SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-KSB
(Mark One)
[X] Annual report pursuant to section 13 or 15 (d) of the Securities Exchange
Act of 1934
For the fiscal year ended September 30, 1999
------------------
[ ] Transition report pursuant to section 13 or 15(d) of the Securities Exchange
Act of 1934
For the transition period from to .
----------- ------------
Commission File No. 0-23763
Quitman Bancorp, Inc.
---------------------
(Name of Small Business Issuer in Its Charter)
Georgia 58-2365866
- --------------------------------------------- -------------------
(State or Other Jurisdiction of Incorporation (I.R.S. Employer
or Organization) Identification No.)
602 East Screven Street, Quitman, Georgia 31643
- ----------------------------------------- -------------------
(Address of Principal Executive Offices) (Zip Code)
Issuer's Telephone Number, Including Area Code: (912) 263-7538
-------------------
Securities registered under Section 12(b) of the Exchange Act: None
------
Securities registered under Section 12(g) of the Exchange Act:
Common Stock, par value $0.10 per share
---------------------------------------
(Title of Class)
Check whether the issuer: (1) filed all reports required to be filed by
Section 13 or 15(d) of the Exchange Act 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 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 its most recent fiscal year: $4,096,416
The aggregate market value of the voting stock held by non-affiliates of
the registrant, based on the average bid and asked price of the registrant's
Common Stock on December 7, 1999, was $4.0 million.
As of December 7, 1999, there were issued and outstanding 507,262 shares of
the registrant's Common Stock.
Transitional Small Business Disclosure Format (check one): YES NO X
--- ---
DOCUMENTS INCORPORATED BY REFERENCE
1. Portions of the Annual Report to Stockholders for the Fiscal Year ended
September 30, 1999. (Part II)
2. Portions of the Proxy Statement for the Annual Meeting of Stockholders for
the Fiscal Year ended September 30, 1999. (Parts II and III)
<PAGE>
PART I
Quitman Bancorp, Inc. (the "Company" or "Registrant") may from time to time
make written or oral "forward-looking statements", including statements
contained in the Company's filings with the Securities and Exchange Commission
(including this annual report on Form 10-KSB and the exhibits thereto), in its
reports to stockholders and in other communications by the Company, which are
made in good faith by the Company pursuant to the "safe harbor" provisions of
the Private Securities Litigation Reform Act of 1995.
These forward-looking statements involve risks and uncertainties, such as
statements of the Company's plans, objectives, expectations, estimates and
intentions, that are subject to change based on various important factors (some
of which are beyond the Company's control). The following factors, among others,
could cause the Company's financial performance to differ materially from the
plans, objectives, expectations, estimates and intentions expressed in such
forward-looking statements: the strength of the United States economy in general
and the strength of the local economies in which the Company conducts
operations; the effects of, and changes in, trade, monetary and fiscal policies
and laws, including interest rate policies of the board of governors of the
federal reserve system, inflation, interest rates, market and monetary
fluctuations; the timely development of and acceptance of new products and
services of the Company and the perceived overall value of these products and
services by users, including the features, pricing and quality compared to
competitors' products and services; the willingness of users to substitute
competitors' products and services for the Company's products and services; the
success of the Company in gaining regulatory approval of its products and
services, when required; the impact of changes in financial services' laws and
regulations (including laws concerning taxes, banking, securities and
insurance); technological changes; disruptions caused by computer malfunctions
associated with the year 2000 issue; acquisitions; changes in consumer spending
and saving habits; and the success of the Company at managing the risks
resulting from these factors.
The Company cautions that the listed factors are not exclusive. The Company
does not undertake to update any forward-looking statement, whether written or
oral, that may be made from time to time by or on behalf of the Company.
Item 1. Description of Business
- --------------------------------
General
The Company is a Georgia-chartered corporation organized in December 1997
at the direction of Quitman Federal Savings Bank (the "Bank") to acquire all of
the capital stock that the Bank issued in its conversion from the mutual to
stock form of ownership (the "Conversion"). On April 2, 1998, the Bank completed
the Conversion and became a wholly owned subsidiary of the Company. The Company
is a unitary savings and loan holding company. Changes to federal law that
occurred after the end of the fiscal year significantly restrict the ability of
the Company to affiliate in any way with non-financial companies. However, these
changes do not impact the current business of the Company and the Company
generally is not restricted in the types of business activities in which it may
engage provided that the Bank retains a specified amount of its assets in
housing-related investments. The Company conducts no significant business or
operations of its own other than holding all of the outstanding stock of the
Bank and investing the Company's portion of the net proceeds obtained in the
Conversion.
The Bank, which was founded in 1936 under the name Quitman Federal Savings
and Loan Association, is a federally chartered stock savings bank headquartered
in Quitman, Georgia. The Bank obtained its current name in November 1997. The
Bank is subject to examination and comprehensive
1
<PAGE>
regulation by the Office of Thrift Supervision ("OTS") and its deposits are
federally insured by the Savings Association Insurance Fund ("SAIF"). The Bank
is a member of and owns capital stock in the Federal Home Loan Bank (the "FHLB")
of Atlanta, which is one of the 12 regional banks in the FHLB System.
The Bank attracts deposits from the general public (primarily certificates
of deposit) and uses those deposits, together with other funds, primarily to
originate and invest in loans secured by one- to four-family residential real
estate. The Bank also originates consumer, commercial and construction loans and
uses borrowings to fund loans.
Competition
The Bank is one of many financial institutions serving its market area of
Brooks County and parts of Lowdnes County, Georgia. The competition for deposits
comes from other insured financial institutions such as commercial banks, thrift
institutions, credit unions, finance companies, and multi-state regional banks
in the Bank's market area. Deposit competition also includes a number of
insurance products sold by local agents and investment products such as mutual
funds and other securities sold by local and regional brokers. Loan competition
varies depending upon market conditions and comes from other insured financial
institutions such as commercial banks, thrift institutions, credit unions,
multi-state regional banks, and mortgage bankers.
Lending Activities
Loan Portfolio Data. Set forth below is selected data relating to the
composition of the Company's loan portfolio by type of loan and type of security
on the dates indicated:
<TABLE>
<CAPTION>
At September 30,
----------------------------------------------------------
1999 1998
---------------------- ----------------------------
Amount Percent Amount Percent
------ ------- ------ -------
(Dollars in thousands)
<S> <C> <C> <C> <C>
Type of Loans:
Real estate loans:
One-to-four family residential....... $31,580 72.79% $27,073 70.69%
Multi-family (5 or more) dwelling.... 612 1.41 810 2.11
Non residential...................... 6,110 14.08 5,339 13.94
Construction......................... 2,801 6.46 3,433 8.96
FHLMC pools.......................... 2 .00 3 0.01
Share loans............................ 470 1.08 557 1.45
Consumer .............................. 1,813 4.18 1,089 2.84
----- ---- ------ -----
43,388 100.00% 38,304 100.00%
====== ====== ------ ======
Less:
Loans in process..................... 1,825 1,489
Allowance for loan losses............ 389 370
Deferred loan origination fees
and costs........................... 53 48
------- ------
Total loans, net....................... $41,121 $36,397
====== ======
</TABLE>
2
<PAGE>
Loan Maturity Tables. The following table sets forth the estimated maturity
of the Company's loan portfolio at September 30, 1999. The table does not
include the effects of possible prepayments or scheduled principal repayments.
All mortgage loans are shown as maturing based on the date of the last payment
required by the loan agreement.
<TABLE>
<CAPTION>
Non
Residential Residential Construction Other Total
----------- ----------- ------------ ----- -----
(In thousands)
<S> <C> <C> <C> <C> <C>
Amounts due:
Within 1 year................. $ 4,170 $2,273 $2,681 $1,119 $10,243
Over 1 to 5 years............. 17,598 2,087 62 832 20,579
Over 5 years.................. 10,426 1,750 58 332 12,566
------ ----- -- --- ------
Total amount due............ $32,194 $6,110 $2,801 $2,283 $43,388
====== ===== ===== ===== ======
Less:
Allowance for loan losses..... 1,825
Loans in process.............. 389
Deferred loan fees............ 53
--------
Loans receivable, net....... $41,121
======
</TABLE>
The following table sets forth the dollar amount of all loans due after
September 30, 2000, which have pre-determined interest rates and which have
floating or adjustable interest rates.
Floating or
Fixed Rates Adjustable Rates Total
----------- ---------------- -----
(In thousands)
Real estate:
Residential................. $27,806 $338 $28,144
Non-residential............. 3,837 -- 3,837
------ ------ ------
Non real estate:
Share loans................. 240 -- 240
Consumer.................... 924 -- 924
------ ------ ------
$32,807 $ 338 $33,145
====== ====== ======
One- Four-Family Residential Loans. The Bank's primary lending activity
consists of the origination of one- to four-family residential mortgage loans
secured by property located in its primary market area. The Bank generally
originates one- to four-family residential mortgage loans in amounts up to 85%
of the appraised market value or purchase price. The maximum loan-to-value ratio
on mortgage loans secured by non-owner occupied properties generally is limited
to 80%. The Bank primarily originates and retains fixed-rate balloon loans
having terms of 3 or 5 years, with principal and interest payments calculated
using up to a 25-year amortization period. Because of the amortization period,
relatively short term and renewability of their loans, there are similarities
between these loans and ARMs, particularly from the Bank's asset/liability
management perspective. The Bank occasionally originates 15 year fixed-rate
loans.
3
<PAGE>
The interest rate on the Bank's ARM loans is based on an index plus a
stated margin. The Bank may offer discounted initial interest rates on ARM loans
but it requires that the borrower qualify for the ARM loan at the fully indexed
rate (the index rate plus the margin). ARM loans provide for periodic interest
rate adjustments upward or downward.
ARM loans decrease the risk associated with changes in interest rates by
periodically repricing, but involve other risks because as interest rates
increase, the underlying payments by the borrower increase, thus increasing the
potential for default by the borrower. At the same time, the marketability of
the underlying collateral may be adversely affected by higher interest rates.
Upward adjustment of the contractual interest rate is also limited by the
maximum periodic and lifetime interest rate adjustment permitted by the loan
documents, and, therefore is potentially limited in effectiveness during periods
of rapidly rising interest rates. At September 30, 1999, less than 10% of the
one- to four-family residential loans that the Bank held had adjustable rates of
interest.
All of the Bank's loans are originated for the Bank's portfolio. The Bank
does not conform its loans to the standards that are used in the mortgage
industry that would allow its loans to be readily sold into the secondary market
since it does not expect to sell its loans. For example, the Bank's lending
policy does not require its borrowers to obtain private mortgage insurance on
the amount of a loan that exceeds the typical loan to value ratios used in the
mortgage loan industry and the Bank may lend money to individuals based on its
review of personal circumstances that other lenders might not consider.
Mortgage loans originated and held by the Bank generally include
due-on-sale clauses. This gives the Bank the right to deem the loan immediately
due and payable in the event the borrower transfers ownership of the property
securing the mortgage loan without the Bank's consent.
Residential Construction Loans. The Bank makes residential construction
loans on one- to four-family residential property to the individuals who will be
the owners and occupants upon completion of construction. No principal payments
are required during construction. After that time, the payments are set at an
amount that will repay the loan over the term of the loan. The maximum
loan-to-value ratio is 85%. Because residential construction loans are not
rewritten if permanent financing is obtained from the Bank, these loans are made
on terms similar to those of the Bank's single family residential loans and may
be paid off over terms of 3 to 5 years with an amortization period of 25 years.
The Bank also originates speculative loans to residential builders who have
established business relationships with the Bank. These speculative loans
typically are made for a term of six months after which the Bank allows one
extension of six months. If after one year a unit remains unsold, the Bank
requires that the builder make a 10% principal reduction payment and the Bank
either then allows the builder to make interest payments for 90 days before he
is required to make another principal reduction payment, or the builder may
choose that the Bank treat the loan as a regular loan, pursuant to which he will
make monthly payments for the full term of the loan. In underwriting such loans,
the Bank considers the number of units that the builder has on a speculative bid
basis that remain unsold. The Bank's experience has been that most speculative
loans are repaid well within the twelve month period. Speculative loans are
generally originated with a loan to value ratio that does not exceed 75%. At
September 30, 1999 the Bank's largest speculative loan was $70,000, drawn on a
line of credit, and was performing in accordance with its terms.
Construction lending is generally considered to involve a higher degree of
credit risk than long-term financing of residential properties. The Bank's risk
of loss on a construction loan is dependent largely upon the accuracy of the
initial estimate of the property's value at completion of construction and the
estimated cost of construction. If the estimate of construction cost and the
marketability of the property upon
4
<PAGE>
completion of the project prove to be inaccurate, the Bank may be compelled to
advance additional funds to complete the construction. Furthermore, if the final
value of the completed property is less than the estimated amount, the value of
the property might not be sufficient to assure the repayment of the loan. For
speculative loans that the Bank originates to builders, the ability of the
builder to sell completed dwelling units will depend, among other things, on
demand, pricing and availability of comparable properties, and general economic
conditions.
Non-Residential Real Estate Loans. The Bank's non-residential real estate
loans consist of commercial business loans and farm real estate loans.
Commercial real estate loans are secured by churches, office buildings, and
other commercial properties. Farm loans are secured by the farm land. These
loans generally have not exceeded $500,000 or had terms greater than 25 years.
Commercial and farm real estate lending entails significant additional
risks compared to residential property lending. These loans typically involve
large loan balances to single borrowers or groups of related borrowers. The
repayment of these loans typically is dependent on the successful operation of
the real estate project securing the loan. For commercial real estate these
risks can be significantly affected by supply and demand conditions in the
market for office retail space and may also be subject to adverse conditions in
the economy. For loans secured by farm real estate, repayment may be affected by
weather conditions, government policies, and subsidies concerning farming. To
minimize these risks, the Bank generally limits this type of lending to its
market area and to borrowers who are otherwise well known to the Bank, and
generally limits the loan to value ratio to 80%.
Consumer Loans. The Bank offers consumer loans in order to provide a wider
range of financial services to its customers and because these loans provide
higher interest rates and shorter terms than many of the Bank's other loans. The
Bank's consumer loans consist of home equity, automobile, and mobile home loans
and are generally in smaller dollar amounts than the Bank's other loans.
Consumer loans may entail greater risk than residential mortgage loans,
particularly in the case of consumer loans that are unsecured or secured by
assets that depreciate rapidly. Repossessed collateral for a defaulted consumer
loan may not be sufficient for repayment of the outstanding loan, and the
remaining deficiency may not be collectible.
Loan Approval Authority and Underwriting. The Bank's loan committee, which
is comprised of all 5 directors on the board, approves all loans. Mr. Plair, the
Bank's President, has loan authority to approve consumer loans of up to $5,000.
Loan Commitments. At September 30, 1999, commitments to cover originations
of mortgage loans totaled $1.8 million. The Bank believes that virtually all of
its commitments will be funded.
Loans to One Borrower. The maximum amount of loans which the Bank may make
to any one borrower may not exceed the greater of $500,000 or 15% of the Bank's
unimpaired capital and unimpaired surplus. The Bank may lend an additional 10%
of the Bank's unimpaired capital and unimpaired surplus if the loan is fully
secured by readily marketable collateral. At September 30, 1999, the aggregate
loans outstanding of the Bank's five largest borrowers have outstanding balances
of between $496,000 and $644,100.
5
<PAGE>
Nonperforming and Problem Assets
Loan Delinquencies. Loans are reviewed on a monthly basis and are placed on
a non-accrual status when, in the Bank's opinion, the collection of additional
interest is doubtful. Interest accrued and unpaid at the time a loan is placed
on nonaccrual status is charged against interest income. Subsequent interest
payments, if any, are either applied to the outstanding principal balance or
recorded as interest income, depending on the assessment of the ultimate
collectibility of the loan.
Nonperforming Assets. The following table sets forth information regarding
nonaccrual loans and real estate owned, as of the dates indicated. The Bank has
no loans categorized as troubled debt restructurings within the meaning of SFAS
15. For the year ended September 30, 1999, there was $19,745 in interest income
that would have been recorded on loans accounted for on a nonaccrual basis under
the original terms of such loans; however, interest income on these loans, which
is recorded only when received, was $8,392.
<TABLE>
<CAPTION>
At September 30,
1999 1998
----------- ----------
(In thousands)
Loans accounted for on a non-accrual basis:
Mortgage loans:
<S> <C> <C>
Construction loans.................................... $ -- $ 15
One- to four-family residential....................... 214 88
All other mortgage loans.............................. -- --
Non-mortgage loans:
Commercial............................................ -- --
Consumer.............................................. 14 --
------ -----
Total................................................... 228 $ 103
====== =====
Accruing loans contractually past due 90 days or more:
Mortgage loans:
Construction loans.................................... $ 15 $ 15
One- to four-family residential....................... 83 185
All other mortgage loans.............................. -- --
Non-mortgage loans:
Commercial............................................ -- --
Consumer.............................................. 16 10
---- -----
Total................................................... $ 114 $ 210
==== =====
Total non-accrual and accrual loans..................... $ 342 $ 313
==== =====
Real estate owned....................................... $ 139 $ --
==== =====
Other non-performing assets............................. $ -- $ --
==== =====
Total non-performing assets............................. $ 481 $ 313
==== =====
Total non-performing loans to total loans, net.......... .83% .86%
==== =====
Total non-performing loans to total assets.............. .65% .72%
==== =====
Total non-performing assets to total assets............. .91% .72%
==== =====
</TABLE>
Classified Assets. OTS regulations provide for a classification system for
problem assets of savings associations which covers all problem assets. Under
this classification system, problem assets of savings institutions such as the
Bank are classified as "substandard," "doubtful," or "loss." An asset is
considered substandard if it is inadequately protected by the current net worth
and paying capacity of the borrower or of the collateral pledged, if any.
Substandard assets include those characterized by the "distinct possibility"
that the savings institution will sustain "some loss" if the deficiencies are
not corrected. Assets classified as doubtful have all of the weaknesses inherent
in those classified substandard, with the added characteristic
6
<PAGE>
that the weaknesses present make "collection or liquidation in full," on the
basis of currently existing facts, conditions, and values, "highly questionable
and improbable." Assets classified as loss are those considered "uncollectible"
and of such little value that their continuance as assets without the
establishment of a specific loss reserve is not warranted. Assets may be
designated "special mention" because of potential weakness that do not currently
warrant classification in one of the aforementioned categories.
When a savings association classifies problem assets as either substandard
or doubtful, it may establish general allowances for loan losses in an amount
deemed prudent by management. General allowances represent loss allowances which
have been established to recognize the inherent risk associated with lending
activities, but which, unlike specific allowances, have not been allocated to
particular problem assets. When a savings association classifies problem assets
as loss, it is required either to establish a specific allowance for losses
equal to 100% of that portion of the asset so classified or to charge off such
amount. A savings association's determination as to the classification of its
assets and the amount of its valuation allowances is subject to review by the
OTS, which may order the establishment of additional general or specific loss
allowances. A portion of general loss allowances established to cover possible
losses related to assets classified as substandard or doubtful may be included
in determining a savings association's regulatory capital. Specific valuation
allowances for loan losses generally do not qualify as regulatory capital. At
September 30, 1999, the Bank had $565,000, $900,000, $0 and $0 of loans
classified as special mention, substandard, doubtful and loss, respectively.
Allowances for Loan Losses. A provision for loan losses is charged to
operations based on management's evaluation of the losses that may be incurred
in the Bank's loan portfolio. The evaluation, including a review of all loans on
which full collectibility of interest and principal may not be reasonably
assured, considers: (i) the Bank's past loan loss experience, (ii) known and
inherent risks in the Bank's portfolio, (iii) adverse situations that may affect
the borrower's ability to repay, (iv) the estimated value of any underlying
collateral, and (v) current economic conditions.
The Bank monitors its allowance for loan losses and make additions to the
allowance as economic conditions dictate. Although the Bank maintains the Bank's
allowance for loan losses at a level that it considers adequate for the inherent
risk of loss in its loan portfolio, future losses could exceed estimated amounts
and additional provisions for loan losses could be required. In addition, the
Bank's determination as to the amount of allowance for loan losses is subject to
review by the OTS, as part of its examination process. After a review of the
information available, the OTS might require the establishment of an additional
allowance.
7
<PAGE>
The following table illustrates the allocation of the allowance for loan
losses for each category of loans. The allocation of the allowance to each
category is not necessarily indicative of future loss in any particular category
and does not restrict the Bank's use of the allowance to absorb losses in other
loan categories.
<TABLE>
<CAPTION>
At September 30
-----------------------------------------------
1999 1998
------------------------- -------------------
Percent of Percent of
Loans in Loans in
Each Each
Category Category
to Total to Total
Amount Loans Amount Loans
------ ----- ------ -----
(Dollars in thousands)
At end of period allocated to:
<S> <C> <C> <C> <C>
One- to four-family...................... $286 72.8% $ 262 70.7%
Multi-family............................. 6 1.4 7 2.0
Other real estate........................ 81 20.5 85 22.9
Consumer................................. 16 5.3 16 4.4
------ ------ ----- -----
Total allowance....................... $389 100.0% $ 370 100.0%
====== ====== ===== =====
</TABLE>
The following table sets forth information with respect to the Bank's
allowance for loan losses at the dates and for the periods indicated:
At September 30,
--------------------------
1999 1998
-------- ---------
(Dollars in thousands)
Total loans, net.................................. $41,121 $36,397
====== ======
Average loans outstanding......................... 38,759 $34,862
====== ======
Allowance balances (at beginning of period)....... 370 $ 346
Provision:
Residential..................................... 15 17
Non-residential................................. 2 6
Consumer........................................ 3 1
Net charge-offs (recoveries):
Residential..................................... 1 --
Non-residential................................. -- --
Consumer........................................ -- --
------- ------
Allowance balance (at end of period).............. $ 389 $ 370
======= ======
Allowance for loan losses as a percent
of total loans outstanding...................... .94% 1.01%
====== ======
Net loans charged off as a percent of
average loans outstanding....................... -- --
8
<PAGE>
Investment Activities
Investment Securities. The Bank is required under federal regulations to
maintain a minimum amount of liquid assets which may be invested in specified
short-term securities and certain other investments. The Company classifies its
investment securities as "available-for-sale" or "held-to-maturity" in
accordance with SFAS No. 115.
The Company's investment securities "available-for-sale" and
"held-to-maturity" portfolios at September 30, 1999 did not contain securities
of any issuer with an aggregate book value in excess of 10% of the Company's
equity, excluding those issued by the United States government agencies.
Mortgage-Backed Securities. To supplement lending activities, the Company
has invested in residential mortgage-backed securities. Mortgage-backed
securities can serve as collateral for borrowings and, through repayments, as a
source of liquidity. Mortgage-backed securities represent a participation
interest in a pool of single-family or other type of mortgages. Principal and
interest payments are passed from the mortgage originators, through
intermediaries (generally quasi-governmental agencies) that pool and repackage
the participation interests in the form of securities, to investors such as the
Company. The quasi-governmental agencies guarantee the payment of principal and
interest to investors and include the Federal Home Loan Mortgage Company
("FHLMC"), the Government National Mortgage Association ("GNMA"), and the
Federal National Mortgage Association ("FNMA"). Expected maturities will differ
from contractual maturities due to scheduled repayments and because borrowers
may have the right to call or prepay obligations with or without prepayment
penalties.
Investment Portfolio. The following table sets forth the carrying value of
the Company's investment securities available-for-sale and held-to-maturity
portfolios, and FHLB stock at the dates indicated.
At September 30,
---------------------
1999 1998
-------- ---------
(In thousands)
Investment securities:
U.S. Government securities available-for-sale... $300 $ 714
U.S. Government securities held-to-maturity..... -- --
U.S. Agency securities available-for-sale....... 4,980 4,409
U.S. Agency securities held-to-maturity......... -- 200
State, County and Municipal securities
available-for-sale............................ 388 --
State, County and Municipal securities
held-to-maturity.............................. -- --
------- --------
Total investment securities................... 5,668 5,323
Interest-bearing deposits........................ 262 203
FHLB stock....................................... 287 240
Mortgage-backed securities available-for-sale.... 891 518
Mortgage-backed securities held-to-maturity...... -- --
------- --------
Total investments............................. $7,108 $6,284
======= ========
8
<PAGE>
The following table sets forth certain information regarding scheduled
maturities, carrying values, approximate fair values, and weighted average
yields for the Company's investments at September 30, 1999 by contractual
maturity. The following table does not take into consideration the effects of
scheduled repayments or the effects of possible prepayments. Further, yields on
tax exempt obligations have not been computed on a tax equivalent basis.
<TABLE>
<CAPTION>
Total
One Year or Less One to Five Years Five to Ten Years More than Ten Years Investment Securities
Carrying Average Carrying Average Carrying Average Carrying Average Carrying Average Market
Value Yield Value Yield Value Yield Value Yield Value Yield Value
------- ------- ------- ------- ------- ------- ------- ------- ------- ------- ------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Investment securities:
U.S. Government securities.... $ -- --% $ 300 6.07% -- -- $ 300 6.07% $ 300
U. S. Agency securities....... 1,846 6.10 3,134 5.88 -- -- 4,980 5.96 4,980
Corporate notes and bonds..... -- -- -- -- -- -- -- -- --
Other securities(1)........... -- -- 168 6.36 -- -- $ 220 5.00% 388 5.59 388
-------- ------- ------ ---- ----- ----- ---- ---- ------ ---- ------
Total investment securities. 1,846 6.10 3,602 5.92 -- -- 220 5.00 5,668 5.94 5,668
Interest-bearing deposits....... 262 6.22 -- -- -- -- -- -- 262 6.22 262
Federal funds sold.............. -- -- -- -- -- -- -- -- -- -- --
FHLB stock...................... 287 7.53 -- -- -- -- -- -- 287 7.53 287
Mortgage-backed securities...... -- -- 357 6.44 -- -- 534 5.05 891 5.61 891
-------- ------- ------ ---- ------ ------ ---- ---- ------ ---- -----
Total investments........... $ 2,395 6.28% $ 3,959 5.97% -- -- $ 754 5.04% $7,108 5.97% $7,108
======== ======= ======= ===== ====== ====== ==== ==== ===== ==== =====
</TABLE>
(1) State, county and municipal securities
10
<PAGE>
Sources of Funds
General. Deposits are the Bank's major external source of funds for lending
and other investment purposes. Funds are also derived from the receipt of
payments on loans and prepayment of loans and maturities of investment
securities and mortgage-backed securities and, to a much lesser extent,
borrowings and operations. Scheduled loan principal repayments are a relatively
stable source of funds, while deposit inflows and outflows and loan prepayments
are significantly influenced by general interest rates and market conditions.
Consumer and commercial deposits are attracted principally from within the
Bank's primary market area through the offering of a selection of deposit
instruments including checking accounts, regular savings accounts, money market
accounts, and term certificate accounts. IRA accounts are also offered.
Certificates of Deposit. The following table indicates the amount of the
Bank's certificates of deposit of $100,000 or more by time remaining until
maturity as of September 30, 1999.
Certificates
Maturity Period of Deposit
- --------------- ----------
(In thousands)
Within three months............... $1,308
Three through six months.......... 2,599
Six through twelve months......... 3,178
Over twelve months................ 2,609
-------
$9,694
=======
Borrowings. Advances (borrowings) may be obtained from the FHLB of Atlanta
to supplement the Bank's supply of lendable funds. Advances from the FHLB of
Atlanta are typically secured by a pledge of the Bank's stock in the FHLB of
Atlanta, a portion of the Bank's first mortgage loans, and other assets.
The following table sets forth the terms of the Bank's short-term FHLB
advances.
<TABLE>
<CAPTION>
During the Year ended September 30,
-----------------------------------
1999 1998
---- ----
(Dollars in thousands)
<S> <C> <C>
Balance at period end....................................... $2,500 $ --
Average balance outstanding during the period............... 917 615
Maximum amount outstanding at any month-end
during the period......................................... 3,500 1,600
Weighted average interest rate during the period............ 5.6% 5.5%
</TABLE>
11
<PAGE>
Personnel
At September 30, 1999 the Bank had twelve full-time employees and six
part-time employee. None of the Bank's employees are represented by a collective
bargaining group. The Bank believes that its relationship with the Bank's
employees is good.
Regulation
Set forth below is a brief description of certain laws which relate to the
Company and the Bank. The description is not complete and is qualified in its
entirety by references to applicable laws and regulation.
Holding Company Regulation
General. The Company is a unitary savings and loan holding company that
files reports with the OTS and is subject to regulation and examination by the
OTS. In addition, the OTS has enforcement authority over the Company and any
non-savings institution subsidiaries. This permits the OTS to restrict or
prohibit activities that it determines to be a serious risk to the Bank. This
regulation is intended primarily for the protection of the Bank's depositors and
not for the benefit of stockholders of the Company. The Company is also
registered with the Georgia Department of Banking and Finance.
Subsequent to the end of the fiscal year, federal law was amended to
effectively prohibit the Company from affiliating in any way with a
non-financial company. In connection with the amendment to federal law, the
Company may now become affiliated with securities firms and insurance companies.
These changes to federal law do not impact the current business of the Company.
Unlike savings and loan holding companies that may be created in the future, the
Company generally is not restricted in the types of business in which it may
engage, provided that the Bank maintains a specified amount of its assets in
housing related investments.
Qualified Thrift Lender ("QTL") Test. As the Company owns only one savings
institution, it is able to diversify its operations into activities not related
to banking, but only so long as the Bank satisfies the QTL test. If the Company
controlled more than one savings institution, it would lose the ability to
diversify its operations into nonbanking related activities, unless such other
savings institutions each also qualified as a QTL or were acquired in a
supervised acquisition. See "Savings Institution Regulation -- Qualified Thrift
Lender Test."
Savings Institution Regulation
General. As a federally chartered, SAIF-insured savings institution, the
Bank is subject to extensive regulation by the OTS and the Federal Deposit
Insurance Corporation ("FDIC"). Lending activities and other investments must
comply with various federal and state statutory and regulatory requirements. The
Bank is also subject to certain reserve requirements promulgated by the Board of
Governors of the Federal Reserve System ("Federal Reserve").
12
<PAGE>
Insurance of Deposit Accounts. The Bank's deposit accounts are insured by
the SAIF to a maximum of $100,000 for each insured member (as defined by law and
regulation). Insurance of deposits may be terminated by the FDIC upon a finding
that the institution has engaged in unsafe or unsound practices, is in an unsafe
or unsound condition to continue operations or has violated any applicable law,
regulation, rule, order or condition imposed by the FDIC or the institution's
primary regulator.
As a member of the SAIF, the Bank pays an insurance premium to the FDIC.
The FDIC also maintains another insurance fund, the Bank Insurance Fund ("BIF"),
which primarily insures commercial bank deposits.
The deposit insurance assessment for most SAIF members is .064% of deposits
on an annual basis through the end of 1999. During this same period, BIF members
will be assessed approximately .013% of deposits. After 1999, assessments for
BIF and SAIF members may be the same. It is expected that these continuing
assessments for both SAIF and BIF members will be used to repay outstanding
Financing Corporation bond obligations.
Regulatory Capital Requirements. OTS capital regulations require savings
institutions to meet three capital standards: (1) tangible capital equal to 1.5%
of total adjusted assets, (2) core capital equal to at least 4% of total
adjusted assets, and (3) risk-based capital equal to 8% of total risk-weighted
assets. Regulations that enable the OTS to take prompt corrective action against
savings associations effectively impose higher capital requirements on savings
associations.
Dividend and Other Capital Distribution Limitations. The Bank must give the
OTS 30 days advance notice of any proposed declaration of dividends to the
Company, and the OTS has the authority under its supervisory powers to prohibit
the payment of dividends to the Company. In addition, the Bank may not declare
or pay a cash dividend on its capital stock if the dividend would (1) reduce the
regulatory capital of the Bank below the amount required for the liquidation
account established in connection with the conversion from mutual to stock form
or (2) reduce the amount of capital of the Bank below the amounts required in
accordance with other OTS regulations. In contrast, the Company has fewer
restrictions on the payment of dividends.
Qualified Thrift Lender Test. Savings institutions must meet a qualified
thrift lender ("QTL") test. If the Bank maintains an appropriate level of
qualified thrift investments ("QTIs") (primarily residential mortgages and
related investments, including certain mortgage-related securities) and
otherwise qualify as a QTL, the Bank will continue to enjoy full borrowing
privileges from the FHLB of Atlanta. The required percentage of QTIs is 65% of
portfolio assets (defined as all assets minus goodwill and other intangible
assets, property used by the institution in conducting its business and liquid
assets in an amount not exceeding 20% of total assets). In addition, savings
institutions may include shares of stock of the FHLBs, FNMA, and FHLMC as QTIs.
Compliance with the QTL test is determined on a monthly basis in nine out of
every twelve months. As of September 30, 1999, the Bank was in compliance with
its QTL requirement.
Federal Reserve. The Federal Reserve requires all depository institutions
to maintain noninterest- bearing reserves at specified levels against their
transaction accounts (primarily checking, NOW and Super NOW checking accounts)
and non-personal time deposits. The balances maintained to meet the reserve
requirements imposed by the Federal Reserve may be used to satisfy liquidity
requirements that are imposed by the OTS.
13
<PAGE>
Proposed Regulation. The OTS has announced that it will consider amending
its capital standards so as to more closely conform its requirements to those of
the other federal banking agencies. The impact of this possible change is not
expected to materially impact the Bank. The impact on the Company cannot yet be
determined.
Item 2. Description of Property
- -------------------------------
(a) Properties.
The Company and the Bank operate from their office at 602 East Screven
Street, Quitman, Georgia. The Bank sold its office at 100 West Screven Street,
Quitman, Georgia.
(b) Investment Policies.
See "Item 1. Description of Business" above for a general description of
the Bank's investment policies and any regulatory or Board of Directors'
percentage of assets limitations regarding certain investments. The Bank's
investments are primarily acquired to produce income, and to a lesser extent,
possible capital gain.
(1) Investments in Real Estate or Interests in Real Estate. See "Item 1.
Description of Business - Lending Activities" and "Item 2. Description of
Property."
(2) Investments in Real Estate Mortgages. See "Item 1. Description of
Business - Lending Activities."
(3) Investments in Securities of or Interests in Persons Primarily Engaged
in Real Estate Activities. See "Item 1. Description of Business - Lending
Activities."
(c) Description of Real Estate and Operating Data.
Not Applicable.
Item 3. Legal Proceedings
- -------------------------
There are various claims and lawsuits in which the Company or the Bank are
periodically involved, such as claims to enforce liens, condemnation proceedings
on properties in which the Bank holds security interests, claims involving the
making and servicing of real property loans, and other issues incident to the
Bank's business. In the opinion of management, no material loss is expected from
any of such pending claims or lawsuits.
Item 4. Submission of Matters to a Vote of Security Holders
- -------------------------------------------------------------
No matter was submitted to a vote of security holders during the fourth
quarter of the fiscal year.
14
<PAGE>
PART II
Item 5. Market for Common Equity and Related Stockholder Matters
- ------------------------------------------------------------------
The information contained under the section captioned "Common Stock
Information" of the Company's Annual Report to Stockholders for the fiscal year
ended September 30, 1999 (the "Annual Report"), is incorporated herein by
reference.
Item 6. Management's Discussion and Analysis or Plan of Operation
- -------------------------------------------------------------------
The information contained in the section captioned "Management's Discussion
and Analysis of Financial Condition and Results of Operations" of the Annual
Report is incorporated herein by reference.
Item 7. Financial Statements
- ------------------------------
The Registrant's financial statements listed under Item 13 are incorporated
herein by reference.
Item 8. Changes in and Disagreements with Accountants On Accounting and
Financial Disclosure.
- --------------------------------------------------------------------------------
Not applicable.
PART III
Item 9. Directors, Executive Officers, Promoters and Control Persons: Compliance
with Section 16(a) of the Exchange Act.
- --------------------------------------------------------------------------------
The information contained under the sections captioned "Section 16(a)
Beneficial Ownership Reporting Compliance" and "Proposal I - Election of
Directors" in the Proxy Statement is incorporated herein by reference.
Item 10. Executive Compensation
- --------------------------------
The information contained in the section captioned "Director and Executive
Compensation" in the Proxy Statement is incorporated herein by reference.
Item 11. Security Ownership of Certain Beneficial Owners and Management
- ------------------------------------------------------------------------
Information required by this item is incorporated herein by reference to
the section captioned "Security Ownership of Certain Beneficial Owners" in the
Proxy Statement and to the first chart in the section captioned "Proposal I -
Election of Directors" in the Proxy Statement.
15
<PAGE>
Item 12. Certain Relationships and Related Transactions
- --------------------------------------------------------
The information required by this item is incorporated herein by reference
to the section captioned "Certain Relationships and Related Transactions" in the
Proxy Statement.
Item 13. Exhibits, List, and Reports on Form 8-K
- -------------------------------------------------
(a) Listed below are all financial statements and exhibits filed as part
of this report.
1. The consolidated statements of financial condition of Quitman
Bancorp, Inc. as of September 30, 1999 and 1998 and the related
consolidated statements of income, comprehensive income,
stockholders' equity and cash flows for each of the years in the
two year period ended September 30, 1999, together with the
related notes and the independent auditors' report of Stewart,
Fowler & Stalvey, P.C., independent certified public accountants.
2. Schedules omitted as they are not applicable.
3. The following exhibits are included in this Report or
incorporated herein by reference:
(a) List of Exhibits:
3(i) Articles of Incorporation of Quitman Bancorp, Inc. *
3(ii) Bylaws of Quitman Bancorp, Inc. *
10.1 Director Indexed Salary Continuation Plan *
10.2 Executive Indexed Salary Continuation Plan *
10.3 1999 Stock Option Plan **
10.4 1999 Restricted Stock Plan ***
13 Portions of Annual Report to Stockholders for the fiscal
year ended September 30, 1999
21 Subsidiaries of the Registrant****
23 Consent of Stewart, Fowler & Stalvey, P.C.
27 Financial Data Schedule (electronic filing only)
- --------------------------
* Incorporated by reference to the identically numbered exhibit to the
registration statement on Form SB-2 (File No. 333-43063) declared effective
by the SEC on February 11, 1998.
** Incorporated by reference to Exhibit A to the proxy statement for a special
meeting held on April 13, 1999 (File No. 0-23763).
*** Incorporated by reference to Exhibit B to the proxy statement for a special
meeting held on April 13, 1999 (File No. 0-23763).
**** Incorporated by reference to the identically numbered exhibit to the Form
10-KSB for the fiscal year ended September 30, 1998 (File No. 0-23763).
(b) Not applicable
16
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, as amended, the registrant has duly caused this report to
be signed on its behalf by the undersigned, thereunto duly authorized as of
December 23, 1999.
QUITMAN BANCORP, INC.
By: /s/ Melvin E. Plair
-------------------------------------
Melvin E. Plair
President and Chief Executive Officer
(Duly Authorized Representative)
Pursuant to the requirement of the Securities Exchange Act of 1934, as
amended, this report has been signed below by the following persons on behalf of
the registrant and in the capacities indicated as of December 23, 1999.
/s/ Claude R. Butler /s/ Melvin E. Plair
- ---------------------------------- ------------------------------------------
Claude R. Butler Melvin E. Plair
Chairman of the Board and Director President and Chief Executive Officer
(Principal Executive and Financial Officer)
/s/ Robert L. Cunningham, III /s/ Peggy L. Forgione
- ---------------------------------- ------------------------------------------
Robert L. Cunningham, III Peggy L. Forgione
Vice Chairman and Director Vice President and Controller
(Principal Accounting Officer)
/s/ Walter B. Holwell
- ----------------------------------
Walter B. Holwell
Director
/s/ John W. Romine
- ----------------------------------
John W. Romine
Director
/s/ Daniel M. Mitchell, Jr.
- ----------------------------------
Daniel M. Mitchell, Jr.
Director
EXHIBIT 13
<PAGE>
QUITMAN BANCORP, INC.
ANNUAL REPORT
For the Year Ended
September 30, 1999
<PAGE>
QUITMAN BANCORP, INC.
ANNUAL REPORT
TABLE OF CONTENTS
Letter to Stockholders.......................................................1
Company Information..........................................................2
Common Stock Information.....................................................3
Management's Discussion and Analysis of Financial Condition
and Results of Operations....................................................4
Independent Auditors' Report................................................14
Consolidated Financial Statements...........................................15
Notes to Consolidated Financial Statements..................................20
Office Locations and Other Corporate Information............................43
<PAGE>
December 10, 1999
Dear Fellow Stockholders:
This is the second annual stockholders' report for Quitman Bancorp, Inc., the
holding company for Quitman Federal Savings Bank. The bank completed its
conversion from a federally chartered mutual savings bank to a federally
chartered stock savings bank in April 1998. The conversion generated $6.2
million of new capital, although the bank's current financial safety and
soundness is the result of many years of conservative management. Our successful
management of capital remains a key challenge.
As we wrote last year, we believe the company is well positioned to meet
tomorrow's challenges and demands as a community savings bank, and we look
forward to the future with enthusiasm and optimism. Here are some of the reasons
why.
We operate from our new office that opened in April 1999. This new office is
substantially larger than our old office and allows us to focus on our customers
instead of trying to find space for our employees to work. Through time, our
goal is to more than offset the dramatically increased expenses of our new
office with additional income. We correctly presumed that we would not
accomplish this goal before the end of our fiscal year. However, we exceeded our
projections for the fiscal year. We are pleased to report that this year we
earned more than last year in both the aggregate and on a per share basis.
We still have a loyal customer base, a dedicated board of directors and an
excellent staff who recognize the importance of quality service. We will
continue to focus on what we do best. These have been the key ingredients to our
profitability and growth for more than 60 years and will continue to shape our
future.
The market for savings bank stocks has not significantly improved from the
decline that occurred in 1998. This market has definitely affected the price of
your company stock. While we, as fellow stockholders, can't control the market,
we can continue to run the bank and trust that our stock price will eventually
increase because of the actions we are taking now. However, we are not sitting
still. During the fiscal year we repurchased common stock at a total cost of
$1.4 million. We hope that the future proves this to be an investment from which
we all benefit.
Your board of directors and management are committed to protecting and enhancing
the value of your investment in the company. To do so, we are challenged to
continue delivering high quality services to our customers and community. We
appreciate the confidence, support, and loyalty of our customers, employees, and
stockholders. If you know people who or businesses that want a better banking
relationship, then send them to us. You and they will be glad you did.
Sincerely,
/s/Melvin E. Plair /s/Claude R. Butler
- ------------------- ---------------------
Melvin E. Plair Claude R. Butler
President and CEO Chairman of the Board
<PAGE>
QUITMAN BANCORP, INC.
Company Information
Quitman Bancorp, Inc. (the "Company") is a Georgia-chartered corporation
organized at the direction of Quitman Federal Savings Bank (the "Bank") in
connection with the Bank's conversion from a mutual to stock form of
organization (the "Conversion"). On April 2, 1998, the Bank completed the
Conversion and became a wholly owned subsidiary of the Company. The Company is a
unitary savings and loan holding company which, under existing laws, generally
is not restricted in the types of business activities in which it may engage
provided the Bank retains a specified amount of its assets in housing-related
investments.
Because the Company owns the Bank and most of the income and operations that are
being reported are those of the Bank, in this report references to "we," "us,"
and "our" refer to the Company and the Bank.
The Bank is a federally chartered stock savings bank that commenced business in
1936. The Bank is examined and regulated by the Office of Thrift Supervision
("OTS") and its deposits are federally insured by the Savings Association
Insurance Fund ("SAIF") of the Federal Deposit Insurance Corporation ("FDIC").
The Bank is a member of and owns capital stock in the Federal Home Loan Bank
("FHLB") of Atlanta, which is one of the 12 regional banks in the FHLB System.
We are located in Quitman, which is in the center of the southern part of
Georgia, approximately 15 miles west of Valdosta and Interstate 75 and 10 miles
north of the Florida border. Our market area is Brooks county (in which Quitman
is located) as well as parts of Lowndes county, both of which are in Georgia.
Our market area is based primarily on agricultural goods such as cotton,
peanuts, corn and tobacco and dairy products.
We attract deposits from the general public and use these deposits primarily to
originate residential loans. Our principal sources of funds for lending
activities are deposits, Federal Home Loan Bank borrowings and the amortization,
repayment, and maturity of loans and investment securities. We do not rely on
brokered deposits. Principal sources of income are interest on loans and
investment securities. Our principal expense is interest paid on deposits.
2
<PAGE>
Common Stock Information
Since its issuance in April 1998, our common stock ("Common Stock") has been
traded in the over-the-counter market with quotations available through the OTC
Bulletin Board (symbol: QTMB). The following table reflects high and low bid
quotations as published by Charles Schwab & Co. The quotations reflect
inter-dealer prices, without retail mark-up, mark-down, or commission, and may
not represent actual transactions.
Date High Low
- ---- -------- --------
April 2, 1998 to June 30, 1998 $15.125 12.000
July 1, 1998 to September 30, 1998 13.125 9.000
October 1, 1998 to December 31, 1998 11.125 9.250
January 1, 1999 to March 31, 1999 11.750 10.000
April 1, 1999 to June 30, 1999 11.500 10.000
July 1, 1999 to September 30, 1999 11.500 10.625
The number of shareholders of record of Common Stock as of September 30, 1999,
was approximately 195, exclusive of the number of persons or entities who held
stock in nominee or "street" name through various brokerage firms. At September
30, 1999, there were 533,960 shares issued and outstanding. Our ability to pay
dividends to stockholders is primarily dependent upon the dividends we receive
from the Bank. The Bank may not declare or pay a cash dividend on any of its
stock if that dividend would cause the Bank's regulatory capital to be reduced
below (1) the amount required for the liquidation account established in
connection with the Conversion, or (2) the regulatory capital requirements
imposed by the OTS. We paid dividends on the Common Stock in the amount of
$112,413 on May 24, 1999. This dividend was declared on April 20, 1999 in the
amount of $0.20 per share.
3
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
General
We may from time to time make written or oral "forward-looking
statements", including statements contained in our filings with the Securities
and Exchange Commission, in our reports to stockholders and in our other
communications, which are made in good faith pursuant to the "safe harbor"
provisions of the Private Securities Litigation Reform Act of 1995.
These forward-looking statements involve risks and uncertainties, such
as statements of our plans, expectations, and estimates that are subject to
change based on several factors (some of which are beyond our control). The
following factors, among others, could cause our financial performance to differ
materially from the plans, expectations, and estimates expressed in our
forward-looking statements: the strength of the United States economy and the
strength of the local economies in which we operate; the effects of, and changes
in, trade, monetary and fiscal policies and laws, including interest rate
policies of the Board of Governors of the Federal Reserve System, inflation,
interest rate, market and monetary fluctuations; the timely development of and
acceptance of our new products and services and the perceived overall value of
these products and services by customers, including the features and pricing
compared to competitors' products and services; the willingness of customers to
substitute our products and services for those of our competitors; the impact of
changes in financial services' laws and regulations (including laws concerning
taxes, banking, and securities); technological changes; disruption in data
processing caused by computer malfunctions associated with the year 2000
problem; acquisitions; changes in consumer spending and saving habits; and our
success in dealing with these factors.
This list of factors is not exclusive. We do not undertake to update
any forward-looking statement, whether written or oral, that may be made from
time to time by us or on our behalf.
Our results of operations depend primarily on net interest income,
which is determined by (i) the difference between rates of interest we earn on
our interest-earning assets and the rates we pay on interest-bearing liabilities
(interest rate spread), and (ii) the relative amounts of interest-earning assets
and interest-bearing liabilities. Our results of operations are also affected by
non-interest income, including, primarily, income from customer deposit account
service charges, gains and losses from the sale of investments and
mortgage-backed securities and non-interest expense, including, primarily,
compensation and employee benefits, federal deposit insurance premiums, office
occupancy costs, and data processing cost. Our results of operations also are
affected significantly by general and economic and competitive conditions,
particularly changes in market interest rates, government policies and actions
of regulatory authorities, all of which are beyond our control.
Market Risk Analysis
Asset/Liability Management. Our assets and liabilities may be analyzed
by examining the extent to which our assets and liabilities are interest rate
sensitive and by monitoring the expected effects of interest rate changes on our
net portfolio value. We also use this information to analyze the risk that
changes in market interest rates will have on our operations. Part of this
analysis of market risk is made by estimating how our operations would be
affected by instantaneous changes in market interest rates. We discuss these
estimates under "Net Portfolio Value."
An asset or liability is interest rate sensitive within a specific time
period if it will mature or
4
<PAGE>
reprice within that time period. If our assets mature or reprice more quickly or
to a greater extent than our liabilities, our net portfolio value and net
interest income would tend to increase during periods of rising interest rates
but decrease during periods of falling interest rates. Conversely, if our assets
mature or reprice more slowly or to a lesser extent than our liabilities, our
net portfolio value and net interest income would tend to decrease during
periods of rising interest rates but increase during periods of falling interest
rates. As described in the following paragraph, our policy has been to address
the interest rate risk inherent in the historical savings institution business
of originating long-term loans funded by short-term deposits by maintaining
liquid assets in excess of regulatory minimums for material and prolonged
changes in interest rates. At September 30, 1999, our liquid asset ratio was
14.91%.
We originate fixed rate real estate loans which approximated 92.0% of
our loan portfolio at September 30, 1999. To manage the interest rate risk of
this type of loan portfolio, generally we limit maturities of fixed rate loans
to no more than 5 years and maintain a portfolio of liquid assets. Our liquid
assets include cash and cash equivalents and investment securities
available-for-sale. At September 30, 1999, these liquid assets totaled $8.5
million, which was 18.9% of our total liabilities of $45.1 million. We maintain
these liquid assets to protect us in the event market interest rates rise and we
experience losses because we are paying more for our liabilities than we are
earning on our assets. If this happens, we may need liquid assets to continue
paying our liabilities and to continue operating with required capital levels.
However, maintaining liquid assets tends to reduce potential net income because
liquid assets usually provide a lower yield than less liquid assets. In the past
several years we have increased the size of our construction lending portfolio
through, in part, the use of short term borrowings from the FHLB. Construction
loans have a shorter duration than most of our other loans and this type of
lending and borrowing has somewhat reduced our interest rate risk. At September
30, 1999, the average weighted term to maturity of our mortgage loan portfolio
was slightly more than 3 years and the average weighted term of our deposits was
slightly less than 15 months. In the future, we may begin funding parts of loans
originated by other financial institutions as a way of increasing our interest
rate spread. However, these loan participations and the method we use to fund
them may result in additional interest rate risk as well, as possibly, credit
risk.
Net Portfolio Value. In recent years, we have measured our interest
rate sensitivity by computing the "gap" between the assets and liabilities which
were expected to mature or reprice within certain time periods, based on
assumptions regarding loan prepayment and deposit decay rates formerly provided
by the OTS. However, we now receive computations of amounts by which our net
interest income over the next 12 months ("NII") would change in the event of
assumed changes in market interest rates. We use this information to analyze the
risk we face from changes in market interest rates. We also analyze market risk
in managing our assets and liabilities. See "Asset/Liability Management." These
computations indicate to us how the net present value of our cash flow from
assets, liabilities and off balance sheet items (our net portfolio value or
"NPV") would change in the event of assumed changes in market interest rates.
These computations estimate the effect on our NII from instantaneous and
permanent increases and decreases in market interest rates. In our interest rate
risk management policy we have set maximum decreases in NII and NPV that we
would be willing to tolerate under these assumed conditions. In addition, we
have also received computations of how these assumed conditions would impact our
NPV.
5
<PAGE>
Board Limit of a
Percentage Change In Change in NPV
----------------------- ----------------------------
Changes Dollars
in Market NII NPV (in thousands) Percentages
---------- ---------- --------------- ------------
Interest Rates(1)
-----------------
(basis points)
+400 -60% -65% -$1,079 -17.13%
+300 -60% -60% -$ 764 -12.13%
+200 -40% -40% -$ 476 -7.56%
+100 -20% -25% -$ 203 -3.22%
-100 -25% -25% $ 203 3.22%
-200 -40% -40% $ 420 6.67%
-300 -50% -50% $ 728 11.56%
-400 -60% -60% $1,096 17.40%
- --------------
(1) 100 basis points equals 1%.
Because most of our loans have a longer term than most of our deposits,
the computation of the impact on our net income indicated we would earn more
income if interest rates were to fall and we would earn less income if interest
rates were to rise. Specifically, the computation of an instantaneous and
permanent 200 basis point decrease in market interest rates indicated an
approximately 5% increase in estimated pre-tax income. The computation of an
instantaneous and permanent 200 basis point increase in market interest rates
indicated an approximately 9% decrease in estimated pre-tax income. Both of
these computations (1) were based on financial information at September 30,
1999, (2) assumed net income over the 12 months following September 30, 1998 and
(3) resulted in financial results within the guidelines shown in the table
above. These computations assumed that certain types of our loans, securities,
and deposit accounts would have certain interest rates during the 12 month
period. For example, our savings and NOW accounts were assumed to yield no more
than 4.20% and our consumer loans and fixed rate mortgage loans were assumed to
yield 9.00% and 8.50%, respectively. The use of different assumptions would also
result in different results.
While we cannot predict future interest rates or their effects on our
NPV or net interest income, we do not expect current interest rates, assuming
rates remain stable, to have a material adverse effect on our NPV or net
interest income. Computations of prospective effects of hypothetical interest
rate changes are based on numerous assumptions, including relative levels of
market interest rates resulting in specific interest rates for our various
investment securities, loan portfolios and liabilities. These assumptions also
include estimates of other components of our income and the duration of certain
of our investment securities as well as prepayments, deposit run-offs and growth
rates and should not be relied upon as indicative of actual results. Certain
shortcomings are inherent in such computations. Although certain assets and
liabilities may have similar maturity or periods of repricing they may react at
different times and in different degrees to changes in the market interest
rates. The interest rates on certain types of assets and liabilities may
fluctuate in advance of changes in market interest rates, while rates on other
types of
6
<PAGE>
assets and liabilities may lag behind changes in market interest rates. In the
event of a change in interest rates, prepayments and early withdrawal levels
could deviate significantly from those assumed in making the calculations
discussed above. Additionally, an increased credit risk may result as the
ability of many borrowers to service their debt may decrease in the event of an
interest rate increase.
The board of directors reviews our asset and liability policies. The
board of directors meets quarterly to review interest rate risk and trends, as
well as liquidity and capital ratios and requirements. Management administers
the policies and determinations of the board of directors with respect to our
asset and liability goals and strategies. We expect that our asset and liability
policies and strategies will continue as described so long as competitive and
regulatory conditions in the financial institution industry and market interest
rates continue as they have in recent years.
Financial Condition
Total consolidated assets increased $8.4 million, or 18.9% to $52.8
million at September 30, 1999, from $44.4 million at September 30, 1998. The
increase in total assets reflects a $4.7 million increase in loans receivable, a
$717,992 increase in investment securities, and a $144,541 increase in the cash
value of life insurance. Our increase in loans receivable is mainly due to
increased demand for loans in our market area.
Deposits increased $7.0 million or 1.5% to $42.0 million at September
30, 1999 from $35.0 million at September 30, 1998. The increase in fiscal 1999
was a result of competitive pricing to fund loan demand. Advances from the
Federal Home Loan Bank ("FHLB") of Atlanta increased $2.5 million to $2.5
million. Other liabilities increased by $225,000 primarily due to the purchase
of investment securities in September 1999, which did not close until October
1999 of $221,000. As a result of the acquisition of treasury stock, our equity
decreased $1.3 million.
7
<PAGE>
Average Balance Sheet
The following table sets forth certain information relating to the
Savings Bank's average balance sheet and reflects the average yield on assets
and average cost of liabilities for the periods indicated and the average yields
earned and rates paid. Such yields and costs are derived by dividing income or
expense by the average balance of assets or liabilities, respectively, for the
periods presented. Average balances are derived from month-end balances.
Management does not believe that the use of month-end balances instead of daily
average balances has caused any material differences in the information
presented.
<TABLE>
<CAPTION>
Year Ended September 30,
--------------------------------------------------------------------------------------
1999 1998
---------------------------------------- ------------------------------------------
Average Average Average Average
Balance Interest Yield/Cost Balance Interest Yield/Cost
------- -------- ---------- ------- -------- ----------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C>
Interest-earning assets:
Loans receivable(1)........................ $38,759 $3,505 9.04% $34,577 $3,156 9.13%
Mortgage-backed securities................. 701 40 5.71 524 30 5.73
Investment securities...................... 5,499 325 5.91 3,490 230 6.59
Other interest-earning assets.............. 488 31 6.35 1,563 99 6.33
------ ----- ----- -----
Total interest-earning assets............ 45,447 3,901 8.58 40,154 3,515 8.75
Non-interest-earning assets.................. 3,155 -- 1,767 --
------ ----- ------ -----
Total assets............................. $48,602 $3,901 $41,921 $3,515
====== ===== ====== =====
Interest-bearing liabilities:
NOW Accounts............................... $ 1,795 $ 62 3.45 $ 1,464 $ 52 3.55
Savings accounts........................... 1,847 77 4.17 2,240 87 3.88
Money market accounts...................... -- -- -- -- -- --
Certificates of deposit.................... 34,671 2,030 5.86 31,783 1,929 6.07
Other liabilities.......................... 634 35 5.52 615 36 5.85
------ ----- ---- ------ -----
Total interest-bearing liabilities....... 38,947 2,204 5.66 36,102 2,104 5.83
Non-interest bearing liabilities............. 1,336 -- 1,537 --
------ ----- ------ -----
Total liabilities........................ 40,283 $2,204 37,639 $2,104
===== =====
Equity....................................... 8,319 4,282
------ ------
Total liabilities and retained earnings.. $48,602 $41,921
====== ======
Net interest income.......................... $1,697 $1,411
Interest rate spread(2)...................... 2.92% 2.92%
Net yield on interest-earning assets(3)...... 3.73% 3.51%
Ratio of average interest-earning assets
to average interest-bearing liabilities..... 116.69% 111.22%
- ---------------------------------
</TABLE>
(1) Average balances include non-accrual loans.
(2) Interest-rate spread represents the difference between the average yield on
interest-earning assets and the average cost of interest-bearing
liabilities.
(3) Net yield on interest-earning assets represents net interest income as a
percentage of average interest-earning assets. (4) Annualized (where
appropriate) for purposes of comparability with year-end data.
8
<PAGE>
The table below sets forth certain information regarding changes in
interest income and interest expense of the Savings Bank for the periods
indicated. For each category of interest-earning assets and interest-bearing
liabilities, information is provided on changes attributable to (i) changes in
volume (changes in average volume multiplied by old rate); (ii) changes in rates
(changes in rate multiplied by old average volume); (iii) changes in rate-volume
(changes in rate multiplied by the change in average volume).
<TABLE>
<CAPTION>
Year Ended September 30,
-----------------------------------------------------------------------------------------------
1999 vs. 1998 1998 vs. 1997
---------------------------------------------- ----------------------------------------------
Increase (Decrease) Increase (Decrease)
Due to Due to
---------------------------------------------- ----------------------------------------------
Rate/ Rate/
Volume Rate Volume Net Volume Rate Volume Net
---------- ------- --------- --------- ------------- -------- ----------- ------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Interest income:
Loans receivable.............. $382 $(30) $ (3) $349 $231 $(15) $ (1) $215
Investment securities......... 142 (24) (13) 105 16 9 1 26
Other interest-earning assets. (68) 3 (3) (68) 78 -- (1) 77
--- --- --- --- --- --- -- ---
$456 $(51) $(19) $386 $325 $ (6) $ (1) $318
=== === === === === === == ===
Interest expense:
NOW accounts.................. $ 12 $ (1) $ (1) $ 10 $ (1) $ 4 $ -- $ 3
Savings accounts.............. (15) 6 (1) (10) 2 3 -- 5
Money market accounts......... --- -- -- -- -- --- -- ---
Certificate of deposit 175 (68) (6) 101 143 3 1 147
Other liabilities............. 1 (2) -- (1) (31) 4 (2) (29)
--- --- --- --- --- --- -- ---
Total interest-bearing
Liabilities............... $173 $(65) $ (8) $100 $113 $ 14 $ (1) $126
=== === === === === === == ===
Net change in interest income... $283 $ 14 $(11) $286 $212 $(20) $ -- $192
=== === === === === === === ===
</TABLE>
9
<PAGE>
Results of Operations for the Years Ended September 30, 1999 and 1998
Net Income. Net income increased $44,762 or 14.8% from $303,537 for
fiscal 1998 to $348,299 for fiscal 1999. The increase was primarily the result
of an increase in interest on loans receivable due to an increase in the average
balance of $4.2 million, an increase in other interest income on other interest
earning assets due to an increase in the average balance of $1.1 million and an
increase of $141,000 in non-interest income partially offset by an increase in
interest expense due to an increase in the average balance of interest-bearing
liabilities of $2.8 million and increase in non-interest expenses of $329,000.
Net Interest Income. Our net interest income increased $241,918 or
16.6% to $1,696,116 in fiscal 1999 compared to $1,454,198 in fiscal 1998. The
increase was due primarily to the growth of average interest-earning assets from
$40.2 million in fiscal 1998 to $45.4 million in fiscal 1999.
The increase in our average interest-earning assets of $5.2 million
reflects an increase of $4.2 million in average loans. Our increase in average
loans receivable is mainly due to increased demand for loans in our market area.
Our interest rate spread did not change and net interest margin
increased in fiscal 1999 compared to fiscal 1998. This was due to the decrease
in the yield on interest-earning assets from 8.75% in fiscal 1998 to 8.58% in
fiscal 1999 and the decrease in the interest cost of average interest-bearing
liabilities from 5.83% in fiscal 1998 to 5.66% in fiscal 1999.
The yield on our average interest-earning assets decreased in fiscal
1998 primarily due to a decrease in the yield on loans receivable. This decrease
in yield on our loans receivable primarily reflected a decrease in the average
interest rates and, to a lesser degree, the payoff of higher yielding loans.
The decrease in the cost of our average interest-bearing liabilities
was due primarily to an increase in the average balance of our certificates of
deposit from $29.4 million in fiscal 1997 to $31.8 million in fiscal 1998 offset
by a decrease in the average rates.
Provision for Loan Losses. Our provision for loan losses decreased
$4,100 from $24,000 for fiscal 1998 to $19,900 for fiscal 1999. The decrease in
the provision for fiscal 1999 was the result of management's review of our loan
portfolio, the potential losses in our loan portfolio and our history of
experiencing no losses on loans in recent years.
Noninterest Income. Our non-interest income increased approximately
$141,000 in fiscal 1999 as compared to fiscal 1998. This was attributable to a
gain on the sale of fixed assets and an increase in other income.
Noninterest Expense. Our non-interest expense increased by $329,154 or
32.89% from $1,004,035 for fiscal 1998 to $1,333,189 for fiscal 1999. The
increase was primarily attributable to increases in compensation expense,
depreciation expense on equipment additions, and other operating expenses.
10
<PAGE>
As a result of the conversion, our expenses have increased because of
the costs associated with our employee stock ownership plan, and the costs of
being a public company. We also offered checking accounts and the use of an
automated teller machine (an "ATM") to our customers during fiscal 1999. Our
preparation costs for these products and the costs of soliciting checking
account funds has also increased our expenses. We have not yet received
sufficient checking account funds or other income to offset these additional
costs.
Although no definite plans have been made, we are exploring whether to
purchase land and construct a branch. We would likely hire experts or spend
money before we commit to purchasing land or constructing a new branch. If we
decided not to build a new branch, the money that we had spent up to that time
would be a noninterest expense and would negatively affect our income.
We expect noninterest expense will increase as a result of the staffing and
equipping of the new bank building opened in April 1999. We expect a
reduction in net income (and possibly losses) compared to prior periods as
a result of these expenses until the new building results in higher overall
levels of loan and deposit activity to offset the additional expenses. We
believe that this expansion should enhance shareholder value and hope that
the decrease in earnings will not be as great following the end of year
2000. Our statement of beliefs concerning our expansion is a forward
looking statement. The Private Securities Litigation Reform Act of 1995
(the "Act") provides protection to us in making certain forward looking
statements that are accompanied by the factors that could cause actual
results to differ materially from the forward looking statement. As with
any expansion, if a new office or additional personnel do not ultimately
result in increased loan and deposit activity and increased net income,
these expenses would continue to have an adverse affect on net income past
the end of year 2000. Our noninterest expense would further increase if we
build the new branch discussed in the prior paragraph.
Income Tax Expense.Our income tax expense increased $12,970 from $177,815
in fiscal 1998 to $190,785 in fiscal 1999 due to the increase in income before
taxes.
Return on Equity and Assets:
YEAR ENDED SEPTEMBER 30,
-------------------------
1999 1998
--------- ---------
Return on Assets (Net income divided
by average assets) .72% .70%
Return on Equity (Net income divided by
average equity) 4.19% 5.08%
Dividend Payout Ratio (Dividends paid
divided by net income) 32.27% --
Equity to Assets Ratio (Equity divided by total
assets) 14.52% 20.21%
11
<PAGE>
Liquidity and Capital Resources
We are required to maintain minimum levels of liquid assets as defined
by OTS regulations. This requirement, which varies from time to time depending
upon economic conditions and deposit flows, is based upon a percentage of our
deposits and short-term borrowings. The required ratio is 4.0% and our liquidity
ratio average was 15% and 14% at September 30, 1999 and 1998, respectively.
Our primary sources of funds are deposits, repayment of loans and
mortgage-backed securities, maturities of investments and interest-bearing
deposits, funds provided from operations and advances from the FHLB of Atlanta.
While scheduled repayments of loans and mortgage-backed securities and
maturities of investment securities are predicable sources of funds, deposit
flows, and loan prepayments are greatly influenced by the general level of
interest rates, economic conditions and competition. We use our liquidity
resources principally to fund existing and future loan commitments, to fund
maturing certificates of deposit and demand deposit withdrawals, to invest in
other interest-earning assets, to maintain liquidity, and to meet operating
expenses. We expect that these liquidity needs will continue to exist in future
years.
Net cash provided by our operating activities (the cash effects of
transactions that enter into our determination of net income -- e.g., non-cash
items, amortization and depreciation, provision for loan losses) for the year
ended September 30, 1999 was $275,429 as compared to $402,899 for the year ended
September 30, 1998.
Net cash used in our investing activities (i.e., cash receipts,
primarily from our investment securities and mortgage-backed securities
portfolios and our loan portfolio) for the year ended September 30, 1999 totaled
$6.7 million, an increase of $1.2 million from September 30, 1998. The increase
was primarily attributable to our use of $3.8 million in cash to fund the
purchase of available-for-sale investment securities and the use of $5.0 million
in cash to fund the net increase in loan originations, partially offset by the
proceeds from the maturity and sale of investment securities and sale of fixed
assets.
Net cash provided by our financing activities (i.e., cash receipts
primarily from net increases in deposits and net FHLB advances) for fiscal 1999
totaled $8.0 million compared to $4.8 million for fiscal 1998. This is a result
of a net increase in deposits of $7.0 million in fiscal 1999 as compared to an
increase of $.5 million in fiscal 1998 and proceeds of $2.5 million in FHLB
advances.
We are taking necessary steps to be certain our data processing
equipment and software will properly function on January 1, 2000, the date that
computer problems are expected to develop worldwide on computer systems that
incorrectly identify the year 2000 and incorrectly compute interest, payment or
delinquency. Accurate data processing is essential to our operations.
We have examined our computers to determine whether they will properly
function on January 1, 2000 and do not believe that we will experience material
costs to upgrade our computers. We have ordered and installed an upgrade to our
computer system that is intended to solve the Year 2000 Computer software issue.
We installed this upgrade during the first calendar quarter of 1998. Testing of
this software is complete. We believe that all reprogramming efforts have been
completed and tested.
12
<PAGE>
If there is a malfunction of the software, we plan to implement "manual
processing" until our software becomes Y2K compliant. We have ordered packages
of all forms required to handle loans, deposits and operations. Detailed plans
for the manual operation of Quitman Federal Savings Bank are in progress.
Non-information technology such as; heating, air conditioning and door
locks have been tested. These areas will not be impacted.
We have made contact with our Commercial Borrowers regarding the Year
2000 issue, advising them of the potential problem. As the majority of our loan
portfolio is 1 to 4 family dwellings, we do not feel our commercial borrowers
will be an issue.
During the fiscal year ending September 30, 2000, approximately $27.4
million of certificates of deposit (approximately 74% of our total deposits)
will mature. We expect that most of these certificates of deposit will be
renewed. Even if many of these certificates of deposit are not renewed, we
believe that we have sufficient liquidity and other sources of funds to
successfully manage the outflow of funds.
A new bank building was constructed during the year ended September 30,
1999, the cost of the new facility and land was $1,059,931. We are exploring
whether to purchase land and construct a branch. Although no definite plans have
been made, if a new branch is built, the land and construction costs could total
approximately $600,000. We have sufficient liquid assets to pay for these costs.
Pursuant to FASB No. 130 the Bank is required to record changes in the
value of its investment portfolio as regards unrealized gains or losses that may
result from movements in interest rates. As of September 30, 1999, the Savings
Bank shows unrealized losses, net of tax effect, totaling $78,000 due to the
recent upward surge in interest rates as the national money markets reacted to
actions by the Federal Open Market Committee. Management does not anticipate the
realization of the above loss. The unrealized loss does however negatively
impact the Bank's capital. The unrealized losses combined with net operating
income of $348,000 yields a net increase in the Bank's capital of $270,000, net
of applicable taxes, and a corresponding increase in the book value of common
stock from $13.56 on September 30, 1998 to $14.37 as of September 30, 1999. The
Bank's capital continues to exceed regulatory requirements and continues to be
adequate to support future asset growth.
13
<PAGE>
INDEPENDENT AUDITOR'S REPORT
----------------------------
To the Board of Directors and Stockholders
Quitman Bancorp, Inc. and Subsidiary
Quitman, Georgia
We have audited the accompanying consolidated statements of financial condition
of Quitman Bancorp, Inc. and Subsidiary as of September 30, 1999 and 1998, and
the related consolidated statements of income, comprehensive income,
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 consolidated financial
statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the consolidated financial position of Quitman
Bancorp, Inc. and Subsidiary as of September 30, 1999 and 1998, and the
consolidated results of their operations and their consolidated cash flows for
the years then ended in conformity with generally accepted accounting
principles.
/s/Stewart, Fowler & Stalvey, P.C.
- -----------------------------------
Valdosta, Georgia
October 15, 1999
14
<PAGE>
QUITMAN BANCORP, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
----------------------------------------------
ASSETS
------
<TABLE>
<CAPTION>
SEPTEMBER 30,
----------------------------
1999 1998
------------ ------------
<S> <C> <C>
Cash and Cash Equivalents, Notes 1 and 2:
Cash and amounts due from depository
institutions $ 1,706,799 168,404
Interest-bearing deposits in other banks 261,896 203,462
------------ ------------
Total Cash and Cash Equivalents 1,968,695 371,866
Investment securities:
Available-for-sale (fair value $6,558,701 in 1999
and $5,640,709 in 1998), Notes 1 and 3 6,558,701 5,640,709
Held-to-maturity (fair value $0 in 1999 and
$199,936 in 1998), Notes 1 and 3 0 200,000
Loans receivable, Notes 1 and 4 41,120,768 36,397,067
Office properties and equipment, at cost, net of
accumulated depreciation, Notes 1 and 5 1,601,398 681,453
Real estate acquired in settlement of loans, Note 1 139,045 0
Accrued interest receivable, Note 6 514,290 447,854
Investment required by law-stock in Federal
Home Loan Bank, at cost, Note 13 286,700 239,800
Cash value of life insurance, Note 11 482,354 337,813
Other assets, Notes 1 and 9 170,198 45,182
------------ ------------
Total Assets $ 52,842,149 44,361,744
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
------------------------------------
Liabilities:
Deposits, Note 7 $ 41,993,095 34,954,584
Advances from Federal Home Loan Bank, Note 13 2,500,000 0
Accrued interest payable 303,512 275,028
Income taxes payable, Note 9 1,312 24,660
Other liabilities 369,230 143,719
------------ ------------
Total Liabilities 45,167,149 35,397,991
------------ ------------
Stockholders' Equity:
Common stock, $.10 par value, 4,000,000 shares authorized, 661,250 shares
issued and 533,960 shares outstanding at September 30, 1999 (661,250
September 30, 1998) 66,125 66,125
Preferred stock, no par value, 1,000,000 shares
authorized, no shares issued or outstanding 0 0
Additional paid in capital 6,135,412 6,135,412
Retained Earnings, Note 8 3,491,984 3,256,097
Accumulated other comprehensive income (loss) (77,699) 35,119
Treasury stock, at cost (127,290 shares) (1,438,272) 0
Receivable from ESOP, Note 11 (502,550) (529,000)
------------ ------------
Total Stockholders' Equity 7,675,000 8,963,753
------------ ------------
Total Liabilities and Stockholders' Equity $ 52,842,149 44,361,744
============ ============
</TABLE>
Note:The accompanying notes to financial statements are an integral part of
this statement.
15
<PAGE>
QUITMAN BANCORP, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF INCOME
---------------------------------
YEAR ENDED SEPTEMBER 30,
------------------------
1999 1998
---------- ----------
Interest Income:
Loans receivable:
First mortgage loans $3,290,099 3,029,927
Consumer and other loans 214,504 148,753
Interest on FHLMC Pool 171 259
Investment securities 364,730 280,948
Interest-bearing deposits 30,374 98,115
Federal funds sold 481 524
---------- ----------
Total Interest Income 3,900,359 3,558,526
---------- ----------
Interest Expense:
Deposits, Note 7 2,169,361 2,067,707
Interest on Federal Home Loan
Bank advances 34,882 36,621
---------- ----------
Total Interest Expense 2,204,243 2,104,328
---------- ----------
Net Interest Income 1,696,116 1,454,198
Provision for loan losses, Notes 1 and 4 19,900 24,000
---------- ----------
Net Interest Income After Provision for Losses 1,676,216 1,430,198
---------- ----------
Non-Interest Income:
Gain (loss) on sale of securities 2,594 18
Gain on sale of fixed assets 84,019 0
Gain (loss) on sale of other real estate 6,402 7,102
Late charges on loans 35,349 32,811
Insurance commissions 1,192 1,584
Other income 66,501 13,674
---------- ----------
Total Non-Interest Income 196,057 55,189
---------- ----------
Non-Interest Expense:
Compensation 464,815 317,778
Other personnel expenses, Note 11 218,218 231,509
Occupancy expenses of premises 33,111 22,048
Furniture and equipment expenses 162,272 121,847
Advertising, Note 1 42,379 41,529
Federal deposit insurance 21,990 22,419
Other operating expenses 390,404 246,905
---------- ----------
Total Non-Interest Expense 1,333,189 1,004,035
---------- ----------
Income Before Income Taxes 539,084 481,352
Provision for Income Taxes, Note 9 190,785 177,815
---------- ----------
Net Income $ 348,299 303,537
========== ==========
Earnings Per Share, Note 1:
Basic $ .65 $ .50
========== ==========
Diluted $ .65 $ .50
========== ==========
Note:The accompanying notes to financial statements are an integral part of
this statement.
16
<PAGE>
QUITMAN BANCORP, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
YEAR ENDED SEPTEMBER 30,
---------------------------
1999 1998
--------- ----------
Net Income $ 348,299 303,537
--------- ----------
Other comprehensive income (loss), net of tax:
Unrealized gains (losses) on securities:
Unrealized holding gains (losses) arising
during period (111,106) 29,144
Less:reclassification adjustment for(gains)
losses included in net income (1,712) (18)
--------- ---------
Other comprehensive income (loss) (112,818) 29,126
--------- ---------
Comprehensive Income $ 235,481 332,663
========= =========
Note:The accompanying notes to financial statements are an integral part of
this stateme
17
<PAGE>
QUITMAN BANCORP, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
-----------------------------------------------
<TABLE>
<CAPTION>
ACCUMULATIVE
OTHER
COMMON STOCK ADDITIONAL RECEIVABLE COMPREHENSIVE
-------------------- PAID IN RETAINED FROM INCOME TREASURY
SHARES AMOUNT CAPITAL EARNINGS ESOP (LOSS) STOCK TOTAL
-------- -------- -------- --------- ----------- ---------- -------- -------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Balances, September
30, 1997 0 $ 0 0 2,952,560 0 5,993 0 2,958,553
Net Income 0 0 0 303,537 0 0 0 303,537
Common stock issued 661,250 66,125 6,135,412 0 0 0 0 6,201,537
Change in loan
receivable from
stock ownership
plan 0 0 0 0 (529,000) 0 0 (529,000)
Change in other
comprehensive
income (loss) 0 0 0 0 0 29,126 0 29,126
----------- ----------- ----------- ----------- ----------- ----------- ----------- ----------
Balances,
September 30,
1998 661,250 66,125 6,135,412 3,256,097 (529,000) 35,119 0 8,963,753
Acquisition of
shares of treasury
stock (127,290) 0 0 0 0 0 (1,438,272) (1,438,272)
Net income 0 0 0 348,299 0 0 0 348,299
Dividends paid 0 0 0 (112,412) 0 0 0 (112,412)
Change in loan
receivable from
employee stock
ownership plan 0 0 0 0 26,450 0 0 26,450
Change in other
comprehensive
income (loss) 0 0 0 0 0 (112,818) 0 (112,818)
----------- ----------- ----------- ----------- ----------- ----------- ----------- ----------
Balances,
September 30,
1999 533,960 $ 66,125 6,135,412 3,491,984 (502,550) (77,699) (1,438,272) 7,675,000
=========== =========== =========== =========== =========== =========== =========== ==========
</TABLE>
Note:The accompanying notes to financial statements are an integral part of
this stateme
18
<PAGE>
QUITMAN BANCORP, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
-------------------------------------
<TABLE>
<CAPTION>
YEAR ENDED SEPTEMBER 30,
-------------------------------
1999 1998
------------ ------------
<S> <C> <C>
Cash Flows From Operating Activities:
- -------------------------------------
Net income $ 348,299 303,537
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation 110,046 79,081
Provision for loan losses 19,900 24,000
(Increase) Decrease in deferred income tax benefit (18,366) 4,532
Amortization (Accretion) of securities and loans 15,715 7,338
Gain on sale of other real estate (6,402) (7,102)
Gain on sale of securities (2,594) (18)
Gain on sale of fixed assets (84,019) 0
Change in Assets and Liabilities:
(Increase) Decrease in accrued interest receivable (65,367) (66,636)
Increase (Decrease) in accrued interest payable 28,484 2,682
Increase (Decrease) in other liabilities 4,442 68,023
Increase (Decrease) in income taxes payable (23,348) (32,196)
(Increase) Decrease in other assets (48,531) 19,640
---------- ----------
Net cash provided by operating activities 278,259 402,881
---------- ----------
Cash Flows From Investing Activities:
- -------------------------------------
Capital expenditures (1,220,972) (438,007)
Purchase of available-for-sale securities (3,845,382) (3,634,680)
Proceeds from sale of foreclosed property 139,380 296,710
Proceeds from maturity of held-to-maturity securities 200,000 600,000
Net (increase) decrease in loans (5,015,624) (3,321,041)
Purchase of stock in Federal Home Loan Bank (46,900) (12,100)
Principal collected on mortgage-backed securities 163,332 36,666
Proceeds from sale of available-for-sale securities 500,000 498,018
Proceeds from sale of fixed assets 275,000 0
Proceeds from maturity of available-for-sale securities 2,300,000 550,000
Increase in cash value of life insurance (144,541) (119,707)
---------- ----------
Net cash provided (used) by investing activities (6,695,707) (5,544,159)
---------- ----------
Cash Flows From Financing Activities:
- -------------------------------------
Net increase (decrease) in deposits 7,038,511 483,781
Proceeds from Federal Home Loan Bank advances 2,500,000 0
Payments on Federal Home Loan Bank advances 0 (1,300,000)
Issuance of 661,250 shares of common stock 0 6,201,537
(Increase) Decrease in loan to employee stock ownership plan 26,450 (529,000)
Purchase of treasury stock (1,438,272) 0
Dividends paid (112,412) 0
---------- ----------
Net cash provided (used) by financing activities 8,014,277 4,856,318
---------- ----------
Net Increase (Decrease) in cash and cash equivalents 1,596,829 (284,942)
Cash and Cash Equivalents at Beginning of Period 371,866 656,808
---------- ----------
Cash and Cash Equivalents at End of Period $1,968,695 371,866
========== ==========
Supplemental Disclosures of Cash Flow Information
- -------------------------------------------------
Cash paid during the year for:
Income taxes $ 221,974 205,479
========== ==========
Interest $2,175,759 2,101,646
========== ==========
Schedule of Non-Cash Investing and Financing Activities
- -------------------------------------------------------
Total increase (decrease) in unrealized gains
on securities available-for-sale $ (170,937) 47,218
========== ==========
Loans transferred to foreclosed real estate $ 272,023 225,693
========== ==========
Securities purchased and closed in subsequent year $ 221,069 0
========== ==========
</TABLE>
Note:The accompanying notes to financial statements are an integral part of
this stateme
19
<PAGE>
QUITMAN BANCORP, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 1 - Summary of Significant Accounting Policies
- ---------------------------------------------------
Nature of Operations: Quitman Bancorp, Inc. (the "Company") is a Georgia -
chartered corporation organized at the direction of Quitman Federal Savings Bank
(the "Bank") (formerly Quitman Federal Savings & Loan Association) in connection
with the Bank's conversion from a mutual to stock form of organization (the
"Conversion"). On April 2, 1998, the Bank completed the conversion and became a
wholly owned subsidiary of the Company.
The Company is engaged in the activity of providing traditional banking services
through its banking subsidiary, Quitman Federal Savings Bank. The Bank is a
federally chartered stock savings bank that commenced business in 1936. Business
activities are predominately with customers in the Brooks and Lowndes County,
Georgia area.
Consolidated financial statements: The accompanying consolidated financial
statements include the accounts of Quitman Bancorp, Inc. and its wholly owned
subsidiary, Quitman Federal Savings Bank. All inter-company transactions and
accounts have been eliminated in consolidation.
Investment Securities: Investment securities for which the management has the
ability and intent to hold to maturity are classified as held-to-maturity and
carried at amortized cost using methods approximating the interest method. Other
securities are classified as available-for-sale and are carried at fair value.
Unrealized gains and losses on securities available-for-sale are recognized as
direct increases or decreases in stockholders' equity. Cost of any securities
sold is recognized by the specific identification method.
Loans Receivable: Loans receivable are stated at unpaid principal balances, less
the allowance for loan losses and net deferred loan-origination fees and
discounts. Uncollectible interest on loans that are contractually past due is
charged off or an allowance is established based on management's periodic
evaluation. The allowance is established by a charge to interest income equal to
all interest previously accrued and income is subsequently recognized only to
the extent that cash payments are received until, in management's judgement, the
borrower's ability to make periodic interest and principal payments is back to
normal, in which case the loan is returned to accrual status.
Office properties and equipment and related depreciation and amortization:
Office properties and equipment, consisting of land, buildings, furniture and
fixtures and automobile are carried at cost, less accumulated depreciation. The
building, furniture, fixtures and equipment are being depreciated on the
straight-line method.
Loan origination fees: Commencing with loans originated during the year ended
September 30, 1988, mortgage loan origination fees and related direct loan
origination costs are deferred and the net amount so deferred is amortized over
the life of the loan by a method that approximates the level yield method and
reflected as an adjustment of interest income. Fees for originating consumer
loans which do not materially exceed the direct loan origination cost, are
recorded as income when received and the direct loan origination costs are
expensed as incurred.
Real estate and other property acquired in settlement of loans: At the time of
foreclosure, real estate and other property acquired in settlement of loans is
recorded at fair value, less estimated costs to sell. Any write-downs based on
the asset's fair value at date of acquisition are charged to the allowance for
loan losses. Subsequent to acquisition, such assets are carried at the lower of
cost or market value less estimated costs to sell. Cost incurred in maintaining
such assets and any subsequent write-downs to reflect declines in the fair value
of the property are included in income (loss) on foreclosed assets.
20
<PAGE>
Note - Summary of Significant Accounting Policies (Continued)
- -------------------------------------------------------------
Allowance for losses: An allowance for loan losses is charged to operations
based upon management's evaluation of the potential losses in its loan
portfolio. This evaluation includes a review of all loans on which full
collectibility may not be reasonably assured, considers the estimated value of
the underlying collateral and such other factors as, in management's judgement,
deserve recognition under existing economic conditions.
Income taxes: Income taxes have been computed under Statement of Financial
Accounting Standards No. 109. Implementation of Statement No. 109 with regard to
income taxes did not have a material effect on the tax provisions of the
Company. Deferral of income taxes results primarily from differences in the
provision for loan losses, depreciation and unrealized gains and losses on
available-for-sale securities for tax purposes and financial reporting purposes.
The deferred tax assets and liabilities represent the future tax return
consequences of those differences, which will either be taxable or deductible
when the assets and liabilities are recovered or settled. The financial
statements reflect a net deferred asset of $103,391 and $26,906 at September 30,
1999 and 1998, respectively.
Cash and cash equivalents: For purposes of the statement of cash flows, the
Company considers all highly liquid debt instruments purchased with a maturity
of three months or less to be cash equivalents and includes cash on hand and
amounts due from banks (excluding certificates of deposit).
Off balance sheet financial 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. Such financial
instruments are recorded in the financial statements when they become payable.
Use of estimates: The preparation of financial statements in conformity with
generally accepted accounting principles requires management to make estimates
and assumptions that effect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
Certain significant estimates: Material estimates that are particularly
susceptible to significant change relate to the determination of the allowance
for losses on loans and the valuation of real estate acquired in connection with
foreclosures or in satisfaction of loans. In connection with the determination
of allowances for losses on loans and the valuation of foreclosed real estate,
management obtains independent appraisals for significant properties.
While management uses available information to recognize losses on loans and
foreclosed real estate, future additions to the allowances may be necessary
based on changes in local economic conditions. In addition, regulatory agencies,
as an integral part of their examination process, periodically review the Bank's
allowances for losses on loans and foreclosed real estate. Such agencies may
require the Bank to recognize additions to the allowances based on their
judgements about information available to them at the time of their examination.
It is at least reasonably possible that the allowances for losses on loans and
foreclosed real estate may change in the near term.
Advertising costs: The Bank expenses advertising costs as they are incurred.
Advertising costs charged to expenses were $42,379 and $41,529 for the years
ended September 30, 1999 and 1998, respectively.
21
<PAGE>
Note 1 - Summary of Significant Accounting Policies (Continued)
- ---------------------------------------------------------------
Fair values of financial instruments: Statement of Financial Accounting
Standards No. 107, Disclosure about Fair Value of Financial Instruments,
requires disclosure of fair value information about financial instruments,
whether or not recognized in the statement of financial condition. 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 instruments.
Statement No. 107 excludes certain financial instruments and all nonfinancial
instruments from its disclosure requirements. Accordingly, the aggregate fair
value amounts presented do not represent the underlying value of the Company.
The following methods and assumptions were used by the Company in estimating its
fair value disclosures for financial instruments:
Cash and cash equivalents: The carrying amounts reported in the statement of
financial condition for cash and cash equivalents approximate those assets'
fair values.
Time deposits: Fair values for time deposits are estimated using a discounted
cash flow analysis that applies interest rates currently being offered on
certificates to a schedule of aggregated contractual maturities on such time
deposits.
Investment 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: For variable-rate loans that reprice frequently and with no
significant change in credit risk, fair values are based on carrying amounts.
The fair values for other loans (for example, fixed rate commercial real
estate, mortgage loans and commercial and industrial loans) are estimated
using discounted cash flow analysis, based on interest rates currently being
offered for loans with similar terms to borrowers of similar credit quality.
Loan fair value estimates include judgements regarding future expected loss
experience and risk characteristics. The carrying amount of accrued interest
receivable approximates its fair value.
Deposits: The fair values disclosed for demand deposits (for example,
checking accounts, interest-bearing checking accounts and savings accounts)
are, by definition, equal to the amount payable on demand at the reporting
date (that is, their carrying amounts). The fair values for 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 contractual maturities on such time deposits.
The carrying amount of accrued interest payable approximates fair value.
Advances from Federal Home Loan Bank: The carrying amounts of advances from
the Federal Home Loan Bank approximate their fair value.
Other liabilities: Commitments to extend credit were evaluated and fair value
was estimated using the terms for similar agreements, taking into account the
remaining terms of the agreements and the present creditworthiness of the
counterparties. For fixed-rate loan commitments, fair value also considers
the difference between current levels of interest rates and the committed
rates.
22
<PAGE>
Note 1 - Summary of Significant Accounting Policies (Continued)
- ---------------------------------------------------------------
Earnings per share: The following table sets forth the reconciliation of the
numerators and denominator of the basic and diluted earnings per share (EPS)
computations:
<TABLE>
<CAPTION>
YEAR ENDED SEPTEMBER 30,
---------------------------------
1999 1998
----------- -----------
<S> <C> <C>
(a) Net income available to shareholders $ 348,299 303,537
----------- -----------
Denominator:
Weighted-average shares outstanding 584,111 661,250
Less: ESOP weighted-average shares
Unallocated 50,916 52,900
----------- -----------
(b) Basic EPS weighted-average shares outstanding 533,195 608,350
Effect of dilutive securities:
Stock options 1,030 0
----------- -----------
(c) Diluted EPS weighted-average shares outstanding 534,225 608,350
=========== ===========
Basic earnings per share (a/b) $ .65 .50
=========== ===========
Diluted earnings per share (a/c) $ .65 .50
=========== ===========
</TABLE>
Segment reporting: The Company is engaged in the activity of providing
traditional banking services through its commercial banking subsidiary
previously discussed under "nature of operations". The Company does not have
reportable segments, foreign operations, assets located in foreign countries
or major customers, as defined in Statement of Financial Accounting Standards
No.
131 (Disclosures About Segments of an Enterprise and Related Information).
New accounting standards: In June 1996, the FASB issued SFAS No. 125
(Accounting For Transfers And Servicing Of Financial Assets And
Extinguishments Of Liabilities). This statement provides accounting and
reporting standards for transfers and servicing of financial assets and
extinguishments of liabilities. Those standards are based on consistent
application of a financial-components approach that focuses on control. Under
that approach, after a transfer of financial assets, an entity recognizes the
financial and servicing assets it controls and the liabilities it has
incurred, derecognizes financial assets when control has been surrendered and
derecognizes liabilities when extinguished. This statement provides
consistent standards for distinguishing transfers of financial assets that
are sales from transfers that are secured borrowings. The statement applies
to transfers and servicing of financial assets and extinguishments of
liabilities occurring after December 31, 1996. However, as a result of an
amendment to SFAS No. 125 by the FASB in December 1996, certain provisions of
SFAS No. 125 are deferred for an additional year. Adoption of the new
accounting standard did not have a material impact on the Company's financial
statements.
23
<PAGE>
Note 1 - Summary of Significant Accounting Policies (Continued)
- ---------------------------------------------------------------
In February 1997, the FASB issued SFAS No. 128 (Earnings Per Share). This
statement establishes standards for computing and presenting earnings per
share and applies to entities with publicly held common stock or potential
common stock. This statement simplifies the standards for computing earnings
per share previously found in APB Opinion No. 15 (Earnings Per Share) and
makes them comparable to international earnings per share standards. It
replaces the presentation of primary earnings per share with a presentation
of basic earnings per share. It also requires dual presentation of basic and
diluted earnings per share on the face of the income statement for all
entities with complex capital structures and requires a reconciliation of
the numerator and denominator of the basic earnings per share computation to
the numerator and denominator of the diluted earnings per share computation.
Basic earnings per share excludes dilution and is computed by dividing
income available to common stockholders by the weighted-average number of
common shares outstanding for the period. Diluted earnings per share
reflects the potential dilution that could occur if securities or other
contracts to issue common stock were exercised or converted into common
stock or resulted in the issuance of common stock that then shared in the
earnings of the entity. Diluted earnings per share is computed similarly to
fully diluted earnings per share pursuant to Opinion 15. This statement is
effective for financial statements issued for periods ending after December
15, 1997. The adoption of this statement did not have a material impact on
the company's financial statements.
In February 1997, the FASB issued SFAS No. 129 (Disclosure Of Information
About Capital Structure). This statement establishes standards for
disclosing information about an entity's capital structure. It applies to
all entities. This statement continues the previous requirements to disclose
certain information about an entity's capital structure found in APB
Opinions No. 10 (Omnibus Opinion - 1996), No. 15 (Earnings Per Share) and
FASB No. 47 (Disclosure Of Long-Term Obligations), for entities that were
subject to the requirements of those standards. This statement is effective
for financial statements issued for periods ending after December 15, 1997.
The adoption of this statement did not have a material impact on the
Company's financial statements.
In June 1997, the FASB issued SFAS No. 130 (Reporting Comprehensive Income).
This statement establishes standards for reporting and display of
comprehensive income and its components (revenues, expenses, gains and
losses) in a full set of general-purpose financial statements. This
statement requires that all items that are required to be recognized under
accounting standards as components of comprehensive income be reported in a
financial statement that is displayed with the same prominence as other
financial statements. This statement does not require a specific format for
that financial statement but requires that an enterprise display an amount
representing total comprehensive income for the period in that financial
statement. This statement requires that an enterprise (a) classify items of
other comprehensive income by their nature in a financial statement and (b)
display the accumulated balance of other comprehensive income separately
from retained earnings and additional paid-in capital in the equity section
of a statement of financial position. This statement is effective for fiscal
years beginning after December 15, 1997. The adoption of this statement did
not have a material impact on the Company's financial statements.
24
<PAGE>
Note 1 - Summary of Significant Accounting Policies (Continued)
- ---------------------------------------------------------------
In June 1997, the FASB issued SFAS No. 131 (Disclosures About Segments Of An
Enterprise And Related Information). This statement establishes standards
for the way that public business enterprises report information about
operating segments in annual financial statements and requires that those
enterprises report selected information about operating segments in interim
financial reports issued to shareholders. It also establishes standards for
related disclosures about products and services, geographic areas and major
customers. This statement requires that a public business enterprise report
financial and descriptive information about its reportable operating
segments. Operating segments are components of an enterprise about which
separate financial information is available that is evaluated regularly by
the chief operating decision maker in deciding how to allocate resources and
in assessing performance. Generally, financial information is required to be
reported on the basis that it is used internally for evaluating segment
performance and deciding how to allocate resources to segments. The
statement requires that a public business enterprise report a measure of
segment profit or loss, certain specific revenue and expense items and
segment assets. It requires reconciliations of total segment revenues, total
segment profit or loss, total segment assets and other amounts disclosed for
segments to corresponding amounts in the enterprise's general-purpose
financial statements. It requires that all public business enterprises
report information about the revenues derived from the enterprise's products
or services (or groups of similar products and services), about the
Countries in which the enterprise earns revenues and holds assets and about
major customers regardless of whether that information is used in making
operating decisions. The statement also requires that a public business
enterprise report descriptive information about the way that the operating
segments were determined, the products and services provided by the
operating segments, differences between the measurements used in reporting
segment information and those used in the enterprise's general-purpose
financial statements and changes in the measurement of segment amounts from
period to period. This statement is effective for financial statements for
periods beginning after December 15, 1997. The adoption of this statement
did not have a material impact on the Company's financial statements.
In February 1998, the FASB issued SFAS No. 132 (Employers' Disclosures About
Pensions and Other Postretirement Benefits). This statement revises
employers' disclosures about pension and other postretirement benefit plans.
It does not change the measurement or recognition of those plans. It
standardizes the disclosure requirements for pensions and other
postretirement benefits to the extent practical, requires additional
information on changes in the benefit obligations and fair values of plan
assets that will facilitate financial analysis and eliminate certain
disclosures previously required by FASB Statements No. 87, 88 and 106. The
statement suggests combined formats for presentation of pension and other
postretirement benefit disclosures. This statement is effective for fiscal
years beginning after December 15, 1997. The adoption of this statement did
not have a material impact on the Company's financial statements.
25
<PAGE>
Note 1 - Summary of Significant Accounting Policies (Continued)
- ---------------------------------------------------------------
In June 1998, the FASB issued SFAS No. 133 (Accounting for Derivative
Instruments and Hedging Activities). This statement establishes accounting
and reporting standards for derivative instruments, including certain
derivative instruments embedded in other contracts, (collectively referred
to as derivatives) and for hedging activities. It requires that an entity
recognize all derivatives as either assets or liabilities in the statement
of financial position and measure those instruments at fair value. If
certain conditions are met, a derivative may be specifically designated as
(a) a hedge of the exposure to changes in the fair value of a recognized
asset or liability or an unrecognized firm commitment, (b) a hedge of the
exposure to variable cash flows of a forecasted transaction, or (c) a hedge
of the foreign currency exposure of a net investment in a foreign operation,
an unrecognized firm commitment, an available-for-sale security or a
foreign-currency-denominated forecasted transaction. Under this statement,
an entity that elects to apply hedge accounting is required to establish at
the inception of the hedge the method it will use for assessing the
effectiveness of the hedging derivative and the measurement approach for
determining the ineffective aspect of the hedge. Those methods must be
consistent with the entity's approach to managing risk. This statement is
effective for all fiscal quarters of fiscal years beginning after June 15,
1999. In June 1999, the FASB issued SFAS No. 137 (Accounting for Derivative
Instruments and Hedging Activities - Deferral of the Effective Date of SFAS
No. 133). This statement deferred the effective date to all fiscal quarters
of fiscal years beginning after June 15, 2000. Initial application of this
statement should be as of the beginning of an entity's fiscal quarter; on
that date, hedging relationships must be designated anew and documented
pursuant to the provisions of this statement. The adoption of this statement
is not expected to have a material impact on the Company's financial
statements.
In October 1998, the FASB issued SFAS No. 134 (Accounting for
Mortgage-Backed Securities Retained after the Securitization of Mortgage
Loans Held For Sale by a Mortgage Banking Enterprise). This statement amends
Statement No. 65 (Accounting for Certain Mortgage Banking Activities) to
require that after the securitization of a mortgage loan held for sale, an
entity engaged in mortgage banking activities classify the resulting
mortgage-backed securities or other retained interests based on its ability
and intent to sale or hold those investments. This statement conforms the
subsequent accounting for securities retained after the securitization of
mortgage loans by a mortgage banking enterprise with the subsequent
accounting for securities retained after the securitization of other types
of assets by a non-mortgage banking enterprise. This statement shall be
effective for the first fiscal quarter beginning after December 15, 1998.
The adoption of this statement is not expected to have a material impact on
the Company's financial statements.
26
<PAGE>
Note 2 - Cash
- -------------
As of September 30, 1999, the Bank had cash on deposit with certain commercial
banks in excess of federal depository insurance as follows:
<TABLE>
<CAPTION>
FEDERAL
BOOK BANK DEPOSITORY
BALANCE BALANCE INSURANCE
---------- ---------- ---------
<S> <C> <C> <C>
Total $1,018,659 625,459 323,755
========== ========== =========
</TABLE>
As of September 30, 1998, the Association had cash on deposit with certain
commercial banks in excess of federal depository insurance as follows:
<TABLE>
<CAPTION>
FEDERAL
BOOK BANK DEPOSITORY
BALANCE BALANCE INSURANCE
---------- ---------- ---------
<S> <C> <C> <C>
Total $ 254,580 389,271 214,982
========== ========== =========
</TABLE>
Note 3 - Investment Securities
- ------------------------------
Investment securities are carried in the accompanying balance sheets as follows:
Securities available-for-sale consist of the following:
- -------------------------------------------------------
<TABLE>
<CAPTION>
As of September 30, 1999:
GROSS GROSS
AMORTIZED UNREALIZED UNREALIZED MARKET
COST GAINS LOSSES VALUE
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
U.S. Treasury Obligations $ 298,413 1,665 0 300,078
Obligations of other U.S.
Government agencies 5,091,933 0 112,126 4,979,807
Mortgage-backed securities 896,081 7,382 12,680 890,783
State, County and Municipal
securities 390,000 0 1,967 388,033
---------- ---------- ---------- ----------
$6,676,427 9,047 126,773 6,558,701
========== ========== ========== ==========
</TABLE>
As of September 30, 1998:
<TABLE>
<CAPTION>
GROSS GROSS
AMORTIZED UNREALIZED UNREALIZED MARKET
COST GAINS LOSSES VALUE
--------- ---------- --------- ----------
<S> <C> <C> <C> <C>
U.S. Treasury Obligations $ 697,263 16,284 0 713,547
Obligations of other U.S.
Government agencies 4,383,021 25,728 145 4,408,604
Mortgage-backed securities 507,214 11,344 0 518,558
---------- ---------- --------- ----------
$5,587,498 53,356 145 5,640,709
========== ========== ========= ==========
</TABLE>
Securities held-to-maturity consist of the following:
- -----------------------------------------------------
As of September 30, 1998:
<TABLE>
<CAPTION>
GROSS GROSS
AMORTIZED UNREALIZED UNREALIZED MARKET
COST GAINS LOSSES VALUE
Obligations of other U.S. --------- ---------- --------- ----------
<S> <C> <C> <C> <C>
Government agencies $ 200,000 0 64 199,936
========= ========== ========= ==========
</TABLE>
27
<PAGE>
Note 3 - Investment Securities (Continued)
- ------------------------------------------
The amortized cost and estimated market value of debt securities at September
30, 1999, by contractual maturity, are shown below. Expected maturities will
differ from contractual maturities because borrowers may have the right to call
or prepay obligations with or without call or prepayment penalties.
<TABLE>
<CAPTION>
SECURITIES
AVAILABLE-FOR-SALE
---------------------------
AMORTIZED MARKET
COST VALUE
---------- ----------
<S> <C> <C>
Due in one year or less $ 725,058 715,790
Due after one year through
five years 5,184,466 5,088,687
Due after five years through
ten years 766,903 754,224
---------- ----------
$6,676,427 6,558,701
========== ==========
</TABLE>
Proceeds from sales of available-for-sale securities during the years ended
September 30, 1999 and 1998 were $500,000 and $498,000 with gross gains and
losses of $2,594 and $18 being realized, respectively. Proceeds from maturities
of available-for-sale securities during the years ended September 30, 1999 and
1998 were $2,300,000 and $550,000, respectively. Proceeds from maturities of
held-to-maturity securities during the years ended September 30, 1999 and 1998
were $200,000 and $600,000, respectively.
Securities with a carrying value of $586,314 and $382,148 at September 30, 1999
and 1998, respectively, were pledged to secure public monies as required by law.
Note 4 - Loans Receivable
- -------------------------
A summary of loans receivable is presented below:
<TABLE>
<CAPTION>
SEPTEMBER 30,
-------------------------------
1999 1998
----------- ----------
<S> <C> <C>
First mortgage loans $38,302,559 33,221,746
Construction loans 2,801,542 3,433,262
FHLMC pool 1,787 2,850
Share loans 469,609 556,740
Consumer loans 1,812,528 1,089,165
----------- -----------
43,388,025 38,303,763
Loans in process (1,825,400) (1,488,548)
Allowance for loan losses (389,000) (370,000)
Deferred loan origination fees (52,857) (48,148)
----------- -----------
$41,120,768 36,397,067
=========== ===========
</TABLE>
An analysis of changes in the allowance for loan losses is as follows:
<TABLE>
<CAPTION>
YEAR ENDED SEPTEMBER 30,
------------------------------
1999 1998
---------- ----------
<S> <C> <C>
Balance at beginning of period $ 370,000 346,000
Provision charged to income 19,900 24,000
Recoveries 0 0
Losses charged to allowance (900) 0
---------- ----------
$ 389,000 370,000
========== ==========
</TABLE>
28
<PAGE>
Note 4 - Loans Receivable (Continued)
- -------------------------------------
First mortgage loans on residential (one-to-four units) real estate are pledged
to secure advances from the Federal Home Loan Bank (See Note 13). The advances
must be fully secured after discounting the qualifying loans at 75% of the
principal balances outstanding.
The Bank predominately grants mortgage and consumer loans to customers in the
immediate Quitman and South Georgia area. The Bank has a diversified loan
portfolio consisting predominately of mortgage loans collateralized by
residential properties. The following schedule provides an additional summary of
the Bank's loans:
SEPTEMBER 30,
--------------------------------
1999 1998
----------- ----------
First Mortgage Loans:
Secured by 1 to 4 family
residences $31,580,020 27,072,746
Secured by over 4 family
residences 612,668 810,000
Other real estate 6,109,871 5,339,000
Construction loans 2,801,542 3,433,262
FHLMC pools 1,787 2,850
Share loans 469,609 556,740
Consumer loans 1,812,528 1,089,165
----------- -----------
43,388,025 38,303,763
Loans in Process (1,825,400) (1,488,548)
Allowance for loan losses (389,000) (370,000)
Deferred loan origination fees (52,857) (48,148)
----------- -----------
Total $41,120,768 36,397,067
=========== ===========
Loans on which the accrual of interest has been discontinued amounted to
$228,113 and $103,213 at September 30, 1999 and 1998, respectively. If interest
on those loans had been accrued, such income would have approximated $19,745 and
$7,146 for the years ended September 30, 1999 and 1998, respectively. Interest
income on those loans, which is recorded only when received, amounted to $8,392
and $3,372 for the years ended September 30, 1999 and 1998, respectively. No
contractual modifications have been made to these loans that would affect the
interest ultimately due.
There were no loans at September 30, 1999 or 1998, which the Bank's management
considered to be impaired.
Loans receivable includes loans to officers and directors of the Bank totaling
approximately $980,056 and $720,735 at September 30, 1999 and 1998,
respectively. Since November 1996, loans to officers and directors are made at
an interest rate equal to two percent (2.00%) above the Bank's cost of funds
rate. All related party loans were made in the ordinary course of business and
did not involve more than the normal risk of collectibility or present other
unfavorable features.
29
<PAGE>
Note 5 - Office Properties and Equipment
- ----------------------------------------
Office properties and equipment, at cost, are summarized as follows:
<TABLE>
<CAPTION>
SEPTEMBER 30, ESTIMATED
------------------------------
1999 1998 USEFUL LIVES
---------- ---------- ------------
<S> <C> <C> <C>
Land $ 228,914 252,061
Buildings 831,017 234,087 20-31 years
Construction in progress 0 35,724
Furniture and fixtures 749,315 458,897 5-10 years
Automobile 31,337 31,337 5 years
---------- ----------
1,840,583 1,012,106
Less accumulated depreciation 239,185 330,653
---------- ----------
$1,601,398 681,453
========== ==========
</TABLE>
Depreciation expense for the years ended September 30, 1999 and 1998 was
$110,046 and $79,081, respectively.
Note 6 - Accrued Interest Receivable
- ------------------------------------
Accrued interest receivable is summarized as follows:
<TABLE>
<CAPTION>
SEPTEMBER 30,
------------------------------
1999 1998
---------- ----------
<S> <C> <C>
Investment securities $ 100,059 97,290
Loans receivable 414,231 350,564
---------- ----------
$ 514,290 447,854
========== ==========
</TABLE>
Note 7 - Deposit Account Analysis
- ---------------------------------
An analysis of deposit accounts and the weighted average interest rates as of
the dates indicated is presented below:
<TABLE>
<CAPTION>
SEPTEMBER 30,
--------------------------------------------------------------
1999 1998
-------------------------- -----------------------
BOOK VALUE % BOOK VALUE %
----------- --------- ----------- ---------
<S> <C> <C> <C> <C>
Type of Account:
Checking Accounts $ 636,751 1.52 220,800 0.63
N.O.W. Accounts - 3.48%
(1998 - 3.42%) 2,029,835 4.83 1,523,871 4.36
Passbook - 3.14%
(1998 - 3.15%) 2,068,427 4.93 1,507,207 4.31
Certificates - 5.86%
(1998 - 6.07%) 37,258,082 88.72 31,702,706 90.70
----------- --------- ----------- ---------
$41,993,095 100.00% 34,954,584 100.00%
=========== ========= =========== =========
</TABLE>
The aggregate amount of certificates of deposit in denominations of $100,000 or
more was $9,694,268 and $6,749,622 at September 30, 1999 and 1998, respectively.
At September 30, 1999, scheduled maturities of certificates of deposit were as
follows:
YEAR ENDING
SEPTEMBER 30,
-------------
2000 $27,394,949
2001 7,360,167
2002 1,368,842
2003 1,124,124
2004 10,000
-----------
$37,258,082
===========
30
<PAGE>
Note 7 - Deposit Account Analysis (Continued)
- ---------------------------------------------
The Bank held deposits of $395,778 and $381,331 for related parties at September
30, 1999 and 1998, respectively.
Interest expense on deposits is summarized as follows:
YEAR ENDED SEPTEMBER 30,
--------------------------
1999 1998
---------- ---------
Passbook savings $ 77,195 86,717
NOW 62,406 51,765
Certificates of deposit 2,029,760 1,929,225
---------- ----------
$2,169,361 2,067,707
========== ==========
Note 8 - Stockholders' Equity and Regulatory Matters
- ----------------------------------------------------
On October 14, 1997, the Bank's Board of Directors formally approved a plan
("Plan") to convert from a federally-chartered mutual savings bank to a
federally-chartered stock savings bank. The Plan, which included formation of a
holding company, was approved by the Office of Thrift Supervision (OTS) and
included the filing of a registration statement with the Securities and Exchange
Commission. The conversion was completed on April 2, 1998.
The Plan called for the common stock of the Bank to be purchased by the holding
company and for the common stock of the holding company to be offered to various
parties in a subscription offering at a price based on an independent appraisal.
The proceeds received under the conversion were as follows:
661,250 shares of common stock issued
@ $10 per share $6,612,500
Cost of conversion 410,963
----------
Net Proceeds $6,201,537
==========
The Bank may not declare or pay a cash dividend if the effect thereof would
cause its net worth to be reduced below either the amounts required for the
liquidation account discussed below or the regulatory capital requirements
imposed by federal regulations.
At the time of conversion, the Bank established a liquidation account, which
will be a memorandum account that does not appear on the balance sheet, in an
amount equal to its retained income as reflected in the latest consolidated
balance sheet used in the final conversion prospectus. The liquidation account
will be maintained for the benefit of eligible account holders who continue to
maintain their deposit accounts in the Bank after conversion. In the event of a
complete liquidation of the Bank (and only in such an event), eligible
depositors who continue to maintain accounts shall be entitled to receive a
distribution from the liquidation account before any liquidation may be made
with respect to common stock.
The Bank is subject to various regulatory capital requirements administered by
the federal banking agencies. Failure to meet minimum capital requirements can
initiate certain mandatory - and possibly additional discretionary - actions by
regulators that, if undertaken, could have a direct material effect on the
Bank's financial statements. Under capital adequacy guidelines and the
regulatory framework for prompt corrective action, the bank must meet specific
capital guidelines that involve quantitative measures of the Bank's assets,
liabilities, and certain off-balance-sheet items as calculated under regulatory
accounting practices. The Bank's capital amounts and classification are also
subject to qualitative judgments by the regulators about components, risk
weightings, and other factors.
31
<PAGE>
Note 8 - Stockholders' Equity and Regulatory Matters (Continued)
- ----------------------------------------------------------------
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 risk-based capital (as defined in the regulations) to risk-weighted
assets (as defined), tangible capital (as defined) to adjusted total assets (as
defined) and core capital (as defined) to adjusted total assets (as defined).
Management believes, as of September 30, 1999 and 1998, that the Bank meets all
capital adequacy requirements to which it is subject.
As of June 30, 1998, the most recent notification from the OTS categorized the
Bank as "well capitalized" under the regulatory framework for prompt corrective
action. To be categorized as "well capitalized" the Bank must maintain minimum
total tangible, core and risk-based ratios as set forth in the following tables.
There are no conditions or events since that notification that management
believes have changed the institution's category.
The following tables reconcile capital under generally accepted accounting
principles (GAAP) to regulatory capital (in thousands).
<TABLE>
<CAPTION>
TANGIBLE CORE RISK-BASED
CAPITAL CAPITAL CAPITAL
---------- ---------- ----------
<S> <C> <C> <C>
At September 30, 1999:
Total equity $ 6,108 6,108 6,108
Unrealized (gains) losses on securities 67 67 67
General valuation allowance 0 0 389
---------- ---------- ----------
Regulatory Capital $ 6,175 6,175 6,564
========== ========== ==========
At September 30, 1998:
Total equity $ 5,839 5,839 5,839
Unrealized gains on securities (29) (29) (29)
General valuation allowance 0 0 370
---------- ---------- ----------
Regulatory Capital $ 5,810 5,810 6,180
========== ========== ==========
</TABLE>
The Bank's actual capital amounts and ratios are presented (dollars in
thousands) as follows:
<TABLE>
<CAPTION>
TO BE WELL
CAPITALIZED UNDER
FOR CAPITAL PROMPT CORRECTIVE
ACTUAL ADEQUACY PURPOSES: ACTION PROVISIONS:
-------------------------- ---------------------- -------------------------
AMOUNT RATIO AMOUNT RATIO AMOUNT RATIO
------- ------- ------ ------- -------- -------
<S> <C> <C> <C> <C> <C> <C>
As of September 30, 1999:
Tangible Capital
(to adjusted total assets) $6,175 11.91% 778 1.5% 2,593 5.0%
Core Capital
(to adjusted total assets) 6,175 11.91% 2,074 4.0% 2,593 5.0%
Risk-Based Capital
(to risk-weighted assets) 6,564 18.49% 2,840 8.0% 3,550 10.0%
As of September 30, 1998:
Tangible Capital
(to adjusted total assets) $5,810 13.4% 650 1.5% 2,168 5.0%
Core Capital
(to adjusted total assets) 5,810 13.4% 1,301 3.0% 2,168 5.0%
Risk-Based Capital
(to risk-weighted assets) 6,180 21.3% 2,321 8.0% 2,901 10.0%
</TABLE>
Note 9 - Provision For Income Taxes
- -----------------------------------
The income tax provision is as follows:
<TABLE>
<CAPTION>
YEAR ENDED SEPTEMBER 30,
------------------------------
1999 1998
---------- ----------
<S> <C> <C>
Taxes payable currently $ 209,151 173,283
Deferred taxes (benefit) (18,366) 4,532
---------- ----------
Total tax provision $ 190,785 177,815
========== ==========
</TABLE>
32
<PAGE>
Note 9 - Provision for Income Taxes (Continued)
- -----------------------------------------------
The provision for income taxes represents the portion of estimated income taxes
relating to the years ended September 30, 1999 and 1998.
Through 1995, the Bank qualified under provisions of the Internal Revenue Code
which permitted annual bad debt deductions based on a percentage of taxable
income before such deductions. The maximum annual bad debt deduction was 8%
under the Tax Reform Act of 1986. New tax legislation effective for 1996
eliminates the percentage of taxable income method for computing the provision
for bad debts of thrift institutions and requires the recapture of the provision
for bad debts since 1987 to the extent that the provision computed under the
percentage of taxable income method exceeds that which would have been computed
under the experience method. Such recapture totals $142,587 for the Bank and
results in an additional income tax liability of $48,480. This additional tax
may be repaid over a six year period beginning in 1996 or, if certain conditions
are met, over a six year period beginning in 1998. The full amount of the
recapture was accrued as of September 30, 1996.
Retained earnings at September 30, 1999 include accumulated bad debt deductions
prior to 1988 amounting to approximately $6,000 for which no provision for
income taxes has been made. If, in the future, these amounts are used for any
purpose other than to absorb losses on bad debts, federal income taxes will be
imposed at the then applicable rates. The amount of unrecognized deferred tax
liability is approximately $2,040.
Deferred taxes on income result from timing differences in the recognition of
revenue and expense for tax and financial statement purposes. Deferred tax
assets have been recorded. No valuation allowance was required. The amount and
sources of these assets were as follows:
<TABLE>
<CAPTION>
SEPTEMBER 30,
-----------------------------
1999 1998
---------- ----------
<S> <C> <C>
Deferred Tax Assets:
Allowance for loan losses $ 122,060 115,600
Unrealized losses on available-for-sale securities 40,027 0
---------- ----------
Total 162,087 115,600
---------- ----------
Deferred Tax Liabilities:
Bad debt deduction recapture 36,788 42,419
Unrealized gains on available-for-sale securities 0 18,092
Depreciation 21,908 28,183
---------- ----------
Total 58,696 88,694
---------- ----------
Net Deferred Tax Assets (Liabilities) $ 103,391 26,906
========== ==========
</TABLE>
The following is a summary of the differences between the income tax expense as
shown in the accompanying financial statements and the income tax expense which
would result from applying the Federal statutory tax rate of 34% to earnings
before taxes on income:
<TABLE>
<CAPTION>
YEAR ENDED SEPTEMBER 30,
------------------------------
1999 1998
---------- ----------
<S> <C> <C>
Expected income tax $ 183,289 163,660
Increase (decrease) in tax resulting from:
State and local taxes 18,949 12,459
Other, net (11,453) 1,696
---------- ----------
Actual income tax expense $ 190,785 177,815
========== ==========
</TABLE>
33
<PAGE>
Note 10 - Commitments, Contingencies and Financial Instruments With Off-Balance-
- --------------------------------------------------------------------------------
Sheet Risk
----------
The consolidated financial statements do not reflect various commitments and
contingent liabilities which arise in the normal course of business and which
involve elements of credit risk, interest rate risk and liquidity risk. These
commitments and contingent liabilities are commitments to extend credit and
standby letters of credit. A summary of the Bank's' commitments and contingent
liabilities is as follows:
NOTIONAL AMOUNT
-----------------------------
SEPTEMBER 30,
-----------------------------
1999 1998
----------- ---------
Commitments to extend credit $ 1,825,400 1,488,548
Standby letters of credit 109,790 0
Commitments to extend credit and standby letters of credit all include exposure
to some credit loss in the event of nonperformance by the customer. The Bank's
credit policies and procedures for credit commitments are the same as those for
extensions of credit that are reported in the financial statements. Because
these instruments have fixed maturity dates and because many of them expire
without being drawn upon, they do not generally present any significant
liquidity risk to the Bank. The Bank has not incurred any losses on its
commitments in the year ended September 30, 1999 or 1998.
Note 11 - Retirement Plans
- --------------------------
401(k) Plan - The Bank has a 401(k) plan, covering all full-time employees who
meet the plan's eligibility requirements. The plan is a defined contribution
plan. The Bank made contributions to the plan in the amount of $-0- and $12,000
for the years ended September 30, 1999 and 1998, respectively.
Deferred Compensation Plan - Effective December 15, 1996, the Bank adopted a
deferred compensation plan for the benefit of its officers and directors.
Although the plan is to be funded from the general assets of the Bank, life
insurance policies were acquired for the purpose of serving as the primary
funding source. As of September 30, 1999 and 1998, the cash values of those
policies were $482,354 and $337,813 and the liability accrued for benefits
payable under the plan was $-0- and $-0-, respectively.
Employee Stock Ownership Plan - Effective April 2, 1998, the Bank adopted an
employee stock ownership plan (ESOP) for those employees who meet the
eligibility requirements of the plan.
The ESOP trust borrowed $529,000 on April 2, 1998 from the Company and purchased
52,900 shares of the Company's common stock at a price of $10 per share. The
loan is a ten-year loan with principal payments of $52,900 annually plus
interest at 8.5% and is guaranteed by the Bank.
ESOP shares are maintained in a suspense account until released to participants'
accounts. The release of shares from the suspense account is based on the debt
service paid in the year in proportion to the total of current year and
remaining debt service. Allocation of released shares to participants' accounts
is done as of December 31 based on the then fair market value of the shares.
Fair market value is determined from the last published trade on or prior to the
valuation date.
34
<PAGE>
Note 11 - Retirement Plans (Continued)
- --------------------------------------
As of September 30, 1999 and 1998, the ESOP held 52,900 shares of the Company's
common stock as follows:
<TABLE>
<CAPTION>
SEPTEMBER 30,
-----------------------------
1999 1998
----------- ----------
<S> <C> <C>
Number of Shares:
Released and allocated $ 2,645 0
Suspense 50,255 52,900
Fair Value:
Released and allocated $ 28,090 0
Suspense 533,708 529,000
</TABLE>
The expense recorded by the Company is based on contributions to the ESOP
accrued during the year in amounts determined by the Board of Directors and
represents compensation and interest as follows:
<TABLE>
<CAPTION>
YEAR ENDED
----------------------------
SEPTEMBER 30,
----------------------------
1999 1998
---------- ----------
<S> <C> <C>
Compensation $ 27,851 37,698
Interest 43,459 22,302
---------- ----------
$ 71,310 60,000
========== ==========
</TABLE>
Note 12 - Reconciliation of Regulatory Reports
- ----------------------------------------------
Net income and net worth of the Bank reported in these audited financial
statements differs from amounts in reports filed with the Office of Thrift
Supervision (OTS) as follows (In Thousands):
Net Income:
- -----------
<TABLE>
<CAPTION>
YEAR ENDED SEPTEMBER 30,
---------------------------------
1999 1998
---------------------------------
<S> <C> <C>
Net Income reported to OTS $ 338 334
Reconciling Items 0 (48)
---------- ----------
Net Income for the twelve months ended
September 30 per audited financial statement $ 338 286
========== ==========
</TABLE>
<TABLE>
<CAPTION>
Net Worth:
- ----------
YEAR ENDED SEPTEMBER 30,
---------------------------------
1999 1998
----------- -----------
<S> <C> <C>
Net Worth reported to OTS $ 6,108 5,839
Reconciling Items 0 0
----------- -----------
Total Net Worth on September 30, per audited
financial statement $ 6,108 5,839
=========== ===========
</TABLE>
35
<PAGE>
Note 13 - Advances From Federal Home Loan Bank
- ----------------------------------------------
Advances consist of the following:
<TABLE>
<CAPTION>
SEPTEMBER 30,
----------------------------
1999 1998
---------- ---------
<S> <C> <C>
Advances payable - Federal Home Loan Bank of Atlanta, bearing interest at 5.75%,
due October 4, 1999, collateralized by all stock in the Federal Home Loan Bank
and qualifying first mortgage loans. $2,500,000 0
========== ==========
</TABLE>
Note 14 - Fair Values of Financial Instruments
- ----------------------------------------------
The estimated fair values of the Company's financial instruments are as follows:
<TABLE>
<CAPTION>
SEPTEMBER 30, 1999 SEPTEMBER 30, 1998
-------------------------------- -------------------------------
CARRYING FAIR CARRYING FAIR
AMOUNT VALUE AMOUNT VALUE
------------- ----------- ------------- -----------
<S> <C> <C> <C> <C>
Financial assets:
Cash and cash equivalents $ 1,968,695 1,968,695 371,866 371,866
Investment securities 6,558,701 6,558,701 5,840,709 5,840,645
Loans, net of allowance
for loan losses 41,120,768 41,308,000 36,397,067 36,447,000
Accrued interest receivable 514,290 514,290 447,854 447,854
Investment in Federal Home
Loan Bank stock 286,700 286,700 239,800 239,800
Financial liabilities:
Deposits 41,993,095 42,058,000 34,954,584 35,084,000
Advances from Federal Home
Loan Bank 2,500,000 2,500,000 0 0
Accrued interest payable 303,512 303,512 275,028 275,028
</TABLE>
The carrying amounts in the preceding table are included in the statement of
financial condition under the applicable captions.
<TABLE>
<CAPTION>
SEPTEMBER 30, 1999 SEPTEMBER 30, 1998
-------------------------------- -------------------------------
CARRYING FAIR CARRYING FAIR
AMOUNT VALUE AMOUNT VALUE
------------- ----------- ------------- -----------
<S> <C> <C> <C> <C>
Other:
Loan commitments $ 1,825,400 1,825,400 1,488,548 1,488,548
Standby letters of credit 109,790 109,790 0 0
</TABLE>
Note 15 - Related Party Transactions
- ------------------------------------
Related parties to the Company are identified as its officers and directors.
During the years ended September 30, 1999 and 1998, the Company had the
following related party transactions:
<TABLE>
<CAPTION>
YEAR ENDED SEPTEMBER 30,
-------------------------------
1999 1998
------------ ----------
<S> <C> <C>
Loans to officers and directors (balance at
September 30), Note 4 $ 980,056 720,735
Deposits held for officers and directors (balance
at September 30), Note 7 395,778 381,331
Insurance premiums paid - director 47,664 17,353
Legal fees paid - director 5,616 8,148
Supplies purchased - officers and directors 3,369 321
Furnishings purchased 78,158 0
</TABLE>
36
<PAGE>
Note 16 - Year 2000 Issue
- -------------------------
The Bank is aware of the issues associated with the programming code in existing
computer systems as the Millennium (Year 2000) approaches. The "year 2000"
problem is pervasive and complex as virtually every computer operation will be
affected in some way by the rollover of the two digit year value to 00. 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 Bank is utilizing external resources to identify, correct or reprogram and
test the systems for the year 2000 compliance. It is believed that all
reprogramming efforts have been completed and tested. Management estimates the
cost of the year 2000 compliance will be $10,000.
37
<PAGE>
Note 17 - Financial Information of Quitman Bancorp, Inc. (Parent Only)
- ----------------------------------------------------------------------
STATEMENT OF FINANCIAL CONDITION
--------------------------------
Assets
------
SEPTEMBER 30,
---------------------------
1999 1998
----------- ---------
Cash on deposit $ 22,425 1,553,906
Investment in Quitman Federal Savings Bank 6,108,324 5,839,420
Investment securities available-for-sale 986,400 1,010,200
Loans receivable - subsidiary ESOP 502,550 529,000
Accrued interest receivable 50,975 43,702
Other assets 5,638 0
---------- ----------
Total Assets $7,676,312 8,976,228
========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
------------------------------------
Liabilities:
Income taxes payable $ 1,312 9,417
Deferred income taxes payable 0 3,058
---------- -----------
1,312 12,475
---------- ----------
Stockholders' Equity:
Capital stock 66,125 66,125
Additional paid in capital 6,135,412 6,135,412
Retained earnings 3,491,984 3,256,097
Accumulated other comprehensive income (loss) (77,699) 35,119
ESOP loan guaranty of subsidiary (502,550) (529,000)
Treasury stock (1,438,272) 0
---------- -----------
7,675,000 8,963,753
---------- ----------
Total Liabilities and Stockholders' Equity $7,676,312 8,976,228
========== ==========
38
<PAGE>
Note 17 - Financia Information of Quitman Bancorp, Inc.(Parent Only) (Continued)
- --------------------------------------------------------------------------------
STATEMENT OF INCOME
-------------------
YEAR ENDED SEPTEMBER 30,
------------------------------
1999 1998
---------- ----------
Income:
Equity in income of subsidiary $ 338,392 238,388
Interest income 99,695 43,424
---------- ----------
438,087 281,812
Expenses 83,416 16,378
---------- ----------
Income before taxes 354,671 265,434
Income taxes 6,372 9,417
---------- ----------
Net Income $ 348,299 256,017
========== ==========
39
<PAGE>
Note 17 - Financial Information of Quitman Bancorp, Inc.(Parent Only)(Continued)
- --------------------------------------------------------------------------------
STATEMENT OF CASH FLOWS
-----------------------
<TABLE>
<CAPTION>
YEAR ENDED SEPTEMBER 30,
------------------------------
1999 1998
---------- ----------
<S> <C> <C>
Cash Flows From Operating Activities:
Net income $ 348,299 256,017
Adjustments:
Equity in income of subsidiary (338,392) (238,388)
Amortization of premium on securities 3,890 278
(Increase) decrease in accrued interest receivable (7,273) (43,702)
Increase (decrease) in income taxes payable (8,105) 9,417
---------- ----------
Net Cash Provided (Used) By Operating Activities (1,581) (16,378)
---------- ----------
Cash Flows From Investing Activities:
Purchase of available-for-sale securities (505,665) (1,001,484)
Maturity of available-for-sale securities 500,000 0
Loan to subsidiary ESOP 26,450 (529,000)
Investment in subsidiary 0 (3,100,769)
----------- ----------
Net Cash Provided (Used) By Investing Activities 20,785 (4,631,253)
---------- ----------
Cash Flows From Financing Activities:
Issuance of 661,250 shares of common stock 0 6,201,537
Dividends paid (112,413) 0
Purchase of treasury stock (1,438,272) 0
---------- ----------
Net Cash Provided By Financing Activities (1,550,685) 6,201,537
---------- ----------
Net Increase In Cash (1,531,481) 1,553,906
Cash And Cash Equivalents At Beginning Of Period 1,553,906 0
---------- ----------
Cash And Cash Equivalents At End Of Period $ 22,425 1,553,906
========== ==========
Supplemental Disclosure of Cash Flow Information:
- -------------------------------------------------
Cash Paid During The Period For:
Interest $ 0 0
========== ==========
Income taxes $ 14,477 0
========== ==========
Schedule Of Non-Cash Investing And Financing Activities:
- --------------------------------------------------------
Total increase (decrease) in unrealized gains on
Securities available-for-sale $ (25,576) 8,994
========== ==========
</TABLE>
40
<PAGE>
Note 18 - 1999 Stock Option Plan
- --------------------------------
The Company adopted a Stock Option Plan (the Plan), which was approved by the
stockholders on April 13, 1999. The purpose of the plan is to attract and retain
qualified personnel for positions of substantial responsibility and to provide
additional incentive to certain officers, directors, key employees and other
persons to promote the success of the business of the Company and the Bank. The
Plan authorizes the granting of stock options for up to 66,125 shares of common
stock. Under the Plan, the exercise price of each option equals the market price
of the Company's stock on the grant date, and an option's maximum term is ten
years. Options are granted as administered by the Board of Directors.
The fair value of each option grant is estimated on the grant date using an
option-pricing model with the following weighted-average assumptions used for
grants in the year ended September 30, 1999: dividend yield 1.87%, risk free
interest rate of 4.81%, expected lives of 5 years for the options and a
volatility rate of 23.06%.
A summary of the statement of the Company's Stock Option Plan as of September
30, 1999 and the changes during the year then ended is presented below:
YEAR ENDED SEPTEMBER 30, 1999
-----------------------------
WEIGHTED-
AVERAGE
EXERCISE
SHARES PRICE
------------ ----------
Outstanding at beginning of year 0 0
Granted 65,788 $ 10.50
Exercised 0 0
Forfeited 0 0
----------
Outstanding at end of year 65,788 $ 10.50
==========
Exercisable at September 30, 1999 42,978 10.50
==========
Weighted-average fair value of options
Granted during the year $ 2.97
==========
The following table summarizes information about fixed stock options outstanding
at September 30, 1999:
WEIGHTED-
RANGE OF AVERAGE WEIGHTED- WEIGHTED-
OR ACTUAL NUMBER REMAINING AVERAGE NUMBER AVERAGE
EXERCISE OUTSTANDING CONTRACTUAL EXERCISE ESERCISABLE EXERCISE
PRICES AT 9-30-99 LIFE PRICE AT 9-30-99 PRICE
------ ---------- ---- ----- ---------- -----
$10.50 65,788 9 YEARS $10.50 42,978 $10.50
====== ======
If the Company had used the fair value based method of accounting for its Stock
Option Plan, as prescribed by Statement of Financial Accounting Standards No.
123, directors and officers compensation cost in net income would have increased
by $127,645, resulting in net income $271,712, net of tax. Basic earnings per
share would have declined from $.65 to $.51 and diluted earnings per share would
have declined from $.65 to $.51.
Note 19 - Restricted Stock Plan
- -------------------------------
The Company adopted a Restricted Stock Plan (RSP), which was approved by the
stockholders on April 13, 1999. The RSP was adopted as a method of providing
directors, officers and key employees of the Bank with a proprietary interest in
the Company in a manner designed to encourage such persons to remain in the
employment or service of the Bank.
41
<PAGE>
Note 19 - Restricted Stock Plan (Continued)
- -------------------------------------------
The Bank will contribute sufficient funds to the RSP to purchase common stock
representing up to 4% of the aggregate number of shares issued in the conversion
(i.e., 26,450 shares of common stock) in the open market. Alternatively, the RSP
may purchase authorized but unissued shares of common stock or treasury shares
from the Company. All of the common stock to be purchased by the RSP will be
purchased at the fair market value of such stock on the date of purchase.
The RSP is administered by a Committee appointed by the Bank's Board of
Directors. Plan share awards under the RSP will be determined by the RSP
Committee. All 26,449 shares of common stock were awarded to officers and
directors by the RSP during the year ended September 30, 1999. All plan share
awards shall be vested at the rate of 20% as of September 1, 1999 and 20%
annually thereafter.
Contributions made by the Bank to the RSP for the year ended September 30, 1999
were as follows:
Number of awards granted 26,449
Number of awards earned - 20% 5,290
Fair market value of Company's stock,
per share, on September 1, 1999 $ 11.00
-------
Contributions $58,190
=======
Stock issued under this plan was purchased on the open market at a cost of
$58,190, which was expensed as compensation.
42
<PAGE>
<TABLE>
<CAPTION>
QUITMAN BANCORP, INC.
602 East Screven Street
Quitman, Georgia 31643
(912) 263-7538
Board of Directors and Executive Officers of Quitman Bancorp, Inc.
<S><C> <C>
Claude R. Butler John W. Romine
Chairman of the Board President and owner
Pork Producer Romine Furniture Co., Inc.
Robert L. Cunningham, III Melvin E. Plair
Vice Chairman of the Board President and Chief Executive Officer
Secretary & Treasurer of Quitman Bancorp, Inc. and Quitman
R.L. Cunningham & Sons, Inc. Federal Savings Bank
Peanut warehouse and peanut seed business
Peggy L. Forgione
Walter B. Holwell Vice President and Controller
President and owner Quitman Bancorp, Inc. and Quitman
Holwell & Holwell, Inc. Federal Savings Bank
Insurance agents
Daniel M. Mitchell, Jr.
Attorney at Law
---------------------------------------------
Corporate Counsel Independent Auditors
Daniel M. Mitchell, Jr. Esquire Stewart, Fowler & Stalvey, P.C.
110 S. Washington Street 3208 Wildwood Plantation Drive
Quitman, Georgia 31643 Valdosta, Georgia 31605
Special Counsel Transfer Agent and Registrar
Malizia Spidi & Fisch, PC Registrar & Transfer Company
One Franklin Square 10 Commerce Drive
1301 K Street, N.W., Suite 700 East Cranford, New Jersey 07016
Washington, D.C. 20005 (908) 497-2300
-------------------------------------------
</TABLE>
Our Annual Report for the year ended September 30, 1999 on Form 10-KSB is
available without charge upon written request. For a copy of the Form 10-KSB or
any other investor information, please write Mr. Melvin E. Plair, President and
Chief Executive Officer. The Annual Meeting of Stockholders will be held on
January 18, 2000 at 4:30 p.m. at 602 East Screven Street, Quitman, Georgia.
EXHIBIT 23
<PAGE>
[Stewart, Fowler & Stalvey, P.C. Letterhead]
Consent of Independent Auditors
We hereby consent to the incorporation by reference in the Registration
Statement on Form S-8 (SEC File No. 333-79893) of Quitman Bancorp, Inc., of our
report dated October 15, 1999, relating to the consolidated statements of
financial condition of Quitman Bancorp, Inc. as of September 30, 1999 and 1998
and the related consolidated statements of income, comprehensive income,
stockholders' equity, and cash flows for the years then ended,
/s/ Stewart, Fowler & Stalvey, P.C.
Valdosta, Georgia
December 23, 1999
<TABLE> <S> <C>
<ARTICLE> 9
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
ANNUAL REPORT ON FORM 10-KSB AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE
TO SUCH FINANCIAL INFORMATION.
</LEGEND>
<MULTIPLIER> 1000
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> SEP-30-1999
<PERIOD-END> SEP-30-1999
<CASH> 1,707
<INT-BEARING-DEPOSITS> 262
<FED-FUNDS-SOLD> 0
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 6,559
<INVESTMENTS-CARRYING> 0
<INVESTMENTS-MARKET> 0
<LOANS> 41,510
<ALLOWANCE> 389
<TOTAL-ASSETS> 52,842
<DEPOSITS> 41,993
<SHORT-TERM> 2,500
<LIABILITIES-OTHER> 674
<LONG-TERM> 0
0
0
<COMMON> 66
<OTHER-SE> 7,609
<TOTAL-LIABILITIES-AND-EQUITY> 52,842
<INTEREST-LOAN> 3,505
<INTEREST-INVEST> 364
<INTEREST-OTHER> 31
<INTEREST-TOTAL> 3,900
<INTEREST-DEPOSIT> 2,169
<INTEREST-EXPENSE> 35
<INTEREST-INCOME-NET> 1,696
<LOAN-LOSSES> 20
<SECURITIES-GAINS> 3
<EXPENSE-OTHER> 1,333
<INCOME-PRETAX> 539
<INCOME-PRE-EXTRAORDINARY> 348
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 348
<EPS-BASIC> .65
<EPS-DILUTED> .65
<YIELD-ACTUAL> 2.92
<LOANS-NON> 228
<LOANS-PAST> 114
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 370
<CHARGE-OFFS> 1
<RECOVERIES> 0
<ALLOWANCE-CLOSE> 389
<ALLOWANCE-DOMESTIC> 389
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 0
</TABLE>
