Quitman Bancorp, Inc.
Annual Report
For the Year Ended
September 30, 2000
<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 13
Consolidated Financial Statements 14
Notes to Consolidated Financial Statements 19
Office Locations and Other Corporate Information 40
<PAGE> 1
December 11, 2000
Dear Fellow Stockholders:
This is the third 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, while our net income in the aggregate and on a per share basis is
less than last year, our income from operations is greater than last year,
due to the non-recurring gain on the sale of our old office building and
equipment reported in last year.
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
share 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 years ended
September 30, 2000 and 1999, we repurchased common stock at a total cost of
$1.7 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> 2
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, 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.
<PAGE> 3
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.
<TABLE>
<CAPTION>
Date High Low
------------------------------------ ------ ------
<S> <C> <C>
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
October 1, 1999 to December 31, 1999 10.625 9.250
January 1, 2000 to March 31, 2000 10.110 9.500
April 1, 2000 to June 30, 2000 10.500 8.000
July 1, 2000 to September 30, 2000 9.0625 8.750
</TABLE>
The number of shareholders of record of Common Stock as of September 30,
2000, was approximately 196. At September 30, 2000, there were 507,262
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
$101,452 on May 31, 2000. These dividends were declared on April 4, 2000
in the amount of $0.20 per share. We paid dividends on the Common Stock in
the amount of $112,413 on May 24, 1999. These dividends were declared on
April 20, 1999 in the amount of $0.20 per share.
<PAGE> 4
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, 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 reprice within that time period. If our
assets mature or reprice more quickly or to a greater extent than our
<PAGE> 5
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, 2000,
our liquid asset ratio was 13.01%.
We originate fixed rate real estate loans which approximated 92.0% of
our loan portfolio at September 30, 2000. 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, 2000, these liquid assets
totaled $8.2 million, which was 15.5% of our total liabilities of $52.8
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,
2000, 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.
<PAGE> 6
<TABLE>
<CAPTION>
Board Limit of a
Percentage Change In Change in NPV
-------------------------- --------------------------
Changes
in Market
Interest rates(1) NII NPV Dollars Percentages
----------------- ------------ ------------ ------------ ------------
(basis points) (in thousands)
<S> <C> <C> <C> <C>
+400 -60% -65% -$1,570 -24.33%
+300 -60% -60% -$1,116 -17.30%
+200 -40% -40% -$737 -11.42%
+100 -20% -25% -$382 -5.92%
-100 -25% -25% $503 7.80%
-200 -40% -40% $1,037 16.07%
-300 -50% -50% $1,606 24.89%
-400 -60% -60% $2,266 35.12%
(1) 100 basis points equals 1%.
Management now requires a minimum NPV ratio of 6%.
</TABLE>
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. If interest rates were to rise
materially, we could report losses. Specifically, the computation of an
instantaneous and permanent 200 basis point decrease in market interest
rates indicated an approximately 29% increase in estimated pre-tax income.
The computation of an instantaneous and permanent 200 basis point increase
in market interest rates indicated an approximately 33% decrease in
estimated pre-tax income. Both of these computations (1) were based on
financial information at September 30, 2000, (2) assumed net income over
the 12 months following September 30, 1999 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 3.95% and
our consumer loans and fixed rate mortgage loans were assumed to yield
9.50% and 8.75%, 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
<PAGE> 7
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 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.
Financial Condition
-------------------
Total consolidated assets increased $7.6 million, or 14.4% to $60.5
million at September 30, 2000, from $52.8 million at September 30, 1999.
The increase in total assets reflects a $7.9 million increase in loans
receivable. Our increase in loans receivable is mainly due to increased
demand for loans in our market area.
Deposits increased $5.3 million or 12.6% to $47.3 million at September
30, 2000 from $42.0 million at September 30, 1999. The increase in fiscal
2000 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 $5.0 million. Other liabilities decreased by $165,000 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 $.3 million.
<PAGE> 8
Average Balance Sheet
The following table sets forth certain information relating to the
Company'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,
------------------------------------------------------
2000 1999
-------------------------- --------------------------
Average Average Average Average
Balance Interest Yield/ Balance Interest Yield/
Cost Cost
------- ------- -------- ------- ------- -------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C>
Interest-earning assets:
Loans receivable(1) $45,086 $4,113 9.12% $38,759 $3,505 9.04%
Mortgage-backed securities 958 60 6.26 701 40 5.71
Investment securities 5,898 336 5.70 5,499 325 5.91
Other interest-earning assets 580 36 6.21 488 31 6.35
------- ------ ------- ------
Total interest-earning assets 52,522 4,545 8.65 45,447 3,901 8.58
Non-interest-earning assets 4,134 - 3,155 -
------- ------ ------- ------
Total assets $56,656 $4,545 $48,602 $3,901
======= ====== ======= ======
Interest-bearing liabilities:
NOW Accounts $ 2,202 $ 67 3.04 $ 1,795 $ 62 3.45
Savings accounts 2,157 86 3.99 1,847 77 4.17
Money market accounts - - - - - -
Certificates of deposit 38,700 2,330 6.02 34,671 2,030 5.86
Other liabilities 4,230 270 6.38 634 35 5.52
------- ------ ------- ------
Total interest-bearing
liabilities 47,289 2,753 5.82 38,947 2,204 5.66
Non-interest bearing liabilities 1,717 - 1,336 -
------- ------ ------- ------
Total liabilities 49,006 $2,753 40,283 $2,204
====== ======
Equity 7,650 8,319
------- -------
Total liabilities and
retained earnings $56,656 $48,602
======= =======
Net interest income $1,792 $1,697
Interest rate spread(2) 2.83% 2.92%
Net yield on interest-earning assets(3) 3.41% 3.73%
Ratio of average interest-earning assets
earning assets to average interest-
bearing liabilities 111.07% 116.69%
_________________________________
(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.
</TABLE>
<PAGE> 9
The table below sets forth certain information regarding changes in
interest income and interest expense of the Company 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,
--------------------------------------------------------------
2000 vs. 1999 1999 vs. 1998
------------------------------ ------------------------------
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 $ 572 31 5 608 382 (30) (3) 349
Investment securities 39 (7) (1) 31 142 (24) (13) 105
Other interest-earning assets 6 (1) - 5 (68) 3 (3) (68)
------ ------ ------ ------ ------ ------ ------ ------
617 23 4 644 456 (51) (19) 386
------ ------ ------ ------ ------ ------ ------ ------
Interest expense:
NOW accounts 14 (7) (2) 5 12 (1) (1) 10
Savings accounts 13 (3) (1) 9 (15) 6 (1) (10)
Money market accounts - - - - - - - -
Certificate of deposit 236 57 7 300 175 (68) (6) 101
Other liabilities 199 5 31 235 1 (2) - (1)
------ ------ ------ ------ ------ ------ ------ ------
Total interest-bearing
liabilities 462 52 35 549 173 (65) (8) 100
------ ------ ------ ------ ------ ------ ------ ------
Net change in interest income $ 155 (29) (31) 95 283 14 (11) 286
====== ====== ====== ====== ====== ====== ====== ======
</TABLE>
<PAGE> 10
Results of Operations for the Years Ended September 30, 2000 and 1999
---------------------------------------------------------------------
Net Income. Net income decreased $75,924 or 21.8% from $348,299 for
fiscal 1999 to $272,305 for fiscal 2000. The decrease was primarily the
result of an increase in noninterest expense of $185,000 that more than
offsets an increase in net interest after provision for loan losses of
$55,000. As discussed below, an increase in interest on loans receivable
due to an increase in the average balance of $6.3 million and an increase
in other interest income on other interest earning assets due to an
increase in the average balance of $.7 million partially offset by an
increase in interest expense due to an increase in the average balance of
interest-bearing liabilities of $8.3 million. In addition, the net income
for fiscal 1999 included a non-recurring gain of $84,000 on the sale of our
old office facilities and equipment.
Net Interest Income. Our net interest income increased $95,551 or 5.6%
to $1,791,667 in fiscal 2000 compared to $1,696,116 in fiscal 1999. The
increase was due primarily to the growth of average interest-earning assets
from $45.4 million in fiscal 1999 to $52.5 million in fiscal 2000.
The increase in our average interest-earning assets of $7.1 million
reflects an increase of $6.3 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 decreased .09% and net interest margin
decreased .32% in fiscal 2000 compared to fiscal 1999. This was due to the
increase in the yield on interest-earning assets from 8.58% in fiscal 1999
to 8.65% in fiscal 2000 and the increase in the interest cost of average
interest-bearing liabilities from 5.66% in fiscal 1999 to 5.82% in fiscal
2000.
The yield on our average interest-earning assets increased in fiscal
1999 primarily due to an increase in the yield on loans receivable. This
increase in yield on our loans receivable primarily reflected an increase
in the average interest rates.
The increase 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 $34.7 million in fiscal 1999 to $38.7 million in fiscal
2000 and a nominal increase in the average rates.
Provision for Loan Losses. Our provision for loan losses increased
$40,250 from $19,900 for fiscal 1999 to $60,150 for fiscal 2000. The
increase in the provision for fiscal 2000 was the result of management's
review of our loan portfolio, the potential losses in our loan portfolio
and our history of experiencing only nominal losses on loans in recent
years.
Noninterest Income. Our non-interest income decreased approximately
$1,000 in fiscal 2000 as compared to fiscal 1999. This was attributable to
a non-recurring gain of $84,000 on the sale of fixed assets in fiscal 1999
partially offset by an increase in service charge income of $64,000 and an
increase in gain on sale of other real estate of $14,000 in fiscal 2000.
Noninterest Expense. Our non-interest expense increased by $184,940 or
13.87% from $1,333,189 for fiscal 1999 to $1,518,129 for fiscal 2000. The
increase was primarily attributable to increases in compensation and other
personnel expense and depreciation expense on equipment additions.
<PAGE> 11
We expected noninterest expense to increase as a result of the
staffing and equipping of the new bank building opened in April 1999, and
these expenses did increase dramatically. We expected a reduction in net
income (and possibly losses) compared to prior periods as a result of these
expenses until the new building resulted in higher overall levels of loan
and deposit activity to offset the additional expenses. We believe that
this expansion should enhance shareholder value and that the expansion
costs have stabilized. We do, however, expect that our compensation
expense will increase during fiscal year 2001 because of annual pay
adjustments that will likely be made near the end of the 2000 calendar
year. However, our greater concern for the coming fiscal year would be if
market interest rates continue to increase. The negative impact of
interest rate increases is discussed earlier in this section under "Market
Risk Analysis". 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. Our noninterest expense would further increase if we build the new
branch discussed below.
We 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
also increased our expenses in fiscal year 2000. Although our checking
account funds have increased, we have not yet received sufficient other
income from the ATM to offset its additional cost.
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.
Income Tax Expense. Our income tax expense decreased $54,538 from
$190,785 in fiscal 1999 to $136,247 in fiscal 2000 due to the decrease in
income before taxes.
Return on Equity and Assets:
<TABLE>
<CAPTION>
YEAR ENDED SEPTEMBER 30,
--------------------------
2000 1999
---------- ----------
<S> <C> <C>
Return on Assets (Net income divided
by average assets) .48% .72%
Return on Equity (Net income divided by
average equity) 3.56% 4.19%
Dividend Payout Ratio (Dividends paid
divided by net income) 37.26% 32.27%
Equity to Assets Ratio (Equity divided by total
assets) 12.61% 14.52%
</TABLE>
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 13% and 15% at September 30, 2000
and 1999, respectively.
<PAGE> 12
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, 2000 was $432,766 as compared to $278,259
for the year ended September 30, 1999.
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, 2000
totaled $8.3 million, an increase of $1.6 million from September 30, 1999.
The increase was primarily attributable to our use of $.8 million in cash
to fund the purchase of available-for-sale investment securities and the
use of $8.0 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 foreclosed property.
Net cash provided by our financing activities (i.e., cash receipts
primarily from net increases in deposits and net FHLB advances) for fiscal
2000 totaled $7.5 million compared to $8.0 million for fiscal 1999. This is
a result of a net increase in deposits of $5.3 million in fiscal 2000 as
compared to an increase of $7.0 million in fiscal 1999 and proceeds of $2.5
million in FHLB advances.
During the fiscal year ending September 30, 2001, approximately $36.0
million of certificates of deposit (approximately 76% 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 Company 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,
2000, the Company shows unrealized losses, net of tax effect, totaling
$72,000 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 Company's capital. The
unrealized losses combined with net operating income of $272,000 yields a
net increase in the Company's capital of $200,000, net of applicable taxes,
and a corresponding increase in the book value of common stock from $14.37
on September 30, 1999 to $15.03 as of September 30, 2000. The Bank's
capital continues to exceed regulatory requirements and continues to be
adequate to support future asset growth.
<PAGE> 13
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, 2000
and 1999, 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, 2000
and 1999, 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 16, 2000
<PAGE> 14
<TABLE>
<CAPTION>
QUITMAN BANCORP, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
----------------------------------------------
ASSETS
------
SEPTEMBER 30,
------------------------
2000 1999
----------- -----------
<S> <C> <C>
Cash and Cash Equivalents, Notes 1 and 2:
Cash and amounts due from depository
institutions $ 598,471 1,706,799
Interest-bearing deposits in other banks 1,064,984 261,896
----------- -----------
Total Cash and Cash Equivalents 1,663,455 1,968,695
Investment securities:
Available-for-sale (fair value
$6,546,404 in 2000 and $6,558,701
in 1999), Notes 1 and 3 6,546,404 6,558,701
Loans receivable, Notes 1 and 4 49,052,004 41,120,768
Office properties and equipment,
at cost, net of accumulated
depreciation, Notes 1 and 5 1,483,607 1,601,398
Real estate acquired in settlement
of loans, Note 1 0 139,045
Accrued interest receivable, Note 6 583,330 514,290
Investment required by law-stock in Federal
Home Loan Bank, at cost, Note 13 320,300 286,700
Cash value of life insurance, Note 11 626,638 482,354
Other assets, Notes 1 and 9 193,195 170,198
----------- -----------
Total Assets $60,468,933 52,842,149
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
------------------------------------
Liabilities:
Deposits, Note 7 $47,336,018 41,993,095
Advances from Federal Home Loan Bank,
Note 13 5,000,000 2,500,000
Accrued interest payable 337,586 303,512
Income taxes payable, Note 9 14,770 1,312
Other liabilities 156,446 369,230
----------- -----------
Total Liabilities 52,844,820 45,167,149
----------- -----------
Stockholders' Equity:
Common stock, $.10 par value, 4,000,000
shares authorized, 661,250 shares
issued and 507,262 shares outstanding
at September 30, 2000 (533,960-
September 30, 1999) 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 3,662,836 3,491,984
Accumulated other comprehensive income (loss) (72,086) (77,699)
Treasury stock, at cost, 153,988 shares,
(127,290 shares at September 30, 1999) (1,718,524) (1,438,272)
Receivable from ESOP, Note 11 (449,650) (502,550)
----------- -----------
Total Stockholders' Equity 7,624,113 7,675,000
----------- -----------
Total Liabilities and Stockholders' Equity $60,468,933 52,842,149
=========== ===========
</TABLE>
<PAGE> 15
<TABLE>
<CAPTION>
QUITMAN BANCORP, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF INCOME
---------------------------------
YEAR ENDED SEPTEMBER 30,
------------------------
2000 1999
----------- -----------
<S> <C> <C>
Interest Income:
Loans receivable:
First mortgage loans $ 3,835,384 3,290,099
Consumer and other loans 277,221 214,504
Interest on FHLMC Pool 104 171
Investment securities 396,245 364,730
Interest-bearing deposits 33,865 30,374
Federal funds sold 2,119 481
----------- -----------
Total Interest Income 4,544,938 3,900,359
----------- -----------
Interest Expense:
Deposits, Note 7 2,483,483 2,169,361
Interest on Federal Home Loan
Bank advances 269,788 34,882
----------- -----------
Total Interest Expense 2,753,271 2,204,243
----------- -----------
Net Interest Income 1,791,667 1,696,116
Provision for loan losses, Notes 1 and 4 60,154 19,900
----------- -----------
Net Interest Income After Provision for Losses 1,731,513 1,676,216
----------- -----------
Non-Interest Income:
Gain (loss) on sale of securities (7,387) 2,594
Gain on sale of fixed assets 0 84,019
Gain (loss) on sale of other real estate 20,610 6,402
Late charges on loans 38,904 35,349
Insurance commissions 10,517 1,192
Service charge income 105,556 41,576
Other income 26,968 24,925
----------- -----------
Total Non-Interest Income 195,168 196,057
----------- -----------
Non-Interest Expense:
Compensation 540,266 464,815
Other personnel expenses, Note 11 255,153 218,218
Occupancy expenses of premises 49,873 33,111
Furniture and equipment expenses 211,765 162,272
Business Occupation and other taxes 59,630 55,552
Other operating expenses 401,442 399,221
----------- -----------
Total Non-Interest Expense 1,518,129 1,333,189
----------- -----------
Income Before Income Taxes 408,552 539,084
Provision for Income Taxes, Note 9 136,247 190,785
----------- -----------
Net Income $ 272,305 348,299
=========== ===========
Earnings Per Share, Note 1:
Basic $ .59 $ .65
=========== ===========
Diluted $ .59 $ .65
=========== ===========
</TABLE>
<PAGE> 16
<TABLE>
<CAPTION>
QUITMAN BANCORP, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
-----------------------------------------------
YEAR ENDED SEPTEMBER 30,
------------------------
2000 1999
----------- -----------
<S> <C> <C>
Net Income $ 272,305 348,299
----------- -----------
Other comprehensive income (loss), net of tax:
Unrealized gains (losses) on securities:
Unrealized holding gains (losses) arising
during period 738 (111,106)
Less: reclassification adjustment for
(gains)losses included in net income 4,875 (1,712)
----------- -----------
Other comprehensive income (loss) 5,613 (112,818)
----------- -----------
Comprehensive Income $ 277,918 235,481
=========== ===========
</TABLE>
<PAGE> 17
<TABLE>
<CAPTION>
QUITMAN BANCORP, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
-----------------------------------------------
ACCUMULATED
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,
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
Acquisition of
shares of treasury
stock (26,698) 0 0 0 0 0 (280,252) (280,252)
Net income 0 0 0 272,305 0 0 0 272,305
Dividends paid 0 0 0 (101,453) 0 0 0 (101,453)
Change in loan
receivable from
employee stock
ownership plan 0 0 0 0 52,900 0 0 52,900
Change in other
comprehensive
income (loss) 0 0 0 0 0 5,613 0 5,613
---------- ---------- ---------- ---------- ---------- ---------- ---------- ----------
Balances,
September 30,
2000 507,262 $ 66,125 6,135,412 3,662,836 (449,650) (72,086) (1,718,524) 7,624,113
========== ========== ========== ========== ========== ========== ========== ==========
</TABLE>
<PAGE> 18
<TABLE>
<CAPTION>
QUITMAN BANCORP, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
-------------------------------------
YEAR ENDED SEPTEMBER 30,
------------------------
2000 1999
----------- -----------
<S> <C> <C>
Cash Flows From Operating Activities:
Net income $ 272,305 348,299
Adjustments to reconcile net income
to net cash provided by operating
activities:
Depreciation 142,339 110,046
Provision for loan losses 60,154 19,900
Deferred income taxes 12,013 (18,366)
Amortization (Accretion) of securities 11,371 15,715
(Gain) Loss on sale of other real estate (20,610) (6,402)
(Gain) Loss on sale of securities 7,387 (2,594)
(Gain) Loss on sale of fixed assets 0 (84,019)
Change in Assets and Liabilities:
(Increase) Decrease in accrued interest
receivable (70,109) (65,367)
Increase (Decrease) in accrued interest
payable 34,074 28,484
Increase (Decrease) in other liabilities 8,285 4,442
Increase (Decrease) in income taxes payable 13,458 (23,348)
(Increase) Decrease in other assets (37,901) (48,531)
----------- -----------
Net cash provided by operating activities 432,766 278,259
----------- -----------
Cash Flows From Investing Activities:
Capital expenditures (24,548) (1,220,972)
Purchase of available-for-sale securities (873,319) (3,845,382)
Proceeds from sale of foreclosed property 228,057 139,380
Proceeds from maturity of held-to-maturity
securities 0 200,000
Net (increase) decrease in loans (8,059,792) (5,015,624)
Purchase of stock in Federal Home Loan Bank (33,600) (46,900)
Principal collected on mortgage-backed
securities 113,885 163,332
Proceeds from sale of available-for-sale
securities 541,477 500,000
Proceeds from sale of fixed assets 0 275,000
Proceeds from maturity of available-for-sale
securities 0 2,300,000
Increase in cash value of life insurance (144,284) (144,541)
----------- -----------
Net cash provided (used) by
investing activities (8,252,124) (6,695,707)
----------- -----------
Cash Flows From Financing Activities:
Net increase (decrease) in deposits 5,342,923 7,038,511
Proceeds from Federal Home Loan Bank advances 2,500,000 2,500,000
(Increase) Decrease in loan to employee stock
ownership plan 52,900 26,450
Purchase of treasury stock (280,252) (1,438,272)
Dividends paid (101,453) (112,412)
----------- -----------
Net cash provided (used) by
financing activities 7,514,118 8,014,277
----------- -----------
Net Increase (Decrease) in cash
and cash equivalents (305,240) 1,596,829
Cash and Cash Equivalents at Beginning of Period 1,968,695 371,866
----------- -----------
Cash and Cash Equivalents at End of Period $ 1,663,455 1,968,695
=========== ===========
Supplemental Disclosures of Cash Flow Information
-------------------------------------------------
Cash paid during the year for:
Income taxes $ 130,744 221,974
=========== ===========
Interest $ 2,719,197 2,175,759
=========== ===========
Schedule of Non-Cash Investing and Financing Activities
-------------------------------------------------------
Total increase (decrease) in unrealized gains
on securities available-for-sale $ 8,504 (170,937)
=========== ===========
Loans transferred to foreclosed real estate $ 68,402 272,023
=========== ===========
Securities purchased and closed in
subsequent year $ 0 221,069
=========== ===========
</TABLE>
<PAGE> 19
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.
<PAGE> 20
Note 1 - 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 $112,512
and $103,391 at September 30, 2000 and 1999, 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 $33,678 and $42,379
for the years ended September 30, 2000 and 1999, respectively.
Stock-based compensation: In October 1995, the Financial Accounting
Standards Board issued Statement of Financial Accounting Standards (SFAS)
No. 123, Accounting for Stock-Based Compensation. The Company has elected
to disclose the proforma effect on net income as if the fair value based
method of accounting for stock options had been used.
<PAGE> 21
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.
<PAGE> 22
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,
------------------------
2000 1999
----------- -----------
<S> <C> <C>
(a) Net income available to shareholders $ 272,305 348,299
----------- -----------
Denominator:
Weighted-average shares outstanding 512,085 584,111
Less: ESOP weighted-average shares
Unallocated 46,741 50,916
----------- -----------
(b) Basic EPS weighted-average shares
outstanding 465,344 533,195
Effect of dilutive securities:
Stock options 0 1,030
----------- -----------
(c) Diluted EPS weighted-average shares
outstanding 465,344 534,225
=========== ===========
Basic earnings per share (a/b) $ .59 .65
=========== ===========
Diluted earnings per share (a/c) $ .59 .65
=========== ===========
</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 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 had no material impact on the
Company's financial statements.
<PAGE> 23
Note 1 - Summary of Significant Accounting Policies (Continued)
---------------------------------------------------------------
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 had no material impact on the Company's financial statements.
In February 1999, the FASB issued SFAS No. 135 (Rescission of SFAS No. 75
and Technical Corrections). This statement rescinds SFAS No. 75,
Deferral of the Effective Date of Certain Accounting Requirements for
Pension Plans of State and Local Governmental Units. This statement also
amends SFAS No. 35, Accounting and Reporting by Defined Benefit Pension
Plans, to exclude from its scope plans that are sponsored by and provide
benefits for the employees of one or more state or local government
units. This statement also amends other existing authoritative
literature to make various technical corrections, clarify meaning, or
describe applicability under changed conditions. This statement is
effective for financial statements issued for fiscal years ending after
February 15, 1999. The adoption of this statement had no material impact
on the Company's financial statement.
In June 1999, the FASB issued SFAS No. 136 (Transfers of Assets to a Not-
for-Profit Organization or Charitable Trust that Raises or Holds
Contributions for Others). This statement establishes standards for
transactions in which an entity, the donor, makes a contribution by
transferring assets to a not-for-profit organization or charitable trust,
the recipient organization, that accepts the assets from the donor and
agrees to use those assets on behalf of or transfer those assets, the
return on investment of those assets, or both to another entity, the
beneficiary, that is specified by the donor. It also establishes
standards for transactions that take place in a similar manner but are
not contributions because the transfers are revocable, repayable or
reciprocal. This statement is effective for financial statements issued
for fiscal periods beginning after December 15, 1999. The adoption of
this statement is not expected to have a material impact on the Company's
financial statements.
In June 2000, the FASB issued SFAS No. 138 (Accounting for Certain
Derivative Instruments and Certain Hedging Activities). This statement
amends the accounting and reporting standards of SFAS No. 133 for certain
derivative instruments and certain hedging activities. Adoption of this
statement had no material impact on the Company's financial statements.
In June 2000, the FASB issued SFAS No. 139 (Recission of SFAS No. 53 and
amendments to SFAS No. 63, 89 and 121). This statement rescinds SFAS No.
53 and amends SFAS No. 63, 89 and 121, which established standards for
financial reporting by producers and distributors of motion picture
films. This statement will have no impact on the Company's financial
statements.
<PAGE> 24
Note 1 - Summary of Significant Accounting Policies (Continued)
---------------------------------------------------------------
In September 2000, the FASB issued SFAS No. 140 (Accounting for Transfers
and Servicing of Financial Assets and Extinguishments of Liabilities).
This statement replaces SFAS No. 125. It revises the standards for
accounting for securitizations and other transfers of financial assets
and collateral and requires certain disclosures, but it carries over most
of Statement 125's provisions without reconsideration. This statement
provides accounting and reporting standards for transfers and servicing
of financial assets and extinguishements 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. This statement is effective for
transfers and servicing of financial assets and extinguishments of
liabilities occurring after March 31, 2001. Adoption of this statement
had no material impact on the Company's financial statements.
Note 2 - Cash
-------------
As of September 30, 2000, 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 $1,249,905 350,906 331,446
========== ========== ==========
</TABLE>
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>
Note 3 - Investment Securities
------------------------------
Investment securities are carried in the accompanying balance sheets as
follows:
Securities available-for-sale consist of the following:
-------------------------------------------------------
As of September 30, 2000:
<TABLE>
<CAPTION>
GROSS GROSS
AMORTIZED UNREALIZED UNREALIZED MARKET
COST GAINS LOSSES VALUE
---------- ---------- --------- ---------
<S> <C> <C> <C> <C>
Obligations of other U.S.
Government agencies $4,928,756 0 97,773 4,830,983
Mortgage-backed securities 1,033,594 3,543 12,192 1,024,945
State, County and Municipal
securities 693,277 821 3,622 690,476
---------- ---------- --------- ---------
$6,655,627 4,364 113,587 6,546,404
========== ========== ========= =========
</TABLE>
<PAGE> 25
Note 3 - Investment Securities (Continued)
------------------------------------------
As of September 30, 1999:
<TABLE>
<CAPTION>
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>
The amortized cost and estimated market value of debt securities at
September 30, 2000, 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 $ 452,219 442,270
Due after one year through
five years 4,915,415 4,829,388
Due after five years through
ten years 203,277 201,500
Due after ten years through
fifteen years 837,791 827,556
Due after fifteen years through
twenty years 246,925 245,690
---------- ----------
$6,655,627 6,546,404
========== ==========
</TABLE>
Proceeds from sales of available-for-sale securities during the years ended
September 30, 2000 and 1999 were $541,477 and $500,000 with gross gains
(losses) of $(7,387) and $2,594 being realized, respectively. Proceeds
from maturities of available-for-sale securities during the years ended
September 30, 2000 and 1999 were $0 and $2,300,000, respectively. Proceeds
from maturities of held-to-maturity securities during the years ended
September 30, 2000 and 1999 were $0 and $200,000, respectively.
Securities with a carrying value of $780,188 and $586,314 at September 30,
2000 and 1999, respectively, were pledged to secure public monies as
required by law.
<PAGE> 26
Note 4 - Loans Receivable
-------------------------
A summary of loans receivable is presented below:
<TABLE>
<CAPTION>
SEPTEMBER 30,
------------------------
2000 1999
----------- -----------
<S> <C> <C>
First mortgage loans $43,030,387 38,302,559
Construction loans 4,155,435 2,801,542
FHLMC pool 1,044 1,787
Share loans 551,954 469,609
Consumer loans 3,248,972 1,812,528
----------- -----------
50,987,792 43,388,025
Loans in process (1,425,127) (1,825,400)
Allowance for loan losses (438,456) (389,000)
Deferred loan origination fees (72,205) (52,857)
----------- -----------
$49,052,004 41,120,768
=========== ===========
</TABLE>
An analysis of changes in the allowance for loan losses is as follows:
<TABLE>
<CAPTION>
YEAR ENDED SEPTEMBER 30,
------------------------
2000 1999
----------- -----------
<S> <C> <C>
Balance at beginning of period $ 389,000 370,000
Provision charged to income 60,154 19,900
Recoveries 0 0
Losses charged to allowance (10,698) (900)
----------- -----------
$ 438,456 389,000
=========== ===========
</TABLE>
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:
<TABLE>
<CAPTION>
SEPTEMBER 30,
------------------------
2000 1999
----------- -----------
<S> <C> <C>
First Mortgage Loans:
Secured by 1 to 4 family
residences $36,014,298 31,580,020
Secured by over 4 family
residences 856,130 612,668
Other real estate 6,159,959 6,109,871
Construction loans 4,155,435 2,801,542
FHLMC pools 1,044 1,787
Share loans 551,954 469,609
Consumer loans 3,248,972 1,812,528
----------- -----------
50,987,792 43,388,025
Loans in Process (1,425,127) (1,825,400)
Allowance for loan losses (438,456) (389,000)
Deferred loan origination fees (72,205) (52,857)
----------- -----------
Total $49,052,004 41,120,768
=========== ===========
</TABLE>
<PAGE> 27
Note 4 - Loans Receivable (Continued)
-------------------------------------
Loans on which the accrual of interest has been discontinued amounted to
$193,819 and $228,113 at September 30, 2000 and 1999, respectively. If
interest on those loans had been accrued, such income would have
approximated $14,200 and $19,745 for the years ended September 30, 2000 and
1999, respectively. Interest income on those loans, which is recorded only
when received, amounted to $10,086 and $8,392 for the years ended September
30, 2000 and 1999, respectively. No contractual modifications have been
made to these loans that would affect the interest ultimately due.
There were no loans at September 30, 2000 or 1999, which the Bank's
management considered to be impaired.
Loans receivable includes loans to officers and directors of the Bank
totaling approximately $1,167,543 and $980,056 at September 30, 2000 and
1999, 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.
Note 5 - Office Properties and Equipment
----------------------------------------
Office properties and equipment, at cost, are summarized as follows:
<TABLE>
<CAPTION>
SEPTEMBER 30, ESTIMATED
2000 1999 USEFUL LIVES
---------- ---------- ------------
<S> <C> <C> <C>
Land $ 228,914 228,914
Buildings 831,017 831,017 20-31 years
Furniture and fixtures 773,862 749,315 5-10 years
Automobile 31,337 31,337 5 years
---------- ----------
1,865,130 1,840,583
Less accumulated depreciation 381,523 239,185
---------- ----------
$1,483,607 1,601,398
========== ==========
</TABLE>
Depreciation expense for the years ended September 30, 2000 and 1999 was
$142,339 and $110,046, respectively.
Note 6 - Accrued Interest Receivable
------------------------------------
Accrued interest receivable is summarized as follows:
<TABLE>
<CAPTION>
SEPTEMBER 30,
------------------------
2000 1999
----------- -----------
<S> <C> <C>
Investment securities $ 103,059 100,059
Loans receivable 480,271 414,231
----------- -----------
$ 583,330 514,290
=========== ===========
</TABLE>
<PAGE> 28
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,
-------------------------------------------
2000 1999
-------------------- --------------------
BOOK VALUE % BOOK VALUE %
----------- ------- ----------- -------
<S> <C> <C> <C> <C>
Type of Account:
Checking Accounts $ 1,002,609 2.12 636,751 1.52
N.O.W. Accounts - 3.04%
(1999 - 3.48%) 2,062,054 4.35 2,029,835 4.83
Passbook - 4.02%
(1999 - 3.14%) 1,949,812 4.12 2,068,427 4.93
Certificates - 6.01%
(1999 - 5.86%) 42,321,543 89.41 37,258,082 88.72
----------- ------- ----------- -------
$47,336,018 100.00% 41,993,095 100.00%
=========== ======= =========== =======
</TABLE>
The aggregate amount of certificates of deposit in denominations of
$100,000 or more was $9,369,333 and $9,694,268 at September 30, 2000 and
1999, respectively.
At September 30, 2000, scheduled maturities of certificates of deposit were
as follows:
<TABLE>
<CAPTION>
YEAR ENDING
SEPTEMBER 30,
-------------
<S> <C>
2001 $35,994,381
2002 4,548,978
2003 1,524,362
2004 229,396
2005 24,426
-----------
$42,321,543
===========
</TABLE>
The Bank held deposits of $596,776 and $395,778 for related parties at
September 30, 2000 and 1999, respectively.
Interest expense on deposits is summarized as follows:
<TABLE>
<CAPTION>
YEAR ENDED SEPTEMBER 30,
2000 1999
---------- ----------
<S> <C> <C>
Passbook savings $ 86,747 77,195
NOW 66,839 62,406
Certificates of deposit 2,329,897 2,029,760
---------- ----------
$2,483,483 2,169,361
========== ==========
</TABLE>
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:
<TABLE>
<S> <C>
661,250 shares of common stock issued
@ $10 per share $6,612,500
Cost of conversion 410,963
----------
Net Proceeds $6,201,537
==========
</TABLE>
<PAGE> 29
Note 8 - Stockholders' Equity and Regulatory Matters (Continued)
----------------------------------------------------------------
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.
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, 2000 and
1999, 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, 2000:
Total equity $ 6,317 6,317 6,317
Unrealized (gains) losses
on securities 66 66 66
General valuation allowance 0 0 438
---------- ---------- ----------
Regulatory Capital $ 6,383 6,383 6,821
========== ========== ==========
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
========== ========== ==========
</TABLE>
<PAGE> 30
Note 8 - Stockholders' Equity and Regulatory Matters (Continued)
----------------------------------------------------------------
The Bank's actual capital amounts and ratios are presented (dollars in
thousands) as follows:
<TABLE>
<CAPTION>
TO BE WELL
CAPITALIZED
UNDER PROMPT
FOR CAPITAL CORRECTIVE
ADEQUACY ACTION
ACTUAL PURPOSES PROVISIONS
-------------- -------------- --------------
AMOUNT RATIO AMOUNT RATIO AMOUNT RATIO
------ ------ ------ ------ ------ ------
<S> <C> <C> <C> <C> <C> <C>
As of September 30, 2000:
Tangible Capital
(to adjusted total assets) $6,383 10.69% 896 1.5% 2,986 5.0%
Core Capital
(to adjusted total assets) 6,383 10.69% 2,388 4.0% 2,986 5.0%
Risk-Based Capital
(to risk-weighted assets) 6,821 16.53% 3,301 8.0% 4,126 10.0%
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%
</TABLE>
Note 9 - Provision For Income Taxes
-----------------------------------
The income tax provision is as follows:
<TABLE>
<CAPTION>
YEAR ENDED SEPTEMBER 30,
-----------------------
2000 1999
---------- ----------
<S> <C> <C>
Taxes payable currently $ 124,234 209,151
Deferred taxes (benefit) 12,013 (18,366)
Total tax provision $ 136,247 190,785
</TABLE>
The provision for income taxes represents the portion of estimated income
taxes relating to the years ended September 30, 2000 and 1999.
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, 2000 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.
<PAGE> 31
Note 9 - Provision for Income Taxes (Continued)
-----------------------------------------------
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,
-----------------------
2000 1999
---------- ----------
<S> <C> <C>
Deferred Tax Assets:
Allowance for loan losses $ 138,875 122,060
Unrealized losses on available-for-sale
securities 37,135 40,027
Deferred compensation payable 1,331 0
---------- ----------
Total 177,341 162,087
---------- ----------
Deferred Tax Liabilities:
Bad debt deduction recapture 26,259 36,788
Depreciation 38,570 21,908
---------- ----------
Total 64,829 58,696
---------- ----------
Net Deferred Tax Assets (Liabilities) $ 112,512 103,391
========== ==========
</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,
-----------------------
2000 1999
---------- ----------
<S> <C> <C>
Expected income tax $ 138,908 183,289
Increase (decrease) in tax resulting from:
State and local taxes 14,088 18,949
Other, net (16,749) (11,453)
---------- ----------
Actual income tax expense $ 136,247 190,785
========== ==========
</TABLE>
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:
<TABLE>
<CAPTION>
NOTIONAL AMOUNT
-----------------------
SEPTEMBER 30,
-----------------------
2000 1999
---------- ----------
<S> <C> <C>
Commitments to extend credit $1,425,127 1,825,400
Standby letters of credit 61,300 109,790
</TABLE>
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,
2000 or 1999.
<PAGE> 32
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 $0 for the years ended September 30, 2000 and 1999, 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, 2000 and 1999, the cash values of
those policies were $626,638 and $482,354 and the liability accrued for
benefits payable under the plan was $3,914 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.
As of September 30, 2000 and 1999, the ESOP held 52,900 shares of the
Company's common stock as follows:
<TABLE>
<CAPTION>
SEPTEMBER 30,
-----------------------
2000 1999
---------- ----------
<S> <C> <C>
Number of Shares:
Released and allocated 7,935 2,645
Suspense 44,965 50,255
Fair Value:
Released and allocated $ 71,911 28,090
Suspense 407,495 533,708
</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,
-----------------------
2000 1999
---------- ----------
<S> <C> <C>
Compensation $ 33,605 27,851
Interest 39,344 43,459
---------- ----------
$ 72,949 71,310
========== ==========
</TABLE>
<PAGE> 33
Note 12 - Reconciliation of Regulatory Reports
----------------------------------------------
Net income and net worth of the Bank reported in these audited financial
statements is the same as amounts in reports filed with the Office of
Thrift Supervision (OTS) as follows (In Thousands):
Net Income:
<TABLE>
<CAPTION>
YEAR ENDED SEPTEMBER 30,
-----------------------
2000 1999
---------- ----------
<S> <C> <C>
Net Income reported to OTS $ 256 338
Reconciling Items 0 0
---------- ----------
Net Income for the twelve months ended
September 30 per audited financial statement $ 256 338
========== ==========
</TABLE>
Net Worth:
<TABLE>
<CAPTION>
SEPTEMBER 30,
-----------------------
2000 1999
---------- ----------
<S> <C> <C>
Net Worth reported to OTS $ 6,317 6,108
Reconciling Items 0 0
---------- ----------
Total Net Worth on September 30, per audited
financial statement $ 6,317 6,108
========== ==========
</TABLE>
Note 13 - Advances From Federal Home Loan Bank
----------------------------------------------
Advances consist of the following:
<TABLE>
<CAPTION>
SEPTEMBER 30,
-----------------------
2000 1999
---------- ----------
<S> <C> <C>
Advances payable - Federal Home Loan Bank of
Atlanta, bearing interest at 6.94%,
due October 4, 2000, collateralized by all
stock in the Federal Home Loan Bank and
qualifying first mortgage loans. $5,000,000 2,500,000
========== ==========
</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, 2000 SEPTEMBER 30, 1999
----------------------- -----------------------
CARRYING FAIR CARRYING FAIR
AMOUNT VALUE AMOUNT VALUE
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Financial assets:
Cash and cash equivalents $ 1,663,455 1,663,455 1,968,695 1,968,695
Investment securities 6,546,404 6,546,404 6,558,701 6,558,701
Loans, net of allowance
for loan losses 49,052,004 49,021,000 41,120,768 41,308,000
Accrued interest receivable 583,330 583,330 514,290 514,290
Investment in Federal Home
Loan Bank stock 320,300 320,300 286,700 286,700
Financial liabilities:
Deposits 47,336,018 47,260,000 41,993,095 42,058,000
Advances from Federal Home
Loan Bank 5,000,000 5,000,000 2,500,000 2,500,000
Accrued interest payable 337,586 337,586 303,512 303,512
</TABLE>
<PAGE> 34
Note - 14- Fair Values of Financial Instruments (Continued)
-----------------------------------------------------------
The carrying amounts in the preceding table are included in the statement
of financial condition under the applicable captions.
<TABLE>
<CAPTION>
SEPTEMBER 30, 2000 SEPTEMBER 30, 1999
----------------------- -----------------------
CARRYING FAIR CARRYING FAIR
AMOUNT VALUE AMOUNT VALUE
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Other:
Loan commitments $ 1,425,127 1,425,127 1,825,400 1,825,400
Standby letters of credit 61,300 61,300 109,790 109,790
</TABLE>
Note 15 - Related Party Transactions
------------------------------------
Related parties to the Company are identified as its officers and
directors. During the years ended September 30, 2000 and 1999, the Company
had the following related party transactions:
<TABLE>
<CAPTION>
YEAR ENDED SEPTEMBER 30,
-----------------------
2000 1999
---------- ----------
<S> <C> <C>
Loans to officers and directors (balance at
September 30), Note 4 $1,167,543 980,056
Deposits held for officers and directors (balance
at September 30), Note 7 596,776 395,778
Insurance premiums paid - director 15,845 47,664
Legal fees paid - director 3,090 5,616
Supplies purchased - officers and directors 8,295 3,369
Furnishings purchased 1,011 78,158
</TABLE>
<PAGE> 35
Note 16 - Financial Information of Quitman Bancorp, Inc. (Parent Only)
----------------------------------------------------------------------
<TABLE>
<CAPTION>
STATEMENT OF FINANCIAL CONDITION
--------------------------------
ASSETS
------
SEPTEMBER 30,
-----------------------
2000 1999
---------- ----------
<S> <C> <C>
Cash on deposit $ 79,016 22,425
Investment in Quitman Federal Savings Bank 6,316,975 6,108,324
Investment securities available-for-sale 739,062 986,400
Loans receivable - subsidiary ESOP 449,650 502,550
Accrued interest receivable 42,206 50,975
Other assets 3,243 5,638
---------- ----------
Total Assets $7,630,152 7,676,312
========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
------------------------------------
Liabilities:
Income taxes payable $ 6,039 1,312
---------- ----------
Stockholders' Equity:
Capital stock 66,125 66,125
Additional paid in capital 6,135,412 6,135,412
Retained earnings 3,662,836 3,491,984
Accumulated other comprehensive income (loss) (72,086) (77,699)
ESOP loan guaranty of subsidiary (449,650) (502,550)
Treasury stock (1,718,524) (1,438,272)
---------- ----------
7,624,113 7,675,000
---------- ----------
Total Liabilities and Stockholders' Equity $7,630,152 7,676,312
========== ==========
</TABLE>
<PAGE> 36
Note 16 - Financial Information of Quitman Bancorp, Inc. (Parent Only)
(Continued)
----------------------------------------------------------------------
<TABLE>
<CAPTION>
STATEMENT OF INCOME
-------------------
YEAR ENDED SEPTEMBER 30,
-----------------------
2000 1999
---------- ----------
<S> <C> <C>
Income:
Equity in income of subsidiary $ 256,239 338,392
Interest income 82,863 99,695
Gain (Loss) on sale of securities (7,319) 0
Miscellaneous 673 0
---------- ----------
332,456 438,087
Expenses 50,413 83,416
---------- ----------
Income before taxes 282,043 354,671
Income taxes 9,738 6,372
---------- ----------
Net Income $ 272,305 348,299
========== ==========
</TABLE>
<PAGE> 37
Note 16 - Financial Information of Quitman Bancorp, Inc. (Parent Only)
(Continued)
----------------------------------------------------------------------
<TABLE>
<CAPTION>
STATEMENT OF CASH FLOWS
-----------------------
YEAR ENDED SEPTEMBER 30,
-----------------------
2000 1999
---------- ----------
<S> <C> <C>
Cash Flows From Operating Activities:
Net income $ 272,305 348,299
Adjustments:
Equity in income of subsidiary (256,239) (338,392)
Amortization of premium on securities 4,210 3,890
(Gain) Loss on sale of securities 7,319 0
Dividends received from subsidiary 101,452 0
(Increase) decrease in accrued
interest receivable 8,769 (7,273)
Increase (decrease) in income
taxes payable 4,727 (8,105)
---------- ----------
Net Cash Provided (Used) By Operating Activities 142,543 (1,581)
---------- ----------
Cash Flows From Investing Activities:
Purchase of available-for-sale securities 0 (505,665)
Maturity of available-for-sale securities 0 500,000
Payments received on loan to subsidiary ESOP 52,900 26,450
Proceeds from sale of available-for-sale
Securities 242,851 0
---------- ----------
Net Cash Provided (Used) By Investing Activities 295,751 20,785
---------- ----------
Cash Flows From Financing Activities:
Dividends paid (101,452) (112,413)
Purchase of treasury stock (280,251) (1,438,272)
---------- ----------
Net Cash Provided By Financing Activities (381,703) (1,550,685)
---------- ----------
Net Increase In Cash 56,591 (1,531,481)
Cash And Cash Equivalents At Beginning Of Period 22,425 1,553,906
---------- ----------
Cash And Cash Equivalents At End Of Period $ 79,016 22,425
========== ==========
Supplemental Disclosure of Cash Flow Information:
-------------------------------------------------
Cash Paid During The Period For:
Interest $ 0 0
========== ==========
Income taxes $ 5,011 14,477
========== ==========
Schedule Of Non-Cash Investing And Financing Activities:
--------------------------------------------------------
Total increase (decrease) in unrealized gains on
Securities available-for-sale $ 7,042 (25,576)
========== ==========
</TABLE>
<PAGE> 38
Note 17 - 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
options 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%.
Weighted-average assumptions used for grants in the year ended September
30, 2000 are as follows: dividend yield 2.10%, risk free interest rate of
6.00%, expected lives of 4.5 years for the options and a volatility rate of
3.05%.
A summary of the statement of the Company's Stock Option Plan as of
September 30, 2000 and 1999 and the changes during the years then ended is
presented below:
<TABLE>
<CAPTION>
YEAR ENDED YEAR ENDED
SEPTEMBER 30, 2000 SEPTEMBER 30, 1999
------------------ ------------------
WEIGHTED- WEIGHTED-
AVERAGE AVERAGE
EXERCISE EXERCISE
SHARES PRICE SHARES PRICE
------ ---------- ------ ----------
<S> <C> <C> <C> <C>
Outstanding at
beginning of
year 66,121 $ 9.75 0 $ .00
Granted 0 .00 66,121 9.75
Exercised 0 .00 0 .00
Forfeited 0 .00 0 .00
------ ------
Outstanding at end of year 66,121 $ 9.75 66,121 9.75
====== ======
Exercisable at
September 30 66,121 44,961
====== ======
Weighted-average fair
value of options
granted during
the year $ 1.20 $ 2.97
========== ==========
</TABLE>
The following table summarizes information about fixed stock options
outstanding at September 30, 2000:
<TABLE>
<CAPTION>
WEIGHTED-
RANGE OF AVERAGE WEIGHTED- WEIGHTED-
OR ACTUAL NUMBER REMAINING AVERAGE NUMBER AVERAGE
EXERCISE OUTSTANDING CONTRACTUAL EXERCISE EXERCISABLE EXERCISE
PRICES AT 9-30-00 LIFE PRICE AT 9-30-00 PRICE
----------- ----------- ----------- ----------- ----------- -----------
<C> <C> <C> <C> <C> <C>
$ 9.75 66,121 8 YEARS $ 9.75 66,121 $ 9.75
</TABLE>
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
for the year ended September 30, 2000 would have increased by $25,392,
resulting in net income of $257,070, net of tax. Basic earnings per share
would have declined from $.59 to $.55 and diluted earnings per share would
have declined from $.59 to $.55.
<PAGE> 39
Note 17 - Stock Option Plan (Continued)
---------------------------------------
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
for the year ended September 30, 1999 would have increased by $133,534,
resulting in net income of $268,179, net of tax. Basic earnings per share
would have declined from $.65 to $.50 and diluted earnings per share would
have declined from $.65 to $.50.
Note 18 - 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.
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,
2000 and 1999 were as follows:
<TABLE>
<CAPTION>
SEPTEMBER 30,
-----------------------
2000 1999
---------- ----------
<S> <C> <C>
Number of awards outstanding at
beginning of year 21,159 0
Number of awards granted 0 26,449
Number of awards earned - 20% 5,290 5,290
---------- ----------
Number of awards outstanding at end of year 15,869 21,159
========== ==========
Fair market value of Company's stock,
per share, on September 1, 2000 and 1999 $ 10.00 11.00
========== ==========
Contributions $ 52,900 58,190
========== ==========
</TABLE>
Stock issued under this plan was purchased on the open market at a cost of
$52,900 and $58,190, which was expensed as compensation for the year ended
September 30, 2000 and 1999, respectively.
<PAGE> 40
QUITMAN BANCORP, INC.
602 East Screven Street
Quitman, Georgia 31643
(912) 263-7538
Board of Directors and Executive Officers of Quitman Bancorp, Inc.
------------------------------------------------------------------
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
Vice President and co-owner Quitman Bancorp, Inc. and Quitman
Holwell-Fletcher Insurance Federal Savings Bank
Agency, Inc. 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
-------------------------------- ----------------------------
Manatt, Phelps & Phillips, LLP Registrar & Transfer Company
1001 Page Mill Road,Bldg. 2 10 Commerce Drive
Palo Alto, CA 94304 Cranford, New Jersey 07016
(908) 497-2300
Our Annual Report for the year ended September 30, 2000 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 23, 2001 at 4:30 p.m. at 602 East Screven Street,
Quitman, Georgia.
