UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-KSB
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15 (d)
OF THE SECURITIES EXCHANGE ACT OF 1934
(NO FEE REQUIRED EFFECTIVE OCTOBER 7, 1996)
FOR THE FISCAL YEAR ENDED SEPTEMBER 30, 1996
Commission File Number: 333-12373
SOUTHERN COMMUNITY BANCSHARES, INC.
(Exact name of small business issuer as specified in its charter)
Delaware 63-1176408
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
325 2nd Street, S.E., Cullman, AL 35055
(Address of principal executive (Zip Code)
offices)
The registrant's telephone number, including area code: (205) 734-4863
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-KSB.
The registrant's revenues for its most recent fiscal year were
$5,235,294.
The aggregate market value of the registrant's outstanding common
stock held by non-affiliates of the registrant at December 12, 1997
was approximately $14,289,615 (based on 752,085 shares at the most
recent trading price of which management was aware ($19.00 on
December 12, 1997) (for this purpose, the registrant's directors and
executive officers and stock benefit plans and trusts have not been
deemed to be non-affiliates).
The total number of outstanding shares of the registrant's common
stock at September 30, 1997 was 1,137,500.
Transitional small business disclosure format: No.
<PAGE>
DOCUMENTS INCORPORATED BY REFERENCE
The following portions of the Southern Community Bancshares, Inc.
Annual Report to Shareholders for the fiscal year ended September 30,
1997, are incorporated by reference into Part II of this Form 10-KSB:
1. Market Price of Common Shares and Related Shareholder Matters;
2. Management's Discussion and Analysis of Financial Condition
and Results of Operations; and
3. Consolidated Financial Statements.
The following portions of the definitive Proxy Statement for the 1997
Annual Meeting of Shareholders of Southern Community Bancshares, Inc.
are incorporated by reference into Part III of this Form 10-KSB:
1. Voting Securities and Ownership of Certain Beneficial Owners
and Management; and
2. PROPOSAL ONE - ELECTION OF DIRECTORS -- Compensation of
Executive Officers and Directors.
<PAGE>
ITEM 1.--DESCRIPTION OF BUSINESS
General
The Holding Company is a Delaware corporation organized at the
direction of the Association for the purpose of purchasing all of the
capital stock of the Association to be issued in connection with the
Conversion. Before the conversion, the Holding Company did not engage
in any material operations. The Holding Company is a unitary savings
and loan holding company, the principal assets consist of the capital
stock of the Association and the investments made with the net
proceeds retained from the sale of Common Shares in connection with
the Conversion. The office of the Holding Company is located at 325
2nd Street, S.E., Cullman, Alabama, and its telephone number is (205)
734-4863.
The Association is a federal stock savings and loan association which
was organized in 1905. As a federal savings and loan association, the
Association is subject to supervision and regulation by the OTS. The
Association is a member of the Federal Home Loan Bank (the "FHLB") of
Atlanta, and the deposit accounts of the Association are insured up to
applicable limits by the FDIC in the Savings Association Insurance
Fund (the "SAIF"). The Association conducts business from its offices
in Cullman County, Alabama, and its executive office is located at 325
2nd Street, S.E., Cullman, Alabama. At September 30, 1997, the
Association had $70.9 million of total assets, $56.4 million of total
liabilities, including $55.9 million of deposits, and $14.5 million of
equity.
The Association is principally engaged in the business of originating
mortgage loans secured by first mortgages on one-to-four family
residential real estate located in Cullman County, Alabama, the
Association's primary market area. Such loans account for $25.6
million and $23.5 million at September 30, 1997 and 1996,
respectively. The Association also originates loans for the
construction of residential real estate and construction and permanent
mortgage loans secured by multifamily real estate (over four units)
and nonresidential real estate in its primary market area. Such loans
account for $13.5 million and $13.1 million of total loans,
respectively. In addition to real estate lending, the Association
originates a limited number of commercial loans and secured and
unsecured consumer loans. The stated loans account for $5.6 million
and $4.6 million of total loans, respectively. For liquidity and
interest rate risk management purposes, the Association invests in
interest-bearing deposits in other financial institutions, U.S.
Government and agency obligations, mortgage-backed securities, and
other investments permitted by applicable law. As of September 30,
1997, the carrying value of investments that management has the intent
and ability to hold until maturity was $3.5 million and the carrying
value of investments that were available for sale was $13.0 million.
In addition, as of that same date, the Association's aggregate cash
and interest-bearing deposits in other banks totaled $9.9 million.
Funds for lending and other investment activities are obtained
primarily from savings deposits, which are insured up to applicable
limits by the FDIC, and loan principal repayments.
Historically, the Association has operated as a traditional savings
and loan association, emphasizing the origination of loans secured by
single-family residences. The Association has recently focused on
increasing consumer and commercial lending and has added a loan
officer experienced in the commercial lending area. The Association
has also taken steps to increase its noninterest income by repricing
certain of its deposit products and service charges.
Interest on loans and investments is the Association's primary source
of income. The Association's principal expense is interest paid on
deposit accounts. Operating results are dependent to a significant
degree on the net interest income of the Association, which is the
difference between interest income earned on loans, mortgage-backed
securities and other investments, and interest paid on deposits and
borrowings. Like most thrift institutions, the Association's interest
income and interest expense are significantly affected by general
economic conditions and by the policies of various regulatory
authorities.
Market Area
The Association conducts business from its office in Cullman, Alabama.
The Association's primary market area for lending and deposit activity
is Cullman County, Alabama.
Cullman County's economy is principally agricultural, light industry,
and manufacturing. Cullman County is among the largest poultry
producing counties in the United States. For the period 1994 to 1999,
the population of Cullman County is projected to grow by 5.20% and the
City of Cullman's population is projected to grow by 7.73%. The
projected population growth of 5.20% for the county is projected to be
above that of Alabama at 3.47% and level with the United States at
5.28%. The projected population growth for the City at 7.73% exceeds
the projections for the United States, Alabama, and Cullman County.
Income levels in Cullman County are below averages for the State of
Alabama and the United States according to demographic statistics.
For 1994, average per capita income for Cullman County was 12% below
and 30% below, respectively, average per capita income for Alabama and
the United States, respectively. For 1999, average per capita income
for Cullman County is projected to be 12% below and 31% below,
respectively, average per capita income for Alabama and the United
States, respectively.
Cullman County has no single, dominant employer. The largest employer
in the county is the Wal-Mart Distribution Center with approximately
1,500 employees.
The Association is one of two thrift institutions based in Cullman
County and had a 46% share of the County's thrift deposits and a 8.2%
share of all deposits in the county, as of June 30, 1995.
Lending Activities
General. The Association's principal lending activity is the
origination of conventional real estate loans, including construction
loans, secured by one- to four-family homes located in the
Association's primary market area. Loans secured by multifamily
properties containing five units or more and by nonresidential real
estate and loans for the construction of residences and other
properties are also offered by the Association. In addition to real
estate lending, the Association originates commercial loans and
consumer loans, including loans secured by deposit accounts,
automobile loans, and a limited number of other secured and unsecured
loans.
Since the enactment of FIRREA in 1989, a savings association generally
may not make loans to one borrower and related entities in an amount
which exceeds 15% of its unimpaired capital and surplus, although
loans in an amount equal to an additional 10% of unimpaired capital
and surplus may be made to a borrower if the loans are fully secured
by readily marketable securities. At September 30, 1997, the
Association's loans-to-one borrower limit was $1.6 million and its
five largest loans or groups of loans-to-one borrower, including
related entities, were $1,523,000, $1,391,000, $767,000, $568,000 and
$568,000. Each of these loans is secured by real estate, a
substantial portion of which is rental property. All of these loans
or groups of loans were performing in accordance with their terms at
September 30, 1997.
Loan Portfolio Composition. The following table sets forth the
composition of the Association loan portfolio by type of loan at the
dates indicated:
September 30,
---------------------------------------
1997 1996
------------------ ------------------
Amount % Amount %
--------- ------ -------- -------
(In thousands)
Real estate loans:
One-to four-family $25,617 59.58% $23,470 59.27%
Nonresidential 8,077 18.78 8,602 21.72
Multifamily 4,172 9.70 3,671 9.26
Construction 1,267 2.95 837 2.11
------- ------ ------- ------
Total real estate loans 39,133 91.01 36,580 92.36
------- ------ ------- ------
Commercial loans 2,294 5.34 1,417 3.58
------- ------ ------- ------
Consumer loans:
Automobile loans 1,535 3.57 1,368 3.45
Loans on deposits 518 1.20 568 1.43
Other consumer loans 1,311 3.05 1,201 3.03
------- ------ ------- ------
Total consumer loans 3,364 7.82 3,137 7.91
------- ------ ------- ------
Total loans 44,791 104.17 41,134 103.85
------- ------ ------- ------
Less:
Undisbursed portion of loans
in progress 816 1.90 582 1.47
Unearned and deferred income 170 .40 149 .38
Allowances for loan losses 806 1.87 802 2.00
------- ------ ------- ------
Net loans $42,999 100.00% $39,601 100.00%
======= ====== ======= ======
Contractual Principal Repayments and Interest Rates. The following
table sets forth certain information at September 30, 1997 regarding
the dollar amount of loans maturing in the Association'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
Due in 1 Year
1 Year Through Over
or Less 5 Years 5 Years Total
(In thousands)
Mortgage Loans:
Adjustable $ 7,891 $ 2,642 $ 5,205 $15,738
Fixed 766 1,664 20,965 23,395
Consumer 1,346 2,018 0 3,364
Commercial 413 275 1,606 2,294
------- ------- ------- -------
Total $10,416 $ 6,599 $27,776 $44,791
======= ======= ======= =======
The following table sets forth the dollar amount of all loans, before
net items, due after one year from September 30, 1997 which have fixed
interest rates or which have adjustable interest rates.
Fixed Rates
(In thousands)
Fixed rates of interest $26,301
Adjustable rates of interest 8,074
-------
Total $34,375
=======
Scheduled contractual amortization of loans does not reflect the
actual term of the Association'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 Association 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.
Loan Solicitation and Processing. Loan originations are developed
from a number of sources, including continuing business with
depositors, other borrowers and real estate developers, solicitations
by the Association`s lending staff and walk-in customers.
Loan applications for permanent real estate loans are taken by loan
personnel at the Association's office. The Association typically
obtains a credit report, verification of employment, and other
documentation concerning the creditworthiness of the borrower. An
appraisal of the fair market value of the real estate which will be
given as security for the loan is prepared by an appraiser approved by
the Board of Directors. Upon the completion of the appraisal and the
receipt of information on the credit history of the borrower, the
application for a loan is submitted for review in accordance with the
Association's underwriting guidelines. All real estate loans are
approved by the Loan Committee of the Association (the Loan Committee
is comprised of two members, Mr. Eston Jones and Mr. Daniel Keel).
Loans not secured by real estate may be approved by the President or
the Vice President-Lending of the Association for amounts less than
$20,000. Loans not secured by real estate in amounts in excess of
$20,000 require approval of the Loan Committee. Any loan in an amount
in excess of $250,000 requires the approval of the full Board of
Directors of the Association.
If a mortgage loan application is approved, the Association typically
obtains an attorney's opinion of title. The Association obtains title
insurance on only approximately 5% of its loans secured by real
estate. Borrowers are required to carry satisfactory fire and
casualty insurance and flood insurance, if applicable, and to name the
Association as an insured mortgagee.
The procedure for approval of construction loans is the same as for
permanent real estate loans, except that an appraiser evaluates the
building plans, construction specifications, and estimates of
construction costs. The Association also evaluates the feasibility of
the proposed construction project and the experience and record of the
builder. Once approved, the construction loan is disbursed in
portions based upon periodic inspections of construction progress.
Consumer loans are underwritten on the basis of the borrower's credit
history and an analysis of the borrower's income and expenses, ability
to repay the loan, and the value of the collateral, if any.
Loan Originations. The Association currently originates a variety of
mortgage loans, including adjustable and fixed rate loans. The
Association is an approved seller/servicer for the Federal Home Loan
Mortgage Corporation (FHLMC) and as such, originates loans for the
various programs of FHLMC. Further, the Association originates
certain first and second mortgage loans secured by single family
dwellings which are nonconforming.
At September 30, 1997, the Association owns loan participation
interests in 10 loans with an aggregate outstanding balance of
approximately 4.5 million. These loans consist of both adjustable and
fixed rate loans. The Association is the lead lender on one loan of
the 10, which loan has an outstanding balance of $292,000 at
September 30, 1997. The remaining 9 loans are serviced by other
lending institutions. All participation loans are performing and
secured by first mortgages. The participation loans are secured by
various types of properties, including multifamily residences,
shopping centers, office buildings, and a country club, some of which
are outside of the Association's primary market area. The Association
does not currently intend to originate or purchase additional loan
participations outside their market area.
The following table shows total loans originated, loan reductions, and
the net increase in the Association's loan portfolio during the
periods indicated:
Year Ended
September 30,
1997 1996
(In thousands)
Loans originated:
One-to-four family residential $ 8,626 $ 7,981
Multifamily residential 568 0
Nonresidential 660 991
Construction 1,758 2,107
Commercial 1,674 336
Consumer 3,093 3,234
-------- --------
Total loans originated 16,379 14,649
Principal repayments (13,504) (13,876)
Increase (decrease) in other items, net (1) 523 258
-------- --------
Net increase (decrease) $ 3,398 $ 1,031
======== ========
(1) Other items consist of deferred loan fees, allowance for loan
losses and the undisbursed portion of construction loans.
Loans Secured by One- to Four-Family Residences. The principal
lending activity of the Association is the origination of conventional
loans secured by first mortgages on one- to four-family residences,
primarily single-family residences located within the Association's
primary market area. At September 30, 1997, the Association's one- to
four-family residential loans totaled approximately $25.6 million, or
59.6% of total loans.
OTS regulations limit the amount which the Association may lend in
relationship to the appraised value at the time of loan origination of
the real estate and improvements which will secure the loan (the
"LTV"). In accordance with such regulations and laws, and as a matter
of policy established by the Board of Directors of the Association,
the Association makes loans secured by one- to four-family residences
for not more than a 85% LTV.
ARMs are currently offered by the Association for terms of up to 20
years. On ARMs currently offered by the Association, the interest
rate adjustment periods are one year and rates are adjusted in
accordance with the weekly average yield on United States Treasury
securities adjusted to a constant maturity of one year. The new
interest rate at each change date is determined by adding a margin of
2.75% to the prevailing index. On ARMs currently offered by the
Association, the maximum allowable adjustment at each adjustment date
is 2.0% and the maximum allowable adjustment over the term of the loan
is 6.0%.
Although ARMs decrease the Association's interest rate risk, such
loans involve other risks. As interest rates rise, for example, the
payment by the borrower increases to the extent permitted by the terms
of the loan. Such increases in the payment may increase the potential
for default. Moreover, the marketability of the underlying property
may be adversely affected by a general increase in interest rates.
The Association believes that such risks have not had a material
adverse effect on the Association to date.
The Association currently offers fixed rate loans for terms of 15, 20,
and 30 years. The fixed-rate loans are competitively priced based on
market conditions and the Association's cost of funds.
Loans Secured by Multifamily Residences. In addition to loans on one-
to four-family properties, the Association originates loans secured by
multifamily properties which contain more than four units. At
September 30, 1997, loans secured by multifamily residences totaled
approximately $4.2 million, or 9.7% of total loans. At September 30,
1997, the largest single loan secured by a multifamily residence was
$1.4 million and was performing in accordance with its terms.
Multifamily loans are offered with adjustable or fixed rates for terms
of up to 20 years and have LTVs up to 80%.
Multifamily lending is generally considered to involve a higher degree
of risk than one- to four-family residential lending because the
borrower typically depends upon income generated by the project to
cover operating expenses and debt service. The profitability of a
project can be affected by economic conditions, government policies,
and other factors beyond the control of the borrower. The Association
attempts to reduce the risk associated with multifamily lending by
evaluating the creditworthiness of the borrower and the projected
income from the project and by obtaining personal guarantees on loans
made to corporations and partnerships.
Loans Secured by Nonresidential Real Estate. The Association also
originates loans for the purchase of nonresidential real estate. At
September 30, 1997, approximately $8.1 million, or 18.8%, of the
Association's total loans were secured by mortgages on nonresidential
real estate. At such date, the largest single loan secured by
nonresidential real estate was $1.5 million and was performing in
accordance with its terms. The Association's nonresidential real
estate loans have adjustable rates or fixed rates, terms of up to 30
years, and LTVs of up to 80%. The Association also makes loans for
the construction of nonresidential real estate.
Although loans secured by nonresidential real estate have higher
interest rates than one- to four-family residential real estate loans,
nonresidential real estate lending is generally considered to involve
a higher degree of risk than residential lending due to the relatively
larger loan amounts and the effects of general economic conditions on
the successful operation of income-producing properties. The
Association has endeavored to reduce such risk by evaluating the
credit history and past performance of the borrower, the location of
the real estate, the financial condition of the borrower, the quality
and characteristics of the income stream generated by the property,
and appraisals supporting the property's valuation.
Construction Loans. The Association makes loans for the construction
of single-family houses, multifamily properties, and nonresidential
real estate projects. Of the loans made by the Association for
construction of single-family residences, all are made to
owner-occupants or to professional builders.
Construction loans are offered with adjustable or fixed rates for
terms of up to one year. At September 30, 1997, the Association's
loan portfolio included $1.3 million in construction loans, or 3.0% of
total loans. The majority of construction loans were for construction
of residential properties.
Construction loans, particularly loans involving nonresidential real
estate, generally involve greater underwriting and default risks than
do loans secured by mortgages on existing properties. Loan funds are
advanced upon the security of the project under construction, which is
more difficult to value before the completion of construction.
Moreover, because of the uncertainties inherent in estimating
construction costs, it is relatively difficult to evaluate accurately
the LTV and the total loan funds required to complete a project. In
the event a default on a construction loan occurs and foreclosure
follows, the Association would have to take control of the project and
attempt either to arrange for completion of construction or dispose of
the unfinished project.
All of the Association's loans are secured by property in the
Association's primary market area.
Commercial Loans. The Association makes commercial loans to
businesses in its primary market area. Such loans are typically
secured by a security interest in equipment, nonresidential real
estate, or other assets of the borrower. At September 30, 1997, the
Association's commercial loan portfolio totaled $2.3 million, or 5.3%
of total loans.
Consumer Loans. The Association makes various types of consumer
loans, including loans made to depositors on the security of their
deposit accounts, automobile loans, home improvement loans, and other
secured loans and unsecured personal loans. Consumer loans are made
at variable or fixed rates of interest and for varying terms based on
the type of loan. At September 30, 1997, the Association had
approximately $3.4 million, or 7.8% of total loans, invested in
consumer loans.
Consumer loans, particularly consumer loans which are unsecured or are
secured by depreciating assets such as automobiles, may entail greater
risk than residential real estate loans. Repossessed collateral for a
defaulted consumer loan may not provide an adequate source of
repayment of the outstanding loan balance. The risk of default on
consumer loans increases during periods of recession, high
unemployment, and other adverse economic conditions.
Loan Origination and Other Fees. The Association realizes loan
origination fees and other fee income from its lending activities and
also realizes income from late payment of charges, application fees,
and fees for other miscellaneous services.
Loan origination fees and other fees are a volatile source of income,
varying with the volume of lending, loan repayments, and general
economic conditions. All nonrefundable loan origination fees and
certain direct loan origination costs are deferred and recognized in
accordance with SFAS No. 91 as an adjustment to yield over the life of
the related loan. At September 30, 1997, the Association had $170,000
of net loan fees which had been deferred and are being recognized as
income over the estimated maturities of the related loans.
Non-performing Assets. Non-performing assets include nonaccruing
loans, real estate acquired by foreclosure or by deed-in-lieu thereof,
in-substance foreclosures, and repossessed assets. The Association
ceases to accrue interest on real estate loans if the collateral value
is not adequate, in the opinion of management, to cover the
outstanding principal and interest. Prior to 1997, the Association
reviewed loans which were 90 days or more delinquent and made a
determination, based upon its estimation of collectibility, whether to
continue to accrue, or to cease accruing, interest on such loan.
During 1997, the Association implemented a new policy ceasing the
accrual of interest on all loans which were 90 days or more
delinquent.
Real estate acquired by the Association as a result of foreclosure
proceedings is classified as real estate owned ("REO") until it is
sold. When property is so acquired, such property is recorded by the
Association at the fair value of the real estate, less estimated
selling expenses, at the date of acquisition and any write-down
resulting therefrom is charged to the allowance for loan losses. All
costs incurred in maintaining REO property are expenses from the date
the property is acquired. Costs relating to the development and
improvement of the property are capitalized to the extent of fair
value
As of September 30, 1997, the Association's total non-performing loans
amounted to $265,000, or 0.6% of total net loans, compared to
$153,000, or 0.4% of total net loans at September 30, 1996.
The following table sets forth information with respect to the accrual
and nonaccrual status of the Association's loans and other
non-performing assets at the dates indicated:
September 30,
1997 1996
(In thousands)
Accruing loans delinquent 90+ days $ 0 $ 126
Loans accounted for on a nonaccrual basis:
Real estate:
One- to four-family 263 25
Multifamily 0 0
Nonresidential 0 0
Consumer 2 2
------- -------
Total nonaccrual loans 265 27
------- -------
Total non-performing loans 265 153
------- -------
Real estate owned 0 0
------- -------
Total non-performing assets $ 265 $ 153
======= =======
Allowance for loan losses $ 806 $ 802
======= =======
Non-performing assets as a percent of total loans 0.6% 0.4%
======= =======
Non-performing loans as a percent of total loans 0.6% 0.4%
======= =======
Allowance for loan losses as a percent of
non-performing loans 304.2% 524.2%
======= =======
(1) Consists of real estate acquired by foreclosures.
Interest income foregone on non-accrual loans was not significant for
any period shown.
Classified Assets. The Association classifies its own assets on a
quarterly basis in accordance with federal regulations and Association
policy. Problem assets are classified as "substandard," "doubtful,",
or "loss." "Substandard" assets have one or more defined weaknesses
and are characterized by the distinct possibility that the Association
will sustain some loss if the deficiencies are not corrected.
"Doubtful" assets have the same weaknesses as "substandard" assets,
with the additional characteristics that (i) the weaknesses make
collection or liquidation in full, on the basis of currently existing
facts, conditions, and values, questionable and (ii) there is a high
possibility of loss. An asset classified "loss" is considered
uncollectible and of such little value that its continuance as an
asset of the Association is not warranted.
The aggregate amounts of the Association's classified loans at the
dates indicated were as follows:
September 30,
1997 1996
(In thousands)
Classified loans:
Substandard $281 $212
Doubtful 0 198
Loss 97 100
Total classified loans $378 $510
The Association establishes general allowances for loan losses for any
loan classified as substandard or doubtful. If an asset, or portion
thereof, is classified as a loss, the Association establishes specific
allowances for losses in the amount of 100% of the portion of the
asset classified loss. Generally, the Association charges off the
portion of any real estate loan deemed to be uncollectible.
The Association analyzes each classified asset on a quarterly basis to
determine whether changes in the classifications are appropriate under
the circumstances. Such analysis focuses on a variety of factors,
including the amount of any delinquency and the reasons for the
delinquency, if any, the use of the real estate securing the loan, the
status of the borrower, and the appraised value of the real estate.
As such factors change, the classification of the asset will change
accordingly.
Allowance for Loan Losses. Senior management, with oversight by the
Board of Directors, reviews on a quarterly basis the allowance for
loan losses as it relates to a number of relevant factors, including,
but not limited to, trends in the level of delinquent and
nonperforming assets and classified loans, current and anticipated
economic conditions in the primary lending area, past loss experience,
and possible losses arising from specific problem assets. To a lesser
extent, management also considers loan concentrations to single
borrowers and changes in the composition of the loan portfolio. While
management believes that it uses the best information available to
determine the allowance for loan losses, unforeseen market conditions
could result in adjustments and net income could be significantly
affected if circumstances differ substantially from the assumptions
used in making the final determination. The amounts in the provisions
for loan losses shown in the table below for 1995 through 1997 were
determined based upon past loan experience, a review of individual
specific problem loans, if any, the estimated value of the underlying
collateral, and the prevailing economic conditions.
At September 30, 1997, the Association's allowance for loan losses was
$806,000 compared to $802,000 at September 30, 1996. The following
table sets forth an analysis of the Association's allowance for loan
losses for the periods indicated:
1997 1996 1995
(In thousands)
Balance at beginning of period $ 802 $ 624 $ 632
Charge-offs (56) (20) (11)
Recoveries 60 8 9
------ ------ ------
Net (charge-offs) recoveries 4 (12) (8)
Provision for loan losses 190 0
------ ------ ------
Balance at end of year $ 806 $ 802 $ 624
====== ======= ======
Ratio of net (charge-offs)
recoveries to average loans
outstanding during the period (.01)% (.03)% (.02)%
====== ======= ======
Ratio of allowance for loan losses
to total loans 1.87 % 1.95 % 1.62 %
====== ======= ======
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,
1997 1996
--------------------- ---------------------
% of Loans % of Loans
in Each in Each
Category Category
to Total to Total
Amount Loans Amount Loans
Real estate loans $ 41 91.01% $ 41 92.36%
Commercial loans 54 3.57 222 3.58
Consumer loans 2 7.82 27 7.91
Unallocated 709 0 512 0.0
---- ------- ----- -------
Total $806 104.17% $ 802 103.85%
==== ======= ===== =======
Securities
The Association accounts for its investments in accordance with the
provisions of Statement of Financial Accounting Standards ("SFAS")
No. 115, Accounting for Certain Investments in Debt and Equity
Securities. Securities classified as held-to-maturity are stated at
cost, adjusted for amortization of premiums and accretion of discounts
on the constant effective yield method. The Association has the
positive intent and ability to hold these securities to maturity.
Available-for-sale securities are carried at fair value and include
all debt and equity securities not classified as held-to-maturity or
trading. Trading securities are those held principally for the
purpose of selling in the near future and are carried at fair value.
The Association does not currently have any trading securities.
Unrealized holding gains and losses for trading securities are
included in earnings. Unrealized holding gains and losses for
available-for-sale securities are excluded from earnings and reported,
net of any income tax effect, as a separate component of retained
earnings. Realized gains and losses for securities classified as
either available-for-sale or held-to-maturity are reported in earnings
based on the adjusted cost of the specific security sold.
The Company's securities portfolio includes mortgage-backed securities
which are insured or guaranteed by the FHLMC, GNMA, or the FNMA, all
of which are backed by FHLMC, GNMA, and FNMA securities.
Mortgage-backed securities 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. Investments in
mortgage-backed securities as well as investments in other investment
securities are managed by the Company's Investment Committee in
accordance with the Company's Portfolio and Investment Policy.
The following table sets forth the carrying value of the Company's
investment portfolio at the dates indicated:
September 30,
1997 1996
(In thousands)
Available for sale (1):
U.S. Treasury and federal agencies $ 6,983 $ 3,500
Mutual funds 0 1,762
Federal Home Loan Bank stock 430 430
-------- --------
Investment securities 7,413 5,692
Mortgage-backed securities 5,583 5,936
-------- --------
Total $ 12,996 $ 11,628
======== ========
Held to maturity (2):
U.S. Treasury and federal agencies $ 1,348 $ 4,093
Obligations of state and political
subdivisions 150 160
-------- --------
Investment securities 1,498 4,253
Mortgage-backed securities 2,027 2,514
-------- --------
Total $ 3,525 $ 6,767
======== ========
(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.
The following table sets forth information regarding the scheduled maturities,
amortized costs, fair value and weighted average yields for the Association's
securities at September 30, 1997:
<TABLE>
<CAPTION>
One Year or Less One to Five Years Five to Ten Years After Ten Years Other
------------------ ------------------ ----------------- ------------------ ------------------
Carrying Average Carrying Carrying Average Average Carrying Average Carrying Average
Value Yield Value Value yield Yield Value Yield Value yield
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Available for sale:
U.S. Treasury and
federal agencies $3,001 5.82% $3,213 6.14% $ 769 5.88% $ 0 0.00% $ 6,983 5.99%
Federal Home Loan
Bank stock 0 0 0 0.00 0 0.00 430 3.60 430 3.60
Mortgage-backed
securities 276 4.82 2,576 5.80 880 6.14 1,851 6.08 5,583 6.08
------ ----- ------ ----- ------ ----- ------ ----- ------- -----
Total $3,277 5.74% $5,789 5.99% $1,649 6.02% $2,281 5.61% $12,996 5.95%
====== ===== ====== ===== ====== ===== ====== ===== ======= =====
Held-to-maturity:
U.S. Treasury and
federal agencies $ 500 4.46% $ 848 5.36% $ 0 0.00% $ 0 0.00% 1,348 5.99%
Obligations of state
and political
subdivisions 0 0.00 150 6.60 0 0.00 0 0.00 150 3.60
Mortgage-backed
securities 598 5.27 1,180 5.87 249 7.21 0 0.00 2,027 6.08
------ ----- ------ ----- ------ ----- ------ ----- ------- -----
Total $1,098 4.90% $2,178 5.72% $ 249 7.21% $ 0 0.00% $ 3,525 5.94%
====== ===== ====== ===== ====== ===== ====== ===== ======= =====
</TABLE>
Cash and Interest-Bearing Deposits in Other Banks
The Association also had cash on hand and cash due from and on deposit
with other banks amounting to $9.9 million and $3.9 million at
September 30, 1997 and 1996, respectively.
Deposits and Borrowings
General. Deposits have traditionally been the primary source of the
Association's funds for use in lending and other investment
activities. In addition to deposits, the Association derives funds
from interest payments and principal repayments on loans and income on
earning assets. Loan payments are a relatively stable source of
funds, while deposit inflows and outflows fluctuate in response to
general interest rates and money market conditions. The Association
has the ability to use FHLB advances as an alternative source of funds
but has not utilized such source in the recent past.
Deposits. The Company's deposits are attracted principally from
within the Company's primary market area through the offering of a
wide selection of deposit instruments, including NOW accounts, money
market accounts, regular passbook savings accounts, and term
certificate accounts. Included among these deposit products are
individual retirement account certificates of approximately $3.9
million at September 30, 1997. Deposit account terms vary, with the
principal differences being the minimum balance required, the time
periods the funds must remain on deposit and the interest rate. As of
September 30, 1997, the certificates of deposit with principal amounts
of $100,000 or more totaled to $6.6 million.
Interest rates paid, maturity terms, service fees and withdrawal
penalties are established by the Association 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.
The following table sets forth the dollar amount of deposits in the various
types of deposit programs offered at the dates indicated:
<TABLE>
<CAPTION>
1997 1996
------------------- --------------------
Percent Percent
of Total of Total
Amount Deposits Amount Deposits
(In thousands)
<S> <C> <C> <C> <C>
Transaction accounts:
NOW accounts (1) $10,561 18.9% $11,237 19.7%
Passbook savings accounts (2) 9,286 16.6 8,327 14.6
Money market accounts (3) 1,094 2.0 940 1.6
------- ------ ------- ------
Total transaction accounts 20,941 37.5 20,504 35.9
------- ------ ------- ------
Certificates of deposit:
4.01--6.00% 32,295 57.7 32,730 57.2
6.01--8.00% 2,489 4.5 3,754 6.6
8.01--10.00% 150 .3 150 .3
------- ------ ------- ------
Total certificates of deposit (4) 34,934 62.5 36,634 64.1
------- ------ ------- ------
Total deposits $55,875 100.0% $57,138 100.0%
======= ====== ======= ======
(1) The weighted average rate on NOW accounts at September 30, 1997 was 2.5%.
(2) The weighted average rate on passbook savings accounts at September 30, 1997 was 2.2%.
(3) The weighted average rate on money market accounts at September 30, 1997 was 2.2%.
(4) The weighted average rate on all certificates of deposit, including IRA accounts,
at September 30, 1997 was 4.3%.
</TABLE>
The following table sets forth the amount and maturities of the Association's
certificates of deposit at September 30, 1997.
<TABLE>
<CAPTION>
Over One Over Two Over Three
One Year Year Through Years Through Years Through Over
or Less Two Years Three Years Four Years Four Years Totals
(In Thousands)
<S> <C> <C> <C> <C> <C> <C>
4.00%--6.00% $25,614 $4,257 $ 769 $1,462 $193 $32,295
6.01%--8.00% 842 453 627 467 100 2,489
8.01%--10.00% 0 0 0 0 0 0
> or = 10.00% 0 150 0 0 0 150
------- ------ ------ ------ ---- -------
$26,456 $4,860 $1,396 $1,929 $293 $34,934
======= ====== ====== ====== ==== =======
</TABLE>
The following table sets forth the Association's deposit account balance
activity for the periods indicated:
Year Ended
September 30,
1997 1996
(In thousands)
Beginning balance $57,138 $56,008
Net increase (decrease) in deposits
before interest credited (2,763) (395)
Interest credited 1,500 1,525
Ending balance 55,875 57,138
------- -------
Net increase (decrease) $ 1,263 $ 1,130
======= =======
The following table sets forth the change in dollar and amount of deposits in
the various types of accounts offered by the Association between the dates
indicated:
<TABLE>
<CAPTION>
Increase
(Decrease)
Balance at from Balance at
September 30, % of September 30, September 30, % of
1997 Deposit 1996 1996 Deposits
<S> <C> <C> <C> <C> <C>
Interest-bearing and
noninterest bearing $11,655 20.86% $ (521) $12,176 21.31%
demand deposits
Passbook savings 9,286 16.62 958 8,328 14.58
Certificates of deposit 34,934 62.52 (1,700) 36,634 64.11
------- ------- -------- ------- -------
Total $55,875 100.00% $(1,263) $57,138 100.00%
======= ======= ======== ======= =======
</TABLE>
The following table sets forth the maturities of the Association's
certificates of deposit having principal amounts of $100,000 or more at
September 30, 1997:
Certificate of Deposit
Maturing in Quarter Ending: Amount
December 31, 1997 $1,241
March 31, 1998 2,021
June 30, 1998 438
September 30, 1998 1,064
After September 30, 1998 1,814
------
Total certificates of deposit with balances
of $100,000 or more $6,578
======
Borrowings. The FHLB system functions as a central reserve bank
providing credit for its member institutions and certain other
financial institutions. As a member in good standing of the FHLB of
Atlanta, the Association is authorized to apply for advances from the
FHLB of Atlanta, provided certain standards of creditworthiness have
been met. Under current regulations, an association must meet certain
qualifications to be eligible for FHLB advances. The extent to which
an association is eligible for such advances will depend upon whether
it meets the Qualified Thrift Lender Test (the "QTL Test"). If an
association meets the QTL Test, the Association will be eligible for
100% of the advances it would otherwise be eligible to receive. If an
association does not meet the QTL Test, the Association will be
eligible for such advances only to the extent it holds specified QTL
Test assets. At September 30, 1997, the Association was in compliance
with the QTL Test and had no advances from the FHLB.
Competition
The Association competes for deposits with other savings and loan
associations, savings banks, commercial banks, and credit unions and
with issuers of commercial paper and other securities, including
shares in money market mutual funds. The primary factors in
competition for deposits are customer service and convenience of
office location. In making loans, the Association competes with other
savings banks, savings and loan associations, commercial banks,
mortgage brokers, consumer finance companies, credit unions, leasing
companies, and other lenders. The Association competes for loan
originations primarily through the interest rates and loan fees it
charges and through the efficiency and quality of services it provides
to borrowers. Competition is intense and is affected by, among other
things, the general availability of lendable funds, general and local
economic conditions, current interest rate levels, and other factors
which are not readily predictable. The Association does not offer all
of the products and services offered by some of its competitors,
particularly commercial banks. The Association monitors the product
offerings of its competitors and adds new products when it can do so
competitively and cost effectively.
REGULATION
The Company
General. The Holding Company is a savings and loan holding company
within the meaning of the Home Owners Loan Act, as amended (the
"HOLA"). Consequently, the Holding Company is subject to regulation,
examination, and oversight by the OTS and is required to submit
periodic reports thereto. Because the Holding Company is a
corporation organized under Delaware law, the Holding Company is also
subject to the provisions of the Delaware General Corporation Law
applicable to Delaware corporations generally.
Activities Restrictions. There are generally no restrictions on the
activities of a savings and loan holding company which holds only one
subsidiary savings institution. However, if the Director of the OTS
determines that there is reasonable cause to believe that the
continuation by a savings and loan holding company of an activity
constitutes a serious risk to the financial safety, soundness or
stability of its subsidiary savings institution, the Director may
impose such restrictions as deemed necessary to address such risk,
including limiting (i) payment of dividends by the savings
institution; (ii) transactions between the savings institution and its
affiliates; and (iii) any activities of the savings institution that
might create a serious risk that the liabilities of the holding
company and its affiliates may be imposed on the savings institution.
Notwithstanding the above rules as to permissible business activities
of unitary savings and loan holding companies, if the savings
institution subsidiary of such a holding company fails to meet a QTL
test, then such unitary holding company also shall become subject to
the activities restrictions applicable to multiple savings and loan
holding companies and, unless the savings institution requalifies as a
QTL within one year thereafter, shall register as, and become subject
to the restrictions applicable to, a bank holding company.
If the Company were to acquire control of another savings institution,
other than through merger or other business combination with the
Association, the Company would thereupon become a multiple savings and
loan holding company. Except where such acquisition is pursuant to
the authority to approve emergency thrift acquisitions and where each
subsidiary savings institution meets the QTL test, as set forth below,
the activities of the Company and any of its subsidiaries (other than
the Savings Bank or other subsidiary savings institutions) would
thereafter be subject to further restrictions. Among other things, no
multiple savings and loan holding company or subsidiary thereof which
is not a savings institution shall commence or continue for a limited
period of time after becoming a multiple savings and loan holding
company or subsidiary thereof which is not a savings institution shall
commence or continue for a limited period of time after becoming a
multiple savings and loan holding company or subsidiary thereof any
business activity, upon prior notice to, and no objection by the OTS,
other than: (i) furnishing or performing management services for a
subsidiary savings institution; (ii) conducting an insurance agency or
escrow business; (iii) holding, managing, or liquidating assets owned
by or acquired from a subsidiary savings institution; (iv) holding or
managing properties used or occupied by a subsidiary savings
institution; (v) acting as trustee under deeds of trust; (vi) those
activities authorized by regulation as of March 5, 1987 to be engaged
in by multiple savings and loan holding companies; or (vii) unless the
Director of the OTS by regulation prohibits or limits such activities
for savings and loan holding companies, those activities authorized by
the Federal Reserve Board as permissible for bank holding companies.
Those activities described in (vii) above also must be approved by the
Director of the OTS prior to being engaged in by a multiple savings
and loan holding company.
Limitations on Transactions with Affiliates. Transactions between
savings institutions and any affiliate are governed by Sections 23A
and 23B of the Federal Reserve Act. An affiliate of a savings
institution is any company or entity which controls, is controlled by
or is under common control with the savings institution. In a holding
company context, the parent holding company of a savings institution
(such as the Company) and any companies which are controlled by such
parent holding company are affiliates of the savings institution.
Generally, Sections 23A and 23B (i) limit the extent to which the
savings institution or its subsidiaries may engage in "covered
transactions: with any one affiliate to an amount equal to 10% of such
institution's capital stock and surplus, and contain an aggregate
limit on all such transactions with all affiliates to an amount equal
to 20% of such capital stock and surplus and (ii) require that all
such transactions be on terms substantially the same, or at least as
favorable, to the institution or subsidiary as those provided to a
non-affiliate. The term "covered transaction" includes the making of
loans, purchase of assets, issuance of a guarantee and similar other
types of transactions. In addition to the restrictions imposed by
Sections 23A and 23B, no savings institution may (i) loan or otherwise
extend credit to an affiliate, except for any affiliate which engages
only in activities which are permissible for bank holding companies,
or (ii) purchase or invest in any stocks, bonds, debentures, notes or
similar obligations of any affiliate, except for affiliates which are
subsidiaries of the savings institution.
In addition, Sections 22(h) and (g) of the Federal Reserve Act place
restrictions on loans to execute officers, directors and principal
stockholders. Under Section 22(h), loans to a director, an executive
officer and to a greater than 10% stockholder of a savings
institution, and certain affiliated interests of either, may not
exceed, together with all other outstanding loans to such person and
affiliated interests, the institution's loan to one borrower limit
(generally equal to 15% of the institution's unimpaired capital and
surplus). Section 22(h) also requires that loans to directors,
executive officers and principal stockholders be make on terms
substantially the same as offered in comparable transactions to other
persons and also requires prior board approval for certain loans. In
addition, the aggregate amount of extensions of credit by a savings
institution to all insiders cannot exceed the institution's unimpaired
capital and surplus. Furthermore, Section 22(g) places additional
restrictions on loans to executive officers. At September 30, 1997,
the Savings Bank was in compliance with the above restrictions.
Restrictions on Acquisitions. Except under limited circumstances,
savings and loan holding companies are prohibited from acquiring,
without prior approval of the Director of the OTS, (i) control of any
other savings institution or savings and loan holding company or
substantially all the assets thereof or (ii) more than 5% of the
voting shares of a savings institution or holding company thereof
which is not a subsidiary. Except with the prior approval of the
Director of the OTS, no director or officer of a savings and loan
holding company or person owning or controlling by proxy or otherwise
more than 25% of such company's stock, may acquire control of any
savings institution, other than a subsidiary savings institution, or
of any other savings and loan holding company.
The Director of the OTS may only approved acquisitions resulting in
the formation of a multiple savings and loan holding company which
controls savings institutions in more than one state if (i) the
multiple savings and loan holding company involved controls a savings
institution which operated a home or branch office located in the
state of the institution to be acquired as of March 5, 1987; (ii) the
acquirer is authorized to acquire control of the savings institution
pursuant to the emergency acquisition provisions of the Federal
Deposit Insurance Act ("FDIA"); or (iii) the statutes of the state in
which the institution to be acquired is located specifically permit
institutions to be acquired by the state-chartered institutions or
savings and loan holding companies located in the state where the
acquiring entity is located (or by a holding company that controls
such state-chartered savings institutions).
The FIRREA amended provisions of the Bank Holding Company Act of 1956
to specifically authorize the Federal Reserve Board to approve an
application by a bank holding company to acquire control of a savings
institution. FIRREA also authorized a bank holding company that
controls a savings institution to merge or consolidate the assets and
liabilities to, any subsidiary bank which is a member of the BIF with
the approval of the appropriate federal banking agency and the Federal
Reserve Board. As a result of these provisions, there have been a
number of acquisitions of savings institutions by bank holding
companies in recent years.
Federal Securities Laws. The Company is registered with the
Securities and Exchange Commission ("SEC") under the Securities
Exchange Act of 1934, as amended (the "Securities Exchange Act"), and
under OTS regulations. Generally, the Common Stock may not be
deregistered for at least three years after the Conversion. The
Company is subject to the information, proxy solicitation, insider
trading restrictions and other requirements of the Securities Exchange
Act.
The Association
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 BIF; the
authorization of the FDIC to make emergency special assessments under
certain circumstances against BIF members and members of the SAIF; the
establishment of risk-based deposit insurance premiums; and improved
examinations and reporting requirements. The FDICIA also provides for
enhanced federal supervision of depository institutions based on,
among other things, an institution's capital level.
Deposit Insurance
The FDIC is an independent federal agency that insures the deposits,
up to prescribed statutory limits, of banks and thrifts and safeguards
the safety and soundness of the banking and thrift industries. The
FDIC administers two separate insurance funds, the BIF for commercial
banks and state savings banks and the SAIF for savings associations
and banks that have acquired deposits from savings associations. The
FDIC is required to maintain designated levels of reserves in each
fund. The reserves of the SAIF are currently below the level required
by law, primarily because a significant portion of the assessments
paid into the SAIF have been used to pay the cost of prior thrift
failures while the reserves of the BIF met the level required by law
in May 1995. Thrifts are generally prohibited from converting from
one insurance fund to the other until the SAIF meets its designated
reserve level, except with the prior approval of the FDIC in certain
limited cases, and provided certain fees are paid. The insurance fund
conversion provisions do not prohibit a SAIF member from converting to
a bank charter or merging with a bank during the moratorium as long as
the resulting bank continues to pay the applicable insurance
assessments to the SAIF during such period and as long as certain
other conditions are met.
The Association is a member of the SAIF and its deposit accounts are
insured by the FDIC up to the prescribed limits. The FDIC has
examination authority over all insured depository institutions,
including the Association, and has authority to initiate enforcement
actions against federally insured savings associations if the FDIC
does not believe the OTS has taken appropriate action to safeguard
safety and soundness and the deposit insurance fund.
The FDIC is authorized to establish separate annual assessment rates
for deposit insurance for members of the BIF and members of the SAIF.
The FDIC may increase assessment rates for either fund if necessary to
restore the fund's ratio of reserves to insured deposits to the target
level within a reasonable time and may decrease such rates if such
target level has been met. The FDIC has established a risk-based
assessment system for both SAIF and BIF members. Under this system,
assessments vary depending on the risk the institution poses to its
deposit insurance fund. Such risk level is determined based on the
institution's capital level and the FDIC's level of supervisory
concern about the institution.
Both the SAIF and the BIF are required by law to attain and thereafter
maintain a reserve ratio of 1.25% of insured deposits. The BIF has
achieved the required reserve rate, and, as discussed below, the FDIC
recently substantially reduced the average deposit insurance premium
paid by BIF-insured banks to a level substantially below the average
premium paid by savings institutions.
The deposits of the Association are currently insured by the SAIF.
Both the SAIF and the Bank Insurance Fund ("BIF"), the federal deposit
insurance fund that covers the deposits of state and national banks
and certain state savings banks, are required by law to attain and
thereafter maintain a reserve ratio of 1.25% of insured deposits. The
BIF has achieved the required reserve rate, and, as discussed below,
during the past year the FDIC reduced the average deposit insurance
premium paid by BIF-insured banks to a level substantially below the
average premium paid by savings institutions.
On November 4, 1995, the FDIC approved a final rule regarding deposit
insurance premiums. That rule reduced deposit insurance premiums for
BIF member institutions to zero basis points (subject to a $2,000
minimum) for institutions in the lowest risk category, while holding
deposit insurance premiums for SAIF members at their current levels 23
basis points for institutions in the lowest risk category). 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, except for the possible impact of certain
exemptions for de novo and "weak" institutions, established the
special assessment necessary to recapitalize the SAIF at 65.7 basis
points of SAIF assessable deposits held by affected institutions as of
March 31, 1995. The legislation provides that all SAIF member
institutions pay a special one-time assessment to recapitalize the
SAIF, which in the aggregate is sufficient to bring the reserve ratio
in the SAIF to 1.25% of insured deposits It is anticipated that after
recapitalization of the SAIF, premiums paid by SAIF-insured
institutions will be reduced to match those currently being assessed
by BIF-insured commercial banks. 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
Association paid a special assessment of approximately $370,000, or
$237,000 net of related tax benefits. Accordingly, an accrual for
that amount was provided 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 Association had no goodwill or other
intangible assets at September 30, 1997. Both core and tangible
capital are further reduced by an amount equal to a savings
institution's debt and equity investments in subsidiaries engaged in
activities not permissible to national banks (other than subsidiaries
engaged in activities undertaken as agent for customers or in mortgage
banking activities and subsidiary depository institutions or their
holding companies). These adjustments do not affect the Association's
regulatory capital. Supplementary capital generally consists of
hybrid capital instruments; perpetual preferred stock which is not
eligible to be included as core capital; subordinated debt and
intermediate-term preferred stock; and general allowances for loan
losses up to a maximum of 1.25% of risk-weighted assets.
In determining compliance with the risk-based capital requirement, a
savings institution is allowed to include both core capital and
supplementary capital in its total capital, provided that the amount
of supplementary capital included does not exceed the savings
institution's core capital. In determining the required amount of
risk-based capital, total assets, including certain off-balance sheet
items, are multiplied by a risk weight based on the risks inherent in
the type of assets. The risk weight assigned by the OTS for principal
categories of assets are (i) 0% for cash and securities issued by the
U. S. Government or unconditionally backed by the full faith and
credit of the U. S. Government; (ii) 20% for securities (other than
equity securities) issued by U. S. Government-sponsored agencies and
mortgage-backed securities issued by, or fully guaranteed as to
principal and interest by, the FNMA or the FHLMC, except for those
classes with residual characteristics or stripped mortgage-related
securities; (iii) 50% for prudently underwritten permanent one-to-four
family first lien mortgage loans not more than 90 days delinquent and
having a loan-to-value ratio of not more than 80% at origination
unless insured to such ratio by an insurer approved by the FNMA or the
FHLMC, qualifying residential bridge loans made directly for the
construction of one-to-four family residences and qualifying
multi-family residential loans; and (iv) 100% for all other loans and
investments, including consumer loans, commercial loans, and
single-family residential real estate loans more than 90 days
delinquent, and for repossessed assets.
At September 30, 1997, the Association exceeded all of its regulatory
capital requirements. The following table sets forth the
Association's compliance with applicable regulatory capital
requirements at September 30, 1997:
<TABLE>
<CAPTION>
For To Be Well
Capital Capitalized Under
Adequacy Prompt Corrective
Actual Purposes Action Provisions
---------------- ----------------- ------------------
Amount Ratio Amount Ratio Amount Ratio
-------- ------ ------- ------ ------- ------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C>
September 30, 1997:
Total capital (to risk
weighted assets) $11,065 31.4% $2,817 8.0% $3,522 10.0%
Tier 1 (core) capital (to
risk weighted assets) 10,259 29.1 N/A N/A 2,113 6.0
Tier 1 (core) capital (to
adjusted total assets) 10,259 15.1 2,044 3.0 3,407 5.0
Tangible capital (to adjusted
total assets) 10,259 15.1 1,022 1.5 N/A N/A
September 30, 1996:
Total capital (to risk
weighted assets) 6,674 19.8 2,690 8.0 3,363 10.0
Tier 1 (core) capital (to
risk weighted assets) 5,872 17.4 N/A N/A 2,018 6.0
Tier 1 (core) capital (to
adjusted total assets) 5,872 9.2 1,908 3.0 3,181 5.0
Tangible capital (to adjusted
total assets) 5,872 9.2 954 1.5 N/A N/A
</TABLE>
The following table is a reconciliation of the Association's stockholder's
equity to tangible, Tier 1, and risk-based capital as required by the OTS:
1997 1996
(In thousands)
Stockholder's equity $10,222 $ 5,685
Unrealized loss on securities available for sale 37 187
------- -------
Tangible and Tier 1 capital 10,259 5,872
Allowance for loan losses 806 802
------- -------
Total risk based capital $11,065 $ 6,674
======= =======
Total assets $68,112 $63,431
Adjusted total assets 68,149 63,617
Total risk weighted assets 35,218 33,631
In August 1993, the OTS adopted a final rule incorporating an
interest-rate risk component into the risk-based capital regulation.
Under the rule, an institution with a greater than "normal" level of
interest rate risk is subject to a deduction of its interest rate risk
component from total capital for purposes of calculating its
risk-based capital. As a result, such an institution is required to
maintain additional capital in order to comply with the risk-based
capital requirement. An institution with a greater than "normal"
interest rate risk is defined as an institution that would suffer a
loss of net portfolio value exceeding 2.0% of the estimated economic
value of its assets in the event of a 200 basis point increase or
decrease (with certain minor exceptions) in interest rates. The
interest rate risk component is calculated, on a quarterly basis, as
one-half of the difference between an institution's measured interest
rate risk and 2.0% multiplied by the economic value of its assets.
The rule also authorizes the Director of the OTS, or his designee, to
waive or defer an institution's interest rate risk component on a
case-by-case basis. The final rule was effective as of January 1,
1994, subject however to a three quarter "lag" time between the
reporting date of the data used to calculate an institution's interest
rate risk and the effective date of each quarter's interest rate risk
component. Recently the OTS postponed the interest rate risk capital
deduction in order to provide sufficient time to implement and
evaluate the OTS appeals process as well as get a better sense of the
direction that the other federal banking agencies may take in their
implementation of Section 305 of FDICIA.
Prompt Corrective Action. Under Section 39 of the FDIA, as added by
the FDICIA, each federal banking agency was required to implement a
system of promptly corrective action for institutions which it
regulates. The federal banking agencies, including the OTS, adopted
substantially similar regulations to implement Section 38 of the FDIA,
effective as of December 19, 1992. Under the regulations, an
institution is deemed to be (i) "well capitalized" if it has total
risk-based capital of 10.0% or more, than a Tier 1 risk-based capital
ratio of 6.0% or more, has a Tier 1 leverage capital ratio of 5.0% or
more and is not subject to any order or final capital directive to
meet and maintain a specific capital level for any capital measure,
(ii) "adequately capitalized" if it has a total risk-based capital
ratio of 8.0% or more, a Tier 1 risk-based capital ratio of 4.0% or
more and a Tier 1 leverage capital ratio of 4.0% or more (3.0% under
certain circumstances) and does not meet the definition of "well
capitalized," (iii) "undercapitalized" if it has a total risk-based
capital ratio that is less than 8.0%, a Tier 1 risk-based capital
ratio that is less than 4.0% or a Tier 1 leverage capital ratio that
is less than 4.0% (3.0% under certain circumstances), (iv)
"significantly undercapitalized" if it has a total risk-based capital
ratio that is less than 6.0%, a Tier 1 risk-based capital ratio that
is less than 3.0% or a Tier 1 leverage capital ratio that is less than
3.0%, and (v) "critically undercapitalized" if it has a ratio of
tangible equity to total assets that is equal to or less than 2.0%.
Section 38 of the FDIA and the regulations promulgated thereunder also
specify circumstances under which a federal banking agency may
reclassify a well capitalized institution as adequately capitalized
and may require an adequately capitalized institution or an
undercapitalized institution to comply with supervisory actions as if
it were in the next lower category (except that the FDIC may not
reclassify a significantly undercapitalized institution as critically
undercapitalized).
An institution generally must file a written capital restoration plan
which meets specified requirements with an appropriate federal banking
agency with 45 days of the date that the institution receives notice
or is deemed to have notice that it is undercapitalized, significantly
undercapitalized or critically undercapitalized. A federal banking
agency must provide the institution with written notice of approval or
disapproval with 60 days after receiving a capital restoration plan,
subject to extensions by the agency.
An institution which is required to submit a capital restoration plan
must concurrently submit a performance guaranty by each company that
controls the institution. Such guaranty shall be limited to the
lesser of (i) an amount equal to 5.0% of the institution's total
assets at the time the institution was notified or deemed to have
notice that it was undercapitalized or (ii) the amount necessary to
restore the relevant capital measures of the institution to the levels
required for the institution to be classified as adequately
capitalized. Such a guarantee shall expire after the federal banking
agency notifies the institution that it has remained adequately
capitalized for each of four consecutive calendar quarters. An
institution which fails to submit a written capital restoration plan
with the requisite period,including any required performance guarantee(s),
or fails in any material respect to implement a capital restoration plan,
shall be subject to the restrictions in Section 38 of the FDIA which are
applicable to significantly undercapitalized institutions.
Immediately upon becoming undercapitalized, an institution shall
become subject to the provisions of Section 38 of the FDIA (i)
restricting payment of capital distributions and management fees, (ii)
requiring that the appropriate federal banking agency monitor the
condition of the institution and its efforts to restore its capital,
(iii) requiring submission of a capital restoration plan, (iv)
restricting the growth of the institution's assets and (v) requiring
prior approval of certain expansion proposals. The appropriate
federal banking agency for an undercapitalized institution also may
take any number of discretionary supervisory actions if the agency
determines that any of these actions is necessary to resolve the
problem of the institution at the least possible long-term cost to the
deposit insurance fund, subject in certain cases to specified
procedures. These discretionary supervisory actions include requiring
the institution to raise additional capital; restricting transactions
with affiliates; restricting interest rates paid by the institution on
deposits; requiring replacement of senior executive officers and
directors; restricting the activities of the institution and its
affiliates; requiring divestiture of the institution or the sale of
the institution to a willing purchaser; and any other supervisory
action that the agency deems appropriate. These and additional
mandatory and permissive supervisory actions may be taken with respect
to significantly undercapitalized and critically undercapitalized
institutions.
At September 30, 1997, the Association was deemed a "well capitalized"
institution for purpose of the above regulations and as such was not
subject to the above mentioned restrictions.
Safety and Soundness. On November 18, 1993, a joint notice of
proposed rulemaking was issued by the OTS, the Office of the
Comptroller of the Currency and the Federal Reserve Board
(collectively, the "agencies") concerning standards for safety and
soundness required to be prescribed by regulation pursuant to
Section 39 of the FDIA. In general, the standards relate to (1)
operational and managerial matters; (2) asset quality and earnings;
and (3) compensation. The operational and managerial standards cover
(a) internal controls and information systems, (b) internal audit
system, (c) loan documentation, (d) credit underwriting, (e) interest
rate risk exposure, (f) asset growth, and (g) compensation, fees and
benefits. Under the proposed asset quality and earnings standards,
the Association 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
Association 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 5%. At September 30, 1997, the Association's liquidity ratio
was in excess of the required minimum.
Capital Distributions. OTS regulations govern capital distributions
by savings institutions, which include cash dividends, stock
redemptions or repurchases, cash-out mergers, interest payments on
certain convertible debt and other transactions charged to the capital
account of a savings institution to make capital distributions.
Generally, the regulation creates a safe harbor for specified levels
of capital distributions from institutions meeting at least their
minimum capital requirements, so long as such institutions notify the
OTS and receive no objection to the distribution from the OTS.
Savings institutions and distributions that do not qualify for the
safe harbor are required to obtain prior OTS approval before making
any capital distributions.
Generally, a savings institution that before and after the proposed
distribution meets or exceeds its fully phased-in capital requirements
(Tier 1 institutions) may make capital distributions during any
calendar year equal to the higher of (i) 100% of net income for the
calendar year-to-date plus 50% of its "surplus capital ratio" at the
beginning of the calendar year or (ii) 75% of net income over the most
recent four-quarter period. The "surplus capital ratio" is defined to
mean the percentage by which the institution's ratio of total capital
to assets exceeds the ratio of its fully phased-in capital
requirement: is defined to mean an institution's capital requirements
under the statutory and regulatory standards applicable on
December 31, 1994, as modified to reflect any applicable individual
minimum capital requirement imposed upon the institution. Failure to
meet fully phased-in or minimum capital requirements will result in
further restrictions on capital distributions, including possible
prohibition without explicit OTS approval.
Tier 2 institutions, which are institutions that before and after the
proposed distribution meet or exceed their minimum capital
requirements, may make capital distributions up to 75% of their net
income over the most recent four quarter period.
In order to make distributions under these safe harbors, Tier 1 and
Tier 2 institutions must submit 30 days written notice to the OTS
prior to making the distribution. The OTS may object to the
distribution during that 30-day period based on safety and soundness
concerns. In addition, a Tier 1 institution deemed to be in need of
more than normal supervision by the OTS may be downgraded to a Tier 2
or Tier 3 institution as a result of such a determination.
Tier 3 institutions, which are institutions that do not meet current
minimum capital requirements, or that have capital in excess of either
their fully phased-in capital requirement or minimum capital
requirement but which have been notified by the OTS that it will be
treated as a Tier 3 institution because they are in need of more than
normal supervision, cannot make any capital distribution without
obtaining OTS approval prior to making such distributions.
At September 30, 1997, the Association 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.
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. At September 30, 1997, the
qualified thrift investments of the Association 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 Association 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 Banks. The FHLBs provide credit to their members in
the form of advances. The Association is a member of the FHLB of
Atlanta and must maintain an investment in the capital stock of the
FHLB of Atlanta in an amount equal to the greater of 1% of the
aggregate outstanding principal amount of the Association's
residential mortgage loans, home purchase contracts, and similar
obligations at the beginning of each year, and 5% of its advances from
the FHLB. The Association is in compliance with this requirement with
an investment in stock of the FHLB of Atlanta of $429,800 at
September 30, 1997.
FHLB advances to members such as the Association who meet the QTL Test
are generally limited to the lower of (i) 25% of the member's assets
and (ii) 20 times the member's investment in FHLB stock. The granting
of advances is subject also to the FHLB's collateral and credit
underwriting guidelines. Upon the origination or renewal of a loan or
advance, the FHLB of Atlanta is required by law to obtain and maintain
a security interest in collateral in one or more of the following
categories: fully disbursed, whole first mortgage loans on improved
residential property or securities representing a whole interest in
such loans; securities issued, insured, or guaranteed by the U.S.
Government or an agency thereof; deposits in any FHLB; or other real
estate related collateral up to 30% of the member association's
capital) acceptable to the applicable FHLB, if such collateral has a
readily ascertainable value and the FHLB perfects its security
interest in the collateral.
Each FHLB is required to establish standards of community investment
or service that its members must maintain for continued access to
long-term advances from the FHLBs. The standards take into account a
member's performance under the Community Reinvestment Act and its
record of lending to first-time home buyers. All long-term advances
by each FHLB must be made only to provide funds for residential
housing finance. The FHLBs have established an "Affordable Housing
Program" to subsidize the interest rate of advances to member
associations engaged in lending for long-term, low-, and
moderate-income, owner-occupied and affordable rental housing at
subsidized rates. The FHLB of Atlanta reviews and accepts proposals
for subsidies under that program twice a year. The Association has
not participated in such program.
Federal Reserve System. The Federal Reserve Board requires all
depository institutions to maintain average daily reserves equal to
various percentages against their accounts. The percentages are
subject to adjustment by the Federal Reserve Board. At September 30,
1997, the Association 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
Federal Taxation. The Holding Company is subject to the federal tax
laws that apply to corporations generally. With certain exceptions,
the Association is also subject to the federal tax laws and
regulations which apply to corporations generally.
One such exception is related to special bad debt reserve deductions
that have in the past been available to thrift institutions such as
the Association. Under Section 593 of the code, thrift institutions
meeting certain definitional tests primarily relating to their assets
and the nature of their business, have been permitted to establish a
tax reserve for bad debts and to make annual additions thereto, which
additions could, within specified limitations, be deducted in arriving
at their taxable income. Under Section 593, for purposes of the bad
debt reserve deduction, loans were categorized as "qualifying real
property loans," which generally included loans secured by improved
real estate, and "nonqualifying loans," which included all other types
of loans. The amount of the bad debt reserve deduction for
"nonqualifying loans" was computed using an amount based on the
Association's actual loss experience (the "experience method"). A
thrift institution could elect annually to compute its allowable
addition to its bad debt reserves for qualifying loans under either
the experience method or based on a percentage equal to 8.0% of the
institution's taxable income (the "percentage of taxable income
method").
The prior availability of the percentage of taxable income method
permitted qualifying thrift institutions to be taxed at a lower
effective federal income tax rate than that applicable to corporations
generally. The Small Business Job Protection Act of 1995 eliminates
the lower effective federal income tax rate for thrift institutions
such as the Association.
In August 1996 Congress enacted, and the President signed into law,
the Small Business Job Protection Act. Under the Small Business Job
Protection Act, Section 593 of the Code and the percentage of taxable
income method are repealed and the Association will hereafter be
permitted to use only the experience method of computing additions to
its bad debt reserve. In addition, the Association will be required
to recapture (i.e., take into income) over a six-year period the
excess of the balance of its bad debt reserves as of December 31, 1995
over the balance of such reserves as of December 31, 1987. However,
under the legislation, such recapture requirements would be suspended
for each of two successive taxable years beginning January 1, 1996, in
which the Association originates a minimum amount of certain
residential loans based upon the average of the principal amounts of
such loans made by the Association during its six taxable years
preceding 1996. The Association is expected to recapture
approximately $154,000, $57,000 tax effected of its tax bad debt
reserve. The recapture will not have an effect on the Association's
financial statements because the related tax expense has previously
been accrued.
In addition to the regular income tax, the Association is subject to a
minimum tax. An alternative minimum tax is imposed at a minimum tax
rate of 20% on "alternative minimum taxable income" (which is the sum
of a corporation's regular taxable income, with certain adjustments
and tax preference items), less any available exemption. Such tax
preference items include (i) 100% of the excess of a thrift
institution's bad debt deduction over the amount that would have been
allowable based on actual experience and (ii) interest on certain
tax-exempt bonds issued after August 7, 1986. In addition, 75% of the
amount by which a corporation's "adjusted current earnings" exceeds
its alternative minimum taxable income computed without regard to this
preference item and prior to reduction by net operating losses, is
included in alternative minimum taxable income. Net operating losses
can offset no more than 90% of alternative minimum taxable income.
The alternative minimum tax is imposed to the extent it exceeds the
corporation's regular income tax. Payments of alternative minimum tax
may be used as credits against regular tax liabilities in future
years.
If the Association distributes cash or property to its stockholders,
and the distribution is treated as being from its accumulated bad debt
reserves, the distribution will cause the Association to have
additional taxable income. A distribution is deemed to have been made
from accumulated bad debt reserves to the extent that (a) the reserves
exceed the amount that would have been accumulated on the basis of
actual loss experience, and (b) the distribution is a "nonqualified
distribution." A distribution with respect to stock is a nonqualified
distribution to the extent that, for federal income tax purposes, (i)
it is in redemption of shares, (ii) it is pursuant to a liquidation of
the institution, or (iii) in the case of a current distribution,
together with all other such distributions during the taxable year, it
exceeds the institution's current and post-1951 accumulated earnings
and profits. The amount of additional taxable income created by a
nonqualified distribution is an amount that when reduced by the tax
attributable to it is equal to the amount of the distribution.
The tax returns of the Association have been closed by statute or
audited through 1992. In the opinion of management, any examination
of open returns would not result in a deficiency which could have a
material adverse effect on the financial condition of the Association.
Alabama and Delaware Taxation. The State of Alabama imposes a 6.0%
excise tax on the earnings of financial institutions such as the
Association. The 6.0% excise tax also would apply to the Holding
Company. In addition to the excise taxes, the State of Alabama
imposes an annual state franchise tax for domestic and foreign
corporations. A domestic corporation, including a federally chartered
stock savings bank domiciled in Alabama, is assessed a domestic
franchise tax of approximately 1.0% based on the par value of its
common stock. Foreign corporations, such as the Holding Company which
is incorporated in Delaware, are assessed a foreign franchise tax of
0.3% based on a total of capital (as determined by statute) deemed to
be employed in the state of Alabama. The foreign corporation's
investment in the capital of an Alabama corporation is excluded from
the taxable base. The Holding Company will also be subject to the
Delaware franchise tax.
The Company was organized in the State of Delaware, and therefore it
will be required to file a franchise tax return with the State of
Delaware. The Company will also be required to file an income tax
return in the State of Delaware if it derives income from business
activities carried on in the State of Delaware. Currently, the
Company does not have any business activities in the State of
Delaware.
Delaware law provides two methods to calculate the Delaware Franchise
Tax. One method is based on the Company's authorized number of shares
and the second method is based on the Company's "assumed no-par
capital" with respect to no par shares and on the Company's "assumed
par value capital" with respect to par value shares. The lesser
result under both methods is then used to determine the franchise tax
liability in the State of Delaware.
Under the first method the franchise tax is calculated at a base rate
of $90 on the first 10,000 shares, plus $50.00 per each additional
10,000 shares or part thereof.
The second method is based on "assumed no-par capital" with respect to
no-par shares and an "assumed par-value capital" with respect to par
value shares as follows:
1. The "assumed no-par capital" is the authorized number of shares
without par value multiplied by $100. The tax on the
"assumed no-par capital" is $30.00 for each $300,000 or less
and is graduated as follows: (i) $50.00 for over $300,000
but not over $500,000; (ii) $90.00 for over $500,000 but not
over $1,000,000; and (iii) $90 for over $1,000,000, plus
$50.00 per each additional $1,000,000 or part thereof.
2. The tax on par value is $200 for each $1,000,000, or fraction
thereof of an "assumed par-value capital." The "assumed
par-value capital" is found as follows: (i) ascertain
average asset value per share by dividing total gross assets
by the total number of issued shares, including shares
without par value; (ii) if average asset value is more than
par value; it is multiplied by the total number of authorized
par value shares; if average assets value is less than par
value of any class of authorized shares, such shares must be
taken at their par value. Where it is necessary to use
average asset value for one class of shares and par value of
any other class or classes, the "assumed par-value capital"
is the sum of the products of the multiplications.
If a corporation has both no-par shares and par-value shares, the
no-par shares are taxed as calculated above upon a share basis which
is added to the tax calculated above on the par value shares.
Executive Officers of Association Who Are Not Directors
Presented below is certain information regarding the executive
officers of the Association who are not directors:
Name Age Position
Beth B. Knight 35 Vice President-Finance and
Chief Financial Officer
Raymond A. Williams 44 Vice President-Lending and
Chief Lending Officer
Beth B. Knight. Ms. Knight has a BS in accounting from the University
of Alabama and she is a Certified Public Accountant. She joined the
Association in 1992 and has served in her current capacity since
joining the Association.
Raymond A. Williams. Mr. Williams worked for a major commercial bank
for 15 years prior to joining the Association in 1995 as chief lending
officer.
Employees
The Association had 17 full time employees and three part-time
employees at September 30, 1997. None of the employees is represented
by a collective bargaining agreement.
ITEM 2.--PROPERTIES.
The following table sets forth information regarding the Association's
offices at September 30, 1997:
Owned or Date Net Book
Location Leased Acquired Value
325 Second Street SE Owned 1968 $202,000
Cullman, AL
(Main Office)
1414 Second Ave., N.W. Owned 1988 185,000
Cullman, AL
(Branch)
1602 Second Ave., SW Leased (1) 1979 13,000
Cullman, AL
(Branch)
(1) Lease expires March 31, 2000.
The net book value of the Company's investment in furnishings and
equipment totaled $736,000 at September 30, 1997.
ITEM 3.--LEGAL PROCEEDINGS.
Neither the Holding Company nor the Association is presently involved
in any material legal proceedings. From time to time, the Association
is a party to legal proceedings incidental to its business to enforce
its security interest in collateral pledged to secure loans made by
the Association.
ITEM 4.--SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
Not applicable.
ITEM 5.--MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
The information contained in the 1997 Annual Report to Shareholders
(the "Annual Report") under the caption "Common Stock Data" is
incorporated herein by reference.
ITEM 6.--SELECTED FINANCIAL DATA
The information called for by item 6 is set forth in the Annual Report
for the year ended September 30, 1997 at pages 2 and 3 under the
heading "Selected Financial Information and Other Data" and is
incorporated herein by reference.
ITEM 7.--MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
The information called for by Item 7 is set forth in the Annual Report
for the year ended September 30, 1997 at pages 5-10 under the heading
"Management's Discussion and Analysis of Financial Condition and
Results of Operations" and is incorporated herein by reference.
ITEM 8.--FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
SELECTED QUARTERLY FINANCIAL DATA (UNAUDITED)
(Dollars in Thousands Except Per Share Amounts)
First Second Third Fourth Total
Interest revenue $1,204 $1,234 $1,248 $1,362 $5,048
Interest expense 643 605 510 677 2,435
------ ------ ------ ------ ------
Net interest revenue 561 629 738 685 2,613
Provision for loan losses 0 5 0 (5) 0
Non-interest revenue 65 40 76 7 188
Non-interest expense 382 354 484 352 1,572
------ ------ ------ ------ ------
Income before income taxes 244 310 330 345 1,229
Income tax expense 84 106 119 128 437
------ ------ ------ ------ ------
Net income $ 160 $ 204 $ 211 $ 217 $ 792
====== ====== ====== ====== ======
Net income per share (1) $ .15 $ .20 $ .21 $ .23 $ .66
====== ====== ====== ====== ======
(1) Net income per share for the first quarter is for the period from
the date of the conversion, December 23, 1996, to December 31,
1997. Net income per share for the year is for the period from
the date of conversion to September 30, 1997.
1996
First Second Third Fourth Total
Interest revenue $1,148 $1,096 $1,221 $1,177 $4,642
Interest expense 644 626 666 638 2,574
------ ------ ------ ------ ------
Net interest revenue 504 470 555 539 2,068
Provision for loan losses 0 4 2 184 190
Non-interest revenue 78 58 89 17 242
Non-interest expense 358 315 445 663 1,781
------ ------ ------ ------ ------
Income before income taxes 224 209 197 (291) 339
Income tax expense 60 83 68 (93) 118
------ ------ ------ ------ ------
Net income $ 164 $ 126 $ 129 $ (198) $ 221
====== ====== ====== ====== ======
Net income per share N/A N/A N/A N/A N/A
Other information called for by Item 8, is set forth in the Company's Annual
Report for the year ended September 30, 1997 and is incorporated herein by
reference.
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
The information contained in the definitive Proxy Statement for the
1997 Annual Meeting of Shareholders of Southern Community Bancshares,
Inc. (the "Proxy Statement"), under the caption (PROPOSAL ONE--ELECTION
OF DIRECTORS--Section 16(a) Beneficial Ownership Reporting Compliance"
is incorporated herein by reference.
ITEM 11.--EXECUTIVE COMPENSATION
The information contained in the Proxy Statement under the caption
"PROPOSAL ONE - ELECTION OF DIRECTORS -- Compensation of Executive
Officers and Directors" is incorporated herein by reference.
ITEM 12.--SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information contained in the Proxy Statement under the caption
"PROPOSAL ONE - ELECTION OF DIRECTORS -- Certain Transactions" is
incorporated herein by reference.
ITEM 13.--CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information contained in the Proxy Statement under the caption
"PROPOSAL ONE - ELECTION OF DIRECTORS -- Certain Transactions" is
incorporated herein by reference.
<PAGE>
PART IV
ITEM 14.--EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON
FORM 8-K
(a) EXHIBITS
3(a) Certificate of Incorporation Incorporated by reference to the Form SB-2
3(b) Bylaws Incorporated by reference to the Form SB-2
13 Annual Report to Shareholders
21 Subsidiaries of the Registrant
23 Consent of Independent Public Accountants
27 Financial Data Schedule
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 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.
Pursuant to the requirements of the Securities Exchange Act of 1923,
the registrant has duly caused this report to be signed on its behalf
by the undersigned thereunto duly authorized.
SOUTHERN COMMUNITY BANCSHARES INC.
Date: December 29, 1997 By: /s/ William R. Faulk
William R. Faulk
President and Chief Executive Officer
Date: December 29, 1997 By: /s/ Beth Knight
Beth Knight
Secretary and Treasurer
EXHIBIT 13
Selected Financial Information and Other Data
At September 30,
1997 1996 1995
Total amount of:
Assets $70,885 $63,861 $62,026
Cash and interest-bearing time deposits in
other financial institution 9,887 3,868 6,108
Investment securities 8,911 9,945 10,802
Mortgage-backed securities 7,610 8,450 5,452
Loans receivable, net 42,999 39,601 38,570
Deposits 55,875 57,138 56,008
Equity 14,470 5,685 5,606
Summary of Earnings:
Year Ended September 30,
1997 1996 1995
(Dollars in thousands)
Interest income $ 5,048 $4,642 $4,399
Interest expense 2,435 2,574 2,300
------- ------ ------
Net interest income 2,613 2,068 2,099
Provision for loan losses 0 190 0
------- ------ ------
Net interest income after provision
for loan losses 2,613 1,878 2,099
Noninterest income, net 188 242 329
Noninterest expense, net 1,572 1,781 1,496
------- ------ ------
Income before provision for income taxes 1,229 339 932
Income tax expense 437 118 310
------- ------ ------
Net income $ 792 $ 221 $ 622
======= ====== ======
<PAGE>
Selected Financial Ratios:
Year Ended September 30,
1997 1996 1995
(Dollars in thousands)
Performance ratios:
Return on average assets 1.1% .3% 1.0%
Return on average equity 5.8 3.9 11.8
Interest rate spread (1) 3.0 3.0 3.2
Net interest margin (2) 3.8 3.3 3.5
Ratio of noninterest expenses to
average assets 2.2 2.8 2.4
Average equity to average assets 19.1 9.0 8.4
Average interest-earning assets to average
interest-bearing liabilities 121.7 107.3 106.9
Assets quality ratios:
Nonperforming assets to total assets (3) .4 .2 .3
Nonperforming loans to total loans (3) .6 .4 .3
Allowance for loan losses to total loans 1.9 1.9 1.6
Allowance for loan losses to nonperforming
loans (3) 304.2 524.2 302.9
(1) Interest rate spread represents the difference between the weighted
average yield on interest-earning assets and weighted average rate
paid on interest-bearing liabilities.
(2) Net interest margin represents annualized net interest income as a
percentage of average interest-earning assets.
(3) Nonperforming loans consist of nonaccrual loans and accruing loans
90 days or more delinquent and nonperforming assets consist of
nonperforming loans and real estate owned.
<PAGE>
COMMON STOCK DATA
The Company's common stock began trading on the NASDAQ on December 23,
1996, under the symbol "SCBS." At September 30, 1997, there were
1,137,350 shares of the common stock outstanding and approximately 400
stockholders of record. The following table sets forth information as
to high and low sales prices of the Company's common stock and cash
dividends per share of common stock for the calendar quarters
indicated.
Price Per Share Dividends Per Share
High Low Regular Special
Fiscal 1997:
First quarter $13.750 $12.250 $.000 $.000
Second quarter $13.500 $13.000 $.075 $.000
Third quarter $14.625 $13.500 $.075 $.000
Fourth quarter $16.750 $14.750 $.075 $.000
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
General
The principal business of the Association consists of accepting
deposits from the general public and investing those funds in loans
secured by one- to four-family residential properties located in the
Association's primary market area and loans for other general purposes
to individuals and businesses. The Association's securities portfolio
consists primarily of U.S. Treasury notes and government agency
securities and mutual funds backed by mortgage-backed securities.
The Association's earnings are primarily dependent upon its net
interest income, the difference between interest income and interest
expense. Interest income is a function of the balances of loans and
investments outstanding during a given period and the yield earned on
such loans and investments. Interest expense is a function of the
amount of deposits outstanding during the same period and interest
rates paid on such deposits. The Association's earnings are also
affected by provisions for loan losses, service charges, and other
noninterest income, operating expenses, and income taxes.
The Association is significantly affected by prevailing economic
conditions, as well as government policies and regulations concerning,
among other things, monetary and fiscal affairs, housing, and
financial institutions. Deposit flows are influenced by a number of
factors, including interest rates paid on competing investments,
account maturities, and level of personal income and savings within
the Association's market. In addition, deposit growth is affected by
how customers perceive the stability of the financial services
industry amid various current events such as regulatory changes,
failures of other financial institutions, and financing of the deposit
insurance fund. Lending activities are influenced by the demand for
and supply of housing lenders, the availability and cost of funds, and
various other items. Sources of funds for lending activities of the
Association include deposits and income provided from operations.
Changes in Financial Condition
At September 30, 1997, the Company's assets totaled $70.9 million, as
compared to $63.9 million at September 30, 1996. Total assets
increased by $7.0 million, or 11.0%, from September 30, 1996 to
September 30, 1997. The increase in total assets during this period
was principally funded through $9.9 million in net proceeds from the
stock offering.
The increase in total assets at September 30, 1997 was due primarily
to a $5.8 million increase in interest bearing deposits in banks, $3.4
million increase in net loans, and $1.7 million increase in investment
securities available for sale offset by $2.8 million decrease in
investment securities held to maturity. The $5.8 million increase was
the result of the Company's election to invest a substantial portion
of its new and excess funds into investments and loans, especially
one-to-four family residential loans.
During the fiscal year ended September 30, 1997, total deposits
decreased by $1.3 million, or $2.2%, to $55.9 million. This decrease
was the result of withdrawals from deposit accounts maintained with
the Association for payment of the Company's common stock during the
stock offering. Primarily, as a result of the stock offering, the
Company's equity increased by $8.8 million to $14.5 million at
September 30, 1997 compared to $5.7 million at September 30, 1996.
Results of Operations for the Years Ended September 30, 1997, 1996,
and 1995
The Company had net income of $792,000 for the year ended
September 30, 1997 compared to net income of $221,000 for fiscal 1996.
The $571,000 increase in net income represented a 258.3% increase over
fiscal 1996. Net income for fiscal 1996 was materially affected by a
one time special assessment to recapitalize the Savings Association
Insurance Fund ("SAIF") and a $190,000 provision for loan losses. The
SAIF Assessment was approximately $370,000, $237,000 net of taxes, for
the year ended September 30, 1996. The Company's net income of
$221,000 for the fiscal year ended September 30, 1996 represented a
decrease of $401,000, or 64.4%, from fiscal 1995. This decrease from
fiscal 1995 to fiscal 1996 was also the result of the SAIF assessment
and provision for loan losses during fiscal 1996.
Total interest income increased by $406,000, or 8.8%, in fiscal year
ended September 1997 compared to fiscal year ended September 30, 1996.
Such increase was primarily the result of an increase in the average
interest earning assets as a result of investing the stock offering
proceeds. The average balance of interest earning assets increased by
$7.4 million.
Interest expense on deposits increased by $273,000, or 11.9%, during
the fiscal year ended September 1996 compared to fiscal 1995. Such
increase was due primarily to an increase in interest paid on
deposits, as a result of 40 basis point (1.0% equaling 100 basis
points) increase in the average rate paid on deposits in response to
market conditions.
Provision for Loan Losses
The Association did not have a provision for loan losses during the
fiscal year ended September 30, 1997 compared to $190,000 and $0
during fiscal 1996 and 1995, respectively. Provisions for loan losses
are charged to earnings to bring the total allowance to a level deemed
appropriate by management based on the volume and type of lending
conducted by the Association. The provision in fiscal 1996 was made
in order to adjust the allowance for the increased volume of mortgage
loans as well as the expansion of consumer and commercial lending.
Commercial and consumer loans traditionally have a higher rate of
default and are secured by collateral that often depreciates or is
less liquid than the real estate securing mortgage loans.
The Association's methodology for evaluating the adequacy of its
allowance for loan losses, which conforms with GAAP, considers
collateral valuation, changes in the loan portfolio mix, and certain
economic indicators, causing it to be a leading indicator of inherent
risk in the loan portfolio. Accordingly, it is not necessarily
reflective of past trends in charge-offs and other factors. The
methodology incorporates economic indicators such as growth in
personal income and unemployment rates as well as other economic
indicators affecting the Association's market area and considers
higher risk loan groups, including growth in the Association's
consumer and multi-family and non-residential loan portfolios.
Non-Interest Income
Non-interest income was $187,000 in fiscal 1997, a decrease of
$55,000, or 22.6%, compared to non-interest income of $242,000 in
fiscal 1996. The primary difference in non-interest income between
fiscal 1997 and fiscal 1996 was from a reduction in fees from deposit
accounts. Non-interest income amounted to $242,000 for the fiscal
year ended September 30, 1996 compared to $329,000 for fiscal 1995.
The decrease was due primarily to a $50,000 decrease in income from
real estate operations and a $72,000 decrease in gain on sale of
premises and equipment.
Non-Interest Expenses
The primary reason for the decrease in non-interest expenses in fiscal
1997 compared to fiscal 1996 was the 1996 one-time special assessment
of 65.7 basis points on SAIF insured deposits as of March 31, 1995
which was partially offset by the $150,000 increase in compensation
and benefits which resulted from increased personnel, merit raises,
and $95,000 in ESOP expense which was new in fiscal 1997.
Non-interest expenses amounted to $1.8 million during the fiscal year
ended September 30, 1996, a $285,000, or 19.1%, increase over the $1.5
million of non-interest expenses during the year ended September 30,
1995. The primary reason for the increase in non-interest expenses in
fiscal 1996 compared to fiscal 1995 was the $370,000 one-time special
assessment in fiscal 1996.
Income Taxes
The provision for income taxes was $437,000, $118,000, and $310,000 in
fiscal 1997, 1996, and 1995, respectively. The changes in such
respective amounts primarily reflect the fluctuations in levels of
income before income taxes of the Company during those fiscal years of
$1,229,000, $339,000 and $932,000, respectively.
Net Interest Income
The Company's net interest income is determined by its interest rate
spread (i.e., the difference between the yields earned on its
interest-earning assets and the rates paid on its interest-bearing
liabilities) and the relative amounts of interest-earning assets and
interest-bearing liabilities.
Total interest income increased by $406,000, or 8.8%, in the fiscal
year ended September 30, 1997 compared to fiscal 1996. The increase
was due primarily to an increase in income and dividends on securities
held to maturity and securities available for sale (including,
mortgage-backed securities and investment securities) increased
$156,000, or 14.9% resulting from an increase in the average balances
resulting from investing the stock offering proceeds. Interest income
from other interest earning assets increased $159,000, or 77.9%, as
the average balance increased due to investing the proceeds from the
stock offering.
Total interest income increased by $242,000, or 5.5%, for the fiscal
year ended September 30, 1996 compared to the fiscal year ended
September 30, 1995. This increase was due primarily to a $165,000, or
5.1%, increase in interest and fees on loans as the average balance
increased by $230,000 and the average yield increased by 37 basis
points. Interest income from other interest-earning assets increased
$73,000, or 55.7%, to $204,000 for 1996 as a result of a $1.0 million
increase in the average balance.
Liquidity and Capital Resources
The Association is required under applicable federal regulations to
maintain specified levels of "liquid" investments in qualifying types
of United States Government, federal agency, and other investments
having maturities of five years or less. Current OTS regulations
require that a savings association maintain liquid assets of not less
than 5% of its average daily balance of net withdrawable deposit
accounts and borrowings payable in one year or less, of which
short-term liquid assets must consist of not less than 1%. Monetary
penalties may be imposed for failure to meet applicable liquidity
requirements. At September 30, 1997, the Association's liquidity, as
measured for regulatory purposes, was in excess of the minimum OTS
requirement.
Cash was generated by the Association's operating activities during
the years ended September 30, 1997 and 1996 primarily as a result of
net income. The adjustments to reconcile net income to cash provided
by operating activities during the periods presented consisted
primarily of amortization of premiums and discounts, proceeds from the
sale of loans, and increases or decreases in interest and dividends
receivable, prepaid income taxes, accrued interest payable, and
accrued expenses and other liabilities. The primary investing
activity of the Association is lending, which is funded with cash
provided by operations, as well as principal collections and
maturities of interest-bearing deposits in banks. For additional
information about cash flows from the Association's operating,
financing, and investing activities, see the Statements of Cash Flows
included in the Consolidated Financial Statements.
At September 30, 1997, the Association had outstanding $816,000 in
undisbursed portion of mortgage loans. At the same date, the total
amount of certificates of deposit which are scheduled to mature by
September 30, 1998 was $26.5 million. The Association believes that
it has adequate resources to fund commitments as they arise and that
it can adjust the rate on savings certificates to retain deposits in
changing interest rate environments. If the Association requires
funds beyond its internal funding capabilities, advances from the FHLB
of Atlanta are available as an additional source of funds.
The Association is required to maintain specified amounts of capital
pursuant to the Financial Institutions Reform, Recovery, and
Enforcement Act of 1989 ("FIRREA") and regulations promulgated
thereunder by the OTS. The capital standards generally require the
maintenance of regulatory capital sufficient to meet a tangible
capital requirement, a core capital requirement, and a risk-based
requirement. At September 30, 1997, the Association's tangible and
core capital totaled $10.3 million, or 15.1% of adjusted total assets,
which exceeded the respective minimum requirements at that date by
approximately $9.2 million and $8.2 million, respectively, or 12.1%
and 13.6%, respectively. The Association's risk-based capital totaled
$11.1 million at September 30, 1997, or 31.4% of risk-weighted assets,
which exceeded the current requirement of 8% by approximately
$8.2 million, or 23.4% of risk-weighted assets.
Impact of Inflation and Changing Prices
The financial statements and related financial data presented herein
have been prepared in accordance with GAAP, which requires the
measurement of financial position and operating results in terms of
historical dollars, without considering changes in relative purchasing
power over time due to inflation.
Unlike most industrial companies, virtually all of the Association's
assets and liabilities are monetary in nature. As a result, interest
rates generally have a more significant impact on a financial
institution's performance than does the effect of inflation.
Average Balance, Interest, and Average Yields and Rates
The following table sets forth certain information relating to the
Company's average interest-earning assets and interest-bearing
liabilities and reflects the average yield on assets and the average
cost of liabilities for the periods and at the date indicated. Such
yields and costs are derived by dividing income or expense by the
average monthly balance of assets or liabilities, respectively, for
the periods indicated.
The table also presents information for the periods indicated and at
September 30, 1997 with respect to the difference between the weighted
average yield earned on interest-earning assets and the weighted
average rate paid on interest-bearing liabilities, or "interest rate
spread," which savings institutions have traditionally used as an
indicator of profitability. Another indicator of an institution's net
interest income is its "net yield on interest-earning assets." which
is its net interest income divided by the average balance of
interest-earning assets. Net interest income is affected by the
interest rate spread and by the relative amounts of interest-earning
assets and interest-bearing liabilities. When interest-earning assets
approximate or exceed interest-bearing liabilities, any positive
interest rate spread will generate net interest income.
<TABLE>
<CAPTION>
As of Year Ended September 30,
September 30 1997 1996
1997 ------------------------------ ------------------------------
Weighted Average Yield/ Average Yield/
Yield/Rate Balance Interest Rate Balance Interest Rate
---------- -------- -------- ------ ------- -------- -----
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C> <C>
Interest-earning assets:
Interest-bearing deposits in other financial
institutions 5.50% $ 7,540 $ 363 4.81% $ 4,162 $ 204 4.90%
Investment securities and FHLB stock 5.87 13,134 731 5.57 10,417 581 5.58
Mortgage-backed securities 5.96 8,035 475 5.91 7,885 469 5.95
Loans receivable 8.52 40,609 3,479 8.57 39,551 3,388 8.57
-------- ------- ------- ------
Total interest-earning assets 7.39 69,318 $ 5,048 7.28 62,015 $4,642 7.49
Non-interest-earning assets 1,859 1,788
-------- -------
Total assets $ 71,177 $63,803
======== =======
Interest-bearing liabilities 4.26 $ 56,950 2,435 4.28% $57,774 2,573 4.45%
Noninterest-bearing liabilities 648 319
-------- -------
Total liabilities 57,598 58,092
-------- -------
Equity 13,579 5,711
-------- -------
Total liabilities and retained earnings $ 71,177 $63,803
======== ------- ======= -------
Net interest income $ 2,613 $2,068
======= =======
Interest rate spread 3.00% 3.04%
Net interest margin (net interest income as ======= =======
a percentage of average interest-earning assets) 3.77% 3.33%
======= =======
Average interest-earning assets to average
interest-bearing liabilities 121.72% 107.34%
====== =======
</TABLE>
Rate/Volume Analysis
The table below sets forth certain information regarding changes in
interest income and interest expense of the Association for the
periods indicated. For each category of interest-earning asset and
interest-bearing liability, information is provided on changes
attributable to: (i) changes in volume (changes in volume multiplied
by prior period rate) and (ii) changes in rates (change in rate
multiplied by prior period volume). Changes in rate-volume (changes
in rate multiplied by changes in volume) are allocated proportionately
between changes in volume and changes in rates.
<TABLE>
<CAPTION>
Year Ended September 30,
1997 Compared to 1996 1996 Compared to 1995
------------------------------------- -------------------------------------
Increase Increase Increase Increase
(Decrease) (Decrease) Total (Decrease) (Decrease) Total
Due to Due to Increase Due to Due to Increase
Rate Volume (Decrease) Rate Volume (Decrease)
(In Thousands)
<S> <C> <C> <C> <C> <C> <C>
Interest income attributable to:
Interest-bearing deposits in other
financial institutions $ (4) $163 $159 $ 25 $ 48 $ 73
Investment securities (2) 151 149 (15) (144) (159)
Mortgage-backed securities (2) 9 7 13 150 163
Loans receivable 1 90 91 146 19 165
----- ----- ----- ------ ------ -----
Total interest income (7) 413 406 169 73 242
----- ----- ----- ------ ------ -----
Interest expense attributable to:
Deposits (103) (36) (139) 237 36 273
----- ----- ----- ------ ------ -----
Increase (decrease) in net interest income $ 96 $449 $545 $ (68) $ 37 $ (31)
====== ===== ===== ====== ====== ======
</TABLE>
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To Southern Community Bancshares, Inc.:
We have audited the accompanying consolidated statements of financial
condition of SOUTHERN COMMUNITY BANCSHARES, INC. (a Delaware
corporation) AND SUBSIDIARY as of September 30, 1997 and 1996, and the
related consolidated statements of income, stockholders' equity, and
cash flows for each of the three years in the period ended
September 30, 1997. These consolidated financial statements are the
responsibility of the Company's management. Our responsibility is to
express an opinion on these consolidated 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 Southern Community Bancshares, Inc. and
subsidiary as of September 30, 1997 and 1996, and the results of their
operations and their cash flows for each of the three years in the
period ended September 30, 1997, in conformity with generally accepted
accounting principles.
ARTHUR ANDERSEN LLP
/S/ Arthur Andersen LLP
Birmingham, Alabama
October 21, 1997
<PAGE>
<TABLE>
SOUTHERN COMMUNITY BANCSHARES, INC.
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
SEPTEMBER 30, 1997 AND 1996
ASSETS
<CAPTION>
1997 1996
<S> <C> <C>
CASH AND DUE FROM BANKS $ 579,544 $ 350,755
INTEREST BEARING DEPOSITS IN BANKS 9,307,720 3,517,485
INVESTMENT SECURITIES AVAILABLE-FOR-SALE, at fair value 7,412,925 5,691,964
MORTGAGE-BACKED SECURITIES AVAILABLE-FOR-SALE, at fair value 5,583,924 5,936,460
INVESTMENT SECURITIES HELD-TO-MATURITY, fair value of
$1,492,141 and $4,215,480, respectively 1,498,407 4,253,410
MORTGAGE-BACKED SECURITIES HELD-TO-MATURITY, fair value
of $2,033,126 and $2,471,850, respectively 2,026,416 2,513,997
LOANS RECEIVABLE, net 42,998,875 39,600,795
ACCRUED INTEREST RECEIVABLE 469,453 432,010
PREMISES AND EQUIPMENT, net 545,564 603,278
INCOME TAXES RECEIVABLE 185,579 320,478
OTHER ASSETS 276,604 640,039
------------- -------------
Total assets $ 70,885,011 $ 63,860,671
============= =============
LIABILITIES AND STOCKHOLDERS' EQUITY
DEPOSITS $ 55,874,668 $ 57,137,702
ACCRUED INTEREST PAYABLE 102,304 108,765
ACCRUED EXPENSES AND OTHER LIABILITIES 437,922 929,423
------------- -------------
Total liabilities 56,414,894 58,175,890
COMMITMENTS AND CONTINGENCIES
PREFERRED STOCK, par value $.01, no shares issued, 100,000 0 0
shares authorized
COMMON STOCK, par value $.01 per share, 3,000,000 shares
authorized, 1,137,350 shares issued and outstanding 11,374 0
ADDITIONAL PAID-IN CAPITAL 10,786,689 0
RETAINED EARNINGS, substantially restricted 6,445,252 5,871,509
UNEARNED COMPENSATION (2,736,893) 0
UNREALIZED LOSS ON AVAILABLE-FOR-SALE SECURITIES, net of
deferred taxes (36,305) (186,728)
------------- -------------
Total stockholders' equity 14,470,117 5,684,781
------------- -------------
Total liabilities and stockholders' equity $ 70,885,011 $ 63,860,671
============= =============
The accompanying notes are an integral part of these consolidated statements.
</TABLE>
<PAGE>
<TABLE>
SOUTHERN COMMUNITY BANCSHARES, INC.
CONSOLIDATED STATEMENTS OF INCOME
FOR THE YEARS ENDED SEPTEMBER 30, 1997, 1996, AND 1995
<CAPTION>
1997 1996 1995
<S> <C> <C> <C>
INTEREST INCOME:
Interest and fees on loans $3,479,134 $3,387,699 $3,222,506
Interest and dividends on investment securities 730,798 581,317 740,396
Interest on mortgage-backed and related securities 475,408 468,809 305,470
Other interest income 362,505 203,800 130,907
---------- ---------- ----------
Total interest income 5,047,845 4,641,625 4,399,279
---------- ---------- ----------
INTEREST EXPENSE--DEPOSITS 2,434,567 2,573,461 2,300,245
---------- ---------- ----------
Net interest income before provision
for loan losses 2,613,278 2,068,164 2,099,034
PROVISION FOR LOAN LOSSES 0 190,170 0
---------- ---------- ----------
Net interest income after provision
for loan losses 2,613,278 1,877,994 2,099,034
---------- ---------- ----------
NONINTEREST INCOME:
Service charges on deposit accounts 182,225 234,963 198,193
Income (loss) from real estate operations, net 0 838 50,815
Gain on sale of premises and equipment 0 1,500 73,702
Other 5,224 4,958 6,040
---------- ---------- ----------
Total noninterest income 187,449 242,259 328,750
---------- ---------- ----------
NONINTEREST EXPENSE:
Compensation and benefits 869,414 719,704 758,415
Occupancy and equipment 171,158 180,007 189,158
SAIF deposit insurance 50,310 498,942 131,666
Data processing 119,329 118,208 114,486
Professional fees 55,564 45,243 76,358
Other 306,388 219,137 225,895
---------- ---------- ----------
Total noninterest expense 1,572,163 1,781,241 1,495,978
---------- ---------- ----------
Income before income taxes 1,228,564 339,012 931,806
INCOME TAX EXPENSE 436,723 118,024 310,256
---------- ---------- ----------
Net income $ 791,841 $ 220,988 $ 621,550
========== ========== ==========
EARNINGS PER SHARE $ .66 N/A N/A
========== ========== ==========
The accompanying notes are an integral part of these consolidated statements.
</TABLE>
<PAGE>
<TABLE>
SOUTHERN COMMUNITY BANCSHARES, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
FOR THE YEARS ENDED SEPTEMBER 30, 1997, 1996, AND 1995
<CAPTION>
Unrealized
Loss on
Available
Unrealized for
Depreciation Sale
on Certain Securities,
Additional Marketable Net of
Common Paid-In Retained Unearned Equity Deferred
Stock Capital Earnings Compensation Securities Taxes Total
<S> <C> <C> <C> <C> <C> <C> <C>
BALANCE, SEPTEMBER 30, 1994 $ 0 $ 0 $5,028,971 $ 0 $(33,826) $ 0 $ 4,995,145
Net income 0 0 621,550 0 0 0 621,550
Adoption of SFAS No. 115 0 0 0 0 33,826 (121,784) (87,958)
Change in net unrealized loss
on securities available-for-sale 0 0 0 0 0 76,850 76,850
-------- ----------- ---------- ----------- -------- ---------- -----------
BALANCE, SEPTEMBER 30, 1995 0 0 5,650,521 0 0 (44,934) 5,605,587
Net income 0 0 220,988 0 0 0 220,988
Change in net unrealized loss
on securities available-for-sale 0 0 0 0 0 (141,794) (141,794)
-------- ----------- ---------- ----------- -------- ---------- -----------
BALANCE, SEPTEMBER 30, 1996 0 0 5,871,509 0 0 (186,728) 5,684,781
Net income 0 0 791,841 0 0 0 791,841
Change in unrealized loss
on securities available-for-sale 0 0 0 0 0 150,423 150,423
Issuance of common stock 11,374 10,752,273 0 (909,880) 0 0 9,853,767
Amortization of unearned
compensation 0 34,416 60,824 0 95,240
Repurchase of stock for stock
plan trusts 0 0 (1,878,680) 0 0 (1,878,680)
Contribution to plan trust 0 0 0 (9,157) 0 0 (9,157)
Dividends declared ($.225 per share) 0 (218,098) 0 (218,098)
-------- ----------- ---------- ----------- -------- ---------- -----------
BALANCE, September 30, 1997 $11,374 $10,786,689 $6,445,252 $(2,736,893) $ 0 $ (36,305) $14,470,117
======== =========== ========== ============ ======== ========== ============
The accompanying notes are an integral part of these consolidated statements.
</TABLE>
<PAGE>
<TABLE>
SOUTHERN COMMUNITY BANCSHARES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED SEPTEMBER 30, 1997, 1996, AND 1995
<CAPTION>
1997 1996 1995
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 791,841 $ 220,988 $ 621,550
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation 82,388 82,388 81,679
Amortization and accretion on securities (35,252) (49,120) (73,200)
Amortization of unearned ESOP 95,240 0 0
Amortization of net deferred loan origination
fees and costs (47,407) (42,452) (30,669)
Provision (benefit) for deferred income taxes 122,904 (198,635) 66,314
Provision for loan losses 0 190,170 0
(Gain) loss on sale of foreclosed real estate, net 0 291 (43,040)
Gain on sale of premises and equipment, net 0 (1,500) (73,702)
Change in assets and liabilities:
Increase (decrease) in income taxes (81,822) (98,442) 188,288
receivable/payable
Decrease in accrued interest receivable (37,443) (48,029) (38,513)
Decrease (increase) in other assets 363,435 (536,612) 44,636
Increase (decrease) in accrued interest payable (6,461) (4,513) 65,262
Increase (decrease) in accrued expenses and
other liabilities (491,501) 693,579 (21,660)
----------- ------------ -------------
Total adjustments (35,919) (12,875) 165,395
----------- ------------ -------------
Net cash provided by operating activities 755,922 208,113 786,945
----------- ------------ -------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from maturities/calls of investment
securities available-for-sale 3,620,636 1,000,000 0
Proceeds from maturities/calls of investment
securities held-to-maturity 2,760,000 3,950,497 6,550,000
Purchases of investment securities
available-for-sale (5,272,915) (4,102,853) (597,769)
Purchases of investment securities
held-to-maturity 0 0 (3,448,595)
Net loan repayments (originations) (3,350,673) (1,217,051) 1,409,406
Proceeds from maturities of mortgage-backed
securities available-for-sale 1,072,607 672,582 498,922
Proceeds from maturities of mortgage-backed
securities-held-to-maturity 474,148 650,497 126,578
Purchases of mortgage-backed securities
available-for-sale (500,825) (4,492,120) (490,000)
Capital expenditures (24,674) (84,678) (23,512)
Proceeds from sale of foreclosed real estate 0 43,924 329,855
Proceeds from sale of fixed assets 0 1,500 202,066
----------- ------------ -------------
Net cash provided by (used in)
investing activities (1,221,696) (3,577,702) 4,556,951
CASH FLOWS FROM FINANCING ACTIVITIES:
Increase (decrease) in deposits (1,263,034) 1,129,732 (2,219,802)
Net proceeds from public stock offering 9,853,767 0 0
Repurchase of stock for stock plan trusts (1,878,680) 0 0
Contributions to plan trusts (9,157) 0 0
Payment of dividends (218,098) 0 0
----------- ------------ -------------
Net cash provided by (used in)
financing activities 6,484,798 1,129,732 (2,219,802)
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 6,019,024 (2,239,857) 3,124,094
CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR 3,868,240 6,108,097 2,984,003
----------- ------------ -------------
CASH AND CASH EQUIVALENTS AT END OF YEAR $9,887,264 $ 3,868,240 $ 6,108,097
=========== ============ =============
SUPPLEMENTAL DISCLOSURES:
Cash paid for:
Interest on deposits $2,341,955 $ 2,577,974 $ 2,234,983
Income taxes 339,991 418,241 57,800
Transfers from loans to real estate
acquired through foreclosure 0 38,771 5,444
=========== ============ =============
CHANGE IN UNREALIZED NET LOSS ON SECURITIES
AVAILABLE FOR SALE, net of deferred taxes $ 150,423 $ 141,794 $ 44,934
CHANGE IN UNREALIZED DEPRECIATION ON CERTAIN
MARKETABLE EQUITY SECURITIES 0 0 (33,826)
The accompanying notes are an integral part of these consolidated statements.
</TABLE>
<PAGE>
Southern Community Bancshares, Inc.
Notes to Financial Statements
September 30, 1997 AND 1996
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Organization, Nature of Operations, and Principles of
Consolidation
Southern Community Bancshares, Inc. (the "Company") was
incorporated in the State of Delaware in July 1996, for the
purpose of becoming a holding company to own all of the
outstanding capital stock of First Federal Savings and Loan
Association of Cullman (the "Association") upon the Association's
conversion from a federally chartered mutual savings association
to a federally chartered stock savings association (the
"Conversion"). The accounting for the conversion is in a manner
similar to that utilized in a pooling of interests.
The Association received its federal charter in 1905 and was
converted to a federally chartered stock organization on
December 23, 1996 through the sale of all of its common stock to
the Company. The Association is primarily engaged in the business
of obtaining funds in the form of various savings deposit products
and investing those funds in mortgage loans or single family real
estate and, to a lesser extent, in consumer loans. The
Association operates from its three offices in the primary market
area of Cullman County, Alabama.
The accompanying consolidated financial statements include the
accounts of the Company, and the Association. All significant
intercompany balances and transactions have been eliminated in
consolidation.
Basis of Financial Statement Presentation
The accounting principles and reporting policies of the Company,
and the methods of applying these principles, conform with
generally accepted accounting principles ("GAAP") and with general
practices within the thrift industry. In preparing the financial
statements, management is required to make estimates and
assumptions that affect the reported amounts of assets and
liabilities as of the date of the balance sheet and revenues and
expenses for the period. Actual results could differ
significantly from those 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.
Material estimates that are particularly susceptible to
significant changes in the near-term relate to the determination
of the allowance for loan losses and the valuation of real estate
acquired in connection with foreclosures or in satisfaction of
loans. In connection with the determination of the allowances for
loan losses and real estate owned, management obtains independent
appraisals for significant properties, evaluates the overall
portfolio characteristics and delinquencies and monitors economic
conditions.
A substantial portion of the Company's loans are secured by real
estate in its primary market area. Accordingly, the ultimate
collectibility of a substantial portion of the Company's loan
portfolio and the recovery of a portion of the carrying amount of
foreclosed real estate are susceptible to changes in economic
conditions in the Company's primary market areas.
Cash and Cash Equivalents
For purposes of the statements of cash flows and presentation of
the statements of financial condition, the Association considers
cash, due from banks and interest bearing deposits in banks as
cash and cash equivalents.
Investment and Mortgage-Backed Securities
Securities classified as held-to-maturity are stated at cost,
adjusted for amortization of premiums and accretion of discounts
on the constant effective yield method. The Company has the
positive intent and ability to hold these securities to maturity.
Available-for-sale securities are carried at fair value, except
for FHLB required stock holding which are carried at cost, and
include all debt and equity securities not classified as
held-to-maturity or trading. Trading securities are those held
principally for the purpose of selling in the near future and are
carried at fair value. The Company does not currently have any
trading securities.
Unrealized gains and losses for trading securities are included in
earnings. Unrealized gains and losses for available-for-sale
securities are excluded from earnings and reported, net of any
income tax effect, as a separate component of retained earnings.
Realized gains and losses for securities classified as either
available-for-sale or held-to-maturity are reported in earnings
based on the adjusted cost of the specific security sold.
Loans Receivable
Loans receivable are stated at their unpaid balances, less the
allowance for loan losses and net deferred loan origination fees
and discounts.
The Company 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. In
addition, various regulatory agencies, as an integral part of
their examination process periodically review the Company's
allowance for losses on loans and the carrying value of foreclosed
real estate. Such agencies may require the Company to recognize
additions to the allowances based on their judgments about
information available to them at the time of their examinations.
Losses on individually identified impaired loans are measured
based on the present value of expected future cash flows
discounted at each loan's original effective interest rate. As a
practical expedient, impairment may be measured based on the
loan's observable market price or the fair value of the collateral
if the loan is collateral dependent. When the measure of the
impaired loan is less than the recorded investment in the loan,
the impairment is recorded through a provision added to the
allowance for loan losses. Because on the Company's loan
portfolio primarily consists of one-to-four family residential
mortgages and consumer installment loans that are evaluated
collectively for impairment, the Company had no loans designated
as impaired under the provisions of Statement of Financial
Accounting Standards ("SFAS") No. 114 at September 30, 1997.
Loan Origination Fees and Related Costs
Loan origination fees and certain direct origination costs are
capitalized and recognized as an adjustment of the yield of the
related loan over the remaining period to contractual maturity.
Foreclosed Real Estate
Real estate acquired through, or in lieu of, loan foreclosure is
initially recorded at fair value at the date of foreclosure,
establishing a new cost basis. Costs to maintain or hold the
property are expensed and amounts incurred to improve the
property, to the extent that fair value is not exceeded, are
capitalized. Valuations are periodically performed by management,
and an allowance for losses is established by a charge to income
if the carrying value of a property exceeds its fair value less
the estimated costs to sell.
Premises and Equipment
Land is carried at cost. Buildings, leasehold improvements, and
furniture, fixtures and equipment are carried at cost, less
accumulated depreciation and amortization. Depreciation is
provided using the straight-line and accelerated methods over the
estimated useful lives of the assets. The cost of leasehold
improvements is amortized using the straight-line method over the
life of the lease. The estimated useful lives of furniture,
fixtures, and equipment range from 5 to 15 years and for building
and improvements range from 5 to 33 years.
Income Taxes
The Company accounts for income taxes through the use of the asset
and liability method for accounting for deferred income taxes.
Under the asset and liability method, deferred taxes are
recognized for the tax consequences of temporary differences by
applying enacted statutory rates applicable to future years to
differences between the financial statement carrying amounts and
the tax bases of existing assets and liabilities. The effect on
deferred taxes of a change in tax rates would be recognized in
income in the period that includes the enactment date.
Earnings Per Share
Earnings per share are computed based on the weighted average
number of shares of common stock outstanding during the period
less shares of stock which have been placed in trust for possible
future benefit plans and Employee Stock Ownership Plan ("ESOP")
Trust shares are not considered outstanding for earnings per share
calculation.
Earnings per share for the period from December 23, 1996, the date
of Conversion, to September 30, 1996, has been computed based on
the earnings during that period and on the weighted average number
of shares of common stock and common stock equivalents outstanding
during that period. The weighted average number of shares used
for the period from December 23, 1996 through September 30, 1997
was 975,727. If earnings per share had been computed on a
retroactive basis for the year ended September 30, 1997,
recognizing earnings for the entire year, earnings per share would
have been $.81 per share as compared to the $.66 per share
reported in the accompanying consolidated statements of income.
Pending Accounting Pronouncements
Earnings Per Share
In February 1997, the Financial Accounting Standards Board
("FASB") issued SFAS No. 128, Earnings Per Share. This Statement
establishes standards for computing and presenting earnings per
share ("EPS") and applies to entities with publicly held common
stock or potential common stock. This Statement simplifies the
standards for computing earnings per share previously found in
Accounting Principles Board ("APB") Opinion No. 15, Earnings per
Share, and makes them comparable to international EPS standards.
It replaces the presentation of primary EPS with a presentation of
basic EPS and requires dual presentation of basic and diluted EPS
on the face of the income statement for all entities with complex
capital structures and requires a reconciliation of the numerator
and denominator of the basic EPS computation to the numerator and
denominator of the diluted EPS computation.
This Statement is effective for financial statements issued for
periods ending after December 15, 1997, including interim periods;
earlier application is not permitted. This Statement requires
restatement of all prior-period EPS data presented. The Company
will adopt the Statement at fiscal year-end 1998. to the extent
the statement had been implemented for the year ended
September 30, 1997, both basic and diluted earnings per share
under SFAS No. 128 would be have been identical to earnings per
share as presented in these financial statements.
Disclosure of Information About Capital Structure
In February 1997, the FASB issued SFAS No. 129, Disclosure of
Information About Capital Structure. This Statement establishes
standards for disclosing information about an entity's capital
structure. It applies to all entities. SFAS No. 129 is effective
for financial statements for periods ending after December 15,
1997. It contains no change in disclosure requirements for
entities that were previously subject to the requirements of APB
Nos. 10 and 15 and SFAS No. 47.
Management believes there will be no material effect on the
consolidated financial statements from the adoption of this
pronouncement.
Reporting of Comprehensive Income
In June 1997, the FASB issued SFAS No. 130, Reporting of
Comprehensive Income, which establishes 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 a financial statement that
is 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. Management
believes there will be no material effect on the consolidated
financial statements from the adoption of this pronouncement.
Disclosure about Segments and Related Information
In June 1997, the FASB issued SFAS No. 131, Disclosures about
Segments of an Enterprise and Related Information, which
establishes standards for the way that public business enterprises
report information about operating segments in annual financial
statements and requires that those enterprises report selected
information about operating segments in interim financial reports
issued to stockholders.
This statement also establishes standards for related disclosures
about products and services, geographic areas, and major
customers. This statement requires the reporting of financial and
descriptive information about an enterprise's reportable operating
segments.
This statement is effective for financial statements for periods
beginning after December 15, 1997. In the initial year of
application, comparative information for earlier years is to be
restated. Management believes there will be no material effect on
the consolidated financial statements from the adoption of this
pronouncement.
Financial Statement Reclassification
The financial statements for prior years have been reclassified in
order to conform with the 1997 financial statement presentation.
The reclassification did not change total assets or net income in
the prior year.
2. INVESTMENT AND MORTGAGE-BACKED SECURITIES
Details of securities are as follows:
<TABLE>
<CAPTION>
September 30, 1997
Gross Gross
Amortized Unrealized Unrealized Estimated
Cost Gains Losses Fair Value
<S> <C> <C> <C> <C>
Available-for-sale:
U.S. Treasury and federal agencies $ 6,980,741 $ 2,384 $ 0 $ 6,983,125
Mutual funds 0 0 0 0
Federal Home Loan Bank stock 429,800 0 0 429,800
------------ ----------- ----------- -----------
Investment securities 7,410,541 2,384 0 7,412,925
Mortgage-backed securities 5,643,733 4,503 (64,312) 5,583,924
------------ ----------- ----------- -----------
Total $ 13,054,274 $ 6,887 $ (64,312) $12,996,849
============ =========== ============ ===========
Held-to-maturity:
U.S. Treasury and federal agencies $ 1,348,407 $ 0 $ (14,869) $ 1,333,538
Obligations of state and political
subdivisions 150,000 8,603 0 158,603
------------ ----------- ----------- -----------
Investment securities 1,498,407 8,603 (14,869) 1,492,141
Mortgage-backed securities 2,026,416 20,084 (13,374) 2,033,126
------------ ----------- ----------- -----------
Total $ 3,524,823 $ 28,687 $ (28,243) $ 3,525,267
============ =========== ============ ===========
</TABLE>
<TABLE>
<CAPTION>
September 30, 1996
Gross Gross
Amortized Unrealized Unrealized Estimated
Cost Gains Losses Fair Value
<S> <C> <C> <C> <C>
Available-for-sale:
U.S. Treasury and federal agencies $ 3,535,814 $ 0 $ (35,755) $ 3,500,059
Mutual funds 1,774,941 0 (12,836) 1,762,105
Federal Home Loan Bank stock 429,800 0 0 429,800
------------ ----------- ----------- -----------
Investment securities 5,740,555 0 (48,591) 5,691,964
Mortgage-backed securities 6,184,262 0 (247,802) 5,936,460
------------ ----------- ----------- -----------
Total $ 11,924,817 $ 0 $ (296,393) $11,628,424
============ =========== ============ ===========
Held-to-maturity:
U.S. Treasury and federal agencies $ 4,093,481 $ 0 $ (47,894) $ 4,045,587
Obligations of state and political
subdivisions 159,929 9,964 0 169,893
------------ ----------- ----------- -----------
Investment securities 4,253,410 9,964 (47,894) 4,215,480
Mortgage-backed securities 2,513,997 0 (42,147) 2,471,850
------------ ----------- ----------- -----------
Total $ 6,767,407 $ 9,964 $ (90,041) $ 6,687,330
============ =========== ============ ===========
</TABLE>
The amortized cost and estimated fair value of securities, by
contractual maturity, are shown below. Expected maturities will
differ from contractual maturity because borrowers may have the
right to call or prepay obligations:
<TABLE>
<CAPTION>
September 30, 1997
Available-for-Sale Held-to-Maturity
Amortized Amortized
Cost Fair Value Cost Fair Value
<S> <C> <C> <C> <C>
Due in one year or less $ 3,001,876 $ 3,006,901 $ 499,976 $ 499,450
Due after one year through five years 3,206,367 3,203,726 998,431 992,691
Due after five years through ten years 757,498 757,498 0 0
Due after ten years 444,800 444,800 0 0
------------ ------------ ----------- ----------
7,410,541 7,412,925 1,498,407 1,492,141
Mortgage-backed securities 5,643,733 5,583,924 2,026,416 2,033,126
------------ ------------ ----------- ----------
Total $ 13,054,274 $ 12,996,849 $3,524,823 $3,525,267
============ ============ =========== ==========
</TABLE>
All mortgage-backed securities were issued by either U.S.
government agencies (Government National Mortgage Association) or
government-sponsored enterprises (Federal Home Loan Mortgage
Corporation or Freddie Mac). The mutual funds are backed
primarily by Federal Home Loan Mortgage Association
mortgage-backed securities and private issuer mortgage-backed
securities.
During the year ended September 30, 1997, the Company sold mutual
funds with a book and fair value of $1,870,636 with no gain or
loss. There were no other sales of securities during the years
ended September 30, 1997 and 1996.
3. LOANS RECEIVABLE, NET
<TABLE>
Loans receivable are summarized as follows:
<CAPTION>
September 30 September 30
1997 1996
<S> <C> <C>
Mortgage loans:
Principal balances:
Secured by 1-4 family residences $25,617,086 $23,470,482
Secured by nonresidential properties 8,077,000 8,601,682
Secured by multifamily properties 4,172,496 3,670,986
Construction loans 1,266,600 837,400
------------ ------------
39,133,182 36,580,550
Less:
Undisbursed portion of mortgage loans (815,502) (581,781)
Net deferred loan origination fees (169,738) (149,591)
------------ ------------
Total mortgage loans 38,147,942 35,849,178
Commercial loans 2,293,540 1,416,551
Consumer loans:
Principal balances:
Loans secured by automobiles 1,534,822 1,367,522
Loans secured by savings accounts 518,173 568,183
Other 1,310,362 1,201,395
------------ ------------
Total consumer loans 3,363,357 3,137,100
------------ ------------
Total loans 43,804,839 40,402,829
Less allowance for loan losses 805,964 802,034
------------ ------------
Loans receivable, net $42,998,875 $39,600,795
=========== ============
</TABLE>
In the ordinary course of business, the Company makes loans to
officers, directors, employees, and other related parties of the
Company. These loans are made on substantially the same terms as
those prevailing for comparable transactions with others. Such
loans do not involve more than normal risk of collectibility nor
do they present other unfavorable features. The amounts of such
related party loans and commitments at September 30, 1997 and 1996
were $1,035,000 and $1,105,000, respectively. During the year
ended September 30, 1997, new loans totaled $312,000 and
repayments were $382,000.
Activity in the allowance for loan losses is summarized as
follows:
1997 1996 1995
Balance at beginning of year $802,034 $623,638 $632,208
Provision charged to income 0 190,170 0
Charge-offs (55,878) (20,141) (17,170)
Recoveries 59,808 8,367 8,600
--------- --------- ---------
Balance at end of year $805,964 $802,034 $623,638
======== ========= =========
The Company had loans on nonaccrual status of approximately
$265,000 and $27,000 and at September 30, 1997 and 1996,
respectively. Interest income foregone on these nonaccrual loans
was not significant for fiscal years 1997 and 1996.
4. LOAN SERVICING
The Company originates and services mortgage loans for Freddie
Mac. Mortgage loans serviced for Freddie Mac are not included in
the accompanying statements of financial condition. Unpaid
principal balances of serviced loans totaled $1,723,251 at
September 30, 1997 and $1,588,014 at September 30, 1996. The
serviced loans were sold without recourse.
5. ACCRUED INTEREST RECEIVABLE
Accrued interest receivable at September 30 is summarized as
follows:
1997 1996
Investment securities $116,948 $ 88,003
Mortgage-backed securities 41,333 45,855
Loans receivable 311,172 298,152
-------- ---------
Total $469,453 $ 432,010
======== =========
6. FORECLOSED REAL ESTATE
Activity in the allowance for losses on foreclosed real estate at
September 30 is summarized as follows:
1997 1996 1995
Balance at beginning of year $0 $0 $214,609
Provision charged to income 0 0 0
Charge-offs 0 0 (214,609)
-- -- ---------
Balance at end of year $0 $0 $ 0
== == =========
7. PREMISES AND EQUIPMENT
A summary of premises and equipment at September 30 is as follows:
1997 1996
Land $ 163,081 $ 163,081
Buildings and improvements 731,216 753,583
Leasehold improvements 30,166 30,166
Furniture, fixtures, and equipment 736,366 726,325
---------- ----------
1,660,829 1,673,155
Less accumulated depreciation and
amortization 1,152,265 1,069,877
----------- -----------
Net premises and equipment $ 508,564 $ 603,278
=========== ===========
8. DEPOSITS
<TABLE>
Deposits are summarized as follows:
<CAPTION>
September 30, 1997 September 30, 1996
Amount Percent Amount Percent
<S> <C> <C> <C> <C>
Demand and NOW accounts, including
noninterest-bearing deposits of
$93,914 in 1997 and $113,594 in 1996 $10,561,301 18.9% $11,236,279 19.7%
Money market accounts 1,093,499 2.0 940,391 1.6
Passbook savings 9,286,230 16.6 8,327,355 14.6
----------- ------ ----------- ------
20,941,030 37.5 20,504,025 35.9
Certificates of deposit, rates from 2.51%
to 12.75% in 1997 and 1996 34,933,638 62.5 36,633,677 64.1
----------- ------ ----------- ------
Total $55,874,668 100.0% $57,137,702 100.0%
=========== ====== =========== ======
</TABLE>
The aggregate amount of jumbo certificates of deposit with a
minimum denomination of $100,000 was $6,578,414 at September 30,
1997 and $5,589,383 at September 30, 1996. Deposits in excess of
$100,000 are not federally insured.
Scheduled maturities of certificates of deposit are as follows:
Years Ending
September 30 Amount
1998 $26,455,814
1999 4,860,063
2000 1,396,135
2001 1,928,280
2002 293,346
$34,933,638
Interest expense on deposits at September 30 are summarized as
follows:
1997 1996 1995
NOW accounts $ 250,614 $ 247,313 $ 286,845
Money market accounts 58,778 55,289 37,731
Passbook savings 250,510 240,093 229,105
Certificates of deposit 1,877,771 2,033,947 1,754,606
Withdrawal penalties (3,106) (3,181) (8,042)
----------- ----------- -----------
Total $2,434,567 $2,573,461 $2,300,245
=========== =========== ===========
The Company has pledged U.S. government and government agency
obligations totaling $1,120,000 at September 30, 1997 and 1996 as
collateral against certain large deposits.
9. INCOME TAXES
The provisions for income taxes for the years ended September 30
are as follows:
1997 1996 1995
Current:
Federal $260,611 $ 286,824 $212,262
State 53,208 29,835 31,680
-------- --------- --------
313,819 316,659 243,942
Deferred:
Federal 104,083 (180,222) 64,841
State 18,821 (18,413) 1,473
-------- --------- --------
122,904 (198,635) 66,314
-------- --------- --------
Total $436,723 $ 118,024 $310,256
======== ========= ========
The differences between the provision for income taxes and the
amount computed by applying the statutory federal income tax rate
of 34% to income before income taxes at September 30 were as
follows:
1997 1996 1995
Expected income tax expense at
statutory federal tax rate $417,712 $115,264 $316,814
Increase (decrease) resulting from:
State income tax, net of federal
benefit 47,539 7,539 21,882
Tax-exempt interest income (41,063) (2,639) (28,000)
Other, net 12,535 (2,140) (440)
--------- --------- ---------
$436,723 $118,024 $310,256
======== ======== =========
Effective rate 36% 36% 33%
======== ======== ========
Temporary differences between the financial statement carrying
amounts and tax bases of assets and liabilities at September 30
that give rise to significant portions of the net deferred tax
asset relate to the following:
1997 1996
Deferred loan fees, net $ 8,333 $ 16,663
Allowance for loan losses for financial
reporting 296,753 296,753
Unrealized loss on securities available
for sale 18,703 109,850
SAIF assessment 0 136,902
Other 47,913 23,228
---------- ----------
Deferred tax asset 371,702 583,396
Allowance for loan losses for the tax
reserve in excess of base year (56,881) (56,881)
Depreciation (47,341) (44,657)
Other (45,405) (45,732)
---------- ----------
Deferred tax liability (149,627) (147,270)
---------- ----------
Net deferred tax asset $ 222,075 $ 436,126
========== ==========
Thrift institutions, in determining taxable income, have
historically been allowed special bad debt deductions based on
specified experience formulae or on a percentage of taxable income
before such deductions. The bad debt deduction based on the
latter has been gradually reduced to 8%. On August 2, 1996,
Congress passed the Small Business Job Protection Act that, will
among other things, repeal the tax bad debt reserve method for
thrifts effective for taxable years beginning after December 31,
1996. As a result, thrifts must recapture into taxable income the
amount of their post-1987 tax bad debt reserves over a six-year
period beginning after 1995. This recapture can be deferred for
up to two years if the thrift satisfies a residential loan
portfolio test. The Bank is expected to recapture approximately
$154,000; $57,000 tax effected, of its tax bad debt reserves into
taxable income over six years as a result of this new law. The
recapture will not have any effect on the Association's financial
statements because the related tax expense has already been
accrued.
Because of such repeal, thrifts such as the Association may only
use the same tax bad debt reserve that is allowed for 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 similar 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 bank for tax purposes. However, no further recapture
would be allowed if the thrift converted to a commercial bank
charter or was acquired by a bank. The Association does not
anticipate engaging in any transactions at this time that would
require the recapture of its remaining tax bad debt reserves.
10. REGULATORY MATTERS
The Association 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 Association's financial statements. Under capital
adequacy guidelines and the regulatory framework for prompt
corrective action, the Association must meet specific capital
guidelines that involve quantitative measures of the Association's
assets, liabilities, and certain off-balance sheet items as
calculated under regulatory accounting practices. The
Association'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 Association 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, the Association 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 Association as
well capitalized under the regulatory framework for prompt
corrective action. To be categories as well capitalized, the
Association 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 Association:
<TABLE>
<CAPTION>
To Be Well
Capitalized Under
For Capital Prompt Corrective
Actual Adequacy Purposes Action Provisions
-------------------- ----------------- ----------------
Amount Ratio Amount Ratio Amount Ratio
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C>
September 30, 1997:
Total capital (to risk weighted
assets) $11,065 31.4% $2,817 8.0% $3,522 10.0%
Tier 1 (core) capital (to risk
weighted assets) 10,259 29.1 N/A N/A 2,113 6.0
Tier 1 (core capital (to
adjusted total assets) 10,259 15.1 2,044 3.0 3,407 5.0
Tangible capital (to adjusted
total assets) 10,259 15.1 1,022 1.5 N/A N/A
September 30, 1996:
Total capital (to risk weighted
assets) 6,674 19.8 2,690 8.0 3,363 10.0
Tier 1 (core) capital (to risk
weighted assets) 5,872 17.4 N/A N/A 2,018 6.0
Tier 1 (core) capital (to
adjusted total assets) 5,872 9.2 1,908 3.0 3,181 5.0
Tangible capital (to adjusted
total assets) 5,872 9.2 954 1.5 N/A N/A
</TABLE>
The following table is a reconciliation of the Association's
stockholder's equity to tangible, Tier 1, and risk-based capital
as required by the OTS:
1997 1996
(In thousands)
Stockholder's equity $10,222 $ 5,685
Net unrealized loss on debt securities
available for sale 37 187
------- --------
Tangible and Tier 1 capital 10,259 5,872
Allowance for loan losses 806 802
------- --------
Total risk based capital $11,065 $ 6,674
======= ========
Total assets $68,112 $ 63,431
Adjusted total assets 68,149 63,617
Total risk weighted assets 35,218 33,631
Pursuant to OTS regulations, an institution that exceeds 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.
The Company's principal source of funds for dividend payments is
dividends from the Association. Certain restrictions exist
regarding the ability of the Association to pay dividends to the
Company. At July 1, 1997, dividend payments by the Association
were subject to regulatory approval.
11. COMMITMENTS AND CONTINGENCIES
Lease Commitment
The Association leases property utilized as a branch office under
a long-term lease expiring March 31, 2000, at an annual rental of
$15,409 plus taxes and maintenance. The Association has three
5-year options to renew with rentals adjusted to the consumer
price index. Rent expense under this lease totaled $15,409 for
the year ended September 30, 1997.
At September 30, 1997, projected minimum lease payments for years
ending September 30 are as follows:
1998 $15,409
1999 15,409
2000 7,705
2001 0
2002 0
Total $38,523
Financial Instruments With Off-Balance-Sheet Risk
The Association does not engage in transactions involving options,
standby letters of credit, financial guarantees, interest-rate
swaps, and forward and future contracts. Further, the Association
does not routinely issue loan commitments, other than undisbursed
portions of construction loans, and had none outstanding at
September 30, 1997 and 1996.
Significant Group Concentrations of Credit Risk
The majority of the Association's business activity is with
customers located in Cullman County and surrounding areas. While
this area is heavily involved in agribusiness activities, there is
significant diversified industry with no heavy concentration in
any one industry.
FDIC Assessment
The deposits of the Association are currently insured by the
Savings Association Insurance Fund ("SAIF"). Both the SAIF and
the Bank Insurance Fund ("BIF"), the federal deposit insurance
fund that covers the deposits of state and national banks and
certain state savings banks, are required by law to attain and
thereafter maintain a reserve ratio of 1.25% of insured deposits.
The BIF has achieved the required reserve rate, and, as discussed
below, during the period year the FDIC reduced the average deposit
insurance premium paid by BIF-insured banks to a level
substantially below the average premium paid by savings
institutions.
Banking legislation was enacted September 30, 1996 to eliminate
the premium differential between SAIF-insured institutions and
BIF-insured institutions. The FDIC Board of Directors established
a special assessment necessary to recapitalize the SAIF at 65.7
basis points of SAIF assessable deposits held by affected
institutions as of March 31, 1995. Based upon its level of SAIF
deposits as of March 31, 1995, the Association paid a special
assessment of approximately $370,000 during the year ended
September 30, 1997. 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 poor elimination of the thrift
charter.
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 financial position of the Company.
12. COMPENSATION AND EMPLOYEE BENEFITS
Profit Sharing Plan
The Company maintains a defined contribution profit sharing plan
covering all full-time employees who meet certain eligibility
requirements. Contributions to the Plan are at the discretion of
the Board of Directors and are determined on a calendar-year
basis. For the plan year ended December 31, 1997 management
intends to make a contribution of approximately $19,700, of which
the total amount had been accrued at September 30, 1997 and is
included in other liabilities in the accompanying consolidated
statements of financial condition.
Employee Stock Ownership Plan
In connection with the Conversion, the Association established an
ESOP for eligible employees. The ESOP purchased 90,988 shares of
the Company's common stock. Expense related to the ESOP for the
year ended September 30, 1997 was approximately $61,000. Unearned
compensation related to the ESOP was approximately $2,737,000 at
September 30, 1997 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.
13. 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
noninterest bearing demand, savings, and money market savings),
are, as required by SFAS No. 107, equal to the amounts payable on
demand at the reporting date (i.e., their carrying amounts). Fair
values for certificates of deposits are estimated using a
discounted cash flow calculation that applies interest rates
currently being offered on certificates to a schedule of
aggregated monthly maturities.
Commitments to Extend Credit
The value of these unrecognized financial instruments is estimated
based on the fee income associated with the commitments which, in
the absence of credit exposure, is considered to approximate their
settlement value. As no significant credit exposure exists and
because such fee income is not material to the Company's financial
statements at September 30, 1997 and 1996, the fair value of these
commitments is not presented.
Many of the Company's assets and liabilities are short-term
financial instruments whose carrying amounts reported in the
statement of condition approximate fair value. These items
include cash and due from banks, interest-bearing bank balances,
accrued interest receivable and payable, and similar assets. The
estimated fair values of the Company's remaining on-balance sheet
financial instruments as of September 30, 1997, are summarized
below:
<TABLE>
<CAPTION>
1997 1996
Carrying Estimated Carrying Estimated
Value Fair Value Value Fair Value
<S> <C> <C> <C> <C>
Financial Assets:
Investment securities
available for sale $ 7,412,925 $ 7,412,925 $ 5,691,964 $ 5,691,964
Mortgage backed and related
securities available for sale 5,583,924 5,583,924 5,936,460 5,936,460
Investment securities
held-to-maturity 1,498,407 1,492,141 4,253,410 4,215,480
Mortgage backed and related
securities held-to-maturity 2,026,416 2,033,126 2,513,997 2,471,850
Loans, net 49,998,875 50,413,865 39,600,795 39,605,896
Financial Liabilities:
Deposits 55,874,668 55,982,666 57,137,702 57,196,530
</TABLE>
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.
14. STOCK CONVERSION
On December 23, 1996, 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 1,137,350 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 $575,000, including underwriting fees. These
conversion costs were deducted from the gross proceeds of the sale
of the common stock.
In connection with the Offering, the Association established a
liquidation account in an amount equal to its regulatory capital
as of the latest practicable date prior to consummation of the
Offering.
The Company's ability to pay dividends will be largely dependent
upon dividends to the Company from the Association. Pursuant to
Office of Thrift Supervision ("OTS") regulations, the Association
will not be permitted to pay dividends on its capital stock or
repurchase shares of its stock if its stockholders' equity would
be reduced below the amount required for the liquidation account
or if stockholders' equity would be reduced below the amount
required by the OTS.
15. PARENT COMPANY FINANCIAL STATEMENTS
Separate condensed financial statements of Southern Community
Bancshares, Inc. (the "Parent Company") as of and for the year
ended September 30, 1997 are presented below:
Statement of Financial Condition
September 30, 1997
(Dollar amounts in thousands)
ASSETS:
Cash and cash equivalents $ 753
Securities available for sale 1,750
Investment in subsidiary 10,222
Due from subsidiary 1,888
Other assets 26
-------
Total assets $14,639
=======
LIABILITIES:
Other liabilities $ 169
STOCKHOLDERS' EQUITY:
Common stock 11
Additional paid-in capital 10,787
Retained earnings 6,445
Unearned compensation (2,737)
Unrealized gain on securities available for sale, net (36)
--------
Total stockholders' equity 14,470
-------
Total liabilities and stockholders' equity $14,639
=======
<PAGE>
Statement of Income
For the Year Ended September 30, 1997
(Dollar amounts in thousands)
INTEREST INCOME $ 143
OPERATING EXPENSE 151
LOSS BEFORE INCOME TAXES AND EQUITY IN UNDISTRIBUTED
CURRENT YEAR SUBSIDIARY EARNINGS (8)
INCOME TAX BENEFIT 3
LOSS BEFORE EQUITY IN UNDISTRIBUTED CURRENT YEAR
SUBSIDIARY EARNINGS (5)
EQUITY IN UNDISTRIBUTED CURRENT YEAR SUBSIDIARY EARNINGS 797
Net income $ 792
<PAGE>
Statement of Cash Flows
For the Year Ended September 30, 1997
(Dollar amounts in thousands)
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 792
Equity in undistributed current year earnings of subsidiary
797
--------
(5)
Adjustments to reconcile net income to net cash provided by
operating activities:
Amortization of discounts on securities (1)
Increase in other assets (26)
Increase in other liabilities 169
--------
Net cash provided by operating activities 137
--------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of securities available for sale (3,250)
Proceeds from maturity of securities available for sale 1,500
--------
Net cash used by investing activities (1,750)
--------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from issuance of common stock 9,854
Purchase of Bank's common stock (5,382)
Contributions to plan trusts of the Association (1,888)
Dividends paid (218)
--------
Net cash provided by financing activities 2,366
--------
NET INCREASE IN CASH AND CASH EQUIVALENTS 753
CASH AND CASH EQUIVALENTS, beginning of year 0
--------
CASH AND CASH EQUIVALENTS, end of year $ 753
========
Earnings are presented on a retroactive basis, recognizing
earnings of the subsidiary for the year ended September 30, 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.
EXHIBIT 21
LIST OF SUBSIDIARIES
NAME OF BUSINESS STATE OF INCORPORATION
First Federal Savings and Loan Alabama
Association of Cullman
EXHIBIT 23
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
As independent public accountants, we hereby consent to the
incorporation by reference in this registration statement of our
report dated October 21, 1997 included in Southern Community
Bancshares, Inc.'s Form 10-KSB for the year ended September 30, 1997
and to all references to our Firm included in this registration
statement.
/s/ Arthur Andersen LLP
Birmingham, Alabama
December 29, 1997
<TABLE> <S> <C>
<ARTICLE> 9
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> SEP-30-1997
<PERIOD-END> SEP-30-1997
<CASH> 580
<INT-BEARING-DEPOSITS> 9308
<FED-FUNDS-SOLD> 0
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 12997
<INVESTMENTS-CARRYING> 3525
<INVESTMENTS-MARKET> 3525
<LOANS> 43805
<ALLOWANCE> 806
<TOTAL-ASSETS> 70885
<DEPOSITS> 55875
<SHORT-TERM> 0
<LIABILITIES-OTHER> 540
<LONG-TERM> 0
0
0
<COMMON> 11
<OTHER-SE> 14459
<TOTAL-LIABILITIES-AND-EQUITY> 70885
<INTEREST-LOAN> 3479
<INTEREST-INVEST> 1206
<INTEREST-OTHER> 363
<INTEREST-TOTAL> 5048
<INTEREST-DEPOSIT> 2435
<INTEREST-EXPENSE> 2435
<INTEREST-INCOME-NET> 2613
<LOAN-LOSSES> 0
<SECURITIES-GAINS> 0
<EXPENSE-OTHER> 1572
<INCOME-PRETAX> 1229
<INCOME-PRE-EXTRAORDINARY> 1229
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 792
<EPS-PRIMARY> .66
<EPS-DILUTED> .66
<YIELD-ACTUAL> 3.77
<LOANS-NON> 265
<LOANS-PAST> 0
<LOANS-TROUBLED> 1483
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 802
<CHARGE-OFFS> 56
<RECOVERIES> 60
<ALLOWANCE-CLOSE> 806
<ALLOWANCE-DOMESTIC> 97
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 709
</TABLE>
