UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-KSB/A
The following items were the subject
of a Form 12b-25 and are included herein:
(1) Item 1; (2) Item 6; (3) Item 7; and
(4) Financial Data Schedule. The following
additional items are amended herewith:
(1) Item 10; (2) Item 11; and (3) Item 12.
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the fiscal year ended December 31, 1997
[ ] TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
OF 1934
For the transition period from ______ to ________
Commission File Number: 0-22911
SOUTHERN SECURITY BANK CORPORATION
(Exact name of registrant as specified in its charter)
Delaware 65-0325364
(State or other jurisdiction (IRS Employer
of incorporation) Identification No.)
3475 Sheridan Street, Hollywood, Florida 33021
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (954) 985-3900
Securities registered pursuant to Section 12(g) of the Act:
Class A Common Stock, $.01 par value
Title of each class
Check whether the issuer (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 (or
for such shorter period that the registrant was required to file such reports),
and (2) has been subject to such filing requirements for the past 90 days. Yes
__X__ No ______
Check if there is no disclosure of delinquent filers in response to Item 405 of
Regulation S-B is not contained in this form, and no disclosure will be
contained to the best of registrant's knowledge, in definitive proxy or
information statements, incorporated by reference in Part III of this Form
10-KSB or any amendment to this Form 10-KSB. __[ ]__
State issuer's revenues for the most recent fiscal year $1,579,285
State the aggregate market value of the voting and non voting common equity held
by non-affiliates computed by reference to the price at which the common equity
was sold, or the average bid and asked price of such common equity as a
specified date within the past 60 days: - - There is no public market for the
registrant's common equity. Based solely upon the offering price in certain
private sales of the registrant's common equity made within the last 90 days,
the approximate market value of common equity held by non affiliates as of March
23, 1998 would have been $7,125,095. Solely for the purpose of this calculation,
all directors, officers and holders of more than 5% of the registrant's
outstanding common stock have been deemed to be affiliates.
State the number of shares outstanding of each of the issuer's classes of common
equity, as of the latest practicable date: (i) Class A Voting Common Stock -
4,299,673; (ii) Class B Non-Voting Common Stock - None.
DOCUMENTS INCORPORATED BY REFERENCE: None
Transitional Small Business Disclosure Format (check one):
Yes___; No X
<PAGE>
PART I
Item 1. Description of Business
General
Southern Security Bank Corporation (the "Holding Corporation") is a bank
holding company that owns 96.81% of outstanding capital stock of Southern
Security Bank (the "Bank"). The Holding Corporation is organized under the law
of Delaware, while the Bank is a Florida State Chartered Bank that is a member
of the Federal Reserve System whose deposits are insured by the Federal Deposit
Insurance Corporation ("FDIC"). The Bank provides a full range of commercial
banking and consumer banking services to businesses and individuals. On December
31, 1997, the Holding Corporation and its subsidiary Bank (collectively,
referred to herein as the "Company") had consolidated total assets of
$16,931,962, total deposits of $15,675,312, net loans of $12,463,278, and
stockholders equity of $472,830.
The Company, including the Bank and the offices of the Holding
Corporation, is located at 3475 Sheridan Street, Hollywood, Florida 33021. Its
telephone number is (954) 985-3900.
Historical Development
The predecessor of the Holding Corporation was incorporated under the law
of Florida on April 8, 1992 under the name PCM Acquisition Group, Inc ("PCM").
PCM was reorganized under the Florida law under the name Southern Security Bank
Corporation ("SSB") on June 28, 1993, for the purpose of acquiring control of
the Bank, which was then known as Florida First International Bank. The Holding
Corporation completed the acquisition of the Bank on December 16, 1993 (the
"Acquisition") through the purchase of 96.6% of its outstanding common stock.
Subsequent to the date of Acquisition, the name of the Bank was changed to
Southern Security Bank. During the period since the Acquisition, management has
strived to bring the Bank into compliance with regulatory guidelines and to
position the Company for growth. Classified and non-performing assets were
liquidated as quickly as possible consistent with the avoidance of undue losses.
New procedures were adopted and old procedures were updated and rewritten for
the purpose of verifying the quality of all new loans. Management believes that
the following Bank statistics are indicative of the progress that has been
achieved since the time of the Acquisition.
At 12/16/93 At 12/31/97
Net Loan Portfolio Balance at end of Period $ 6,951,096 $ 12,463,278
Charge-Off Devalued/Impaired Earning Assets $ 1,202,000 $ 37,337
Total Classified Assets and Owned Real Estate $ 3,970,999 $ 430,000
Total Assets of Bank affiliate 12/16/93 and 12/31/97 $13,089,724 $ 16,924,041
Total Capital of Bank affiliate 12/16/93 and 12/31/97 $ 288,381 $ 897,708
Total Classified Assets as a Percent of Total Loans 48.46% 3.45%
On November 10, 1997, SSB was merged (the "Merger") with Southern Security
Financial Corporation, a Delaware corporation ("SSF"), with the Holding
Corporation being the surviving corporation under the name Southern Security
Bank Corporation. Prior to the Merger, SSF had 279 shareholders of record, no
substantial assets and no operating history. The Class A Common Stock of SSF was
registered under the Securities Exchange Act of 1934, as amended (the "Exchange
Act"), on September 29, 1997. As a result of the Merger, the former shareholders
of the Company obtained 95% of the outstanding capital stock of the Holding
Corporation, and the former shareholders of SSF obtained 4.9% of the outstanding
capital stock of the Holding Corporation. The Merger was effected for the
purpose of placing the Holding Corporation in a posture to aid in the eventual
development of a trading market in the Company's Class A Common Stock through:
(i) registering the Class A Common Stock under the 1934 Act; (ii) increasing the
number of stockholders from 110 to 389; and (iii) reincorporating the Holding
Corporation under the law of Delaware.
The Bank
The Bank, which is the sole subsidiary of the Holding Corporation,
is a state chartered banking association engaging in a general commercial and
consumer banking business. The Bank's services are provided through its
full-service community banking office. The Bank engages in general commercial
banking providing a wide range of loan and deposit services. As of December 31,
1997, the Bank had approximately 1,100 deposit accounts and 700 loans
outstanding. Retail services offered by the Bank include installment loans,
credit cards, checking accounts, savings accounts, NOW accounts, and various
types of time-deposit instruments. Mortgage lending activities include
commercial, industrial, and residential loans secured by real estate. Commercial
lending activities include originating secured and unsecured loans and lines of
credit, and providing cash management and accounts receivable financing services
to a variety of businesses. The Bank also operates a merchant credit card
program. The Bank's installment loan department makes direct auto, home equity,
home improvement, and personal loans to individuals. The Bank also offers safe
deposit box services.
Correspondent Banking. Correspondent banking involves one bank
providing services to another bank which cannot provide that service for itself
for economic or organizational reasons. The Bank purchases correspondent
services offered by larger banks, including check collections, purchase of
federal funds, security safekeeping, investment service, coin and currency
supplies, overline and liquidity loan participations, and sales of loans to or
loan participation with correspondent banks. The Bank also sells loan
participations to correspondent banks with respect to loans which exceed the
Bank's lending limit. The Bank has established correspondent relationships with
Compass Bank of Birmingham, Alabama and Independent Bankers Bank of Orlando,
Florida with respect to the foregoing services. As compensation for services
provided by a correspondent, the Bank maintains certain balances with the
correspondent in non-interest bearing accounts. Such compensating balances are
not considered significant to the Bank's operations.
Market Area
The Bank has one office, which is located in Hollywood, Florida. The
Bank considers its primary market and service area to be the City of Hollywood
and surrounding towns in Broward and Palm Beach Counties. The population of
Hollywood is approximately 125,000, with 53,000 households, and a civilian labor
force of 60,000. The density of population is approximately 4,463 persons per
square mile. Public school enrollment is at 20,000, with a pupil to teacher
ratio of 19.5 to one. Real estate property assessed valuations are approximately
$5.8 billion. Boca Raton, where the Company proposes to open a new main office,
has a population of approximately 66,000, with 27,000 households, and a total
civilian labor force of 32,000. The density of population is approximately 2,262
persons per square mile. Public school enrollment is 12,800, with a pupil to
teacher ratio of 17.6 to one. Real estate property assessed valuation is
approximately $8.3 billion.
Employees
The Company has 12 full time employees at the Bank level and three
employees at the Holding Corporation level. The Company's employees are not
unionized, and the Company considers its employee relations to be excellent.
Supervision and Regulation
Upon its initial acquisition (change of control occurred 12/16/93)
of a financial institution, the Company "obtained" a charter from the State of
Florida for a State bank and a member of the Federal Reserve System. As a
Fed-member State Bank, the Bank is be subject to the provisions of the Federal
Reserve Bank regulations and administrative practices and the Florida Banking
Code which is administered by the Florida Department of Banking and Finance (the
"FDBF"). The Bank has its deposit obligations insured by the Federal Deposit
Insurance Company ("FDIC") in the maximum individual amounts of $100,000 each,
and is subject to regulation by the FDIC. The FDBF supervises and regulates all
areas of the Bank's operations, including, without limitation, its loans,
mortgages, issuance of securities, annual shareholders meetings, capital
adequacy requirements, payment of dividends and the establishment or termination
of branches. As a state-chartered banking institution in the State of Florida,
the Bank is empowered by statute, subject to limitations expressed therein, to
take savings and time deposits, to accept checking accounts, to pay interest on
such deposits, to make loans on residential and other real estate, to make
consumer and commercial loans, to invest, with certain limitations, in equity
securities and in debt obligations of Companies and to undertake other various
banking services on behalf of its customers.
Bank Holding Company Regulation. The Holding Corporation is a one-bank
holding company, registered with the Federal Reserve Board under the Bank
Holding Company Act of 1956, as amended (the "BHC Act"). As such, the Holding
Corporation and the Bank are subject to the supervision, examination, and
reporting requirements of the BHC Act and the regulations of the Board of
Governors of the Federal Reserve System (the "FRB"). The Holding Corporation is
required to file semi-annual and annual reports with the FRB and such
additional information as the FRB may require pursuant to the BHC Act. The FRB
may conduct examinations of the Holding Corporation and the Bank. Under FRB
regulations, the Holding Corporation is required to serve as a source of
financial and managerial strength to the Bank and may not conduct its operations
in an unsafe or unsound manner. In addition, it is the FRB's policy that in
serving as a source of strength to its subsidiary banks, a bank holding company
should stand ready to use available resources to provide adequate capital funds
to its subsidiary banks during periods of financial stress or adversity and
should maintain the financial flexibility and capital- raising capacity to
obtain additional resources for assisting its subsidiary banks. A bank holding
company's failure to meet its obligations to serve as a source of strength to
its subsidiary banks will generally be considered by the FRB to be an unsafe and
unsound banking practice or a violation of the FRB's regulations or both. The
BHC Act requires every bank holding company to obtain the prior approval of the
FRB before (i) it may acquire direct or indirect ownership or control of any
voting shares of any bank if, after such acquisition, the bank holding company
will directly or indirectly own or control more than 5% of the total voting
shares of the bank, (ii) it or any of its subsidiaries, other than a bank, may
acquire all or substantially all of the assets of the bank, or (iii) it may
merge or consolidate with any other bank holding company. The BHC Act further
provides that the Federal Reserve may not approve any transaction that would
result in a monopoly or would be in furtherance of any combination or conspiracy
to monopolize or attempt to monopolize the business of banking in any section of
the United States, or the effect of which may be substantially to lessen
competition or to tend to create a monopoly in any section of the country, or
that in any other manner would be in restraint of trade, unless the anti-
competitive effects of the proposed transaction are clearly outweighed by the
public interest in meeting the convenience and needs of the community to be
served. The Federal Reserve is also required to consider the financial and
managerial resources and future prospects of the bank holding companies and
banks concerned and the convenience and needs of the community to be served.
The BHC Act generally prohibits the Holding Corporation from
engaging in activities other than banking or managing or controlling banks or
other permissible subsidiaries and from acquiring or retaining direct or
indirect control of any company engaged in any activities other than those
activities determined by the FRB to be so closely related to banking or managing
or controlling banks as to be a proper incident thereto. In determining whether
a particular activity is permissible, the FRB must consider whether the
performance of such an activity reasonably can be expected to produce benefits
to the public, such as greater convenience, increased competition, or gains in
efficiency, that outweigh possible adverse effects, such as undue concentration
of resources, decreased or unfair competition, conflicts of interests, or
unsound banking practices. For example, factoring accounts receivable, acquiring
or servicing loans, leasing personal property, conducting discount securities
brokerage activities, performing certain data processing services, acting as
agent or broker in selling credit life insurance and certain other types of
insurance in connection with credit transactions, and performing certain
insurance underwriting activities all have been determined by the FRB to be
permissible activities of bank holding companies. Despite prior approval, the
FRB has the power to order a bank holding company or its subsidiaries to
terminate any activity or to terminate its ownership or control of any
subsidiary when it has reasonable cause to believe that continuation of such
activity or such ownership or control constitutes a serious risk to the
financial safety, soundness, or stability of any bank subsidiary of that bank
holding company.
Bank Regulation. The Bank is chartered under the laws of the State
of Florida and its deposits are insured by the FDIC to the extent provided by
law. The Bank is subject to comprehensive regulation, examination and
supervision by the FDBF and the FRB and to other laws and regulations applicable
to banks. Such regulations including limitations on loans to a single borrower
and to its directors, officers and employees; restrictions on the opening and
closing of branch offices; the maintenance of required capital and liquidity
ratios; the granting of credit under equal and fair conditions; and the
disclosure of the costs and terms of such credit. The Bank is examined
periodically by both the FDBF and the FRB, to each of whom it submits periodic
reports regarding its financial condition and other matters. Both the FDBF and
the FRB have a broad range of powers to enforce regulations under their
respective protection of the safety and soundness of the Bank, including the
institution of cease and desist orders and the removal of directors and
officers. These regulatory agencies also have the authority to approve or
disapprove mergers, consolidations, and similar corporate actions. There are
various statutory and contractual limitations on the ability of the Bank to pay
dividends, extend credit, or otherwise supply funds to the Holding Corporation.
The FDIC and the FDBF also have the general authority to limit the
dividends paid by insured banks and bank holding companies if such payment may
be deemed to constitute an unsafe and unsound practice. Dividends and management
fees from the Bank constitute the sole source of funds for dividends to be paid
by the Holding Corporation. Under Florida law applicable to banks and subject to
certain limitations, after charging off bad debts, depreciation and other
worthless assets, if any, and making provisions for reasonably anticipated
future losses on loans and other assets, the board of directors of a bank may
declare a dividend of so much of the bank's aggregate net profits for the
current year combined with its retained earnings (if any) for the preceding two
years as the board shall deem to be appropriate and, with the approval of the
FDBF, may declare a dividend from retained earnings for prior years. Before
declaring a dividend, a bank must carry 20% of its net profits for any preceding
period as is covered by the dividend to its surplus fund, until the surplus fund
is at least equal to the amount of its common stock then issued and outstanding.
No dividends may be paid at any time when a bank's net income from the preceding
two years is a loss or which would cause the capital accounts of the bank to
fall below the minimum amount required by law, regulation, order or any written
agreement with the FDBF or a federal regulatory agency. Florida law applicable
to companies (including the Holding Corporation) provides that dividends may be
declared and paid only if, after giving it effect, (i) the company is able to
pay its debts as they become due in the usual course of business, and (ii) the
company's total assets would be greater than the sum of its total liabilities
plus the amount that would be needed if the company were to be dissolved at the
time of the dividend to satisfy the preferential rights upon dissolution of
shareholders whose preferential rights are superior to those receiving the
dividend.
The Bank is subject to agreements with the FRB and with the State
Comptroller and Banking Commissioner of Florida pursuant to which the Bank is
prohibited from declaring or paying any dividends without their prior written
consent. Under federal law, federally insured banks are subject, with certain
exceptions, to certain restrictions on any extension of credit to their parent
holding companies or other affiliates, on investment in the stock or other
securities of affiliates, and on the taking of such stock or securities as
collateral from any borrower. In addition, such banks are prohibited from
engaging in certain tie-in arrangements in connection with any extension of
credit or the providing of any property or service.
The FDIC Improvement Act of 1991 ("FDICIA") made a number of reforms
addressing the safety and soundness of deposit insurance funds, supervision,
accounting, and prompt regulatory action, and implemented other regulatory
improvements. FDICIA also recapitalized the Bank Insurance Fund ("BIF"), under
which the Bank pays a quarterly statutory assessment. Under FDICA, annual
full-scope, on-site examinations are required of all insured depository
institutions. The cost for conducting an examination of an institution may be
assessed to that institution, with special consideration given to affiliates and
any penalties imposed for failure to provide information requested. Insured
state banks also are precluded from engaging as principal in any type of
activity that is impermissible for a national bank, including activities
relating to insurance and equity investments. FDICIA also recodifies current law
restricting extensions of credit to insiders under the Federal Reserve Act. The
policies of regulatory authorities have had a significant effect on the
operating results of commercial banks in the past, and may be expected to do so
in the future. An important function of the FRB System is to regulate aggregate
national credit and money supply through such means as open market dealings in
securities, establishment of the discount rate on bank borrowing, changes in
reserve requirements against bank deposits, and limitations on the deposits on
which a bank may pay interest. Policies of these agencies may be influenced by
many factors including inflation, unemployment, short-term and long-term changes
in the international trade balance, and fiscal policies of the United States
Government. Loans made by the Bank are also subject to numerous other federal
and state laws and regulations, including the Truth in Lending Act, the
Community Reinvestment Act, the Equal Credit Opportunity Act, the Real Estate
Settlement Procedures Act, and the Financial Institutions Reform, Recovery, and
Enforcement Act of 1989. The federal bank regulatory agencies have an array of
powers to enforce laws, rules, regulations and orders. Among other things, the
agencies may require that institutions cease and desist from certain activities,
may preclude persons from participating in the affairs of insured depository
institutions, may suspend or remove deposit insurance, and may impose civil
money penalties against institution-affiliated parties for certain violations.
The foregoing is a brief summary of certain statutes, rules, and regulations
affecting the Company and the Bank. Numerous other statutes and regulations have
an impact on the operations of the Company and the Bank. Supervision,
regulation, and examination of banks by the bank regulatory agencies are
intended primarily for the protection of depositors, not shareholders.
Commitments to Florida Department of Banking and Finance. The
Company entered into specific agreements with the FRB and the FDBF when it
initially offered securities prior to the acquisition of the Bank, including the
following: (1) The Bank may not pay dividends or management fees for the purpose
of paying the salaries or employment contracts of Wilson or Modder without prior
approval from the FDBF; (2) the Bank may not pay dividends to its shareholders
without the approval of the FDBF; (3) the Company confirmed that the employment
contracts between Modder and Wilson are with the Holding Company and are not
obligations of the Bank; (4) Messrs. Wilson and Modder will not become officers
of the Bank without prior approval of the FDBF; and (5) the FDBF did not and
will not approve or disapprove the disclosure materials for any offering of
securities or any aspects of the employment agreements between Modder, Wilson,
and the Company.
Insurance of Deposits. The Bank's deposit accounts are insured by
the FDIC up to a maximum of $100,000 per insured depositor. The FDIC issues
regulations, conducts periodic examinations, requires the filing of reports and
generally supervises the operation of its insured banks. Any insured bank which
is not operated in accordance with or does not conform to FDIC regulations,
policies and directives may be sanctioned for non-compliance. Proceedings may be
instituted against any insured bank or any director, officer, or employee of
such bank engaging in unsafe and unsound practices, including the violation of
applicable laws and regulations. The FDIC has the authority to terminate
insurance of accounts pursuant to procedures established for that purpose.
Bank Branching. Florida banks are permitted by statute to branch
statewide. Such branch banking, however, is subject to prior approval by the
FDBF and the FDIC. Any approval by the FDBF and the FDIC of branching by the
Bank would take into consideration several factors, including the Bank's level
of capital, the prospects and economics of the proposed branch office, and other
considerations deemed relevant by the FDBF and the FDIC for purposes of
determining whether approval should be granted to open a branch office.
Competition
The Company operates in a competitive environment, where it must
compete with numerous other financial entities. In one or more aspects of its
business, the Company competes with other commercial banks, savings and loan
associations, credit unions, finance companies, mutual funds, insurance
companies, brokerage and investment banking companies, and other financial
intermediaries operating in the Company's market area. Most of these
competitors, some of which are affiliated with bank holding companies, have
substantially greater resources and lending limits, and may offer certain
services that the Bank does not currently provide. In addition, many of the
Bank's non-bank competitors are not subject to the same extensive federal
regulations that govern bank holding companies and federally insured banks.
The primary factors in the competition for deposits are interest
rates, personalized services, the quality and range of financial services,
convenience of office locations and office hours. Competition for deposits comes
primarily from other commercial banks, savings associations, credit unions,
money market mutual funds and other investment alternatives. Competition for
loans emanates from other commercial banks, savings associations, mortgage
banking firms, credit unions and other financial intermediaries. Many of the
financial institutions operating in the Company's market area offer certain
services, such as trust, investment and international banking, which the Company
does not offer. To compete, the Bank relies upon specialized services,
responsive handling of customer needs, and personal contacts by its officers,
directors and staff. In those instances where the Company is unable to provide
services a customer needs, it seeks to arrange for those services to be provided
by other banks with which it has a correspondent relationship.
Since September 1995, certain bank holding companies are authorized
to acquire banks throughout the United States. In addition, since June 1,
1997, certain banks are permitted to merge with banks organized under the
law of other states. These changes, together with economic developments in the
United States, have lead to a period of consolidation in the banking industry,
and may be expected to lead to even greater competition for the Company and for
the Company to be placed in competition in the future with financial
institutions with which it does not currently compete. As a result, the Company
may be expected to encounter intense competition within its market area for the
foreseeable future.
Plan of Development
The long-term business plan of the Company is to strengthen the capital
base of the Bank and then to generate additional capital through leveraging of
the earning assets which could be used in conjunction with the Bank's charter as
a vehicle to branch into other affluent banking markets. In December, 1997, the
Company commenced a private offering for $5 million of common stock. Although
the Bank had not achieved break-even earnings level by the end of 1997,
management believes that if at least $1 million in additional equity for the
Bank is received in this Offering, then the Bank will have a sufficient capital
base to achieve and sustain profitable operations.
Item 6. Management's Discussion and Analysis or Plan of Operation
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Overview
The Company's principal asset is its ownership of a controlling interest
in the Bank, which is a State of Florida chartered commercial banking company
domiciled in Hollywood, Florida. The Bank, Southern Security Bank, which may be
referred to as SSB, is a state chartered commercial bank regulated by the
Florida Division of Banking and Finance, as its primary regulator. Since the
Bank is a member of the Federal Reserve system, the Bank's secondary regulator
is the Federal Reserve Bank of Atlanta.
The Company's results of operations are primarily dependent upon the
results of operations of the Bank. The Bank conducts a commercial banking
business which consists of, in very general terms, attracting deposits from the
general public and applying a majority of these funds (typically 60% to 75%) to
the origination of commercial loans to small businesses, consumer loans, and
secured real estate loans in its local trade area of South Florida. The balance
(approximately 25% to 40%) is generally held in cash and invested in government
guaranteed - investment grade securities.
The Bank's profitability depends primarily on generating sufficient net
interest income (the difference between interest income received from loans and
investments and the interest expense incurred on deposits) to offset the Bank's
operating expenses. Any excess thereof is pre-tax profit earned by the Bank. The
careful balance sought between the interest rate earned and frequency of rate
changes, as that balance relates to that interest rate paid to the Bank's
deposit base, determines the nature and extent to which the Bank may be
profitable. For example, if the income generated by the Bank's net interest
income plus non-interest income is in excess of the Bank's other non-interest
expenses, operating expenses and loan loss reserves, the Bank should be
operating profitably. Non-interest expenses consist primarily of personnel
compensation and benefits, occupancy and related expenses, deposit insurance
premiums paid the FDIC, as well as other operating expenses. Non-Interest income
consists primarily of loan origination fees, discounts on accounts receivable
purchases, service charges and gains on securities transactions.
Operating History
Since the acquisition of its affiliate Bank on December 16, 1993 through
the acquisition of 96.6% of the Bank's outstanding common stock, the Company has
focused its attention on maximizing asset quality and minimizing expenses. For
the three-year period prior to the Company's control of the Bank, cumulative
loan losses and charge-offs were in excess of more than $1,200,000. For the four
years since the Company's ownership, cumulative losses in this category were
less than $84,000. Total classified assets as a percentage of total loans at
December 16, 1993 exceeded 48% and as of December 31, 1997 were at 3.4%. The
Bank's loan portfolio since the acquisition date has grown more than 180% to
approximately $12.4 million and total asset growth from $13 million to nearly
$17 million. It is the Management's belief that the Bank has been cleansed of
many of those negative characteristics that impeded the Bank from obtaining
normalized operating profits. In the case of the Bank, the predominant
impediments at acquisition were the Bank's dangerous under-capitalization and
the poor asset quality of its loan portfolio. After more than four years of
effort, the Bank is presently viewed by management as having high asset quality,
and capital exceeding statutory guidelines. An existing negative characteristic
of the Bank is its low level of earning assets as it relates to operating
expenses. Management is seeking to correct this problem by increasing the level
of earning assets (predominantly by increasing the loan portfolio) and
increasing the level of capital in support of this growth.
Although the Company has implemented a program of increasing net loans,
which have increased to more than $12.4 million as of December 31, 1997 from
less than $7 million at December 31, 1993, this earning asset category requires
an additional $3 million in growth to bring the Bank to break even. The loan
growth experienced during this four-year period was financed by a corresponding
growth in the deposit base of the Bank, and by an infusion of new capital at the
Bank level. Generally, banks maintain an average loan to deposit ratio of 75%,
and for the Bank to increase its loan portfolio by $5 million, its deposit base
will require growth of $7.5 million. To support this level of balance sheet
growth, the Bank's capital will need to grow by approximately $400,000. Thus, a
relatively small amount of additional capital should bring the Bank to marginal
profitability. Additional capitalization should provide a foundation for future
growth and profitability, including the opening of a second bank branch to be
located in Boca Raton, Palm Beach County, Florida.
RESULTS OF OPERATIONS:
After the change of control of the Bank in December 1993, Management
sought to restore and renovate the asset quality of the Bank, the policies and
procedures by which the Bank was operated, and the safety and soundness of the
enterprise. Since these plans and programs have taken effect, the operation of
the institution was stabilized, and its asset quality was raised from
classification "poor" to "good." However, the limited amount of capital
available to the Bank has caused its operations over the last 24 months reflect
a stable pattern of operation without meaningful period-to-period differences.
Average Balance Sheet. An analysis of the Company's average balance sheet
levels for the last two years is presented in the Table Average Balance Sheet
Analysis. The Company's net interest income and net yields on interest-earning
assets increased 8.7% percent over 1996. This increase was the result of the
improved contribution of the securities portfolio and loan portfolio, and
deposit pricing management efforts. The average yield/rate for interest-earning
assets increased 2.9% over 1996 while the average yield/rate of interest-bearing
liabilities decreased 5.7% from 1996 to 1997.
<TABLE>
<CAPTION>
Southern Security Bank Corporation
Average Balance Sheet Analysis
December Year Ended December 31,
31, 1997 1997 1996
Average Average Average Average Average
Yield/Rate Balance Interest Yield/Rate Balance Interest Yield/Rate
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(Dollars in Thousands) (Dollars in Thousands)
Assets:
<S> <C> <C> <C> <C> <C> <C> <C>
Interest-earning assets:
Investments (1) 6.72% $ 3,455 237 6.86% $ 4,100 $ 280 6.83%
Federal funds sold n/a 1,545 87 5.63% 855 47 5.50%
Loans receivable 9.18% 10,665 1,113 10.44% 10,811 1,078 9.97%
------ ----- ----- ------ ----- ----
Total interest earning assets 15,665 1,437 9.17% 15,766 1,405 8.91%
----- ---- ----- -----
Noninterest-earning assets 2,301 1,834
------ -------
Total $ 17,966 $ 17,600
======= =======
Liabilities and Stockholders' Equity:
Interest-bearing liabilities:
NOW and money market accounts 2.59% $ 5,012 126 2.51% 4,706 117 2.49%
Savings accounts 2.10% 401 8 2.00% 273 6 2.20%
Certificates of deposit 5.72% 7,364 416 5.65% 7,788 458 5.88%
Other 6.00% 130 8 6.15% 165 11 6.67%
------ ----- ----- ------ ----- ----
Total interest-bearing
liabilities 12,907 558 4.32% 12,932 592 4.58%
----- ---- ----- -----
Noninterest-bearing liabilities 4,445 3,789
Stockholders' equity 614 879
------ -------
Total $ 17,966 $ 17,600
======= ======
Net interest income and net yield
on interest-earning assets 879 5.61% 813 5.16%
==== ==== === =====
(1) Includes investment securities and Federal Reserve Bank stock.
(2) Includes loans for which the accrual of interest has been suspended.
</TABLE>
Net Income (loss) for the respective periods of 1997 and 1996 was ($1,167,000)
and ($555,000) which represents an increase in the net loss by $612,000 defined
by a combination of factors as described below.
Analysis of Changes in Interest Income and Interest Expense. Interest
income during 1997 was $1,437,000 as compared to $1,405,000 for 1996. This
marginal increase, although not indicative of future performance, does
demonstrate stabilization. Interest expense for this period was $558,000 for
1997, and $592,000 for 1996, which represents a decrease of $33,000, largely due
to the increased amount of non-interest deposits held by the Bank. The resultant
Net Interest Income was $879,000 in 1997 and $813,000 for 1996, reflecting an
increase of approximately $66,000.
The impact of the bank's strategies can be seen in the table titled
Analysis of Changes in Interest Income and Interest Expense for the periods
indicated. The table indicates changes in net interest income resulting either
from changes in average balances or to changes in average rates for earning
assets and interest-bearing liabilities. For each category of interest-earning
assets and interest-bearing liabilities, information is provided on changes
attributable to: (i) change in volume (change in volume multiplied by prior year
rate); (ii) change in rate (change in rate multiplied by prior year volume);
(iii) changes in rate/volume (change in rate multiplied by change in volume);
and (iv) total changes in rate and volume.
Southern Security Bank Corporation
Analysis of Changes in Interest Income and Interest Expense
<TABLE>
<CAPTION>
Year Ended December 31,
1997 vs. 1996 1996 vs. 1995
Increase (Decrease) Attributable to Increase (Decrease) Attributable to
-------------------------------------------------------------------------------------
Volume Rate Rate/Volume Net Volume Rate Rate/Volume Net
-------------------------------------------------------------------------------------
(Dollars in Thousands)
Interest income on:
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Investments $ (44) $ 1 $ 0 $ (43) $ 128 $ (4) $ (3) $ 121
Federal funds sold 38 1 1 40 (53) (32) 14 (71)
Loans receivable (15) 50 0 35 223 (22) (6) 195
----- ------ --- ------ ------ -------- ------ -----
Total interest income on
interest-earning assets (21) 52 1 32 298 (58) 5 245
----- ------ --- ------ ------ -------- ------ -----
Interest expense on:
NOW and money market accounts 8 1 0 9 (8) (35) 2 (41)
Savings accounts 3 (1) 0 2 (4) 1 0 (3)
Certificates of deposit (25) (18) 1 (42) 131 (16) (6) 109
Other (2) (1) 0 (3) 6 (2) (2) 2
----- ------ --- ------ ------ -------- ------ -----
Total interest expense on
interest-bearing liabilities (16) (19) 1 (34) 125 (52) (6) 67
----- ------ --- ------ ------ -------- ------ -----
Increase (decrease) in net
interest income $ (5) $ 71 $ 0 $ 66 $ 173 $ (6) $ 11 $ 178
===== ====== === ====== ===== ======== ==== =======
</TABLE>
Other Income and Expenses. Total other income was $142,000 during 1997
compared with $108,000 for 1996, which represents an improvement of $34,000 in
this category, but is not viewed by Management as indicative of any particular
trend or significance. Salaries and employee benefits totaled $1,228,000 and
$686,000 for 1997 and 1996 respectively, which represents a difference of
$542,000, which is largely attributed to settlement of amounts owed the two
principal officers of the Holding Company under the terms of their employment
agreements. Total other expenses were $843,000 and $788,000 for 1997 and 1996,
respectively, which represents a difference of $55,000, of which $57,000 was due
to the application of funds toward the regulatory approval procedures, travel
and professional fees associated with the merger with a shell public company,
Southern Security Financial Corporation.
Federal Income Taxes. At December 31, 1997, the Company had net operating
loss carry-forwards for Federal income tax purposes available to offset future
federal taxable income, in the amount of $7,674,000 with specific amounts
expiring each year from 2002 through the year 2012.
FINANCIAL CONDITION
Asset/Liability Management. A principal objective of the Bank's
asset/liability management strategy is to minimize the Bank's exposure to
changes in interest rates by matching the maturity and repricing horizons of
interest-earning assets and interest-bearing liabilities. This strategy is
overseen in part through the direction of the Asset and Liability Committee
(ALCO) of the Bank which establishes policies and monitors results to control
interest rate sensitivity.
ALCO examines the extent to which its assets and liabilities are interest
rate sensitive and monitors the Bank's interest rate sensitivity GAP. An asset
or liability is considered to be interest rate-sensitive if it will be repriced
or mature within the time period analyzed, usually one year or less. The
interest rate sensitivity GAP is the difference between interest-earning assets
and interest-bearing liabilities scheduled to mature or reprice within such time
periods. A GAP is considered positive when the amount of interest rate-sensitive
assets is greater than the amount of interest rate-sensitive liabilities. The
GAP is considered negative when the amount of interest rate-sensitive assets is
less than the amount of interest rate-sensitive liabilities. During a period of
rising interest rates, a positive GAP would tend to result in an increase in net
interest income; and a negative GAP would tend to adversely affect net interest
income. Conversely, during a period of falling interest rates, a negative GAP
would tend to result in an increase in net interest rates, while a positive GAP
would tend to adversely affect net interest income.
If the repricing of the Bank's assets and liabilities were equally
flexible and moved concurrently, the impact of any increases or decreases in
interest rates on net interest income would be minimal. However, as commercial
banking companies generally have a significant quantity of their earning assets
in Rate-Over-Prime, rate-adjusted-day-of-change earning assets, GAP management
is critical, as very few, if any, rate-sensitive liabilities (deposit accounts)
adjust at such a rapid frequency.
The ALCO committee evaluates the Bank's GAP position, and stratifies these
results according to how often the repayment of particular assets and
liabilities are impacted by changes in interest rates. Additionally, income
associated with interest-earning assets and costs associated with
interest-bearing liabilities may not be affected uniformly by changes in
interest rates; thus, the magnitude and duration of changes in interest rates
may have a significant impact on net interest income. For example, although
certain assets and liabilities may have similar maturities or periods of
repricing, they may react in different degrees to changes in market interest
rates. Interest rates on certain types of assets and liabilities fluctuate in
advance of changes in general market interest rates, while interest rates on
other types of assets and liabilities may lag behind changes in general market
rates. Additionally, certain types of earning assets (variable rate mortgage
loans, for example) may have interest caps which may limit level of
rate-increases, even though general market interest rates increase. The
management of GAP is further complicated by asset (loan) prepayment and/or early
withdrawal of liabilities (deposits). In volatile interest rate markets the
level of assets and liabilities assumed by bank managers may not have accounted
for the deviation that has occurred in the unpredictable interest rate
environment.
Therefor, Bank management and the ALCO committee's strategy are to
maintain a balanced interest rate risk position to protect its net interest
margin from market fluctuations. They review on at least a monthly basis, the
maturity and repricing of assets and liabilities for the various time period
traunches considered. The Bank's ALCO policy limits for GAP and the Bank's
position with respect to various time traunches are:
(Total Rate-Sensitive Assets, RSA)/(Total Rate Sensitive Liabilities, RSL)
= 0.80 to 1.20, the Bank is at 1.26.
RSA/RSL (0 to 365 days) = 0.80 to 1.20, the Bank is at 0.67. RSA/RSL (0 to
90 days) = 0.80 to 1.20, the Bank is at 1.22. RSA/RSL (91-365 days) = 0.80
to 1.20, the Bank is at 0.25.
0 to 365 day GAP/Total Assets = +or-10%, the Bank is at (-19.71%). 0 to 90
day GAP/Total Assets = +or-10%, the Bank is at +5.62%.
91 to 365 day GAP/Total Assets = +or-10%, the Bank is at (-25.33%).
The Bank's view of these GAP positions is as follows:
i. Total RSA/Total RSL Ratio: Out of "Target" of .80 to 1.20 at
1.26. Rate sensitive assets currently outweigh rate sensitive
liabilities. Management is pursuing a program to obtaining
additional rate sensitive liabilities at an accelerated pace
to that of assets. This is accomplished through repricing
opportunities as well as occasions to amend maturities.
ii. RSA/RSL - 0 to 365 Day: Out of Target of .80 - 1.20 at 0.67%.
The most applicable and currently achievable strategy is to
further increase the core deposit base within this time
horizon.
iii. RSA/RSL - 0 to 90 Day: Out of Target of .80 - 1.20 at 1.22%.
The most applicable and currently achievable strategy is to
further increase the core deposit base within this time
horizon.
iv. RSA/RSL - 91 - 365 Day: Out of Target of .80 - 1.20 at 0.25%.
The most applicable and currently achievable strategy is to
further increase the core deposit base within this time
horizon.
v. 0 - 365 Day GAP/Total Assets Month End: Out of Guideline of
-10% through +10% at -19.71%. The most applicable and
currently achievable strategy is to increase investments in
higher yielding loans which will reprice outside the 12
month horizon.
vi. 0 - 90 Day GAP/Total Assets Month End: Out of Target of -10%
through +10% at 13.21%. This category is a component of
numeral 5 above and is interrelated with numeral 6 above,
however, are inverted. The most applicable and currently
achievable strategy is to increase investments in higher
yielding loans which will reprice from within 4 to 12 months.
vii. 91-365 Day GAP/Total Assets Month End: Out of Target of -10%
through +10% at - 25.33%. This category is a component of
numeral 5 above and is interrelated with numeral 6 above,
however, are inverted. The most applicable and currently
achievable strategy is to increase investments in higher
yielding loans which will reprice from within 4 to 12 months.
Loan Maturity Schedule: The following schedule sets forth the time to
contractual maturity of the Bank's loan portfolio at December 31, 1997. Loans
which have adjustable rates and fixed rates are all shown in the period of
contractual maturity. Demand loans, loans having no contractual maturity and
overdrafts are reported as due in one year or less.
<TABLE>
<CAPTION>
One year One to Over Home
Total or Less Five Years Five Years Nonaccrual Equity
Residential Real Estate
<S> <C> <C> <C> <C> <C> <C>
Fixed rate $ 1,691,741 $ 0 $ 315,378 $ 1,361,363 $ 15,000 $ 0
Adjustable rate 1,485,981 0 370,896 1,115,085 0 0
Consumer
Fixed rate 3,092,577 9,395 3,083,182 0 0 0
Adjustable rate 170,482 64,967 105,515 0 0 0
Commercial
Fixed rate 663,679 183,313 190,294 290,072 0 0
Adjustable rate 2,636,594 1,828,950 807,644 0 0 0
Commercial Real Estate
Fixed rate 586,738 74,518 121,242 390,978 0 0
Adjustable rate 2,313,072 228,805 1,079,882 561,891 0 442,494
Other 43,193 43,193 0 0 0 0
$ 12,684,057 $ 2,433,141 $ 6,074,033 $ 3,719,389 $ 15,000 $ 442,494
Add deferred loan costs 68,023
$ 12,752,080
</TABLE>
Fixed rate loans due after one year total approximately $5.8 million and
adjustable rate loans due after one year total approximately $4.0 million.
Adjustable rate loans which reprice after December 31, 1998 total approximately
$117,000 at December 31, 1997.
The Bank extends credit with terms, rates and fees commensurate with those
in its market place for like types of credit. Loan maturities may positively or
negatively impact the Bank's GAP position and, ultimately, its profitability.
Securities Portfolio. The Company's investment securities portfolio
consists of high quality securities. The Company utilized buying opportunities
during the last two years to extend the average life of its investment
portfolio. The maturity distribution of the securities portfolio is reflected in
the following Table of Maturities of Investment Securities. The average
yield/rate for the Company's investment portfolio decreased from 6.83% in 1996
to 6.73% at December 31, 1997.
Southern Security Bank Corporation
Maturities of Investment Securities
December 31, 1997
<TABLE>
<CAPTION>
One Year of Less Through Five Years Through Ten Years After Ten Years Total
---------------- ------------------ ----------------- --------------- -----
Weighted Weighted Weighted Weighted Weighted
Carrying Average Carrying Average Carrying Average Carrying Average Carrying Average
Value Yield Value Yield Value Yield Value Yield Value Yield
(Dollars in Thousands)
U.S. Treasury Securities
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Held to maturity $ -- --% $ 246,867 6.51% $ -- --% $ -- --% $ 246,867 6.51%
Available for Sale -- -- -- -- -- -- -- -- -- --
Mortgage-backed securities
Held to maturity $ -- --% -- -- 150,856 7.50 530,354 6.35 681,210 6.60
Available for Sale -- -- -- -- -- -- 380,094 6.68 380,094 6.68
U.S. government corporations
and agencies:
Held to maturity -- -- -- -- 399,417 6.40 500,000 7.33 899,417 6.92
Available for Sale -- -- -- -- -- -- -- -- -- --
------ ---- -------- ----- ------- ---- --------- ---- ------- ----
Total $ -- --$ $ 246,867 6.51% $ 550,273 6.70% $1,410,448 6.78% $2,207,588 6.73%
====== ==== ======== ==== ======== ==== ========= ==== ========= ====
</TABLE>
<PAGE>
Asset Quality. The Bank's management seeks to maintain a high quality of
assets through conservative underwriting and sound lending practices. The
earning asset portfolio (exclusive of investment securities) is generally split
into five categories, four of which are types of loans, and the fifth is
accounts receivable purchase financing. Loan concentrations are defined as loan
outstanding that are segregated into similar collateral types and/or nature of
cash-flow income generation, which may cause a correspondingly similar impact
with a particular economic or other condition. The Company/Bank routinely
monitors these concentrations in order to make necessary adjustments in its
lending practices that most clearly reflect the economic conditions and trends,
loan ratios, loan covenants, asset valuations, and industry trends.
Displayed below are the percentages of the total portfolio for the past
two years for the period ending December 31, 1997 and December 31, 1996:
1997 1996
Commercial Loans to businesses: 22% 27%
Consumer & Installment Loans: 26% 8%
Residential Mortgage Loans: 25% 31%
Commercial Mortgage Loans: 23% 29%
Accounts Receivable financing: 4% 4%
In an effort to maintain the quality of the loan portfolio management
seeks to minimize higher risk loans. In view of the relative significance of
real estate related loans, a downturn in the value of the value of real estate
property, could have an adverse impact on the Company's profitability. As part
of the Bank's loan policy and loan management strategy, the Bank typically
limits its loan-to-value ratio to a maximum of 50%-80% depending on the type of
real property secured thereby. The use of qualified third party certified
appraisers for property valuations, and property inspections by knowledgeable
bank officials helps mitigate real property loan risks.
The Directors Loan and Discount Committee for the Bank concentrates its
efforts and resources, and that of its senior management and lending officers,
on loan review and underwriting procedures and
standards. Internal controls include ongoing reviews of loans made to monitor
documentation and ensure the existence and valuations of collateral, early
detection of loan degradation, and regional economic conditions.
Classification of Assets. Generally, interest on loans is accrued and
credited to income based on the outstanding balance of the contract obligations
of each loan/receivable contract. It is the Bank's policy to discontinue the
accrual of interest income and classify loan(s)/asset(s) as non-accrual when
principal or interest is past-due 90 days or more and/or the loan is not
properly/adequately collateralized, or if in the belief of Bank management
principal and/or interest is not likely to be paid accordance with the terms of
the obligation/documentation. As of December 31, 1997 delinquent loans greater
than 30 and less than 90 days (excluding Government Guaranteed) totaled
$241,000; Classified loans totaled $24,000; and Other Real Estate Owned
(consisting of 5 condominium units) totaled $406,000.
<PAGE>
The following table sets forth information with respect to nonperforming assets
identified by the Bank, including nonaccrual loans, loans past due 90 days or
more and still accruing and real estate owned at December 31, 1997 and 1996.
<TABLE>
<CAPTION>
1997 1996
(Dollars in Thousands)
--------------------------------
Nonaccrual loans
<S> <C> <C>
Real estate $ 15 $ 48
Installment 0 8
Accrual loans - Past Due 90 days or more
Real estate 513* 98
Installment 22 0
Restructured loans 0 0
Real estate owned 406 490
Total nonperforming assets $ 956 $ 644
</TABLE>
* - Consists of two purchased loan participations which are 100% guaranteed
by United States government agencies.
Total non performing assets have increased in 1997 from 1996 by $312,000
(48%); however, the Bank's exposure to loss has been reduced. Nonaccrual loans
decreased by $41,000 (73%), and real estate owned decreased by $84,000 (17%).
Accrual loans over 90 days increased by $437,000 (346%). Management believes
that the exposure to loss is substantially mitigated as the $513,000 real estate
loans for 1997 are guaranteed by United States government agencies.
Allowances for Loan Losses, the reserve, is established though a provision
for loan losses charged to operations. Loans are charged against the allowance
for loan losses when management believes that the collection of the principal is
unlikely. Subsequent recoveries are added to the allowance. The allowance is an
amount that management believes will be adequate to absorb possible losses
inherent in existing loans and loan commitments, based on evaluations of
collection and prior loss experience. Management evaluates the adequacy of the
allowance monthly, or more frequently as necessary. The evaluation takes into
consideration such factors as changes in the nature and volume of the loan
portfolio, overall portfolio quality, loan concentrations, specific identified
problem assets/loans, and current anticipated economic conditions that may
effect the borrower's ability to fulfill its contractual commitment(s). As of
December 31, 1997, the Bank has set a conservative loan loss percentage at no
less than 1.53% of total loan portfolio balance.
For comparative purposes, in demonstration of Bank's clean-up efforts
since the change of control date, in the following table the right most column
shows year end, December 31, 1992 prior to ownership and control by the Company,
and the left column shows the Bank as of December 31, 1997:
12/31/97 12/31/92
Ending Balance Loan Loss Reserve $289,000 $ 619,000
Loan Portfolio Charge-Offs 41,000 593,000
Classified Loans 24,000 3,004,000
Other Real Estate Owned 406,000 967,000
------- -------
Total Classified Assets 430,000 3,971,000
Percent Classified to Total Loans 3.4% 48.5%
The following table sets forth the composition of the allowance for loan losses
by type of loan at the dates indicated. The allowance is allocated to specific
categories of loans for statistical purposes only, and may be applied to loan
losses incurred in any loan category.
<TABLE>
<CAPTION>
1997 1996
Amount of Amount of
Amount of Loans to Amount of Loans to
Allowance Gross Loans Allowance Gross Loans
(Dollars in Thousands)
<S> <C> <C> <C> <C>
Commercial $ 72,852 26.02% $ 53,688 31.43%
Commercial Real Estate 64,012 22.86% 49,274 28.85%
Residential Real Estate 77,647 25.05% 77,561 31.32%
Consumer 73,338 25.73% 14,763 7.90%
Other 953 0.34% 854 0.50%
Total allowance for loan losses $ 288,802 100.00% $ 196,140 100.00%
</TABLE>
Liabilities and Stockholders' Equity: The Liability side of the balance
sheet has great significance to the profitable operation of a banking company.
Deposits are the major source of the Bank's funds for lending and other
investment activities. Deposits are attracted principally from within the Bank's
primary market area through the offering of a broad variety of deposit
instruments including checking accounts, money market accounts, regular savings
accounts and certificates of deposits (known as CD's). Maturity terms, service
fees and withdrawal penalties are established by the Bank on a periodic basis.
The determination of rates and terms is predicated on funds acquisition and
liquidity requirements, rates paid by competitors, growth goals and Federal
regulations.
Federal Regulations promulgated by the FDIC pursuant to the Federal
Deposit Insurance Company Improvement Act of 1991, place limitations in the
ability of certain insured depository institutions to accept, renew, or rollover
deposits by offering rates of interest which are significantly higher than the
prevailing rates of interest on deposits offered by other insured depository
institutions having the same type of Charter in the institution's market area.
The following table sets forth the Deposit base of the Bank at the close of
business on December 31, 1997 and December 31, 1996 displayed in thousands (000
omitted). The Company views the deposit base as good core deposit base that is
stable and improving. Non-interest bearing transaction accounts are on a demand
basis, and as such, balances continually fluctuate. Such was the case as
reflected on the last business day illustrated in the table below. In 1997 the
non-interest bearing transaction balances were at a low on the last business day
while in 1996 they were at a peak on the last business day. For the year 1996,
total deposits averaged $16.2 million compared to the 1997 average of $17.9
million.
12/31/97 12/31/96
Total non-interest bearing transaction accounts $ 3,975 $ 5,847
Total interest bearing transaction accounts 5,293 4,752
Total Savings and Time Deposits 6,407 7,657
------------------------------- ------- -------
Total for all Deposits accounts $15,675 $18,256
The following table sets forth information with respect to the return on assets
and the return on equity for the years ending December 31, 1997 and 1996, and
the ratio of average equity to average assets for those years.
1997 1996
(Dollars in Thousands)
-----------------------------
Net loss $ (1,167) $ (555)
Average total assets 17,966 17,600
Average total equity 614 879
Return on average assets (6.5)% (3.2)%
Return on average equity (190.1)% (63.1)%
Equity to assets ratio 3.4% 5.0 %
There were no dividends declared in the years ended December 31, 1997 and 1996.
The Company's net loss increased by $612,000 (103%) in 1997 due to the
settlement of compensation due to executive officers under the terms of their
employment agreements and a substantial provision for loan losses. The increased
provision for loan losses of $122,000 reflected the expectation loan growth, not
the degradation of the loan portfolio.
<PAGE>
Equity and Capital Resources. The Bank is subject to various regulatory
capital requirements administered by Federal and State banking authorities.
Failure to meet minimum capital requirements can initiate certain mandatory and
possible additional discretionary actions by regulators that, if not undertaken,
could have a direct material effect on the Bank's financial statements and
operation. Under capital adequacy guidelines and the regulatory framework for
prompt corrective action, the Bank must meet specific capital guidelines that
involve quantitative measures of the Bank's assets, liabilities, and certain
off-balance sheet items as calculated under regulatory accounting policies.
The Bank's capital accounts and classifications are also subject to
qualitative judgements by the regulators about components, risk weighting, and
other factors. Quantitative and qualitative measures established by regulation
to ensure capital adequacy require the Bank to maintain minimum amounts and
ratios, set forth in the table below, of total and Tier-1 capital, as defined by
regulation, to risk weighted assets, and of Tier-1 capital to average assets.
Management believes that as of December 31, 1997 it has met the capital adequacy
requirements as defined by these definitions.
However, the Bank in its written agreement with the regulators has agreed
to attempt to maintain a 6.25% ratio of capital to total assets, which was at
5.08% at December 31, 1997. The third column below with the indication
Adequately is that regulatory definition for an Adequately Capitalized banking
institution. The right column below with the indication well is that regulatory
definition for a Well Capitalized banking institution.
Regulatory Definition for each Capital Tier category SSB Adequately Well
Tier-2 Capital = Tier-2 Cap/Risk Weighted Assets 8.9% 8.00% 10.0%
Tier-1 Risk = Tier-1 Cap/Risk Weighted Assets 7.6% 4.00% 6.0%
Tier-1 Leverage = Tier-1 Cap/Avg Quarterly Assets 5.0% 4.00% 5.0%
In December 1997 the Company commenced a private offering of $5,000,000 of
common stock. The primary purpose of the offering is to provide additional
capital to the Bank so that it may grow its base of earning assets, and achieve
stabilized profitability, a condition which does not presently exist. Without
the injection of additional capital into the Bank, it is unlikely that adequate
profitability can be achieved, although the Bank expects to be very close to
break-even operation within the first quarter of 1998.
Effect of Government Policy, Future Legislation and Changing Financial Markets
One of the primary determinants of the Company's future success and
profitability is the interest rate differentials obtained by its affiliate
banking institutions. The Bank's earning capacity will be largely controlled by
the difference between the interest rate paid on its deposits and other
borrowing and the interest rates received on loans to customers and securities
held in its investment portfolio. The value and yields of its assets and the
rate paid on its liabilities are sensitive to changes in prevailing rates of
interest. Consequently, the earnings and growth of the Company will be
influenced by general economic
conditions, the monetary and fiscal policies of the federal government and
policies of regulatory agencies which implement national monetary policy. The
nature and impact of any future changes in monetary policies cannot be
predicted. The entire regulatory environment which controls the banking industry
in the United States is undergoing significant change, both as to the banking
industry itself and the permissible competition between banks and non-banking
financial institutions. There have been significant regulatory changes in the
areas of bank mergers and acquisitions, the products and services offered by
banks and the non-banking activities in which bank holding companies may engage.
Partly as a result of such changes, banks are now actively competing with other
types of depository institutions and with non-bank financial institutions such
as money market funds, brokerage firms, insurance companies and other financial
services organizations. It is not possible at this time to assess what impact
these changes will ultimately have on the Company and its operations. Certain
legislative and regulatory proposals that could affect the Company are pending,
or may be introduced, in the United States Congress, the Florida legislature and
various other governmental agencies. These proposals could further alter the
structure, regulation and competitive relationship of financial institutions and
may subject the Company to increased regulation, disclosure and reporting
requirements. In addition, the various banking regulatory agencies frequently
propose rules and regulations to implement and enforce already existing
legislation. It cannot be predicted whether or in what form any future
legislation or regulations will be enacted or to the extent to which the
business of the Company will be affected by such matters.
Year 2000
The Company is aware that many existing computer programs use only two
digits to identify a year in the date field. These programs were designed and
developed without considering the impact of the upcoming change of the century.
If not corrected, many computer applications could fail or create erroneous
results by or at Year 2000.
The Company has commenced a thorough review of the potential impacts of the
Year 2000 problem on its operations and financial condition. The Company expects
to incur minimal internal staff costs and other expenses in the execution of its
implementation plan for Year 2000 compliance. It is the Company's intention to
have all mission critical programs updated and tested for Year 2000 compliance
by December 31, 1998. Management reports progress on its compliance program to
the Board of Directors at least quarterly.
Item 7. Financial Statements
SOUTHERN SECURITY BANK CORPORATION
AND SUBSIDIARY
CONSOLIDATED FINANCIAL REPORT
DECEMBER 31, 1997
<PAGE>
INDEPENDENT AUDITOR'S REPORT
To the Board of Directors and Stockholders
Southern Security Bank Corporation and Subsidiary
Boca Raton, Florida
We have audited the accompanying consolidated balance sheets of Southern
Security Bank Corporation and subsidiary as of December 31, 1997 and 1996, and
the related consolidated statements of operations, stockholders' equity, and
cash flows for the years then ended. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audits 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 financial position of Southern Security
Bank Corporation and subsidiary as of December 31, 1997 and 1996, and the
results of their operations and their cash flows for the years then ended in
conformity with generally accepted accounting principles.
s/McGladrey & Pullen, LLP
Fort Lauderdale, Florida
March 24, 1998, except for the last
paragraph of Note 16 as to which
the date is April 30, 1998.
<PAGE>
SOUTHERN SECURITY BANK CORPORATION AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
December 31, 1997 and 1996
ASSETS 1997 1996
- -------------------------------------------------------------------------
Cash and due from banks (Note 3) $ 1,107,669 $ 3,005,602
Federal funds sold -- 1,231,000
----------------------------------
Total cash and cash equivalents 1,107,669 4,236,602
Securities held to maturity (Note 4) 1,827,494 2,108,882
Securities available for sale (Note 4) 380,094 1,377,545
Federal Reserve Bank stock, at cost 63,100 59,500
Loans, net (Notes 5, 13 and 17) 12,463,278 11,414,773
Premises and equipment (Note 6) 399,799 430,275
Other real estate owned 406,298 489,804
Accrued interest receivable 125,870 106,715
Other assets 158,360 96,896
----------------------------------
$ 16,931,962 $ 20,320,992
----------------------------------
See Notes to Consolidated Financial Statements.
<PAGE>
<TABLE>
<CAPTION>
LIABILITIES AND STOCKHOLDERS' EQUITY
1997 1996
- ---------------------------------------------------------------------------------------
Liabilities:
<S> <C> <C>
Noninterest-bearing deposits $ 3,974,999 $ 5,847,168
Interest-bearing deposits (Note 7) 11,700,313 12,409,035
----------------------------------
Total deposits 15,675,312 18,256,203
Federal funds purchased 206,000 --
Securities sold under repurchase agreements -- 750,000
Notes Payable (Note 9) 100,000 250,000
Other liabilities 452,550 305,805
----------------------------------
Total liabilities 16,433,862 19,562,008
----------------------------------
Commitments and contingencies (Notes 14 and 17) -- --
Minority interest in subsidiary 25,270 37,816
----------------------------------
Stockholders' equity (Notes 2, 10, 11, and 15):
Series A voting convertible preferred stock,
$.01 par value; $1.50 liquidation value;
1,200,000 shares authorized; issued
and outstanding 1997 none
1996 596,622 shares -- 5,966
Class A voting common stock, $.01 par value;
30,000,000 1,644,988
shares authorized; issued and outstanding 1997
4,299,673 shares; 1996 9,856,664 shares 42,997 98,567
Class B Non-Voting Convertible common stock,
$.01 par value; 5,000,000 shares authorized;
none issued and outstanding -- --
Capital surplus 4,215,371 3,259,822
Accumulated (deficit) (3,786,230) (2,619,576)
----------------------------------
472,138 744,779
Unrealized gain (loss) on securities available
for sale, net (Note 4) 692 (23,611)
----------------------------------
Total stockholders' equity 472,830 721,168
----------------------------------
$ 16,931,962 $ 20,320,992
----------------------------------
</TABLE>
<PAGE>
SOUTHERN SECURITY BANK CORPORATION AND SUBSIDIARY
<TABLE>
<CAPTION>
CONSOLIDATED STATEMENTS OF OPERATIONS
Years Ended December 31, 1997 and 1996
1997 1996
- -----------------------------------------------------------------------------------------
Interest income:
<S> <C> <C>
Interest and fees on loans $ 1,113,375 $ 1,077,786
Interest and dividends on securities 237,029 280,152
Interest on federal funds sold 86,653 46,831
----------------------------------
1,437,057 1,404,769
Interest expense 558,451 591,883
----------------------------------
Net interest income 878,606 812,886
Provision for loan losses (Note 5) 130,000 8,000
----------------------------------
Net interest income after
provision for loan losses 748,606 804,886
----------------------------------
Other income:
Service charges on deposit accounts 98,959 70,062
Securities gains (losses), net (Note 4) 753 (6,697)
Other 42,516 44,162
----------------------------------
Total other income 142,228 107,527
----------------------------------
Other expenses:
Salaries and employee benefits 1,227,901 685,646
Occupancy and equipment 338,750 333,710
Data and item processing 78,926 75,274
Professional fees 86,850 48,483
Insurance 87,861 77,709
Other 250,641 253,411
----------------------------------
Total other expenses 2,070,929 1,474,233
----------------------------------
Net (loss) before minority interest in
net loss of subsidiary (1,180,095) (561,820)
Minority interest in net loss of subsidiary 13,441 6,481
----------------------------------
Net (loss) $ (1,166,654) $ (555,339)
----------------------------------
Basic and diluted earnings
per share (Note 12) $ (0.31) $ (0.20)
----------------------------------
</TABLE>
<PAGE>
See Notes to Consolidated Financial Statements.
<TABLE>
<CAPTION>
SOUTHERN SECURITY BANK CORPORATION AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
Years Ended December 31, 1997 and 1996
Preferred Stock Common Stock
------------- -------------
Shares Amount Shares Amount
- ----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Balance, December 31, 1995 1,002,624 $ 10,026 8,893,442 $ 88,934
Net (loss) - - - -
Issuance of stock in private
placements 29,558 296 527,662 5,277
Conversion of preferred
stock (Note 10) (435,560) (4,356) 435,560 4,356
Net change in unrealized gain (loss) on
securities available for sale (Note 4) - - - -
--------------------------------------------------------
Balance, December 31, 1996 596,622 5,966 9,856,664 98,567
Net (loss) - - - -
Issuance of stock in private
placements - - 884,859 8,849
Issuance of stock in settlement of
certain liabilities (Notes 9 and 11) - - 595,120 5,951
Conversion of preferred
stock (Note 10) (596,622) (5,966) 596,622 5,966
Preferred stock dividends - - 197,178 1,972
Reverse acquisition (Note 2) - - (7,830,770) (78,308)
Net change in unrealized gain (loss) on
Securities available for sale (Note 4) - - - -
--------------------------------------------------------
Balance, December 31, 1997 - $ - 4,299,673 $ 42,997
--------------------------------------------------------
</TABLE>
See Notes to Consolidated Financial Statements.
Unrealized
Gain
(Loss)
on
Securities
Paid-In Accumulated Available for
Capital (Deficit) Sale, Net Total
- -------------------------------------------------------------
$ 2,933,995 $ (2,064,237) $ 17,059 $ 985,777
- (555,339) - (555,339)
325,827 - - 331,400
- - - -
- - (40,670) (40,670)
- -------------------------------------------------------------
3,259,822 (2,619,576) (23,611) 721,168
- (1,166,654) - (1,166,654)
522,067 - - 530,916
351,121 - - 357,072
- - - -
(1,972) - - -
84,333 - - 6,025
- - 24,303 24,303
- -------------------------------------------------------------
$ 4,215,371 $ (3,786,230) $ 692 $ 472,830
- -------------------------------------------------------------
<PAGE>
SOUTHERN SECURITY BANK CORPORATION AND SUBSIDIARY
<TABLE>
<CAPTION>
CONSOLIDATED STATEMENTS OF CASH FLOWS
Years Ended December 31, 1997 and 1996
1997 1996
- -------------------------------------------------------------------------------------------------------------
Cash Flows From Operating Activities
<S> <C> <C>
Net (loss) $ (1,166,654) $ (555,339)
Adjustments to reconcile net (loss) to net cash used in
operating activities:
Net (accretion) on securities (7,452) (1,931)
Provision for loan losses 130,000 8,000
Depreciation and amortization 76,406 65,254
Securities (gains) losses, net (753) 6,697
Minority interest in net loss of subsidiary (13,441) (6,481)
Issuance of common stock
as compensation for officers 207,072 --
Decrease (increase) in:
Accrued interest receivable (19,155) 23,939
Other assets (55,439) 21,105
Increase in other liabilities 146,745 36,235
----------------------------------
Net cash (used in) operating activities (702,671) (402,521)
----------------------------------
Cash Flows From Investing Activities
Net cash flows from securities (Note 18) 1,308,642 1,468,876
Loan originations and principal collections on loans 1,335,699 (289,132)
Purchases of loans (2,514,204) (1,790,534)
Purchase of premises and equipment (45,930) (56,373)
Proceeds from sale of other real estate owned 83,506 --
----------------------------------
Net cash provided by (used in) investing activities 167,713 (667,163)
----------------------------------
Cash Flows From Financing Activities
Net increase (decrease) in federal funds purchased
and securities sold under repurchase agreements (544,000) 750,000
Net increase (decrease) in deposits (2,580,891) 1,820,024
Proceeds from issuance of stock 530,916 331,400
----------------------------------
Net cash provided by (used in) financing activities (2,593,975) 2,901,424
----------------------------------
Increase (decrease) in cash and cash equivalents (3,128,933) 1,831,740
Cash and cash equivalents
Beginning 4,236,602 2,404,862
----------------------------------
Ending $ 1,107,669 $ 4,236,602
----------------------------------
</TABLE>
See Notes to Consolidated Financial Statements.
<PAGE>
SOUTHERN SECURITY BANK CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- -------------------------------------------------------------------------------
Note 1. Summary of Significant Accounting Policies
Description of business: Southern Security Bank Corporation (the "Company")
provides a full range of banking services to individual and corporate customers
in Southeast Florida through its subsidiary bank.
Basis of presentation: The financial statements of Southern Security Bank
Corporation and its subsidiary have been prepared in conformity with generally
accepted accounting principles and conform to predominate practice within the
banking industry. In preparing the financial statements, the Company's
management is required to make estimates and assumptions which significantly
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.
Significant estimates which are particularly susceptible to change in a short
period of time include the determination of the allowance for loan losses and
the fair value of securities. Actual results could differ from those estimates.
Principles of consolidation: The accompanying consolidated financial statements
include the accounts of Southern Security Bank Corporation and its
majority-owned subsidiary, Southern Security Bank (the "Bank"). All significant
intercompany balances and transactions have been eliminated in consolidation.
Cash and cash flows: Cash and cash equivalents includes cash and due from banks,
and federal funds sold. For purposes of reporting cash flows, loans, deposits,
federal funds purchased and securities sold under repurchase agreements are
reported net. The Bank maintains deposits with financial institutions which are
in excess of federally insured amounts.
Securities held to maturity: Debt securities for which the Bank has both the
positive intent and ability to hold to maturity are classified as held to
maturity and reported at amortized cost. Amortization of premiums and accretion
of discounts, computed by the interest method over their contractual lives, is
included in interest income.
Securities available for sale: Securities classified as available-for-sale are
those debt securities that the Bank intends to hold for an indefinite period of
time, but not necessarily to maturity. Any decision to sell a security
classified as available-for-sale would be based on various factors, including
significant movements in interest rates, changes in the maturity mix of the
Bank's assets and liabilities, liquidity needs, regulatory capital
considerations, and other similar factors.
Securities available for sale are reported at fair value with unrealized gains
or losses reported as a separate component of stockholders' equity, net of the
related deferred tax effect. The amortization of premiums and accretion of
discounts, computed by the interest method over the contractual lives of the
applicable securities are included in interest income. Realized gains or losses,
determined on the basis of the cost of specific securities sold, are included in
earnings.
Declines in the fair value of individual securities classified as either held to
maturity or available for sale below their amortized cost that are determined to
be other than temporary result in write-downs of the individual securities to
their fair value with the resulting write-downs included in current earnings as
realized losses.
Loans: Loans receivable that management has the intent and ability to hold for
the foreseeable future or until maturity or payoff are stated at the amount of
unpaid principal, plus unamortized premiums, net loan origination fees and
costs, and an allowance for loan losses.
Loan origination and commitment fees and certain direct loan origination costs
are being deferred and recognized over the expected life of the related loan as
an adjustment of yield. The Bank is generally amortizing these amounts over the
contractual life using the interest method. Commitment fees based upon a
percentage of a customer's unused line of credit and fees related to standby
letters of credit are recognized over the commitment period.
Interest on loans is calculated by using the simple interest method on daily
balances of the principal amount outstanding. For impaired loans, accrual of
interest is discontinued on a loan when management believes, after considering
collection efforts and other factors, that the borrower's financial condition is
such that collection of interest is doubtful. Interest income is recognized on
those loans only upon receipt. Accrual of interest is generally resumed when the
customer is current on all principal and interest payments.
A loan is impaired when it is probable the Bank will be unable to collect all
contractual principal and interest payments due in accordance with the terms of
the loan agreement. Impaired loans are measured based on the present value of
expected future cash flows discounted at the loan's effective interest rate or,
as a practical expedient, at the loan's observable market price or the fair
value of the collateral if the loan is collateral dependent. The amount of
impairment, if any, and any subsequent changes are included in the allowance for
loan losses.
The allowance for loan losses is established through a provision for loan losses
charged to expense. Loans are charged against the allowance for loan losses when
management believes that collectibility of the principal is unlikely. The
allowance is an amount that management believes will be adequate to absorb
estimated losses on existing loans, based on an evaluation of the collectibility
of loans and prior loss experience. This evaluation also takes into
consideration such factors as changes in the nature and volume of the loan
portfolio, overall portfolio quality, review of specific problem loans, and
current economic conditions that may affect the borrower's ability to pay. While
management uses the best information available to make its evaluation, future
adjustments to the allowance may be necessary if there are significant changes
in economic conditions.
Premises and equipment: Premises and equipment are stated at cost less
accumulated depreciation. Depreciation is computed principally by the
straight-line methods over the following estimated useful lives:
Years
-------------
Leasehold improvements 5 - 10
Furniture and equipment 3 - 12
Other real estate owned: Real estate acquired through foreclosure or deed in
lieu of foreclosure represents specific assets to which the Company has acquired
legal title in satisfaction of indebtedness. Such real estate is recorded at the
property's fair value at the date of foreclosure (cost). Initial valuation
adjustments, if any, are charged against the allowance for loan losses. Property
is evaluated regularly to ensure the recorded amount is supported by its current
fair value and valuation allowances to reduce the carrying amount to fair value
less estimated cost to dispose are recorded as necessary. Revenues and expenses
related to holding and operating these properties are included in operations.
Income taxes: Deferred taxes are provided on a liability method whereby deferred
tax assets are recognized for deductible temporary differences, and operating
loss or tax credit carryforwards and deferred tax liabilities are recognized for
taxable temporary differences. Temporary differences are the differences between
the reported amounts of assets and liabilities and their tax bases. Deferred tax
assets are reduced by a valuation allowance when, in the opinion of management,
it is more likely than not that some portion or all of the deferred tax assets
will not be realized. Deferred tax assets and liabilities are adjusted for the
effects of changes in tax laws and rates on the date of enactment.
Off-balance sheet instruments: In the ordinary course of business, the Bank has
entered into off-balance sheet financial instruments consisting of commitments
to extend credit and standby letters of credit. Management assesses the risks
related to those instruments for potential losses on an ongoing basis.
Transfers of receivables: The Financial Accounting Standards Board has issued
Statement No. 125, Accounting for Transfers and Servicing of Financial Assets
and Extinguishment of Liabilities, which is effective for transfers of
receivables occurring after December 31, 1996. The Statement does not permit
earlier or retroactive application. The Statement distinguishes transfers of
financial assets that are sales from transfers that are secured borrowings. A
transfer of financial assets in which the transferor surrenders control over
those assets is accounted for as a sale to the extent that consideration other
than beneficial interests in the transferred assets is received in exchange. For
transfers that are not accounted for as sales, the Statement requires that
debtors reclassify financial assets pledged as collateral and that secured
parties recognize those assets and their obligation to return them in certain
circumstances in which the secured party has taken control of those assets.
Earnings per share: The FASB has issued Statement No. 128, Earnings per Share,
which supersedes APB Opinion No. 15. Statement No. 128 established revised
standards for the computation and presentation of earnings per share and applies
to all entities that have common stock or potential common stock, such as
options, warrants and convertible securities, outstanding that trade in a public
market. Other entities which choose to present earnings per share in their
financial statements must also apply the provisions of this Statement. Those
entities that have only common stock outstanding are required to present basic
earnings per-share amounts. (Basic per-share amounts are computed by dividing
net income (the numerator) by the weighted-average number of common shares
outstanding (the denominator). All other entities are required to present basic
and diluted per-share amounts. Diluted per-share amounts assume the conversion,
exercise or issuance of all potential common stock instruments unless the effect
is to reduce the loss or increase the income per common share from continuing
operations.
The Company initially applied Statement No. 128 for the year ended December 31,
1997 and, as required by the Statement, has restated all per share information
for the prior years to conform to the Statement.
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 balance sheet, 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. SFAS No. 107 excludes certain
financial instruments and all nonfinancial assets and liabilities from its
disclosure requirements. Accordingly, the aggregate fair value amounts presented
do not represent the underlying value of the Bank.
The fair value estimates presented are based on pertinent information available
to management as of December 31, 1997 and 1996. Although management is not aware
of any factors that would significantly affect the estimated fair value amount,
such amounts have not been comprehensively revalued for purposes of these
financial statements since these dates and therefore, current estimates of fair
value may differ significantly from the amounts presented in these financial
statements.
Emerging accounting standards: The Financial Accounting Standards Board issued
Statement No. 130, Reporting Comprehensive Income in June, 1997. Statement No.
130 requires an entity to include a statement of comprehensive income in their
full set of general-purpose financial statements. Comprehensive income consists
of the net income or loss of the entity plus or minus the change in equity of
the entity during the period from transactions, other events, and circumstances
resulting from nonowner sources. Statement No. 130 is effective for years
beginning after December 15, 1997 and will require financial statements of
earlier periods that are presented for comparative purposes to be reclassified.
Note 2. Reverse Acquisition
On November 10, 1997, Southern Security Financial Corporation (SSFC) acquired
all of the outstanding stock of the Company. For accounting purposes, the
acquisition has been treated as a reorganization of the Company, with the
Company as the acquirer (reverse acquisition). The classes and terms of
authorized stock have remained substantially the same as a result of the
acquisition.
SSFC was a shell corporation registered under Section 12(g) of the Securities
Exchange Act of 1934 and incorporated in the state of Delaware. Prior to
November 10, 1997, SSFC had no business operations or significant assets or
liabilities. As a result of the reverse acquisition, the 602,500 shares of
common stock of SSFC outstanding immediately prior to the transaction were
converted into 256,088 shares of common stock of SSFC and 4,043,585 shares of
common stock of SSFC were issued to the stockholders of the Company in exchange
for all of their outstanding stock to effect a 1:3 stock split. Subsequent to
the reverse acquisition, SSFC changed its name to Southern Security Bank
Corporation.
Note 3. Restrictions on Cash and Due From Banks
The Bank is required to maintain reserve balances in cash or on deposit with the
Federal Reserve Bank, based on a percentage of deposits. Required reserve
balances were completely satisfied by cash on hand at December 31, 1997 and
1996.
Note 4. Investment Securities
Securities held to maturity: The amortized cost and fair values of securities
held to maturity as of December 31, 1997 and 1996 are summarized as follows:
<TABLE>
<CAPTION>
1997
--------------------------------------------------------
Gross Gross
Amortized Unrealized Unrealized Fair
Cost Gains Losses Values
--------------------------------------------------------
<S> <C> <C> <C> <C>
U. S. Treasury securities $ 246,867 $ 4,148 $ - $ 251,015
U. S. Government corporations
and agencies 899,417 331 - 899,748
Mortgage-backed securities 681,210 11,224 - 692,434
---------------------------------------------------------
$ 1,827,494 $ 15,703 $ - $ 1,843,197
---------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
1996
---------------------------------------------------------
Gross Gross
Amortized Unrealized Unrealized Fair
Cost Gains Losses Values
---------------------------------------------------------
<S> <C> <C> <C> <C>
U. S. Government corporations
and agencies $ 1,399,327 $ - $ (22,708) $ 1,376,619
Mortgage-backed securities 709,555 7,518 - 717,073
---------------------------------------------------------
$ 2,108,882 $ 7,518 $ (22,708) $ 2,093,692
---------------------------------------------------------
</TABLE>
The amortized cost and fair values of securities held to maturity at December
31, 1997, by contractual maturity, are shown below.
Amortized Fair
Cost Values
---------------------------------
Due after one year through five years $ 246,867 $ 251,015
Due after five through ten years 399,417 399,748
Due after ten years 500,000 500,000
Mortgage-backed securities 681,210 692,434
---------------------------------
$ 1,827,494 $ 1,843,197
---------------------------------
Gross losses of $1,453 were recognized on securities held to maturity in the
year ended December 31, 1996 as a result of the disposition of a security that
was called by the maker.
Securities held to maturity with a carrying amount of approximately $1,300,000
and $475,000 at December 31, 1997 and 1996, respectively, were pledged as
collateral on trustee deposits and repurchase agreements.
Securities available for sale: The amortized cost and fair values of securities
available for sale as of December 31, 1997 and 1996 are summarized as follows.
<TABLE>
<CAPTION>
1997
----------------------------------------------------------
Gross Gross
Amortized Unrealized Unrealized Fair
Cost Gains Losses Values
----------------------------------------------------------
<S> <C> <C> <C> <C>
Mortgage-backed securities $ 379,378 $ 1,325 $ (609) $ 380,094
----------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
1996
----------------------------------------------------------
Gross Gross
Amortized Unrealized Unrealized Fair
Cost Gains Losses Values
----------------------------------------------------------
<S> <C> <C> <C> <C>
Mortgage-backed securities $ 1,390,201 $ 2,852 $ (15,508) $ 1,377,545
----------------------------------------------------------
</TABLE>
Contractual maturities of mortgage-backed securities available for sale are not
disclosed because borrowers have the right to call or repay obligations with or
without call or repayment penalties.
Gross realized gains (losses) from the sale of securities available for sale for
the years ended December 31, 1997 and 1996 were as follows:
1997 1996
- --------------------------------------------------------------------------
Gross gains $ 753 $ -
Gross losses - (5,244)
There were no securities available for sale pledged at December 31, 1997.
Securities available for sale with a carrying amount of approximately $715,000
at December 31, 1996, were pledged as collateral on trustee deposits and for
repurchase agreements.
Changes in the unrealized loss on securities available for sale are as follows:
<TABLE>
<CAPTION>
Years Ended December 31,
------------------------
1997 1996
----------------------------------
<S> <C> <C>
Balance, beginning $ (23,611) $ 17,059
Net change in unrealized gains (losses) during the year 13,372 (42,373)
Amortization of unrealized loss on security transferred
to held to maturity 11,826 145
Allocation of changes to minority interest in subsidiary (895) 1,558
---------------------------------
Balance, ending $ 692 $ (23,611)
---------------------------------
</TABLE>
<PAGE>
Note 5. Loans
The composition of net loans as of December 31, 1997 and 1996 is as follows:
1997 1996
-----------------------------------
Commercial $ 3,300,273 $ 3,641,451
Commercial real estate 2,899,810 3,342,084
Residential real estate 3,177,722 3,579,962
Consumer 3,263,059 915,062
Other 43,193 57,953
-----------------------------------
12,684,057 11,536,512
-----------------------------------
Allowance for loan losses (288,802) (196,140)
Deferred loan fees and
purchased premiums, net 68,023 74,401
-----------------------------------
Loans, net $ 12,463,278 $ 11,414,773
-----------------------------------
Activity in the allowance for loan losses for the years ended December 31, 1997
and 1996 was as follows:
1997 1996
---------------------------------
Balance, beginning $ 196,140 $ 182,832
Amounts charged off:
Consumer loans (13,620) (5,326)
Commercial loans (27,359) -
Provision for loan losses 130,000 8,000
Recoveries of amounts charged off
Commercial loans 3,641 10,634
---------------------------------
Balance, ending $ 288,802 $ 196,140
---------------------------------
The Bank's recorded investment in impaired loans was $15,000 and $56,124 at
December 31, 1997 and 1996, respectively. The specific allowance associated with
impaired loans, and included in the allowance for loan losses, at December 31,
1997 and 1996, was $7,500 and $24,073, respectively. The average recorded
investment in impaired loans during 1997 and 1996 was $55,000 and $45,000,
respectively. Interest income on impaired loans, recognized for cash payments
received in 1997 and 1996, was not significant.
Note 6. Premises and Equipment
The major classes of premises and equipment and the total accumulated
depreciation as of December 31, 1997 and 1996 are as follows:
1997 1996
-------------------------------
Leasehold improvements $ 705,408 $ 675,332
Furniture, fixtures, and equipment 534,974 536,105
-------------------------------
1,240,382 1,211,437
Less accumulated depreciation and amortization 840,583 781,162
-------------------------------
$ 399,799 $ 430,275
-------------------------------
Note 7. Deposits
The composition of interest-bearing deposits at December 31, 1997 and 1996 is as
follows:
1997 1996
-------------------------------
Now accounts $ 1,602,893 $ 1,167,277
Money market accounts 3,690,050 3,584,884
Savings accounts 431,153 363,789
Certificates of deposit less than $100,000 4,276,204 5,203,073
Certificates of deposit of $100,000 or more 1,700,013 2,090,012
-------------------------------
Total $ 11,700,313 $ 12,409,035
-------------------------------
At December 31, 1997, the scheduled maturities of certificates of deposit are as
follows:
Less $100,000
than and
$100,000 over Total
-------------------------------------------------
Three months or less $ 1,023,219 $ 300,000 $ 1,323,219
Over three through six months 650,144 800,000 1,450,144
Over six through twelve months 2,420,661 500,013 2,920,674
Over one through two years 120,757 100,000 220,757
Over two through three years 55,423 - 55,423
Over three through four years 6,000 - 6,000
------------------------------------------------
$ 4,276,204 $ 1,700,013 $ 5,976,217
------------------------------------------------
Note 8. Income Taxes
The net cumulative tax effects of the primary temporary differences as of
December 31, 1997 and 1996 are shown in the following table:
<TABLE>
<CAPTION>
1997 1996
- ------------------------------------------------------------------------------
Deferred tax assets:
<S> <C> <C>
Allowance for loan losses $ 42,000 $ -
Other real estate owned 25,200 25,200
Premises and equipment 41,500 47,900
Net operating loss carryforward 2,878,400 2,568,900
Accrual to cash conversion for income taxes 56,800 40,100
Other 2,300 7,100
----------------------------
Total deferred tax assets 3,046,200 2,689,200
----------------------------
Deferred tax liabilities:
Allowance for loan losses - (6,800)
Deferred loan costs (13,800) (9,900)
----------------------------
Total deferred tax liabilities (13,800) (16,700)
----------------------------
3,032,400 2,672,500
Valuation allowance for deferred tax assets (3,032,400) (2,672,500)
----------------------------
Net deferred tax assets $ - $ -
----------------------------
</TABLE>
The Company has recorded a valuation allowance on the deferred tax assets to
reduce the total to an amount that management believes is more likely than not
to be realized. The valuation allowance increased by $359,900 and $219,600
during the years ended December 31, 1997 and 1996, respectively. Realization of
deferred tax assets is dependent upon sufficient future taxable income during
the period that deductible temporary differences and carryforwards are expected
to be available to reduce taxable income. No income tax benefits have been
provided for the years ended December 31, 1997 and 1996, because the results of
operations do not provide evidence that the net operating losses available for
carryforward will be utilized in the future.
The Bank has available federal net operating loss carryforwards approximating
the following at December 31, 1997:
Expiring December 31,
- -----------------------------------
2002 $ 143,000
2003 998,000
2004 500,000
2005 759,000
2006 526,000
2007 935,000
2008 905,000
2009 872,000
2010 898,000
2011 288,000
2012 850,000
-----------------
$ 7,674,000
-----------------
Note 9. Notes Payable
The Company has an unsecured note payable to a trust affiliated with a
shareholder in the amount of $100,000 at December 31, 1997 and 1996. The note is
due June 30, 1998 and interest is payable quarterly at 8.0%. The due date of the
note is automatically extended for additional periods of six months at each due
date unless the lender provides 30 days notice of its intent not to permit
additional extensions.
The Company also had unsecured notes payable to two directors and officers in
the total amount of $150,000 at December 31, 1996. The notes were exchanged for
250,000 shares of Class A Common Stock of the Company on June 30, 1997.
Note 10. Capital Stock
The Company has authorized the issuance of 5,000,000 shares of Preferred Stock
with a par value of $.01 per share. The Certificate of Incorporation created
Series A Preferred Stock and authorized the issuance of 1,200,000 shares from
the total authorized shares. The Board of Directors has the authority to issue
preferred shares in one or more classes, to fix the number of shares
constituting any class and the stated value thereof, and to fix the terms of any
such class, including dividend rights, dividend rates, conversion or exchange
rights, voting rights, rights and terms of redemption and the liquidation
preference of such class.
The Series A Preferred Stock is convertible into common stock on a
share-for-share basis upon the occurrence of certain events. Dividends are
payable quarterly, when declared by the Board of Directors, on the Series A
Preferred Stock at an annual rate of $.06 per share. Accumulated but unpaid
dividends for any past quarterly dividend periods will be cumulative and accrue
without interest. No dividends may be declared or paid on common stock of the
Company and no common stock shall be redeemed until all dividends in arrears on
the Series A Preferred Stock have been paid. In addition, holders of Series A
Preferred Stock shall also receive a dividend any time a dividend is declared on
the Class A Common Stock generally on a share for share basis. No dividends have
been declared on the Series A Preferred Stock since the inception of the
Company. Accumulated dividends at December 31, 1996 totaled approximately
$120,000. All shares of Series A Preferred Stock which were issued and
outstanding on December 31, 1996 were converted into Class A Common Stock during
the year ended December 31, 1997 and accumulated but unpaid dividends were
settled by the issuance of Class A Common Stock at a price of $.60 per share.
Shares of Series A Preferred Stock may be either converted to Class A common
stock, generally on a share for share basis, or redeemed at a price of $1.50 per
share plus the amount of any dividends in arrears, in the event the Company
files a registration statement relating to an initial public offering of the
Class A Common Stock. Shares of Series A Preferred Stock may be redeemed at a
price of $1.50 per share plus the amount of any dividends in arrears, in the
event the Company (1) merges with another company and does not remain as the
continuing corporation, (2) sells or transfers all or substantially all of its
assets to another corporation, or (3) the Company is liquidated, dissolved or
otherwise winds up its business. In the event of a stock split, reverse stock
split or stock dividend resulting in an increase or decrease in the number of
shares of common stock outstanding, the conversion price of the Series A
Preferred Stock shall be correspondingly increased or decreased proportionately.
Note 11. Officer and Stock-Based Compensation
At June 30, 1997, the Company settled contractual liabilities under employment
agreements with two officers totaling $207,072, through the issuance of 345,120
shares of Class A Common Stock. In addition, the Company has recognized
liabilities totaling approximately $290,000 at December 31, 1997 for additional
amounts due to the two officers for services performed in connection with their
employment agreements.
Under the Incentive Stock Option Plan (the "Plan") adopted by the Bank in 1988,
the Bank is authorized to grant options for the purchase of up to 20% of the
outstanding common shares of the Bank (420,390 shares at December 31, 1997). All
directors, officers and employees of the Bank are eligible to receive options to
purchase shares of common stock at the fair value of the stock at the date of
grant, but in no event may the price be less than the par value of such stock.
Options granted under the plan expire no more than 8 years from the date of
issue, or upon termination of employment. The Plan expires July 1, 2000, and no
additional options may be granted after that date under the Plan. The
weighted-average remaining life of options outstanding at December 31, 1997 and
1996 is 5.5 years and 6.2 years, respectively.
A summary of the options for the purchase of common stock of the Bank
outstanding as of December 31, 1997 and 1996, and changes during the years then
ended is presented below. The fair value of each option grant is estimated on
the date of grant using the present value with the following weighted-average
assumptions used for grants in 1997 and 1996: risk-free interest rates of 6
percent for 1997 and 7 percent for 1996 and expected lives of 6 years for both
years.
<TABLE>
<CAPTION>
1997 1996
-------------------------------------------------------------
Weighted-Average Weighted-Average
Shares Exercise Shares Exercise
Price Price
- --------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Outstanding at beginning of year 319,690 $ 1.00 193,930 $ 1.00
Granted 95,180 1.00 137,760 1.00
Exercised -- --
Forfeited -- (12,000) 1.00
------------- -------------
Outstanding at end of year 414,870 1.00 319,690 1.00
------------- -------------
Options exercisable at year-end 414,870 1.00 319,690 1.00
------------- -------------
Weighted-average fair value of
options granted during the year $ 0.08 $ 0.14
</TABLE>
In addition to the plan discussed above, the Company has granted stock options
for the purchase of shares of common stock of the Company to directors of the
Company under various compensation agreements and actions of the Board of
Directors, representing a majority of the shareholders. All options for the
purchase of common stock of the Company expire 10 years from the date of issue.
The weighted-average remaining life of options outstanding at December 31, 1997
and 1996 was 7.0 and 6.7 years, respectively.
A summary of the options for the purchase of common stock of the Company
outstanding as of December 31, 1997 and 1996, and changes during the years then
ended is presented below. (After giving effect to the 1 for 3 reverse stock
split executed in connection with the reverse merger discussed in Note 2.) The
fair value of each option grant is estimated on the date of grant using the
present value with the following weighted-average assumptions used for grants in
1997 and 1996: risk-free interest rates of 6 percent for 1997 and 7 percent for
1996 and expected lives of 9 years for both years, and, no dividends. Volatility
was assumed to be zero because there is currently no market for the Company's
stock.
<TABLE>
<CAPTION>
1997 1996
-------------------------------------------------------------
Weighted-Average Weighted-Average
Shares Exercise Shares Exercise
Price Price
- --------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Outstanding at beginning of year 667,134 $ 0.34 632,801 $ 0.26
Granted 91,478 1.80 34,333 1.80
Exercised - -
Forfeited - -
-------------- ---------------
Outstanding at end of year 758,612 0.51 667,134 0.34
-------------- ---------------
Options exercisable at year-end 758,612 0.51 667,134 0.34
-------------- ---------------
Weighted-average fair value of
options granted during the year $ 0.75 $ 0.84
</TABLE>
The Company and its subsidiary apply APB Opinion 25 and related Interpretations
in accounting for their plans. Accordingly, no compensation cost has been
recognized for the stock options discussed above. Had compensation cost for the
Company's stock options been determined based on the fair value at the grant
dates for awards under those plans, the Company's net loss and loss per common
share and common equivalent share would have been increased to the pro forma
amounts indicated below:
1997 1996
----------------------------------------------
Net loss As reported $ (1,166,654) (555,339)
Pro forma (1,235,000) (584,000)
Basic earnings per share As reported (0.31) (0.20)
Pro forma (0.33) (0.20)
<PAGE>
Note 12. Earnings per Share
Following is information about the computation of the earnings per share data
for the years ended December 31, 1997 and 1996: (After giving effect to the 1
for 3 reverse stock split executed in connection with the reverse merger
discussed in Note 2.)
<TABLE>
<CAPTION>
Per Share
Numerator Denominator Amounts
------------------------------------------
Year Ended December 31, 1997
------------------------------------------
<S> <C> <C> <C>
Net loss $(1,166,654)
Less preferred stock dividends accrued (14,834)
------------
Basic and diluted earnings per share,
income available to common shareholders $(1,181,488) 3,771,047 $ (0.31)
=======================================
</TABLE>
<TABLE>
<CAPTION>
Year Ended December 31, 1996
-----------------------------------------
<S> <C> <C> <C>
Net loss $ (555,339)
Less preferred stock dividends accrued (47,752)
------------
Basic and diluted earnings per share,
income available to common shareholders (603,091) 3,088,970 $ (0.20)
=====================================
</TABLE>
Convertible preferred stock in the amount of 596,622 shares at December 31, 1996
and options for the purchase of 758,612 shares and 667,134 shares at December
31, 1997 and 1996, respectively, have not been included in the computation of
diluted earnings per share for 1997 and 1996 because their inclusion would have
been antidilutive as a result of losses being reported for these years.
Note 13. Related-Party Transactions
The Bank has had, and may be expected to have in the future, banking
transactions in the ordinary course of business with directors, significant
stockholders, principal officers, their immediate families and affiliated
companies in which they are principal stockholders (commonly referred to as
related parties). Aggregate loans to, or guaranteed by, these related parties at
December 31, 1997 and 1996 and the activity therein for the years then ended was
as follows:
1997 1996
---- ----
Balance, beginning $ 705,057 $ 836,331
New loans - 160,000
Repayments (450,000) (291,274)
--------------------------
Balance, ending $ 255,057 $ 705,057
=========================
Note 14. Leases
The Bank leases its facilities under a noncancelable agreement which expires
December 31, 2013. The approximate future minimum lease payments under this
lease as of December 31, 1997, are as follows:
Years ending December 31 Amount
- --------------------------------------------------------------
1998 $ 161,646
1999 166,496
2000 171,490
2001 176,635
2002 181,934
Thereafter 2,400,081
------------------
Total minimum lease payments $ 3,258,282
------------------
Total lease expense for the years ended December 31, 1997 and 1996 approximated
$214,100 and $226,900, respectively, net of sublease income of approximately
$22,900 and $40,600, respectively, and is included in occupancy and equipment
expense in the accompanying consolidated statements of operations.
Note 15. Restrictions on Retained Earnings and Regulatory Capital Requirements
The Bank is subject to certain restrictions on the amount of dividends that may
be declared without prior regulatory approval. At December 31, 1997, no retained
earnings were available for dividend declaration without regulatory approval.
The Bank is subject to various capital requirements administered by the federal
banking agencies. Failure to meet minimum capital requirements can initiate
certain mandatory - and possibly additional discretionary actions by regulators
that, if undertaken, could have a direct material effect on the Bank's financial
statements. Under capital adequacy guidelines and the regulatory framework for
prompt corrective action, the Bank must meet specific capital guidelines that
involve quantitative measures of the Bank's assets, liabilities, and certain
off-balance-sheet items as calculated under regulatory accounting practices. The
Bank's capital amounts and classification are also subject to qualitative
judgments by the regulators about components, risk weightings, and other
factors.
Quantitative measures established by regulation to ensure capital adequacy
require the Bank to maintain minimum amounts and ratios (set forth in the table
below) of total and Tier I capital to risk-weighted assets, and of Tier I
capital to average assets (all defined in the regulations). Management believes
the Bank meets all capital adequacy requirements required by law as of December
31, 1997.
As of December 31, 1997, the most recent notification from the Federal Reserve
categorized the Bank as adequately capitalized under the regulatory framework
for prompt corrective action. To be categorized as adequately capitalized the
Bank must maintain minimum total risk-based, Tier I risk-based, and Tier I
leverage ratios as set forth in the table below. There are no conditions or
events since that notification that management believes have changed the Bank's
category.
The Bank's actual capital amounts and ratios are also presented in the table
below:
<TABLE>
<CAPTION>
To Be
Adequately Capitalized
For Capital Under Prompt Corrective
Actual Adequacy Purposes Action Provisions
- ---------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
As of December 31, 1997:
Total Capital (to
Risk-Weighted Assets) $ 1,046,502 8.9% $ 956,859 8.0% $ 956,859 8.0%
Tier I Capital (to
Risk-Weighted Assets) $ 896,993 7.6% $ 478,430 4.0% $ 478,430 4.0%
Tier I Capital (to
Average Assets) $ 896,993 5.0% $ 711,600 4.0% $ 711,600 4.0%
As of December 31, 1996:
Total Capital (to
Risk-Weighted Assets) $ 1,238,319 11.2% $ 881,360 8.0% $ 881,360 8.0%
Tier I Capital (to
Risk-Weighted Assets) $ 1,099,885 10.0% $ 440,680 4.0% $ 440,680 4.0%
Tier I Capital (to
Average Assets) $ 1,099,885 6.6% $ 670,440 4.0% $ 670,440 4.0%
</TABLE>
Under the framework, the Bank's capital levels do not allow the Bank to accept
brokered deposits without prior approval from regulators.
Note 16. Regulatory Matters and Going Concern Considerations
On April 13, 1995, the Company entered into a written agreement (the
"Agreement") with the Federal Reserve Bank of Atlanta (the "FRB"). Among other
items, the written agreement:
a. Prohibits the declaration or payment of dividends by the Company without
the prior written approval of the FRB;
b. Requires the Company to submit a written plan to maintain an adequate
capital position which, at a minimum, addresses and considers (i) current and
future capital requirements of the Bank, including the maintenance of adequate
capital ratios, (ii) the volume of the Bank's adversely classified assets, (iii)
the Bank's anticipated level of earnings, and (iv) the source and timing of
additional funds that may be necessary to fulfill future capital requirements;
c. Prohibits any additional borrowings by the Company, or any payments on
existing debt of the Company, without the prior written approval of the FRB;
d. Prohibits the Company from entering into new financial transactions, or
amending the terms of existing agreements, with related parties, without the
prior written approval of the FRB; and,
e. Prohibits the Company from entering into any transaction with the Bank
without the prior written approval of the FRB.
On March 17, 1992, the Bank entered into a written agreement (the "Agreement")
with the Federal Reserve Bank of Atlanta (the "FRB") and the State of Florida
Department of Banking and Finance (the "Department"). In addition to requiring
the Bank to implement certain operating administrative policy and procedure
changes, the written agreement:
a. Prohibits the declaration or payment of dividends by the Bank without
the prior written approval of the FRB and the Department;
b. Requires the Bank to submit a written plan to maintain an adequate
capital position which, at a minimum, addresses and considers (a) current and
future capital requirements including the maintenance of minimum capital ratios,
(b) the volume of adversely classified assets, (c) the Bank's anticipated level
of retained earnings, and (d) the source and timing of additional funds that
fulfill future capital requirements;
c. Requires that, in the event the Bank's leverage ratio falls below 6.25%,
the Bank notify the FRB and the Department about the capital deficiency and
submit a written statement detailing the steps to be taken to increase the
leverage ratio; and,
d. Requires the Bank to maintain at all times an allowance for loan
losses not less than 1.53% of total loans.
As shown in the financial statements, the Company incurred net losses of
$1,166,654 and $555,339 during the years ended December 31, 1997 and 1996,
respectively. Despite these losses, the Bank continued to meet the minimum
regulatory capital requirements prescribed under prompt corrective action
provisions at December 31, 1997. Failure to meet these capital requirements may
result in one or more regulatory sanctions, including restrictions as to the
source of deposits and the appointment of a conservator. It is the opinion of
management that the ability to meet the prescribed capital requirements in the
future is dependent on the ability to raise additional capital, as well as the
ability to improve operating results. In the Company's written plan submitted to
the FRB, as well as the Bank's written plan submitted to the FRB and the State
of Florida Department of Banking and Finance, management has indicated that it
intends to raise additional capital through the sale of common stock and that it
expects to significantly reduce the loss from operations in 1998. In December
1997 the Company commenced a private offering of up to 1,000,000 shares of
common stock at an officer price of $5 per share. The securities may not be
offered or sold in the U.S. absent registration under the Securities Act of 1933
or an applicable exemption from registration. The offering is being made in
reliance upon applicable exemptions from registration. The Company has sold
144,000 shares under the private offering through April 30, 1998. There can be
no assurance that the sale of additional shares can be accomplished. In
addition, management believes that improvements in the Bank's profitability in
1998 have been sufficient to eliminate operating losses at the Bank, and expects
that such improvement in the Bank's profitability will significantly reduce the
Company's loss from operations in 1998.
Note 17. Commitments and Contingencies
Financial instruments with off-balance-sheet risk: The Bank is a party to
financial instruments with off-balance-sheet risk in the normal course of
business, to meet the financing needs of its customers. These financial
instruments include commitments to extend credit and standby letters of credit.
These instruments involve, to varying degrees, elements of credit and interest
rate risk in excess of the amounts recognized on the consolidated balance sheet.
The Bank's exposure to credit loss in the event of nonperformance by the
counterparty to the financial instruments for commitments to extend credit and
letters of credit is represented by the contractual amounts of those
instruments. The Bank uses the same credit policies in making commitments and
conditional obligations as it does for on-balance-sheet instruments.
These commitments were as follows at December 31, 1997 and 1996:
1997 1996
----------------------------------
Commitments to extend credit $ 1,995,917 $ 1,536,353
Standby letters of credit 58,632 58,632
----------------------------------
$ 2,054,549 $ 1,594,985
----------------------------------
Commitments to extend credit are commitments to lend to a customer as long as
there is no violation of any condition established in the contract. Commitments
generally have fixed expiration dates or other termination clauses and may
require payment of a fee. Since many of the commitments are expected to expire
without being drawn upon, the total commitment amounts do not necessarily
represent future cash requirements. The Bank evaluates each customer's
creditworthiness on a case-by-case basis. The amount of collateral obtained, if
any, is based on management's credit evaluation of the counterparty. Collateral
held varies, but may include cash, accounts receivable, inventory, property,
plant and equipment, and residential and commercial real estate.
Standby letters of credit are conditional commitments issued by the Bank to
guarantee the performance of a customer to a third party. These guarantees are
primarily issued to support public and private borrowing arrangements, including
commercial paper, construction bonding, and similar transactions. The credit
risk involved in issuing letters of credit is essentially the same as that
involved in extending loans to customers. The collateral varies but may include
accounts receivable, inventory, property, plant and equipment, and residential
and commercial real estate.
Contingencies: In the normal course of business, the bank is involved in various
legal proceedings. In the opinion of management, any liability resulting from
such proceedings would not have a material adverse effect on the Bank's
financial statements.
In addition, the Company has executed employment agreements with two individuals
who are both officers and directors of the Company. Under the terms of the
agreements, the Company has agreed to pay base salaries of $175,000 per year,
adjusted for inflation, to grant semiannual options for the purchase of 0.6% of
the outstanding Class A Common Stock at an exercise price equal to 110% of the
per share book value of such shares at the date of grant, and to provide certain
other benefits and compensation to the two officers. The employment agreements
expire June 10, 2002, except that if the Company does not deliver written notice
of its intent to terminate to the officers at least six months prior to that
date, the agreements shall automatically renew for an additional five-year
period.
The employment agreements also include provisions requiring the payment of up to
200% of an officer's total annual compensation upon the occurrence of certain
events leading to the termination of employment such as a change in control of
the Company, death or disability.
Financial instruments with concentration of credit risk: The Bank makes
commercial, residential and consumer loans to customers primarily in Southeast
Florida. A substantial portion of its debtors' abilities to honor their
contracts is dependent upon the local economy. The economy of the Bank's primary
market area is not heavily dependent on any individual economic sector.
Interest rate risk: The Bank assumes interest rate risk as a result of its
normal operations. As a result, the fair values of the Bank's financial
instruments will change when interest rate levels change, and that change may be
either favorable or unfavorable to the Bank. Management attempts to match
maturities of assets and liabilities to the extent believed necessary to manage
interest rate risk. However, borrowers with fixed-rate obligations are more
likely to prepay in a falling rate environment and less likely to prepay in a
rising rate environment. Conversely, depositors who are receiving fixed rates
are more likely to withdraw funds before maturity in a rising rate environment
and less likely to do so in a falling rate environment. Management monitors
rates and maturities of assets and liabilities and attempts to manage interest
rate risk by adjusting terms of new loans and deposits and by investing in
securities with terms that mitigate the Bank's overall interest rate risk.
Note 18. Additional Cash Flow Information
<TABLE>
<CAPTION>
Years Ended December 31,
-----------------------------------
1997 1996
-------------------------------------
<S> <C> <C>
Cash flows from securities:
Securities available for sale:
Sales $ 782,010 $ 1,173,016
Maturities and paydowns 584,473 252,964
Purchases (349,945)
Securities held to maturity:
Maturities and paydowns 541,563 447,846
Purchases (245,859) (399,250)
Purchases of Federal Reserve Bank stock (3,600) (5,700)
----------------------------------
$ 1,308,642 $ 1,468,876
----------------------------------
Supplemental disclosures of cash flow information:
Cash payments for interest $ 633,500 $ 632,532
Supplemental schedule of Noncash Investing and
Financing Activities
Net change in unrealized gain (loss) on securities available
for sale (Note 4) 24,303 (40,670)
Issuance of 250,000 shares of Class A Common Stock
in exchange for notes payable to shareholders (Note 9) 150,000 -
Issuance of 345,120 shares of Class A Common Stock
as compensation for officers (Note 11) 207,072 -
Addition of 256,088 shares of Class A Common Stock
in connection with reverse merger (Note 2) 6,025 -
</TABLE>
Note 19. Securities Sold Under Repurchase Agreements
Securities sold under agreements to repurchase generally mature within one month
from the transaction date. The securities sold under the repurchase agreements
are held in safekeeping for the Bank and are identified as pledged by the
safekeeping agent. Securities sold under agreements to repurchase averaged
approximately $8,000 and $65,000 during 1997 and 1996, respectively, and the
average interest rate was approximately 5.5 percent. The maximum amount
outstanding at any time during 1997 and 1996 was $750,000.
Note 20. Fair Value of Financial Instruments
The following methods and assumptions were used by the Bank in estimating the
fair value of its financial instruments:
Cash and cash equivalents: The carrying amounts reported in the balance sheet
for cash and short-term instruments approximated their fair values.
Investment securities (including mortgage-backed securities): Fair values for
investment securities are based on quoted market prices, where available. If
quoted market prices are not available, fair values are based on quoted market
prices of comparable instruments.
Loans receivable: For variable-rate loans that reprice frequently and with no
significant change in credit risk, values are based on carrying values. Fair
values for other loans are estimated on discounted cash flows, using interest
rates currently being offered for loans with similar terms to borrowers with
similar credit quality. Management believes that the allowance for loan losses
is an appropriate indication of the applicable credit risk associated with
determining the fair value of its loan portfolio and the allowance has been
deducted from the estimate fair value of loans.
Accrued interest receivable: The carrying amount of accrued interest receivable
approximates its fair value.
Off-balance sheet instruments: Fair values for the Bank's off-balance sheet
instruments, primarily lending commitments, are based on fees currently charged
to enter into similar agreements, taking into account the remaining terms of the
agreements. The fair value for such commitments are nominal.
Deposit liabilities: The fair values of demand deposits and passbook savings
equal their carrying amounts which represents the amount payable on demand. The
carrying amounts for variable-rate, fixed-term money market accounts and
certificates of deposit approximate their fair value at the reporting date. Fair
values for fixed-rate certificates of deposit are estimated using a discounted
cash flow calculation that applies interest rates currently being offered on
certificates to a schedule of aggregated expected monthly maturities on time
deposits.
Other liabilities: The carrying amount of other liabilities approximates their
fair value.
Following is a summary of the carrying amounts and approximate fair values of
the Bank's financial instruments at December 31, 1997 and 1996:
<TABLE>
<CAPTION>
1997
------------------------------
Carrying Fair
Amount Value
-------------------------------
<S> <C> <C>
Cash and cash equivalents $ 1,107,669 $ 1,107,669
Investment securities (including Federal Reserve Bank stock) 2,270,588 2,286,391
Loans receivable 12,463,278 12,588,248
Accrued interest receivable 125,870 125,870
Deposits 15,675,312 15,680,210
Other liabilities 758,550 758,550
Commitments to extend credit - -
</TABLE>
<TABLE>
<CAPTION>
1996
------------------------------
Carrying Fair
Amount Value
-------------------------------
<S> <C> <C>
Cash and cash equivalents $ 4,236,602 $ 4,236,602
Investment securities (including Federal Reserve Bank stock) 3,545,927 3,530,737
Loans receivable 11,414,773 11,515,557
Accrued interest receivable 106,715 106,715
Deposits 18,256,203 18,284,700
Other liabilities 1,305,805 1,305,805
Commitments to extend credit - -
</TABLE>
Note 21. Year 2000 Issue
The Company has conducted a comprehensive review of its computer systems to
identify the systems that could be affected by the Year 2000 Issue, and is
developing an implementation plan to resolve the Issue. The Issue is whether
computer systems will properly recognize date-sensitive information when the
year changes to 2000. Systems that do not properly recognize such information
could generate erroneous data or cause a system to fail. The Company is heavily
dependent on computer processing in the conduct of its business activities.
Based on the review of the computer systems, management does not believe the
cost of remediation will be material to the Company's financial statements.
Note 22. Parent Company Only Financial Statements
Condensed financial statements for Southern Security Bank Corporation are
presented below:
Southern Security Bank Corporation
Parent Company Only Balance Sheets
December 31, 1997 and 1996
<TABLE>
<CAPTION>
1997 1996
ASSETS
--------------------------------
<S> <C> <C>
Cash $ 721 $ 5,202
Investment in Southern Security Bank 843,231 982,879
Other assets 36,408 79,780
--------------------------------
$ 880,360 $ 1,067,861
</TABLE>
<TABLE>
<CAPTION>
LIABILITIES AND STOCKHOLDERS' EQUITY
<S> <C> <C>
Liabilities
Notes payable $ 100,000 $ 250,000
Other liabilities 307,530 96,693
--------------------------------
Total liabilities 407,530 346,693
Stockholders' equity 472,830 721,168
--------------------------------
$ 880,360 $ 1,067,861
</TABLE>
Southern Security Bank Corporation
Parent Company Only Statements of Operations
Years Ended December 31, 1997 and 1996
<TABLE>
<CAPTION>
1997 1996
--------------------------------
<S> <C> <C>
Equity in net loss of Southern
Security Bank $ (283,951) $ (198,911)
Interest expense 6,117 8,000
Other expenses 876,586 348,428
--------------------------------
Net (loss) $ (1,166,654) $ (555,339)
</TABLE>
Southern Security Bank Corporation
Parent Company Only Statements of Cash Flows
Years Ended December 31, 1997 and 1996
<TABLE>
<CAPTION>
1997 1996
--------------------------------
<S> <C> <C>
Net (loss) $ (1,166,654) $ (555,339)
Adjustments to reconcile net (loss) to net
cash provided by operating activities:
Equity in net loss of Southern Security
Bank 283,951 198,911
Issuance of common
stock as compensation for officers 207,072 -
Other 260,234 144,973
--------------------------------
Net cash (used in) operating activities (415,397) (211,455)
Net cash (used in) investing activities (120,000) (165,000)
Net cash provided by financing activities 530,916 331,400
--------------------------------
Increase (decrease) in cash and cash
equivalents (4,481) (45,055)
Cash and cash equivalents
Beginning 5,202 50,257
--------------------------------
Ending $ 721 $ 5,202
================================
</TABLE>
Item 10. Executive Compensation
Compensation of Management
The following Table shows information concerning annual and long-term
compensation to certain Executive Officers for services to the Company for the
years ended December 31, 1997, 1996 and 1995. The table includes information on
the Company's Chairman and President, Philip C. Modder, and its Chief Executive
Officer, James L. Wilson, (collectively, the "Named Executive Officers"). No
other current executive officer earned more than $100,000 in salary and bonus in
1997.
<TABLE>
<CAPTION>
Annual Compensation Long-Term Compensation
Name and
Principal Position All Other
Compen-
sation
Securities
Year Salary Other Annual Underlying LTIP
Compensation Options/ Payouts ($)
SARs (#)
- ----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Philip C. Modder, Chairman 1997 $175,000 $17,000(1) 48,807 -0- $ -0-
and President 1996 $127,000 $17,000(1) 19,619 -0- $ -0-
1995 $149,000 $17,000(1) 18,692 -0- $ -0-
- ----------------------------------------------------------------------------------------------------------------
James L. Wilson, Chief 1997 $175,000 17,000(1) 42,671 -0- $ -0-
Executive Officer 1996 $103,000 17,000(1) 14,714 -0- $ -0-
1995 $125,000 17,000(1) 15,966 -0- $ -0-
</TABLE>
(1) Includes Term Life Insurance premiums and automobile allowances of $10,800
to Messrs. Modder and Wilson.
The following table shows information concerning options granted to Named
Executive Officers during the fiscal year ended December 31, 1997.
Option / SAR Grants in Last Fiscal Year
<TABLE>
<CAPTION>
Number of Securities % of Total Options/SAR's Exercise or Expiration
Underlying Options / Granted to Employees in Base Price Date
Name SAR's Granted Fiscal Year ($/Share)
- ------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Philip Modder 48,807 53% $0.24 6/30/2007
James Wilson 42,671 47% $0.24 6/30/2007
</TABLE>
In addition, as Directors of the Company's Bank subsidiary, each Messrs.
Modder and Wilson received 11,600 options to purchase shares of common stock of
the Bank. Such options are exercisable at the greater of 110% of the fair market
value or par value of the Bank's shares on the date of grant and are exercisable
for a period of five years from the date of grant.
The following table shows information concerning option exercises and
year-end option values for options held by the Named Executive Officers.
Aggregated Option/SAR Exercises in Last Fiscal Year
and
Fiscal Year-End Option SAR Values
<TABLE>
<CAPTION>
Number of Value of
Securities Unexercised
Underlying In-the-Money
Unexercised Options/SAR's
Shares Acquired Options/SAR's at FY-End at FY-End
Name on Exercise Value Realized Exercisable/ Exercisable/
Unexercisable Unexercisable
- ------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Philip Modder -0- -0- 282,785 / 0 $-0-(1)
James Wilson -0- -0- 209,018 / 0 $-0-(1)
</TABLE>
(1) Average option exercise price was $.26 per share, the approximate book value
of the shares. There is no market for the Company's Common Stock, and any shares
issued upon exercise of the options would have been restricted under the
Securities Act.
Employment Agreements
Philip C. Modder and James L. Wilson have Employment Agreements with the
Company dated June 11, 1992 as amended June 30, 1997 (as so amended, the
"Employment Agreements"). The Employment Agreements provide that Modder shall
serve as the Company's President and Chairman of the Board, and that Wilson
shall serve as the Company's Chief Executive Officer and Vice Chairman of the
Board. By order of the Board of Directors of the Company on September 23, 1997
and subject to approval by bank regulators, which approval was granted thereby
with an effective date of December 1, 1997, the positions of Messrs. Modder and
Wilson were changed to Chairman of the Board and President, and Vice Chairman of
the Board and Chief Executive Officer, respectively.
The Employment Agreements provide that Modder and Wilson shall each serve
for a five year term from June 11, 1997, except that if the Company does not
deliver written notice to the respective executive at least six months prior to
the end of the term it shall automatically renew for an additional five year
term. Each Employment Agreement provides for the following compensation to the
executive: (I) the executive will be paid a base salary of $175,000 per year,
subject to annual increase by the greater of the change in the Consumer Price
Index ("CPI") or 5%; (ii) the executive will be paid a bonus equal to 2.5% of
the pre-tax net income of the Company; (iii) if the Company acquires the assets
of any existing financial institution, the executive shall receive a bonus equal
to 0.20% of the gross assets for each such transaction; (iv) the executive shall
during term of the Agreement receive semi-annual grants on July 1st and January
1st of stock options equal to 0.6% of the outstanding Class A Common Stock of
the Company exercisable at 110% of per share book value of such stock on the day
preceding the grant (the executives have agreed that options granted on July 1,
1997 and January 1, 1998 are exercisable at the price at which shares were
offered in private placements on or about the date of grant -- $1.80 per share
in the case of the July 1, 1997 options and $5.00 per share in the case of the
January 1, 1998 options); (v) if permitted by law and in accordance with
applicable federal and state regulations, loans equal to the exercise price of
the options granted at interest rates not greater than prime plus 1% with a term
of not less than 30 months; (vi) if any of the options is not an "incentive
stock option" under the Internal Revenue Code, reimbursement of any taxes the
executive is required to pay by reason thereof; (vii) disability insurance
coverage providing for benefits in the amount of 60% of the executives total
annual compensation subject to cost of living adjustments equal to the lesser of
the change in the CPI or 12% per annum; (viii) a whole life insurance annuity
policy in the face amount of $1,750,000 plus reimbursement of any income taxes
the executive is required to pay as a result of payment of the premiums on such
insurance policy; (viii) family membership in two country clubs; (ix) an
automobile allowance of $900 per month adjusted annual in accordance with the
CPI plus sales taxes, insurance and operating costs of the auto; and (ix)
comprehensive medical and dental insurance.
Termination payments.
The Employment Agreements contain provisions for additional compensation
to the executive or his legal representatives in the event of termination,
including: (I) if an Employment Agreement terminates for any reason, all options
provided for thereunder become fully vested and exercisable for a period of ten
years from the date of such termination; (ii) if an Employment Agreement is
terminated for any reason other than death or permanent disability, the Company
will pay for the executive's comprehensive medical and dental insurance for two
years following the date of termination; (iii) in the event of the death or
permanent disability of the executive, the executive's annual compensation shall
be paid to him or his legal representatives for a period of 12 months following
termination; (iv) in the event of a Change of Control of the Company (defined to
include the acquisition of 20% or more of the combined voting power or the
Company's outstanding stock after the date of the agreement, a change in the
majority of the Board of Directors of the Company in connection with a business
combination, sale of assets or related transaction), if the executive
terminates the agreement on 60 days written notice he shall receive a lump sum
payment of 200% of his total annual compensation for the preceding 12 months;
and (v) upon 60 days written notice before termination by the executive, the
executive shall receive a lump sum payment of 200% of his annual compensation
for the preceding 12 months together with continuation of employee benefits for
the periods described above.
Compensation of Directors: At present the Company does not compensate any of its
directors for their services to the Company as directors, although they may do
so in the future, subject to applicable regulatory approval. The Company may
reimburse its directors for their costs incurred for attending meetings of the
Board of Directors. The Company's Bank subsidiary compensates its directors,
some of whom are directors of the Company, by annual grants of options to
purchase up to 17,200 shares of the Bank's common stock. Such options are
exercisable at the greater of fair market value or par value of the Bank's
shares on the date of grant, and are exercisable for a period of eight years,
except that in the case of Messrs. Modder and Wilson, they are exercisable at
the greater of 110% of fair market value or par value on the date of grant for a
period of five years.
Item 11. Security Ownership of Certain Beneficial Owners and Management
SECURITY OWNERSHIP OF
CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth certain information regarding the
beneficial ownership of the Company's Common Stock as of June 1, 1998, by each
person known by the Company to be the beneficial owner of more than five percent
of all Classes of the Company's voting securities.
Name and Address of Number of % of Outstanding
Beneficial Owner Shares Shares
- -------------------------------------------------------------
Philip C. Modder
3475 Sheridan Street
Hollywood, FL 33021 1,008,613 (2) 19.6%
James L. Wilson
3475 Sheridan Street
Hollywood, FL 33021 921,513 (3) 17.5%
Jack E. & Molly W. Butler, TTE's
U/A dtd 11/13/90
2363 Loblolly Lane
Deerfield Beach, FL 33442 309,343 (4) 5.9%
Robert D. & Martha L. Butler,
TTE's
U/A dtd 3/29/90
84 Southeast 4th Avenue
Deerfield Beach, FL 33441 312,948 (5) 5.9%
Linda K. Strasser
6770 N.W. 87th Avenue
Parkland, FL 33067 398,128 (6) 7.6%
Timothy S. Butler
H.C. 10, Box 580
Lakemont, GA 30552 449,738 (7) 8.5%
Harold C. Friend
3475 Sheridan Street
Hollywood, FL 33021 281,688 (8) 5.4%
------------------------------------------
(1) Based on information supplied by the persons indicated.
(2) Includes options to purchase 308,583 shares that are exercisable within 60
days, and 67,511 shares owned by Mr. Modder's wife.
(3) Includes options to purchase 234,816 shares that are exercisable within 60
days, and 40,844 shares owned by Mr. Wilson's wife.
(4) Jack E. and Molly W. Butler share voting and investment power with respect
to such shares.
(5) Robert D. and Martha L. Butler share voting and investment power with
respect to such shares.
(6) Includes 16,667 shares owned by Linda Strasser's husband and options owned
by him to purchase 100,841 shares that are exercisable within 60 days.
(7) Includes 250,000 shares owned by a trust as to which Mr. Butler has sole
voting and investment power and options to purchase 134174 shares that are
exercisable within 60 days.
(8 Includes options to purchase 19,953 shares that are exercisable within 60
days, 40,933 shares owned by Mr. Friend's wife, and 152,467 shares owned by
Mr. Friend as custodian for his children.
The following table sets forth information concerning the beneficial
ownership of the Company's Common Stock beneficially owned by each director of
the Company, by each executive officer of the Company named in the compensation
table, and by all directors and executive officers of the Company as a group, as
of June 1, 1998.
Shares of Class A Percent (%) of
Name (1) Common Stock Class
Philip C. Modder 1,008,613 (2) 19.2%
James L. Wilson 921,513 (2) 17.5%
Eugene J. Strasser 398,128 (3) 7.6%
Harold C. Friend 281,688 (2) 5.4%
Robert D. Butler 42,890 (4) 0.8%
Timothy S. Butler 449,738 (2) 8.5%
All directors and executive
officers as a group (7 persons)
3,101,570 (5) 58.9%
(1) The business address of each of the persons identified above is at
Southern Security Bank Corporation, 3475 Sheridan
Street, Hollywood, Florida 33021.
(2) See footnotes to preceding table.
(3) Includes 272,620 shares owned by Eugene Strasser's wife and options
to purchase 100,841 shares that are exercisable within 60 days.
(4) Includes options to purchase 11,841 shares that are exercisable
within 60 days.
(5) Except as otherwise indicated in the footnotes above, members of
the group have sole voting and investment power as
to such shares.
Item 12. Certain Relationships and Related Transactions
CERTAIN TRANSACTIONS
On September 30, 1993, the Company received from Philip Modder, the
Chairman of the Company, and James Wilson, the President of the Company,
$100,000 and $50,000, respectively, in services and assistance in payment of
organizational expenses of the Company, and they received non interest bearing
notes therefor (the "Notes"). On June 30, 1997, in exchange for elimination of
the Notes, the Company sold 945,269 shares of its Common Stock to Philip Modder,
and 472,634 shares of its Common Stock to James Wilson, in each case at an
agreed upon fair value of $0.10579 per share (110% of the then per share book
value). On the same date, Messrs. Modder and Wilson entered into an agreement
with the Board of Directors of the Company pursuant to which they eliminated
certain obligations of the Company to them for unpaid wages and benefits under
the terms of their employment agreements ($78,563 in the case of Mr. Modder, and
$128,563 in the case of Mr. Wilson) in exchange for the Company issuing Common
Stock to them (742,632 shares and 1,215,266 shares, respectively) at the agreed
upon value of $.10579 per share. Messrs. Modder and Wilson subsequently agreed
with the Company to revalue the shares of Common Stock issued on June 30, 1997
at $.60 per share and, as a result, the Company rescinded the issue of 2,780,590
of the shares (1,390,085 each) made to them on June 30, 1997. As of December 31,
1997, the Company owed $222,000 to Mr. Modder and $68,000 to Mr. Wilson for
unpaid back wages and benefits.
The Company currently owes $100,00 to a trust affiliated with Jack E.
Butler, who is the father of Timothy S. Butler and the uncle of Robert D.
Butler, who are directors of the Company, pursuant to the terms of a note that
bears interest at the rate of 8% per annum payable quarterly (the "Butler
Note"). The Butler Note was issued on December 29, 1993 and matures every six
months, when it is automatically renewed unless the trust notifies the Company
of its intention to call the note 60 days prior to such maturity date. The next
maturity date of the Butler Note is on June 30, 1998.
13. Exhibits and Reports on Form 8-K
Exhibits. The following exhibits are filed as part of this report.
2.1 Agreement and Plan of Merger by and between Southern Security Financial
Corporation and Southern Security Bank Corporation, dated October 31, 1997*
2.2 Certificate of Merger of Southern Security Bank Corporation into
Southern Security Financial Corporation, dated November 10, 1997*
2.3 Articles of Merger of Southern Security Bank Corporation into Southern
Security Financial Corporation, under Florida law, dated November 12, 1997*
3.(i)
(a) Certificate of Incorporation of Southern Security Bank Corporation,
dated October 3, 1996**
(b) Certificate of Amendment of Certificate of Incorporation of Southern
Security Bank Corporation, dated January 17, 1997**
(c) Certificate of Amendment of Certificate of Incorporation of Southern
Security Financial Corporation, dated November 12, 1997 (changing name to
Southern Security Bank Corporation*
(ii) By-laws of the registrant***
4.1 Stock Certificate for Class A Common Stock***
9.0 Voting Trust Agreement--N/A
10.1 Executive Employment Agreement of Philip C. Modder, dated June 11,
1992, together with Amendment No. 1 thereto, dated June 30, 1997***(1)
10.2 Executive Employment Agreement of James L. Wilson, dated June 11,
1992, together with Amendment No. 1 thereto***(1)
10.3 Minutes of Meeting of June 6, 1997, of the Board of Directors of the
registrant relating to modification of the compensation arrangements for Philip
C. Modder and James L. Wilson(1)***
10.4 Agreements between Southern Security Bank Corporation, Inc. and the
Federal Reserve Bank of Atlanta, dated February 13, 1995 -- corrected version
filed herewith.
11.0 Statement re Computation of Per Share Earnings -- N/A.
13.0 Annual Report to security holders for the last fiscal year -- N/A
16.0 Letter re change of Certifying Accountant -- N/A
17.0 Letter re change in accounting principles -- N/A
21.0 Subsidiaries of the Registrant -- ***
22.0 Published Report re matters submitted to vote -- N/A
23.0 Consent of experts and counsel -- N/A
27.0 Financial Data Schedule -- filed herewith.
_________
* Filed as an exhibit to Form 8-K of the registrant filed on November 25,
1997.
** Filed as an exhibit to Form 10-SB of the registrant filed 7/31/97
*** Filed as an Exhibit to Form 10-KSB filed on April 2, 1998.
(1) Management compensation plan or arrangement.
(b) Reports filed on Form 8-K. The following reports on Form 8-K were filed
subsequent to November 30, 1997.
(i) Form 8-K filed November 25, 1997
(ii) Form 8-K/A filed February 6, 1998
<PAGE>
SIGNATURES
In accordance with Section 13 or 15(d) of the Securities Exchange
Act, the registrant caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
SOUTHERN SECURITY BANK CORPORATION
May 29, 1998 By: s/ James L. Wilson
--------------------------------
Name: James L. Wilson
Title: Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934,
this report has been signed below by the following persons on behalf of the
Registrant and in the capacities and on the dates indicated;
Signature Title Date
(i) Principal Executive Officer: Chief Executive Officer May 29, 1998
s/ James L. Wilson
----------------------------
James L. Wilson
(ii) Principal Accounting and Vice President May 31, 1998
Financial Officer:
s/ Floyd D. Harper
----------------------------
Floyd D. Harper
(iii) Directors:
s/Philip C. Modder Chairman of the Board June 2, 1998
----------------------------
Philip C. Modder
s/James L. Wilson Vice Chairman May 29, 1998
----------------------------
James L. Wilson
s/Timothy S. Butler Director June 2, 1998
----------------------------
Timothy S. Butler
s/Harold C. Friend Director June 1, 1998
----------------------------
Harold C. Friend
s/Robert D. Butler Director June 2, 1998
----------------------------
Robert D. Butler
s/Eugene J. Strasser Director June 2, 1998
----------------------------
Eugene J. Strasser
<PAGE>
EXHIBIT INDEX
Exhibit
2.1 Agreement and Plan of Merger by and between Southern Security Financial
Corporation and Southern Security Bank Corporation, dated October 31, 1997*
2.2 Certificate of Merger of Southern Security Bank Corporation into
Southern Security Financial Corporation, dated November 10, 1997*
2.3 Articles of Merger of Southern Security Bank Corporation into Southern
Security Financial Corporation, under Florida law, dated November 12, 1997*
3.(i)
(a) Certificate of Incorporation of Southern Security Bank Corporation,
dated October 3, 1996**
(b) Certificate of Amendment of Certificate of Incorporation of Southern
Security Bank Corporation, dated January 17, 1997**
(c) Certificate of Amendment of Certificate of Incorporation of Southern
Security Financial Corporation, dated November 12, 1997 (changing name to
Southern Security Bank Corporation*
(ii) By-laws of the registrant***
4.1 Stock Certificate for Class A Common Stock***
9.0 Voting Trust Agreement--N/A
10.1 Executive Employment Agreement of Philip C. Modder, dated June 11,
1992, together with Amendment No. 1 thereto, dated June 30, 1997***
10.2 Executive Employment Agreement of James L. Wilson, dated June 11,
1992, together with Amendment No. 1 thereto, dated June 30, 1998***
10.3 Minutes of Meeting of June 6, 1997, of the Board of Directors of the
registrant relating to modification of the compensation arrangements for Philip
C. Modder and James L. Wilson***
10.4 Agreements between Southern Security Bank Corporation, Inc. and the
Federal Reserve Bank of Atlanta, dated February 13, 1995 -- corrected version
filed herewith.
11.0 Statement re Computation of Per Share Earnings -- N/A.
13.0 Annual Report to security holders for the last fiscal year -- N/A
16.0 Letter re change of Certifying Accountant -- N/A
17.0 Letter re change in accounting principles -- N/A
21.0 Subsidiaries of the Registrant -- ***.
22.0 Published Report re matters submitted to vote -- N/A
23.0 Consent of experts and counsel -- N/A
27.0 Financial Data Schedule -- filed herewith.
_________
* Filed as an exhibit to Form 8-K of the registrant filed on 11/25/97.
** Filed as an exhibit to Form 10-SB of the registrant filed on 7/31/97
*** Filed as an Exhibit to Form 10-KSB of the registrant filed on 4/2/98.
FEDERAL RESERVE BANK OF ATLANTA
Marion P. Rivers, III
Assistant Vice President
April 13, 1995
The Board of Directors
Southern Security Bank Corporation, Inc.
Post Office Box 520
Boca Raton, Florida 33429-0520
Re: Written Agreement dated April 13, 1995
Dear Board Members:
This will acknowledge receipt of two signed copies of the Written Agreement
and the cross-referenced side letter. The Federal Reserve Bank executed this
document on April 13, 1995. The corporation's record copy of the Agreement is
enclosed. Also attached is our executed draft of the accompanying side letter
clarifying our mutual understanding of certain monthly operating expenses.
The Agreement's April 13, 1995 "as of date" established the start date upon
which various reporting deadlines will be based. To clarify when the Reserve
Bank expects receipt of individual provision responses, the following grid
recaps the established deadlines dates:
- - Paragraph 2 - Capital Adequacy: the 90-day deadline is July 12, 1995;
- - Paragraph 8 - Tax Policies/Procedures: the 90-day deadline is July 12, 1995;
Management may of course submit responses before these dates if you wish.
The quarterly reports required by paragraph 11, detailing compliance with all
Agreement requirements, will commence with the second quarter of 1995; this
first report is due no later than July 30, 1995. Compliance is expected to
commence immediately for those provisions without a response due date.
We appreciate your cooperation and look forward to reviewing your initial
submissions. If you have any questions regarding this action, please contact me
or Examiner Robert Schaffel at 404/589-7220.
Very truly yours,
Marion P. Rivers, III
Enclosures
cc: Cheryl Mueller, BOG
State of Florida
104 Marietta Street, N.W. Atlanta, Georgia 30303-2713 404/585-7206
<PAGE>
UNITED STATES OF AMERICA
BEFORE THE BOARD GOVERNORS OF THE FEDERAL RESERVE SYSTEM
WASHINGTON, D.C.
- -------------------------------------
Written Agreement By and Among
SOUTHERN SECURITY BANK CORPORATION, INC.
Deerfield Beach, Florida
PHILIP C. MODDER
JAMES WILSON
Institution-Affiliated Parties of DOCKET NOS. 95-004-WA/RB-HC
Southern Security Bank Corporation, Inc. 95-004-WA/RB-I1
Deerfield Beach, Florida 95-004-WA/RB-12
and
FEDERAL RESERVE BANK OF ATLANTA
Atlanta, Georgia
- ----------------------------------------
WHEREAS, in order to maintain the financial soundness of Southern Security
Bank Corporation, Deerfield Beach, Florida ("Southern Security"), a registered
bank holding company, the Federal Reserve Bank of Atlanta (the "Reserve Bank"),
Southern Security, and Philip C. Modder ("Modder"), chairman of the board and a
director, and James Wilson ("Wilson"), president and a director,
institution-affiliated parties of Southern Security, have mutually agreed to
enter into this Written Agreement (the "Agreement");
WHEREAS, as of the date of this Agreement, Southern Security owns and
controls the Southern Security Bank, Hollywood, Florida (the "Bank");
WHEREAS, this Agreement is being executed in accordance with the Rules
Regarding Delegation of Authority of the Board of Directors of the Federal
Reserve System (the "Board of Governors"), specifically 12 C.F.R. 265-11(a)(15),
and the Reserve Bank has received the prior approval of the Director of the
Division of Banking Supervision and Regulation (the "Director") and the General
Counsel of the Board of Governors to enter into this Agreement with Southern
Security, Modder, and Wilson; and
WHEREAS, on March 23, 1995, the board of directors of Southern Security, at
a duly constituted meeting, adopted a resolution authorizing and directing
Philip C. Modder to enter into this Agreement on behalf of Southern Security and
consented to compliance with each and every provision of this Agreement by
Southern Security and its institution-affiliated parties, as defined in sections
3(u) and 8(b)(3) of the Federal Deposit Insurance Act, as amended (the "FDI
Act") 12 U.S.C. 1813(u) and 1818(b)(3)); and
WHEREAS, on April 5, 1995, Modder and Wilson, in their individual
capacities, consented to compliance with paragraphs 4(c), 5, and 14 through 18
of this Agreement;
NOW, THEREFORE, before the taking of any testimony or adjudication of or
finding on any issue of fact or law herein, and without this Agreement
constituting an admission of any allegation made or implied by the Board of
Governors, and for the purpose of settling this matter without further
proceedings, the Reserve Bank and Southern Security hereby agree as follows:
1. Dividends. Southern Security shall not declare or pay dividends without the
prior written approval of the Reserve Bank and the Director. Requests for
permission to pay a dividend shall be in writing and received 30 days prior to
the proposed declaration date. Such requests shall, at a minimum, contain
sufficient documentation to demonstrate that the proposed dividend is in
compliance with the Board of Governors' dividend policy and is otherwise
consistent with the Board of Governors' Capital Adequacy Guidelines (12 C.F.R.
Part 225, App. A and D).
2. Capital Adequacy. Within 90 days of this Agreement, Southern Security shall
submit to the Reserve Bank an acceptable written plan to improve and,
thereafter, maintain an adequate capital position at the Bank. The plan shall,
at a minimum, address and consider:
a. The current and future capital requirements of the Bank, including
the maintenance of adequate risk-based capital ratios and tier 1 leverage ratio
in accordance with the Capital Adequacy Guidelines of the Board of Governors (12
C.F.R. Part 208, App. A and B);
b. the Bank's continued compliance with the capital requirements contained
within paragraphs 2(a) and 2(b) of the Written Agreement dated March 17, 1992,
among the Reserve Bank, the State Comptroller and Banking Commissioner of the
State of Florida, and the Bank;
c. the volume of the Bank's adversely classified assets and the potential
for additional asset quality problems at the Bank;
d. requests by the Bank's federal or state regulators for an increase in
the Bank's capita;
e. the anticipated level of earnings of the Bank, with particular attention
to the Bank maintaining an adequate loan loss reserve;
f. the source and timing of additional funds that may be necessary to
achieve compliance with the capital plan developed and submitted pursuant to the
provisions of this paragraph; and
g. Southern Security's responsibility to act as a source of strength to the
Bank, and, in connection therewith, to use its assets to provide whatever
capital support to the Bank as may be required by the Reserve Bank in a manner
consistent with the Board of Governors'; Policy Statement on the responsibility
of bank holding companies to act as a source of strength to their bank
subsidiaries, dated April 24, 1987.
3. Debt Restrictions.
a. Southern Security shall not, directly or indirectly, increase its
borrowings or incur any additional debt, including debt to stockholders, without
the prior written approval of the Reserve Bank.
b. Southern Security shall not, directly or indirectly, make any debt
service payments to any institution-affiliated party, or related interest
thereof, without the prior written approval of the Reserve Bank.
4. Insider Transactions.
a. Except as otherwise provided in the executive employment agreements with
Modder and Wilson, dated June 11, 1992, Southern Security shall not, directly or
indirectly, increase the salaries of, or pay any bonuses or fees to, or make any
other type of form of payments, including, but not limited to, the reimbursement
of expenses or the payment of indebtedness, to or on behalf of any
institution\-affiliated party, or related interest thereof, of Southern Security
or the Bank without the prior written approval of the Reserve Bank.
b. Southern Security shall not, directly or indirectly, enter into,
participate or, in any other manner, engage in any financial transaction with
any institution-affiliated party or principal shareholder, or related interest
thereof, of Southern Security or the Bank without the prior written approval of
the Reserve Bank.
c. Except as otherwise provided by paragraph 4.a hereof, Modder and Wilson
shall not, directly or indirectly, in any manner engage in, enter into or
participate in any financial transaction with Southern Security without the
prior written approval of the Reserve Bank.
d. Any request for prior approval pursuant to this paragraph shall be
accompanied by documentation adequate to provide the Reserve Bank with the
details of each proposed payment or transaction, including a full description of
the proposal, the purpose(s) for the payment or transaction, the amounts
involved, the benefits to be derived by Southern Security or the Bank and such
other matters that may be pertinent to the proposed payment or transaction to
assist the Reserve Bank in its review of each proposal.
e. For the purposes of this Agreement, the terms:
(1) "Related interest" shall be defined as set forth in section
215.2(m) of Regulation O of the Board of Governors (12 C.F.R. 215.2(m));
(2) "financial transaction" shall include, but is not limited to: (A)
an extension of credit (as defined in section 215.3 of Regulation O of the Board
of Governors (12 C.F.R. 215(3)), (B) the transfer, sale or purchase of any
asset, (C) a contract or payment for services, (D) the payment of any Southern
Security debt to any shareholder or institution affiliated party of Southern
Security, the Bank, or any related interest thereof, or (B) the direct or
indirect payment by Southern Security of any obligation of any
institution-affiliated party or principal shareholder, or related interest
thereof, of southern Security or the Bank; and
(3) "principal shareholder" shall include any individual or company
(other than Southern Security) that directly or indirectly, or acting through
or in consent with one or more persons, owns, controls or has the power to vote
more than 10 percent of any class of voting securities or Southern Security of
the Bank.
5. Employment Contracts.
a. Southern Security and Modder and Wilson shall each not amend or modify
any current employment contract or agreement and shall not enter into any new
employment or consulting contract or agreement without providing at least 30
days advance written notice to the Reserve Bank.
b. The advance written notice required by this paragraph shall include
documentation adequate to provide the Reserve Bank with the details of each
proposed amended or new contract or agreement, including a full description of
the proposed contract or agreement, the name and qualifications of the person
providing the proposed services, the amounts involved, the benefits to be
derived by Southern Security, and such other matters that may be pertinent to
the proposal and assist the Reserve Bank in its review of each proposed amended
or new contract or agreement.
c. The Reserve Bank shall have the right to disapprove any proposed amended
or new employment or consulting contract or agreement. If the Reserve Bank
disapproves any proposed amendment or new employment or consulting contract or
agreement, Southern Security, Modder and Wilson, as the case may be, shall not
proceed with such proposal.
6. Required Approval of New Directors and Executive Officers.
During the term of this Agreement, or as otherwise required by law, southern
Security shall comply with the provisions of Section 32 of the FDI Act (U.S.C.
1831i) with respect to the appointment of any new directors or the hiring or
promotion of any senior executive officer.
7. Restriction on Intercorporate Transactions.
a. Southern Security shall not, directly or indirectly, enter into,
participate, or in any other manner engage in any transaction with the Bank
without the prior written approval of the Reserve Bank.
b. Any request for prior approval pursuant to this paragraph shall be
accompanied by documentation adequate to provide the Reserve Bank with the
details of each proposed transaction, including a full description of the
proposed transaction, the purpose(s) for the transaction, the amounts involved,
the benefits to be derived by Southern Security and the Bank, the proposed
transaction's compliance with all applicable laws and regulations, including
sections 23A and 23B of the Federal Reserve Act (12 U.S.C. 371c and 371c-1) and
such other matters that may be pertinent to the proposal and assist the Reserve
Bank in its review of each proposal.
c. For the purposes of this paragraph, the term "transaction" shall
include, but not be limited to the transfer, sale or purchase of any asset, the
direct or indirect payment of any expense or obligation of Southern Security,
the payment of a management or service fee or any nature, or any extension of
credit, including overdrafts.
8. Tax Policies and Procedures.
a. Within 90 days of this Agreement, Southern Security shall submit to the
Reserve Bank an acceptable proposed written tax allocation agreement between
Southern Security and the Bank and shall take such other actions as are
necessary to execute the tax allocation agreement with the Bank within 120 days
of this Agreement. The tax agreement shall address, at a minimum:
(1) The timing and method of estimating quarterly tax payments;
(2) the disposition of any deferred tax liability;
(3) the computation and payment of any tax benefits;
(4) the allocation of the surtax exemption;
(5) any refund due the Bank on a separate entity basis, regardless of
the availability of a consolidated refund; and
(6) the Policy Statement on Intercorporate Tax Transactions issued by
the Board of Governors, dated September 25, 1978.
b. In no event shall the tax agreement required under this paragraph call
for the Bank to incur a greater liability because of its affiliation with
Southern Security than it would as a separate taxable entity.
c. Southern Security shall remit to the Bank, immediately upon receipt by
Southern Security; (1) any state or federal income tax refund, or similar refund
received by Southern Security that becomes due, owing or otherwise reimbursable
to the Bank; and (2) the reimbursement of any tax overpayment that is allocable
to the Bank, subject to the concurrence of the Reserve Bank.
d. Southern Security shall not use monies received from the Bank pursuant
to the written tax allocation agreement between Southern Security and the Bank,
for purposes other than the remittance of same to the Internal Revenue Service
and the State of Florida in accordance with such tax agreement, and shall, in
all other respects, fully comply with such tax agreement.
9. Sale of Equity Securities.
a. Southern Security shall provide the Reserve Bank with at least 30 days
advance written notice of the proposed sale or offering of any equity
securities.
b. The advance written notice required by this paragraph shall include all
prospectus, offering or private placement materials, as well as a full
description of the proposed uses of the funds raised by the securities' sale, an
opinion letter from an independent securities counsel stating that the materials
contain adequate disclosures and comply with the registration, reporting, and
anti-fraud provisions of the federal and state securities laws, and such other
matters that may be pertinent to assist the Reserve Bank in its review of the
proposed sale or offering.
10. Policy and Plan Approval. The plans and tax agreement required by paragraphs
2 and 8 hereof shall be submitted to the Reserve Bank for review and approval.
An acceptable plan and tax agreement shall be submitted to the Reserve Bank
within the required time periods. Southern Security shall submit the plan and
tax agreement to the Reserve Bank no later than 30 days prior to the expiration
of the applicable time periods. The Reserve Bank may comment on the plan and tax
agreement within 10 days of receipt. Southern Security shall provide the Reserve
Bank with revised plan and tax agreement as may be required, within 5 days of
receipt of written comments, if any. Within 10 days of receipt of the revised
plan and tax agreement, the Reserve Bank shall communicate in writing its
approval or disapproval. Southern Security shall adopt the approved plan within
10 days of approval by the Reserve Bank and the tax agreement as provided in
paragraph 8 hereof, and then shall fully comply with them. During the term of
this Agreement, the approved plan and tax agreement shall not be amended or
rescinded without the prior written approval of the Reserve Bank.
11. Quarterly Compliance Reports. Within 45 days after the end of each calendar
quarter (March 31, June 30, September 30, and December 31) following the date of
this Agreement, Southern Security shall furnish to the Reserve Bank written
progress reports detailing the form and manner of all actions taken to secure
compliance with this Agreement and the results thereof.
12. All communications regarding this Agreement shall be sent to:
(a) Mr. Marion P. Rivers, III
Assistant Vice President
Federal Reserve Bank of Atlanta
104 Marietta Street, N.W.
Atlanta, George 30303
(b) Mr. Philip C. Modder
Chairman
Southern Security Bank Corporation
Post Office Box 520
Boca Raton, Florida 33429-0520
(c) Mr. James Wilson
President
Southern Security Bank Corporation
Post Office Box 520
Boca Raton, Florida 33429-0520
13. The provisions of this Agreement shall be binding upon Southern Security all
of its institution-affiliated parties, in their capacities as such, as their
successors and assigns, and Modder and Wilson in their individual capacities.
14. The provisions of this Agreement shall remain effective and enforceable
until stayed, modified, terminated or suspended, in writing, by the Reserve
Bank.
15. Notwithstanding any provision of this Agreement to the contrary, the Reserve
Bank may, in its sole discretion, grant written extensions of time to the
Southern Security, Modder, and Wilson to comply with any provision of this
Agreement.
16. The provisions of this Agreement shall not bar, estop or otherwise prevent
the Board of Governors, the Reserve Bank or any federal or state agency or
department from taken any other action affecting Southern Security, the Bank or
any of its current or former instituion-affiliated parties thereof including,
but not limited to Modder and Wilson, and their successors or assigns.
17. This Agreement is a "written agreement" for the purposes of section 8 of the
FDI Act (12 U.S.C. 1818).
IN WITNESS WHEREOF, the parties have caused this Agreement to be executed
as of the 13th day of April, 1995.
SOUTHERN SECURITY BANK CORPORATION FEDERAL RESERVE BANK OF ATLANTA
By: s/Philip C. Modder By: s/ Marion P. Rivers, III
- ---------------------- --------------------------
Marion P. Rivers, III
Title: Chairman & CEO Assistant Vice President
With respect to paragraphs 4(c), 5, and 14 through 18 hereof, in their
individual capacities.
s/ Philip C. Modder s/ James Wilson
- ----------------------------- --------------------------------
Philip C. Modder James Wilson
The undersigned directors of Southern Security each acknowledges having
read the foregoing Agreement and approves of the consent thereto by Southern
Security.
s/Timothy Butler s/Philip C. Modder
- ----------------------------- ---------------------------------
Timothy Butler Philip C. Modder
s/Eugene Strasser, M.D. s/James Wilson
- ----------------------------- ---------------------------------
Eugene Strasser, M.D. James Wilson
s/David Butler s/Harold Friend
- ----------------------------- ---------------------------------
David Butler Harold Friend
<PAGE>
UNITED STATES OF AMERICA
BEFORE THE BOARD GOVERNORS OF THE FEDERAL RESERVE SYSTEM
WASHINGTON, D.C.
- -------------------------------------
Written Agreement By and Among
FLORIDA FIRST INTERNATIONAL BANK
Hollywood, Florida
FEDERAL RESERVE BANK OF ATLANTA
Atlanta, Georgia DOCKET NO. 92-022-WA/RB-SM
and
STATE COMPTROLLER AND BANKING
COMMISSIONER OF THE STATE OF FLORIDA
Tallahassee, Florida
- ----------------------------------------
WHEREAS, in recognition of their common goal to restore and maintain the
financial soundness of the Florida First International Bank, Hollywood, Florida
(the "Bank"), a State chartered bank which is a member of the Federal Reserve
System, the Bank, the Federal Reserve Bank of Atlanta (the "Reserve Bank") and
the State Comptroller and Banking Commissioner of the State of Florida (the
"Comptroller") have mutually agreed to enter into this Written Agreement (the
"Agreement"), which replaces the prior Written Agreement, effective January 9,
1989;
WHEREAS, this Agreement is being executed in accordance with the Rules
Regarding Delegation of Authority of the Board of Governors of the Federal
Reserve System (the "Board of Governors"), specifically 12 CFR 265.11(a)(15),
and the Reserve Bank has received the prior approval of the Director of the
Division of Banking Supervision and Regulation (the "Director") and the General
Counsel of the Board of Governors to enter into this Agreement with the Bank;
and
WHEREAS, on February 27, 1992, the board of directors of the Bank, at a
duly constituted meeting adopted a resolution authorizing and directing
President, George Jordan to enter into this Agreement on behalf of the Bank and
consented to compliance by the Bank and its institution-affiliated parties, as
defined by Section 3(u) of the Federal Deposit Insurance Act, as amended (12
U.S.C. 1813(u)) (the "FDI Act"), with each and every provision of this
Agreement.
NOW, THEREFORE, before the taking of any testimony or adjudication of or
finding on any issue of fact or law herein, and without this Agreement
constituting an admission of any allegation made or implied by the Board of
Governors or the Comptroller, the Bank, the Reserve Bank, and the Comptroller
agree as follows:
1. The Bank shall not declare or pay any dividends without the prior
written approval of the Reserve Bank, the Comptroller, and the Director.
2. (a) Within 60 days of this Agreement, the Bank shall submit to the
Reserve Bank and the Comptroller a written plan to maintain an adequate capital
position. The plan shall, at a minimum, address and consider (1) the Bank's
current and future capital requirements, including the maintenance of an
adequate risk-based capital ratio and tier 1 leverage ratio in conformity with
the Capital Adequacy Guidelines of the Board of Governors (12 C.F.R. Part 208,
App. A and B), (2) the volume of the Bank's adversely classified assets, (3) the
Bank's anticipated level of retained earnings, and (4) the source and timing of
additional funds to fulfill the future capital and the loan loss reserve
requirements set forth in this Agreement.
(b) Notwithstanding the provisions of paragraph 2(a) hereof, in the
event that the Bank's tier 1 leverage ratio falls below 6.25 percent, the Bank,
shall within 5 days of such event, notify the Reserve Bank and the Comptroller
about the capital deficiency and shall submit a written statement detailing the
steps that will be taken by the Bank to increase the Bank's tier 1 leverage
ratio above 6.25 percent within 90 days of such event.
3. (a) The board of directors shall take all actions as are necessary to
ensure the Bank's substantial compliance with its established written
asset/liability management policies and procedures.
(b) The Asset/Liability Committee (the "ALCO") of the bank shall, at
all times, be comprised of at least two outside directors. The ALCO shall have
the responsibility for monitoring compliance with the Bank's asset/liability
policies and procedures, and shall review, on a monthly basis, all decision made
by the Bank's management with regard to such policies and procedures, paying
particular attention to whether each decision was made in accordance with the
policies and procedures. Any exceptions to the policies and procedures shall be
documented by the ALCO as to the reason for the excepting and the continuity of
the exception with the Bank's overall goals and strategies and shall be approved
by the majority of the ALCO members.
4. (a) A majority of the Bank's Loan Committee shall, at all times, be
comprised of outside directors, who are not executive officers of the Bank. The
prior approval of the Loan Committee shall be required for any extension of
credit made by the Bank(1) that in the aggregate will exceed $100,000 to any
borrower, including any related interest(s) of the borrower or (2) to any
institution-affiliated party of the Bank, including any related interest(s) of
such borrower. The Bank's Loan Committee shall have the responsibility for
monitoring compliance with the Bank's written loan policies and procedures and
shall review, on a monthly basis, all loans made by the Bank and the activities
of all personnel of the Bank involved in its lending operations. At each meeting
of the Loan Committee, the Committee shall review the current status of all
loans in excess of $50,000 that are in default as to principal or interest for
30 days or more as of the date of the board meeting, that are adversely
classified or listed for special mention by State or Federal examiners in the
Bank's latest report of examination or that are to an institution-affiliated
party of the Bank. The Committee shall specifically address whether the
extension of credit was made in accordance with the Bank's written loan policies
and procedures and whether the collection actions undertaken by Bank management
to reduce the volume of past due loans were in full compliance with the Bank's
collection procedures as set forth in its written loan policies and procedures.
The Loan Committee shall maintain accurate written minutes of its meetings,
which shall be available for subsequent supervisory review.
(b) At least once every 30 days from the date of this Agreement, but
not less than 5 days before a board of directors' meeting, the Loan Committee
shall to the board of directors a written report regarding all actions it has
taken.
(c) For the purpose of this Agreement, the terms (1) "related
interest" shall be defined as set forth in Section 215.2(k) of Regulation O of
the Board of Governors (12 CFR 215.2(k)); (2) "extension of credit" shall be
defined as set forth in Section 215.3 of Regulation O of the Board of Governors
(12 CFR 215.3); and (3) "executive officer" shall be defined as set forth in
Section 215.2(d) of Regulation O of the Board of Governors (12 CFR 215.2(d)).
5. The Bank shall not, directly or indirectly, (a) extend any additional
credit to or for the benefit of any borrower, including any related interest of
the Borrower, who is obligated in any manner to the Bank on any extension of
credit or portion thereof that has been charged off by the Bank or classified
"Loss" or "Doubtful" in the Report of Examination of the Bank, dated October 31,
1991 (the "Report of Examination":) as long as such credit remains uncollected;
and (b) extend any additional credit to any borrower whose line of credit has
been classified "Substandard" in the Report of Examination without the prior
approval of the Bank's board of directors, who shall document the reasons for
the additional advances, specifically (1) that the additional extension of
credit is necessary to protect the Bank's interest in the ultimate collection of
the credit already granted, or (2) that the additional credit is in full
compliance with the Bank's written loan policy and is adequately secured, that a
through credit analysis has been performed indicating that the additional
extension of credit is reasonable and justified, that all necessary loan
documentation has been properly and accurately prepared and filed, that the
additional extension will not impair the Bank's interest in obtaining repayment
of the already outstanding credit, and that the board of directors reasonably
believes that the additional extension of credit will be repaid according to its
terms. The certification, together with the credit analysis and related
information that was used in the determination, shall be maintained by the Bank
for subsequent supervisory review.
6. Within 60 days of this Agreement, the Bank shall submit to the Reserve
Bank and the Comptroller a written plan designed to improve the Bank's position
on each loan in excess of $100,000 that was in default as to principal or
interest in excess of 90 days as of the date of this Agreement and each asset,
including other real estate, adversely classified by examiners in the Report of
Examination, through amortization, repayment, liquidation, additional collateral
or other means, whichever may be appropriate. The plan shall not be amended or
rescinded without the prior written approval of the Reserve Bank, except that
the plan shall be amended periodically to cover loans or others assets in excess
of $100,000 that are adversely classified or listed for special mention in
subsequent examinations of the Bank or, with respect to loans, in default as to
principal or interest in excess of 90 days as of the date of each subsequent
examination or visitation. Amended plans based on loans or other assets that are
classified or listed for special mention or overdue in subsequent examinations
or visitations shall be submitted to the Reserve Bank and the Comptroller with
the next progress report, described by paragraph 13 hereof, following each
subsequent examination or visitation.
7. (a) Within 45 days of this Agreement, the Bank shall take all necessary
steps to correct all exceptions to the Bank's loan files reflected in the loans
adversely classified and the loans listed for technical exceptions in the Report
of Examination, including obtaining accurate and current financial statements,
updating insurance coverage, and obtaining income/cashflow information.
(b) Within 60 days of this Agreement, the Bank shall submit to the
Reserve Bank and the Comptroller (1) a written report detailing the actions
taken pursuant to paragraph 7(a) hereof, and (2) written procedures designed to
ensure that all extensions of credit comply with the Bank's revised loan policy
concerning required loan documentation and collateral.
8. (a) Within 30 days of this Agreement, the Bank shall establish and
shall, thereafter, continue to maintain, through charges to current operating
income, an adequate valuation reserve for loan losses. The adequacy of this
reserve shall be determined in light of past loss experience, evaluation of the
potential for losses in the loan portfolio of the Bank (especially the potential
for unidentified losses in loans adversely classified) and examiners' other
criticisms. A written record shall be maintained indicating the methodology used
in determining the amount of the reserve needed (e.g., at a minimum, the
methodology should address the maintenance of a reserve equal to a sum of : 40
to 50 percent of loans classified "Doubtful", 10 to 20 percent of loans
classified "Substandard" and .5 to 1 percent of all other loans). This record
shall be submitted to the Reserve Bank and the comptroller for review within 60
days of this Agreement.
(b) Notwithstanding the provisions of paragraph 8(a) hereof, the
Bank's valuation reserve for loan losses shall, within 10 days of this Agreement
and, thereafter, at all times subsequent to date of this Agreement, equal, at a
minimum, 1.78 percent of the Bank's total loans, excluding Federal funds sold.
(c) For the purpose of this paragraph, the Bank's total loans shall
not include any loans or portions of loans that have been adversely classified
as "Loss" by examiners in any report of examination or visitation (which loans
shall be charged off upon the Bank's receipt of any report of examination or
visitation) or otherwise charged off the books of the Bank, and the amount of
total loans shall be the amount listed on line 11 of Schedule RC-C of the
Consolidated Report of Condition of the Bank as reported for each quarter after
the date of this Agreement.
(d) The requirement of this paragraph shall not be construed as a
standard for future operations of the Bank after the termination of this
Agreement. It is the intention of these requirements to provide for an
appropriate reduction in adversely classified assets and to maintain adequate
loan loss reserves during the term of this Agreement.
9. Within 45 days of this Agreement, the Bank shall develop and submit to
the Reserve Bank and the Comptroller written loan review procedures. The loan
review procedures shall be designed to identify and categorize problem credits
and to assess the overall quality of the Bank's loan portfolio. These procedures
shall, at a minimum, include the following:
(a) A description of the risk grades to be assigned to each loan;
(b) the designation of the individual(s) who will be responsible for
determining loan grades;
(c) a description of when loans will be graded; and,
(d) a mechanism for reporting periodically to the Bank's board of directors
the status of the loan reviews and the action(s) taken by management to improve
the Bank's position on each loan adversely graded.
10. Within 45 days of this Agreement, the Bank shall amend its present
written loan policies and procedures and shall submit such amended policies and
procedures to the Reserve Bank and the Comptroller. The amended loan policies
and procedures shall include, but not be limited to, the following:
(a) The establishment of procedures for performing credit evaluations,
including, at a minimum, (1) reviewing current (less than 12 months old)
balance sheet and income information, (2) determining business trends by
obtaining statements for the previous two years for existing businesses, (3)
reviewing the applicant's liquidity, cash flow and leverage position, (4)
determining the applicant's current status and payment record on outstanding
debts, (5) obtaining credit bureau reports, (6) verifying contingent
liabilities, and (7) obtaining all other necessary documentation regarding the
applicant, guarantor, and/or collateral;
(b) guidelines for determining when audited financial statements of loan
customers will be required in lieu of applicant prepared statements or
compilations;
(c) guidelines for loans secured by real estate and/or income producing
properties, including appraisal requirements and requirements for minimum debt
service coverage ratios and minimum dollar amounts on which an outside appraisal
will be required;
(d) procedures designed to ensure that extensions of credit are generally
made to borrowers within the Bank's defined trade area;
(e) procedures for establishing repayment plans at the inception on all
extensions of credit;
(f) guidelines for placing loans on nonaccrual status in conformity with
call report instructions; and,
(g) procedures for exceptions to the loan policy, including required
documentation by the account officer and approval by the board of directors.
11. (a) Within 60 days of this Agreement, the Bank shall submit to the
Reserve Bank and the Comptroller a written strategic plan concerning the Bank's
proposed business activities for 1992. This plan shall at a minimum provide for
or describe:
(1) The responsibilities of the Bank's board of directors towards the
definition, approval, implementation and monitoring of the strategic plan, and
the procedures designed to ensure that the board of directors fulfill such
responsibilities;
(2) management, lending, and operational objectives, given the
condition of the Bank as reflected in the Report of Examination;
(3) an identification of the major areas in and the means by which the
Bank will seek to improve its operational and earnings performance;
(4) the operating assumptions that form the basis for major projected
income and expense components and the sources and uses of cash flow;
(5) financial performance objectives, including plans for asset growth,
earnings, liquidity and capital supported by detailed quarterly and annual pro
forma financial statements, including projected budgets, cash flow statements,
balance sheets and income statements;
(6) the establishment of a quarterly review process to monitor the
actual income, expenses and net cash flow of the Bank in comparison to budgetary
projections; and,
quarterly and annual budgets and cash flow statements and quarter-end and
year-end balance sheet and income statements for the Bank.
(b) A strategic plan for each calendar year subsequent to 1992 shall be
submitted to the Reserve Bank and the Comptroller at least one month prior to
the beginning of that calendar year. The revised projected quarterly and annual
financial statements required by paragraph 11(1)(7) hereof shall be submitted to
the Reserve Bank and the Comptroller within 30 days of the end of each calendar
quarter.
12. The plans, policies, and procedures required by paragraphs 2(a), 6,
7(b)(2), 9, and 10 hereof shall be submitted to the Reserve Bank and the
Comptroller for review and approval. The Reserve Bank and the Comptroller may
comment on the plans, policies and procedures within 10 business days of
receipt. Acceptable plans, policies, and procedures shall be submitted to the
Reserve Bank and the Comptroller within the time periods set forth in this
Agreement. The Bank shall adopt all approved plans, policies and procedures
within 10 business days of approval by the Reserve Bank and the Comptroller and
then shall fully comply with them. During the term of this Agreement, the Bank
shall not amend or rescind the approved plans, policies, and procedures without
the prior written approval of the Reserve Bank and the Comptroller.
13. Within 30 days of the end of each calendar quarter (March 31, June
30, September 30, and December 31) following the date of this Agreement, the
Bank shall furnish to the Reserve Bank and the Comptroller written progress
reports detailing the form and manner of all actions taken to ensure compliance
with this Agreement and the results thereof, including updated reports on all
asset improvement plans required by paragraph 6 hereof. The board of directors
of the Bank shall certify in writing to the Reserve Bank and the Comptroller
that each director has reviewed each quarterly progress report required by this
paragraph. Such reports may be discontinued when corrections required by this
Agreement have been accomplished, and the Reserve Bank and the Comptroller have,
in writing, released the Bank from making further reports.
14. All communications regarding this Agreement shall be sent to:
(a) Mr. Ronald N. Zimmerman
Vice President
Federal Reserve Bank of Atlanta
104 Marietta St., N.W.
Atlanta, Georgia 30303-2713
(b) Mr. Gerald A. Lewis
State Comptroller and Banking Commissioner
Office of the Comptroller
State of Florida
Tallahassee, Florida 32399-0350
(c) Mr. George W. Jordan
President
Florida First International Bank
Post Office Box 6699
Hollywood, Florida 33081
15. Notwithstanding any provision of this Agreement to the contrary,
the Reserve Bank and the Comptroller may, in their sole discretion, grant
written extensions of time to the Bank to comply with any provision of this
Agreement.
16. The provisions of this Agreement shall be binding upon the Bank,
all of its institution-affiliated parties, in their capacities as such, and
their successors and assigns.
17. Each provision of this Agreement shall remain effective and
enforceable until stayed, modified, terminated or suspended by the Reserve Bank
and the Comptroller.
18. The provision of this Agreement shall not bar, estop or otherwise
prevent the Board of Governors or the Comptroller from taking any other action
affecting the Bank or any of its current or former institution-affiliated
parties and their successors and assigns.
19. This Agreement is a "written agreement" for the purposes of section
8 of the FDI Act (12 U.S.C. 1818).
20. As of the date of this Agreement, the Written Agreement by and
among the Bank, the Reserve Bank, and the Comptroller, dated January 9, 1969, is
terminated.
IN WITNESS WHEREOF, the parties have caused this Agreement to the
executed as of the 17th day of March, 1992.
Florida First International Bank Federal Reserve Bank
By s/ "G.W. Jordan" By s/ "Marion P. Rivers III"
President
State Comptroller and Banking
Commissioner of the State of
Florida
By s/"Gerald Lewis"
The undersigned directors of the Bank each acknowledges reading the
foregoing Agreement and approves of the consent thereto by the Bank.
s/"Sylvia M. Berman" s/"Robert J. Steinmetz"
s/"Frank D. Camperlengo" s/"Howard S. Wolkowitz"
s/"George W. Jordan"
SOUTHERN SECURITY BANK
ASSET/LIABILITY MANAGEMENT POLICY
REVIEWED: MAY 27, 1997
APPROVED: MAY 27, 1997
MODIFIED: JULY 22, 1997
SOUTHERN SECURITY BANK
ASSET/LIABILITY MANAGEMENT POLICY
I. STATEMENT OF POLICY....................................1
II. AUTHORITY FOR ASSET/LIABILITY MANAGEMENT COMMITTEE.....1
III. ASSET/LIABILITY MANAGEMENT COMMITTEE...................2
IV. ANNUAL PROFIT PLAN.....................................4
V. LIQUIDITY POLICY.......................................4
VI. PRIMARY FUNDING NEEDS AND SOURCES......................7
VII. OFF BALANCE SHEET POLICY...............................8
VIII. INTERBANK LIABILITIES (REGULATION F)...................9
<PAGE>
ASSET/LIABILITY MANAGEMENT POLICY
Southern Security Bank is a full service banking institution organized and
operated to meet the financial needs of individuals and business throughout the
Broward County Area.
I. STATEMENT OF POLICY
A. Asset/Liability Management is the coordination of all balance sheet
categories so as to maximize shareholder wealth. The actual practice
of Asset/Liability Management focuses on the narrower asset/liability
relationship between variable rate assets and variable rate
liabilities. The advent of deregulation caused financial institution
management to assess its ability to reinvest variable cost funds into
profitable investments to maintain stable profitability. Because
banking is an industry that is changing together with the fluctuating
nature of the local and national economies, this policy is subject to
change as needed. The asset/liability management objectives of
Southern Security Bank include the following.
1. Managing net interest margins.
2. managing profitability.
3. Controlling interest rate risk exposure (GAP analysis).
4. Insuring liquidity
5. Performing balance sheet planning (maintaining the ability to
meet loan demand and deposit withdrawals).
6. Perform tax planning. 7. Plan bank funding.
B. It shall be the policy of the Bank's management to achieve the above
objective in the functioning of its Asset/Liability Management Policy.
Quantitative goals shall be established to fit these objectives in
light of the operating environment and long-term planning goals.
C. Foremost among the policies to govern Asset/Liability Management is
that of requiring full compliance with all state and federal laws.
II. AUTHORITY FOR ASSET/LIABILITY MANAGEMENT COMMITTEE
Asset/Liability management policies of the bank are under the purview
of the Board of Directors who shall delegate authority for their
formulation and administration to the Asset/Liability Management
Committee.
III. ASSET/LIABILITY MANAGEMENT COMMITTEE
A. An Asset/Liability Management Committee shall be appointed to:
1. monitoring stress conditions, financial markets and regulatory change
on a continuing basis.
2. manage mix of rate sensitive sources and uses of funds over interest
rate cycle.
3. evolve key loan deposit investment and funds management strategies
consistent with profit planning and long-range goals and objectives.
B. The composition of this committee shall include the Chairman of the
Board, the President, the Chief Operating Officer and the Senior
Lending Officer. As the staff of Southern Security Bank increases in
size and additional officers are employed, the committee may decide to
include additional members, which may include directors. The Chairman
of the committee shall be the Chairman of the Board of the bank who
shall be responsible for carrying out the Asset/Liability management
subject to quarterly review by the Board of Directors or more often if
conditions dictate.
C. The Asset/Liability Management Committee shall meet at least monthly or
more frequently as conditions require, such as in times of increased
rate volatility and unexpected economic changes.
D. At its monthly meetings, committee members will review:
1. minutes of the previous meetings.
2. monthly Asset/Liability funds budget in relation to the actual
flow of funds as well as peer group comparisons. The committee
will also conduct a spread analysis and determine how well the
allocation of sources and uses of funds as well as related
strategies and programs are working to meet the bank's longer
range targets.
3. alternative scenarios developed through sensitivity or what if
analysis. These scenarios will incorporate such variables as
expected loan demand, investment opportunities, core deposit
growth within specific categories, regulatory changes,
monetary policy adjustments and the overall state of the
economy and, in addition, interest rates on particular sources
and uses of funds.
4. ratio of the amount of rate-sensitive assets to the amount of
rate-sensitive liabilities which are sensitive within defined
time frames, (i.e., 90, 180, 365 days). the sensitive assets
and rate-sensitive liabilities and the maturity distribution.
Furthermore, it will review rate-sensitivity reports as well
as mix/spread analysis to assess the effects of anticipated
interest rates and of the volume and mix of asset/liability
items on net interest margin.
5. current and prospective liquidity position both on the asset
and liability sides of the balance sheet and in relation to
rate sensitivity.
6. results of the implementation of funding strategies which are
designed to insure that the bank has adequate funds for loans,
investments, deposit coverage, debt repayment and the
expansion of service capability when they are necessary.
Prospective assessment of the availability of funds both for
shorter term and capital purposes at a price that will give a
reasonable and consistent return on investment in relation to
the risk involved. Weighted average maturity distribution on
money market certificates and $100,000 and larger certificates
of deposits.
7. balances maintained with correspondent banks and other
non-earning assets.
8. ratio of loan loss reserve to outstanding loans.
9. capital levels to determine whether they are sufficient
to support asset growth; to underwrite interest rate risk;
to match the expectations of rating agencies and the
marketplace, and to meet long- and short-term funding needs.
Periodic review of bank's dividend policy.
10. tax position.
11. recommendations on asset/liability allocations, current months
funds budget and action plan.
E. Discussion of information recommendations and actions taken by the
committee will be recorded and reported in the minutes of the meeting.
Copies of these minutes will be distributed to the committee members
and other key personnel. A copy of the minutes for each meeting will be
maintained on file in the office of the Chief Executive Officer.
F. This committee will be involved in all operations and functions of the
bank. It requires a management information system providing thorough
and useful information quickly available. Manual preparation of such
information is burdensome and time consuming.
G. The committee shall attempt to be proactive rather than reactive in
implementing and accomplishing balance sheet goals. the bank has the
opportunity to enter the financial markets without burden of old,
economically outdated operating programs. Such strategy shall include:
1. establishing loan pricing closely paralleling the bank's cost
of funds.
2. providing variable/renegotiable rate loan products which will
change based upon and appropriate index. It will be the
intention of the committee to have these variable rate
products reflect, as much as possible, changes in the bank's
own cost of funds.
3. utilizing secondary mortgage market capabilities through loan
origination and pass through arrangements to maintain
liquidity.
4. assessing the role of the investment portfolio in light of
deregulation of interest rates and tax reform.
5. maximizing investment yield subject to risk and maturity
considerations. In addition, certain hedging devices, i.e.,
interest rate swaps, options and loss programs may be used
from time to time to more effectively manage the portfolio.
6. developing an investment portfolio that is responsive to
fluctuating levels of interest rates by emphasizing shorter
maturities and money market instruments to better match
funding liabilities.
H. Asset/Liability Management affects all bank activities. The remaining
policy areas discovered herein interrelate with Asset/Liability
management.
IV. ANNUAL PROFIT PLAN
A. Long-range plans serve as the basis for profit plans and the
Asset/Liability Management Committee will review variances
from the budget segments of these plans so that timely
corrective action can be taken or adverse variance with regard
to interest rates, volume levels, and mix of assets and
liabilities.
B. The committee will also review performance measures quarterly.
Based on discernible changes and trends or patterns, it will
make alterations and strategies for loan policies, bond
portfolio structure and funds acquisitions in order to achieve
year-end goals.
C. On an operating level, management will have sufficient
authority to react to contingencies daily.
D. Sufficient flexibility will be built into the budgeting
process so that variance analysis input and rolling monthly
12-month forecasts can be factored on an ongoing basis.
E. The Board of Directors will review each calendar quarter
comparisons of actual versus planned results in the annual
profit plan. These reviews will focus on dollar as well as
percentage variances for the quarter being reviewed in the
year-to-date results.
V. LIQUIDITY POLICY
A. Liquidity represents the ability to accommodate the most efficient
decreases in deposits and/or the run-off of other liabilities as well
as fund increases in the loan portfolio, lines and letters of credit
and fulfill short-term credit needs. A bank has adequate liquidity
potential when it can obtain sufficient cash promptly at a reasonable
cost. Liquidity is essential to compensate for expected and unexpected
balance sheet fluctuations and to provide funds for growth. The price
of liquidity is a function of market conditions and the degree of
interest rate and credit risk. If liquidity needs are met through
holdings of high quality, short-term assets, the price is income
sacrificed by not holding longer term and/or lower quality assets. If
liquidity needs are not met through liquid asset holdings, the bank
may be forced to acquire additional liabilities under adverse market
conditions at excessively high rates. Determination of the adequacy of
the bank's liquidity position depends on the analysis of:
1. historical funding requirements.
2. current liquidity position.
3. anticipated future funding needs.
4. options for reducing funding needs or attracting
additional funds.
5. sources of funds.
B. To insure adequate liquidity or a safe pattern of cash flows in a
fluctuating rate environment, the Asset/Liability Management Committee
will consider the implementation of three strategies:
1. Extending the maturities of the bank's liabilities unless
interest rates are heading downward.
2. Diversifying the bank's sources of funds, including the
development of new funding sources.
3. matching the maturity of assets and liabilities, recognizing
that this strategy usually causes a higher cost of funding
assets than maturity mismatching.
C. In assessing liquidity, the committee will consider current position
and future outlook. It will especially monitor large liability
dependence, temporary investments to large liabilities, fixed rate
assets to core deposits and loans to deposits.
D. To provide funds to satisfy liquidity needs, the bank must do one or
more of the following:
1. Dispose of liquid assets.
2. Increase short-term borrowing or issue additional short-term
deposit liabilities.
3. Decrease holdings of non-liquid assets.
4. Increase liabilities of a term nature.
5. Increase capital funds.
E. The committee will guide the bank's funding operations according to the
following principles:
1. Compete for stable deposit money by building multi-service
customer relationships.
2. Lengthen the maturity of purchased liabilities unless longer
term rates so far exceed current or prospective short-term
rates as to make this option unfeasible.
3. Diversify sources of funds by maintaining an active presence
in as many money markets as possible for a small bank.
4. Promote buyer/seller relations and market reputations so that
investor confidence will enable the bank to raise funds it
needs when it needs them at reasonable rates.
5. Plan and arrange for contingency funding through a variety of
sources before adverse market conditions cause difficulty.
6. Conduct frequent profitability analysis of deposit accounts
relationship and compare funds cost with those of alternative
sources.
F. Liquidity targets and guidelines. It should be understood that targets
are just that and if not met, an acceptable explanation will follow.
Guidelines should not be violated unless prior approval is obtained. As
follows.
1. A net loan to deposit ratio of 80% maximum. (Guideline, refer to
loan policy)
2. Net Loans & Leases (& Capital) of not greater than
8.0%. (Target, refer to loan policy)
3. Net loans to total assets of not more than 75%. (Target, refer to
loan policy).
4. Commercial loans to total loans not to exceed 60%.
(Target, refer to loan policy).
5. Consumer Loans to total loans not to exceed 50%. (Target, refer to
loan policy).
6. Real Estate Loans to total loans not to exceed 60%. (Target, refer
to loan policy).
7. Temporary Investments to average total assets of 10% - 20%.
(Guideline)
Temporary investments are interest bearing balances due from
depository institutions, federal funds sold and securities
purchased under agreements to resell, trading-account assets,
and debt securities with remaining maturities or earliest
repricing opportunity of one year or less.
8. Certificates of deposits, borrowing and public funds should account
for less than 50% of total assets. (Target)
9. Borrowing to total capital should be less than 200%. (Guideline)
10. The rate sensitive asset to rate sensitive liability ration from 0
to 90 days should be maintained between .80 to 1.20. (Target).
11. The rate sensitive asset to rate sensitive liability ration from
91 - 365 days should be maintained between .80 to 1.20. (Target).
12. Zero to 90 day GAP to total assets shall not exceed -10% to +10%.
(Target) 13. 91 - 365 day GAP to total assets shall not exceed
-10% to +10%. (Target) 14. Zero to 190 day rate sensitive loans to
total loans, 50% to 70%. (Guideline) 15. Net Liquidity to Net
Liability, more than 20%. (Target) Net Liquidity is cash,
due from banks, fed funds sold, interest-bearing deposits
maturing in 30 days or less, and market value of all
unencumbered, rated, investment-grade securities. Net
Liability is total deposits less due from banks.
16. Short term liquidity divided by total assets should be greater than
20%. (Target)
17. Riskless Assets to Total Assets 10% to 25%. (Guideline) Riskless
Assets are cash & due from, U.S. treasuries and government agency
securities less pledge amount, FDIC insured certificates of
deposits, cash and federal funds sold.
18. In determining the spread rate (rate differential) between marginal
liability cost and marginal yield, reserve requirements, taxes and
deposit insurance must be considered incremental costs for cost of
funds calculations. The resulting net spread should not be less
than 3%. (Target)
19. Gross Off Balance sheet items to total assets should not be greater
than 10%. (Target)
20. Volatile Liability Dependence Ratio should be less than a Plus 10%
and preferable a negative ratio. (Target)
G. A small bank runs an extreme risk of illiquidity quickly due to the
risk of loans transferred from other institutions inherently exceeding
the transfer of deposits. Therefore, it is imperative that the
established policy be adhered to as it relates to prudent maximum loan
limits rather than the legal maximum limits which relate to the amount
of capital not liquidity. A loan policy has been adopted and is
referenced hereto.
H. Similarly, long-range investment strategies based on the investment
Policy incorporated herein must have regard for liquidity needs.
Liquidity is sought while at the same time minimizing the cost of those
funds. It must be expected to experience cyclical deposit fluctuations
particularly in the Florida economy and to a lesser degree, loan demand
fluctuations. The Asset/Liability Management Committee will endeavor to
make
educated predictions for funding requirements and investments which can
be purchased with these requirements in mind.
I. There should be established unsecured (preferably) or secured lines of
credit with correspondent banks. Preferably at least two lines should
be established. Diversification reduces dependency on any single
supplier. The bank should not exceed its capacity to borrow in any one
area or market. The committee shall determine an appropriate level of
borrowing that the bank may have. Initially it shall be the
responsibility of the committee to arrange for lines of credit at other
financial institutions. These lines of credit shall include fed funds,
repo's and the Federal Reserve discount window.
VI. PRIMARY FUNDING NEEDS AND SOURCES
Primary funding needs and sources are measured by our need and ability to raise
cash at a reasonable cost or minimum loss. Our bank must be capable of meeting
all customer obligations at all times. Specifically, we must meet cash
withdrawal requirements, fund lines and letters of credit, and fulfill
short-term credit needs. Practically, we will achieve sufficient liquidity by
the following procedures:
1. Pursuit of core deposits.
2. We should have part of our investment portfolio maturing
within one year. As these investments mature, they will be
used to meet the bank's cash needs or they will be reinvested
to maintain a desired liquidity position.
3. We will attempt to define volatile deposits existing in our
money market savings account (i.e., accounts over $100,000).
This balance in the account will be classified as volatile
money and we will keep at least an amount equal to this in our
Fed funds sold account to offset volatile deposits. This money
in Fed funds would then become a temporary source of liquidity
if needed.
4. We may apply for a second line of credit from the
Federal Reserve or a correspondent to be used if needed.
5. Should we experience temporary high loan demand, we will
attempt to meet it by selling loans to correspondent
banks.
6. In terms of illiquidity, we could explore the possibility of
raising money by buying money from such sources as the CD
market.
7. For liquidity purposes we are classifying our investment
portfolio into liquidity and income designations. Government
agency, and other short-term investments maturing within two
years, and municipal securities maturing within one year, will
be designated as "liquid" investments, while investments with
maturities greater than the above criterion will be considered
"income" investments.
8. We will attempt to forecast loan and deposit expectations
through the use of historical trends and future economic
expectations. These projections will enable us to plan for
seasonal liquidity needs rather than react hastily to
liquidity pressure.
9. Should the bank become illiquid in spite of these steps, we
will curtail lending. The first step is to cease making real
estate mortgage loans; the second is to cease making
commercial loans; the third step will be to slow consumer
loans; and the
fourth step is to refuse loans to new customers. Only as a
last resort will we refuse short-term working capital loans to
existing commercial customers or short-term loans to
individual customers.
VII. OFF BALANCE SHEET POLICY
The Off Balance Sheet items (contingent liabilities) of the bank will consist
primarily of unused portions of committed lines of credit where the bank has a
legal obligation to fund these unused portions when called upon. Said legal
obligation arises from the acceptance of a commitment fee from the borrower
whether or not the loan has actually closed.
Additionally, while the bank is not at this time seeking to engage in the
issuance of standby or trade letters of credit, we recognize the possibility of
being called upon to do so by existing customers. Any letter of credit activity
will be subject to the same policy, procedures, credit and collateral
requirements that any loan request is subject to and once paid for, will become
an Off Balance Sheet Item until it is called upon or expires.
Because of liquidity considerations and their generally lower profit potential,
total exposure in letters of credit will be reviewed monthly by the Director's
Loan Committee.
Because of liquidity considerations, all unused portions of lines of credit will
be reviewed by the Director's Loan Committee monthly, said total to be compared
to the bank's average excess liquidity for the prior thirty-day period.
Loans of credit in excess of officer's authority will be subject to lending
authorities set forth in the bank's Loan Policy.
VIII. INTERBANK LIABILITIES REGULATION(S)
Credit Exposure that may exist between the Bank and its correspondent banking
relationship with outside correspondents, as that term is defined in Federal
Reserve Regulation F, shall at all times be monitored and controlled as required
by that regulation.
A. No less frequently than quarterly, the Bank's Chief Operating Officer,
or in its absence the Senior Loan Officer, or such designated
"Responsible Officer" as specified and directed by the Board of
Directors, shall review the call reports, annual reports, and such
other publicly available information as the Responsible Officer shall
deem appropriate concerning each correspondent to which this Bank has
a "significant exposure". For purposes herein, "significant exposure"
shall be deemed to exist whenever the exposure of this Bank to a
correspondent is more than $100,000 on a monthly average basis.
Exposure shall be measured by using the actual amount owed to the Bank
on all exposure types. This is to include the sale of federal funds
(exclusive of agent status).
B. The Responsible Officer shall conduct such reviews more frequently than
quarterly if prudent to do so, based upon the size and type of the
Bank's exposure and the financial condition of such correspondent. In
assessing the financial condition of each
correspondent, the Responsible Officer shall consider at a minimum the
following financial characteristics of the correspondent's:
1. Capital level;
2. Level of non-accruals and past due loans and leases;
3. Level of
earnings;
4. Factors affecting the correspondent financial condition.
In such assessments, the Responsible Officer may also take into account the
rating of the correspondent by a bank rating agency whose general assessment and
selection criteria have been reviewed and approved by the Board of Directors. At
present, this board has reviewed and approved the criteria of the following bank
rating agency:
Bauer Financial Reports, Inc.
P.O. Drawer 145510
Coral Gables, Florida 35114
This board recognizes the need to establish a current list of acceptable
correspondents. The list of institutions initially identified is neither all
inclusive or deemed an approval of a nonqualifying institution as required by
this policy:
Independent Bankers Bank - Orlando Florida
Compass Bank - Birmingham, Alabama
First Union National Bank, Charlotte, North Carolina
Chase Manhattan Bank - New York, New York
Fleet Bank - Providence, Rhode Island
C. The Responsible Officer shall determine whether the correspondent
qualified as at least "adequately capitalized" as defined in
Regulation F. At present that standard requires the correspondent to
have at a minimum:
1. - Total Risk Based Capital Ratio of 8.0%
- Tier 1 Risk Based Capital Ratio of 4.0%; and - Leverage
Ratio of 4.0%.
2. If the numerical values as defined above in Section
4.20[C](1,2,3) are not equal to or exceed those minimum
requirements as defined by Regulation "F" for an "Adequately
Capitalized" correspondent, those minimum requirements
stipulated in Regulation "F" shall be the applicable
qualifications. The Responsible Officer shall:
a. begin applying the amended standards immediately; and
b. bring such changes to the attention of the
Asset/Liability Committee immediately, and to the
Board of Directors at its next regular meeting after
the Responsible Officer becomes aware of the changes,
so that it may revise this policy.
3. Additionally, the bank should limit exposure to correspondent
banks in the form of noninterest and interest bearing FDIC
insured accounts and federal funds
exclusive of agent status). The limit for these balances on
inter-day and intra-day transactions are 10% of total assets.
The maturity of such exposure should be daily but may
occasionally extend to seven days (except for FDIC insured
time deposits which should not exceed one year). The
correspondent should also meet the following quantitative
measures: a. Nonperforming Assets/Assets equal to or less than
1.25% b. Repossessed Assets/Total Assets equal to less than
1.25% c. Return on Assets equal to or more than .75%.
D. The Bank shall neither establish nor (to the extent possible) continue
a significant exposure to a correspondent in which the form or maturity
of the exposure and the financial condition of the correspondent create
a significant risk that the payments expected by the Bank will not be
made in full or on time.
1. If a correspondent relationship which initially complied with
Bank policy later becomes non-complying because of
deterioration of the financial condition of the correspondent,
market changes or any other reason, the Responsible Officer
shall terminate and close out the relationship, or reduce it
to an insignificant level as rapidly as possible, consistent
with prudent banking standards.
2. The Responsible Officer shall report all such situations,
the remedial action taken and the results of that action
immediately to the Executive Committee of the Board of
Directors, and to the Board of Directors at its next
schedule meeting.
E. The Bank's internal financial limit for its exposure to any
institutional correspondent shall be established and recorded on the
"Bank's Interbank Liability (Regulation F) Control Records". (See
Appendix for Control Record format.)
1. The Board of Directors shall review these limits from time to
time upon recommendations of management or upon its own
motion, and revise those limits up or down either as a global
change applicable to all correspondent relationships, or for
any or each specific correspondent(s) as it deems appropriate.
2. Bank management shall use only the most current revision of
each form in determining what are the internal limits of the
Bank for exposures to correspondents. Each officer
responsible for a corespondent relationship of the Bank
shall structure that relationship so as to preclude the
possibility of the relationship growing to a size in excess
of the applicable internal limit unless such growth is merely
an occasional anomaly, resulting from unusual market
disturbances, market movements favorable to the Bank,
increases in activity, operational problems, or other unusual
circumstances.
F. Procedure to determine the Bank's internal financial limit for its
exposure to any institutional correspondent.
1. At least quarterly, determine the size of the exposure in each
present or proposed correspondent relationship of the Bank.
2. If the exposure is not "significant" as defined herein, go to
Step 3. If the exposure is "significant" as defined, go to
Step 4.
3. Monitor the size of the exposure retroactively on a monthly
basis, or more frequently if appropriate. If the exposure
becomes significant, to Step 4.
4. Review each correspondent's latest call report, annual report,
rating by any bank rating service approved in the Policy, or
any other available financial and other information about the
correspondent to determine whether it has at lest the capital
as defined in item C of this section.
5. If the correspondent does not meet all of those three
requirements, determine how best to reduce the Bank's exposure
to that correspondent below the level defined as "significant"
in the Policy. Alternatively, determine how to eliminate that
exposure completely. Weigh the risks and costs of each
alternative against the risks and costs of continuing the
relationship at its present level or some level higher than
the lowest figure which constitutes a "significant" exposure
under the Policy until its normal liquidation if it is one
which will liquidate normally at a fixed time in the future.
Document these processes and report them to the Executive
Committee of the Board of Directors.
6. If the correspondent does not meet all three of those
requirements, compare the size of the Bank's exposure to
that correspondent with the limits stated in the Bank's
interbank liability control record established by the
Policy.
7. If the exposure is less than the applicable limit on the
control record, note that the fact in the working papers and
repeat the above steps at the next regular monitoring.
8. If the exposure is greater than the applicable limit in the
Bank's control record, the Responsible Officer shall reduce
the exposure at or below the level limit amount, unless the
excess is merely an occasional one, resulting from unusual
market disturbances, market movements favorable to the Bank,
increases in activity, operation problems, or other unusual
circumstances. Document these activities.
G. Compliance officer's Procedure to determine the Bank's compliance with
its internal financial limit for exposure to institutional
correspondent(s).
1. At least annually, obtain all records regarding the monitoring
of interbank exposure pursuant to the Bank's policy since the
immediately previous review by the Compliance Officer.
2. If the number of correspondent relationships the Bank has is
not large, review all of them. If it is large, select a
representative sample for review, and review them.
3. Note whether correct determinations of the size and compliance
or lack thereof with the Bank's policy were made by the
Responsible Officer.
4. Note whether all corrective actions required by the Bank's
policy and procedure were taken and reported to the Bank's
Executive Committee and/or the Board of Directors.
5. Advise the Bank's auditor of the results of this examination.
H. To override internal limits as to Interbank Liabilities will require
documenting the processes and the situation. Authority is vested with
the Chief executive Officer to override the limitations herein
established.
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<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-END> DEC-31-1997
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<INVESTMENTS-HELD-FOR-SALE> 380,094
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0
0
<COMMON> 42,997
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<INCOME-PRETAX> (1,166,654)
<INCOME-PRE-EXTRAORDINARY> (1,166,654)
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<NET-INCOME> (1,166,654)
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