SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
AMENDMENT NO. 1 TO
FORM 8-K
CURRENT REPORT
Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
Date of Report (Date of earliest event reported) November 10, 1997
Southern Security Bank Corporation
-----------------------------------------------
(Exact name of registrant as specified in its charter)
Delaware 0-22911 65-0325364
- ---------------------------------------------------------------------------
(State or other jurisdiction Commission (IRS Employer
of incorporation) File Number) Identification No.)
3475 Sheridan Street, Hollywood, Florida 33021
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (561) 416-1100
Southern Security Financial Corporation
-------------------------------------------
(Former name, if changed since last report)
278-A New Dorp Lane, Staten Island, New York 10306-3036
-------------------------------------------------------------------
(Former address, if changed since last report)
<PAGE>
Item 7. Financial Statements and Exhibits
Pursuant to Item 7(a)(4) of Form 8-K, this Amendment contains
additional financial information required by Form 8-K that was not included in
the original Form 8-K of the Registrant dated November 10, 1997 (the
"Form 8-K"). Such information includes (a) pro forma financial information
showing the business combination, (b) statistical disclosure for bank holding
companies required by Industry Guide 3 of the Securities and Exchange
Commission, and (c) interim financial information for the period ended
September 30, 1997. In addition, the Registrant's audited financial statements
for the periods ended December 31, 1996 and December 31, 1995 (the "Financial
Statements") that were filed as part of the Form 8-K have been revised to
provide additional disclosures are being refiled as part of this Amendment.
The Financial Statements filed in the form 8-K are superceded and replaced in
their entirety by the Financial Statements contained in this Amendment.
No additional exhibits are filed herewith.
<PAGE>
Southern Security Financial Corporation (SSFC) was incorporated on October 4,
1996 in the state of Delaware. Effective November 10, 1997, SSFC acquired
Southern Security Bank Corporation (SSBC), in a stock for stock exchange. Prior
to the acquisition of SSBC, SSFC was a "public shell" company, with no
significant operations or assets. The acquisition of SSBC was accounted for as a
reverse acquisition. Under a reverse acquisition, SSBC is treated for accounting
purposes as having acquired SSFC and the historical financial statements of SSBC
become the historical financial statements of SSFC. Therefore, all references to
the historical activities of the Company refer to the historical activities of
SSBC. The following pro forma balance sheet reflects the financial condition of
Southern Security Bank Corporation as of September 30, 1997 as if the reverse
acquisition had occurred on that date and the proforma statements of income
reflect the results of operations for year ended December 31, 1996 and the nine
months ended September 30, 1997 as if the reverse acquisition had occurred on
January 1, 1996, which is prior to October 4, 1996, the date of inception of
Southern Security Financial Corporation.
<TABLE>
<CAPTION>
Southern Security Bank Corporation and subsidiary
Pro Forma Balance Sheet
September 30, 1997
Southern Southern
Security Security Pro
Bank Financial Forma Pro
Corporation Corporation Eliminations Forma
----------- ----------- ------------ -----
<S> <C> <C> <C> <C>
ASSETS (Dollars in Thousands)
Cash and cash equivalents 3,146 -- -- 3,146
Securities 3,405 -- -- 3,405
Loans 10,346 -- -- 10,346
Other assets 1,112 6 -- 1,118
-------- ------- ------- ------
18,009 6 -- 18,015
======== ======= ======= ======
LIABILITIES AND STOCKHOLDERS'
EQUITY
Liabilities:
Noninterest-bearing deposits 3,906 -- -- 3,906
NOW, money market and
savings accounts 5,923 -- -- 5,923
Time deposits 6,753 -- -- 6,753
-------- ------- ------- ------
Total deposits 16,582 -- -- 16,582
Other liabilities 393 -- -- 393
-------- ------- ------- ------
Total liabilities 16,975 -- -- 16,975
Minority interest in subsidiary 31 -- -- 31
Stockholders' equity 1,003 6 -- 1,009
-------- ------- ------- ------
18,009 6 -- 18,015
======== ======= ======= ======
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Southern Security Bank Corporation and Subsidiary
Pro Forma Statement of Income
Nine Months ended September 30, 1997
Southern Southern
Security Security Pro
Bank Financial Forma Pro
Corporation Corporation Eliminations Forma
----------- ----------- ------------ -----
(Dollars in Thousands)
<S> <C> <C> <C> <C>
Net interest income 661 -- -- 661
Other income 122 -- -- 122
Other expenses 1,415 -- -- 1,415
----- ------- ------- -----
Net loss before minority interest in net
loss of subsidiary (632) -- -- (632)
Minority interest in net loss of subsidiary 4 -- -- 4
-------- ------- ------ -----
Net loss (628) -- -- (628)
====== ====== ====== ======
Net loss per common share and
common equivalent share 0.04 -- -- 0.04
====== ====== ====== ======
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Southern Security Bank Corporation and Subsidiary
Pro Forma Statement of Income
Year ended December 31, 1996
Southern Southern
Security Security Pro
Bank Financial Forma Pro
Corporation Corporation Eliminations Forma
----------- ----------- ------------ -----
(Dollars in Thousands)
<S> <C> <C> <C> <C>
Net interest income 813 -- -- 813
Other income 107 -- -- 107
Other expenses 1,482 -- -- 1,482
----- ------- ------- -----
Net loss before minority interest
in net loss of subsidiary (562) -- -- (562)
Minority interest in net loss of subsidiary 7 -- -- 7
-------- ------- ------ -----
Net loss (555) -- -- (555)
====== ====== ====== =====
Net loss per common share and
common equivalent share 0.05 -- -- 0.05
====== ====== ====== =====
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Southern Security Bank Corporation
Average Balance Sheet Analysis
Year Ended December 31,
----------------------------------------------------------------------
December 31, 1996 1995
1996 ----------------------------------- ---------------------------------
Average Average Average Average Average
Yield/Rate Balance Interest Yield/Rate Balance Interest Yield/Rate
---------- ------ -------- ---------- ------- -------- ----------
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C> <C>
Assets:
Interest-earning assets:
Investments (1) 7.86% 4,100 280 6.83% 2,269 159 7.01%
Federal funds sold 5.27% 855 47 5.50% 1,556 118 7.58%
Loans receivable 9.84% 10,811 1,078 9.97% 8,635 883 10.23%
------ ------ ------ ----- ------ -----
Total interest earning assets 15,766 1,405 8.91% 12,460 1,160 9.31%
------ ------ ----- -----
Noninterest-earning assets 1,834 3,053
------ -----
Total 17,600 15,513
====== ======
Liabilities and Stockholders' Equity:
Interest-bearing liabilities:
NOW and money market accounts 2.47% 4,706 117 2.49% 4,943 158 3.20%
Savings accounts 2.11% 273 6 2.20% 461 9 1.95%
Certificates of deposit 5.91% 7,788 458 5.88% 5,663 349 6.16%
Other 165 11 6.67% 100 9 9.00%
------ ------ ------ ------ ------ -----
Total interest-bearing liabilities 12,932 592 4.58% 11,167 525 4.70%
------ ------ ------ -----
Noninterest-bearing liabilities 3,789 3,506
Stockholders' equity 879 840
---- ----
Total 17,600 15,513
====== =====
Net interest income and net yield on interest- 813 5.16% 635 5.10%
earning assets ====== ===== ===== =====
</TABLE>
(1) Includes investment securities and Federal Reserve Bank Stock
<PAGE>
<TABLE>
<CAPTION>
Southern Security Bank Corporation
Analysis of Changes in Interest Income and Interest Expense
Year Ended December 31,
---------------------------------------------------------------------------------------
1996 vs. 1995 1995 vs. 1994
Increase (Decrease) Attributable to Increase (Decrease) Attributable to
------------------------------------------- --------------------------------------
Volume Rate Rate/Volume Net Volume Rate Rate/Volume Net
------ ---- ----------- --- ------ ---- ----------- ---
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Interest income on:
Investments 128 (4) (3) 121 17 51 11 79
Federal funds sold (53) (32) 14 (71) 24 34 21 79
Loans receivable 223 (22) (6) 195 165 87 23 275
----- ---- ---- ---- ---- ---- --- ----
Total interest income on
interest-earning assets 298 (58) 5 245 206 172 55 433
---- ---- ---- ---- ---- ---- --- ----
Interest expense on:
NOW and money market accounts
(8) (35) 2 (41) 3 46 2 51
Savings Accounts (4) 1 0 (3) (3) (1) 0 (4)
Certificates of deposit 131 (16) (6) 109 139 47 86 272
Other 6 (2) (2) 2 0 1 0 1
----- ---- ---- ---- --- --- --- ---
Total interest expense on
interest-bearing 125 (52) (6) 67 139 93 88 320
liabilities ---- ---- ---- ____ ____ ____ ____ ____
Increase (decrease) in net
interest income 173 (6) 11 178 67 79 (33) 113
=== === === == == == ==== ===
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Southern Security Bank Corporation
Maturities of Investment Securities
December 31, 1996
After One Year After Five Years
One Year or 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)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Mortgage-backed securities:
Held to maturity -- --% $709,555 6.57% $ -- --% $ -- --% $ 709,555 6.57%
available for Sale 72,220 1.94 301,115 7.25 411,290 6.62 592,920 6.40 1,377,545 6.42
U.S. government
corporations and agencies:
Held to maturity -- -- -- -- 899,327 6.86 500,000 7.33 1,399,327 7.03
available for sale -- -- -- -- -- -- -- -- -- --
---- ---- ---- ---- ---- ---- ---- ---- ---- ----
Total $72,220 1.94% $1,010,670 6.77% $1,310,617 6.78% $1,092,920 6.83% $3,486,427 6.69%
====== ==== ======= ==== ====== ==== ========= ==== ===== ====
</TABLE>
Loan Maturity Schedule: The following schedule sets forth the time to
contractual maturity of the Bank's loan portfolio at December 31, 1996. 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.
<PAGE>
<TABLE>
<CAPTION>
One year One to Over
Total or less Five Years Five Years Nonaccrual
----- ------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C>
Residential Real Estate
Fixed rate $1,508,735 $ -- $ 299,449 $ 1,160,867 $ 48,419
Adjustable rate 2,145,628 25,142 250,309 1,870,177 --
Consumer
Fixed rate 752,361 9,761 735,381 -- 7,219
Adjustable Rate 162,700 97,371 65,329 -- --
Commercial
Fixed rate 1,157,579 474,227 264,149 419,203 --
Adjustable rate 2,483,872 1,870,314 613,558 -- --
Commercial Real Estate
Fixed Rate 1,272,752 294,941 385,609 592,202 --
Adjustable Rate 2,069,333 612,930 1,242,990 213,413 --
Other 57,953 57,953 -- -- --
$11,610,913 $3,442,639 $3,856,774 $4,255,862 $55,638
======== ======== ======== ======== ======
</TABLE>
Fixed rate loans due after one year total approximately $3.9 million and
adjustable rate loans due after one year total approximately $4.2 million.
Adjustable rate loans which reprice after December 31, 1997 total approximately
$500,000 at December 1996. 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, 1996 and 1995.
<TABLE>
<CAPTION>
1996 1995
---- ----
(Dollars in Thousands)
<S> <C> <C>
Nonaccrual loans
Real Estate 48 -
Installment 8 -
Accrual loans - Past Due 90 days or more
Real Estate 98 --
Restructured loans -- --
Real estate owned 490 490
--- ---
Total nonperforming assets 644 490
==== ====
</TABLE>
Southern Security Bank Corporation
Allowance for Loan Losses
December 31, 1996 and 1995
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>
1996 1995
---- ----
Amount of Amount of Loans to Amount of Amount of Loans to
Allowance Gross Loans Allowance Gross Loans
------------------------------------- -------------------------------------
(Dollars in Thousands)
<S> <C> <C> <C> <C>
Commercial $ 53,688 31.43% $ 52,291 28.78%
Commercial Real Estate 49.274 28.85% 35,882 19.11%
Residential Real Estate 77,561 31.32% 60,891 33.52%
Consumer 14,763 7.90% 33,385 18.38%
Other 854 0.50% 383 0.21%
--- ----- ---- -----
Total Allowance for loan losses $ 196,140 100.00% $ 182,832 100.00%
======= ======= ======= =======
</TABLE>
Activity in the Bank's allowance for loan losses for the years ended December
31, 1996 and 1995 was as follows:
<TABLE>
<CAPTION>
1996 1995
---- ----
<S> <C> <C>
Balance, beginning $ 182,832 $ 168,767
------- -------
Amounts charged off:
Consumer loans (5,326) -
Recoveries of amounts charged off:
Commercial loans 10,634 14,065
------ ------
Net (charge-offs) recoveries 5,308 14,065
----- ------
Provision for loan losses 8,000 -
----- --
Balance, ending $ 196,140 $ 182,832
======= ========
</TABLE>
Southern Security Bank
Deposit Accounts
December 31, 1996
<TABLE>
<CAPTION>
1996 1995
---- ----
Weighted % of Weighted % of
Amount Average Rate Deposits Amount Average Rate Deposits
------ ----------- ---------- -------- ----------- --------
-
<S> <C> <C> <C> <C> <C> <C>
Noninterest bearing accounts 5,847,168 0.00% 32.03% 3,615,650 0.00% 19.81%
Interest-bearing accounts:
NOW accounts 1,167,277 1.91% 6.39% 1,220,545 1.83% 6.69%
Money Market deposit accounts 3,584,884 2.63% 19.64% 3,400,278 3.08% 18.63%
Savings Accounts 363,789 2.11% 1.99% 297,727 2.21% 1.63%
Time Deposits 7,293,085 5.91% 39.95% 7,901,979 5.85% 43.28%
--------- ---------
Total Deposits 18,256,203 16,436,179
========== ======
</TABLE>
As of december 31, 1996, the aggregate amount of time certificates of deposit in
amount greater than or equal to $100,000 was $2,090,012. The following table
presents the maturity distribution of these time certificates of deposit at
December 31, 1996.
3 months or less $ 990,012
Over 3 months through 6 months 500,000
Over 6 months through 12 months 300,000
Over 12 months 300,000
--------
Total $ 2,090,012
=========
The following table sets forth information with respect to the return on assets
and the return on equity for the years ending December 31, 1996 and 1995, and
the ratio of average equity to average assets for those years.
1996 1995
---- ----
(Dollars in Thousands)
Net loss (555) (714)
Average total assets 17,600 15,513
Average total equity 879 840
Return on average assets (3.2)% (4.6)%
Return on average equity (63.1)% (85.0)%
Equity to assets ratio 5.0% 5.4%
There were no dividends declared in the years ended December 31, 1996 and 1995.
<TABLE>
<CAPTION>
SOUTHERN SECURITY BANK CORPORATION AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
September 30, 1997 and 1996
ASSETS 1997 1996
<S> <C> <C>
Cash and due from banks $ 1,526,000 $ 1,627,000
Federal funds sold 1,620,000 346,000
------------------------------------
Total cash and cash equivalents 3,146,000 1,973,000
Securities held to maturity 2,683,000 2,125,000
Securities available for sale 722,000 1,453,000
Loans, net of allowance for loan losses
1997 $190,000; 1996 $191,000 10,346,000 10,255,000
Premises and equipment 389,000 415,000
Other real estate owned 451,000 490,000
Other assets 272,000 214,000
------------------------------------
$ 18,009,000 $ 16,925,000
====================================
<PAGE>
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities:
Noninterest-bearing deposit $ 3,906,000 $ 3,660,000
NOW, money market and savings accounts 5,923,000 4,541,000
Time deposits 6,753,000 7,278,000
------------------------------------
Total deposits 16,582,000 15,479,000
Other borrowings 100,000 250,000
Other liabilities 293,000 339,000
------------------------------------
Total liabilities 16,975,000 16,068,000
------------------------------------
Minority interest in subsidiary 31,000 40,000
------------------------------------
Stockholders' equity:
Capital stock and paid-in-capital 4,252,000 3,338,000
Accumulated (deficit) (3,247,000) (2,479,000)
Unrealized gain (loss) on securities available for
sale, net (2,000) (42,000)
-------------------------------------
Total stockholders' equity 1,003,000 817,000
-------------------------------------
$ 18,009,000 $ 16,925,000
==================================
</TABLE>
See Notes to Consolidated Financial Statements
<PAGE>
SOUTHERN SECURITY BANK CORPORATION AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF INCOME Nine Months Ended September 30, 1997 and 1996
<TABLE>
<CAPTION>
1997 1996
<S> <C> <C>
Interest Income $ 1,090,000 $ 1,070,000
Interest expense 429,000 450,000
------------------------------------
Net interest income 661,000 620,000
Provisions for loan losses 8,000
------------------------------------
Net interest income after provision
for loan losses 661,000 612,000
Other Income 122,000 79,000
------------------------------------
Other expenses:
Salaries and employee benefits 753,000 526,000
Occupancy and equipment 242,000 241,000
Other 420,000 344,000
------------------------------------
Total other expenses 1,415,000 1,111,000
------------------------------------
Net (loss) before minority interest in
net loss of subsidiary (632,000) (420,000)
Minority interest in net loss of subsidiary 4,000 5,000
------------------------------------
Net (loss) $ (628,000) $ (415,000)
====================================
Net loss per common share and common
equivalent share $ (0.04) $ (0.04)
====================================
</TABLE>
See Notes to Consolidated Financial Statements
<PAGE>
SOUTHERN SECURITY BANK
CORPORATION AND SUBSIDIARY CONSOLIDATED STATEMENTS OF CASH FLOWS Nine Months
Ended September 30, 1997 and 1996
<TABLE>
<CAPTION>
1997 1996
---- ----
<S> <C> <C>
Cash Flows From Operating Activities
Net (loss) $ (628,000) $ (415,000)
Adjustments to reconcile net (loss) to net cash provided by
operating activities:
Provision for loan losses - 8,000
Depreciation and amortization 55,000 47,000
Capital stock issued as compensation to officers 207,000 --
-------- ------
Other (87,000) 99,000
-------- ------
Net cash (used in) operating activities (453,000) (261,000)
--------- ---------
Cash Flows From Investing Activities
Net cash flows from securities 160,000 1,425,000
Loan originations and principal collections on loans 1,069,000 (920,000)
Purchase of premises and equipment (12,000) (24,000)
Net proceeds from sale of other real estate owned 39,000 -
------ --
Net cash (used in) investigating activities 1,256,000 481,000
--------- -------
Cash Flows From Financing Activities
Net increase in deposits (1,674,000) (957,000)
Decrease in other borrowings (750,000) -
Proceeds from issuance of stock 530,000 305,000
------- -------
Net cash provided by financing activities (1,894,000) (652,000)
---------- --------
Increase in cash and cash equivalents (1,091,000) (432,000)
Cash and cash equivalents
Beginning 4,237,000 2,405,000
--------- ---------
Ending $ 3,146,000 $ 1,973,000
========= =========
</TABLE>
See Notes to Consolidated Financial Statements.
<PAGE>
SOUTHERN SECURITY BANK CORPORATION AND SUBSIDIARY
NOTES TO FINANCIAL STATEMENTS
Note 1. Unaudited Financial Statements
The unaudited financial statements furnished reflect all adjustments, consisting
of normal recurring accruals, which are, in the opinion of management, necessary
for a fair presentation of the Company's financial position as of September 30,
1997 and 1996 and the results of operations for the nine months ended September
30, 1997 and 1996. The results for the nine month periods are not necessarily
indicative of the operating results of the company for the entire year.
Note 2. Subsequent 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 recapitalization of the Company, with the
Company as the acquirer (reverse 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 4,970,204 shares of
common stock of SSFC were issued to the stockholders of the Company in exchange
for all of their oustanding stock. Subsequent to the reverse acquisition, SSFC
changed its name to Southern Security Bank Corporation.
<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 sheet of Southern Security
Bank Corporation and subsidiary as of December 31, 1996, and the related
consolidated statements of income, stockholders' equity, and cash flows for the
year then ended. These financial statements are the responsibility of the Bank's
management. Our responsibility is to express an opinion on these financial
statements based on our audit.
We conducted our audit in accordance with generally accepted auditing standards.
Those standards require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the 1996 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, 1996, and the
results of their operations and their cash flows for the year then ended in
conformity with generally accepted accounting principles.
As discussed in Note 15 to the financial statements, the Company entered into a
written agreement with the Federal Reserve Bank ("FRB") which requires, among
other things, that the Bank meet prescribed minimum capital requirements.
Although the Bank met these capital requirements at December 31, 1996, the
Bank's ability to meet the prescribed capital requirements in the future is
uncertain. Failure to meet these requirements may result in one or more
regulatory sanctions, including restricting as to the source of deposits and the
appointment of a conservator. Management's plans concerning these matters are
described in Note 15.
/s/ McGladrey & Pullen, LLP
Fort Lauderdale, Florida
March 14, 1997
<PAGE>
INDEPENDENT AUDITORS REPORT
To the Board of Directors and Stockholders
Southern Security Bank Corporation and Subsidiary
Hollywood, Florida
We have audited the accompanying consolidated balance sheet of Southern Security
Bank Corporation and subsidiary as of December 31, 1995, and the related
consolidated statements of income, stockholders' equity, and cash flows for the
year then ended. These financial statements are the responsibility of the Bank's
management. Our responsibility is to express an opinion on these financial
statements based on our audit.
We conducted our audit in accordance with generally accepted auditing standards.
Those standards require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit provides 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, 1995, and the results of
their operations and their cash flows for the year then ended in conformity with
generally accepted accounting principles.
As discussed in Note 15 to the financial statements, the Company entered into a
written agreement with the Federal Reserve Bank ("FRB") which requires, among
other things, that the Bank meet prescribed minimum capital requirements.
Although the Bank met these capital requirements at December 31, 1995, the
Bank's ability to meet the prescribed capital requirements in the future is
uncertain. Management's plans concerning these matters are described in Note 15.
Pompano Beach, Florida /s/ Wm. C. Barnett, CPA
June 10, 1997
<PAGE>
<TABLE>
<CAPTION>
SOUTHERN SECURITY BANK CORPORATION AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
December 31, 1996 and 1995
ASSETS 1996 1995
---- ----
<S> <C> <C>
Cash and due from banks (Note 2) $ 3,005,602 $1,392,862
Federal funds sold 1,231,000 1,012,000
--------- ---------
Total cash and cash equivalents 4,236,602 2,404,862
Securities held to maturity (Note 3) 2,108,882 1,644,863
Securities available for sale (Note 3) 1,377,545 3,363,079
Federal Reserve Bank stock, at cost 59,500 53,800
Loans, net (Notes 4, 11 and 15) 11,414,773 9,343,107
Premises and equipment (Note 5) 430,275 439,156
Other real estate owned 489,804 489,804
Accrued interest receivable 106,715 130,654
Other assets 96,896 198,209
--------- ---------
20,320,992 18,067,534
========== ==========
</TABLE>
See Notes to Consolidated Financial Statements.
<PAGE>
<TABLE>
<CAPTION>
LIABILITIES AND STOCKHOLDERS' EQUITY 1996 1995
---- ----
<S> <C> <C>
Liabilities:
Noninterest-bearing deposits $ 5,847,168 $ 3,615,650
Interest-bearing deposits (Note 6) 12,409,035 12,820,529
---------- ----------
Total deposits 18,256,203 16,436,179
Securities sold under repurchase 750,000 -
agreements
Notes Payable (Note 8) 250,000 250,000
Other liabilities 305,805 349,778
------- -------
Total liabilities 19,562,008 17,035,957
---------- ----------
Commitments and contingencies (Note 15)
Minority interest in subsidiary 37,816 45,800
------ ------
Stockholders' equity (Notes 3, 9, 10, and 13):
Series A voting convertible preferred
stock, $.01 par
value; $1.50 liquidation value;
1,200,000 shares
authorized; issued and outstanding
1996 596,622 shares;
1995 1,002,624 shares 5,966 10,026
Class A voting common stock, $.01 par
value; 20,000,000
shares authorized; issued and
outstanding 1996
9,856,664 shares; 1995 8,893,442 98,567 88,934
shares
Capital surplus 3,259,822 2,933,995
Accumulated (deficit) (2,619,576) (2,064,237)
--------- ---------
744,779 968,718
Unrealized gain (loss) on securities
available for
sale, net (Note 3) (23,611) 17,059
------ ------
Total stockholders' equity 721,168 985,777
------- -------
$ 20,320,992 $18,067,534
========== ==========
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
SOUTHERN SECURITY BANK CORPORATION AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF INCOME
Years Ended December 31, 1996 and 1995
1996 1995
---- ----
<S> <C> <C>
Interest income:
Interest and fees on loans $ 1,077,786 $ 883,351
Interest and dividends on securities 280,152 158,756
Interest on federal funds sold 46,831 118,105
----- -------
1,404,769 1,160,212
Interest expense:
Deposits 591,883 524,592
------- -------
Net interest income 812,886 635,620
Provision for loan losses (Note 4) 8,000 -
----- ---
Net interest income after 804,886 635,620
provision for loan losses _______ _______
Other income:
Service charges on deposit accounts 70,062 51,108
Securities losses, net (Note 3) (6,697) -
Other 44,162 83,111
------ ------
Total other income 107,527 134,219
------- -------
Other expenses:
Salaries and employee benefits 685,646 701,575
Occupancy and equipment 333,710 367,838
Other 454,877 427,890
------- -------
Total other expenses 1,474,233 1,497,303
--------- ---------
Net (loss) before minority
interest in net loss of subsidiary (561,820) (727,464)
Minority interest in net loss of 6,481 13,332
subsidiary _____ ______
Net (loss) $ (555,339) $ (714,132)
======= =======
Net loss per common share and common equivalent
share (Note 17) $ (0.05) $ (0.07)
======= =======
</TABLE>
See Notes to Consolidated Financial Statements.
<PAGE>
<TABLE>
<CAPTION>
SOUTHERN SECURITY BANK CORPORATION AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
Years Ended December 31, 1996 and 1995
Unrealized
Gain (Loss)
on
Securities
Preferred Stock Common Stock Paid-In Accumulated Available for
Shares Amount Shares Amount Capital (Deficit) Sale, Net Total
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Balance, December 31, 624,264 $ 6,243 7,632,244 $ 76,322 $ 2,004,490 $ (1,350,105) $ (8,461) $ 728,489
1994
Net (loss) - - - - - (714,132) - (714,132)
Issuance of stock in
private placements 378,360 3,783 1,261,198 12,612 929,505 - - 945,900
Net change in
unrealized
gain (loss) on
securities
available-for-sale - - - - - - 25,520 25,520
(Note 3)
Balance, December 31, 1,002,624 $ 10,026 8,893,442 $ 88,934 $ 2,933,995 $ (2,064,237) $ 17,059 $ 985,777
1995
Net (loss) - - - - - (555,339) - (555,339)
Issuance of stock in
private placements 29,558 296 527,662 5,277 325,827 - - 331,400
Conversion of
preferred
stock (Note 9) (435,560) (4,356) 435,560 4,356 - - - -
Net change in
unrealized
gain (loss) on
securities
available-for-sale - - - - - - (40,670) (40,670)
(Note 3)
Balance, December 31, 596,622 $ 5,966 9,856,664 $ 98,567 $ 3,259,822 $ (2,619,576) $(23,611) $ 721,168
1996 ======= ===== ========= ====== ========= ========= ====== =======
</TABLE>
See Notes to Consolidated Financial Statements.
<PAGE>
<TABLE>
<CAPTION>
SOUTHERN SECURITY BANK CORPORATION AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
Years Ended December 31, 1996 and 1995
1996 1995
---- ----
<S> <C> <C>
Cash Flows From Operating Activities
Net (loss) $ (555,339) $ (714,132)
Adjustments to reconcile net (loss) to
net cash provided by
operating activities:
Net (accretion) on securities (1,931) (4,126)
Provision for loan losses 8,000 -
Depreciation and amortization 65,254 58,707
Securities losses, net 6,697 -
Minority interest in net income of (6,481) (13,332)
subsidiary
Decrease (increase) in:
Accrued interest receivable 23,939 (70,230)
Other assets 21,105 54,983
Increase in other liabilities 36,235 147,155
------ -------
Net cash (used in) operating (402,521) (540,975)
activities _______ _______
Cash Flows From Investing Activities
Net cash flows from securities (Note 1,474,576 (3,411,905)
16)
Purchase of Federal Reserve Bank stock (5,700) (16,400)
Loan originations and principal (289,132) (1,918,981)
collections on loans
Purchases of loans (1,790,534) -
Purchase of premises and equipment (56,373) (57,374)
Proceeds from sale of other real estate - 206,065
owned
Net cash (used in) investing (667,163) (5,198,595)
activities _______ _________
Cash Flows From Financing Activities
Proceeds from notes payable 750,000 -
Net increase in deposits 1,820,024 5,753,170
Proceeds from issuance of stock 331,400 945,900
------- -------
Net cash provided by financing 2,901,424 6,699,070
activities _________ _________
Increase in cash and cash 1,831,740 959,500
equivalents
Cash and cash equivalents
Beginning 2,404,862 1,445,362
--------- ---------
Ending $ 4,236,602 $2,404,862
========= ===========
</TABLE>
<PAGE>
See Notes to Consolidated Financial Statements.
Note 1. Summary of Significant Accounting Policies
Description of business: Southern Security Bank Corporation (the "Corp.")
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 Corp.'s management
is required to make estimates and assumptions which significantly affect the
amounts reported in the financial statements. 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 of Hollywood (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 and deposits
are reported net.
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.
In November 1995, the FASB issued a Special Report on implementation of SFAS No.
115. The Special Report included a transition provision which permitted all
entities to reassess the appropriateness of securities classifications and
permitted the transfer of securities between classifications by December 31,
1995. On December 28, 1995, $1.2 million of securities held to maturity with
aggregate unrealized losses of $2,600 were transferred to securities available
for sale.
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, net of unearned discount, 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. 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.
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.
Fair value of financial instruments: SFAS No. 107, Disclosures about Fair Value
of Financial Instruments requires disclosure of fair value information about
financial instruments, whether or not recognized in the statement of financial
condition, for which it is practicable to estimate that value. In cases where
quoted market prices are not available, fair values are based on estimates using
present value or other valuation techniques. Those techniques are significantly
affected by the assumptions used, including the discount rate and estimates of
future cash flows. In that regard, the derived fair value estimates cannot be
substantiated by comparison to independent markets and, in many cases, could not
be realized in immediate settlement of the instrument. 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, 1996 and 1995. 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.
Current accounting development: The Financial Accounting Standards Board has
issued Statement No. 125, Accounting for Transfers and Servicing of Financial
Assets and Extinguishment of Liabilities, which becomes effective for certain
transactions occurring after December 31, 1996 and for other transactions
occurring after December 31, 1997. 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. The Statement also
establishes standards on the initial recognition and measurement of servicing
assets and other retained interests and servicing liabilities, and their
subsequent measurement.
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. In addition, the Statement requires that a liability be
derecognized only if the debtor is relieved of its obligation through payment to
the creditor or by being legally released from being the primary obligor under
the liability either judicially or by the creditor.
Management does not believe the application of the Statement to transactions of
the Bank that have been typical in the past will materially affect the Bank's
financial position and results of operations.
Note 2. 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, 1996 and
1995.
Note 3. Investment Securities
Securities held to maturity: The amortized cost and fair values
of securities held to maturity as of December 31, 1996 and 1995
are summarized as follows:
<TABLE>
<CAPTION>
1996
-------------------------------
Gross Gross
Ammortized Unrealized Unrealized
Cost Gains Losses Fair Values
--------- --------- ---------- -----------
<S> <C> <C> <C> <C>
U. S. Government
corporations and
agencies
$ 1,399,327 $ - (22,708) $ 1,376,619
Mortgage-backed 709,555 7,518 - 717,073
securities _______ _____ _______
$ 2,108,882 $7,518 (22,708) $ 2,093,692
========= ===== ====== =========
</TABLE>
<TABLE>
<CAPTION>
1995
----
Gross Gross
Ammortized Unrealized Unrealized
Cost Gains Losses Fair Values
--------- --------- ---------- -----------
<S> <C> <C> <C> <C>
U. S. Government
corporations
and agencies
$ 1,401,642 $ 6,732 (937) $ 1,407,436
Mortgage-backed 243,222 4,720 - 247,942
securities _______ _____ _______
$ 1,644,863 $ 11,452 (937) $ 1,655,378
========= ===== === =========
</TABLE>
The amortized cost and fair values of securities held to maturity at December
31, 1996, by contractual maturity, are shown below.
Amortized Fair
Cost Values
--------- ------
Due after five years through $ 899,327 $ 887,089
ten years
Due after ten years 500,000 489,530
Mortgage-backed securities 709,555 717,073
$ 2,108,882 $ 2,093,692
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.
<PAGE>
Securities held to maturity with a carrying amount of approximately $475,000 and
$402,000 at December 31, 1996 and 1995, 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, 1996 and 1995 are summarized as follows.
1996
----
Gross Gross
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
--------- ---------- ---------- -----
Mortgage-backed
securities $1,390,201 $ 2,852 (15,508) $1,377,545
<TABLE>
<CAPTION>
1995
---------------
Gross Gross
Amortized Unrealized Unrealized Fair
Cost Gains Losses Values
--------- ---------- ---------
-------
<S> <C> <C> <C> <C>
U.S. Government
corporations and
agencies $ 1,690,860 $ - $(12,795) $ 1,678,065
Mortgage-backed 1,654,475 31,594 (1,055) 1,685,014
securities
--------- ------ ------
$ 3,345,335 $ 31,594 $(13,850) $ 3,363,079
========= ====== ======= =========
</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
<PAGE>
penalties.
Gross realized losses from the sale of securities available for sale for the
year ended December 31, 1996 were $5,244. No securities available for sale were
sold in the year ended December 31, 1995.
Securities available for sale with a carrying amount of approximately $715,000
and $250,000 at December 31, 1996 and 1995, respectively, 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,
1996 1995
-------- ---------
<S> <C> <C>
Balance, beginning $ 17,059 $ (8,461)
Net change in unrealized gains (42,373) 26,712
(losses) during the year
Amortization of unrealized loss on
security transferred
to held to maturity 145 -
Allocation of changes to minority 1,558 (1,192)
interest in subsidiary
Balance, ending $(23,611) $17,059
</TABLE>
Note 4. Loans
The composition of net loans as of December 31, 1996 and 1995 is as follows:
<TABLE>
<CAPTION>
1996 1995
---- ----
<S> <C> <C>
Commercial $3,641,451 $2,734,280
Commercial real estate 3,342,084 1,815,355
Residential real estate 3,627,871 3,183,972
Consumer 915,062 1,745,659
Other 57,953 19,900
11,584,421 9,499,256
---------- ---------
Allowance for loan losses (196,140) (182,832)
Deferred loan costs, net 26,492 26,683
------ ------
Loans, net $11,414,773 $9,343,107
========== =========
</TABLE>
Activity in the allowance for loan losses for the years ended December 31, 1996
and 1995 was as follows:
1996 1995
---------- ---------
Balance, beginning $ 182,832 $ 168,767
Provision for loan losses 8,000 -
Recoveries of amounts charged off 10,634 14,065
Amounts charged off (5,326) -
Balance, ending $ 196,140 $ 182,832
The Bank's recorded investment in impaired loans was $56,124 and none at
December 31, 1996 and 1995, respectively. The specific SFAS No. 114 allowance
associated with impaired loans, and included in the allowance for loan losses,
at December 31, 1996 was $24,073. The average recorded investment in impaired
loans during 1996 and 1995 was $45,000 and $50,000, respectively. Interest
income on impaired loans, recognized for cash payments received in 1996 and
1995, was not significant.
Note 5. Premises and Equipment
The major classes of premises and equipment and the total accumulated
depreciation as of December 31, 1996 and 1995 are as follows:
<TABLE>
<CAPTION>
1996 1995
-------- --------
<S> <C> <C>
Leasehold improvements $ 675,332 $671,007
Furniture, fixtures, and 536,105 578,937
equipment
--------- -------
1,211,437 1,249,944
Less accumulated depreciation 781,162 810,788
and amortization
--------- --------
$ 430,275 $ 439,156
</TABLE>
Note 6. Deposits
The composition of interest-bearing deposits at December 31, 1996 and 1995 is as
follows:
<TABLE>
<CAPTION>
1996 1995
---------- ----------
<S> <C> <C>
Now accounts $1,167,277 $1,220,545
Money markets 3,584,884 3,400,278
Savings accounts 363,789 297,727
Certificates of deposit less than 5,203,073 5,801,979
$100,000
Certificates of deposit of 2,090,012 2,100,000
$100,000 or more
----------- -----------
Total $12,409,035 $12,820,529
=========== ===========
</TABLE>
At December 31, 1996, the scheduled maturities of certificates of deposit are as
follows:
Years ending December 31,
1997 $ 6,358,240
1998 928,845
2001 6,000
$ 7,293,085
NOte 7. Income Taxes
The net cumulative tax effects of the primary temporary differences as of
December 31, 1996 and 1995 are shown in the following table:
<TABLE>
<CAPTION>
1996 1995
-------- --------
<S> <C> <C>
Deferred tax assets:
Allowances for loan losses - 1,800
Other real estate owned 25,200 25,200
writedowns
Premises and equipment 47,900 49,600
Net operating loss carryforward 2,568,900 2,382,700
Accrual to cash conversion for 40,100 8,000
income taxes
Unrealized loss on securities 4,800 -
available for sale
Other 2,300 2,300
--------- ---------
Total deferred tax assets 2,689,200 2,469,600
---------- ---------
Deferred tax liabilities:
Allowances for loan losses (6,800) -
Deferred loan costs (9,900) (10,000)
Unrealized gain on securities - (6,700)
available for sale
------- --------
Total deferred tax (16,700) (16,700)
liabilities
-------- --------
2,672,500 2,452,900
Valuation allowance for deferred (2,672,500) (2,452,900)
tax assets
----------- -----------
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 will ultimately be
realized. 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, 1996 and 1995,
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, 1996:
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 313,000
--------
$6,849,000
=========
Note 8. 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, 1996. The note is due June
30, 1997 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 has unsecured notes payable to two directors and officers in
the total amount of $150,000 at December 31, 1996. The notes are due on demand
and are noninterest bearing.
Note 9. Preferred Stock
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 $.05 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. Accrued but unpaid dividends at December 31, 1996 and 1995 totaled
approximately $120,000 and $70,000, respectively.
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. 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.
In addition, 5 million shares of Class B nonvoting convertible common stock have
been authorized by the Company. No such shares have been issued and none were
outstanding at either December 31, 1996 or 1995.
Note 10. Stock Options
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, or 380,000 shares at December 31, 1996.
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. The Plan expires March 19, 1998 and no additional options may be granted
after that date under the Plan. The weighted-average remaining life of options
outstanding at December 31, 1996 and 1995 is 6.9 years and 7.5 years,
respectively.
A summary of the options for the purchase of common stock of the Bank
outstanding as of December 31, 1996 and 1995, 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 1996 and 1995: risk-free interest rates of 7
percent and expected lives of 6 years for 1996 and 7 years for 1995.
<TABLE>
<CAPTION>
1996 1995
---- ----
Weighted-Average Weighted-Average
Shares Exercise Shares Exercise
Price Price
<S> <C> <C> <C> <C>
Outstanding at 193,930 $1.00 3,130 $1.00
beginning of year
Granted 137,760 1.00 194,520 1.00
Exercised - -
Forfeited (12,000) (3,720)
------ ----
Outstanding at end 319,690 1.00 193,930 1.00
of year
======= =======
Options exercisable 319,690 1.00 193,930 1.00
at year-end
======= =======
Weighted-average
fair value of
options granted
during the year
$0.09 $0.10
</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, 1996
and 1995 was 7.6 years and 8.6 years, respectively.
A summary of the options for the purchase of common stock of the Company
outstanding as of December 31, 1996 and 1995, 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 1996 and 1995: risk-free interest rates of 7
percent and expected lives of 9 years for both years.
<TABLE>
<CAPTION>
1996 1995
---- -----
Weighted-Average Weighted-Average
Shares Exercise Shares Exercise
Price Price
<S> <C> <C> <C> <C>
Outstanding at 1,898,402 $0.09 1,628,000 $0.08
beginning of year
Granted 103,000 0.09 270,402 0.09
Exercised - -
Forfeited - -
-------- -------
Outstanding at end 2,001,402 0.09 1,898,402 0.09
of year ========= =========
Options exercisable 2,001,402 0.09 1,774,949 0.09
at year-end ========= =========
Weighted-average
fair value of
options granted
during the year
$0.04 $0.04
</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:
1996 1995
-----------------------------------------
Net loss As reported $ (555,339) $ (714,132)
Pro forma (572,000) (744,000)
Net loss per common share
and common equivalent
share As reported (0.05) (0.07)
Pro forma (0.05) (0.07)
Note 11. 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
totaled approximately $705,000 and $836,000 at December 31, 1996 and 1995,
respectively.
Note 12. Leases
The Bank leases its facilities under a noncancelable agreement which expires
December 31, 2003, with one ten-year renewal option. The approximate future
minimum lease payments, as reduced by minimum sublease income, under this lease
as of December 31, 1996, are as follows:
Years ending December 31 Amount
- ------------------------ ---------
1997 $ 232,016
1998 268,650
1999 294,735
2000 303,577
2001 312,684
Thereafter 653,792
Total minimum lease $ 2,065,454
payments =========
Total lease expense for the years ended December 31, 1996 and 1995 approximated
$226,900 and $203,600, respectively, net of sublease income of approximately
$40,600 and $58,700, respectively, and is included in occupancy and equipment
expense in the accompanying consolidated statements of income.
Note 13. 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, 1996, 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 to which it is subject as of
December 31, 1996.
As of December 31, 1996, the most recent notification from the Federal Reserve
categorized the Bank as well capitalized under the regulatory framework for
prompt corrective action. To be categorized as well capitalized the Bank must
maintain minimum total risk-based, Tier 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 Well
For Capital Capitalized Under
Adequacy Prompt Corrective
Actual Purposes Action Provisions
<S> <C> <C> <C> <C> <C> <C>
As of December 31,
1996:
Total Capital
(to Risk-
Weighted Assets)
$1,238,319 11.2% $881,360 8.0% $1,101,700 10.0%
Tier I Capital
(to Risk-
Weighted Assets)
$1,099,885 10.0% $440,680 4.0% $661,020 6.0%
Tier I Capital
(to Average
Assets)
$1,099,885 6.6% $670,440 4.0% $838,050 5.0%
As of December 31, 1995:
Total Capital
(to Risk-
Weighted Assets)
$1,303,647 13.7% $763,775 8.0% $954,719 10.0%
Tier I Capital
(to Risk-
Weighted Assets)
$1,183,523 12.4% $381,888 4.0% $572,832 6.0%
Tier I Capital
(to Average
Assets)
$1,183,523 6.7% $710,440 4.0% $888,050 5.0%
</TABLE>
Note 14. 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
$555,339 and $714,132 during the years ended December 31, 1996 and 1995,
respectively. Although the Bank met the minimum regulatory capital requirements
prescribed by the Federal Reserve Board, Federal Deposit Insurance Corporation,
and the State of Florida Department of Banking and Finance at December 31, 1996,
the Bank's ability to meet the prescribed capital requirements in the future is
uncertain. 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. 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. It is the
opinion of management that the future of the Company is dependent on additional
capital to be raised through this sale of additional common stock. There can be
no assurance that such sale can be accomplished.
Note 15. 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, 1996 and 1995:
<TABLE>
<CAPTION>
1996 1995
---- ----
<S> <C> <C>
Commitments to extend credit $1,536,653 $ 1,391,395
Standby letters of credit 58,632 -
---------- -----------
$1,594,985 $ 1,391,395
========= ==========
</TABLE>
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
employment agreements, the Company has agreed to pay base salaries and certain
other benefits and compensation to the two officers. The actual amounts paid
through December 31, 1996 are less than the amount contractually due under the
employment agreements by approximately $385,000. The two individuals have
voluntarily agreed not to demand the payment of such additional amounts due to
them until such time, if ever, that certain conditions are met.
The employment agreements also include provisions requiring the payment of
certain amounts 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 16. Additional Cash Flow Information
<TABLE>
<CAPTION>
Years Ended December 31,
1996 1995
---- ----
<S> <C> <C>
Cash flows from securities:
Securities available for sale:
Sales $1,173,016 $ -
Maturities and paydowns 252,964 551,155
Purchases -
(2,317,981)
Securities held to maturity:
Maturities and paydowns 447,846 555,751
Purchases (399,250) (2,200,830)
------- ---------
$1,474,576 $(3,411,905)
========= =========
Supplemental disclosures of cash flow $ 632,532 $ 524,592
information: ======= =======
Cash payments for interest
Note 17. Earnings per Common Share and Common Equivalent Share
The computation of earnings per common share and common equivalent share is
based upon the weighted average number of common shares outstanding during
the period. Earnings per common share and common equivalent share include the
effect of the stock options mentioned in Note 10 as if the options had been
exercised at the date the options were granted. The number of common shares
outstanding was increased by the number of shares issuable under the stock
options and this theoretical increase in the number of common shares was
reduced by the number of common shares which are assumed to have been
repurchased with the applicable portion of the proceeds from the exercise of
the options.
Note 18. 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 $65,000 during 1996 and the average interest rate was
approximately 5 percent. The maximum amount outstanding at any time during 1996
was $750,000. There were no securities sold under agreements to repurchase at
any time during 1995.
Note 19. 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 statement of
financial condition 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, 1996 and 1995:
1996
-----------------------------
Carrying Fair
Amount Value
-----------------------------
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 -- --
1995
-----------------------------
Carrying Fair
Amount Value
-----------------------------
Cash and cash equivalents $ 2,404,862 $ 2,404,862
Investment securities (including Federal
Reserve Bank stock) 5,061,742 5,072,257
Loans receivable 9,343,107 9,410,526
Accrued interest receivable 130,654 130,654
Deposits 16,436,179 16,470,039
Other liabilities 599,778 599,778
Commitments to extend credit -- --
</TABLE>
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of
1934, the registrant has duly caused this report to be signed on its behalf by
the undersigned hereunto duly authorized.
SOUTHERN SECURITY BANK CORPORATION
(Registrant)
Dated: February 5, 1998 By: /s/James L. Wilson
Name: James L. Wilson
Title: Chief Executive Officer
