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, 1998
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
$3,050,813.
The aggregate market value of the registrant's outstanding common
stock held by non-affiliates of the registrant at December 10, 1998
was approximately $52,240,247(based on 3,425,590 shares at the most
recent trading price of which management was aware ($15.250 on
December 10, 1998) (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, 1998 was 4,318,250.
Transitional small business disclosure format: No.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Proxy Statement for the Registrant's 1998 Annual
Meeting of Stockholders (the "Proxy Statement") are incorporated
by reference in Part III of this form.
ITEM 1.--DESCRIPTION OF BUSINESS
General
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, 1998, the Company had $275.3
million of total assets, $217.8 million of total liabilities,
including $144.8 million of deposits, and $57.6 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 $116.7 million or
83% of the Savings Bank's total net loan portfolio, at
September 30, 1998. To a lesser extent, the Savings Bank
originates other mortgage loans secured by multi-family and
non-residential real estate, which amounted to $5.8 million or
4.1% of the total net loan portfolio, at September 30, 1998 and
construction loans for one-to-four family and multi-family
residences which amounted to $4.6 million or 3.2% 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 consumer loans to individuals. As of
September 30, 1998, the commercial loans amounted to $12 million
or 8.5% of the Savings Bank's total net loan portfolio.
Automobile loans together with loans secured by savings accounts
and other consumer loans had a total balance of $5.2 million or
3.7% of the Savings Bank's total net loan portfolio as of
September 30, 1998. 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, 1998, the carrying value of investments that
management has the intent and ability to hold until maturity was
$2.7 million and the carrying value of investments that were
available for sale was $119.8 million. In addition, as of that
same date, the Savings Bank's aggregate cash and interest-bearing
deposits in other banks totaled $3.7 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,
retail, 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
1997. During that period manufacturing jobs increased from 5,087
to 16,650. Non-manufacturing jobs increased from 4,062 in 1960 to
34,360 in 1997. 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 $1,280,100,000 in 1997. A
large shopping mall, the Mall at Barnes Crossing, had 10 million
visitors in 1997.
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 200 doctors
representing more than 40 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 (chip mills, 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 1997. 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, 1998, the Savings Bank's loans-to-one borrower
limit was $7.6 million and its five largest loans or groups of
loans-to-one borrower, including related entities, were $1.9
million, $1.7 million, $1.6 million, $1.5 million, and $1.5
million. 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, 1998.
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,
1998 1997 1996
Amount % Amount % Amount %
Mortgage Loans:
One-to-four family res. 116,674 82.50 108,628 85.31 102,021 86.73
Multi-family and non-res. 5,822 4.12 6,082 4.77 7,165 6.09
Construction loans 4,587 3.24 3,148 2.47 3,337 2.84
Total mortgage loans 127,083 89.87 117,858 92.55 112,523 95.66
Commercial Loans:
Real Estate 10,840 7.67 4,495 3.53 966 .82
Other 1,209 .85 2,837 2.23 2,287 1.95
Total commercial loans 12,049 8.52 7,332 5.76 3,253 2.77
Consumer Loans:
Real Estate 306 .22 0 0.00 0 0.00
Other 4,984 3.52 4,561 3.58 4,211 3.57
Total consumer loans 5,290 3.74 4,561 3.58 4,211 3.57
Total loans 144,422 102.13 129,751 101.89 119,987 102.00
Less:
Loans in process 1,799 1.27 1,388 1.09 1,356 1.15
Unearned discounts
and net deferred
loan origination fees 453 .32 438 .34 428 0.36
Allowance for loan losses 756 .53 590 .46 572 0.49
Loans receivable, net 141,414 100.00 127,335 100.00 117,631 100.00
September 30,
1995 1994
Amount % Amount %
Mortgage Loans:
One-to-four family res. 86,716 88.50 75,811 89.97
Multi-family and non-res. 5,946 6.07 6,728 7.98
Construction loans 3,310 3.38 1,120 1.33
Total mortgage loans 95,972 97.94 83,659 99.28
Commercial Loans:
Real Estate 0 0.00 0 0.00
Other 1,537 1.57 0 0.00
Total commercial loans 1,537 1.57 0 0.00
Consumer Loans:
Real Estate 0 0.00 0 0.00
Other 2,653 2.71 1,828 2.17
Total consumer loans 2,653 2.71 1,828 2.17
Total loans 100,162 102.22 85,487 101.45
Less:
Loans in process 1,279 1.31 429 0.51
Unearned discounts and
net deferred loan
origination fees 343 .35 267 0.32
Allowance for loan losses 552 .56 522 0.62
Loans receivable, net 97,988 100.00 84,269 100.00
Contractual Principal Repayments and Interest Rates. The
following table sets forth certain information at September 30,
1998 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 Over
or Less 6 Months 1 Year 3 Years 5 Years 5 Years Total
(In thousands)
Mortgage Loans
Adjustable 1 0 1 51 399 58,422 58,874
Fixed 4,510 824 451 1,673 4,066 56,685 68,209
Consumer 986 831 880 1,212 1,056 325 5,290
Commercial 693 1,314 1,113 120 1,903 6,906 12,049
Total 6,190 2,969 2,445 3,056 7,424 122,338 144,422
The following table sets forth the dollar amount of all loans,
before net items, due after one year from September 30, 1998
which have fixed interest rates or which have adjustable interest
rates.
Fixed Adjustable
Rates Rates Total
(In thousands)
One-to-four family residential 52,296 56,901 113,889
Multi-family and non-residential 10,127 1,971 12,098
Consumer 2,593 0 2,593
Commercial 8,930 0 8,930
Total 73,946 58,872 137,510
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 have 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 the Savings Bank purchased $900,000 of automobile loans 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 1998, 1997, 1996 nor 1995 but has instead
established a consumer lending department which originated $6.2
million,$5.6 million and $5.3 million of consumer loans in fiscal
1998, 1997,and 1996, respectively. It also began offering
commercial loans during fiscal 1996 and originated $11.5 million,
$6.0 million and $2.1 million of commercial loans during 1998,
1997 and 1996, respectively. During this three-year period, the
Savings Bank had loan sales of $2.8 million and $1.1 million in
fiscal 1998 and 1997, respectively, 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 $963 thousand at September 30, 1998 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,
1998 1997 1996
(In thousands)
Loan Originations:
One-to-four family residential $42,938 $27,320 $34,978
Multi-family and nonresidential 3,350 49 263
Construction 6,713 4,554 8,199
Commercial 11,512 5,968 2,149
Consumer 6,259 5,642 5,345
Total loans originated 70,772 43,533 50,934
Purchases 0 0 372
Total loans originated and purchased 70,772 43,533 51,306
Sales and Loan Principal Repayments:
Loans sold proceeds 2,895 1,060 0
Loan repayments 53,617 32,580 31,629
Total loans sold proceeds and loan
principal repayments 56,512 33,640 31,629
Loan originations (repayments), net 14,260 9,893 0
Increase (decrease) due to other items, net (181) (189) (34)
Net increase (decrease) in net loan portfolio $14,079 $9,704 $19,643
Year Ended September 30,
1995 1994
(In thousands)
Loan Originations:
One-to-four family residential $19,673 $20,821
Multi-family and nonresidential 0 2,062
Construction 5,478 1,346
Commercial 1,608 0
Consumer 3,425 905
Total loans originated 30,184 25,134
Purchases 0 900
Total loans originated and purchased 30,184 26,034
Sales and Loan Principal Repayments:
Loans sold proceeds 220 130
Loan repayments 17,201 26,243
Total loans sold proceeds and loan
principal repayments 17,421 26,373
Loan originations (repayments), net 12,763 (339)
Increase (decrease) due to other items, net 956 179
Net increase (decrease) in net loan portfolio $ 13,719 (160)
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, 1998, $114.3 million or 81% 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
$41,600.
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, 1998, approximately 99.8% 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,
1998, $56.5 million, or 48%, 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 $11 million or 25.8%
of the Savings Bank's total originations of one-to-four family
residential loans during the year ended September 30, 1998 as
compared to 44% and 41% of such originations for the years ended
September 30, 1997 and 1996, 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, 1998, $5.8 million or 4.12% 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 $111,950 at September 30, 1998 and the largest was $1.7
million. Originations of non-residential real estate and
multi-family residential real estate amounted to 4.7%, .11%, and
.52% of the Savings Bank's total loan originations in fiscal
1998, 1997, and 1996, 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, 1998, $2 million, or 34% 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, 1998, construction loans amounted to $4.6 million
or 3.24% 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 builders or 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 builder 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 accrued 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 and loans secured by savings accounts. Consumer loans at
September 30, 1998 were $5.3 million, or 3.74%, of the Savings
Bank's total net loan portfolio consisted of consumer loans.
As of September 30, 1998, the Savings Bank's consumer loans also
consisted of loans secured by accounts at the Savings Bank which
amounted to $571,000 or .40% 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, 1998, $12 million, or 8.52%, 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 16% of the total loan originations during the
year ended September 30, 1998.
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, 1998, the Savings
Bank had $453,000 of net loan fees which had been deferred and
are being recognized as income over the estimated maturities of
the related loans. See Notes 1 and 5 of the Notes to the
Consolidated Financial Statements.
Non-Performing Assets. Beginning as of September 30, 1993, the
Savings Bank adopted a policy under which all loans are reviewed
on a regular basis and are placed on a non-accrual status when,
in the opinion of management, the collection of additional
interest is deemed insufficient to warrant further accrual.
Generally, the Savings Bank places all loans more than 90 days
past due on non-accrual status. When a loan is placed on
non-accruing status, total interest accrued to date is reversed.
Subsequent payments are either applied to the outstanding
principal balance or recorded as interest income, depending on
the assessment of the ultimate 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, 1998, the Savings Bank's total non-performing
loans amounted to $831,000, or .59% of total net loans, compared
to $969,000, or .76% of total net loans, at September 30, 1997.
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,
1998 1997 1996 1995 1994
Non-Accruing Loans:
One-to-four family res. $666 969 $717 $715 $560
Multi-family and non-res. 162 0 0 0 0
Construction 2 0 0 0 0
Commercial 0 0 0 0 0
Accruing Loans Greater
Than 90 Days Delinquent:
One-to-four family res. 0 0 0 116 203
Multi-family and non-res. 0 0 0 0 0
Construction 0 0 0 0 0
Commercial 0 0 0 0 0
Consumer 1 0 0 0 0
Total non-performing loans $831 969 $717 838 763
Real estate owned (1) 110 117 0 139 141
Total non-performing assets $941 $1,086 $717 $977 $904
Total non-performing loans
as a percentage of
total net loans .59% .76% .61% .86% .91%
Total non-performing assets
as a percentage of
total assets .34 .50% .35% .60% .58%
(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, 1998
consisted of $455,000 of loans classified as special mention,
$656,000 of loans classified as substandard, $175,000 of loans
classified as doubtful and no loans classified as loss. As of
September 30, 1998, total classified assets amounted to .47% of
total assets.
The following table sets forth the Savings Bank's classified
assets at the dates indicated:
September 30,
1998 1995 1994
Classification:
Special mention $ 455 $ 167 $ 754
Substandard 656 806 736
Doubtful 175 162 0
Loss 0 0 0
Total classified assets $1,286 $1,135 $1,490
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, 1998, the Savings Bank's allowance for loan
losses was $756,000 compared to $590,000 at September 30, 1997.
As of September 30, 1998 and 1997, 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.
1998 1997 1996 1995 1994
Allowance at beginning
of period $590 $572 $552 $522 $500
Provisions 235 20 20 30 25
Charge-offs:
Mortgage loans:
One-to-four family res. 10 0 0 0 12
Multi-family and nonres. 0 0 0 0
Construction 0 0 0 0
Total mortgage loans 10 0 0 0 12
Commercial loans:
Real Estate 53 0 0 0 0
Other 0 0 0 0 0
Total commercial loans 53 0 0 0 0
Consumer loans:
Real Estate 0 0 0 0 0
Other 6 2 0 0 0
Total consumer loans 6 2 0 0 0
Total charge-offs 69 2 0 0 12
Recoveries 0 0 0 0 0
Net charge-offs 69 2 0 0 3
Allowance at end of period $756 $590 $572 $552 $522
Allowance for loan losses
to total non-performing
loans at end of period 90.97% 60.89% 79.78% 65.87 68.41%
Allowance for loan losses
to total net loans at
end of period .53% .46% .49% .56% .62%
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,
1998 1997
% of Loans % of Loans
in Each in Each
Category to Category to
Amount Total Loans Amount Total Loans
Mortgage loans $630 89.87% $501 92.55%
Commercial 88 8.52 54 5.76
Consumer loans 38 3.74 35 3.58
Total allowance
for loan losses $756 102.13% $590 101.89%
September 30,
1996 1995
% of Loans % of Loans
in Each in Each
Category to Category to
Amount Total Loans Amount Total Loans
Mortgage loans $511 95.66% $509 97.94%
Commercial 31 2.77 15 1.57
Consumer loans 30 3.57 28 2.71
Total allowance
for loan losses $572 102.00% $552 102.22%
September 30,
1994
% of Loans
in Each
Category to
Amount Total Loans
Morgage loans $497 99.28%
Commercial 0 0.00
Consumer loans 25 2.17
Total allowance
for loan losses %522 101.45%
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, 1998, $38 million
or 39.3% of the mortgage-backed securities in the Company's
mortgage-backed securities and CMOs portfolio were secured by
pools of adjustable-rate mortgages. Mortgage-backed securities
and CMOs of this type serve to reduce the interest rate risk
associated with changes in interest rates. Investments in
mortgage-backed securities and CMOs as well as investments in
other investment securities are managed by the Company's
Investment Committee in accordance with the Company's Portfolio
and Investment Policy.
The following table sets forth the carrying value of the
Company's investment portfolio at the dates indicated:
September 30,
1998 1997 1996
Securities available for sale:(1)
U.S. government and federal
agencies bonds and notes $ 5,023 $ 7,978 $14,870
State and local bonds and notes 176 609 964
Mortgage-backed securities 59,017 23,643 23,687
Collateralized mortgage obligations 34,962 26,225 22,531
Equity securities 17,149 12,685 10,244
Mutual funds 3,472 2,836 2,816
Total securities available for sale $119,799 $73,976 $75,112
Securities held to maturity: (2)
U.S. government and federal
agencies bonds and notes $ 0 $ 0 $ 0
State and local bonds and notes 0 0 0
Corporate bonds and notes 0 0 0
Mortgage-backed securities 0 0 0
Collateralized mortgage obligations 2,742 4,157 4,756
Total securities available for sale $ 2,742 $ 4,157 $ 4,756
Total securities $122,541 $78,133 $79,868
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 30,1998:
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 $ 0 0.00% $ 0 0.00%
Mortgage-backed securities 3,171 7.21 7,360 6.92
Collateralized mortgage
obligations 0 0.00 250 5.25
Equity securities and mutual
funds 20,620 5.38% 0 0.00
Total securities available
for sale $ 23,791 5.62% $ 7,610 6.87%
Securities held to maturity:(2)
Collateralized mortgage
obligations $ 0 0.00% $ 1,001 6.00%
Total securities held to maturity
Total securities $ 23,791 5.62% $ 8,611 6.77%
Five to Ten Years Other
Carrying Average Carrying Average
Value Yield Value Yield
Securities available for sale:(1)
U.S. treasury and government
obligations $ 5,199 6.58% $ 0 0.00%
Mortgage-backed securities 4,201 6.41 44,285 6.97
Collateralized mortgage
obligations 6,113 6.05 28,599 6.53
Equity securities and mutual
funds 0 0 0 0.00
Total securities available for sale $15,513 6.33% $72,884 6.80%
Securities held to maturity:(2)
Collateralized mortgage
obligations $ 1,249 5.81% $ 492 6.53%
Total securities held to maturity 1,249 5.81 492 6.53
Total securities $16,762 6.29% $73,386 6.80%
(1) The carrying value is the approximate fair value of the
security at each reporting date.
(2) The carrying value is the amortized cost of the security at
each reporting date.
Cash and Interest-Bearing Deposits in Other Banks
The Savings Bank also had cash on hand and cash due from and on
deposit with other banks amounting to $3.8 million, $5.4 million,
and $4.2 million at September 30, 1998, 1997, and 1996,
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 checking
accounts, NOW accounts, money market accounts, regular savings
accounts, and term certificate accounts. Included among these
deposit products are individual retirement accounts of
approximately $12 million at September 30, 1998. 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, 1998, the
certificates of deposit with principal amounts of $100,000 or
more totaled to $36.4 million, as compared to $37.4 million at
September 30, 1997.
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,
1998 1997 1996
Amount % Amount % Amount %
Certificates
of deposit 123,955 85.60 112,585 84.83 112,347 85.28
Transaction accounts:
Saving accounts 6,754 4.67 6,741 10.09 6,873 5.22
Checking and
NOW accounts 14,093 9.73 13,392 5.08 12,520 9.50
Total transaction
accounts 20,847 14.40 20,133 15.17 19,393 14.72
Total deposits 144,802 100.00 132,718 100.00 131,740 100.00
The following table sets forth the savings activities of the
Savings Bank during the periods indicated:
Year Ended September 30,
1998 1997 1996
Net increase (decrease)
before interest credited $12,084 $(5,819) $(7,893)
Interest credited 7,336 6,797 5,079
Net increase (decrease)
in deposits $ 4,748 $ 978 $(2,814)
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
1998 Deposits 1997 1997 Deposits
Interest-bearing and
noninterest bearing
demand deposits 14,092,613 9.73 701,049 13,391,564 10.09
Passbook savings 6,754,054 4.67 12,598 6,741,456 5.08
Certificates of
deposit 123,954,946 85.60 11,369,576 112,585,370 84.83
Total 144,801,613 100.00 12,083,223 132,718,390 100.00
Increase
(Decrease)
from Balance at
Sep 30, Sep 30, % of
1996 1996 Deposits
Interest-bearing and
noninterest bearing
demand deposits 871,766 12,519,798 9.05
Passbook savings (131,582) 6,873,038 5.22
Certificates of deposit 237,773 112,347,597 85.28
Total 977,957 131,740,433 100.00
The following table sets forth the maturities of Community's
certificates of deposit having principal amounts of $100,000 or
more at September 30, 1998:
Certificate of Deposit Maturing
in Quarter Ending: Amount
December 31, 1998 $ 6,853,262
March 31, 1999 10,316,996
June 30, 1999 5,978,664
September 30, 1999 4,920,622
After September 30, 1999 2,240,781
Total certificates of deposit
balances of more than $100,000 $30,310,326
The following table sets forth the certificates of deposit in the
Savings Bank classified by rates at the dates indicated:
At September 30,
1998 1997
4.00%--4.99% $ 14,418 $ 15,966
5.00%--5.99% 63,793 61,190
6.00%--6.99% 45,629 35,322
7.00%--7.99% 115 107
$123,955 $112,585
The following table sets forth the amount and maturities of the
Savings Bank's certificates of deposit at September 30, 1998.
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% $ 14,418 $ 0 $ 0 $ 0
5.00% to 5.99% 50,432 8,555 3,424 1,382
6.00% to 6.99% 40,000 3,048 2,429 53
7.00% to 7.99% 115
Over
Four Years Totals
4.00% to 4.99% $ $ 14,418
5.00% to 5.99% 63,793
6.00% to 6.99% 45,530
7.00% to 7.99% 99 214
$123,955
Deposits in the Savings Bank as of September 30, 1998 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 6,754,054 4.67
2.50 None Golden Now 500 1,442,872 1.00
0.00 None Non-interest Checking 100 121,446 .08
2.50 None Silver Now 300 356,339 .25
3.25 None Daily Money Market 2,500 5,914,460 4.08
0.00 None Student Checking 50 5,171 .00
2.50 None Courtesy Now 100 474,831 .33
0.00 None Community First Checking 50 1,087,190 .75
2.75 None Super Now 1,500 1,805,360 1.25
5.00 None Community First Advantage 25,000 2,684,537 1.85
0.00 None Commercial Checking 100 97,870 .07
0.00 None Small Business Checking 100 102,537 .07
% of
Interest Minimum Minimum Total
Rate Term Certificates Amount Balances Deposits
Fixed Term, Fixed Rate,
5.10 12 month Renewable 1,000 21,787,885 15.05
Fixed Term, Negotiated
5.25 6 month Jumbo Rate, Non-renew. 100,000 4,160,669 2.87
Fixed Term, Fixed Rate,
5.25 30 month Renewable 1,000 3,050,508 2.11
Fixed Term, Fixed Rate,
5.20 24 month Renewable 1,000 10,119,088 6.99
Fixed Term, Fixe Rate,
4.85 182 day Renewable 1,000 13,589,188 9.38
Fixed Term, Negotiated
5.50 12 month Jumbo Rate, Non-renew. 100,000 31,343,035 21.64
Fixed Term, Fixed Rate,
4.10 91 day Renewable 1,000 935,333 .65
Fixed Term, Fixed Rate,
5.15 18 month Renewable 1,000 1,336,055 .92
Fixed Term, Fixed Rate,
5.30 36 month Renewable 1,000 5,982,851 4.13
Fixed Term, Fixed Rate,
5.40 48 month Renewable 1,000 11,408,961 7.88
Negotiated Term, Negotiated
Rate, Non-renew. 1,000 20,241,373 13.98
Total 144,801,613 100.00
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 $65.5 million in FHLB advances outstanding at
September 30, 1998.
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,
1998 1997 1996
Maximum balance $65,451 $18,282 $1,000
Average balance 41,178 6,944 250
Weighted average interest
rate of FHLB advances 5.30% 5.93% 5.98%
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:
1998 1997 1996
FHLB long-term advances 26,451 $14,000 $0
Weighted average interest rate 5.18% 6.05% 0.00%
FHLB short-term advances 39,000 4,282 0
Weighted average interest rate 5.38% 5.54% 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
Northeast 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 commercial banks, and mortgage banking
companies. The Savings Bank competes for loans principally
through the interest rates and loan fees it charges and the
efficiency and quality of services it provides borrowers.
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 $963
thousand at September 30, 1998 due to principal repayments. See
Note 5 of the Notes to Financial Statements.
The Savings Bank originates both fixed-and adjustable-rate
residential real estate loans as market conditions dictate. In
the current interest rate environment, it generally offers
fixed-rate loans up to a 15-year term and adjustable-rate loans
with a maximum term of 30 years. Prior to fiscal 1998 all of the
adjustable-rate loans in the Savings Bank's loan portfolio were
indexed to the National Average Mortgage Rate Index, published by
the FHLB System monthly. During fiscal 1998 the Bank began using
the One Year Treasury Index. All the adjustable-rate loans 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, 1998, $57.8 million or 40% of the
Savings Bank's loans, before net items, were fixed-rate one-to-four
family residential mortgages, and $56.4 million or 39% 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 adjusting one year after
origination.
As market demand for adjustable-rate mortgage loans has
decreased, the Savings Bank has combined origination of shorter-term
fixed-rate loans and one-year adjustable loans with the
purchase of low-risk 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. During fiscal 1995, the Savings Bank also began to
originate consumer and 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 September 30, 1998, based on the most recent available
information provided by the Office of Thrift Supervision ("OTS"),
it was estimated, on an unaudited basis, that the Bank's net
portfolio value ("NPV") (the net present value of the Bank's cash
flows from assets, liabilities, and off-balance sheet items)
would decrease 6%, 12%, 19%, and 25% in the event of 1%, 2%, 3%,
and 4%, respectively, increase in market interest rates, and
decrease 3%, 2%, 1% and 0% in the event of a 1%, 2%, 3% and 4%,
respectively, decrease in market interest rates. These
calculations indicate that the Bank's NPV could be adversely
affected by increases or 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' Interest
Rate Risk ("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 Qualified Thrift Lender ("QTL") test, then such unitary
holding company also shall become subject to the activities
restrictions applicable to multiple savings and loan holding
companies and, unless the savings institution requalifies as a
QTL within one year thereafter, shall register as, and become
subject to the restrictions applicable to, a bank holding
company.
If the Company were to acquire control of another savings
institution, other than through merger or other business
combination with the Savings Bank, the Company would thereupon
become a multiple savings and loan holding company. Except where
such acquisition is pursuant to the authority to approve
emergency thrift acquisitions and where each subsidiary savings
institution meets the QTL test, as set forth below, the
activities of the Company and any of its subsidiaries (other than
the Savings Bank or other subsidiary savings institutions) would
thereafter be subject to further restrictions. Among other
things, no multiple savings and loan holding company or
subsidiary thereof which is not a savings institution shall
commence or continue for a limited period of time after becoming
a multiple savings and loan holding company or subsidiary thereof
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 executive 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, 1998, the Savings Bank was
in compliance with the above restrictions.
Restrictions on Acquisitions. Except under limited
circumstances, savings and loan holding companies are prohibited
from acquiring, without prior approval of the Director of the
OTS, (i) control of any other savings institution or savings and
loan holding company or substantially all the assets thereof or
(ii) more than 5% of the voting shares of a savings institution
or holding company thereof which is not a subsidiary. Except
with the prior approval of the Director of the OTS, no director
or officer of a savings and loan holding company or person owning
or controlling by proxy or otherwise more than 25% of such
company's stock, may acquire control of any savings institution,
other than a subsidiary savings institution, or of any other
savings and loan holding company.
The Director of the OTS may only approve acquisitions resulting
in the formation of a multiple savings and loan holding company
which controls savings institutions in more than one state if (i)
the multiple savings and loan holding company involved controls a
savings institution which operated a home or branch office
located in the state of the institution to be acquired as of
March 5, 1987; (ii) the acquirer is authorized to acquire control
of the savings institution pursuant to the emergency acquisition
provisions of the Federal Deposit Insurance Act ("FDIA"); or
(iii) the statutes of the state in which the institution to be
acquired is located specifically permit institutions to be
acquired by the state-chartered institutions or savings and loan
holding companies located in the state where the acquiring entity
is located (or by a holding company that controls such
state-chartered savings institutions).
The 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 Savings Association
Insurance Fund ("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. 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), noncumulative 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,
1998. 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, 1998 and 1997, 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, 1998 and 1997:
For Capital
Actual Adequacy Purposes
Amount Ratio Amount Ratio
September 30, 1998:
Total capital (to risk
weighted assets) $44,003 40.6% $8,672 8.0%
Tier 1 (core) capital
(to risk weighted assets) 43,247 39.9 N/A N/A
Tier 1 (core) capital
(to adjusted total assets) 43,247 16.5 7,840 3.0
Tangible capital (to
adjusted total assets) 43,247 16.5 3,920 1.5
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
To Be Well
Capitalized Under
Prompt Corrective
Action Provisions
Amount Ratio
September 30, 1998:
Total capital (to risk
weighted assets) $10,840 10.0%
Tier 1 (core) capital
(to risk weighted assets) 6,504 6.0
Tier 1 (core) capital
(to adjusted total assets) 13,066 5.0
Tangible capital (to
adjusted total assets) N/A N/A
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
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:
1998 1997
Stockholders' equity $ 50,876 $ 48,604
Unrealized gain on securities
available for sale (7,629) (5,639)
Tangible and Tier 1 capital 43,247 42,965
Allowance for loan losses 756 590
Total risk based capital $ 44,003 $43,555
Total assets $273,631 $205,627
Adjusted total assets 261,327 199,988
Total risk weighted assets 108,401 91,693
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 prompt 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 within
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, 1998, 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 rule making was issued by the OTS, the Office of the
Comptroller of the Currency and the Federal Reserve Board
(collectively, the "agencies") concerning standards for safety
and soundness required to be prescribed by regulation pursuant to
Section 39 of the FDIA. In general, the standards relate to (1)
operational and managerial matters; (2) asset quality and
earnings; and (3) compensation. The operational and managerial
standards cover (a) internal controls and information systems,
(b) internal audit system, (c) loan documentation, (d) credit
underwriting, (e) interest rate risk exposure, (f) asset growth,
and (g) compensation, fees and benefits. Under the proposed
asset quality and earnings standards, the Savings Bank would be
required to maintain (1) a maximum ratio of classified assets
(assets classified substandard, doubtful and to the extent that
related losses have not been recognized, assets classified loss)
to total capital of 1.0%, and (2) minimum earnings sufficient to
absorb losses without impairing capital. The last ratio
concerning market value to book value was determined by the
agencies not to be feasible. Finally, the proposed compensation
standard states that compensation will be considered excessive if
it is unreasonable or disproportionate to the services actually
performed by the individual being compensated. If an insured
depository institution or its holding company fail to meet any of
the standards promulgated by regulation, then such institution or
company will be required to submit a plan within 30 days to the
FDIC specifying the steps it will take to correct the deficiency.
In the event that an institution or company fails to submit or
fails in any material respect to implement a compliance plan
within the time allowed by the agency, Section 39 of the FDIA
provides that the FDIC must order the institution or company to
correct the deficiency and may (1) restrict asset growth; (2)
require the institution or company to increase its ratio of
tangible equity to assets; (3) restrict the rates of interest
that the institution or company may pay; or (4) take any other
action that would better carry out the purpose of prompt
corrective action. The Savings Bank believes that it will be in
compliance with each of the standards if they are adopted as
proposed.
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,
1998, 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, 1998, 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 additional
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, 1998, 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, 1998, the Savings Bank had $3.3
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, 1998, 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.
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, 1998, the
Savings Bank includes the amounts distributed in taxable income,
along with the amounts deemed necessary to pay the resulting
federal income tax.
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 1998 Position(s) With the Company
Gill Simmons 64 Vice President--Mortgage Loans
Jack Johnson 59 Vice President--Operations and
Compliance
Mark Burleson 32 Vice President-Consumer/Commercial Lending
Sherry McCarty 49 Chief Financial Officer
_________________________________________________________________________
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.
Sherry McCarty is Chief Financial Officer. Ms. McCarty joined
the Savings Bank in 1967 and during her tenure has also served as
Controller.
Employees
The Savings Bank had 33 full time employees at September 30,
1998. 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, 1998:
Net Book
Value at Approximate Owned
Year Sep 30, Square or
Opened 1998 Footage Leased
Main Office:
333 Court Street
Tupelo, Mississippi 1969 $152 10,000 Owned
West Main Street Branch:
3425 West Main Street
Tupelo, Mississippi 1997 $1,326 3,500 Owned
The net book value of the Company's investment in furnishings and
equipment totaled $518 at September 30, 1998.
ITEM 3.--LEGAL PROCEEDINGS
From time to time, the Company is a party to various legal
proceedings incident to its business. At September 30, 1998,
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 1998.
ITEM 5.--MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS
The information contained in the 1998 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 2 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 35 to 41 of the annual report.
ITEM 8--FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
SELECTED QUARTERLY FINANCIAL DATA (UNAUDITED)
(Dollars in thousands except per share amounts)
1998
First Second Third Fourth Total
Interest revenue $3,800 $3,988 $4,296 $4,415 $16,499
Interest expense 2,051 2,255 2,535 2,732 9,573
Net interest revenue 1,749 1,733 1,761 1,683 6,926
Provision for loan
losses 10 15 30 180 235
Non-interest revenue 102 332 480 1,290 2,204
Non-interest expense 840 902 851 1,434 4,027
Income before income
taxes 1,001 1,148 1,360 1,359 4,868
Income tax expense 341 414 474 588 1,817
Net income $ 660 $ 734 $ 886 $ 771 $3,051
Net income per share $.16 $.17 $.21 $.18 $.72
(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
Other information required by Item 8 is set forth in the
Company's annual report for the year ended September 30, 1998,
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.
<PAGE>
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* Specimen Common Stock Certificate
10.1(a)* Employee Stock Ownership Plan
13 Annual Report to Stockholders
21 List of Subsidiaries
*Incorporated herein by reference to the
Registration Statement file number 33-99962
on Form S-1.
(b) Reports on Form 8-K during the year ended
September 30, 1998.
1. On June 10, the Company filed a current
report on Form 8-K
(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: December 29, 1998 By: (Signature)
Jim Ingram
Chief Executive Officer
(Duly Authorized Representative)
By: (Signature)
H. Lewis Whitfield
President
(Duly Authorized Representative)
By: (Signature)
Sherry McCarty
Chief Financial 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: December 29, 1998
(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
COMMUNITY FEDERAL BANCORP, INC.
Consolidated Financial Statements
as of September 30, 1998 and 1997
Together With
Auditors' Report
To Our Stockholders:
We are pleased to report record net income of $3,050,813 or $.72
per share, fully diluted, for the fiscal year ended September 30,
1998.
Community Federal also experienced another year of outstanding
growth in loans and deposits. Net loans increased to
$141,414,264, a gain of $14,079,306 or 11.1%. Total deposits
rose to $144,801,613, an increase of $12,083,223 or 9.1%. We
believe this growth affirms our philosophy of offering
traditional banking services to our customers in a warm, friendly
environment.
Total assets showed dramatic growth from $215,937,823 on
September 30, 1997 to $275,320,442 on September 30, 1998. This
extraordinary increase of 27.5% is partially as a result of our
growth in core customer business. However, there is a special
reason for the bulk of the increase, which is explained below.
You are aware that we have been aggressively managing our capital
to maximize the return to you. In May of 1997, we paid a special
dividend of $2.50 per share. During the fiscal year ended
September 30, 1998, we embarked on a stock repurchase program
through which 310,500 shares were repurchased.
Beyond the special dividend and stock repurchase program, we
implemented a growth program designed to leverage the Company's
strong capital base. Essentially, we will be using deposit
growth and advances from the Federal Home Loan Bank to fund the
purchase of securities. This program should result in more net
income and should improve return on stockholders' equity over
time. We intend to implement this program with great care. Our
new growth program helps explain our dramatic increase in total
assets.
We are fortunate to operate in the dynamic Northeast Mississippi
area. Our customer base is strong and growing, and it is served
by a dedicated, friendly, professional staff. By providing high
quality, personal service, our staff is building great
relationships with our customers, which is translating into
excellent growth and profitability for our company.
As stockholders, your support is critically important to our
success. Please consider us for your banking needs. We are
committed to building outstanding shareholder value, and we need
your full support to accomplish this goal.
On behalf of our board and staff, I want to thank you for your
continuing support of and investment in Community Federal.
Sincerely,
Jim Ingram
Chief Executive Officer
SELECTED CONSOLIDATED FINANCIAL AND OTHER DATA
Year Ended September 30,
1998 1997 1996 1995 1994
INCOME STATEMENT DATA:
Total interest income 16,607 14,508 13,150 11,016 10,011
Total interest expense 9,573 7,024 6,950 6,267 6,438
Net interest income 7,034 7,484 6,200 4,749 3,573
Provision for loan losses 235 20 20 30 25
Net interest income
after provision for
loan losses 6,799 7,464 6,180 4,719 3,548
Noninterest income 1,929 227 188 132 752
Noninterest expense 3,860 2,926 3,036 1,672 1,840
Income before income taxes 4,868 4,765 3,332 3,179 2,460
Provision for income taxes 1,817 1,728 1,184 1,144 1,012
Cumulative effect of change
in accounting principle 0 0 0 0 131
Net income 3,051 3,037 2,148 2,035 1,317
Earnings per share (1)
Basic $.76 $.70 $.27 N/A N/A
Diluted $.72 $.70 $.27 N/A N/A
At September 30,
1998 1997 1996 1995 1994
BALANCE SHEET DATA:
Total assets 275,320 215,938 204,017 162,042 154,600
Loans receivable, net 141,414 127,335 117,631 97,988 84,269
Securities:(2)
Available for sale 119,799 73,976 75,112 25,125 N/A
Held to maturity 2,742 4,157 4,756 33,837 N/A
Mortgage-backed and
related securities(2) N/A N/A N/A N/A 33,755
Securities(2) N/A N/A N/A N/A 30,146
Deposits 144,802 132,718 131,740 134,555 131,989
Stockholders' equity 57,565 58,563 67,139 23,427 20,394
Year Ended September 30,
1998 1997 1996 1995 1994
KEY OPERATING DATA:
Return on average assets 1.2% 1.5% 1.1% 1.3% 0.9%
Return on average equity 5.2 4.7 4.4 9.4 7.0
Average equity to average assets 23.6 30.9 26.2 13.6 12.4
Dividend payout ratio (1) 40.2 389.7 57.9 N/A N/A
Number of offices 2 2 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.
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, 1998,
there were 4,318,250 shares of the common stock outstanding and
approximately 2,400 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 based on the net income,
capital, and financial condition of the Company and the
Association, thrift industry trends, and general economic
conditions justifying the payment of dividends, however 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 1998:
Fourth quarter $17.7500 $14.000 $.080 $ .00
Third quarter 18.8750 17.250 .080 .00
Second quarter 20.8125 18.125 .080 .00
First quarter 22.0000 16.375 .075 .00
Fiscal 1997:
Fourth quarter $18.7500 $17.250 $.075 $ .00
Third quarter 20.7500 16.875 .075 2.50
Second quarter 20.0000 16.750 .075 .00
First quarter 17.3750 13.375 .075 .00
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, 1998 and
1997, and the related consolidated statements of income,
stockholders' equity, and cash flows for each of the three years
in the period ended September 30, 1998. These financial
statements are the responsibility of the Company's management.
Our responsibility is to express an opinion on these financial
statements based on our audits.
We conducted our audits in accordance with generally accepted
auditing standards. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether
the financial statements are free of material misstatement. An
audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An
audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating
the overall financial statement presentation. We believe that
our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to
above present fairly, in all material respects, the consolidated
financial position of Community Federal Bancorp, Inc. and
Subsidiary as of September 30, 1998 and 1997, and the results of
their operations and their cash flows for each of the three years
in the period ended September 30, 1998, in conformity with
generally accepted accounting principles.
ARTHUR ANDERSEN LLP
Birmingham, Alabama
October 8, 1998
COMMUNITY FEDERAL BANCORP, INC.
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
AS OF SEPTEMBER 30, 1998 AND 1997
ASSETS
1998 1997
CASH AND DUE FROM BANKS $ 2,978,714 $ 3,886,874
FEDERAL FUNDS SOLD 300,000 0
Total cash and cash equivalents 3,278,714 3,886,874
INTEREST-BEARING DEPOSITS IN BANKS 792,000 1,550,129
SECURITIES AVAILABLE FOR SALE,
at fair value 119,799,017 73,976,278
SECURITIES HELD TO MATURITY, at
amortized cost (estimated fair
value of $2,760,651 and
$4,122,225 respectively) 2,742,209 4,156,732
LOANS RECEIVABLE, net 141,414,264 127,334,958
ACCRUED INTEREST AND DIVIDENDS
RECEIVABLE 1,523,400 1,239,777
PREMISES AND EQUIPMENT, net 2,944,000 3,318,561
OTHER ASSETS 2,826,838 474,514
Total assets $275,320,442 $215,937,823
LIABILITIES AND STOCKHOLDERS' EQUITY
DEPOSITS 144,801,613 $132,718,390
FEDERAL HOME LOAN BANK ADVANCES 65,451,449 18,282,186
OTHER LIABILITIES:
Accrued interest payable 682,350 731,619
Advances from borrowers for taxes
and insurance 427,879 424,356
Deferred income taxes payable 4,996,792 3,410,146
Accrued expenses and other liabilities 1,395,733 1,808,125
Total liabilities 217,755,816 157,374,822
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 45,210,144 45,113,004
Retained earnings 15,487,717 13,714,336
Treasury stock, at cost, 310,500
shares in 1998 (5,545,540) 0
Unearned compensation (5,277,786) (5,998,323)
Unrealized gain on securities
available for sale, net 7,643,803 5,687,696
Total stockholders' equity 57,564,626 58,563,001
Total liabilities and
stockholders' equity $275,320,442 $215,937,823
The accompanying notes are an integral part of these statements.
COMMUNITY FEDERAL BANCORP, INC.
CONSOLIDATED STATEMENTS OF INCOME
FOR THE YEARS ENDED SEPTEMBER 30, 1998, 1997, AND 1996
1998 1997 1996
INTEREST INCOME:
Interest and fees on loans:
Mortgage loans $ 8,864,345 $ 9,010,094 $ 8,217,595
Consumer loans 1,014,303 325,172 262,356
Commercial loans 916,603 462,641 130,510
Interest and dividends
on securities held to
maturity 196,129 265,859 824,987
Interest and dividends
on securities available
for sale 5,279,983 4,163,866 3,249,772
Other interest income 335,920 280,980 464,598
Total interest income 16,607,283 14,508,612 13,149,818
INTEREST EXPENSE:
Deposits 7,176,109 6,649,961 6,930,124
Other borrowings 2,397,313 374,366 19,410
Total interest expense 9,573,422 7,024,327 6,949,534
Net interest income 7,033,861 7,484,285 6,200,284
PROVISION FOR LOAN LOSSES 235,000 20,000 20,000
Net interest income
after provision for
loan losses 6,798,861 7,464,285 6,180,284
NONINTEREST INCOME:
Gain on sale of securities
available for sale, net 1,650,548 1,967 54,838
Loan servicing fees 129,698 92,686 67,254
Other income 149,127 132,348 65,656
Total noninterest income 1,929,373 227,001 187,748
NONINTEREST EXPENSES:
Compensation and benefits 2,293,192 1,963,349 1,153,133
Special SAIF assessment 0 0 863,835
Deposit insurance premium 87,400 123,616 317,896
Occupancy and equipment 251,693 144,382 134,745
(Gain) loss on real estate
owned, net 30,177 3,279 (15,119)
Loss on sale of loans, net 17,269 9,616 0
Other expenses 1,180,145 682,401 580,990
Total noninterest expenses 3,859,876 2,926,643 3,035,480
Income before income taxes 4,868,358 4,764,643 3,332,552
PROVISION FOR INCOME TAXES 1,817,545 1,728,120 1,184,294
NET INCOME $ 3,050,813 $3,036,523 $2,148,258
EARNINGS PER SHARE
Basic $.76 $.70 $.27
Diluted $.72 $.70 $.27
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, 1998, 1997, AND 1996
Additional
Common Paid-In Retained Unearned
Stock Capital Earnings Compensation
BALANCE,
Sep 30, 1995 $ 0 $ 0 $21,030,744 $ 0
Net income 0 0 2,148,258 0
Change in
unrealized
gain (loss)
on securities,
due to the
reclassification
of securities
from held to
maturity to
available for
sale, net 0 0 0 0
Issuance of
common stock 46,288 44,954,433 0 (3,632,000)
Change in
unrealized gain
on securities
available
for sale, net 0 0 0 0
Amortization
of unearned
compensation 0 51,878 0 167,890
Dividends declared
($.15 per share) 0 0 (667,072) 0
BALANCE,
Sep 30, 1996 46,288 45,006,311 22,511,930 (3,464,110)
Net income 0 0 3,036,523 0
Contributions to
stock plan trusts 0 (16,922) 0 (3,065,278)
Change in unrealized
gain on securities
available for
sale, net 0 0 0 0
Amortization of
unearned
compensation 0 123,615 0 531,065
Dividends declared
($2.80 per share) 0 0 (11,834,117) 0
BALANCE,
September 30,
1997 46,288 45,113,004 13,714,336 (5,998,323)
Net income 0 0 3,050,813 0
Contributions to
stock plan
trusts 0 (27,150) 0 (156,798)
Change in
unrealized gain
on securities
available for
sale, net 0 0 0 0
Amortization
of unearned
compensation 0 124,290 0 877,335
Purchase of
treasury stock,
at cost 0 0 0 0
Dividends declared
($.32 per share) 0 0 (1,277,432) 0
BALANCE,
September 30,
1998 $46,288 $45,210,144 $15,487,717 $(5,277,786)
Unrealized
Gain on
Securities
Treasury Available
Stock for Sale, Net Total
BALANCE, Sep 30, 1995 $ 0 $2,396,156 $23,426,900
Net income 0 0 2,148,258
Change in unrealized
gain (loss) on
securities, due to the
reclassification
of securities from held
to maturity to
available for sale, net 0 (28,115) (28,115)
Issuance of common stock 0 0 41,368,721
Change in unrealized gain on
securities available for
sale, net 0 670,436 670,436
Amortization of unearned
compensation 0 0 219,768
Dividends declared ($.15
per share) 0 0 (667,072)
BALANCE, Sep 30, 1996 0 3,038,477 67,138,896
Net income 0 0 3,036,523
Contributions to stock
plan trusts 0 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 0 0 654,680
Dividends declared
($2.80 per share) 0 0 (11,834,117)
BALANCE, September 30, 1997 0 5,687,696 58,563,001
Net income 0 0 3,050,813
Contributions to stock
plan trusts 0 0 (183,948)
Change in unrealized gain on
securities available for
sale, net 0 1,956,107 1,956,107
Amortization of unearned
compensation 0 0 1,001,625
Purchase of treasury
stock, at cost (5,545,540) 0 (5,545,540)
Dividends declared
($.32 per share) 0 0 (1,277,432)
BALANCE, September 30,
1998 $(5,545,540) $7,643,803 $57,564,626
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, 1998, 1997, AND 1996
1998 1997 1996
CASH FLOWS FROM OPERATING
ACTIVITIES:
Net income $ 3,050,813 $3,036,523 $2,148,258
Adjustments to reconcile net
income to net cash provided
by operating activities:
Depreciation 109,126 81,139 63,832
Deferred income tax provision
(benefit) 28,874 71,401 (281,057)
Amortization of deferred loan
fees and costs, net 82,261 32,371 47,949
Amortization of discounts and
premiums of accretion,net 1,167,070 (48,587) (84,616)
Amortization of unearned
compensation 1,001,625 654,680 219,768
Provision for losses on loans 235,000 20,000 20,000
FHLB stock dividends (136,000) (75,000) (72,589)
(Gain)loss on sale of loans (17,269) 9,616 0
Gain on sale of securities
available for sale, net (1,650,548) (1,967) (54,838)
Proceeds from sale of loans (3,526,997 1,060,138 0
(Gain) loss on sale of
repossessed assets, net 30,177 3,279 (15,119)
Changes in assets and liabilities:
Decrease (increase)in other
assets (2,214,544) 4,525 (171,199)
Decrease (increase)in
interest and dividends
receivable (283,623) 104,170 (184,782)
Increase in income taxes
payable 604,725 71,652 53,588
Increase (decrease)in
accrued interest payable (49,269) 115,197 (47,050)
Increase (decrease)in
accrued expenses and
other liabilities (658,248) (446,868) 1,728,892
Total adjustments (5,277,640) 1,655,746 1,222,779
Net cash provided by
(used in) operating
activities (2,226,827) 4,692,269 3,371,037
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from sale of
repossessed assets 453,502 13,000 190,000
Proceeds from maturities and
principal collections of
securities held to maturity 1,417,819 590,329 1,921,600
Proceeds from maturities,
principal collections, and
calls of securities available
for sale 42,196,340 12,998,115 13,165,134
Proceeds from sales of
securities available for sale 1,864,490 5,498,843 2,621,913
(Purchase of) proceeds from
maturities of interest-bearing
deposits in banks, net 758,129 891,195 (692,324)
(Purchase of) proceeds from
sale of property and
equipment, net 265,435 (2,792,433) (6,351)
Investment in real estate owned (41,535) (7,064) (2,031)
Loan (originations) and principal
repayments, net (11,432,225)(10,952,774)(19,744,689)
Purchase of securities
available for sale (86,112,377)(13,132,359)(36,586,411)
Purchase of securities held
to maturity 0 0 (559,141)
Net cash used in
investing
activities (50,630,422) (6,893,148)(39,692,300)
CASH FLOWS FROM FINANCING
ACTIVITIES:
(Decrease) increase in customer
deposits, net 12,083,223 977,957 (2,814,071)
Proceeds from (repayments of)
FHLB advances, net 47,169,263 18,282,186 (1,000,000)
(Decrease) increase in advances
from borrowers for taxes and
insurance 3,523 (20,428) 51,940
Proceeds from stock offering 0 0 41,368,721
Contributions to stock plan
trusts (183,948) (3,082,200) 0
Purchase of treasry stock,
at cost (5,545,540) 0 0
Dividends paid (1,277,432)(11,834,117) (667,072)
Net cash provided
by financing
activities 52,249,089 4,323,398 36,939,518
Net increase
(decrease) in cash
and cash equivalents (608,160) 2,122,519 618,255
CASH AND CASH EQUIVALENTS,
beginning of year 3,886,874 1,764,355 1,146,100
CASH AND CASH EQUIVALENTS,
end of year $ 3,278,714 $3,886,874 $1,764,355
SUPPLEMENTAL CASH FLOW
INFORMATION:
Cash paid for:
Interest on deposits and
other borrowings $ 9,622,691 $6,909,130 $7,049,843
Income taxes $ 1,247,500 $1,668,000 $1,185,000
SUPPLEMENTAL NONCASH INVESTING
AND FINANCING ACTIVITIES:
Transfer of loans to
repossessed assets $ 579,924 $ 126,576 $ 33,878
Change in unrealized net gain
on securities available
for sale, net of deferred
taxes $ 1,956,107 $2,649,219 $ 642,321
Transfer of securities from
held to maturity to available
for sale at fair value $ 0 $ 0 $27,758,607
The accompanying notes are an integral part of these statements.
COMMUNITY FEDERAL BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 1998 AND 1997
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 19).
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 $3,278,714 and $4,261,874 at
September 30, 1998 and 1997, respectively, consist of cash on
hand of $736,807 and $797,092 at September 30, 1998 and 1997,
respectively; cash due from and on deposit with other banks of
$2,241,907 and $3,464,782 at September 30, 1998 and 1997,
respectively; and federal funds sold of $300,000 at September 30,
1998. The cash due from and on deposit with other financial
institutions primarily consisted of an interest-bearing account
with a correspondent bank.
For purposes of reporting cash flows, cash and cash equivalents
include cash on hand; amounts due from and on deposit with other
banks, and federal funds. Federal funds are generally sold for
one-day periods overnight.
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
management has the 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.
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 that
are evaluated collectively for impairment. The Bank had no loans
designated as impaired under the provisions of Statement of
Financial Accounting Standards ("SFAS") No. 114 at September 30,
1998 and 1997.
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 includes 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
1998, 1997, and 1996 were $6,366, $521, and $8,929,
respectively. The amounts capitalized in 1998, 1997, and, 1996
were $41,535, $7,064, and $2,031, 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.
<PAGE>
Pending Accounting Pronouncements
In June 1997, the Financial Accounting Standards Board ("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 also establishes standards for related
disclosures about products and services, geographic areas, and
major customers. 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.
In February 1998, the FASB issued SFAS No. 132, Employers'
Disclosures About Pensions and Other Postretirement Benefits.
This Statement revises employers' disclosures about pension and
other postretirement benefit plans. It does not change the
measurement or recognition of those plans. It standardizes the
disclosure requirements for pensions and other postretirement
benefits to the extent practicable, requires additional
information on changes in the benefit obligations and fair values
of plan assets that will facilitate financial analysis, and
eliminates certain disclosures that are no longer as useful and
suggests combined formats for presentation of pension and other
postretirement benefit disclosures. This Statement is effective
for fiscal years beginning after December 15, 1997. Earlier
application is encouraged. Restatement of disclosures for
earlier periods provided for comparative purposes is required
unless the information is not readily available, in which case
the notes to the financial statements should include all
available information and a description of the information not
available.
In June 1998, the FASB issued SFAS No. 133, Accounting for
Derivative Instruments and Hedging Activities. This Statement
requires derivatives to be recorded in the balance sheet as
either an asset or liability measured at its fair value. This
Statement also requires that changes in derivatives' fair value
be recognized currently in earnings unless specific hedge
criteria are met. This Statement is effective for all fiscal
quarters of fiscal years beginning after June 15, 1999.
Management believes there will be no material effect on the
consolidated financial statements from the adoption of these
pronouncements.
Financial Statement Reclassification
The financial statements for prior years have been reclassified
in order to conform with the 1998 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, 1998 and 1997 are summarized as follows:
1998
Gross Gross
Amortized Unrealized Unrealized Estimated
Cost Gains Losses Fair Value
U.S. government and
federal agencies
bonds and notes $ 98,509,041 $ 687,462 $(193,273) $ 99,003,230
State and local
bonds and notes 161,241 14,295 0 175,536
Total bonds and
notes 98,670,282 701,757 (193,273) 99,178,766
Equity securities:
FNMA preferred 1,010,000 45,000 0 1,055,000
FHLMC common 420,482 8,053,846 0 8,474,328
FNMA common 572,331 3,728,172 0 4,300,503
FHLB common 3,318,800 0 0 3,318,800
Total equity
securities 5,321,613 11,827,014 0 17,148,627
Mutual funds 3,478,377 0 (6,757) 3,471,620
Total $107,470,272 $12,528,775 $(200,030) $119,799,017
1997
Gross Gross
Amortized Unrealized Unrealized Estimated
Cost Gains Losses Fair Value
U.S. government and
federal agencies
bonds and notes $57,768,977 $ 244,065 $(166,253) $57,846,789
State and local
bonds and notes 682,787 0 (73,962) 608,825
Total bonds and
notes 58,682,787 244,065 (240,215) 58,455,614
Equity securities:
FNMA preferred 1,010,000 32,400 0 1,042,400
FHLMC common 457,926 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
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, 1998
Amortized Estimated
Cost Fair Value
Due in one year or less $ 3,159,182 $ 3,171,452
Due from one to five years 7,637,028 7,609,734
Due from five to ten years 16,541,501 16,705,481
Due after ten years 71,332,600 71,692,103
98,670,311 99,178,770
Equity securities 5,321,613 17,148,627
Mutual funds 3,478,377 3,471,620
Total $107,470,301 $199,799,017
Gross realized gains on the sale of securities available for sale
totaled $1,665,533 and $43,468, and gross realized losses totaled
$14,985 and $41,501 at September 30, 1998 and 1997, 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, 1998 and 1997 are summarized as
follows.
Gross Gross
Amortized Unrealized Unrealized Estimated
1998: Cost Gains Losses Fair Value
U.S. government and
federal agencies
bonds and notes $2,742,209 $19,924 $(1,482) $2,760,651
Total $2,742,209 $19,924 $(1,482) $2,760,651
1997:
U.S. government and
federal agencies
bonds and notes $4,156,732 0 $ (34,507) $4,122,225
Total $4,156,732 0 $ (34,507) $4,122,225
U.S. government and federal agencies bonds and notes designated
as held to maturity at September 30, 1998 bear interest at fixed
and adjustable rates ranging from 5.5% to 7.0%. These bonds and
notes 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, 1998
Carrying Estimated
Value Fair Value
Due from one to five years $1,001,276 $1,004,290
Due from five to ten years 1,249,043 1,265,954
Due after ten years 491,890 490,407
$2,742,209 $2,760,651
4. LOANS RECEIVABLE, NET
Loans receivable at September 30, 1998 and 1997 are summarized as
follows:
1998 1997
Mortgage loans:
Principal balances:
Secured by 1-4 family residences $116,674,242 $108,628,196
Secured by multifamily and
nonresidential properties 5,821,402 6,081,926
Construction loans 4,587,375 3,147,984
127,083,019 117,858,106
Less:
Undisbursed portion of
mortgage loans 1,799,338 1,388,223
Total mortgage loans 125,283,681 116,031,946
Commercial loans:
Principal balances:
Other 1,208,796 2,837,058
Real Estate 10,840,608 4,495,165
Consumer loans:
Principal balances:
Other 4,984,542 4,560,789
Real Estate 305,660 0
Total loans 142,623,287 128,362,895
Less allowance for loan losses 756,285 590,000
Unearned discounts and net
deferred loan origination fees 452,738 437,937
Loans receivable, net $141,414,264 $127,334,958
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:
1998 1997 1996
Balance at beginning of year $590,000 $572,000 $552,000
Provision charged to income 235,000 20,000 20,000
Charge-offs 68,715 2,000 0
Recoveries 0 0 0
Balance at end of year $756,285 $590,000 $572,000
The Bank had loans on nonaccrual status at September 30, 1987 and
1976 in the amounts of approximately $831,000 and $969,000,
respectively. Interest income forgone on nonaccrual loans was
approximately $17,000 and $50,000 for fiscal years 1998 and 1997,
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, 1998
and 1997 are as follows:
1998 1997
Securities available for sale $ $ 472,199
Securities held to maturity 21,504
Loans receivable 729,505
Other 16,569
Total $1,239,777
7. PREMISES AND EQUIPMENT, NET
Premises and equipment at September 30, 1998 and 1997 are
summarized as follows:
1998 1997
Land $ 947,917 $1,322,912
Building and improvements 1,898,417 1,847,918
Furniture, fixtures, and equipment 757,581 715,273
Total 3,603,915 3,886,103
Less accumulated depreciation 659,915 567,542
Premises and equipment, net $2,944,000 $3,318,561
8. DEPOSITS
Deposits at September 30, 1998 and 1997, and the related ranges
of interest rates payable for deposits at September 30, 1998, are
summarized as follows:
1998 1997
Amount Percent Amount Percent
NOW accounts, 0% to
5.00% $ 14,092,613 9.73% 13,391,564 10.09%
Savings accounts,
2.75% 6,754,054 4.67 6,741,456 5.08
20,846,667 14.40 20,133,020 15.17
Certificates of deposit:
4% to 4.99% 14,418,107 9.96 15,965,857 12.03
5% to 5.99% 63,792,916 44.05 61,189,886 46.11
6% to 6.99% 45,629,034 31.51 35,322,441 26.61
7% to 7.99% 114,889 .08 107,186 .08
123,954,946 85.60 112,585,370 84.83
Total $144,801,613 100.00% 132,718,390 100.00%
The aggregate amounts of jumbo certificates of deposit with a
minimum balance of $100,000 were approximately $36,396,989 and
$37,353,716 at September 30, 1998 and 1997, respectively.
Deposits in excess of $100,000 are not federally insured.
Scheduled maturities of certificates of deposit at September 30,
1998 are as follows:
Years ending September 30:
1999 $105,205,697
2000 11,419,550
2001 5,795,318
2002 1,434,891
2003 99,489
Total $123,954,945
Interest expense on deposits for the years ended September 30,
1998, 1997, and 1996 is summarized as follows:
1998 1997 1996
Savings accounts $ 185,456 $ 187,628 $ 260,564
NOW accounts 422,613 402,199 360,598
Certificates of deposit 6,568,040 6,060,134 6,308,962
Total $7,176,109 $6,649,961 $6,930,124
9. EARNINGS PER SHARE
In 1998, the Company adopted SFAS No. 128, Earnings Per Share.
effective December 15, 1997. Basic earnings per share were
computed by dividing net income by the weighted average number of
shares of common stock outstanding during the years ended
September 30, 1998, 1997, and 1996. Diluted earnings per share
for the years ended September 30, 1998, 1997, and 1996, were
computed by dividing net income by the weighted average number of
shares of common stock outstanding and the dilutive effects of
the shares awarded under the Management Recognition Plan ("MRP")
and the Stock Option Plan, based on the treasury stock method
using an average fair market value of the stock during the
respective periods. As a result, the Company's reported earnings
per share for 1997 and 1996 were restated. 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.
The following table represents the earnings per share
calculations for the years ended September 30, 1998, 1997, and
1996 accompanied by the effect of this accounting change on
previously reported earnings per share:
Per Share
Income Shares Amount
1998:
Net income $3,050,813
Basic earnings per share:
Income available to common
shareholders 3,050,813 4,013,858 $.76
Dilutive securities:
Management recognition
plan shares 0 140,915
Incentive stock option
plan shares 0 57,220
Diluted earnings per share:
Income available to common
shareholders plus assumed
conversions $3,050,813 4,211,992 $.72
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
Incentive stock option
plan shares 0 51,151
Diluted earnings per share:
Income available to common
shareholders plus
assumed conversions $3,036,253 4,353,385 $.70
1996:
Net income from March 25, 1996 $1,152,177
Basic and diluted earnings
per share:
Income available to common
shareholders 1,152,177 4,265,638 $.27
Changes in previously reported earnings per share were as follows
for the years ended September 30, 1997 and 1996:
1997 1998
Earnings per share, as reported $.70 $.27
Earnings per share, as amended:
Basic .72 .27
Diluted .70 .70
10. 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, 1998 and 1997:
1998 1997
Actuarial present value of
benefit obligations:
Accumulated benefit
obligation:
Vested $2,346,986 $2,011,979
Nonvested 59,397 55,209
Total 2,406,383 2,067,188
Additional benefit based on
estimated future salary levels 516,496 567,359
Projected benefit obligation for
service rendered to date 2,922,879 2,643,547
Plan assets at fair market value 2,372,912 2,254,819
Unfunded projected benefit obligation (549,967) (388,728)
Unrecognized net loss from past
experience different from that
assumed and effects of changes in
assumptions 525,550 364,104
Unrecognized net transition obligation
(asset from adoption of SFAS No. 87)
being amortized over 20 years (100,083) (109,181)
Unfunded pension cost liability
(included in other liabilities) $ 124,500 $ 133,805
The components of net periodic pension expense for the years
ended September 30, 1998, 1997, and 1996 are as follows:
1998 1997 1996
Service cost--benefits earned
during the period $ 72,863 $ 63,033 $ 57,591
Interest cost on the projected
benefit obligation 172,438 156,320 147,926
Actual return on plan assets (93,825) (200,378) (120,002)
Net asset gain (loss) during
the period deferred for
later recognition (62,839) 9,779 13,507
Amortization of unrecognized
net obligation (9,098) (9,098) (9,098)
Net periodic pension cost $ 79,539 $ 19,656 $ 89,924
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 1998 and 1997.
Employment Agreement
The Company has 36-month employment agreements with its Chief
Executive Officer and its President. These agreements provide
that if their employment under the agreements is terminated by
the Company without cause or if they terminate their employment
for good reason, they shall be paid approximately three times
their salary.
11. 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:
1998 1997
Net income:
As reported $3,050,813 $3,036,523
Pro forma 2,436,936 2,745,844
Earnings per share:
As reported:
Basic $.76 $.70
Diluted .72 .70
Pro forma:
Basic .61 .63
Diluted .57 .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, 1998, 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, 1998 and 1997 and the changes during
the year then ended is as follows:
1998 1997
Weighted Weighted
Average Average
Exercise Exercise
Shares Price Shares Price
Outstanding at beginning
of year 440,859 $15.42 0 $ 0.00
Granted
Forfeitures 22,016 15.10 440,859 15.42
Exercised 0 0.00 0 0.00
Outstanding at end
of year 462,875 $15.41 440,859 $15.42
Exercisable at end
of year 92,875 $15.41 0 $ 0.00
Weighted average fair
value of the options
granted $6.80 $6.92
At September 30, 1998, 440,859 of the 462,875 options outstanding
have exercise prices between $15.19 and $15.94 with a weighted
average exercise price of $15.42 and an average remaining
contractual life of 8.5 years. The remaining 22,016 options
outstanding at September 30, 1998, consist of options granted
during fiscal 1998 and have exercise prices between $14.50 and
$16.38, with a weighted average exercise price of $15.10 and an
average remaining contractual life of 9.5 years. Of the options
granted in fiscal 1998 and 1997, 4,703 and 88,172 options,
respectively, are exercisable as of September 30, 1998.
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 1998
and 1997, respectively: risk-free interest rates of 6.07% and
5.12% for 1998 and 6.76% and 6.70% for 1997; expected life of the
options is 20% per year over the next five years and expected
volatility of 24% in 1998 and 21% in 1997; and dividend yields of
2% in 1998 and 30% in 1997.
12. INCOME TAXES
The provisions (benefit) for income taxes for the years ended
September 30, 1998, 1997, and 1996, were as follows:
1998 1997 1996
Current:
Federal $1,623,894 $1,500,326 $1,324,389
State 164,777 156,393 140,962
1,788,671 1,656,719 1,465,351
Deferred 28,874 71,401 (281,057)
Total $1,817,545 $1,728,120 $1,184,294
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, 1998,
1997, and 1996 were as follows:
1998 1997 1996
Expected income tax expense
at federal tax rate $1,655,242 $1,619,979 $1,133,068
Increase (decrease) resulting
from:
State income tax, net 110,519 107,588 75,840
Dividend received deduction (52,377) (55,452) (47,997)
Tax-exempt interest income 0 0 (5,798)
Other 104,161 56,005 29,181
$1,817,545 $1,728,120 $1,184,294
Effective income tax rate 37% 36% 35%
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, 1998 and 1997 relate to the following:
1998 1997
Book allowance for loan loss $ 288,148 $ 224,200
Retirement plan 131,093 123,580
Accrued bonuses 27,031 54,792
Employee benefit plans 185,035 201,805
Other 44,298 50,902
Deferred tax asset 675,605 655,279
Unrealized gain on securities
available for sale (4,684,912) (3,486,038)
Tax bad debt reserve in excess
of base year (255,993) (324,778)
FHLB dividends (181,446) (129,766)
Accretion of bond discount (40,938) (37,667)
Deferred loan fees and costs, net (97,474) (49,857)
Depreciation (40,343) (23,502)
Other (12,393) (13,817)
Deferred tax liability (5,313,499) (4,065,425)
Net deferred tax liability $(4,637,894) $(3,410,146)
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.
13. FEDERAL HOME LOAN BANK ADVANCES
The Company uses Federal Home Loan Bank ("FHLB") advances as an
alternative to funding sources with similar maturities such as
certificates of deposit or other deposit programs. The Company
is required by its blanket floating lien agreement with the FHLB
to pledge its portfolio of first mortgage collateral, demand
deposit accounts, capital stock, and certain other assets. These
advances generally offer more attractive rates when compared to
other traditional financing options and are flexible, allowing
the Company to quickly obtain the necessary maturities and rates
that best suit the Company's overall asset/liability policy.
The following table summarizes information concerning FHLB
advances at September 30:
1998 1997
(In thousands)
Ending balance $65,451 $18,282
Average balance 41,178 6,944
Maximum month-end balance during year 65,451 18,282
Average rate paid 5.30% 5.93%
Scheduled maturities of FHLB advances as of September 30, 1998
were as follows (in thousands):
Due in less than one year $39,000
Due from one to five years 5,000
Due from five to ten years 15,750
Due after ten years 5,701
$65,451
14. REGULATORY MATTERS
The Bank is subject to various regulatory capital requirements
administered by the federal banking agencies. Failure to meet
minimum capital requirements can initiate certain mandatory and
possibly additional discretionary actions by regulators that, if
undertaken, could have a direct material effect on the Bank's
financial statements. Under capital adequacy guidelines and the
regulatory framework for prompt corrective action, the Bank must
meet specific capital guidelines that involve quantitative
measures of the Bank's assets, liabilities, and certain
off-balance sheet items as calculated under regulatory accounting
practices. The Bank's capital amounts and classifications are
also subject to qualitative judgments by the regulators about
components, risk weightings, and other factors.
Quantitative measures established by regulation to ensure capital
adequacy require the Bank to maintain minimum amounts and ratios
(set forth in the table which follows) of total and Tier 1
capital (as defined in the regulations) to risk-weighted assets
(as defined), and of Tier 1 capital (as defined) to average
assets (as defined). Management believes, as of September 30,
1997 and 1996, that the Bank meets all capital adequacy
requirements to which it is subject.
As of September 30, 1997 and 1996, the most recent notification
from the regulatory authorities categorized the Bank as well
capitalized under the regulatory framework for prompt corrective
action. To be categorized as well capitalized, the Bank must
maintain minimum total risk-based, Tier 1 risk-based, Tier 1
leverage ratios as set forth in the table which follows.
Actual capital amounts and ratios are presented in the table
below for the Bank:
To Be Well
Capitalized Under
For Capital Prompt corrective
Actual Adequacy Purpose Action Provision
Amount Ratio Amount Ratio Amount Ratio
($) (%) ($) (%) ($) (%)
September 30,1998
Total Capital
(To risk weighted
Assets) 44,003 40.6 8,672 8.0 10,840 10.00
Tier 1 (core)
capital (to risk
weighted assets) 43,247 39.9 N/A N/A 6,504 6.0
Tier 1 (core)
capital (to
adjusted total
assets) 43,247 16.5 7,840 3.0 13,066 5.0
Tangible Capital
(to adjusted
total assets) 43,247 16.5 3,920 1.5 N/A N/A
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
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:
1998 1997
(In thousands)
Stockholder's equity $ 50,876 $ 48,604
Unrealized gain on securities
available for sale (7,629) (5,639)
Tangible and Tier 1 capital 43,247 42,965
Allowance for loan losses 756 590
Total risk based capital $ 44,003 $ 43,555
Total assets $273,631 $205,627
Adjusted total assets 261,327 199,988
Total risk weighted assets 108,401 91,693
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. COMMITMENTS AND CONTINGENCIES
Loan Commitments
At September 30, 1998, the Bank had outstanding commitments to
originate loans in the amount of $4,523,134. Of these
outstanding amounts, commitments of $2,239,584 were at fixed
rates ranging between 7% and 9.25%; 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.
16. 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.
17. FAIR VALUE OF FINANCIAL INSTRUMENTS
SFAS No. 107, Disclosures About Fair Value of Financial
Instruments, requires disclosure of fair value information about
financial instruments, whether or not recognized 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.
Federal Home Loan Bank Advances
The fair values of the Company's FHLB advances are based on
quoted market prices of similar instruments or estimates using
the Company's incremental borrowing rates for similar types of
instruments.
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, 1998 and 1997,
are summarized below:
1998 1997
Carrying Estimated Carrying Estimated
Value Fair Value Value Fair Value
Financial Assets:
Securities available
for sale 107,470 119,799 73,976 73,976
Securities held to
maturity 2,742 2,761 4,157 4,122
Loans, net 141,414 142,461 127,335 127,123
Financial Liabilities:
Deposits 144,802 144,237 132,718 132,599
FHLB advances 65,451 64,398 18,282 18,213
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.
18. 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
achieved the required reserve rate, and, as discussed below, 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.
19. 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.
20. 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.
21. 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)
1998 1997
ASSETS:
Cash and cash equivalents $ 2,147 $ 5,902
Securities available for
sale 1,192 11,260
Investment in subsidiary 50,876 48,604
ESOP loan receivable 3,255 3,368
Premises and equipment 436 811
Other assets 8 313
Total assets $57,914 $70,258
LIABILITIES:
FHLB advances $ 0 $10,500
Other liabilities 349 1,195
Total liabilities 349 11,695
STOCKHOLDERS' EQUITY:
Preferred stock 0 0
Common stock 46 46
Additional paid-in capital 45,210 45,113
Retained earnings 15,488 13,714
Treasury stock, at cost (5,546) 0
Unearned compensation (5,277) (5,998)
Unrealized gain on securities
available for sale, net 7,644 5,688
Total stockholder's equity 57,565 58,563
Total liabilities and
stockholders' equity $57,914 $70,258
Statement of Income
For the Year Ended September 30, 1998 and 1997
(Dollar amounts in thousands)
1998 1997
INTEREST INCOME:
Interest and dividends on
securities available for sale $ 452 $ 963
Interest income from subsidiary 393 415
Dividends from subidiary 3,500 0
Total income 4,345 1,378
INTEREST EXPENSE 377 232
Net interest income 3,968 1,146
NONINTEREST EXPENSE:
Loss on sale of securities 0 29
Other operating expenses 127 165
INCOME BEFORE INCOME TAXES AND
DISTRIBUTION (IN EXCESS OF)
UNDER EQUITY BASIS EARNINGS
OF SUBSIDIARY 3,841 952
INCOME TAXES 107 347
INCOME BEFORE DISTRIBUTIONS
(IN EXCESS OF) UNDER EQUITY
BASIS EARNINGS OF SUBSIDIARY 3,734 605
DISTRIBUTIONS (IN EXCESS OF)
UNDER EQUITY BASIS EARNINGS
OF SUBSIDIARY (683) 2,431
Net income $3,051 $3,036
Statement of Cash Flows
For the Year Ended September 30, 1998 AND 1997
(Dollar amounts in thousands)
1998 1997
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 3,051 $3,036
Distribution (in excess of) under
equity basis earnings of subsidiary 683 (2,431)
605
Adjustments to reconcile net income
to net cash provided by operating
activities:
Loss on sale of securities available
for sale 0 29
Amortization of premiums and discounts,
net (39) 13
Decrease in other assets 305 75
Increase in other liabilities (825) 530
Net cash provided by operating
activities 3,175 1,252
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from the sale of available
for sale securities 10,804 5,397
(Purchase)sale of property and
equipment,net 375 (811)
Purchase of securities available
for sale (3,018) (1,920)
Proceeds from maturities, principal
collections and calls on securities
available for sale 2,266 2,682
Net cash provided by investing
activities 10,427 5,348
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from (repayment of)FHLB
advances, net (10,500) 10,500
Contributions to stock plan trusts (147) (1,127)
Purchase of treasury stock, at cost (5,546) 0
Payments received on ESOP loan 113 130
Dividends paid (1,277) (11,834)
Net cash provided by financing
activities (17,357) (2,331)
NET INCREASE(DECREASE)IN CASH
AND CASH EQUIVALENTS (3,755) 4,269
CASH AND CASH EQUIVALENTS,
beginning of year 5,902 1,633
CASH AND CASH EQUIVALENTS,
end of year $ 2,147 $5,902
Earnings are presented on a retroactive basis, recognizing
earnings of the subsidiary for the years ended September 30, 1998
and 1997. 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.
MANAGEMENET'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
General
Community Federal Bancorp, Inc. (the "Company") was incorporated
under the laws of Delaware 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 Company is the sole shareholder of Community Federal Savings
Bank (the "Bank"). The Bank was organized in 1933 as a federally
chartered mutual savings and loan association. In that year, it
became a member of the Federal Home Loan Bank ("FHLB") system and
obtained federal deposit insurance. Today the Bank's deposits
are insured by the Federal Deposit Insurance Corporation
("FDIC").
The Bank's primary market area includes Lee County and its six
contiguous counties, which it serves from two Tupelo locations.
The Bank's business strategy centers around the concept of
operating as a profitable, community-oriented organization
dedicated to providing high-quality products and service to this
market. As part of this strategy, the Bank pursues the following
concepts.
Emphasis on Traditional Banking Products. Traditionally, the
Bank has focused on originating a portfolio of one-to-four family
residential first mortgage loans in its primary market area. In
recent years, the Bank has added consumer and commercial loan
products and has experienced outstanding growth in delivering
these loans to its customers. Historically, the major sources of
funds have been savings deposits and certificates of deposit. In
recent years, checking accounts for consumers and businesses have
been offered by the Bank.
Management of Interest Rate Risk. The 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 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 consumer and
commercial loans that the Bank recently began to originate has
added additional shorter-term loans that will be held in the
Bank's loan portfolio.
Emphasis on 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 Bank and its related
policies and practices are intended to be of high quality. At
September 30, 1998, the 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 .40% of the
Bank's total assets. Total charge offs were $68,715 or .05% of
average loans for the fiscal year ended September 30, 1998.
Utilization of Capital. It is the Company's policy to maintain a
prudent, adequate level of capital. Presently, the Company's
capital far exceeds the level established by regulatory
guidelines. In September of 1997, the Company embarked on a
growth program designed to leverage the Company's capital to a
higher degree. The program involves the use of new deposits and
borrowings from the FHLB to fund the purchase of securities. The
goal of this program is to increase net income and improve the
return on shareholders' equity.
Financial Condition Review
At September 30, 1998, the Company's assets totaled $275 million,
as compared to $216 million at September 30, 1997. Total assets
increased by $59 million, or 27.5%, from September 30, 1997 to
September 30, 1998.
Major uses of funds were loans and investment securities.
Overall net loan growth in 1998 was $14 million, up 11.1% from
$127.3 million at September 30, 1997 to $141.4 million at
September 30, 1998. Consumer loans increased $729,000 or 16%
from $4.6 million at September 30, 1997 to $5.3 million at
September 30, 1998. Commercial loans increased $4.7 million or
64.3% to $12 million at September 30, 1998, compared to $7.3
million at September 30, 1997. Mortgage loans increased $8.8
million or 7.6% from $116.5 million at September 30, 1997 to
$125.2 million at September 30, 1998.
The securities portfolio is utilized to provide a quality
investment alternative for available funds as well as a stable
source of interest income. Investment securities, along with
mortgage-backed and related securities, totaled $122.5 million at
September 30, 1998, an increase of $44.4 million or 56.8% from
$78.1 million at September 30, 1997. The portfolio mix at
September 30, 1998 consisted of 83.2% U.S. Government and federal
agencies bonds and notes, 14% equity securities and 2.8% mutual
funds.
Major sources of funds are deposits and advances from the Federal
Home Loan Bank. During the fiscal year ended September 30, 1998,
total deposits increased by $12.1 million or 9.1% to $144.8
million, compared to $132.7 million at September 30, 1997. The
deposit mix has remained substantially unchanged with the
exception of a slight shift toward more time deposits.
The Company used advances from the FHLB to leverage the purchase
of mortgage-backed and related securities during the fiscal year
ended September 30, 1998. Advances from FHLB amounted to $65.5
million at September 30, 1998, an increase of $47.2 million over
September 30, 1997.
At September 30, 1998, stockholders' equity totaled $57.6 million
or 20.9% of assets. This represents a decrease of $998,000 or
1.7%, compared to September 30, 1997. The Company entered a
stock repurchase program in early 1998, which is recorded as
treasury stock and, in turn, reduced stockholders' equity by $5.5
million. During fiscal 1998, the Company paid regular dividends
of $.32 per share amounting to $1.3 million. Net income
continued to be a strong contributor to stockholders' equity
during fiscal 1998 as the Company's net income amounted to $3.1
million. In addition, the amortization of unearned compensation
increased stockholders' equity by $1 million and realized gains
on securities available for sale increased $2 million.
Results of Operations
Net Income. The Company had consolidated net earnings of $3.1
million for the fiscal year ended September 30, 1998,
representing a return on average assets of 1.2%, a return on
average equity of 5.2%, and basic earnings per share of $.76 and
fully diluted of $.72. For the fiscal year ended September 30,
1997, the Company's net income amounted to $3.0 million or fully
diluted earnings per share of $.70 compared to $2.1 million for
the fiscal year ended September 30, 1996. Net income for 1996
was materially affected by the $864,000 ($535,000, net of tax
benefit), 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 $2.6
million as compared to the $2.1 reported in the consolidated
statements of income.
Net Interest Income. Net interest income is the largest
component of the Company's net income and is determined by the
difference between the yields earned on its interest-earning
assets and the rates paid on interest-bearing liabilities.
Changes in net income can be broken down into two components, the
change in earning assets, less the change in average interest
bearing liabilities, and the change in net interest spread. Net
interest income was $7.0 million, $7.5 million, and $6.2 million
for the years ended September 30, 1998, 1997, and 1996,
respectively. The $450,000 decrease for fiscal 1998 is a
combination of the two components. Net interest margin decreased
to 2.87% from 3.65% for fiscal 1997, and average interest earning
assets increased $40 million or 19.5%, while average interest
bearing liabilities increased $46 million or 32.9%. The net
interest margin for fiscal 1997 increased 24 basis points to
3.65% from 3.41% for fiscal 1996. The main reason for the
increase in net interest income for fiscal year 1997 compared to
fiscal 1996 can be attributed to the $22.8 million increase in
average interest earning assets while there was only a slight
increase of $4 million in average interest bearing liabilities.
Total interest income increased $2.1 million or 14.5% from $14.5
million at September 30, 1997 to $16.6 million at September 30,
1998. Total interest income increased $1.4 million or 10.3% from
September 30, 1996 to September 30, 1997.
Total interest expense increased $2.5 million or 36.3% to $9.5
million at September 30, 1998 from $7 million at September 30,
1997. At September 30, 1997, total interest expense increased
$74,000 or 1.1% over September 30, 1996.
Provision for Loan Losses. The Bank's provision for loan losses
was $235,000 for the fiscal year ended September 30, 1998
compared to $20,000 each during fiscal 1997 and 1996. 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 Bank. Provision
in fiscal 1998 was made in order to adjust the allowance for the
outstanding growth of the consumer and commercial loan portfolio
as well as the mortgage loan portfolio. At September 30, 1998,
the reserve for loan losses amounted to $756,000 or .53% of total
loans outstanding, which is an amount that management considers
to be sufficient to protect against loan loss inherent in the
portfolio.
Non-Interest Income. Non-interest income for September 30, 1998
was $1.9 million, a $1.7 million increase, compared to fiscal
1997. In an effort to maximize earnings on assets, management
sold equity securities for a gain of $1.6 million. The sales
proceeds were reinvested in higher yielding loans and securities.
The remainder of the growth was in the other income category for
service release premiums on fixed rate mortgage loans that were
sold and increased fee income. Non-interest income for fiscal
1997 was $227,000, an increase of $39,000, compared to
non-interest income of $188,000 in fiscal 1996, which was mainly
increased fee income.
Non-Interest Expense. Non-interest expense increased $933,000 to
$3.9 million in fiscal 1998 compared to fiscal 1997.
Compensation and benefits increased $330,000 to $2.3 million due
primarily to expenses associated with the valuation of stock
released from the Employee Stock Ownership Plan and increased
participation in benefit plans. General and administrative
expense accounted for the remaining $218,000 increase.
Non-interest expense decreased $109,000 to $2.9 million in fiscal
1997, compared to fiscal 1996. The primary reasons for the
decrease were attributed 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, the Employee Stock Ownership Plan and
Management Recognition Plan, and $101,000 increase in other
general expenses.
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 change in
relative purchasing power over time due to inflation.
Changing prices generally have an impact on interest rates, which
can affect the Bank's earning stream and the market valuation of
its assets.
Year 2000 Problem
The Company is aware of the issue associated with the programming
code in existing computer systems as the Year 2000 approaches.
The Year 2000 issue is the result of computer programs being
written to store and process data using two digits rather than
four to define the applicable year. Computer programs that have
time sensitive coding may recognize a date using "00" as the year
1900 rather than the year 2000. Systems that do not properly
recognize such information could generate erroneous data or cause
systems to fail.
The Bank has conducted a review of its computer systems to
identify the systems that could be affected by the Year 2000
Issue and has developed an implementation plan to resolve the
issue. The majority of the Bank's data processing is provided by
a third party service bureau. The service bureau is actively
involved in resolving Year 2000 issues and has provided the Bank
with frequent updates regarding its progress. The service bureau
has advised the Bank that it has resolved the majority of thee
Year 2000 issue. The Bank tested the service bureau's system for
Year 2000 compliance during November of 1998. The Bank presently
believes that, based on the progress and testing of the Bank's
service bureau, the Year 2000 problem will not pose significant
operational problems for the Bank's computer system. The total
cost of Year 2000 projects are not estimated to be material to
the financial performance of the Company.
Average Balance, Interest, and Average Yields and Rates
The following table sets forth certain information relating to
the Company's average interest-earning assets and
interest-bearing liabilities and reflects the average yield on
assets and the average cost of liabilities for the periods and at
the date indicated. Such yields and costs are derived by
dividing income or expense by the average monthly balance of
assets or liabilities, respectively, for the periods indicated.
The table also presents information for the periods indicated and
at September 30, 1998 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.
Year Ended September 30,
1998
Average Yield
Balance Interest /Rate
Interest-earning assets:
Loans receivable, net $136,626 $10,795 7.90%
Securities:
Available for sale 98,230 5,280 5.38
Held to maturity 3,513 196 5.58
Other interest-earning assets(1) 6,401 336 5.25
Total interest-earning assets 244,770 16,607 6.78
Non-interest-earning assets 5,386
Total assets $250,156
Interest-bearing liabilities:
Transaction accounts $ 23,641 608 2.57
Certificates of deposit 115,413 6,568 5.69
Borrowings 45,263 2,397 5.30
Total interest-bearing
liabilities 184,317 9,573 5.19
Non-interest-bearing
liabilities 6,841
Total liabilities 191,158
Equity 58,998
Total liabilities and equity $250,156
Net interest income;
interest rate spread $7,034 1.59%
Net interest margin (2) 2.87%
Average interest-earning
assets to average
interest-bearing liabilities 132.80%
Year Ended September 30,
1997
Average Yield
Balance Interest /Rate
Interest-earning assets:
Loans receivable, net $123,610 $ 9,797 7.93%
Securities:
Available for sale 71,645 4,164 5.81
Held to maturity 4,542 266 5.86
Other interest-earning assets(1) 5,001 281 5.62
Total interest-earning assets 204,798 14,508 7.08
Non-interest-earning assets 3,132
Total assets $207,930
Interest-bearing liabilities:
Transaction accounts $ 19,959 $ 589 2.95
Certificates of deposit 111,745 6,061 5.42
Borrowings 6,945 374 5.39
Total interest-bearing liabilities 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 $ 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%
(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 table describes 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,
1998 Compared to 1997
Increase Increase Total
(Decrease) (Decrease) Increase
Due to Rate Due to Volume (Decrease)
Interest-Earning Assets:
Loans $ (30) $1,028 $ 998
Securities:
Available for sale (283) 1,399 1,116
Held to maturity (12) (58) (70)
Other interest-earning assets (17) 72 55
Total interest-earning assets $(342) 2,441 2,099
Interest-Bearing Liabilities:
Transaction accounts (44) 63 19
Certificates of deposit 304 203 507
Borrowings (6) 2,029 2,023
Total interest-bearing
liabilities 254 2,295 2,549
Increase (decrease) in
net interest income $(596) $ 146 $ (450)
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 26 889 915
Held to maturity (108) (451) (559)
Other interest-earning assets 63 (247) (184)
Total interest-earning assets $1,695 1,695 1,359
Interest-Bearing Liabilities:
Transaction accounts (659) 627 (32)
Certificates of deposit (492) 244 (248)
Borrowings (4) 359 355
Total interest-bearing
liabilities (1,155) 1,230 75
Increase (decrease) in
net interest income $ 819 $ 465 $ 465
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 $ 463 $1,106 $1,569
Securities:
Available for sale (158) 1,085 927
Held to maturity 77 (684) (607)
Other interest-earning assets (12) 256 244
Total interest-earning assets 370 1,763 2,133
Interest-Bearing Liabilities:
Transaction accounts (61) 133 72
Certificates of deposit 948 (209) 739
Borrowings 37 (166) (129)
Total interest-bearing
liabilities 924 (242) 682
Increase (decrease) in
net interest income $ (554) $2,005 $1,451
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,
1998, the Company had approximately $3.3 million in cash on hand
and interest-bearing deposits in other banks, which represented
1.2% of total assets. At September 30, 1998, the Company's level
of liquid assets, as measured for regulatory compliance purposes
was 66%, or $94.8 million, in excess of the minimum liquidity
requirement of 4%.
At September 30, 1998, the Savings Bank had $50.9 million of
total equity or 18.6% of total assets. The Savings Bank
continues to exceed its regulatory capital requirements ratios at
September 30, 1998. Tangible and core capital were $43.2
million, which represented 16.5% of adjusted total assets and
risk-based capital was $44 million which represented 40.6% of
total risk-weighted assets at September 30, 1998. Such amounts
exceeded the minimum required ratios of 1.5%, 3%, and 8%,
respectively. At September 30, 1998, 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.
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
Chief Executive Officer President--Washington
Community Federal Bancorp, Inc./ Furniture Mfg., Inc.
Community Federal Savings Bank Houlka, MS
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 H. Lewis Whitfield
Ophthalmologist President
Tupelo, MS Community Federal Bancorp, Inc
Community Federal Savings Bank
Tupelo, MS
L.F. Sams, Jr.
Partner, Law Firm
Mitchell, McNutt, Threadgill,
Smith & Sams
Tupelo, MS
Officers
Jim Ingram, CEO
H. Lewis Whitfield, President
Gill Simmons, Vice President
Jack Johnson, Vice President
Mark Burleson, Vice President
Sherry McCarty, CFO
Terry Baker, Assistant Vice
President
Lynda Riley, Treasurer
Judy Ballard, Secretary
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 Chief Financial Officer
PO Box F
Tupelo, MS 38802
(601) 840-0302
Annual Meeting
The 1999 Annual Meeting of the Stockholders of Community Federal
Bancorp, Inc. will be held at 5:00 p.m. on January 21, 1999, in
the Lobby of Community Federal Savings Bank, 333 Court Street,
Tupelo, Mississippi.
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