.5 million at September 30, 1996.
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:
September 30,
1997 1996 1995
Amount % Amount % Amount %
Certificates
of deposit 112,585 84.83 112,347 85.28 116,562 86.63
Transaction accounts:
Saving accounts 6,741 10.09 6,873 5.22 8,184 6.08
NOW accounts 13,392 5.08 12,520 9.50 9,808 7.29
Total transaction
accounts 20,133 15.17 19,393 14.72 17,992 13.37
Total deposits 132,718 100.00 131,740 100.00 134,554 100.00
The following table sets forth the savings activities of the
Savings Bank during the periods indicated:
Year Ended September 30,
1997 1996 1995
Net increase (decrease)
before interest credited $(5,819) $(7,893) $(2,910)
Interest credited 6,797 5,079 5,476
Net increse (decrease)
in deposits $ 978 $(2,814) $ 2,566
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:
Increase
(Decrease)
Balance at from Balance at
Sep 30, % of Sep 30, Sep 30, % of
1997 Deposits 1996 1996 Deposits
Interest-bearing and
noninterest bearing
demand deposits 13,391,564 10.09 871,766 12,519,798 9.50
Passbook savings 6,741,456 5.08 (131,582) 6,873,038 5.22
Certificates of deposit 112,585,370 84.83 237,773 112,347,597 85.28
Total 132,718,390 100.00 977,957 131,740,433 100.00
Increase
(Decrease)
from Balance at
Sep 30, Sep 30, % of
1995 1995 Deposits
Interest-bearing and
noninterest bearing
demand deposits 2,711,842 9,807,956 7.29
Passbook savings (1,311,366) 8,184,404 6.08
Certificates of deposit (4,214,547) 116,562,144 86.63
Total (2,814,071) 134,554,504 100.00
The following table sets forth the maturities of Community's
certificates of deposit having principal amounts of $100,000 or
more at September 30, 1997:
Certificate of Deposit Maturing
in Quarter Ending: Amount
December 31, 1997 $ 4,461,437
March 31, 1998 6,573,362
June 30, 1998 4,248,338
September 30, 1998 4,489,120
After September 30, 1998 17,581,459
Total certificates of deposit
balances of more than $100,000 $37,353,716
The following table sets forth the certificates of deposit in the
Savings Bank classified by rates at the dates indicated:
At September 30,
1997 1996
4.00%--4.99% $ 15,966 $ 20,952
5.00%--5.99% 61,190 67,348
6.00%--6.99% 35,322 23,945
7.00%--7.99% 107 102
$112,585 $112,347
The following table sets forth the amount and maturities of the
Savings Bank's certificates of deposit at September 30, 1996.
Over One Over Two Over Three
One Year Year Through Years Through Years Through
or Less Two Years Three Years Four Years
4.00% to 4.99% $15,921 $ 6 $ 0 $ 39
5.00% to 5.99% 48,236 7,252 3,960 1,324
6.00% to 6.99% 23,856 7,306 2,806 1,354
7.00% to 7.99% 0 0 0 0
88,013 14,564 6,766 2,717
Over
Four Years Totals
4.00% to 4.99% $ 0 $ 15,966
5.00% to 5.99% 418 61,190
6.00% to 6.99% 0 35,322
7.00% to 7.99% 107 107
525 $112,585
Deposits in the Savings Bank as of September 30, 1997 were
represented by the various programs described below.
% of
Interest Minimum Minimum Total
Rate Term Category Amount Balances Deposits
2.75 None Passbook Savings 50 6,741,456 5.08
2.50 None Golden Checking 500 1,587,884 1.20
0.00 None Non-interest Checking 100 989,188 .75
2.50 None Silver Checking 300 273,291 .21
3.25 None Daily Money Market 2,500 5,482,841 4.13
0.00 None Student Checking 50 2,546 0.00
2.50 None Courtesy Checking 100 456,490 0.34
0.00 None Community First Checking 50 828,150 0.62
2.75 None Super Now Checking 1,500 1,483,595 1.12
5.00 None Community First Advantage 25,000 2,287,580 1.72
% of
Interest Minimum Minimum Total
Rate Term Certificates Amount Balances Deposits
Fixed Term, Fixed Rate,
5.00 12 month Renewable 1,000 28,382,745 21.39
Fixed Term, Negotiated
6.00 6 month Jumbo Rate, Non-renew. 100,000 5,253,036 3.94
Fixed Term, Fixed Rate,
5.25 30 month Renewable 1,000 3,281,108 2.47
Fixed Term, Fixed Rate,
5.20 24 month Renewable 1,000 11,056,577 8.33
Fixed Term, Fixe Rate,
4.85 182 day Renewable 1,000 15,509,107 11.69
Fixed Term, Negotiated
6.00 12 month Jumbo Rate, Non-renew. 100,000 25,966,057 19.56
Fixed Term, Fixed Rate,
4.10 91 day Renewable 1,000 1,346,310 1.01
Fixed Term, Fixed Rate,
5.15 18 month Renewable 1,000 1,714,387 1.29
Fixed Term, Fixed Rate,
5.30 36 month Renewable 1,000 7,612,378 5.74
Fixed Term, Fixed Rate,
5.40 48 month Renewable 1,000 12,463,664 9.39
Total 132,718,390 100.00
Borrowings. The Company 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 Company had $18.3 million in FHLB advances outstanding at
September 30, 1997.
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 12 to the Consolidated Financial
Statements.
Year Ended September 30,
1997 1996 1995
Maximum balance $18,282 $1,000 $3,000
Average balance 6,944 250 2,333
Weighted average interest
rate of FHLB advances 5.93% 5.98% 6.34%
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:
1997 1996 1995
FHLB long-term advances $14,000 $0 $1,000
Weighted average interest rate 6.05% 0.00% 5.98%
FHLB short-term advances 4,282 0 0
Weighted average interest rate 5.54% 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.
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 decrease from $5.7 million at September 30, 1993 to $1.5
million at September 30, 1997 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 condition 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, 1997,
$48 million or 37% of the Savings Bank's loans, before net items,
were fixed-rate one-to-four family residential mortgages, and $60
million or 47% 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 a 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 collateralized mortgage obligations ("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 funds 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 1997 and 1996,
respectively, $815,000 and $1,307,000, 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 commercial loans.
Emphasis on shorter term and adjustable-rate loans and 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 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%, 13%, 20%, and 27% and increase 5%, 6%, 7%, and 11%
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 NPV calculation to monitor institutions' 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, which the OTS expects
will occur shortly. If implemented, the Savings Bank would still
have exceeded the regulatory requirement.
REGULATION
The Company
General. The Company, as a savings and loan holding company
within the meaning of the Home Owners' Loan Act, as amended,
("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 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
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) also requires that loans to directors, executive officers
and principal stockholders be make on terms substantially the
same as offered in comparable transactions to other persons and
also requires prior board approval for certain loans. 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, 1997, 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 approved 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 FIRREA amended provisions of the Bank Holding Company Act of
1956 to specifically authorize the Federal Reserve Board to
approve an application by a bank holding company to acquire
control of a savings institution. FIRREA also authorized a bank
holding company that controls a savings institution 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' enforcement authority over all savings institutions was
substantially enhanced by FIRREA. This enforcement authority
includes, 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. FIRREA significantly
increased the amount of the ground for civil money penalties.
On December 19, 1991, the Federal Deposit Insurance Corporation
Improvement Act of 1991 ("FDICIA") was enacted into law. The
FDICIA provides for, among other things, the recaptilization of
the Bank Insurance Fund ("BIF"); the authorization of the FDIC to
make emergency special assessments under certain circumstances
against BIF members and members of the SAIF; the establishment of
risk-based deposit insurance premiums; and improved examinations
and reporting requirements. The FDICIA also provides for
enhanced federal supervision of depository institutions based on,
among other things, an institution's capital level.
Deposit Insurance
The deposits of the Bank are currently insured by the SAIF. Both
the SAIF and the 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 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, that will reduce 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). The reduction was effective with
respect to the semiannual premium assessment beginning January 1,
1996.
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 states 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 effected institutions as of March 31, 1995. The
legislation provides that all SAIF member institutions pay a
special one-time assessment to recapitalize the SAIF assessable
deposits held by effected 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 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
Savings Bank paid approximately $864,000. The assessment was
accrued in the quarter ended September 30, 1996.
Regulatory Capital Requirements. Federal insured savings
institutions are required to maintain minimum levels of
regulatory capital. Pursuant to FIRREA, the OTS has established
capital standards applicable to all savings institutions. 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,
1997. 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, 1997 and 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, 1997 and 1996:
For Capital
Actual Adequacy Purposes
Amount Ratio Amount Ratio
September 30, 1997:
Total capital (to risk
weighted assets) $43,555 47.5% $7,335 8.0%
Tier 1 (core) capital
(to risk weighted assets) 42,965 46.9 N/A N/A
Tier 1 (core) capital
(to adjusted total assets) 42,965 21.5 5,938 3.0
Tangible capital (to
adjusted total assets) 42,965 21.5 2,969 1.5
September 30, 1996:
Total capital (to risk
weighted assets 42,406 50.8 6,679 8.0
Tier 1 (core) capital
(to risk weighted assets) 41,834 50.1 N/A N/A
Tier 1 (core) capital
(to adjusted total assets) 41,834 22.8 5,496 3.0
Tangible capital (to
adjusted total assets) 41,834 22.8 2,748 1.5
To Be Well
Capitalized Under
Prompt Corrective
Action Provisions
Amount Ratio
September 30, 1997:
Total capital (to risk
weighted assets) $9,169 10.0%
Tier 1 (core) capital
(to risk weighted assets) 5,502 6.0
Tier 1 (core) capital
(to adjusted total assets) 9,896 5.0
Tangible capital (to
adjusted total assets) N/A N/A
September 30, 1996:
Total capital (to risk
weighted assets 8,349 10.0
Tier 1 (core) capital
(to risk weighted assets) 5,009 6.0
Tier 1 (core) capital
(to adjusted total assets) 9,160 5.0
Tangible capital (to
adjusted total assets) N/A N/A
The following table is a reconciliation of the Bank's
stockholder's equity to tangible, Tier 1, and risk-based capital
as required by the OTS:
1997 1996
Stockholders' equity $ 48,604 $ 45,163
Unrealized gain on securities
available for sale (5,639) (3,329)
Tangible and Tier 1 capital 42,965 41,834
Allowance for loan losses 590 572
Total risk based capital $ 43,555 $ 42,406
Total assets $205,627 $186,538
Adjusted total assets 199,988 183,209
Total risk weighted assets 91,693 83,487
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. Recently
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, effective as of December 19, 1992. 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, 1997, 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 tey are adopted as
proposed.
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 4%. At September 30,
1997, 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, 1997, the Savings Bank was a Tier 1 institution
for purposes of this regulation.
Loans to One Borrower. FIRREA imposed limitations on the
aggregate amount of loans that a savings institution could make
to any one borrower, including related entities. Under FIRREA,
the permissible amount of loans-to-one borrower now follows the
national bank standard for all loans made by savings
institutions, as compared to the pre-FIRREA rule that applied
that standard only to commercial loans made by federally
chartered savings institutions. The regulations promulgated
pursuant to FIRREA 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; 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 (limited to
10% of total portfolio assets); 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.
Legislation enacted in 1996 expands the QTL test to provide
savings associations with greater authority to lend and diversify
their portfolios. In particular, credit card and educational
loans may now be made by savings associations without regard to
any percentage-of-assets limit, and commercial loans may be made
in an amount up to 10 percent of total assets, plus an addional
10 percent for small business loans. Loans for personal, family
and household purposes (other than credit card, small business
and educational loans) are now included without limit with other
assets that, in the aggregate, may account for up to 20% of total
assets. At September 30, 1997, the qualified thrift investments
of the Savings Bank were substantially in excess of 65%.
Accounting Requirements. 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 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, 1997, the Savings Bank had $1.3
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, 1997, 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 refinancings 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. At September 30, 1997, the Savings Bank's
post-1987 tax bad debt reserve, subject to recapture, was
approximately $855,000. The Savings Bank recaptured approximately
$171,000 of this reserve into taxable income in the current year.
The recapture did not have any effect on the Savings Bank's net
income because the related tax expense had 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, 1997, 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, 1997, 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 June 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 (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 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 for each $300,000 or
less and is graduated as follows: (i) $50 for over
$300,000 but not over $500,000; (ii) $90 for over $500,000
but not over $1,000,000; and (iii) $90 for over $1,000,000,
plus $50 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.
Executive Officers Who Are Not Directors
The following individuals are executive officers of the Company
who do not serve on the Board of Directors.
Age at
September 30,
Name 1997 Position(s) With the Company
Gill Simmons 63 Vice President--Mortgage Loans
Jack Johnson 58 Vice President--Operations and Compliance
Mark Burleson 31 Vice President--Consumer/Commercial Lending
Set forth below is a brief description of the background of each
person who serves as an executive officer of the Company and the
Savings Bank and who is not a director.
Gill Simmons is Vice President for Mortgage Loans. Mr. Simmons
joined the Savings Bank in 1955 and during his tenure also has
served as Secretary/Treasurer.
Jack Johnson is Vice President for Operations and Compliance.
Mr. Johnson joined the Savings Bank in 1958 and during his tenure
also has served as cashier.
Mark Burleson is Vice President--Consumer/Commercial Lending.
Mr. Burleson joined the Savings Bank in 1994 after being employed
at a Tupelo-area commercial bank for five years where he served,
among other positions, as an assistant vice president and a
branch manager.
Employees
The Savings Bank had 33 full time employees and one part-time
employee at September 30, 1997. 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, 1997:
Net Book
Value at Approximate Owned
Year Sep 30, Square or
Opened 1997 Footage Leased
Main Office:
333 Court Street
Tupelo, Mississippi 1969 $348,000 10,000 Owned
West Main Street Branch:
3425 West Main Street
Tupelo, Mississippi 1997 $1,131,000 3,500 Owned
The net book value of the Company's investment in furnishings and
equipment totaled $516,000 at September 30, 1997.
ITEM 3.--LEGAL PROCEEDINGS
From time to time, the Company is a party to various legal
proceedings incident to its business. At September 30, 1997,
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 contained in the 1997 Annual report under the
caption "Market for Common Stock and Related Stockholder matters"
is incorporated herein by reference.
ITEM 6.--SELECTED FINANCIAL DATA
The information required herein is incorporated by reference from
page 4 of the Annual Report.
ITEM 7.--MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
The information required herein by this item is incorporated by
reference from pages 5 to 11 of the annual report.
ITEM 8--FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
SELECTED QUARTERLY FINANCIAL DATA (UNAUDITED)
(Dollars in thousands except per share amounts)
1997
First Second Third Fourth Total
Interest revenue $3,600 $3,606 $3,626 $3,676 $14,508
Interest expense 1,677 1,648 1,762 1,937 7,024
Net interest revenue 1,923 1,958 1,864 1,739 7,484
Provision for loan
losses 5 5 0 10 20
Non-interest revenue 66 100 85 (24) 227
Non-interest expense 571 633 921 801 2,926
Income before income
taxes 1,413 1,420 1,028 904 4,765
Income tax expense 528 532 378 290 1,728
Net income $ 885 $ 888 $ 650 $ 614 $ 3,037
Net income per share $.21 $.21 $.15 $.13 $.70
(Dollars in thousands except per share amounts)
1996
First Second Third Fourth Total
Interest revenue $2,920 $3,122 $3,507 $3,601 $13,150
Interest expense 1,799 1,841 1,651 1,659 6,950
Net interest revenue 1,121 1,281 1,856 1,942 6,200
Provision for loan
losses 10 5 5 0 20
Non-interest revenue 92 65 53 (23) 187
Non-interest expense 434 498 575 1,528 3,035
Income before income
taxes 769 843 1,329 391 3,332
Income tax expense 300 316 484 84 1,184
Net income $ 469 $ 527 $ 845 $ 307 $ 2,148
Net income per share (1) N/A $.11 $.18 $.07 $.27
(1) Net income per share for the second quarter is for the period
from the date of conversion, March 23, 1996. Net income for
the year is for the period from the date of conversion to
September 30, 1996.
Other information required by Item 8 is set forth in the
Company's annual report for the year ended September 30, 1997,
which appears in Exhibit 13, and is incorporated herein by
reference.
The following financial statements and financial statement
schedules are submitted herewith:
Financial Statements
Report of Independent Public Accountants
Consolidated Statements of Financial Condition
Consolidated Statements of Income
Consolidated Statements of Stockholders' Equity
Consolidated Statements of Cash Flows
Notes to Consolidated Financial Statements
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, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON
FORM 8-K
Financial Statement Schedules. The Financial Statement Schedules
listed below appear in Exhibit 13.
1. Financial Statements:
Report of Independent Accountants
Consolidated Statements of Financial Condition
Consolidated Statements of Income
Consolidated Statements of Stockholders' Equity
Consolidated Statements of Cash Flows
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
3.1* Certificate of Incorporation
3.2* Bylaws
4.1* Speciman Common Stock Certificate
10.1(a)* Employee Stock Ownership Plan
13 Annual Report to Stockholders
21 List of Subsidiaries
23 Consent of independent Public Accountants
*Incorporated herin 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, 1997.
1. On May 5, 1997, the Company filed a current
report on Form 8-K announcing the declaration
of a one-time special dividend of $2.50 per
share to all shareholders of record on May 16,
1997, payable on May 30, 1997.
(c) See (a) (3) above for all exhibits filed herewith
and the Exhibit Index.
(d) There are no other financial statements and
financial statement 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:
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.
COMMUNITY FEDERAL BANCORP, INC.
Date: Dec. 23, 1997 By: (Signature)
Jim Ingram
President and Cheif Executive Officer
(Duly Authorized Representative)
By: (Signature)
Sherry McCarty
Controller
(Chief Financial and Accounting Officer)
(Duly Authorized 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 capacities indicated below as of the date
indicated above.
Date: Dec. 23, 1997
(Signature) (Signature)
Medford M. Leake J. Leighton Pettis
Director Director
(Signature) (Signature)
Charles V. Imbler L. F. Sams, Jr.
Director Director
(Signature) (Signature)
Robert R. Black, Sr. Michael R. Thomas
Director Director
(Signature)
Robert Reed, III
Director
Exhibit 21
LIST OF SUBSIDIARIES
Name of Business State of Incorporation
Community Federal Savings Bank Mississippi
Exhibit 23
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 24, 1997 included in the Community Federal
Bancorp, Inc.'s Form 10-K for the year ended September 30, 1997
and to all references to our Firm included in this registration
statement.
ARTHUR ANDERSEN LLP
Birmingham, Alabama
December 23, 1997
To Our Stockholders:
Community Federal Bancorp's first full year as a public company
yielded record financial results and accomplishments of several
objectives, critical to building long-term shareholder value.
Net income for the fiscal year ended September 30, 1997 exceeded
$3 million, eclipsing our 1996 earnings by 41% and setting a new
standard for your company. These earnings represented a 1.41%
return on average assets and amounted to $.70 on a per share
basis.
Effective management of our capital was, and remains, a priority
of your Board of Directors and management team. Toward those
ends we paid a special dividend of $10.6 million, or $2.50 per
share, in May of 1997. A dividend of 7 1/2 cents per share has
been approved for the first quarter of fiscal 1998 and dividend
levels will continue to be evaluated in conjunction with our
operating strategies. We have also received authorization to
repurchase up to 231,437 shares, or roughly 5.0% of the Company's
outstanding common stock, to be done at management's discretion.
In addition to capital management, our strategic plan for 1997,
and beyond, called for growth through expansion of our retail
banking business and adding to our growing commercial lending
base. The grand opening of our West Tupelo branch at the corner
of West Main and Rutherford Road in October 1997 was at the
centerpiece of these plans. Its 3,500 square feet, four drive-up
windows and automatic teller machine will enable us to serve our
customers on a fast, efficient manner and promote growth!
We also added to our already strong customer service team with
the addition of two excellent consumer / commercial lenders and
eight additional employees. Continued investment in our people
also has taken the form of increased emphasis on training.
Our growth strategy in 1998 will go beyond the expansion of our
retail business described above. We will institute a disciplined
wholesale growth program, utilizing a diversified mix of
"securitized assets" which look like and are used exactly like
the loans that are currently on our books. These will be funded
by NOW accounts, short and intermediate certificates of deposits
and Federal Home Loan Bank advances with a goal of growing assets
under this program by a minimum of 25% during fiscal 1998. We
are confident that this managed program will result in continued
improvement of our return on equity.
Your Company is fortunate to have a group of dedicated, capable,
and energetic employees. This group has worked diligently
during this year to make the transition from a traditional thrift
to a community bank. With these enthusiastic employees we can
face the future with high expectations and confidence. We know
that our shareholders and customers will receive the best in
personal service.
Thank you for your continuing support. We are dedicated to
adding to the value of your investment in Community Federal.
Jim Ingram
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,
Ms 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, 1997,
there were 4,628,750 shares of the common stock outstanding and
approximately 2,445 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 1997:
Fourth quarter $18.750 $17.250 $.075 $ .000
Third quarter 20.750 16.875 .075 2.500
Second quarter 20.000 16.750 .075 .000
First quarter 17.375 13.375 .075 .000
Fiscal 1996:
Fourth quarter $13.625 $12.250 $.075 $ .000
Third quarter 13.475 12.375 .075 .000
Second quarter 13.500 11.750 .000 .000
SELECTED CONSOLIDATED FINANCIAL AND OTHER DATA
Year Ended September 30,
1997 1996 1995 1994 1993
INCOME STATEMENT DATA:
Total interest income 14,508 13,150 11,016 10,011 10,275
Total interest expense 7,024 6,950 6,267 6,438 5,312
Net interest expense 7,484 6,200 4,749 3,573 4,963
Provision for loan losses 20 20 30 25 100
Net interest income
after provision for
loan losses 7,464 6,180 4,719 3,548 4,863
Noninterest income 227 188 132 752 133
Noninterest expense 2,926 3,036 1,672 1,840 1,508
Income before income taxes 4,765 3,332 3,179 2,460 3,488
Provision for income taxes 1,728 1,184 1,144 1,012 1,171
Cumulative effect of change
in accounting principle 0 0 0 131 0
Net income 3,037 2,148 2,035 1,317 2,317
Earnings per share (1) $.70 $.27 N/A N/A N/A
At September 30,
1997 1996 1995 1994 1993
BALANCE SHEET DATA:
Total assets 215,938 204,017 162,042 154,600 147,909
Loans receivable, net 127,335 117,631 97,988 84,269 84,429
Securities:(2)
Available for sale 73,976 75,112 25,125 N/A N/A
Held to maturity 4,157 4,756 33,837 N/A N/A
Mortgage-backed and
related securities(2) N/A N/A N/A 33,755 29,043
Securities(2) N/A N/A N/A 30,146 15,615
Deposits 132,718 131,740 134,555 131,989 129,035
Stockholders' equity 58,563 67,139 23,427 20,394 17,650
Year Ended September 30,
1997 1996 1995 1994 1993
KEY OPERATING DATA:
Return on average assets 1.5% 1.1% 1.3% 0.9% 1.6%
Return on average equity 4.7 4.4 9.4 7.0 14.0
Average equity to average assets 30.9 26.2 13.6 12.4 11.1
Dividend payout ratio (1) 389.7 57.9 N/A N/A N/A
Number of offices 2 1 1 1 1
(1) Earnings per share and dividend payout ratios are presented
from the conversion date.
(2) Securities are presented in connection with the Company's
adoption of Statement of Accounting Standards No. 115 as of
October 1, 1994.
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
are 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's primary lending emphasis has been the origination
for portfolio of one-to-four family residential first mortgage
loans in 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, the
Savings Bank also recently 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, earnings and funds from repayments of loans
and securities into mortgage-backed securities and collateralized
mortgage obligations 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 recently
began to originate 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,
1997, 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 $1.1 million or .5% 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, 1997, the Savings Bank's tangible,
core and risk-based capital ratios amounted to 21.5%, 21.5%, and
47.5%, respectively, which exceeded the minimum requirements of
1.5%, 3.0%, and 8.0%, respectively.
Low Levels of Non-Interest Expense. The Savings Bank's
non-interest expenses were 1.4% of average total assets for the
fiscal year ended September 30, 1997 and have averaged
approximately 1.2% of average total assets annually for each of
the five fiscal years in the period ended September 30, 1997.
Changes in Financial Condition
At September 30, 1997, the Company's assets totaled $215.9
million, as compared to $204 million at September 30, 1996.
Total assets increased by $11.9 million, or 5.9%, from
September 30, 1996 to September 30, 1997. The increase in total
assets during this period was principally funded through $18.3
million in advances from the FHLB of Dallas.
The increase in total assets at September 30, 1997 was due
primarily to a $9.7 million, or 8.3% increase in the Savings
Bank's net loans receivable, and a $2.7 million increase in
premises and equipment reflective of the new west Tupelo branch,
which was partially offset by a $1.7 million decrease in
securities. The $9.7 million increase in loans was the result of
the Company's election to invest a substantial portion of its
excess funds into loans, especially one-to-four family
residential, construction and consumer loans and securities.
During the fiscal year ended September 30, 1997, total deposits
increased by $1.0 million, or .7%, to $132.7 million. The
Company's equity decreased by $8.5 million to $58.6 million at
September 30, 1997 compared to $67.1 million at September 30,
1996 due primarily to a $2.5 million increase in unearned
compensation associated with the ESOP and MRP plans, payment of
regular and special dividends of $11.8 million, and an increase
in unrealized gain on securities available for sale, net of
deferred taxes, of $2.6 million.
Results of Operations for the Years Ended September 30, 1997,
1996, and 1995
The Company had net income of $3.0 million for the year ended
September 30, 1997 compared to net income of $2.1 million for
fiscal 1996. The $888,000 increase in net income represented a
41.3% increase over fiscal 1996. The Company's net income of
$2.1 million for the fiscal year ended September 30, 1996
represented an increase of $113,000 or 5.6% over fiscal 1995.
Net income for fiscal 1996 was materially affected by the
$864,000 one-time special assessment of 65.7 basis points on SAIF
insured deposits as of March 31, 1995. But for this event, the
Company's net income for fiscal 1996 would have been $3 million
as compared to the $2.1 million reported in the consolidated
statements of income.
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.
The Company's net interest income increased by $1.3 million, or
20.7%, in fiscal 1997 compared to fiscal 1996. The increase in
the net interest income rate was primarily the result of an
increase in the Company's average interest-earning assets in 1997
as compared to 1996.
Interest expense on deposits decreased by $280,000, or 4.0%,
during the fiscal year ended September 30, 1997 compared to
fiscal 1996. Such decrease was due primarily to a decrease in
interest paid on deposits, as a result of a 43 basis point
decrease in the average rate paid. This decrease in interest
paid on deposits was partially offset by the $374,000 of interest
paid on FHLB advances that the Company obtained from the FHLB of
Dallas during fiscal 1997. The Company borrowed from the FHLB of
Dallas to meet short-term liquidity needs at interest rates that
were lower than funds then available in its traditional deposit
market.
Total interest income increased by $2.1 million, or 19.4%, in the
fiscal year ended September 30, 1996 compared to fiscal 1995.
The primary reason for the increase in fiscal 1996 was an 18.2%
increase in interest-earning assets from fiscal 1995 to 1996.
The increase in average assets is the result of the stock
offering.
Total interest expense increased by $682,000, or 10.9%, in fiscal
1996 compared to fiscal 1995, and was primarily the result of 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 Company'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 Company's
interest-earning assets increased less rapidly than
interest-bearing liabilities.
Provision for Loan Losses. The Savings Bank's provision for loan
losses was $20,000 for the fiscal year ended September 30, 1997
compared to $20,000 and $30,000 during fiscal 1996 and 1995,
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 1996 and 1997 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 generally accepted
accounting principles ("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 $227,000 in fiscal
1997, an increase of $39,000, or 20.7%, compared to non-interest
income of $188,000 in fiscal 1996. The primary difference in
non-interest income between fiscal 1997 and fiscal 1996 was the
$53,000 decrease in net gain on the sale of securities in fiscal
1997 compared to fiscal 1996; the $25,000 increase in loan
servicing fees in 1997, compared to $67,000 in loan servicing
fees in 1996; and a $67,000 increase in other non-interest
income. Non-interest income amounted to $188,000 for the fiscal
year ended September 30, 1996 compared to $132,000 for fiscal
1995. The increase was due primarily to a $55,000 increase in
net gain on sales of securities.
Non-Interest Expenses. Non-interest expenses decreased $108,000
in fiscal 1997 compared to fiscal 1996 from $3.0 million to $2.9
million. The primary reasons for the decrease were attributable
to the one-time special assessment of $864,000 to recapitalize
the SAIF in 1996, the $194,000 decrease in regular deposit
insurance premiums; offset by the $810,000 increase in
compensation and benefits resulting from an increase in
personnel, merit raises, and the ESOP and MRP plans, and a
$101,000 increase in other expenses.
The primary reasons for the increase in non-interest expenses in
fiscal 1996 compared to fiscal 1995 were the $864,000 one-time
special assessment 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.
Income Taxes. The provision for income taxes was $1.7 million,
$1.2 million, and $1.1 million in fiscal 1997, 1996, and 1995,
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 $4.8 million, $3.3
million, and $3.2 million, respectively. See Note 11 of the
Notes to Consolidated Financial Statements.
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 tables also present information for the periods indicated and
at September 30, 1997 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.
As of
Sep 30, Year Ended September 30,
1997 1997
Weighted Average Yield
Yield/Rate Balance Interest /Rate
Interest-earning assets:
Loans receivable, net 7.89% $123,610 $9,797 7.93%
Securities:
Available for sale 6.80 71,645 4,164 5.81
Held to maturity 6.21 4,542 266 5.86
Other interest-earning
assets(1) 6.04 5,001 281 5.62
Total interest-earning
assets 7.43% 204,798 14,508 7.08
Non-interest-earning
assets 3,132
Total assets $207,930
Interest-bearing liabilities:
Transaction accounts 2.96 19,959 589 2.95
Certificates of deposit 5.53 111,745 6,061 5.42
Borrowings 5.92 6,945 374 5.39
Total interest-bearing
liabilities 5.23 138,649 7,024 5.07
Non-interest-bearing
liabilities 5,024
Total liabilities 143,673
Equity 64,257
Total liabilities
and equity $207,930
Net interest income;
interest rate spread 2.20% $7,484 2.02%
Net interest margin (2) 3.65%
Average interest-earning
assets to average
interest-bearing liabilities 147.71%
Year Ended September 30,
1996
Average Yield
Balance Interest /Rate
Interest-earning assets:
Loans receivable, net $104,425 $8,610 8.25%
Securities:
Available for sale 56,340 3,249 5.77
Held to maturity 11,998 825 6.88
Other interest-earning assets(1) 9,242 465 5.03
Total interest-earning assets 182,005 13,149 7.22
Non-interest-earning assets 5,214
Total assets $187,219
Interest-bearing liabilities:
Transaction accounts 26,507 621 2.79
Certificates of deposit 107,848 6,309 5.85
Borrowings 250 19 7.60
Total interest-bearing liabilities 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 $6,200 2.06%
Net interest margin (2) 3.41%
Average interest-earning assets to
average interest-bearing liabilities 135.21%
Year Ended September 30,
1995
Average Yield
Balance Interest /Rate
Interest-earning assets:
Loans receivable, net $ 90,778 $7,041 7.76%
Securities:
Available for sale 37,260 2,322 6.23
Held to maturity 21,883 1,432 6.54
Other interest-earning assets(1) 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 (2) 3.08%
Average interest-earning assets to
average interest-bearing liabilities 114.61%
(1) Consists primarily of interest-bearing deposits in banks.
(2) Net interest margin is net interest income divided by
average interest-earning assets.
Rate/Volume Analysis
The following tables describe the extent to which changes in
interest rates and changes in volume of interest-related assets
and liabilities have affected the Company'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.
Year Ended September 30,
1997 Compared to 1996
Increase Increase Total
(Decrease) (Decrease) Increase
Due to Rate Due to Volume (Decrease)
Interest-Earning Assets:
Loans $(317) $1,504 $1,187
Securities:
Available for sale 160 755 915
Held to maturity (203) (356) (559)
Mortgage-backed and
related securities (1) 0 0 0
Securities (2) 0 0 0
Other interest-earning assets 63 (247) (184)
Total interest-earning assets $(297) $1,656 $1,359
Interest-Bearing Liabilities:
Deposits and borrowings $(123) $ 198 $ 75
Increase (decrease) in
net interest income $(174) $1,458 $1,284
Year Ended September 30,
1996 Compared to 1995
Increase Increase Total
(Decrease) (Decrease) Increase
Due to Rate Due to Volume (Decrease)
Interest-Earning Assets:
Loans $464 $1,106 $1,570
Securities:
Available for sale (220) 1,147 927
Held to maturity 660 (1,268) (608)
Mortgage-backed and
related securities (1) 0 0 0
Securities (2) 0 0 0
Other interest-earning assets (12) 256 244
Total interest-earning assets $892 $1,241 $2,133
Interest-Bearing Liabilities:
Deposits and borrowings $674 $ 8 $ 682
Increase (decrease) in
net interest income $218 $1,233 $1,451
Year Ended September 30,
1995 Compared to 1994
Increase Increase Total
(Decrease) (Decrease) Increase
Due to Rate Due to Volume (Decrease)
Interest-Earning Assets:
Loans $ 0 $ 588 $ 588
Securities:
Available for sale 0 2,322 2,322
Held to maturity 0 (1,717) (1,717)
Mortgage-backed and
related securities (1) 252 1,609 1,861
Securities (2) (428) (1,435) (1,863)
Other interest-earning assets 178 (363) (185)
Total interest-earning assets $ 2 $1,004 $1,006
Interest-Bearing Liabilities:
Deposits and borrowings $(248) $ 77 $ (171)
Increase (decrease) in
net interest income $ 250 $ 927 $1,177
(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 1996 and 1995.
<PAGE>
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,
1997, the Company had approximately $5.4 million in cash on hand
and interest-bearing deposits in other banks, which represented
2.5% of total assets. At September 30, 1997, the Company's level
of liquid assets, as measured for regulatory compliance purposes
was 9%, or $5.5 million, in excess of the minimum liquidity
requirement of 5%.
At September 30, 1997, the Savings Bank had $48.6 million of
total equity or 23.9% of total assets. The Savings Bank
continues to exceed its regulatory capital requirements ratios at
September 30, 1997. Tangible and core capital were $43 million,
which represented 21.5% of adjusted total assets and risk-based
capital was $43.6 million which represented 47.5% of total
risk-weighted assets at September 30, 1997. Such amounts
exceeded the minimum required ratios of 1.5%, 3%, and 8%,
respectively. At September 30, 1997, the Savings Bank continued
to meet the definition of a "well-capitalized" institution, the
highest of the five categories under the FDICIA prompt corrective
action standards.
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, 1997 and
1996, and the related consolidated statements of income,
stockholders' equity, and cash flows for each of the three years
in the period ended September 30, 1997. These financial
statements are the responsibility of the Company's management.
Our responsibility is to express an opinion on these financial
statements based on our audits.
We conducted our audits in accordance with generally accepted
auditing standards. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether
the financial statements are free of material misstatement. An
audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An
audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating
the overall financial statement presentation. We believe that
our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to
above present fairly, in all material respects, the consolidated
financial position of Community Federal Bancorp, Inc. and
Subsidiary as of September 30, 1997 and 1996, and the results of
their operations and their cash flows for each of the three years
in the period ended September 30, 1997, in conformity with
generally accepted accounting principles.
Birmingham, Alabama
October 24, 1997
COMMUNITY FEDERAL BANCORP, INC.
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
AS OF SEPTEMBER 30, 1997 AND 1996
ASSETS
1997 1996
CASH AND CASH EQUIVALENTS $ 3,886,874 $ 1,764,355
INTEREST-BEARING DEPOSITS IN BANKS 1,550,129 2,441,324
SECURITIES AVAILABLE FOR SALE,
at fair value 73,976,278 75,111,784
SECURITIES HELD TO MATURITY, at
amortized cost (estimated fair
value of $4,122,225 and
$4,625,305 respectively) 4,156,732 4,755,702
LOANS RECEIVABLE, net 127,334,958 117,630,885
ACCRUED INTEREST AND DIVIDENDS
RECEIVABLE 1,239,777 1,343,947
PREMISES AND EQUIPMENT, net 3,318,561 607,267
OTHER ASSETS 474,514 361,678
Total assets $215,937,823 $204,016,942
LIABILITIES AND STOCKHOLDERS' EQUITY
DEPOSITS $132,718,390 $131,740,433
FEDERAL HOME LOAN BANK ADVANCES 18,282,186 0
OTHER LIABILITIES:
Accrued interest payable 731,619 616,422
Advances from borrowers for taxes
and insurance 424,356 444,784
Deferred income taxes payable 3,410,146 1,893,037
Accrued expenses and other liabilities 1,808,125 2,183,370
Total liabilities 157,374,822 136,878,046
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' 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 46,288
Additional paid-in capital 45,113,004 45,006,311
Retained earnings 13,714,336 22,511,930
Unearned compensation (5,998,323) (3,464,110)
Unrealized gain on securities
available for sale, net 5,687,696 3,038,477
Total stockholders' equity 58,563,001 67,138,896
Total liabilities and
stockholders' equity $215,937,823 $204,016,942
The accompanying notes are an integral part of these statements.
COMMUNITY FEDERAL BANCORP, INC.
CONSOLIDATED STATEMENTS OF INCOME
FOR THE YEARS ENDED SEPTEMBER 30, 1997, 1996, AND 1995
1997 1996 1995
INTEREST INCOME:
Interest and fees on loans:
Mortgage loans $ 9,010,094 $ 8,217,595 $ 6,706,168
Consumer loans 325,172 262,356 290,673
Commercial loans 462,641 130,510 43,870
Interest and dividends
on securities held to
maturity 265,859 824,987 1,432,584
Interest and dividends
on securities available
for sale 4,163,866 3,249,772 2,321,642
Other interest income 280,980 464,598 220,885
Total interest income 14,508,612 13,149,818 11,015,822
INTEREST EXPENSE:
Deposits 6,649,961 6,930,124 6,119,346
Other borrowings 374,366 19,410 147,970
Total interest expense 7,024,327 6,949,534 6,267,316
Net interest income 7,484,285 6,200,284 4,748,506
PROVISION FOR LOAN LOSSES 20,000 20,000 30,000
Net interest income
after provision for
loan losses 7,464,285 6,180,284 4,718,506
NONINTEREST INCOME:
Gain on sale of securities
available for sale, net 1,967 54,838 0
Loan servicing fees 92,686 67,254 62,971
Other income 132,348 65,656 69,428
Total noninterest income 227,001 187,748 132,399
NONINTEREST EXPENSES:
Compensation and benefits 1,963,349 1,153,133 839,466
Special SAIF assessment 0 863,835 0
Deposit insurance premium 123,616 317,896 305,811
Occupancy and equipment 144,382 134,745 118,774
(Gain) loss on real estate
owned, net 3,279 (15,119) (217)
Loss on sale of loans, net 9,616 0 1,444
Other expenses 682,401 580,990 406,587
Total noninterest expenses 2,926,643 3,035,480 1,671,865
Income before income taxes 4,764,643 3,332,552 3,179,040
PROVISION FOR INCOME TAXES 1,728,120 1,184,294 1,144,334
NET INCOME $3,036,523 $2,148,258 $2,034,706
EARNINGS PER SHARE $.70 $.27 N/A
The accompanying notes are an integral part of these statements.
COMMUNITY FEDERAL BANCORP, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
FOR THE YEARS ENDED SEPTEMBER 30, 1997, 1996, AND 1995
Additional
Common Paid-In Retained
Stock Capital Earnings
BALANCE, Sep 30, 1994 0 0 18,996,038
Net income 0 0 2,034,706
Change in unrealized
gain on securities
available for sale, net 0 0 0
BALANCE, Sep 30, 1995 0 0 21,030,744
Net income 0 0 2,148,258
Change in unrealized
gain (loss) on securities,
due to the reclassification
of securities from held to
maturity to available for
sale, net 0 0 0
Issuance of common stock 46,288 44,954,433 0
Change in unrealized gain on
securities available for
sale, net 0 0 0
Amortization of unearned
compensation 0 51,878 0
Dividends declared
($.15 per share) 0 0 (667,072)
BALANCE, September 30, 1996 46,288 45,006,311 22,511,930
Net income 0 0 3,036,523
Contributions to stock
plan trusts 0 (16,922) 0
Change in unrealized gain on
securities available for
sale, net 0 0 0
Amortization of unearned
compensation 0 123,615 0
Dividends declared
($2.80 per share) 0 0 (11,834,117)
BALANCE, September 30, 1997 46,288 45,113,004 13,714,336
Unrealized
Gain on
Securities
Unearned Available for
Compensation Sale, Net Total
BALANCE, Sep 30, 1994 0 1,398,075 20,394,113
Net income 0 0 2,034,706
Change in unrealized
gain on securities
available for sale, net 0 998,081 998,081
BALANCE, Sep 30, 1995 0 2,396,156 23,426,900
Net income 0 0 2,148,258
Change in unrealized
gain (loss) on securities,
due to the reclassification
of securities from held to
maturity to available for
sale, net 0 (28,115) (28,115)
Issuance of common stock (3,632,000) 0 41,368,721
Change in unrealized gain on
securities available for
sale, net 0 670,436 670,436
Amortization of unearned
compensation 167,890 0 219,768
Dividends declared
($.15 per share) 0 0 (667,072)
BALANCE, September 30, 1996 (3,464,110) 3,038,477 67,138,896
Net income 0 0 3,036,523
Contributions to stock
plan trusts (3,065,278) 0 (3,082,200)
Change in unrealized gain on
securities available for
sale, net 0 2,649,219 2,649,219
Amortization of unearned
compensation 531,065 0 654,680
Dividends declared
($2.80 per share) 0 0 (11,834,117)
BALANCE, September 30, 1997 (5,998,323) 5,687,696 58,563,001
The accompanying notes are an integral part of these statements.
COMMUNITY FEDERAL BANCORP, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED SEPTEMBER 30, 1997, 1996, AND 1995
1997 1996 1995
CASH FLOWS FROM OPERATING
ACTIVITIES:
Net income $3,036,523 $2,148,258 $2,034,706
Adjustments to reconcile net
income to net cash provided
by operating activities:
Depreciation 81,139 63,832 55,961
Deferred income tax provision
(benefit) 71,401 (281,057) 8,634
Amortization of deferred loan
fees and costs, net 32,371 47,949 44,216
Amortization of discounts and
premiums of accretion,net (48,587) (84,616) (96,389)
Amortization of unearned
compensation 654,680 219,768 0
Provision for losses on loans 20,000 20,000 30,000
FHLB stock dividends (75,000) (72,589) (70,900)
Gain on sale of loans 9,616 0 1,444
Loss on disposal of equipment 0 0 1,299
Gain on sale of securities
available for sale, net (1,967) (54,838) 0
Loss on sale of interest
bearing deposits 0 0 558
(Gain) loss on sale of repossessed
assets, net 3,279 (15,119) (217)
Changes in assets and liabilities:
Decrease (increase)in other
assets 4,525 (171,199) 8,727
Decrease (increase)in
interest and dividends
receivable 104,170 (184,782) (178,393)
Increase in income taxes
payable 71,652 53,588 150,299
Increase (decrease)in
accrued interest payable 115,197 (47,050) 303,178
Increase (decrease)in
accrued expenses and
other liabilities (446,868) 1,728,892 (64,534)
Total adjustments 595,608 1,222,779 193,883
Net cash provided by
operating activities 3,632,131 3,371,037 2,228,589
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from sale of
repossessed assets 13,000 190,000 0
Proceeds from maturities and
principal collections of
securities held to maturity 590,329 1,921,600 3,075,834
Proceeds from maturities,
principal collections, and
calls of securities available
for sale 12,998,115 13,165,134 3,595,826
Proceeds from sales of
securities available for sale 5,498,843 2,621,913 0
(Purchase of) proceeds from
maturities of interest-bearing
deposits in banks, net 891,195 (692,324) 490,393
(Purchase of) proceeds from
sale of property and
equipment, net (2,792,433) (6,351) (227,410)
Investment in real estate owned (7,064) (2,031) 2,464
Proceeds from sale loans 1,060,138 0 220,856
Loan (originations) and
principal repayments, net (10,952,774) (19,744,689)(14,015,127)
Purchase of securities
available for sale (13,132,359) (36,586,411) 0
Purchase of securities held
to maturity 0 (559,141) 0
Net cash used by
investing activities (5,833,010) (39,692,300) (6,857,164)
CASH FLOWS FROM FINANCING
ACTIVITIES:
(Decrease) increase in customer
deposits, net 977,957 (2,814,071) 2,565,448
Proceeds from (repayments of)
FHLB advances, net 18,282,186 (1,000,000) 1,000,000
(Decrease) increase in advances
from borrowers for taxes and
insurance (20,428) 51,940 28,055
Proceeds from stock offering 0 41,368,721 0
Contributions to stock plan
trusts (3,082,200) 0 0
Dividends paid (11,834,117) (667,072) 0
Net cash provided
by financing
activities 4,323,398 36,939,518 3,593,503
Net increase
(decrease) in cash
and cash equivalents 2,122,519 618,255 (1,035,072)
CASH AND CASH EQUIVALENTS,
beginning of year 1,764,355 1,146,100 2,181,172
CASH AND CASH EQUIVALENTS,
end of year $3,886,874 $1,764,355 $1,146,100
SUPPLEMENTAL CASH FLOW
INFORMATION:
Cash paid for:
Interest on deposits and
other borrowings $6,909,130 $7,049,843 $5,964,138
Income taxes $1,668,000 $1,185,000 $ 975,000
SUPPLEMENTAL NONCASH INVESTING
AND FINANCING ACTIVITIES:
Transfer of loans to
repossessed assets $ 126,576 $ 33,878 $ 0
Change in unrealized net gain
on securities available
for sale, net of deferred
taxes $2,649,219 $ 642,321 $ 998,081
Transfer of securities from
held to maturity to available
for sale at fair value $ 0 $27,758,607 $ 0
The accompanying notes are an integral part of these statements.
COMMUNITY FEDERAL BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 1997 and 1996
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 two offices 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 $3,886,874 and $1,764,355 at
September 30, 1997 and 1996, respectively, consist of cash on
hand of $797,092 and $155,000 at September 30, 1997 and 1996,
respectively, and cash due from and on deposit with other
financial institutions of $3,089,782 and $1,609,355 at
September 30, 1997 and 1996, 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 excluded 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.
The Company's available for sale portfolio consists of U.S.
Government and federal agencies, mortgage-backed and related
securities, and equity securities. Also included in securities
available for sale is FHLB common stock, which is carried at cost
and evaluated for impairment, as it is considered a restricted
investment security.
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.
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'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, 1997 and 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 property or the fair value of the property,
less estimated costs of disposition. 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.
Declines in the fair value of the asset, less costs of
disposition below its carrying amount, result in a loss provision
to increase the valuation allowance account. 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
1997, 1996, and 1995 were $521, $8,929, and $457, respectively.
The amounts capitalized in 1997, 1996, and 1995, were $7,064,
$2,031, and $0, respectively.
Premises and Equipment
Land is carried at cost. Buildings, furniture, fixtures, and
equipment are carried at cost, less accumulated depreciation.
Buildings, 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
Provisions for income taxes are based on taxes payable or
refundable for the current year (after exclusion of nontaxable
income) and deferred income taxes on temporary differences
between the tax bases of assets and liabilities and their
reported amounts in the financial statements. Deferred tax
assets and liabilities are included in the financial statements
at currently enacted income tax rates applicable to the period in
which the deferred tax assets are enacted, deferred tax assets
and liabilities are adjusted through the provision for income
taxes in the period of enactment.
Pending Accounting Pronouncements
In February 1997, the Financial Accounting Standards Board
("FASB") issued SFAS No. 129, Disclosure of Information About
Capital Structure. This Statement establishes standards for
disclosing information about an entity's capital structure. It
applies to all entities. This Statement continues the previous
requirements to disclose certain information about an entity's
capital structure found in Accounting Principles Board ("APB")
Opinions No. 10, Omnibus Opinion--1996, and APB No. 15, Earnings
Per Share, and SFAS No. 47, Disclosure of Long-Term Obligations,
for entities that were subject to the requirements of those
standards. SFAS No. 129 eliminates the exemption of nonpublic
entities from certain disclosure requirements of APB No. 15 as
provided by SFAS No. 21, Suspension of the Reporting of Earnings
Per Share and Segment Information by Nonpublic Enterprises. It
supersedes specific disclosure requirements of APB Nos. 10 and 15
and SFAS No. 47 and consolidates them in this Statement for ease
of retrieval and for greater visibility to nonpublic entities.
SFAS No. 129 is effective for financial statements for periods
ending after December 15, 1997. It contains no change in
disclosure requirements for entities that were previously subject
to the requirements of APB Nos. 10 and 15 and SFAS No. 47.
In June 1997, the FASB issued SFAS No. 130, Reporting of
Comprehensive Income. This Statement established standards for
reporting and display of comprehensive income and its components
(revenues, expenses, gains, and losses) in a full set of
financial statements. This Statement also requires that all
items that are required to be recognized under accounting
standards as components of comprehensive income, be reported in
financial statements and are displayed with the same prominence
as other financial statements. This Statement is effective for
fiscal years beginning after December 15, 1997. Earlier
application is permitted. Reclassification of financial
statements for earlier periods provided for comparative purposes
is required.
In June 1997, FASB issued SFAS No. 131, Disclosures About
Segments of an Enterprise and Related Information. This
Statement establishes standards for the way that public business
enterprises report information about operating segments in annual
financial statements and requires that those enterprises report
selected information about operating segments in interim
financial reports issued to stockholders. This Statement also
establishes standards for related disclosures about products and
services, geographic areas, and major customers. This Statement
requires the reporting of financial and descriptive information
about an enterprise's reportable operating segments. This
Statement is effective for financial statements for periods
beginning after December 15, 1997. In the initial year of
application comparative information for earlier years is to be
restated.
Management believes there will be no material effect on the
consolidated financial statements from the adoption of these
pronouncements.
Earnings Per Share
Earnings per share are computed based on the weighted average
number of shares of common stock and common stock equivalents
outstanding during the period. Common stock equivalents for
earnings per share include the number of shares that could have
been purchased with the proceeds from the exercise of the options
related to the Management Recognition ("MRP") and the Incentive
Stock Option ("Stock Option") plans, based on the average market
price of common stock during the period. All allocated shares
held in the Employee Stock Ownership Plan ("ESOP") Trust are
considered outstanding for earnings per share calculations.
Earnings per share for the period from March 25, 1996, the date
of Conversion, to September 30, 1996, have been computed based on
the earnings during that period and on the weighted average
number of shares of common stock and common stock equivalents
outstanding during that period. 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.
In February 1997, the FASB issued SFAS No. 128, Earnings Per
Share. SFAS No. 128 establishes standards for computing and
presenting earnings per share ("EPS") and applies to entities
with publicly held common stock or potential common stock. This
Statement simplifies the standards for computing earnings per
share previously found in APB Opinion No. 15, Earnings Per Share,
and makes them comparable to international EPS standards. It
replaces the presentation of primary EPS with a presentation of
basic EPS and requires dual presentation of basic and diluted EPS
on the face of the income statement for all entities with complex
capital structures and requires a reconciliation of the numerator
and denominator of the basic EPS computation to the numerator of
the basic EPS computation to the numerator and denominator of the
diluted computation.
This Statement is effective for financial statements issued for
periods ending after December 15, 1997, including interim
periods; earlier application is not permitted. This Statement
requires restatement of all prior-period EPS data presented. The
Company will adopt the Statement in fiscal 1998.
Assuming the adoption of SFAS No. 128 had been consummated at
March 25, 1996, the date of conversion, the earnings per share
amounts for 1997 and 1996, on a pro forma basis, would have been
as follows:
Per Share
Income Shares Amount
1997:
Net income $3,036,253
Basic earnings per share:
Income available to common
shareholders 3,036,253 4,215,679 $.72
Dilutive securities:
Management recognition
plan shares 0 86,555
Stock option plan shares 0 51,151
Dilutive earnings per share:
Income available to common
shareholders plus assumed
conversions $3,036,253 4,353,385 $.70
1996:
Net income $1,152,177
Basic and dilutive earnings
per share:
Income available to common
shareholders $1,152,177 4,265,638 $.27
Financial Statement Reclassification
The financial statements for prior years have been reclassified
in order to conform with the 1997 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, 1997 and 1996 are summarized as follows:
1997
Gross Gross
Amortized Unrealized Unrealized Estimated
Cost Gains Losses Fair Value
U.S. government and
federal agencies
bonds and notes $ 8,000,000 $ 3,720 $ (25,650) $ 7,978,070
State and local
bonds and notes 682,787 0 (73,962) 608,825
Total bonds and
notes 8,682,787 3,720 (99,612) 8,586,895
Mortgage-backed and
related securities:
GNMA certificates 3,159,433 39,251 0 3,198,684
FHLMC certificates 9,033,574 140,292 0 9,173,866
FNMA certificates 11,257,885 13,514 0 11,271,399
Collateralized
mortgage obligations 26,318,085 47,288 (140,603) 26,224,770
Total mortgage-
backed and related
securities 49,768,977 240,345 (140,603) 49,868,719
Equity securities:
FNMA preferred 1,010,000 32,400 0 1,042,400
FHLMC common 457,927 5,935,838 0 6,393,765
FNMA common 734,975 3,194,225 0 3,929,200
FHLB common 1,319,500 0 0 1,319,500
Total equity
securities 3,522,402 9,162,463 0 12,684,865
Mutual funds 2,828,377 7,422 0 2,835,799
Total $64,802,543 $9,413,950 $(240,215) $73,976,278
1996
Gross Gross
Amortized Unrealized Unrealized Estimated
Cost Gains Losses Fair Value
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
Total bonds and
notes 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 preferred 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
US 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
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, 1997
Amortized Estimated
Cost Fair Value
Due in one year or less $ 4,000,000 $ 3,974,350
Due from one to five years $14,094,456 14,071,505
Due from five to ten years 9,275,085 9,274,463
Due after ten years 31,082,223 31,135,296
58,451,764 58,455,614
Equity securities 3,522,402 12,684,865
Mutual funds 2,828,377 2,835,799
Total $64,802,543 $73,976,278
Gross realized gains on the sale of securities available for sale
totaled $43,468 and $63,397, and gross realized losses totaled
$41,501 and $8,559 at September 30, 1997 and 1996, respectively.
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, 1997 and 1996 are summarized as
follows.
Gross Gross
Amortized Unrealized Unrealized Estimated
1997: Cost Gains Losses Fair Value
Collateralized mortgage
obligations $4,156,732 0 $(34,507) $4,122,225
1996:
Collateralized mortgage
obligations $4,755,702 0 $(130,397) $4,625,305
Collateralized mortgage obligations designated as held to
maturity at September 30, 1997 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.
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, 1997
Carrying Estimated
Value Fair Value
Due from one to five years $1,002,152 $ 993,480
Due from five to ten years 1,782,312 1,767,303
Due after ten years 1,372,268 1,361,442
$4,156,732 $4,122,225
4. LOANS RECEIVABLE, NET
Loans receivable at September 30, 1997 and 1996 are summarized as
follows:
1997 1996
Mortgage loans:
Principal balances:
Secured by 1-4 family residences $108,628,196 $102,020,850
Secured by multifamily and
nonresidential properties 6,081,926 7,165,559
Construction loans 3,147,984 3,336,971
117,858,106 112,523,380
Less:
Undisbursed portion of
mortgage loans 1,388,223 1,355,841
Unearned discounts and net
deferred loan origination fees 437,937 428,466
Total mortgage loans 116,031,946 110,739,073
Commercial loans 7,332,223 3,253,228
Consumer loans:
Principal balances:
Loans secured by automobiles 815,324 1,318,211
Loans secured by savings accounts 981,703 1,369,201
Other 2,763,762 1,523,172
Total loans 127,924,958 118,202,885
Less allowance for loan losses 590,000 572,000
Loans receivable, net $127,334,958 $117,630,885
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 collectibility, nor do they present other
unfavorable features. As of September 30, 1997 and 1996,
$2,081,135 and $1,666,839, respectively, of these loans were
outstanding. During fiscal year 1997, $1,078,541 of new loans
and advances were made, principal repayments totaled $664,250.
Activity in the allowance for loan losses is summarized as
follows:
1997 1996 1995
Balance at beginning of year $572,000 $552,000 $522,000
Provision charged to income 20,000 20,000 30,000
Charge-offs 2,000 0 0
Recoveries 0 0 0
Balance at end of year $590,000 $572,000 $552,000
The Bank had loans on nonaccrual status at September 30, 1997 and
1996 in the amounts of approximately $969,000 and $717,000,
respectively. Interest income forgone on nonaccrual loans was
approximately $50,000 and $38,000 for fiscal years 1997 and 1996,
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 $1,518,887, $2,212,865,
and $2,932,955 at September 30, 1997, 1996, and 1995,
respectively. Custodial escrow balances maintained in connection
with the foregoing loan servicing were $37,115, $45,805, and
$106,938, at September 30, 1997, 1996, and 1995, 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,
1997, 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, 1997
and 1996 are as follows:
1997 1996
Securities available for sale $ 472,199 $ 641,277
Securities held to maturity 21,504 2,276
Loans receivable 729,505 683,557
Other 16,569 16,837
Total $1,239,777 $1,343,947
7. PREMISES AND EQUIPMENT, NET
Premises and equipment at September 30, 1997 and 1996 are
summarized as follows:
1997 1996
Land $1,322,912 $ 137,068
Building and improvements 1,847,918 579,456
Furniture, fixtures, and equipment 715,273 377,146
Total 3,886,103 1,093,670
Less accumulated depreciation 567,542 486,403
Premises and equipment, net $3,318,561 $ 607,267
8. DEPOSITS
Deposits at September 30, 1997 and 1996, the related ranges of
interest rates payable for deposits at September 30, 1997, and
the weighted average rates paid during 1997 are summarized as
follows:
1997 1996
Amount Percent Amount Percent
NOW accounts, 2.5% to 5.00% 13,391,564 10.09 12,519,798 9.50
Savings accounts, 2.75% 6,741,456 5.08 6,873,038 5.22
20,133,020 15.17 19,392,836 14.72
Certificates of deposit:
4% to 4.99% 15,965,857 12.03 20,952,130 15.90
5% to 5.99% 61,189,886 46.11 67,348,478 51.12
6% to 6.99% 35,322,441 26.61 23,945,222 18.18
7% to 7.99% 107,186 .08 101,767 0.08
112,585,370 84.83 112,347,597 85.28
Total 132,718,390 100.00 131,740,433 100.00
The aggregate amounts of jumbo certificates of deposit with a
minimum balance of $100,000 were approximately $37,353,716 and
$33,504,337 at September 30, 1997 and 1996, respectively.
Deposits in excess of $100,000 are not federally insured.
Scheduled maturities of certificates of deposit at September 30,
1997 are as follows:
Years ending September 30:
1998 $ 85,785,377
1999 17,536,297
2000 5,713,048
2001 3,550,648
2002 0
Total $112,585,370
Interest expense on deposits for the years ended September 30,
1997, 1996, and 1995 is summarized as follows:
1997 1996 1995
Savings accounts $ 187,628 $ 260,564 $ 246,963
NOW accounts 402,199 360,598 302,300
Certificates of deposit 6,060,134 6,308,962 5,570,083
Total $6,649,961 $6,930,124 $6,119,346
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 the years ended September 30,
1997 and 1996 was approximately $348,000 and $220,000,
respectively. Unearned compensation related to the ESOP was
approximately $3,240,000 and $3,464,000 at September 30, 1997 and
1996, respectively, 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.
Management Recognition Plan
During fiscal 1997, the Bank established a MRP which purchased
174,450 shares of the Company's common stock on the open market
subsequent to the Conversion. The MRP provides for awards of
common stock to directors and officers of the Bank. The
aggregate fair market value of the shares purchased by the MRP is
considered unearned compensation at the time of purchase and
compensation is earned ratably over the stipulated vesting
period. The expense related to the MRP was approximately
$307,000 for 1997. Unearned compensation related to the MRP was
approximately $2,758,000 and is shown as a reduction to
stockholders' equity in the accompanying consolidated statements
of financial condition.
Stock Option Plan
During fiscal 1997, the Company established a stock option plan
to provide incentive stock options to employees and non-incentive
stock options to non- employee directors. The Company accounts
for the Plan under the provisions of Accounting Principles Board
Opinion ("APB") No. 25, Accounting for Stock Issued to Employees
(see Note 10).
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, 1997 and 1996:
1997 1996
Actuarial present value of
benefit obligations:
Accumulated benefit
obligation:
Vested $2,011,979 $1,900,209
Nonvested 55,209 49,085
Total 2,067,188 1,949,294
Additional benefit based on
estimated future salary levels 567,359 472,917
Projected benefit obligation for
service rendered to date 2,643,547 2,422,211
Plan assets at fair market value 2,254,819 2,018,315
Unfunded projected benefit obligation (388,728) (403,896)
Unrecognized net loss from past
experience different from that
assumed and effects of changes in
assumptions 364,104 442,654
Unrecognized net transition obligation
(asset from adoption of SFAS No. 87)
being amortized over 20 years (109,181) (118,279)
Unfunded pension cost liability
(included in other liabilities) $ 133,805 $ 79,521
The components of net periodic pension expense for the years
ended September 30, 1997, 1996, and 1995 are as follows:
1997 1996 1995
Service cost--benefits earned
during the period $ 63,033 $ 57,591 $ 64,357
Interest cost on the projected
benefit obligation 156,320 147,926 139,246
Actual return on plan assets (200,378) (120,002) (71,001)
Net asset gain (loss) during
the period deferred for
later recognition 9,779 13,507 14,485
Amortization of unrecognized
net obligation (9,098) (9,098) (9,099)
Net periodic pension cost $ 19,656 $ 89,924 $137,988
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 $33,199, $52,791, and $42,177, for fiscal years 1997, 1996,
and 1995, respectively. The related accrued compensation is
included in "accrued expenses and other liabilities" in the
accompanying consolidated statements of financial condition.
For fiscal year 1997 and 1996, the projected benefit obligations
related to the DRP were approximately $496,000 and $483,000; the
accumulated benefit obligations, which were accrued for and
included in "accrued expenses and other liabilities," were
approximately $325,000 and $309,000; and the service costs were
approximately $33,000 and $53,000, respectively. The weighted
average discount rate used was 6.5% for 1997 and 1996.
10. STOCK-BASED COMPENSATION PLANS
Effective July 1, 1996, the Company adopted SFAS No. 123,
Accounting for Stock-Based Compensation. This Statement
establishes financial accounting and reporting standards for
stock-based employee compensation plans. Those plans include all
arrangements by which employees receive shares of stock or other
equity instruments of the employer or the employer incurs
liabilities to employees in amounts based on the price of the
employer's stock. Examples are stock purchase plans, stock
options, restricted stock and stock appreciation rights. The
accounting requirements of this Statement are effective for
transactions entered into in fiscal years that begin after
December 15, 1995.
The Company has a stockholder approved Option Plan. The Option
Plan provides for the grant of incentive stock options ("ISO") to
employees and nonincentive stock options ("non-ISO") to
non-employee directors. The Company accounts for this plan under
APB No. 25, under which no compensation cost has been recognized.
The Company may grant options up to 462,875 shares under the
Option Plan and has granted options outstanding of 440,859 shares
through September 30, 1997. Under the Option Plan, the option
exercise price equals the stock's market price at the date of
grant. The options vest 20% per year and become exercisable upon
the participant's completion of each of five years of service.
Had compensation costs for these plans been determined consistent
with SFAS No. 123, the Company's net income and earnings per
share would have been reduced to the following pro forma amounts
for the year ended September 30, 1997:
Net income:
As reported $3,036,523
Pro forma 2,745,844
Earnings per share:
As reported $.70
Pro forma .63
Because the SFAS No. 123 method of accounting has not been
applied to options granted prior to March 25, 1996, the resulting
pro forma compensation costs may not be representative of that to
be expected in future years.
At September 30, 1997, unearned compensation related to the
Option Plan has not been recorded, as the Company has not
purchased shares of the Company's common stock to fund the Option
Plan Trust. A summary of the status of the Company's stock
option plan at September 30, 1997 and the changes during the year
then ended is as follows:
Weighted
Average Option
Exercise Price
Shares Price Per Share
Outstanding at beginning
of year 0
Granted 440,859 $15.42 $15.19--$15.94
Forfeitures 0
Exercised 0
Outstanding at end
of year 440,859 $15.42 $15.19--$15.94
Exercisable at end
of year 0 $ 0.00
Weighted average fair
value of the options
granted $6.92
The fair value of each option grant is estimated on the date of
grant using the Black-Scholes option pricing model with the
following weighted-average assumptions used for grants in 1997:
risk-free interest rates of 6.70% and 6.76%; expected life of the
options is 20% per year over the next five years and expected
volatility and dividend yields of 21% and 30%, respectively.
11. INCOME TAXES
The provisions for income taxes for the years ended September 30,
1997, 1996, and 199 were as follows:
1997 1996 1995
Current:
Federal $1,500,326 $1,324,389 $ 984,313
State 156,393 140,962 151,387
1,656,719 1,465,351 1,135,700
Deferred 71,401 (281,057) 8,634
Total $1,728,120 $1,184,294 $1,144,334
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, 1997,
1996, and 1995 were as follows:
1997 1996 1995
Expected income tax expense
at federal tax rate $1,619,979 $1,133,068 $1,080,874
Increase (decrease) resulting
from:
State income tax, net 107,588 75,840 99,580
Dividend received deduction (55,452) (47,997) (35,425)
Tax-exempt interest income 0 (5,798) (8,500)
Other 56,005 29,181 7,805
$1,728,120 $1,184,294 $1,144,334
Effective income tax rate 36% 35% 36%
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, 1997 and 1996 relate to the following:
1997 1996
SAIF assessment $ 0 $ 331,911
Book allowance for loan loss 224,200 217,360
Retirement plan 123,580 118,640
Accrued bonuses 54,792 42,066
Employee benefit plans 201,805 0
Deferred loan fees and costs, net 0 4,848
Other 50,902 25,775
Deferred tax asset 655,279 740,600
Unrealized gain on securities
available for sale (3,486,038) (2,040,330)
Tax bad debt reserve in excess
of base year (324,778) (389,734)
FHLB dividends (129,766) (101,266)
Accretion of bond discount (37,667) (20,302)
Deferred loan fees and costs, net (49,857) 0
Other (37,319) (82,005)
Deferred tax liability (4,065,425) (2,633,637)
Net deferred tax liability $(3,410,146) $(1,893,037)
Thrift institutions, in determining taxable income, had
historically been allowed special bad debt deductions based on
specified experience formulae or on a percentage of taxable
income before such deductions. On August 2, 1996, Congress
passed the Small Business Job Protection Act that, among other
things, repealed 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. At September 30, 1997, the Bank's
post-1987 tax bad debt reserve, subject to recapture, was
approximately $855,000. The Bank recaptured approximately
$171,000 of this reserve into taxable income in the current year.
The recapture did 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.
12. FEDERAL HOME LOAN BANK ADVANCES
The Company 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. At of September 30, 1997, the
Company had $18,282,186 in FHLB advances outstanding at a
weighted average variable rate of 5.93%.
13. REGULATORY MATTERS
The Bank is subject to various regulatory capital requirements
administered by the federal banking agencies. Failure to meet
minimum capital requirements can initiate certain mandatory and
possibly additional discretionary actions by regulators that, if
undertaken, could have a direct material effect on the Bank's
financial statements. Under capital adequacy guidelines and the
regulatory framework for prompt corrective action, the Bank must
meet specific capital guidelines that involve quantitative
measures of the Bank's assets, liabilities, and certain
off-balance sheet items as calculated under regulatory accounting
practices. The Bank's capital amounts and classifications are
also subject to qualitative judgments by the regulators about
components, risk weightings, and other factors.
Quantitative measures established by regulation to ensure capital
adequacy require the Bank to maintain minimum amounts and ratios
(set forth in the table which follows) of total and Tier 1
capital (as defined in the regulations) to risk-weighted assets
(as defined), and of Tier 1 capital (as defined) to average
assets (as defined). Management believes, as of September 30,
1997 and 1996, that the Bank meets all capital adequacy
requirements to which it is subject.
As of September 30, 1997 and 1996, the most recent notification
from the regulatory authorities categorized the Bank as well
capitalized under the regulatory framework for prompt corrective
action. To be categorized as well capitalized, the Bank must
maintain minimum total risk-based, Tier 1 risk-based, Tier 1
leverage ratios as set forth in the table which follows.
Actual capital amounts and ratios are presented in the table
below for the Bank:
To Be Well
Capitalized Under
For Capital Prompt corrective
Actual Adequacy Purpose Action Provision
Amount Ratio Amount Ratio Amount Ratio
($) (%) ($) (%) ($) (%)
September 30,1997
Total Capital
(To risk weighted
Assets) 43,555 47.5 7,335 8.0 9,169 10.0
Tier 1 (core)
capital (to risk
weighted assets) 42,965 46.9 N/A N/A 5,502 6.0
Tier 1 (core)
capital (to
adjusted total
assets) 42,965 21.5 6,000 3.0 9,999 5.0
Tangible Capital
(to adjusted
total assets) 42,965 21.5 3,000 1.5 N/A N/A
September 30, 1996
Total capital
(to risk weighted
assets) 42,406 50.8 6,679 8.0 8,349 10.0
Tier 1 (core)
capital (to risk
weighted assets) 41,834 50.1 N/A N/A 5,009 6.0
Tier 1 (core)
capital (to
adjusted total
assets) 41,834 22.8 5,496 3.0 9,160 5.0
Tangible Capital
(to adjusted
total assets) 41,834 22.8 2,748 1.5 N/A N/A
The following table is a reconciliation of the Bank's
stockholder's equity to tangible, Tier 1, and risk-based capital
as required by the OTS:
1997 1996
Stockholder's equity $ 48,604 $ 45,163
Unrealized gain on securities
available for sale (5,639) (3,329)
Tangible and Tier 1 capital 42,965 41,834
Allowance for loan losses 590 572
Total risk based capital $ 43,555 $ 42,406
Total assets $205,627 $186,538
Adjusted total assets 199,988 183,209
Total risk weighted assets 91,693 83,487
The Company's principal source of funds for dividend payments is
dividends from the Bank. Pursuant to OTS regulations, an
institution that exceeds all fully phased-in capital requirements
before and after a proposed capital distribution and has not been
advised by the OTS that it is in need of more than the normal
supervision can, after prior notice but without the approval of
the OTS, make capital distributions during a calendar year equal
to the greater of (i) 100% of its net income to date during the
calendar year plus the amount that would reduce by one-half its
"surplus capital ratio" (the excess capital over its fully
phased-in capital requirements) at the beginning of the calendar
year, or (ii) 75% of its net income over the most recent
four-quarter period. Any additional capital distributions
require prior regulatory approval.
14. COMMITMENTS AND CONTINGENCIES
Loan Commitments
At September 30, 1997, the Bank had outstanding commitments to
originate loans in the amount of $2,955,025. Of these
outstanding amounts, commitments of $1,106,600 were at fixed
rates ranging between 7.25% and 8.25%; terms for these
outstanding commitments are up to 360 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.
15. 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 54%), while its principal source of
funds is savings deposits with maturities of three years or less
(approximately 91%). 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, 1997, 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%, 13%, 20%, and 27% and increase 5%, 6%, 7%, and 11%
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.
16. 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, 1997.
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, 1997 and
1996, the fair value of these commitments is not material.
Many of the Company's assets and liabilities are short-term
financial instruments whose carrying amounts reported in the
statement of condition approximate their fair values. These
items include cash and due from banks, interest-bearing bank
balances, interest receivable and payable, and similar assets.
The estimated fair values of the Company's remaining on-balance
sheet financial instruments as of September 30, 1997 and 1996,
are summarized below:
1997 1996
Carrying Estimated Carrying Estimated
Value Fair Value Value Fair Value
Financial Assets:
Securities available
for sale 73,976 73,976 75,112 75,112
Securities held to
maturity 4,157 4,122 4,756 4,625
Loans, net 127,335 127,123 117,631 116,996
Financial Liabilities:
Deposits 132,718 132,599 131,740 131,648
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.
17. 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.
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
established a 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. Based upon its level
of SAIF deposits as of March 31, 1995, the Bank recorded its
special assessment of approximately $864,000 during the year
ended September 30, 1996. Upon recapitalization of the SAIF,
premiums paid by SAIF-insured institutions were 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.
18. 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 Bank 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 Bank. Pursuant to OTS
regulations, the Bank 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.
19. SIGNIFICANT EVENT
On May 2, 1997, the Company's Board of Directors declared a
special dividend of $2.50 per share. The dividend, payable
May 30, 1997, to shareholders of record as of May 16, 1997,
totaled approximately $10.6 million.
20. 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, 1997 and 1996 are presented below:
Statement of Financial Condition
September 30, 1997 and 1996
(Dollar amounts in thousands)
1997 1996
ASSETS:
Cash and cash equivalents $ 5,902 $ 1,633
Securities available for
sale 11,260 17,091
Investment in subsidiary 48,604 45,163
ESOP loan receivable 3,368 3,498
Premises and equipment 811 0
Other assets 313 388
Total assets $70,258 $67,773
LIABILITIES:
FHLB advances $10,500 $ 0
Other liabilities 1,195 635
Total liabilities 11,695 635
STOCKHOLDERS' EQUITY:
Preferred stock 0 0
Common stock 46 46
Additional paid-in capital 45,113 45,006
Retained earnings 13,714 22,512
Unearned compensation (5,998) (3,464)
Unrealized gain on securities
available for sale, net 5,688 3,038
Total stockholder's equity 58,563 67,138
Total liabilities and
stockholders' equity $70,258 $67,773
Statement of Income
For the Year Ended September 30, 1997 and 1996
(Dollar amounts in thousands)
1997 1996
INTEREST INCOME:
Interest and dividends on
securities available for sale $ 963 $ 561
Interest income from subsidiary 415 207
Total income 1,378 768
INTEREST EXPENSE 232 0
Net interest income 1,146 768
NONINTEREST EXPENSE:
Loss on sale of securities 29 0
Other operating expenses 165 24
INCOME BEFORE INCOME TAXES AND
EQUITY IN UNDISTRIBUTED CURRENT
YEAR SUBSIDIARY EARNINGS 952 744
INCOME TAXES 347 280
INCOME BEFORE EQUITY IN UNDISTRIBUTED
CURRENT YEAR SUBSIDIARY EARNINGS 605 464
EQUITY IN UNDISTRIBUTED CURRENT
YEAR SUBSIDIARY EARNINGS 2,431 1,684
Net income $3,036 $2,148
Statement of Cash Flows
For the Year Ended September 30, 1997
(Dollar amounts in thousands)
1997 1996
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $3,036 $2,148
Equity in undistributed current
year earnings of subsidiary (2,431) (1,684)
605 464
Adjustments to reconcile net income
to net cash provided by operating
activities:
Loss on sale of securities available
for sale 29 0
Amortization of premiums and discounts,
net 13 0
(Increase) decrease in other assets 75 (388)
Increase in other liabilities 530 635
Net cash provided by operating
activities 1,252 711
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from the sale of available
for sale securities 5,397 0
Purchase of property and equipment (811) 0
Purchase of securities available
for sale (1,920) (18,089)
Proceeds from maturities, principal
collections and calls on securities
available for sale 2,682 708
Net cash used by investing activities 5,348 (17,381)
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from FHLB advances, net 10,500 0
Contributions to stock plan trusts (1,127) 0
Proceeds from issuance of common
stock 0 41,368
Purchase of Bank's common stock 0 (22,532)
Payments received on ESOP loan 130 134
Dividends paid (11,834) (667)
Net cash provided by financing
activities (2,331) 18,303
NET INCREASE IN CASH AND CASH
EQUIVALENTS 4,269 1,633
CASH AND CASH EQUIVALENTS,
beginning of year 1,633 0
CASH AND CASH EQUIVALENTS,
end of year $5,902 $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.
Chairman of the Board Retired--Periodontist
President--Steel City Lumber Co. Tupelo, MS
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--Reed
Officer--Truck Center, Inc. Mfg. Co.
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 Terry Baker, Assistant Vice
Mitchell, McNutt, Threadgill, President
Smith & Sams Lynda Riley, Treasurer
Tupelo, MS Judy Ballard, Secretary
Sherry McCarty, Controller
Corporate Headquarters Independent Public Accountants
333 Court Street Arthur Andersen LLP
Tupelo, MS 38801 Birmingham, AL
(601) 842-3981
Transfer Agent Special Counsel
Registrar and Transfer Co. Elias, Matz, Tiernan and
Cranford, NJ Herrick, LLP
(800) 368-5948 Washington, DC
Listing of Common Stock Special Counsel
Traded Over-the-Counter Mitchell, McNutt, Threadgill,
NASDAQ National Market Smith & Sams, PA
System/ Symbol: CFTP Tupelo, MS
10-K Information
This report is available to
stockholders upon request to:
The Controller
PO Box F
Tupelo, MS 38802
(601) 840-0302
Annual Meeting
The 1998 Annual Meeting of the Stockholders of Community Federal
Bancorp, Inc. will be held at 5:00 p.m. on January 22, 1998, in
the Lobby of Community Federal Savings Bank, 333 Court Street,
Tupelo, Mississippi.
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