UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-KSB
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE
ACT OF 1934
For the fiscal year ended December 31, 1998
[ ] 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 $2,043,261
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
February 28, 1999 would have been $11,437,000. 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.
The number of shares outstanding of each of the issuer's classes of common
equity, as of February 28, 1999 is as follows: (i) Class A Voting Common Stock -
4,567,641; (ii) Class B Non-Voting Common Stock None.
DOCUMENTS INCORPORATED BY REFERENCE: None
Transitional Small Business Disclosure Format (check one):
Yes___; No X
PART I
Item 1. Description of Business
General
Southern Security Bank Corporation (the "Holding Corporation") is a bank
holding company that owns 97.5% 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, 1998, the Holding Corporation and its subsidiary Bank (collectively,
referred to herein as the "Company") had consolidated total assets of
$22,260,841, total deposits of $20,244,046, net loans of $14,612,998, and
stockholders equity of $1,216,120.
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 12/31/98
Net Loan Portfolio Balance at end of Period $ 6,951,096 $ 14,612,998
Charge-Off Devalued/Impaired Earning Assets $ 1,202,000 $ 57,303
Total Classified Assets and Owned Real Estate $ 3,970,999 $ 931,742
Total Assets of Bank affiliate $ 13,089,724 $ 22,248,024
Total Capital of Bank affiliate $ 288,381 $ 1,608,356
Total Classified Assets as a Percent of Total Loans 48.46% 6.26%
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. 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,
1998, 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 is12,800, 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 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 FDICIA, 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.
Item 2. Description of Property
The Company's headquarters and full service community banking office is
located at 3475 Sheridan Street, Hollywood, Florida 33021. At that location, the
Company leases 5,212 square feet of space for its banking and office
requirements under a lease which runs until December 31, 2013. Management
believes that its leased facilities are adequate and well suited to its current
operations.
Item 3. Legal Proceedings
The Company is not a party to, nor is its property the subject of, any
material pending legal proceeding.
Item 4. Submission of Matters to a Vote of Security Holders
During the fourth quarter of 1998, no matter was submitted to a vote of the
Company's shareholders.
PART II
Item 5. Market for Common Equity and Related Stockholder Matters
(a) There is no public trading market for the Company's common equity.
(b) On March 1, 1999, there were 433 holders of record of the
Company's Class A Voting Common Stock, and no shares of the Company's Class B
Non Voting Common Stock were issued or outstanding.
c) Dividends. The Company has not paid any dividends on its Common
Stock since its inception and has no present intention of paying dividends to
its shareholders in the foreseeable future. The Company currently intends to
reinvest earnings, if any, in the development and expansion of its business. The
determination of the Board of Directors of the Holding Company to declare
dividends in the future will depend upon the earnings, capital requirements, and
financial position of the Company, and upon other factors they may deem
relevant. The ability of the Holding Corporation to pay dividends is subject to
statutory restrictions on cash dividends applicable to Florida corporations.
Further, the Holding Corporation's only current source of income on which to pay
dividends is through the payment of dividends or management fees by the Bank.
The Bank may not declare or pay dividends on its common stock if such payment
would cause it to be in violation of restrictions in the Florida Banking Code on
the payment of dividends by Florida state banking corporations, such as the
Bank. The Company is also subject to certain regulatory restrictions imposed by
the Federal Reserve Board on the payment of dividends by member banks to their
stockholders, and by the terms of agreements with the FRB and the State
Comptroller and Banking Commissioner of Florida.
(d) Sales of unregistered securities. During the fiscal year ended
December 31, 1998, the Company sold the following securities without
registration under the Securities Act of 1933:
(1) Commencing on November 12, 1997, the Company made a private offering of
1,000,000 Units at a price of $5.00 per Unit (the "1997 Offering"). Each Unit
included one share of the Company's Class A Common Stock and one Warrant. Each
Warrant entitles the holder to purchase one share of Class A Common Stock at a
price of $7.50 per share at any time from the date of issuance through June 29,
1999.
The 1997 Offering resulted in the sale through April 30, 1998 of 144,000
Units to 12 individuals, all of whom were "accredited investors" within the
meaning of Rule 501 of the SEC, at aggregate price of $720,000 . No underwriters
were used, and no underwriting discounts or commissions were paid. The Company
made the offering in reliance upon the exemptions from registration provided by
Sections 4(2) and 4(6) of the Securities Act of 1933 and Rule 506 of the SEC for
sales by an issuer not involving any public offering and for sales made by an
issuer solely to accredited investors in an amount not exceeding the amount
allowed under Section 3(b) of the Securities Act.
(2) Commencing on June 18, 1998, the Company made a private offering of
2,000,000 Units at a price of $5.00 per Unit (the "1998 Offering"). Each Unit
included one share of the Company's Class A Common Stock and one Warrant. Each
Warrant entitles the holder to purchase one share of Class A Common Stock at a
price of $7.50 per share at any time from the date of issuance through June 29,
1999.
The 1998 Offering resulted in the sale through December 18, 1998 of 107,303
Units to 25 individuals, all of whom were "accredited investors" within the
meaning of Rule 501 of the SEC, at aggregate price of $536,515. No underwriters
were used, and no underwriting discounts or commissions were paid. The Company
made the offering in reliance upon the exemptions from registration provided by
Sections 4(2) and 4(6) of the Securities Act of 1933 and Rule 506 of the SEC for
sales by an issuer not involving any public offering and for sales made by an
issue solely to accredited investors in an amount not exceeding the amount
allowed under Section 3(b) of the Securities Act.
Item 6. Management's Discussion and Analysis or Plan of Operation
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
FORWARD LOOKING STATEMENTS
Statements included in this document, or incorporated herein by reference,
that do not relate to present or historical conditions are "forward looking
statements" within the meaning of that term in Section 27A of the Securities Act
of 1933, as amended, and Section 21F of the Securities Exchange Act of 1934, as
amended. Additional oral or written forward looking statments may be made by the
Company from time to time, and such statements may be included in documents that
are filed with the Securities and Exchange Commission. Such forward looking
statements involve risks and uncertainties that could cause results or outcomes
to differ materially from those expressed in the forward looking statements.
Forward looking statements may include, without limitation, statements relating
to the Company's plans, strategies, objectives, expectations and intentions and
are intended to be made pursuant to the safe harbor provisions of the Private
Securities Litigation Reform Act of 1995. Words such as "believes," "forecasts,"
"intends," "possible," "estimates," "anticipates," and "plans" and similar
expressions are intended to identify forward looking statements. Among the
important factors on which such statements are based are assumptions concerning
the business environment in Broward and Palm Beach Counties of Florida where the
Bank operates, the availability of additional capital to help the Bank achieve
the size necessary to achieve and sustain profitability, changes in interest
rates, changes in the banking industry in general and particularly in the
competitive environment in which the Bank operates, and changes in inflation.
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.
PROPOSED MERGER
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. On February 23, 1999,
the Company and First Colonial Securities Group, Inc. (FCSG) signed a
non-binding letter of intent to merge. A merger of this type is quite unique for
a community banking company. The proposed merger would permit the newly
configured company to provide and cross-sell a full range of financial services,
coupled with a high level of personalized service.
FCSG is a full service brokerage and investment banking firm which recently
moved its headquarters from Philadelphia to Boca Raton, and has twenty offices
throughout the U.S. FCSG's principal officer is Michael Golden who serves as
Chairman and Chief Executive Officer. FCSG has an expertise in the financial
services sector and has completed several public offerings (IPO's) for banks.
If the merger is consummated, Southern Security Bank intends to open full
service banking operations in Boca Raton. At the Company level Michael Golden
will assume the title of Chairman and CEO, Phil Modder will be Vice Chairman,
and Jim Wilson will be President and Director. At Southern Security Bank the
principal officers and directors will be, Philip C. Modder, Chairman and
President, and James L. Wilson as Chief Executive Officer and Vice Chairman,
Michael Golden as Director. After consummation of the transaction the Holding
Corporation will own 97.5% of Southern Security Bank and 100% of First Colonial
Securities Group, Inc.
The Company will be one of the first community Banks in Florida to take
this step toward providing a full range of financial services to its customers.
Upon joint meeting of both boards of Directors in late January, 1999, the
transaction was approved in principle by unanimous vote by the respective Board
of Directors of each company. The completion of the proposed merger is subject
to, among other things, the negotiation of a definitive merger agreement,
approval of the merger agreement by the Board of Directors of each entity,
approval by the shareholders of each entity, and obtaining all necessary
regulatory approvals.
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 five
years since the Company's ownership, cumulative losses in this category were
less than $113,000. Total classified assets as a percentage of total loans at
December 16, 1993 exceeded 48% and as of December 31, 1998 were at 6.26%. The
Bank's loan portfolio since the acquisition date has grown to approximately
$14.6 million and total asset growth from $13 million to $22 million. Management
believes that the Bank has addressed many of those historic problem areas 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 five years of effort, management believes the Bank currently has high
asset quality, and that the Bank's capital exceeds statutory guidelines.
However, management believes that the Bank currently has a low level of earning
assets as they relate 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 $14.6 million as of December 31, 1998 from
less than $7 million at December 31, 1993, this earning asset category requires
an additional $2 million in growth to bring the Bank to profitability. The loan
growth experienced during this five-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 $2 million, its deposit base
will require growth of $3.5 million. To support this level of balance sheet
growth, the Bank's capital will need to grow by approximately $800,000. Thus,
management believes that 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
a classification of "poor" to "good."
Average Balance Sheet. An analysis of the Company's average balance sheet
levels for the last two years is presented in the following table. The Company's
net interest income and net yields on interest-earning assets increased 11.3%
percent over 1997. This increase was the result of the growth of total earning
assets made possible due to deposit growth and capital infusions. The average
yield/rate for interest-earning assets decreased 7.4% from 1997 to 1998 while
the average yield/rate of interest-bearing liabilities increased 10.4% from 1997
to 1998.
<TABLE>
<CAPTION>
Southern Security Bank Corporation
Average Balance Sheet Analysis
December
31, 1998 1998 1997
Average Average Average Average Average
Yield/Rate Balance Interest Yield/Rate Balance Interest Yield/Rate
---------- ------- -------- ---------- ------- -------- ----------
Assets: (Dollars in Thousands) (Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C> <C>
Interest-earning assets: 6.35% 1,596 120 7.52% 3,455 237 6.86%
Investments (1)
Federal funds sold 4.75% 5,038 274 5.44% 1,545 87 5.63%
Loans receivable (2) 9.01% 15,347 1,473 9.60% 10,665 1,113 10.44%
------- ----- -------- ------- ------ --------
Total interest earning assets 21,981 1,867 8.49% 15,665 1,437 9.17%
Noninterest-earning assets 2,731 2,301
----- -----
Total 24,712 17,966
====== ======
Liabilities and Stockholders' Equity:
Interest-bearing liabilties:
NOW and money market accounts 2.16% 5,066 116 2.29% 5,012 126 2.51%
Savings accounts 2.05% 407 8 1.97% 401 8 2.00%
Certificates of deposit 5.52% 13,036 755 5.79% 7,364 416 5.65%
Other 6.00% 137 10 7.30% 130 8 6.15%
------- ----- -------- ------- ------ --------
Total interest-bearing liabilities 18,646 889 4.77% 12,907 558 4.32%
------ --- ----- ------ --- -----
Noninterest bearing liabilities 5,177 4,445
Stockholders' equity 889 614
----- ----
Total 24,712 17,966
====== ======
Net Interest income and net yield
on interest-earning assets 978 4.45% 879 5.61%
=== ===== === =====
</TABLE>
(1) Includes investment securities and Federal Reserve Bank stock.
(2) Includes loans for which the accrual of interest has been suspended.
Net Income (loss) for the respective periods of 1998 and 1997 was ($584,000) and
($1,167,000) which represents a decrease in the net loss by $583,000 defined by
a combination of factors as described below.
Analysis of Changes in Interest Income and Interest Expense. Interest
income during 1998 was $1,867,000 as compared to $1,437,000 for 1997. Management
believes that this increase, although not indicative of future performance, does
demonstrate stabilization. Interest expense for this period was $889,000 for
1998, and $558,000 for 1997, representing an increase of $331,000, which was
largely due to an increase in the amount of interest bearing deposits held by
the Bank. The resultant net interest income was $977,000 in 1998 and $879,000
for 1997, reflecting an increase of approximately $98,000.
The impact of the bank's strategies can be seen in the table titled
Analysis of Changes in Interest Income and Interest Expense. 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) change in rate/volume
(change in rate multiplied by change in volume); and (iv) total change in rate
and volume.
<TABLE>
<CAPTION>
Southern Security Bank Corporation
Analysis of Changes in Interest Income and Interest Expense
- -----------------------------------------------------------------------------------------------------------------------------------
Year Ended December 31,
-----------------------
1998 vs. 1997 1997 vs. 1996
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) 23 (12) (117) (44) 1 0 (43)
Federal funds sold 197 (3) (7) 187 38 1 1 40
Loans receivable 489 (89) (40) 360 (15) 50 0 35
------ ---- -------- ----- --------- -- ------- ---
Total interest income on
interest-earning assets 558 (69) (59) 430 (21) 52 1 32
Interest expense on:
NOW and money market accounts 1 (11) 0 (10) 8 1 0 9
Savings accounts 0 0 0 0 3 (1) 0 2
Certificates of deposit 320 10 9 339 (25) (18) 1 (42)
Other 0 1 1 2 (2) (1) 0 (3)
Total interest expense on
interest-bearing liabilities 321 0 10 331 (16) (19) 1 (34)
Increase (decrease) in net
interest income 237 (69) 99 (5) 71 0 66
======== ===== ========= ========= ============= ====== =======
</TABLE>
<PAGE>
Other Income and Expenses. Total other income was $176,000 during 1998
compared with $142,000 for 1997, 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 $743,000 and
$1,228,000 for 1998 and 1997 respectively, which represents a decrease of
$485,000, which is largely attributed to settlement in 1997 of amounts owed the
two principal officers of the Holding Corporation under the terms of their
employment agreements. Total other expenses were $956,000 and $843,000 for 1998
and 1997, respectively, which represents a difference of $113,000, of which
$53,000 was due to the application of funds toward the regulatory approval
procedures, travel and professional fees associated with the private placement
memorandum issued in1998.
Federal Income Taxes. At December 31, 1998, the Company had net operating
loss carry-forwards for federal income tax purposes available to offset future
federal taxable income, in the amount of $7,996,000 with specific amounts
expiring each year from 2002 through the year 2018.
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 the 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.
Therefore, 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 1.34.
RSA/RSL (0 to 365 days) = 0.80 to 1.20; the Bank is at 1.04. RSA/RSL (0
to 90 days) = 0.80 to 1.20; the Bank is at 1.77. RSA/RSL (91-365 days)
= 0.80 to 1.20; the Bank is at 0.41. 0 to 365 day GAP/Total Assets =
+/- 10%; the Bank is at +2.37%. 0 to 90 day GAP/Total Assets = +/- 10%;
the Bank is at +19.36%. 91 to 365 day GAP/Total Assets = +/- 10%; the
Bank is at (-16.99%).
The Bank's view of these GAP positions is as follows:
1. Total RSA/Total RSL Ratio: Out of "Target" of .80 to 1.20 at 1.34.
Rate sensitive assets currently outweigh rate sensitive liabilities.
Management is pursuing a program to obtain 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.
2. RSA/RSL - 0 to 365 Day: Within "Target" tolerance of .80 - 1.20 at
1.04%.
3. RSA/RSL - 0 to 90 Day: Out of "Target" of .80 - 1.20 at 1.77%. The
most applicable and currently achievable strategy is to further
decrease the core deposit base within this time horizon.
4. RSA/RSL - 91 - 365 Day: Out of "Target" of .80 - 1.20 at 0.41%. The
most applicable and currently achievable strategy is to further
increase the core deposit base within this time horizon.
5. 0 - 365 Day GAP/Total Assets Month End: Within "Guideline" of -10%
through +10% at +2.37%.
6. 0 - 90 Day GAP/Total Assets Month End: Out of "Target" of -10%
through +10% at +19.36%. This category is a component of numeral 5
above and is interrelated with numeral 7 below, 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.
7. 91-365 Day GAP/Total Assets Month End: Out of "Target" of -10%
through +10% at - 16.9%. 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, 1998. 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
----- ------- ---------- ---------- ---------- ------
<S> <C> <C> <C> <C> <C> <C>
Residential Real Estate
Fixed Rate 1,768,041 $ - $ 347,075 $ 1,420,965 $ - $ -
Adjustable Rate 1,088,985 - 266,712 822,273 - -
Consumer
Fixed rate 5,824,585 67,526 5,755,705 - - 1,355
Adjustable rate 185,410 105,843 79,587 - - -
Commercial
Fixed rate 1,034,483 776,086 258,297 - - -
Adjustable rate 1,820,703 966,525 452,915 351,617 49,646 -
Commercial Real Estate
Fixed rate 747,891 73,300 492,718 181,873 - -
Adjustable rate 2,319,403 580,513 379,753 630,825 - 758,312
Other 69,263 69,263 - - - -
------------- ----------- ------------ ------------ --------- ---------
$ 14,858,765 $ 2,609,056 $ 8,032,842 $ 3,407,554 $ 49,646 $ 759,667
========== =========== =========== ======== =========
Add deferred loan costs 25,732
------------
14,884,497
============
</TABLE>
Fixed rate loans due after one year total approximately $8.5 million and
adjustable rate loans due after one year total approximately $3.0 million.
Adjustment rate loans which reprice after December 31, 1998 total approximately
$117,000 at December 31, 1998.
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 6.73% in 1997
to 6.37% at December 31, 1998.
<TABLE>
<CAPTION>
Southern Security Bank Corporation
Maturities of Investment Securities
December 31, 1998
One Year or Less Through Five Years Through Ten Years Ater 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>
U.S. Treasury Securities
Held to maturity $ -- -- % $248,280 6.51 % $ -- --% $ -- --% $ 248,280 6.51%
Available for Sale $ -- -- -- -- -- -- -- -- -- --
Mortgage-backed securities:
Held to maturity -- -- 102,603 7.36 -- -- -- -- 102,603 7.36
Available for Sale -- -- -- -- -- -- 277,970 5.67 277,970 5.87
U.S. government corporations
and agencies:
Held to Maturity -- -- -- -- -- -- -- -- -- --
Available for sale -- -- -- -- -- -- -- -- -- --
Total $-- --% $350,883 6.76% $-- -- % $277,970 5.87% $628,853 6.37%
===== ===== ======== ===== ===== ===== ======== ===== ======== =====
</TABLE>
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 loans
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 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 loan portfolio as of
December 31, 1998 and December 31, 1997:
1998 1997
---- ----
Commercial Loans to businesses: 15% 22%
Consumer & Installment Loans: 41% 26%
Residential Mortgage Loans: 19% 25%
Commercial Mortgage Loans: 21% 23%
Accounts Receivable: 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 e nsure 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, 1998 delinquent loans greater
than 30 and less than 90 days (excluding Government Guaranteed) totaled
$410,435; Classified loans totaled $517,445; and Other Real Estate Owned
(consisting of 5 condominium units and one unimproved lot) totaled $414,297. 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, 1998 and 1997.
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, 1998 and 1997.
1998 1997
---- ----
(Dollars in Thousands)
Nonaccrual loans
Real estate -- 15
Commercial 50 --
Accrual loans - Past Due 90 days or more
Real estate 109 513
Installment 54 22
Restructured loans -- --
Real estate owned 414 406
--- ---
Total nonperforming assets 627 956
==== ====
* -Consists of two purchased loan participations which were 100%
guaranteed by United States government agencies.
Total nonperforming assets have increased in 1998 from 1997 by $43,000
(10%). Nonaccrual loans increased by $35,000 (333%), and real estate owned
increased by $8,000 (2%). Accrual loans over 90 days decreased by $372,000
(70%).
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, 1998, the Bank has set a conservative loan loss percentage at no
less than 1.44% 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, 1998:
12/31/98 12/31/92
Ending Balance Loan Loss Reserve $272,000 $619,000
Loan Portfolio Charge-Offs 65,000 593,000
Classified Loans 517,000 3,004,000
Other Real Estate Owned 414,000 967,000
-----------------------
Total Classified Assets 931,000 3,971,000
Percent Classified to Total Loans 6.3% 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>
1998 1997
---- ----
Amount of Amount of
Amount of Loans to Amount of Loans to
Allowance Gross Loans Allowance Gross Loans
--------- ----------- --------- -----------
<S> <C> <C> <C> <C>
Commercial $ 37,450 19.22% $ 72,852 22.21%
Commercial Real Estate 65,905 20.64% 64,012 19.52%
Residential Real Estate 48,889 19.23% 77,647 21.39%
Consumer 118,527 40.45% 73,338 21.96%
Other 728 0.47% 953 0.29%
---------------- ---------- ------------ ----------
Total allowance for loan losses $ 271,499 100.00% $ 288,802 85.36%
================ ========== ============ ==========
</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 on 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.
Impact of Inflation and Changing Prices
The financial statements and accompanying footnotes have been prepared in
accordance with generally accepted accounting principles ("GAAP"), which require
the measurement of financial position and operating results in terms of
historical dollars without consideration for changes in the relative purchasing
power of money over time due to inflation. The assets and liabilities of the
Company are primarily monetary in nature and changes in market interest rates
have a greater impact on its performance than do the effects of inflation.
The following table sets forth the Deposit base of the Bank at the close of
business on December 31, 1998 and December 31, 1997. The Company views the
deposit base as a 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.
<TABLE>
<CAPTION>
Southern Security Bank
Deposit Accounts
December 31, 1998
1998 1997
---- ----
Weighted Weighted
Average % of Average % of
Amount Rate Deposits Amount Rate Deposits
------ ---- -------- ------ ---- --------
<S> <C> <C> <C> <C> <C> <C>
Noninterest bearing accounts: 5,138,392 0.00% 25.38% 3,974,999 0.00% 25.36%
Interest bearing accounts:
NOW accounts 1,601,587 1.91% 7.91% 1,602,893 1.91% 10.23%
Money market deposit accounts 2,745,687 2.25% 13.56% 3,690,050 2.63% 23.54%
Savings accounts 725,038 2.05% 3.58% 431,153 2.10% 2.75%
Time deposits 10,033,342 5.52% 49.56% 5,976,217 5.72% 38.13%
---------- ---------
Total deposits 20,244,046 15,675,312
========== ==========
</TABLE>
The following table sets forth information with respect to the return on assets
and the return on equity for the years ending December 31, 1998 and 1997, and
the ratio of average equity to average assets for those years.
1998 1997
(Dollars in Thousands)
----------------------
Net loss $ (584,021) $ (1,167)
Average total assets 24,712 17,966
Average total equity 889 614
Return on average assets (2.47%) (6.5)%
Return on average equity (65.7%) (190.1)%
Equity to assets ratio 3.6% 3.4%
There were no dividends declared in the years ended December 31, 1998 and 1997.
The Company's net loss decreased by $582,633 (50%) in 1998 due to the
settlement of compensation due in 1997 to executive officers under the terms of
their employment agreements and a substantial provision for loan losses in 1997.
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, 1998 it has met the capital adequacy
requirements as defined by these definitions.
However, the Bank in its written agreement with the regulators had agreed
to maintain a 6.25% ratio of capital to total assets, which was at 6.25% at
December 31, 1998. The Bank has agreed to increase this level to 7.00% beginning
January 1, 1999. The second 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.
Regulator Definition for each Capital Tier Category SSB Adequately Well
Tier-2 Capital = Tier-2 Cap/Risk Weighted Assets 10.0% 8.00% 10.0%
Tier-1 Risk = Tier-1 Cap/Risk Weighted Assets 10.53% 4.00% 6.0%
Tier-1 Leverage = Tier-1 Cap/Avg Quarterly Assets 6.25% 4.00% 5.0%
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 Issue
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. This is commonly referred to as a "Year 2000 Issue"
and it affects virtually all companies and organizations.
The Company is subject to various regulations and oversight by regulatory
authorities, including the Federal Reserve Bank. These regulatory agencies have
coordinated various regulatory examinations focusing on the Year 2000 issues,
and report their findings to the Company's management and the Board of
Directors.
Management of the Company is committed to ensuring that the Company's daily
operations suffer little impact as a result of the date change at the end of the
century. The Company has commenced a thorough review of the potential impacts of
the Year 2000 issue on its operations and financial condition based on the
Federal Financial Institutions Examination Council's (FFIEC), Interagency
Guidelines. The guidelines identify a process in which Year 2000 issues are
addressed, such as awareness, assessment, remediation, testing and
implementation.
The Company has identified key areas for which management is focusing its
efforts. These areas include data center, desktop environment and networks,
financial applications, facilities, legal, insurance, and outside services. For
each of these areas identified, the Company is employing a process which will
compile inventories of all identified areas which could be affected by the year
2000, including information technology ("IT") systems and non-information
technology systems such as phone systems, fax machines and alarm systems. A
testing schedule is defined and the identified systems are tested, and results
evaluated. A remedy process is then defined, and implemented and testing is
performed again. The process is repeated until repairs are complete. Management
reports progress on its compliance program to the Board of Directors at least
quarterly.
All identified critical applications have been tested. Non-critical testing
validation and repair is scheduled to be performed and completed during the
second quarter of 1999.
The Company has relationships with third parties including its borrowers,
which are also subject to the Year 2000 uncertainties. Management has identified
relationships which are considered material, and would have an adverse effect on
the Bank and the Company if such third parties were not Year 2000 compliant.
Management has solicited Year 2000 certifications from significant vendors, and
also completed its own Year 2000 due diligence. No borrower or third party
vendor has given the Company a response that indicates that they will not be
Year 2000 compliant. It is anticipated that all identified third party vendors
will be compliant, however, no assurance can be given with regard to their
compliance with Year 2000. Also, no assurances can be given that a third party
vendor or borrower will not have a material effect on the Company or Bank, due
to their non-compliance with the Year 2000 issue.
While no assurance can be given to actual system operations upon the turn
of the century, based upon information currently known to it, and upon
consideration of its testing efforts to date, management believes that in the
worst case scenario, the Company will suffer only a slight interruption of
business, as a result of minor application failures of its IT and non-IT systems
and software as a result of the Year 2000. However, if the appropriate
modifications are not made, or are not completed on a timely basis, the Year
2000 issue could have a material impact on the operations of the Bank and the
Company.
Costs of Year 2000
The Company expects to incur minimal internal staff costs and other minimal
costs in the execution of its implementation plan for Year 2000 compliance.
These costs may include new equipment and software purchases, in addition to
testing applications prior to the Year 2000.
Contingency Plans
The Company has prepared or is in the process of preparing contingency
plans for each major area of business identified above. The plans will utilize
in part alternative procedures, other third party vendors and manual
intervention, to compensate for the loss of certain computer system. All such
plans will be completed by the second quarter 1999.
Item 7. Financial Statements
SOUTHERN SECURITY BANK CORPORATION
AND SUBSIDIARY
Consolidated Financial Report
December 31, 1998
Independent Auditor's Report
To the Board of Directors and Stockholders
Southern Security Bank Corporation and Subsidiary
Hollywood, Florida
We have audited the accompanying consolidated balance sheets of Southern
Security Bank Corporation and subsidiary as of December 31, 1998 and 1997, 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, 1998 and 1997, and the
results of their operations and their cash flows for the years then ended in
conformity with generally accepted accounting principles.
Fort Lauderdale, Florida
January 22, 1999, except for the second
paragraph to Note 10 as to which
the date is February 18, 1999.
<PAGE>
SOUTHERN SECURITY BANK CORPORATION AND SUBSIDIARY
Consolidated Balance Sheets
December 31, 1998 and 1997
ASSETS 1998 1997
- -------------------------------------------------------------------------
Cash and due from banks (Note 3) $ 1,012,269 $ 1,107,669
Federal funds sold 4,845,000
-----------------------------------
Total cash and cash equivalents 5,857,269 1,107,669
Securities held to maturity (Note 4) 350,883 1,827,494
Securities available for sale (Note 4) 277,970 380,094
Federal Reserve Bank stock, at cost 84,300 63,100
Loans, net (Notes 5, 13 and 17) 14,612,998 12,463,278
Premises and equipment (Note 6) 344,592 399,799
Other real estate owned 414,298 406,298
Accrued interest receivable 136,854 125,870
Other assets 181,677 158,360
-----------------------------------
$ 22,260,841 $ 16,931,962
===================================
See Notes to Consolidated Financial Statements.
<PAGE>
<TABLE>
<CAPTION>
LIABILITIES AND STOCKHOLDERS' EQUITY 1998 1997
- ------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Liabilities:
Noninterest-bearing deposits $ 5,138,392 $ 3,974,999
Interest-bearing deposits (Note 7) 15,105,654 11,700,313
---------------------------------------------
Total deposits 20,244,046 15,675,312
Federal funds purchased 206,000
Notes payable (Note 9) 100,000 100,000
Other liabilities 661,184 452,550
---------------------------------------------
Total liabilities 21,005,230 16,433,862
---------------------------------------------
Commitments and contingencies (Notes 14 and 17)
Minority interest in subsidiary 39,491 25,270
---------------------------------------------
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; none issued and outstanding
Class A voting common stock, $.01 par value; 30,000,000
1,644,988 shares authorized; issued and outstanding 1998
4,567,641 shares; 1997 4,299,673 shares 45,676 42,997
Class B nonvoting convertible common stock,
$.01 par value; 5,000,000 shares authorized;
none issued and outstanding
Capital surplus 5,537,269 4,215,371
Accumulated deficit (4,370,251) (3,786,230)
---------------------------------------------
1,212,694 472,138
Accumulated other comprehensive income 3,426 692
---------------------------------------------
Total stockholders' equity 1,216,120 472,830
---------------------------------------------
$ 22,260,841 $ 16,931,962
=============================================
</TABLE>
<PAGE>
SOUTHERN SECURITY BANK CORPORATION AND SUBSIDIARY
<TABLE>
<CAPTION>
Consolidated Statements of Operations Years Ended December 31, 1998 and 1997
1998 1997
- ----------------------------------------------------------------------------------------------
<S> <C> <C>
Interest income:
Interest and fees on loans $ 1,472,713 $ 1,113,375
Interest and dividends on securities 120,146 237,029
Interest on federal funds sold 273,926 86,653
------------------------------------
1,866,785 1,437,057
Interest expense 889,292 558,451
------------------------------------
Net interest income 977,493 878,606
Provision for loan losses (Note 5) 40,000 130,000
------------------------------------
Net interest income after provision for loan losses 937,493 748,606
------------------------------------
Other income:
Service charges on deposit accounts 136,298 98,959
Securities gains (losses), net (Note 4) 543 753
Other 39,635 42,516
------------------------------------
Total other income 176,476 142,228
------------------------------------
Other expenses:
Salaries and employee benefits 743,373 1,227,901
Occupancy and equipment 321,349 338,750
Data and item processing 72,505 78,926
Professional fees 140,383 86,850
Insurance 91,886 87,861
Other 330,181 250,641
------------------------------------
Total other expenses 1,699,677 2,070,929
------------------------------------
Net loss before minority interest in
net loss of subsidiary (585,708) (1,180,095)
Minority interest in net loss of subsidiary 1,687 13,441
------------------
Net loss $ (584,021) $ (1,166,654)
====================================
Basic and diluted earnings (loss) per share (Note 12) $ (0.13) (0.31)
</TABLE>
See Notes to Consolidated Financial Statements.
<PAGE>
SOUTHERN SECURITY BANK CORPORATION AND SUBSIDIARY
Consolidated Statements of Stockholders' Equity
Years Ended December 31, 1998 and 1997
<TABLE>
<CAPTION>
Accumulated
Other
Comprehensive Preferred Stock Common Stock Paid-In Accumulated Comprehensive
Income Shares Amount Shares Amount Capital (Deficit) Income Total
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Balance, December 31, 1996 596,622 $ 5,966 9,856,664 $ 98,567 $3,259,822 $(2,619,576)$ (23,611)$721,168
Comprehensive income (loss): - - -
Net loss $ (1,166,654) - - - - - (1,166,654) -(1,166,654)
Other Comprehensive income,
net of tax:
Change in unrealized gain
(loss) on securities available
for sale (Note 4) 24,303 - - - - - - 24,303 24,303
------
Comprehensive income (loss) $ (1,142,351)
=========
Issuance of stock in
private placements - - 884,859 8,849 522,067 - - 530,916
Issuance of stock in
settlement of certain
liabilities (Notes 9 and 11) - - 595,120 5,951 351,121 - - 357,072
Conversion of preferred stock
(Note 10) (596,622) (5,966) 596,622 5,966 - - - -
Preferred stock dividends - - 197,178 1,972 (1,972) - - -
Reverse acquisition (Note 2) - - (7,830,770) (78,308) 84,333 - - 6,025
------- ----- --------- ------ ------ -- -- -----
Balance, December 31, 1997 - - 4,299,673 42,997 4,215,371 (3,786,230) 692 472,830
Comprehensive income (loss):
Net loss $ (584,021) - - - - - (584,021) - (584,021)
Other comprehensive income,
net of tax:
Change in unrealized gain
(loss) on securities available
for sale (Note 4) 2,734 - - - - - - 2,734 2,734
Comprehensive income (loss) $ (581,287)
=======
Issuance of stock - - 267,968 2,679 1,321,898 - - 1,324,577
Balance December 31, 1998 - - 4,567,641 $45,676 5,537,269 $(4,370,251) $ 3,426 1,216,120
===========================================================================
</TABLE>
See Notes to Consolidated Financial Statements
<PAGE>
SOUTHERN SECURITY BANK CORPORATION AND SUBSIDIARY
<TABLE>
<CAPTION>
CONSOLIDATED Statements of Cash Flows
Years Ended December 31, 1998 and 1997
1998 1997
- --------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Cash Flows From Operating Activities
Net loss $ (584,021) $ (1,166,654)
Adjustments to reconcile net loss to net cash used in
operating activities:
Net accretion on securities (22,133) (7,452)
Provision for loan losses 40,000 130,000
Provision for losses on other real estate owned 7,000
Depreciation and amortization 79,485 76,406
Securities (gains) losses, net (543) (753)
Minority interest in net loss of subsidiary (1,687) (13,441)
Issuance of common stock as compensation
for services 89,325 207,072
(Increase) decrease in:
Accrued interest receivable (10,984) (19,155)
Other assets (7,471) (55,439)
Increase in other liabilities 208,634 146,745
---------------------------------------
Net cash used in operating activities (202,395) (702,671)
---------------------------------------
Cash Flows From Investing Activities
Net cash flows from securities (Note 18) 1,583,006 1,308,642
Loan originations and principal collections on loans 3,519,073 1,335,699
Purchases of loans 5,723,793 (2,514,204)
Purchase of premises and equipment (24,278) (45,930)
Proceeds from sale of other real estate owned 83,506
---------------------------------------
Net cash provided by (used in) investing activities (645,992) 167,713
---------------------------------------
Cash Flows From Financing Activities
Net (decrease) in federal funds purchased
and securities sold under repurchase agreements (206,000. (544,000.
Net increase (decrease) in deposits 4,568,735 (2,580,891.
Proceeds from issuance of stock 1,235,252 530,916
---------------------------------------
Net cash provided by (used in) financing activities 5,597,987 (2,593,975)
---------------------------------------
Net increase (decrease) in cash
and cash equivalents 4,749,600 (3,128,933)
Cash and cash equivalents:
Beginning 1,107,669 4,236,602
---------------------------------------
Ending $ 5,857,269 $ 1,107,669
=======================================
</TABLE>
See Notes to Consolidated Financial Statements.
<PAGE>
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.
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.
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.
Effective January 1, 1998, the Company adopted FASB Statement No. 130, which was
issued in June 1997. Statement No. 130 establishes new rules for the reporting
and display of comprehensive income and its components, but has no effect on the
Company's net income or total stockholders' equity. Statement No. 130 requires
unrealized gains and losses on the Bank's available-for-sale securities, which
prior to adoption were reported separately in stockholders' equity, to be
included in comprehensive income. Prior year financial statements have been
reclassified to conform to the requirements of Statement No. 130.
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 other comprehensive income, 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 method 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.
Earnings per share: Basic earnings per-share amounts are computed by dividing
net income (the numerator) by the weighted-average number of common shares
outstanding (the denominator). Diluted earnings 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.
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, 1998 and 1997. 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: In June 1998, the Financial Accounting Standards
Board issued Statement No. 133, Accounting for Derivative Instruments and
Hedging Activities, which is required to be adopted in years beginning after
June 15, 1999. The Statement permits early adoption as of the beginning of any
fiscal quarter after its issuance. The Bank expects to adopt the new Statement
effective January 1, 2000. The Statement will require the Bank to recognize all
derivatives on the balance sheet at fair value. Derivatives that are not hedges
must be adjusted to fair value through income. If the derivative is a hedge,
depending on the nature of the hedge, changes in the fair value of derivatives
will either be offset against the change in fair value of the hedged assets,
liabilities, or firm commitments through earnings or recognized in other
comprehensive income until the hedged item is recognized in earnings. The
ineffective portion of a derivative's change in fair value will be immediately
recognized in earnings. Management does not anticipate that the adoption of the
new Statement will have a significant effect on the Bank's earnings or financial
position.
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 by the Federal Reserve Bank to maintain reserve balances in
cash or on deposit, based on a percentage of deposits. Required reserve balances
were completely satisfied by cash on hand at December 31, 1998 and 1997.
Note 4. Investment Securities
Securities held to maturity: The amortized cost and fair values of securities
held to maturity as of December 31, 1998 and 1997 are summarized as follows:
<TABLE>
<CAPTION>
1998
------------------------------------------------------
Gross Gross
Amortized Unrealized Unrealized Fair
Cost Gains Losses Values
------------------------------------------------------
<S> <C> <C> <C>
U. S. Treasury securities $ 248,280 $ 4,962 $ $ 253,242
Mortgage-backed securities 102,603 3,188 105,791
------------------------------------------------------
$ 350,883 $ 8,150 $ $ 359,033
======================================================
</TABLE>
<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>
The amortized cost and fair values of securities held to maturity at December
31, 1998, by contractual maturity, are shown below.
Amortized Fair
Cost Values
----------------------------------
Due after one year through five years $ 248,280 $ 253,242
Mortgage-backed securities 102,603 105,791
----------------------------------
$ 350,883 $ 359,033
==================================
Gross gains of $543 were recognized on securities held to maturity in 1998 as a
result of the disposition of a security that was called by the maker. No
securities held to maturity were called in 1997.
Securities held to maturity with a carrying amount of approximately $250,000 and
$1,300,000 at December 31, 1998 and 1997, 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, 1998 and 1997 are summarized as follows.
1998
----
Gross Gross
Amortized Unrealized Unrealized Fair
Cost Gains Losses Values
---------------------------------------------------
Mortgage-backed securities $ 274,458 $ 3,512 $ $ 277,970
===================================================
1997
----
Gross Gross
Amortized Unrealized Unrealized Fair
Cost Gains Losses Values
-------------------------------------------------
Mortgage-backed securities $379,378 $ 1,325 $ (609) $ 380,094
=================================================
Contractual maturities of mortgage-backed securities available for sale are not
disclosed because they are not due at a single maturity date. In addition,
mortgage-backed securities may mature earlier than their contractual maturities
because of principal prepayments.
There were no sales of securities available for sale in 1998. The sale of
securities available for sale in 1997 resulted in gross realized gains of $753
and no gross realized losses.
No securities available for sale were pledged at December 31, 1998 and 1997.
Changes in the unrealized gain (loss) on securities available for sale are as
follows:
<TABLE>
<CAPTION>
Year Ended December 31,
-----------------------------
1998 1997
-----------------------------
<S> <C> <C>
Unrealized holding gains (losses) arising during the period $ 2,795 $ 14,125
Amortization of unrealized loss on security transferred
to held to maturity 11,826
Less reclassification adjustment for gains (losses) realized
in net income (753)
-----------------------------
Net unrealized gains (losses), before tax (expense) benefit 2,795 25,198
Tax (expense) benefit
-----------------------------
Other comprehensive income before minority interest 2,795 25,198
Minority interest in other comprehensive income of subsidiary (61) (895)
-----------------------------
Other comprehensive income $ 2,734 $ 24,303
=============================
</TABLE>
<PAGE>
Note 5. Loans
The composition of net loans as of December 31, 1998 and 1997 is as follows:
1998 1997
--------------------------
Commercial $ 2,855,186 $ 3,300,273
Commercial real estate 3,067,294 2,899,810
Residential real estate 2,857,026 3,177,722
Consumer 6,009,996 3,263,059
Other 69,263 43,193
--------------------------
14,858,765 12,684,057
Allowance for loan losses (271,499. (288,802.
Deferred loan fees and unamortized premiums, net 25,732 68,023
--------------------------
Loans, net $ 14,612,998 $ 12,463,278
==========================
Activity in the allowance for loan losses for the years ended December 31, 1998
and 1997 was as follows:
1998 1997
------------------------------
Balance, beginning $ 288,802 $ 196,140
Amounts charged off:
Consumer loans (65,097) (13,620)
Commercial loans (27,359)
Provision for loan losses 40,000 130,000
Recoveries of amounts charged off
Consumer loans 7,794
Commercial loans 3,641
------------------------------
Balance, ending $ 271,499 $ 288,802
==============================
The Bank's recorded investment in impaired loans was approximately $50,000 and
$15,000 at December 31, 1998 and 1997, respectively. The specific allowance
associated with impaired loans, and included in the allowance for loan losses,
at December 31, 1998 and 1997, was approximately $7,400 and $7,500,
respectively. The average recorded investment in impaired loans during 1998 and
1997 was $17,000 and $55,000, respectively. Interest income on impaired loans,
recognized for cash payments received in 1998 and 1997, was not significant.
<PAGE>
Note 6. Premises and Equipment
The major classes of premises and equipment and the total accumulated
depreciation as of December 31, 1998 and 1997 are as follows:
1998 1997
--------------------------
Leasehold improvements $ 712,022 $ 705,408
Furniture, fixtures, and equipment 552,803 534,974
--------------------------
1,264,825 1,240,382
Less accumulated depreciation and amortization 920,233 840,583
--------------------------
$ 344,592 $ 399,799
==========================
Note 7. Deposits
The composition of interest-bearing deposits at December 31, 1998 and 1997 is as
follows:
1998 1997
----------------------------
Now accounts $ 1,601,587 $ 1,602,893
money market accounts 2,745,687 3,690,050
Savings accounts 725,038 431,153
Certificates of deposit less than $100,000 6,749,358 4,276,204
Certificates of deposit of $100,000 or more 3,283,984 1,700,013
-----------------------------
Total $ 15,105,654 $ 11,700,313
=============================
At December 31, 1998, the scheduled maturities of certificates of deposit are as
follows:
Less than $100,000
$100,000 and over Total
-----------------------------------------------
Three months or less $ 1,914,932 $ 1,136,068 $ 3,051,000
Over three through six months 2,180,259 826,720 3,006,979
Over six through twelve months 1,128,500 1,021,168 2,149,668
Over one through two years 1,213,999 300,028 1,514,027
Over two through three years 145,000 145,000
Over three through four years 107,000 107,000
Over four through five years 59,668 59,668
-----------------------------------------------
$ 6,749,358 $ 3,283,984 $ 10,033,342
===============================================
<PAGE>
Note 8. Income Taxes
The net cumulative tax effects of the primary temporary differences as of
December 31, 1998 and 1997 are shown in the following table:
<TABLE>
<CAPTION>
1998 1997
----------------------------------
<S> <C> <C>
Deferred tax assets:
Allowance for loan losses $ 57,200 $ 42,000
Other real estate owned 28,300 25,200
Premises and equipment 69,500 41,500
Net operating loss carryforward 3,010,400 2,878,400
Accrual to cash conversion for income taxes 126,900 56,800
Other 2,300
-----------------------------------
Total deferred tax assets 3,292,300 3,046,200
-----------------------------------
Deferred tax liabilities:
Deferred loan costs (2,700) (13,800)
-----------------------------------
Total deferred tax liabilities (2,700) (13,800)
-----------------------------------
3,289,600 3,032,400
Valuation allowance for deferred tax assets (3,289,600) (3,032,400)
-----------------------------------
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 $257,200 and $359,900
during the years ended December 31, 1998 and 1997, 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, 1998 and 1997, because the results of
operations do not provide evidence that the net operating losses available for
carryforward will be utilized in the future.
The Company has available federal net operating loss carryforwards approximating
the following at December 31, 1998:
Expiring December 31, Amount
- --------------------------------------------
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 844,000
2018 328,000
-------------
$ 7,996,000
=============
Note 9. Notes Payable
The Company has an unsecured note payable to a trust affiliated with a
stockholder in the amount of $100,000 at December 31, 1998 and 1997. The note is
due June 30, 1999 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.
Note 10. Capital Stock
During 1998, the Company sold 251,303 units under a private offering at a price
of $5 per share. Each unit sold consisted of one share of Class A Common Stock
and a warrant to purchase one additional share of Class A Common Stock at a
price of $7.50, which expires September 30, 2001. At December 31, 1998, there
are 251,303 of such warrants outstanding.
Effective February 8, 1999 through March 25, 1999, the Company has offered to
permit the holders of the warrants discussed above to purchase 10 shares of
Class A Common Stock for $5.00 through the early exercise of such warrants. The
Board of Directors has the authority to issue up to 5,000,000 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
Certificate of Incorporation created Series A Preferred Stock and authorized the
issuance of 1,200,000 shares from the total authorized shares.
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. 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 dividends were settled by the
issuance of Class A Common Stock at a price of $1.80 per share (after giving
effect to the 1 for 3 reverse stock split executed in connection with the
reverse merger discussed in Note 2).
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 $278,000 and $290,000 at December 31, 1998
and 1997, respectively for additional amounts due to the two officers for
services performed in connection with their employment agreements. During the
year ended December 31, 1998, one officer voluntarily agreed to permanently
forgive $125,000 of compensation due and the related liability was decreased
accordingly.
Options for the purchase of stock in Southern Security Bank
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 (575,570 shares at December 31, 1998). 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 90 days after 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, 1998
and 1997 is 5.0 years and 4.5 years, respectively.
A summary of the options for the purchase of common stock of the Bank
outstanding as of December 31, 1998 and 1997, and changes during the years then
ended is presented in the following table. 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 1998 and 1997: risk-free
interest rates of 5.5% and 6.0% for 1998 and 1997, expected lives of 6 years for
both years and no dividends.
<TABLE>
<CAPTION>
1998 1997
-------------------------------------------------------------------------------
Weighted-Average Weighted-Average
Shares Exercise Price Shares Exercise Price
-------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Outstanding at beginning of year 414,870 $ 1.00 319,690 $ 1.00
Granted 114,830 1.00 95,180 1.00
Exercised
Forfeited (2,640) 1.00
-------------- ----------
Outstanding at end of year 527,060 1.00 414,870 1.00
============== ==========
Options exercisable at year-end 527,060 1.00 414,870 1.00
============== ==========
Weighted-average fair value of
options granted during the year $ 0.08 $ 0.10
</TABLE>
Options for the purchase of stock in Southern Security Bank Corporation
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
stockholders. 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, 1998 and 1997 was 6.4 and 6.0 years, respectively.
<PAGE>
A summary of the options for the purchase of common stock of the Company
outstanding as of December 31, 1998 and 1997, 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 1998 and 1997: risk-free interest rate of 5.5%
and 6.0% percent for 1998 and 1997, respectively, 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>
1998 1997
------------------------------------------------------------------
Weighted-Average Weighted-Average
Shares Exercise Price Shares Exercise Price
------------------------------------------------------------------
<S> <C> <C> <C> <C>
Outstanding at beginning of year 758,612 $ 0.75 667,134 $ 0.34
Granted 105,076 5.00 91,478 1.80
Exercised
Forfeited
---------- --------
Outstanding at end of year 863,688 1.06 758,612 0.51
========== ========
Options exercisable at year-end 863,688 1.06 758,612 0.51
========== ========
Weighted-average fair value of
options granted during the year $ 1.95 $ 0.75
</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:
1998 1997
- ----------------------------------------------------------------------------
Net loss As reported $ (584,021) $(1,166,654)
Pro forma (818,000) (1,235,000)
Basic earnings per share As reported (0.13) (0.31)
Pro forma (0.18) (0.33)
Note 12. Earnings Per Share
Following is information about the computation of the earnings per share data
for the years ended December 31, 1998 and 1997:
Numerator Denominator Per-Share
Amounts
--------------------------------
Year Ended December 31, 1998
--------------------------------
Net loss $ (584,0210)
Less preferred stock dividends accrued
------------
Basic and diluted earnings (loss) per share,
income available to common stockholders (584,021) 4,425,148 $(0.13)
==================================
Year Ended December 31, 1997
-----------------------------
Net loss $(1,166,654)
Less preferred stock dividends accrued (14,834)
------------
Basic and diluted earnings (loss) per share,
income available to common stockholders (1,181,488) 3,771,047 $(0.31)
===================================
Options for the purchase of 863,688 shares and 758,612 shares at December 31,
1998 and 1997, respectively, have not been included in the computation of
diluted earnings per share for 1998 and 1997 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, 1998 and 1997 and the activity therein for the years then ended was
as follows:
1998 1997
-----------------------------
Balance, beginning $ 255,057 $ 705,057
New loans 248,401
Repayments (76,362) (450,000)
------------------------------
Balance, ending $ 427,096 $ 255,057
==============================
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, 1998, are as follows:
Year Ending
December 31 Amount
- ---------------------------------------------------------
1999 $ 178,920
2000 184,288
2001 189,816
2002 195,510
2003 201,376
Thereafter 2,467,478
----------------
Total minimum lease payments $ 3,417,388
================
Total lease expense for the years ended December 31, 1998 and 1997 approximated
$183,000 and $214,100, respectively, net of sublease income of none and $22,900,
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, 1998, 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, 1998.
<PAGE>
As of December 31, 1998, 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>
As of December 31, 1998:
Total Capital (to
Risk-Weighted Assets) $ 1,800,324 11.8% $ 1,222,234 8.0% $ 1,222,234 8.0%
Tier I Capital (to
Risk-Weighted Assets) $ 1,608,356 10.5% $ 611,117 4.0% $ 611,117 4.0%
Tier I Capital (to
Average Assets) $ 1,608,356 6.3% $ 919,600 4.0% $ 919,600 4.0%
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%
</TABLE>
Under the framework, the Bank's capital levels do not allow the Bank to accept
brokered deposits without prior approval from regulators.
<PAGE>
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 November 13, 1998, 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"). This written
agreement superseded the prior agreement dated March 17, 1992. 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) any planned growth in the Bank's assets, (c) the volume of the
Bank's adversely classified assets, (d) the Bank's anticipated level of
retained earnings, and (e) the source and timing of additional funds to
fulfill future capital requirements; and,
c. Requires the Bank to maintain its tier one leverage ratio at a level of no
less than 6.25% through December 31, 1998 and 7.0% thereafter.As shown in
the financial statements, the Company incurred net losses of $584,021 and
$1,166,654 during the years ended December 31, 1998 and 1997, respectively.
Despite these losses, the Bank continued to meet the minimum regulatory
capital requirements prescribed under prompt corrective action provisions
at December 31, 1998. 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. Management expects to
raise additional capital through the offer for early exercise of warrants
as discussed in Note 10 and to significantly reduce the loss from
operations in 1999. In addition, the Company plans to raise additional
capital in connection with the planned merger discussed in Note 20.
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, 1998 and 1997:
1998 1997
------------------------------
Commitments to extend credit (unfunded) $ 1,923,741 $ 1,995,917
Standby letters of credit 107,932 58,632
------------------------------
$ 2,031,673 $ 2,054,549.
==============================
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 officers voluntarily
agreed to an exercise price of $5.00 for options granted in 1998 and 1999. 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,
---------------------------
1998 1997
---------------------------
<S> <C> <C>
Cash flows from securities:
Securities available for sale:
Sales $ $ 782,010
Maturities, calls, and paydowns 106,139 584,473
Purchases (349,945)
Securities held to maturity:
Maturities and paydowns 1,498,067 541,563
Purchases (245,859)
Purchases of Federal Reserve Bank stock (21,200) (3,600)
-----------------------------
$ 1,583,006 $ 1,308,642
=============================
Supplemental disclosures of cash flow information:
Cash payments for interest $ 683,957 $ 633,500
Supplemental schedule of Noncash Investing and
Financing Activities
Issuance of 250,000 shares of Class A Common Stock
in exchange for notes payable to stockholders (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
Issuance of 16,665 shares of Class A Common Stock
in exchange for services 89,325
Acquisition of other real estate upon foreclosure of loans 15,000
</TABLE>
Note 19. Fair Value of Financial Instruments
The following methods and assumptions were used by the Company 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 estimated 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 statement 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 Company's financial instruments at December 31, 1998 and 1997:
<TABLE>
<CAPTION>
1998
-------------------------------------
Carrying Fair
Amount Value
-------------------------------------
<S> <C> <C>
Cash and cash equivalents $ 1,012,269 $ 1,012,269
Investment securities (including Federal Reserve Bank stock) 713,153 721,303
Loans receivable 14,612,998 14,716,432
Accrued interest receivable 136,854 136,854
Deposits 20,244,046 20,256,510
Other liabilities 761,184 761,184
Commitments to extend credit
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) 2,270,688 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>
Note 20. Planned Merger
The Company has signed a letter of intent to merge with First Colonial
Securities Group, Inc. (FCSG), to be effected through a stock for stock exchange
with the Company to be the surviving parent. FCSG is a full service brokerage
and investment banking firm headquartered in Boca Raton, Florida and has twenty
offices throughout the United States. After consummation of the planned merger,
the Company would own 100% of FCSG.
Note 21. Parent Company Only Financial Statements
Condensed financial statements for Southern Security Bank Corporation only are
presented below:
SOUTHERN SECURITY BANK CORPORATION
PARENT COMPANY ONLY BALANCE SHEETS
December 31, 1998 and 1997
ASSETS 1998 1997
------------------------------
Cash $ 68,108 $ 721
Investment in Southern Security Bank 1,580,675 843,231
Other assets 4,519 36,408
-----------------------------
$ 1,653,302 $ 880,360
=============================
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities
Notes payable $ 100,000 $ 100,000
Other liabilities 337,182 307,530
-----------------------------
Total liabilities 437,182 407,530
Stockholders' equity 1,216,120 472,830
-----------------------------
$ 1,653,302 $ 880,360
==============================
SOUTHERN SECURITY BANK CORPORATION
PARENT COMPANY ONLY STATEMENTS OF OPERATIONS
Years Ended December 31, 1998 and 1997
1998 1997
---------------------------
Equity in net loss of Southern Security Bank $ (37,349) $ (283,951)
---------------------------
Expenses:
Interest expense 10,366 6,117
Other expenses 536,306 876,586
--------------------------
Total expenses 546,672 882,703
---------------------------
Net loss $ (584,021) $ (1,166,654
==========================
SOUTHERN SECURITY BANK CORPORATION
PARENT COMPANY ONLY STATEMENTS OF CASH FLOWS
Years Ended December 31, 1998 and 1997
<PAGE>
<TABLE>
<CAPTION>
1998 1997
-------------------------------------
<S> <C> <C>
Net loss $ (584,021) $ (1,166,654)
Adjustments to reconcile net loss to net cash
used in operating activities:
Equity in net loss of Southern Security Bank 37,349 283,951
Issuance of common stock as compensation for services 89,325 207,072
Other 65,382 260,234
-------------------------------------
Net cash used in operating activities (391,965) (415,397)
Net cash used in investing activities (Investment in Southern
Security Bank ) (775,900) (120,000)
Net cash provided by financing activities 1,235,252 530,916
-------------------------------------
Decrease in cash and cash equivalents 67,387 (4,481.
Cash and cash equivalents:
Beginning 721 5,202
-------------------------------------
Ending $ 68,108 $ 721
=====================================
</TABLE>
Note 22. 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 a remediation 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
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.
Item 8 Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure
None.
PART III
Item 9. Directors, Executive Officers, Promoters and Control Persons;
Compliance With Section 16(a) of the Exchange Act
MANAGEMENT
Company Officers and Directors
<TABLE>
<CAPTION>
Name Term Age Position Position Since
<S> <C> <C> <C> <C>
Philip C. Modder 3yr 58 Chairman of the Board June, 1992
President
James L. Wilson 3 yr 54 Vice Chairman June, 1992
Chief Executive Officer
Timothy S. Butler 2 yr 49 Director December, 1992
Eugene J. Strasser 2 yr 52 Director December, 1992
Harold C. Friend 1 yr 52 Director December, 1994
Robert D. Butler, Jr. ** 1 yr 50 Director December, 1994
</TABLE>
** Timothy S. Butler and Robert D. Butler, Jr. are cousins.
Each director is elected for a period of three years. The term of directorships
are staggered as to expiration date, such that for the present board of
directors, each year one-third of the directorship is subject to re-election,
providing for additional stability and continuity. Vacancies and newly created
directorships resulting from any increase in the number of authorized directors
may be filled by a majority vote of the directors then remaining in office;
However, any additional Directors or vacancies filled may not take office nor
serve, until proper applications and disclosures are filed with the FRB, for
prior approval therefrom. Once approval is obtained from the FRB, director(s)
may thereafter take office and serve in that capacity. Certain information with
respect to the background of each director and the three executive officers of
the Company is set forth below.
Philip C. Modder: Mr. Modder, President of the Company, has been involved in the
banking industry in Palm Beach County for over 25 years. Modder was educated at
the University of Wisconsin, Racine, Wisconsin, Evangel College, Springfield,
Mo., Palm Beach Junior College, Lake Worth, Fl., and Florida Atlantic
University, which granted him a B.S. Degree in 1969, in the academic areas of
Finance and Accounting. Prior to organizing the subject Company, Mr. Modder was
President and Chief Executive Officer and organizing director of Mizner Bank
located in Boca Raton, Florida, from March 1987 to May 1992. Prior thereto, Mr.
Modder served as Senior Vice President of Caribank of Palm Beach County. In
1988, Caribank of Palm Beach County was merged into its parent, Caribank of
Dania.
Prior to that time, Modder previously served as Senior Vice President and Area
Manager of Atlantic National Bank for five years and Vice President and Branch
Manager for eight years at Sun Bank. Mr. Modder serves as a Director and was a
past Chairman of the Boca Raton Chamber of Commerce, and also serves as Chairman
of the Boca Raton Airport Authority. Mr. Modder has also served as an instructor
for the American Institute of Banking.
James L. Wilson: Mr. Wilson, Chief Executive Officer of the Company, has been
involved in banking and the finance industry in Florida since 1970, was educated
at Union College with degree granted in 1968 in the academic areas of
Mathematics and Organic Chemistry. Prior to organizing the Company, Mr. Wilson
was Executive Vice President and Senior Lending Officer of Boca Bank in Boca
Raton, Florida from June 1990 to June 1992. Prior thereto, from June 1985 to May
1990, Wilson was a Principal of Bayshore Investments, Tampa, Florida, a real
estate finance and property management company. Wilson in the early 1980's was
Vice President, and Senior Real Estate Lending Officer for Southeast Bank,
Tampa, Florida. Wilson also held various positions with Royal Trust Bank
(Canada), N.A. with USA offices in Miami; while at Royal Trust, Wilson was a
member of the Bank Acquisition Team, which purchased and/or examined over a
billion dollars in banking companies. Wilson's biography has been published in
multiple editions of Who's Who of America, the South and South West, and the
World since 1984. Mr. Wilson has also served as an instructor for the American
Institute of Banking.
Timothy S. Butler: Mr. Butler was born in Fort Lauderdale and graduated from
Pompano Beach High School in 1967. He attended Broward Community College and
Florida State University. He has served as President of Butler Properties Ltd.
since 1971. That Company manages the family assets consisting of farm land and
various other real estate holdings. From January 1989 to June 1992, he served as
an Associate Director of Mizner Bank in Boca Raton.
Eugene J. Strasser, M.D.: Dr. Strasser did his undergraduate and Pre-Med work at
Loyola College and the University of Maryland where he graduated in 1968. He
attended the University of Maryland Medical School in Baltimore, Maryland where
he graduated in 1972. He is licensed by the American Medical Board as a Board
Certified General Surgeon and a Board Certified Plastic and Reconstructive
Surgeon. He has established his own small, private hospital, CosmoPlast Center,
in Coral Springs, Florida, where he has practiced medicine since 1981.
Harold C. Friend, M.D.: Dr. Friend has been a resident of South Florida for 21
years. He received his B.A. from the University of Texas, and his M.D degree
from the University of Texas Southwestern Medical School in 1972. Friend is a
board-certified Neurologist, practicing in Boca Raton. He has been active in
numerous business activities, including past membership of the Mizner Bank's
Advisory Board, President of Puget Sound Yellow Taxi, Inc. a transportation
company located in Seattle, Washington from June of 1993 to October, 1996, and
President of the Neuroscience Center in Boca Raton, Florida from June 1985 to
the present. As to civic involvement, Dr. Friend has held past and present
positions with the Southern Region of the Boy Scouts, Executive Board of United
Way, and the Local and International Rotary. Dr. Friend's biography is published
in multiple editions of Who's Who of the South and South West, and the World.
Robert David Butler, Jr.: Mr. Butler was born in Boca Raton, Florida and was
reared in Deerfield Beach, Florida. He attended Carson-Newman College and the
University of Tennessee and was graduated with degrees in Business
Administration, English, and Music. After retiring from Eastern Airlines after
fifteen years of service as a flight services representative, in June of 1991 he
established Pegasus Travel Management, a division of Regit Enterprises, Inc., of
which he is President and Chief Executive Officer. Mr. Butler resides in Coconut
Grove, Florida, this city also being the location of the corporation
headquarters of Regit Enterprises.
Floyd Harper: Vice President of the Company (and Senior Vice President and
Cashier of the Bank), 49, graduated with honors from Northwood University, West
Palm Beach, Florida with a Business Administration Degree, received a Degree
from University of Virginia Graduate School of Retail Bank Management, and has
been designated a Certified Consumer Credit Executive thereby. From January 1993
to October 1994, Harper was engaged by the Resolution Trust Corporation in the
disposition of failed banking institutions of over $12 Billion, as Regional Vice
President, Branch Administration, and dealt with deposit acquisition and
operational efficiency. Prior to 1993, Harper was Executive Vice President,
Chief Operating Officer for Southern National Bank, was Vice President &
District Manager for Chase Manhattan Bank (Florida) handling upscale lending,
and served with Atlantic National Bank and Barnett Bank in South Florida.
Peter Stec, Senior Vice President and Senior Lending Officer of the Bank, 46,
has been involved in community banking since 1980 and is experienced in
rehabilitating loan portfolios and in originating new borrowing relationships.
Stec was educated at the University of Dayton, Ohio, where he received a degree
in Business Administration granted in 1975. He has attended the Stonier Graduate
School of Banking and is a Certified Lender-Business Banking, recognized by the
American Bankers Association. From June 1987 to October 1989, Stec managed a 75
employee lending unit consisting of Commercial Lending, Loan Operations, Credit
Administration, as Senior Vice President of First American Bank, a $1.5 Billion
Florida banking company. From November 1989 to March 1993, Stec served as Vice
President and Commercial Lending Manager for Boca Bank, Boca Raton, Florida, and
from June 1985 to May 1987 served as a Loan Officer for Southeast Bank and
Florida Coast Bank in South Florida.
Section 16(a) Beneficial Ownership Reporting Compliance
Section 16(a) of the Securities Exchange Act of 1934 requires the Company's
directors and executive officers, and persons who own more than 10% of a
registered class of the Company's equity securities, to file with the Securities
and Exchange Commission reports of ownership and changes in ownership of common
stock of the Company. Officers, directors and greater than 10% shareholders are
required by SEC regulation to furnish the Company with copies of all Section
16(a) forms they file.
Based solely on review of the copies of Section 16(a) reports furnished to
the Company, the Company believes that, during the 1998 fiscal year, the
following directors, officers, and holders of more than 10% of the Company's
common stock failed to file one Form 4 report with respect to beneficial
ownership of the Company's securities: Timothy S. Butler and Harold C. Friend.
Mr. Philip C. Modder and Mr. James Wilson each failed to file one Form 5 report.
During 1998 there was no public trading market with respect to the Company's
common stock, and based upon the Company's registry of record owners of its
common stock and transfer restrictions on the common stock owned by such
persons, the Company believes that none of the foregoing persons purchased or
sold any shares of the Company's common stock during that period.
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, 1998, 1997 and 1996. 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
1998.
<TABLE>
<CAPTION>
Annual Compensation Long-Term Compensation
Securities
Name and Other Annual Underlying LTIP Other
Principal Position Year Salary Compensation Options/ Layouts Compensation
SARs (#)
- -------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Philip C. Modder, Chairman 1998 $175,000 $17,000(1) 52,538 -0- $ -0-
and President 1997 $175,000 $17,000(1) 48,807 -0- $ -0-
1996 $127,000 $17,000(1) 19,619 -0- $ -0-
- -------------------------------------------------------------------------------------------------------
James L. Wilson, Chief 1998 $175,000 17,000(1) 52,538 -0- $ -0-
Executive Officer 1997 $175,000 17,000(1) 42,671 -0- $ -0-
1996 $103,000 17,000(1) 14,714 -0- $ -0-
</TABLE>
(1) Includes Term Life Insurance premiums and automobile allowances of $10,800
to Messrs. Modder and Wilson.
The following table shows information concerning options granted to
Named Executive Officers during the fiscal year ended December 31, 1998.
<TABLE>
<CAPTION>
Option / SAR Grants in Last Fiscal Year
Number of Securities % of Total Options/SAR's Exercise or Expiration
Underlying Options/ Granted to Employees in Base Price Date
Name SAR's Granted Fiscal Year ($/Share)
- -----------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Philip Modder 52,538 50% $5.00 6/30/2008
James Wilson 52,538 50% $5.00 6/30/2008
</TABLE>
In addition, as Directors of the Company's Bank subsidiary, each Messrs.
Modder and Wilson received 13,500 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.
<TABLE>
<CAPTION>
Aggregated Option/SAR Exercises in Last Fiscal Year
and
Fiscal Year-End Option SAR Values
Number of
Securities Value of
Underlying Unexercised
Unexercised In-the-Money
Options/SAR's Options/SAR's
at FY-End at FY-End
Shares Acquired Exercisable/ Exercisable/
Name on Exercise Value Realized Unexercisable Unexercisable
- --------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Philip Modder -0- -0- 335,323 / 0 $-0-(1)
James Wilson -0- -0- 261,555 / 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: (1) 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%; (2) the executive will be paid a bonus equal to 2.5% of the
pre-tax net income of the Company; (3) 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; (4) 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 and July 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 and July 1, 1998 options); (5) 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; (6) 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;
(7) 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; (8) 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; (9) family membership in two country clubs;
(10) 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
(11) 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: (1) 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; (2) 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; (3) 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; (4) 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 (5) 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 13,500 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 February 28, 1999, 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 1,048,213 (2) 19.3%
James L. Wilson
3475 Sheridan Street
Hollywood, FL 33021 933,400 (3) 17.2%
Jack E. & Molly W. Butler, TTE's
U/A dtd 11/13/90
2363 Loblolly Lane
Deerfield Beach, FL 33442 321,467 (4) 5.9%
Robert D. & Martha L. Butler,
TTE's
U/A dtd 3/29/90
84 Southeast 4th Avenue
Deerfield Beach, FL 33441 325,150 (5) 6.0%
Linda K. Strasser
6770 N.W. 87th Avenue
Parkland, FL 33067 383,060 (6) 7.1%
Timothy S. Butler
151 Deer Track Run
Lakemont, GA 30552 449,675 (7) 8.3%
Harold C. Friend
3475 Sheridan Street
Hollywood, FL 33021 287,708 (8) 5.3%
(1) Based on information supplied by the persons indicated.
(2) Includes options to purchase 335,323 shares that are exercisable within
60 days, and 67,511 shares owned by Mr. Modder's wife.
(3) Includes options to purchase 261,555 shares that are exercisable within
60 days, 40,844 shares owned by Mr. Wilson's wife, 13,334 shares owned
by Mrs. Wilson as custodian for her children.
(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 83,334 shares owned by a trust as to which Mr. Butler has sole
voting and investment power and options to purchase 134,174 shares that
are exercisable within 60 days.
(8) Includes options to purchase 19,953 shares that are exercisable within
60 days, 40,998 shares owned by Mr. Friend's wife, and 94,258 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 February 28, 1999.
Shares of Class A Percent (%) of
Name (1) Common Stock Class
- -------- ------------ -----
Philip C. Modder 1,048,213 (2) 19.3%
James L. Wilson 933,400 (2) 17.2%
Eugene J. Strasser 383,060 (3) 7.1%
Harold C. Friend 287,708 (2) 5.3%
Robert D. Butler, Jr. 41,891 (4) 0.8%
Timothy S. Butler 449,675 (2) 8.3%
All directors and executive
officers as a group
(7 persons) 3,143,947 (5) 57.9%
(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 $100,000 to a trust affiliated with Jack E.
Butler, who is the father of Timothy S. Butler and the uncle of Robert D.
Butler, Jr. 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, 1999.
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 FinancialCorporation, 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 BankCorporation,
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 ****
10.5 Agreement between Southern Security Bank and the Federal Reserve Bank
of Atlanta and the State of Florida Department of Banking and Finance
dated November 13, 1998 -- 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.
**** Filed as an exhibit to Form 10-KSB/A filed on June 10, 1998.
(1) Management compensation plan or arrangement.
(b) Reports filed on Form 8-K.
No reports on Form 8-K were filed during the last quarter of the period
covered by this report.
<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
March 30, 1999 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 March 30, 1999
s/ James L. Wilson
------------------
James L. Wilson
(ii) Principal Accounting and Vice President March 30, 1999
Financial Officer:
s/ Floyd D. Harper
------------------
Floyd D. Harper
(iii) Directors:
s/Philip C. Modder Chairman of the Board March 23, 1999
------------------
Philip C. Modder
s/James L. Wilson Vice Chairman March 30, 1999
-----------------
James L. Wilson
s/Timothy S. Butler Director March 23, 1999
-------------------
Timothy S. Butler
s/Harold C. Friend Director March 23, 1999
------------------
Harold C. Friend
s/Robert D. Butler Director March 23, 1999
------------------
Robert D. Butler
s/Eugene J. Strasser Director March 23, 1999
--------------------
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 ****
10.5 Agreement between Southern Security Bank and Federal Reserve Bank of
Atlanta and the State of Florida Department of Banking and Finance
dated November 13, 1998 - 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.
**** Filed as an exhibit to Form 10-KSB/A filed on June 10, 1998.
UNITED STATES OF AMERICA
BEFORE THE BOARD OF GOVERNORS OF THE FEDERAL RESERVE
SYSTEM
WASHINGTON, D.C.
AND
STATE OF FLORIDA
DEPARTMENT OF BANKING AND FINANCE
DIVISION OF BANKING
TALLAHASSEE, FLORIDA
Written Agreement by and among
SOUTHERN SECURITY BANK
Hollywood, Florida
FEDERAL R)SERVE BADocket No. 98-021-WA/RB-SM
Atlanta, Georgia
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 Southern Security Bank, Hollywood, Florida (the
"Bank"), a State chartered bank that 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 supersedes the Written Agreement, dated March 17, 1992;
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 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 the Bank;
and
WHEREAS, on October 28, 1998, the board of directors of the Bank, at a duly
constituted meeting adopted a resolution authorizing and directing Chairman
Philip C. Modder 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:
6. Management Review
(a) Within 30 days of this Agreement, the Bank's board of directors shall engage
an outside consultant, acceptable to the Reserve Bank and the Comptroller, to
conduct an independent review of the functions and performance of the executive
officers of the Bank and prepare a written report of findings and
recommendations to the Bank's board of directors. The review shall focus on an
assessment of the duties performed by each executive officer and the ability of
each officer to perform competently his or her assigned duties. The primary
purpose of this review shall be to aid in the development of a management
structure that is suitable to the Bank's needs and is adequately staffed by
qualified and trained personnel. At a minimum, the qualifications of management
shall be assessed for its ability to (1) restore and maintain all aspects of the
Bank to a safe and sound condition, and (2) comply with the requirements of this
Agreement.
(b) Within 30 Days of the Bank's receipt of the consultant's written report of
findings and recommendations required by paragraph 1(a) hereof, the Bank shall
submit a written management plan to the Reserve Bank and the Comptroller
describing specific actions that the board of directors proposes to take in
order to strengthen Bank management and to improve the board of directors'
supervision over the Bank's officers. The management plan shall fully address
the consultant's findings and recommendations and include written detailed
descriptions of the responsibilities of each executive officer of the Bank,
including reporting lines of authority and the responsibilities of subordinates.
A copy of the consultant's written report shall also be forwarded to the Reserve
Bank and the Comptroller.
1. Dividends and Management Fees
(a) The Bank shall not declare or pay any dividends without the prior written
approval of the Reserve Bank, the Comptroller, and the Director.
(b) The Bank shall not pay to its parent bank holding company, Southern Security
Corporation, Hollywood, Florida, any fee or fees that represent service or
management fees of any nature without the prior written approval of the Reserve
Bank and the Comptroller. Any request for prior approval pursuant to this
paragraph shall be accompanied by documentation adequate to provide the Reserve
Bank and the Comptroller with the details of each fee proposed to be paid by the
Bank and a description of the benefits proposed to be derived by the payment of
the fee, the type of services to be rendered, and the identity of the person or
persons who will supply the services or advice covered by the fee.
2. Capital Adequacy
(a) Within 60 days of this Agreement, the Bank shall submit to the Reserve Bank
and the Comptroller an acceptable written plan to achieve and maintain
sufficient capital. The plan shall, at a minimum, address and consider: (1) the
Bank's current and future capital requirements, including compliance with the
Capital Adequacy Guidelines of the Board of Governors (12 C.F.R. Part 208, App.
A and B); (2) any planned growth in the Bank's assets; (3) the Bank's level
of concentrations of credit; (4) the volume of the Bank's adversely classified
assets; (5) the Bank's anticipated level of retained earnings; and (6) the
source and timing of additional funds to fulfill the future capital needs of the
Bank.
(b) Notwithstanding the provisions of paragraph 3(a) hereof, the Bank shall,
from the date of this Agreement through December 31, 1998, maintain its tier 1
leverage ratio at a level of no less that 6.25 percent. At all times thereafter
during the term of this Agreement, the Bank shall maintain its tier 1 leverage
ratio at a level of no less than 7 percent.
3. Compliance with Applicable Laws and Regulations
(a) The Bank shall immediately take all necessary steps to eliminate or correct
all violations of State and Federal law, rule, and regulation cited in the State
of Florida Examination Report, dated April 4, 1998 (the "Report of
Examination").
(b) The Bank shall immediately initiate an affirmative compliance program in
order to ensure compliance with the provisions of all applicable laws, rules,
and regulations and this Agreement. Pursuant thereto, the management of the Bank
shall familiarize itself with the applicable provisions of the Federal Reserve
Act and the regulations promulgated thereunder, the laws of the State of
Florida, and the provisions of this Agreement.
4. Brokered Deposits
The Bank shall not accept brokered deposits except in compliance with the
provisions of section 29 of the FDI Act (12 U.S.C. 1831e). The Bank shall notify
the Reserve Bank and the Comptroller if the Bank requests any waiver of the
restrictions imposed by section 29 from the Federal Deposit Insurance
Corporation (the "FDIC"), and shall notify the Reserve Bank and Comptroller of
the FDIC's disposition of any request for such a waiver.
5. Asset/Liability Management
(a) Within 60 days of this Agreement, the Bank shall submit to the Reserve Bank
and the Comptroller an acceptable revised written asset/liability management
policy designed to improve management of the Bank's liquidity and sensitivity to
market risk.
(b) The revised policy regarding liquidity shall, at a minimum, address the
following: (1) a minimum level of temporary assets; (2) a maximum level of
volatile liabilities; (3) an appropriate level of core deposits; (4) an
appropriate level of loans relative to deposits and capital; (5) parameters for
off-balance sheet risk; (6) the number and amount of large deposits; (7) the
Bank's borrowing availability; and (8) appropriate standards for volume, mix and
maturity of the Bank's loans, investments, and deposits.
(c) The revised policy regarding sensitivity to market risk shall, at a minimum,
address the following parameters for interest rate risk: (1) appropriate
guidelines for "GAP" management; (2) an adequate system to model and control the
vulnerability of net interest income to changes in interest rates; and (3)
appropriate parameters governing the economic risk to the Bank's capital due to
changes in interest rates.
(d) The Asset/Liability Committee (the "ALCO") of the Bank shall be responsible
for providing the necessary reports to the board of directors on a monthly basis
so that the board of directors can make informed decisions regarding the Bank's
management of market risk.
(e) The ALCO shall, at all times, be comprised of at least two outside
directors. The ALCO shall be responsible for monitoring compliance with the
Bank's asset/liability policies and procedures, and shall review, on a monthly
basis, all decisions 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 established policies and procedures. Any exceptions to the
policies and procedures shall be documented by the ALCO as to the reason for the
exception, and the continuance of any exception must be approved by a majority
of both the ALCO and the Bank's board of directors.
6. Funds Management
(a) Within 60 days of this Agreement, the Bank shall submit to the Reserve Bank
and the Comptroller an acceptable written funds management plan and procedures
to provide for the maintenance of an adequate liquidity position. The plan and
procedures shall, at a minimum, address and consider:
(1) Identification of potential sources of liquidity if the Bank were to
experience an erosion of its deposit base;
(2) establishment of contingency plans for meeting large, unexpected
withdrawals, which shall, at a minimum, include: (A) the sale of assets, and (B)
establishing lines of credit with other financial institutions to advance funds
on short notice; and
(3) a monthly review by the Bank's board of directors to determine how best to
allocate the Bank's available funding sources among various asset categories
after reviewing: (A) the Bank's liquidity position; (B) outstanding commitments
such as loan commitments and letters of credit; and (C) the Bank's
rate-sensitivity position and net interest margin.
(b) The funds management plan shall be coordinated with the Bank's loan,
investment, operating, and strategic plan and budget policies.
7. Concentrations
Within 60 days of this Agreement, the Bank shall submit to the Reserve Bank and
the Comptroller an acceptable written policy and procedures to monitor and
control concentrations of credit. The policy and procedures shall, at a minimum,
address and consider: (a) methods used to identify assets or groups of assets or
contingent claims with common risk elements that, in the aggregate, represent 25
percent or more of the Bank's tier 1 capital; (b) the establishment by the board
of directors of acceptable limits on concentrations of credit; (c) monitoring
procedures to control concentrations of credit; and (d) written monthly
reporting of concentration levels to the Bank's board of directors, copies of
which shall be retained for subsequent supervisory review.
8. Policy Revisions
Within 90 days of this Agreement, the Bank shall submit to the Reserve Bank and
the Comptroller acceptable revised written policies for the following areas:
(a) Loan Policy: revisions to the loan policy shall include, but not be limited
to: (1) the annual review of the loan policy by the board of directors; (2) the
establishment of the duties, responsibilities, and procedures for the Bank's
Loan and Discount Committee; (3) a requirement that real estate appraisals and
bank management inspections be updated annually, and that appraisals be at "fair
value" estimates; and (4) the board of directors' annual adoption of a list of
approved real estate appraisal firms.
(b) BSA/Suspicious Activity Report/Know Your Customer: revisions to these
policies shall include, but not be limited to: (1) maintenance of a sample
Currency Transaction Report (Form 4789) and preparation instructions; (2)
establishment of procedures for the detection and review of off-line and
multiple transactions; (3) maintenance of a sample Suspicious Activity Report
and preparation instructions; and (4) maintenance of a written record of the
training received by Bank personnel, including the frequency of training and the
names of personnel trained.
(c) Wire Transfer: revisions to the wire transfer policy shall include, but not
be limited to: (1) the specification of the positions responsible for performing
the various wire transfer functions; (2) required written agreements between the
Bank and the customer for requests received by facsimile; (3) a record of the
institutions through which incoming and outgoing wire transfers are processed
and the instances when these institutions are used for the processing of wire
transactions; (4) a requirement that "call-back" procedures are performed and
documented when telephone and/or facsimile wire transfer requests are received
form customers; and (5) a contingency plan in the event of a disaster or
emergency.
9. Loan Committee
(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 or acquired by the Bank (1) that in the aggregate will exceed $100,000 to
any borrower, including related interest(s) of such borrower, except those
collateralized by cash and cash equivalents; (2) to any institution-affiliated
party of the Bank, including any related interest(s) of such borrower; or (3)
for any loan acquisition aggregating 25 percent or more of the Bank's tier 1
capital. All loan approvals by the Loan Committee shall be made in accordance
with the requirements of section 658.48 of the Florida Statutes. The 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 functions and 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 Committee 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 no less
than five days before a board of directors' meeting, the Loan Committee shall
submit 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 C.F.R. 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 C.F.R.
215.3); and "executive officer" shall be defined as set forth in section
215.2(d) of Regulation O of the Board of Governors (12 C.F.R. 215.2(d)).
10. Loan Documentation
(a) Within 45 days of this Agreement, the Bank shall take all necessary steps to
correct all exceptions of the Bank's loan files reflected in the loans adversely
classified and the loans listed for technical exceptions in the Report of
Examination, including, but not limited to, obtaining accurate and current
financial statements, updating insurance coverage, and obtaining income/cash
flow information.
(b) Within 60 days of this Agreement, the Bank shall submit to the Reserve Bank
and to the Comptroller a written report detailing the actions taken pursuant to
paragraph 11(a) hereof.
11. Allowance for Loan and Lease Losses
(a) Within 10 days of this Agreement, the Bank shall eliminate from its books,
by charge-off or collection, all assets or portions of assets classified "Loss"
in the Report of Examination that have not been previously collected in full or
charged-off.
(b) The Bank shall continue to maintain, through charges to current operating
income, an adequate allowance for loan and lease losses (the "ALLL"). The
adequacy of the ALLL shall be determined in light of the current level of
nonperforming loans, the current level of concentrations of credit within the
loan portfolio of the Bank, past loss experience, evaluation of the potential
losses in the loan portfolio of the Bank, especially the potential for
unidentified losses in loans adversely classified, current economic conditions
and examiners' criticisms or other comments contained in the Bank's most recent
report of examination, and the requirements of the Interagency Policy Statement
on the Allowance for Loan and Lease Losses, dated December 21, 1993. A written
record shall be maintained indicating the methodology used in determining the
amount of the ALLL needed.
12. Loan Review
The board of directors shall take all actions necessary to ensure the Bank's
compliance with its established written loan review policy and procedures and
shall not amend such policy and procedures without the prior written approval of
the Reserve Bank and the Comptroller.
13. Strategic Plan and Budget
(a) Within 60 days of this Agreement, the Bank shall submit to the Reserve Bank
and the Comptroller a written strategic plan and budget concerning the Bank's
proposed business activities for 1999. 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 budget, and the procedures designed to ensure that the board of
directors fulfills such responsibilities; (2) management, lending, and
operational objectives, given the condition of the Bank as reflected in the
Report of Examination and subsequent reports; (3) an earnings improvement plan,
with emphasis on the net interest margin and overhead expenses; (4) the
operating assumptions that form the bases for major projected income and expense
components, and the sources and uses of new funds; (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, balance sheets and income statements; (6) the
establishment of a monthly review process to monitor the actual income, expenses
and net cash flow of the Bank in comparison to budgetary projections; (7) the
quarterly revision of projected financial statements, including projected
quarterly and annual budgets and quarter-end and year-end balance sheet and
income statements for the Bank; and (8) the submission to the Reserve Bank and
the Comptroller of a revised strategic plan or budget 60 days prior to the
occurrence of planned material changes to the strategic plan or budget. (b) A
strategic plan and budget for each calendar year subsequent to 1999 shall be
submitted to the Reserve Bank and the Comptroller at least one month prior to
the beginning of that calendar year. The revised quarterly and annual financial
statements required by paragraph 14(a)(7) hereof shall be submitted to the
Reserve Bank and the Comptroller within 30 days of the end of each calendar
quarter.
14. Call Reports
The Bank shall take such actions as are necessary to ensure that all
Consolidated Reports of Condition and Income filed or published by the Bank
accurately reflect the Bank's condition on the date(s) for which such reports
are filed or published, that all such reports are filed or published in a timely
manner, and that all records indicating how such reports are prepared are
adequately maintained for subsequent supervisory review.
15. Approval of, and Compliance with, Submissions
(a) The plans, policies, and procedures required by paragraphs 3(a), 6(a), 7(a),
8, and 9 hereof shall be submitted to the Reserve Bank and to the Comptroller
for review and approval. The Reserve Bank and the Comptroller may comment on the
plans, policies, and procedures. Acceptable plans, policies, and procedures
shall be submitted to the Reserve Bank and to the Comptroller within the time
periods set forth in this Agreement. The Bank shall adopt all approved plans,
policies, and procedures within 10 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.
(b) The Bank's board of directors shall review all policies and procedures
annually, and review compliance with all policies and procedures quarterly.
16. Quarterly Reports
Within 30 days of the end of reach calendar quarter (September 30, December 31,
March 31, and June 30) 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. The board of directors of the Bank
shall certify in writing to the Reserve Bank and to 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.
17. Communications
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, NW
Atlanta, Georgia 30303-2713
(b) Mr. Robert F. Milligan
State Comptroller and Banking Commissioner
Office of the Comptroller - The Capital
State of Florida
Tallahassee, Florida 32399-0350
(c) Mr. Phillip C. Modder
Chairman
Southern Security Bank
3475 Sheridan Street
Hollywood, FL 33021
Miscellaneous
19. Not withstanding 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.
20. The provisions of this Agreement shall be binding upon the Bank and all of
its institution-affiliated parties, in their capacities as such, and their
successors and assigns.
21. Each provision of this Agreement shall remain effective and enforceable
until stayed, modified, terminated or suspended by the Reserve Bank and the
Comptroller.
22. The provisions 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.
23. This Agreement is a "Written Agreement" for the purpose of section 8 of
the FDI Act (12 U.S.C. 1818).
24. As of the date of this Agreement, the Written Agreement by and among the
Bank, the Reserve Bank, and the Comptroller dated March 17, 1992, is terminated
IN WITNESS WHEREOF, the parties have caused this Agreement to be executed
as of the 13th day of November, 1998. ---- --------
Southern Security Bank Federal Reserve Bank of Atlanta
By: s/Philip C. By: s/Marion P. River, III
State Comptroller and Banking
Commissioner of the State of Florida
By: s/Robert F. Milligan
The undersigned directors of the Bank individually acknowledge reading the
foregoing Agreement and approve of the consent thereto by the Bank.
s/ Sylvia M. Berman s/Philip C. Modder
Sylvia M. Berman Philip C. Modder
s/Timothy S. Butler s/Eugene J. Strasser
Timothy S. Butler Eugene J. Strasser, M.D.
s/Frank D. Camperlengo s/James L. Wilson
Frank D. Camperlengo James L. Wilson
<PAGE>
SOUTHERN SECURITY BANK
ASSET/LIABILITY MANAGEMENT POLICY
REVIEWED & APPROVED SEPTEMBER 29, 1998
Southern Security Bank is a full service banking institution organized and
operated to meet the financial needs of individuals and businesses throughout
the Bank's defined market area.
I. STATEMENT OF ASSET/LIABILITY MANAGEMENT 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 their 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
objectives 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 (ALCO).
III. ASSET/LIABILITY MANAGEMENT COMMITTEE
A. An Asset/Liability Management Committee shall be appointed by the Board of
Directors to:
1. monitor business conditions, financial markets and regulatory change
on a continuing basis.
2. manage mix of rate sensitive sources and uses of funds over interest
rate cycles.
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 President, the Chief
Executive Officer, the Cashier, 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 also include directors. The Chairman of the committee shall be the
President of the Bank who shall be responsible for carrying out the
Asset/Liability management subject to not less than 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 may 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, (e.g., 90, 365 days). The committee may also examine and
discuss funds gap reports which itemize rate-sensitive assets and
rate-sensitive liabilities and the maturity distribution. Furthermore,
it may 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. To review the 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. To periodically review the 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 by the Cashier.
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.
G. The committee shall attempt to be proactive rather than reactive in
implementing and accomplishing balance sheet goals. Such strategy may
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 an 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 interest
rates and tax issues.
5. maximizing investment yield subject to risk and maturity
considerations. In addition, certain hedging devices, e.g., 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 discussed herein interrelate with Asset/Liability management.
IV. ANNUAL PROFIT PLAN
A. Long-range plans serve as the basis for profit plans and the ALCO will
review variances from the budget segments of these plans so that timely
corrective action can be taken or adverse variances with regard to interest
rates, volume levels, and mix of assets and liabilities.
B. The committee will also review performance measures not less than
quarterly. Based on discernible changes and trends or patterns, it will
make alterations and strategies for loan policies, investment 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 forecasts can be factored on an ongoing
basis.
E. The Board of Directors will review no less than 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
month being reviewed in the 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 ALCO 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 those Key Indicators in Section
"F" that follows.
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 ALCO 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 bank of equivalent size.
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. Key Indicators; Targets and Guidelines. It should be understood that
Targets are suggestions and if not met, an acceptable explanation will
follow, whereas Guidelines are required and should not be violated unless
prior approval is obtained. These key indicators are as follows:
LIQUIDITY, GAP & RATE RISK DATA:
1. Volatile Liability Dependence Ratio; not less than +10%, preferably a
negative ratio. (Target)
2. Temporary Investments to Average Total Assets; range between 10% to
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.
3. Certificates of Deposits, Borrowing and Public Funds to Total Assets;
less than 50% Ratio (Target).
4. Borrowing to Tier 1 Capital; less than 200% (Guideline).
5. Total Rate Sensitive Asset to Rate Sensitive Liability; ratio between
.80 to 1.20 (Target).
6. Rate Sensitive Asset to Rate Sensitive Liability ratio 0-365 days;
range between .80 to 1.20. (Target)
7. Rate Sensitive Asset to Rate Sensitive Liability ratio 0-90 days;
range between .80 to 1.20 (Target).
8. Rate Sensitive Asset to Rate Sensitive Liability ratio 91-365 days;
range between .80 to 1.20. (Target)
9. Zero to 365 day GAP to Total Assets (Month End); range between -10% to
+10%. (Guideline)
10. Zero to 90 day GAP to Total Assets (Month End); range between -10% to
+10%. (Target)
11. 91 - 365 day GAP to Total Assets (Month End); range between -10% to
+10%. (Target)
12. Riskless Assets to Total Assets; range between 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.
13. Net Liquidity to Net Liability; ratio greater 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.
14. Short Term Liquidity to Total Assets; range should be greater than
20%. (Target)
15. Net Yield on Earning Assets (N.I.M.); In determining the spread (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)
LENDING DATA:
1. Net Loan & Discount to Total Deposits; ratio not greater than 75%
maximum. (Guideline, refer to loan policy)
2. Net Loans & Discount to Total Assets; not greater than 75% (Target,
defer to loan policy).
3. Commercial Loans to Total Loans & Discount; not to exceed 60% (Target,
defer to loan policy).
4. Consumer Loans to Total Loans & Discount; not to exceed 60%. (Target,
defer to loan policy).
5. Real Estate Loans to Total Loans & Discount; not to exceed 60%.
(Target, defer to loan policy).
6. Zero to 180 day Rate Sensitive Loans to Total Loans & Discount, 50% to
70%. (Guideline)
7. Gross Off Balance Sheet Items / Total Assets; not to exceed +10%
(Target)
8. Net Loans & Leases (x Tier 1 Capital); not greater than 14x (Target,
defer to loan policy
G. A bank of equivalent size 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 & discount 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 ALCO
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. A minimum of one and preferably at least
two lines should be established as 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. These lines of credit shall include,
but not be limited to fed funds, repurchase agreements, reserve discount
window, etc.
VI. PRIMARY FUNDING NEEDS AND SOURCES
Primary funding needs and sources are measured by the need and ability to raise
cash at a reasonable cost or minimum loss. The Bank must be capable of meeting
all customer obligations at all times. Specifically, the Bank must meet cash
withdrawal requirements, fund lines and letters of credit, and fulfill
short-term credit needs. Practically, the Bank will achieve sufficient liquidity
by the following procedures:
1. Pursuit of core deposits.
2. The Bank should have part of the 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. The Bank will attempt to define volatile deposits existing in the
certificate accounts (i.e., accounts over $100,000). This balance in
the account will be classified as volatile money and the Bank will
keep at least an amount equal to this in the fed funds sold account to
offset volatile deposits. This money in fed funds would then become a
temporary source of liquidity if needed.
4. The Bank may apply for a seasonal line of credit from the Federal
Reserve or a correspondent to be used if needed.
5. Should the Bank experience temporary high loan demand, the Bank will
attempt to meet it by selling loans to correspondent banks.
6. In terms of illiquidity, the Bank could explore the possibility of
raising money by buying money from such sources as the CD market.
7. For liquidity purposes the Bank is classifying the 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. The Bank will attempt to forecast loan and deposit expectations
through the use of historical trends and future economic expectations.
These projections will enable the Bank to plan for seasonal liquidity
needs rather than react hastily to liquidity pressures.
9. Should the Bank become illiquid in spite of these steps, the Bank will
curtail lending. The first step is to curtail making loans to non
customers, the second step is to curtail making real estate mortgage
loans; the third step is to curtail making commercial loans; the
fourth step will be to slow consumer loans; and the fifth step is to
refuse loans to new customers; and the sixth step is to refuse
short-term working capital loans to existing commercial customers or
short-term loans to individual customers.
VII. INTEREST RATE RISK MANAGEMENT
The authority and responsibility for interest rate risk management rests with
the Bank's Board of Directors. The Board delegates the responsibility for day to
day interest rate risk management to ALCO. The goals and objectives for the
interest rate risk management of the Bank is enacted to meet the following
goals:
A) Ensure management and Board awareness of the Bank's interest rate risk
exposure;
B) Enable dynamic measurement and management of interest rate risk;
C) Select strategies that optimize the ability of the Bank to meet its
long-range financial goals while maintaining interest rate risk within
policy limits established by the Board of Directors;
D) Use both income and market value oriented techniques to select
strategies that optimize the relationship between risk and return;
E) Establish interest rate risk exposure limits for fluctuations in net
income.
The responsibilities of the ALCO as it relates to interest rate risk management
will include:
A) Develop, review and modify as needed the primary asset-liability
strategy of the Bank. The strategy developed will be consistent with
the interest rate risk management objectives, strategic plan and
primary operating strategy of the Bank and will ensure that Bank meets
all board and regulatory requirements.
B) Evaluate the Bank's current interest rate risk position (static
analysis) and the potential effect of the Bank's primary
asset-liability strategy (dynamic analysis) to insure that the
risk/return tradeoffs are consistent with the interest rate risk
objectives of the Bank. Static analysis is the testing of the current
balance sheet whereas dynamic analysis is the forecasting of the
balance sheet.
C) Regular review of pricing of assets and liabilities. Actions taken in
pricing loans and deposits will be designed to optimize loan mix and
yields, minimize funding costs, while keeping a balance sheet
structure consistent with the current asset-liability strategy of the
Bank. When the marginal cost of needed wholesale funding is lower than
the marginal cost of raising this funding in retail markets. The Bank
may supplement retail funding with funding from wholesale sources
(e.g., the Federal Home Loan Bank of Atlanta). Reverse repurchase
agreements and dollar rolls may be done through brokers.
D) Review of investment actions (purchases, sales, calls, transfers, and
designations to held-to- maturity, available-for-sale or
held-for-trading) taken by the Investment Committee to insure that the
investment portfolio has risk/return characteristics consistent with
the Bank's current asset-liability strategy.
E) On at minimum a quarterly basis, review any deviations between actual
performance and policy limits and strategic plans. Make any
modifications to Bank's interest rate risk strategy resulting from
this review. Although the interest rate risk objectives are set, the
management of interest rate risk is an on-going process which must be
reviewed and modified as conditions change.
F) Inform the Board of any regulatory developments that affect
asset/liability policies and strategies.
G) In addition, the ALCO Committee will review the following on a regular
basis:
1) Progress on previously determined strategies;
2) Economic conditions (local, regional and national);
3) Interest rate outlook (local, regional and national);
4) Loan and deposit demand;
5) Deposit pricing and maturity structure;
6) Loan pricing and maturity structure;
7) Liquidity position; and
8) Regulatory capital position.
At least quarterly, a report which outlines Bank's interest rate risk exposure
will be presented to the Board. The Board shall review the results of the
operational decisions and shall make adjustments as it considers necessarily and
appropriate, including adjustments to the authorized level of interest rate
risk. The report and subsequent actions of the Board shall be recorded in the
minutes of the regular board meetings.
Guidelines for Control of Interest Rate Risk:
It is the intention of this policy to promote the Bank's long standing
philosophy of safe and sound conservative management. The policy will provide
the ALCO with the needed guidelines to address interest rate risk. However, this
policy is also intended to provide the flexibility needed to permit a prompt
response to economic and other conditions.
The ALCO will review both deposit and loan goals, using dynamic analysis
techniques to determine which strategies will meet the institution's growth and
interest rate risk goals. The analysis will evaluate whether to use retail or
wholesale strategies to fund this growth. It will also evaluate whether
investments or loans offer the best returns after adjusting for risks and costs.
While the interest rate risk management strategy will normally attempt to match
the repricing characteristics of the institution's assets to those of its
liabilities, this policy recognizes that from time to time it may be in the
institution's best interest to take on a moderate amount of interest rate risk.
Strategies that increase interest rate risk are allowable under this strategy as
long as they have been evaluated using both static and dynamic interest rate
risk measurement techniques. The evaluation must show that the Bank will remain
in compliance with its interest rate risk policy limits before such a strategy
can be approved.
Measuring risk to net interest income:
After the Bank has stratified it's assets and liabilities and determined how it
will treat embedded options (if any), it must measure net interest income (NII)
at risk. The formula to translate Gaps into the amount of net interest income at
risk, measuring exposure over several periods is:
(periodic Gap) x (change in rate) x (time over which the periodic Gap is in
effect) = change in NII
This formula is applied to the Gap report and calculates the change in the
Bank's net interest income for an immediate 100 and 200 basis-point increase in
rates. If the Bank has a positive Time Band Gap, this means that more assets
than liabilities will reprice or mature during this time frame. The cumulative
earnings effect of the Bank's potential repricing imbalances would result in the
total column under impact on annualized net interest income.
This method of measuring the Bank's net interest income at risk employs numerous
basic assumptions, which may include the following.
1. Assumes all repricings occur at the midpoint of the time band.
Non-maturity deposits (including Savings accounts, NOW accounts, and
Money Market accounts)are Beta Adjusted at 25% in both the less than 1
month as well as the 1 to 3 months time band. Each of the foregoing
non-maturity deposits (including non-interest bearing demand deposits)
are Beta adjusted at 12.5% for the 3 - 6 month and also the 6 - 12
month time bands;
2. All maturing assets and liabilities are reinvested at overnight rates;
3. No other new business is booked;
4. There is an instantaneous change in the overnight rate to a new and
constant level;
5. All interest rates move the same amount.
The impact of Gap on the net interest income will have one of the following
impacts:
A) NEUTRAL GAP: Regardless of what rates do, there should be no change in
the net interest margin.
B) POSITIVE GAP: A positive Gap in a rising rate environment will
increase the net interest margin, Conversely, a declining rate
environment will decrease the net interest margin.
C) NEGATIVE GAP: A negative Gap in a rising rate environment will
decrease the net interest margin, Conversely, a declining rate
environment will increase the net interest margin.
The effect of the market rate shocks on the NII may also be reviewed for the
more extreme rate shocks outward to the plus or minus 200 basis points immediate
and permanent rate shocks. This allows management to monitor that the Bank will
maintain an adequate capital level even in an extremely adverse rate shock
environment. The Bank's ALCO will report the to the Board of Directors the
effect of changes on NII not less than quarterly.
Gap Analysis:
Gap analysis is a static interest rate risk measurement tool because it measures
the level of interest rate risk in an existing balance sheet. The completed gap
report compares how quickly an institution's assets respond to changes in market
rates as compared to its liabilities. Presumably, if one side of an
institution's balance sheet responds more quickly to changes in market rates
than the other, interest income will change faster (or slower) than interest
expense. The gap is the mismatch between the quantity of assets and liabilities
repricing in a given period of time.
As an interest rate risk management tool Gap has shortcomings identified by
three factors. First, it doesn't directly measure the effect of changes on rates
on income. Rather it delivers an index of rate sensitivity. Second, its not a
very accurate tool for measuring the interest rate risk in complex financial
instruments with imbedded options like fixed and adjustable-rate mortgages.
Third, because it is a static measurement tool, it can only evaluate the
interest rate risk in historical balance sheets. Gap is an ineffective tool for
measuring the risk/return tradeoffs between strategies an institution is
considering.
While Gap is an indicator of the level of interest rate risk in the balance
sheet, it can not measure the impact of a change in market rates on earnings.
The effect of the placement of the deposits significantly impacts the analysis.
Gap analysis provides only rough indicators of interest rate risk. While dollar
maturity mismatches are identified, the effects of different repricing rates,
periodic repricing limits, floor or ceiling rates, or other factors are not
included. Caution is warranted in interpreting the gap estimates. Even though
gap is only a rough indicator of interest rate risk, the Bank will review and
monitor the gap ratios outlined previously in Section F (Key Indicators). Any
gap ratio exception will warrant an explanation to the Board from the ALCO in
its recorded minutes. The Bank will primarily rely on the net income simulation
to measure and monitor interest rate risk.
The Board recognizes that no policy can anticipate all the conditions,
situations and opportunities which may arise in the normal course of operations.
Management, therefore is expected to exercise prudent judgement in the
implementation of this policy. All deviations from the guidelines established by
this policy will be approved in advance by the ALCO with such deviations
promptly reported to the Board.
VIII. 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
obligations arise from the acceptance of a commitment fee from the borrower
whether or not the facility 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, the Bank recognizes 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.
Due to liquidity considerations and their generally lower profit potential,
total exposure in letters of credit will be reviewed monthly by the Director's
Loan & Discount Committee. Because of liquidity considerations, all unused
portions of lines of credit and commitments will be reviewed as quantified in
the Loan & Discount Policy, which is incorporated herein by reference.
IX. INTERBANK LIABILITIES (REGULATION F)
Credit Exposure that may exist between the Bank and its correspondent banking
relationship with outside correspondents, as that term is defined in the Federal
Reserve's Regulation F, shall at all times be monitored and controlled as
required by that regulation.
A. No less frequently than quarterly, the Bank's Cashier, or in his 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, or 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 with a correspondent is more than $150,000 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 non-qualifying institution as
required by this policy:
Federal Reserve Bank of Atlanta - Atlanta, Georgia
Independent Bankers Bank - Orlando, Florida
Compass Bank - Birmingham, Alabama
First Union National Bank, Charlotte, North Carolina
Chase Manhattan Bank - New York, New York
Nation Bank of Commerce - Lincoln, Nebraska
C. The Responsible Officer shall determine whether the correspondent qualifies
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 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 ALCO 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 the
Bank's 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/or to the Board of
Directors at its next scheduled 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 correspondent
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 this Policy, or any other
available financial information about the correspondent to determine
whether it has at least 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 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 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, operational
problems, or other unusual circumstances. Document these actions.
G. To override internal limits as to Interbank Liabilities will require
documenting the processes and the situation. Authority is vested with the
Chief Executive Officer or President to override the limitations herein
established.
Interbank Liability (Regulation F) Control Record
Correspondent Name: Independent Bankers Bank
Address: P.O. Box 4998
Orlando, FL 32802-2998
Telephone Number: 1-800-275-4222
Contact Person: James H. McKillop III
Exposure Limits: Type Maximum Amount
All $150,000
Most Recent Revision Date: March 23, 1995
Correspondent Name: Compass Bank
Address: 15 South 20 Street
Birmingham, Alabama 35233
Telephone Number: 1-800-239-2265
Contact Person: Kathleen Rethelford
Exposure Limits: Type Maximum Amount
All $150,000
Most Recent Revision Date: March 23, 1995
Correspondent Name: National Bank of Commerce
Address: Lincoln, Nebraska
Telephone Number:
Contact Person:
Exposure Limits: Type Maximum Amount
All $150,000
Most Recent Revision Date: September 22, 1998
X. INVESTMENT ACCOUNT STATEMENT OF OBJECTIVES
1. To furnish an investment vehicle for funds which may be required for
liquidity purposes, especially in periods of deposit decline and/or
increased loan demand.
2. To utilize funds not needed for loan demand.
3. To maximize income derived from investments in accord with liquidity
and quality criteria, advantageously benefitting from applicable tax
law.
4. Florida statutes governing reserve requirements of state chartered
banks direct that a state bank must maintain a daily liquidity
position equal to at least 15 percent of its total transaction
accounts and 8 percent of its total non-transaction accounts, less
those deposits of public funds for which security has been pledged as
provided by law. Bank assets eligible to meet the liquidity
requirement are cash on hand, demand deposits due from correspondent
banks, and other investments and short-term marketable securities.
5. To provide security meeting necessary criteria for public funds
liability composition.
6. To balance the market credit risks of the Bank's asset and liability
composition.
7. To provide for a dependable and steady source of income.
XI. INVESTMENT ACCOUNT RESPONSIBILITY
1. The responsibility of establishing an investment policy and reviewing
transactions is vested with the Bank's Board of Directors.
2. The Bank's Chief Executive Officer or President (or in their absence,
other designated officer) are responsible for executing and carrying
out the investment policy, subject to approval of the Board of
Directors.
3. The Chief Executive Officer or President (or designee) may elect to
implement investment account policy or may appoint a portfolio manager
to do so with duties to include:
a. Active investment account management;
b. Recommend investment strategy;
c. Recommend modifications to the portfolio policy.
4. The Chief Executive Officer or President (or designee) is to establish
the size and composition of the investment account including the
maximum amount to be invested in acceptable portfolio investments
based on total resources as further expounded in the section titled
"Investment Portfolio Considerations".
5. The Chief Executive Officer or President (or designee) shall cause to
be maintained documentation to support the credit responsibility of
all issuers of securities owned by the Bank.
6. In those situations when it may be prudent to make investment
decisions which would differ from current investment policy and when
it would be impossible to convene the Bank's Board of Directors or
Executive Committee, the Chief Executive Officer or President (or
other officer with investment authority) may make such investments.
The purchase is to be reported to the Board of Directors at its next
regular meeting for ratification.
XII. INVESTMENT ACCOUNT REVIEW
1. The Board of Directors will review the investment account not less
than quarterly which will include:
a. Securities maturities;
b. Current market value of securities held;
c. Current quality ratings of issuers of political subdivisions;
d. Current yields of the investment account;
e. Securities purchased, sold or called since date of last review.
f. Pledged / unpledged status
2. An interest rate sensitivity stress test for mortgage backed and
derivative securities should be reviewed at least annually by the
Board of Directors.
XIII. ACCEPTABLE PORTFOLIO INVESTMENTS
The following instruments are acceptable portfolio investments. The Bank will
adhere to the specific guidance or requirements from its regulators covering
suitable investment practices.
1. U.S. Treasury obligations (Bills, Notes, Bonds).
2. Federal agency securities including pass through bonds.
3. Federal National Mortgage Association securities.
4. State, County and Municipal Obligations.
a. General obligations (a prospectus and analysis is required)
b. Revenue obligations
c. Public Housing Authority
d. Ratings equal to A or higher
5. Mortgage derivative products including CMOs, REMICs, CMO, and REMIC
residuals and stripped mortgage backed securities. The Bank recognizes
that the stress testing of these products has significant value for
managing risk and should be obtained whenever possible.
6. Corporate Bonds and Commercial Paper with ratings of AA or higher.
7. Certificates of deposit issued by FDIC insured institutions.
XIV. INVESTMENT PORTFOLIO CONSIDERATIONS
1. Cash position and Asset/Liability Policy.
2. Seasonal loan & deposit fluctuations and liquidity requirements.
3. Pledging requirements.
4. Reserve requirements.
5. Tax position and strategy.
6. Dealers
a. Those banks designated as correspondents of the Bank or other
reputable dealer banks.
b. Non-bank dealers shall be firms of national or regional
recognition and reputation.
7. Issuer quality.
8. Following these considerations, longer maturities shall be stressed
during periods of higher yields with shorter maturities considered
during periods of lower yields.
XV. INVESTMENT LIMITATION AS TO TERM
The maturity distribution criteria of the Bank is based on factors including,
but not exclusively limited to, liquidity, yield, and the Bank's "Gap" position.
Longer maturities shall be stressed during periods of higher yields with shorter
maturities considered during periods of lower yields.
1. U.S. Treasury obligations - preferably seven years, maximum of twenty
years.
2. Federal agency and federal corporation obligations - preferably five
years, maximum of twenty-five years.
3. U.S. Government guaranteed pass through securities - maximum of twenty
years.
4. State, county and municipal obligations - maximum of ten years.
5. Mortgage Derivative Products - Has an expected average life of less
than ten years.
6. Public Housing Authority - maximum of ten years.
7. Corporate bonds - maximum of five years.
8. Certificates of deposit - maximum of one year.
XVI. INVESTMENT LIMITATIONS AS TO AMOUNT
Maturity strategy within the foregoing scope of limitations is to be based on
the portfolio considerations and prudent liquidity requirements.
1. U.S. Treasury Obligations - no limitations.
2. Federal agency or federal corporation securities - 50% of total
deposits except maturities of one year or less.
3. Federal agency securities (Government guaranteed) - no limitations.
4. State, county and municipal obligations - not to exceed $250,000 in
any one issue or $500,000 in any issuing agency to a maximum aggregate
of any one state of $500,000 with exception to the State of Florida
which will be limited to aggregate maximum of $2,000,000. The total
municipal portfolio is not to exceed 30% of average year-to-date
deposits.
5. Mortgage Derivative Products - 30% of total deposits except maturities
of one year or less.
6. Public Housing Authority - not to exceed $250,000 of any one issue or
issuing agency.
7. Corporate bonds and commercial paper - not to exceed $250,000 of any
single issuing corporation.
8. Certificates of Deposit - $100,000 with any single federally insured
financial institution.
9. State of Israel Bonds - not to exceed $100,000
XVII. ACCEPTABLE DENOMINATIONS OF PORTFOLIO INVESTMENTS
Exceptions to the following would include additional purchases of issuers
previously purchased in smaller lot sizes.
1. U.S. Treasury Obligations - minimum of $500,000 and in denominations
thereof, whenever possible.
2. Federal agency, federal corporation securities and mortgage derivative
products minimum of $100,000 and in denominations thereof, whenever
possible.
3. State, county and municipal obligations - minimum of $100,000 and
denominations thereof, whenever possible.
4. Public Housing Authority - minimum of $100,000 whenever possible.
5. Corporate bonds/commercial paper - minimum of $100,000.
6. Special purchases that are bank eligible may be specifically approved
by the Board or Asset/Liability from time to time - maximum not to
exceed $100,000 by any one issuer and $250,000 in aggregate.
7. Certificates of Deposit - $100,000 denomination.
XVII. ACCEPTABLE GEOGRAPHIC SPREAD OF STATE, COUNTY AND MUNICIPAL
INVESTMENTS
1. Emphasis of the State, County and Municipal investment portfolio shall
be placed in those issues of the State of Florida, Florida counties
and its municipalities. Florida securities are exempt from the
intangible personal property tax.
2. Obligations of other states, counties and municipalities should be of
higher quality, better known issues.
XVIII. UNACCEPTABLE INVESTMENT SECURITIES
1. Securities issued by the Commonwealth of Puerto Rico or foreign
securities are not acceptable except as approved specifically by the
Board.
XIX. INVESTMENT PORTFOLIO COMPOSITION & TRADING ACTIVITIES
All investments are designated as hold-to-maturity unless otherwise noted or
identified.
1. The Bank's securities portfolio will consist of the following
classifications with each carried on the Bank's financial statements
as required by generally accepted accounting principles.
a. The "investment" portfolio which consists of securities intended
to be held to maturity.
b. The "trading" portfolio which has securities that are bought and
held principally for the purpose of selling them in the near
term.
c. The "available-for-sale" portfolio in which securities are
purchased and sold for holding gains and other asset/liability
management purposes. Securities held in this portfolio shall be
for the purpose of taking advantage of any one or more of the
following opportunities (with consideration given to the Bank's
earnings, liquidity, tax and capital status):
1. Improve yields
2. Quality grades
3. Maturities
4. Tax position
5. Marketability
6. Gains
XX. INVESTMENT PLEDGING STRATEGY
1. When possible and necessary, the pledging of long or medium term
state, county and municipal obligations should be carried out rather
than those securities acceptable for meeting the statutory reserve
requirements or maturing in the near future. 2. Securities pledged
should be those held for the permanent investment account rather than
securities acquired for liquidity or trading considerations.
XXI. FED FUNDS PURCHASED & SECURITY REPO AGREEMENTS - BANKS
1. Short term liquidity requirement can be met by purchasing federal
funds from correspondent banks that have approved credit lines for the
Bank.
2. Generally, these banks require that a fed funds purchased position not
exceed seven days and every effort should be made to adhere to this
requirement. If for some reason the Bank cannot, steps should be taken
to liquidate securities sufficient to meet the repayment requirement.
Correspondent banks may extend the period if the Bank discusses the
situation with them. It may be appropriate to collateralize such
borrowing by instituting a Securities Repurchase Agreement to the
correspondent bank rather than selling securities, especially if a
loss would be incurred. These instruments are for longer terms and
often have lower interest rates.
XXII.SECURITY REPURCHASE AGREEMENTS (REPO'S) - SALES TO CUSTOMERS
1. Minimum amount of $100,000 in $25,000 increments thereafter.
2. Securities sold shall be government agency securities or, if not
available, U.S. Treasury obligations.
3. Sale shall be based on current market value of the security.
4. Issued on "running open" basis at fluctuating daily rate.
5. Interest shall be paid as negotiated but at least monthly and on
termination of repurchase agreement. Interest expense should be
accrued on a daily basis.
XXIII. FEDERAL FUNDS - SALES
1. Excess funds after determination of daily cash position shall be
invested in fed funds on a "running open" arrangement on immediate
availability basis.
2. Sales shall be to domestic banks only which are of sound financial
strength. Current financial information of banks meeting the criteria
of purchasing banks shall be on file at all times.
3. Funds sold to any one institution shall not exceed $250,000.
4. The Bank's other correspondent institutions are to be excluded from
purchasing fed funds from Southern Security Bank's agent bank.
5. Maximum interest earnings should be obtained, but not at the expense
of safety and liquidity.
6. Interest is to be paid on next day basis.
XXIV. INVESTMENT SAFEKEEPING AND PORTFOLIO ACCOUNTING
1. All definitive securities (certificates with ownership registered or
bearer bonds with coupons attached) are to be maintained in
safekeeping with one or more correspondent banks providing the
service. Safekeeping banks should provide prompt processing of coupon
interest and matured bonds.
2. Book entry securities are to be maintained with a safekeeping bank or
the Federal Reserve Bank.
3. Portfolio accounting shall be attained from a service bureau bank or
correspondent bank offering the service to provide information
necessary for proper investment account review.
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