UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D. C. 20549
FORM 10-K
(X) ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934 FOR THE FISCAL YEAR ENDED DECEMBER 31, 1998
or
( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
Commission file number: 000-25145
LAMAR CAPITAL CORPORATION
(exact name of Registrant as specified in its charter)
MISSISSIPPI 64-0733976
(State or other jurisdiction of (I.R.S. Employer Identification Number)
incorporation of organization)
401 Shelby Speights Drive, Purvis , MS 39475
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: 601-794-6047
Securities registered pursuant to Section 12(b) of the Act:
Name of Each Exchange on
Title of Each Class Which Registered
------------------- -------------------------
None None
Securities registered pursuant to section 12(g) of the Act:
Common Stock, $.50 par value (Title of Class)
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act if
1934 during the preceding 12 months (or for such shorted period that the
Registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. YES ( X ) NO ( )
Indicate by check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K is not contained herein, and will not be contained,
to the best of registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K.
Indicate the number of shares outstanding of each of the Registrant's
classes of common stock, as of the latest practicable date.
Class Outstanding at February 28, 1999
Common stock, $.50 par value 4,315,707 Shares
The aggregate market value of the voting stock held by nonaffiliates of
the Registrant on February 28, 1999 was $26,588,000.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the following documents are incorporated by reference to
Part I, II, and III of the Form 10-K report: Proxy Statement dated April 12,
1999 for Registrant's Annual Meeting of Stockholders to be held May 11, 1999
(Part III).
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LAMAR CAPITAL CORPORATION
FORM 10-K
INDEX
PAGE
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PART I
ITEM 1. BUSINESS............................................................1
ITEM 2. PROPERTIES.........................................................10
ITEM 3. LEGAL PROCEEDINGS..................................................12
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS................12
PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON STOCK AND RELATED
STOCKHOLDER MATTERS................................................12
ITEM 6. SELECTED FINANCIAL DATA............................................14
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS..............................................15
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA........................31
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING
AND FINANCIAL DISCLOSURE...........................................55
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.................55
ITEM 11. EXECUTIVE COMPENSATION.............................................55
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT.........................................................55
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.....................55
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K....55
SIGNATURES....................................................................57
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LAMAR CAPITAL CORPORATION
FORM 10-K
PART I
In addition to historical information, this report contains statements
which constitute forward-looking statements and information which are based on
management's beliefs, plans, expectations and assumptions and on information
currently available to management. The words "may," "should," "expect,"
"anticipate," "intend," "plan," "continue," "believe," "seek," "estimate," and
similar expressions used in this report that do not relate to historical facts
are intended to identify forward-looking statements. These statements appear in
a number of places in this report, including, but not limited to, statements
found in Item 1 "Business" and in Item 7 "Management's Discussion and Analysis."
All phases of the Company's operations are subject to a number of risks and
uncertainties. Investors are cautioned that any such forward-looking statements
are not guarantees of future performance and involve risks and uncertainties,
and that actual results may differ materially from those projects in the
forward-looking statements. Among the factors that could cause actual results to
differ materially are the risks and uncertainties discussed in this report,
including, without limitation, the portions referenced above, and the
uncertainties set forth from time to time in the Company's other public reports
and filings and public statements, many of which are beyond the control of the
Company, and any of which, or a combination of which, could materially affect
the results of the Company's operations and whether forward-looking statements
made by the Company ultimately prove to be accurate.
ITEM 1. BUSINESS
Background
Lamar Capital Corporation (the "Company") was formed in 1986 to serve
as a holding company for Lamar Bank (the "Bank"). The Company conducts its
business activities through the Bank and the other subsidiaries described below.
Since the establishment of the Bank (then called Lamar County Bank) in
1904 in Purvis, Mississippi, the Bank has grown to seven banking facilities in
three southeastern Mississippi counties. Most of this growth has occurred in the
last decade as management responded to opportunities presented by the growth of
the Lamar County and Hattiesburg, Mississippi market areas.
In 1935, the Bank expanded outside of Purvis by acquiring the Sumrall
Bank, located in the extreme north end of Lamar County. In 1980, the Bank moved
into its current main office facilities. In response to the rapid growth of
northeast Lamar County, the Bank built a branch on Highway 98 West in
Hattiesburg in 1989, marking the Bank's initial entry into the Hattiesburg
market area. In 1991, the Bank expanded for the first time into another county
by purchasing the Prentiss branch of a failed savings and loan association from
the Resolution Trust Corporation. In 1994, the Bank opened a second Hattiesburg
branch in the newly constructed Turtle Creek Mall. This opening was followed by
the Bank's first entry into Forrest County, Mississippi with the opening of the
Petal branch in 1996. In June of 1998, the Bank acquired property which will be
used to open a new branch in Hattiesburg, Mississippi on Hardy Street, a major
thoroughfare, near the main campus of the University of Southern Mississippi.
This branch is expected to open in the second half of 1999.
During the 1990's, the Company also expanded its financial products and
its customer base. In 1992, the Bank established a consumer finance subsidiary,
Southern Financial Services, Inc. ("SFSI"), which makes consumer loans to
persons who may not be eligible for financing from the Bank. SFSI, has offices
in Purvis, Hattiesburg, Petal, Prentiss, Monticello, Poplarville and Gulfport,
Mississippi. In 1997, the Company founded The Mortgage Shop, Inc. ("MSI"),
located in Hattiesburg, Mississippi. MSI originates B and C grade mortgage loans
which are sold in the secondary market. Most recently the Bank further expanded
the range of services offered by entering an arrangement with Robert Thomas
Securities, Inc. to provide stock and other securities trading services for
customers of the Bank and other investors. These services are provided in
Hattiesburg and by appointment at other locations. With the addition of these
services, the Company is executing its strategy of offering a broad range of
banking and financial services with the personalized focus of a community
banking organization.
The Company continues to look for additional expansion opportunities,
either by establishing de novo banking offices or by acquiring existing
institutions in the financial services industry. The Company intends to consider
various strategic acquisitions of banks or banking assets in those areas that
management believes would complement and increase the Company's existing
business, or expand in market areas or product lines that management considers
attractive.
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Lines of Business
Historically, the Company has extended credit and provided general
banking services through its banking center network to individuals and small and
medium-sized businesses. During the past several years the Company has sought
new lines of business to diversify its asset mix and further enhance its
profitability. While each new line of business reflects the Company's efforts to
enrich its asset mix, each of these lines of business is an outgrowth of the
community banking and lending services that the Company has performed over the
years. In keeping with the Company's operating philosophy, each of these
businesses has been carefully developed and is subject to various quality
controls. The Company's principal lines of business are:
o Real Estate Lending. The Bank's real estate loans consist of
residential first and second mortgage loans, residential construction
loans and home equity lines of credit and term loans secured by first
and second mortgages on the residences of borrowers for home
improvements, education and other personal expenditures. The Bank
makes mortgage loans with a variety of terms, including fixed and
floating rates. These loans are made consistent with the Bank's
appraisal policy and real estate lending policy which prescribe
maximum loan-to-value ratios and maturities. Management expects that
these loan-to-value ratios are sufficient to compensate for
fluctuations in the real estate market and to minimize the risk of
loss that could result from a downturn in that market. Generally, the
Bank retains real estate loans with maturities under ten years and
sells mortgage loans with longer maturities. MSI originates B and C
grade mortgage loans which are sold in the secondary market.
o Consumer Lending. The Bank and SFSI offer consumer installment loans
to business owners and other individuals for personal, family and
household purposes. Consumer loan repayments depend upon a borrower's
financial stability and are more likely to be adversely affected by
job loss, divorce, illness and other personal hardships. In addition,
collateral such as automobiles and other personal property securing
consumer loans depreciates rapidly and sometimes is an inadequate
repayment source if a borrower defaults. In evaluating these loans,
the Bank requires its lending officers to review the borrower's level
and stability of income, past credit history and the impact of these
factors on the borrower's ability to repay the loan in a timely
manner. In addition, the Bank requires that its banking officers
maintain an appropriate margin between the loan amount and collateral
value.
o Commercial Lending. The Bank's commercial loan portfolio is
dispersed among various business lines such as commercial
construction, trucking, timber, utilities, auto and recreational
vehicles, farm supplies and heavy equipment. Such loans are primarily
for the financing of accounts receivable, property, plant, equipment
and inventory. The Bank also offers Small Business Administration
loans. Commercial lending entails greater risks than traditional,
single family residential lending. Commercial loans typically involve
larger loan balances concentrated in fewer borrowers. The analysis of
commercial loans, which requires expertise in evaluating a commercial
enterprise and its collateral, is generally more complex than the
analysis required for single family residential lending. Like consumer
loans, commercial loans are subject to adverse conditions in the
economy, as well as the market for the specific goods and services
sold by the commercial borrower. Loans secured by commercial real
estate can also be affected by trends in the local real estate market.
In making these loans, the Bank manages its credit risk by actively
monitoring such measures as advance rate, cash flow, collateral value
and other appropriate credit factors.
o Deposits and Other Borrowings. Deposits are a key component of the
Company's banking business, serving as a source of funding for lending
as well as for increasing customer account relationships. The Company
offers competitively priced deposit products, including checking,
savings and time deposit accounts, seeking to increase core deposits
and market share. Borrowings, principally from the Federal Home Loan
Bank ("FHLB"), and lines of credit with other banks, provide other
sources of liquidity.
o Brokerage Services. The Bank provides brokerage services through a
joint arrangement with Robert Thomas Securities, Inc., a subsidiary of
Raymond James & Associates, Inc. These services are provided in
Hattiesburg and by appointment at other locations. The Company
developed brokerage services to (1) help retain existing customers who
were seeking alternative investments, (2) attract additional,
sophisticated customers from its market areas, and (3) to enhance the
Company's franchise by offering a broader scope of financial services.
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o Investments. The Company's investment securities, together with cash
and cash equivalents, provide an important source of liquidity. The
Company uses its investments as collateral for borrowings and to
secure public fund deposits. The investment portfolio is managed by an
internal committee chaired by the President in accordance with
policies approved by the Company's Board of Directors.
The Company's operating revenues are derived primarily from interest
earned from its loan and investment securities portfolios and fee income from
loan and deposit products. The Company is not dependent upon a single customer,
or a few customers, the loss of any one or more of which would have a material
adverse effect on the statement of condition or results of operations.
Competition
The Company competes with several local and regional commercial banks,
thrifts, credit unions and mortgage companies for deposits, loans and other
banking related financial services. There is intense competition in the Bank's
markets from other financial institutions as well as other "non-bank" companies
which engage in similar activities. Some of the Company's competitors are not
subject to the degree of regulatory review and restrictions which apply to the
Bank. In addition, the Company must compete with much larger financial
institutions which have greater financial resources than the Company and
aggressively compete for market share in the Lamar/Forrest County market. These
competitors attempt to gain market share through their financial products mix,
pricing strategies and banking center locations. Legislative developments
related to interstate branching and banking in general, by providing large
banking institutions easier access to a broader marketplace, are creating more
competitive pressure on smaller financial institutions. The Company also
competes with insurance companies, savings banks, consumer finance companies,
investment banking firms, brokerage houses, mutual fund managers, investment
advisors and credit unions. Retail establishments compete for loans by offering
credit cards and retail installment contracts for the purchase of goods and
merchandise. It is anticipated that competition from both bank and non-bank
entities will continue to grow.
Employees
As of December 31, 1998, the Bank had 130 employees of whom 114 were
full-time and 16 part-time. MSI has four full-time employees and SFSI has 24
employees of whom 19 were full-time and five part-time. In addition to a bonus
program, the Bank currently maintains an employee benefit program providing,
among other benefits, a self-insured medical plan, a profit sharing and 401(k)
retirement plan, employee stock ownership plan and life and disability
insurance. In August of 1998, the Company adopted a stock incentive plan under
which it plans to grant stock options for selected employees. These employee
benefits, as a whole, are considered by management to be generally competitive
with employee benefits provided by other employers in Mississippi. The Company
believes the future success of its subsidiaries will depend, in part, on its
ability to continue to attract and retain skilled retail, technical, and
managerial personnel in order to maintain its quality delivery of financial and
banking services. None of the Company's employees are subject to a collective
bargaining agreement, and the Company has never experienced a work stoppage.
Supervision and Regulation
The supervision and regulation of bank holding companies and their
subsidiaries is intended primarily for the protection of depositors, the deposit
insurance funds of the Federal Deposit Insurance Corporation (the "FDIC") and
the banking system as a whole, and not for the protection of the bank holding
company shareholders or creditors. The banking agencies have broad enforcement
power over bank holding companies and banks including the power to impose
substantial fines and other penalties for violations of laws and regulations.
The following description summarizes some of the laws to which the
Company and the Bank are subject. References herein to applicable statutes and
regulations are brief summaries thereof, do not purport to be complete, and are
qualified in their entirety by reference to such statutes and regulations.
The Company. The Company is a bank holding company registered under the
Bank Holding Company Act of 1956, as amended (the "BHCA"), and it is subject to
supervision, regulation and examination by the Board of Governors of the Federal
Reserve System (the "Federal Reserve Board"). The BHCA and other federal laws
subject bank holding
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companies to particular restrictions on the types of activities in which they
may engage, and to a range of supervisory requirements and activities, including
regulatory enforcement actions for violations of laws and regulations.
Regulatory Restrictions on Dividends; Source of Strength. It is the
policy of the Federal Reserve Board that bank holding companies should pay cash
dividends on common stock only out of income available over the past year and
only if prospective earnings retention is consistent with the organization's
expected future needs and financial condition. The policy provides that bank
holding companies should not maintain a level of cash dividends that undermines
the bank holding company's ability to serve as a source of strength to its
banking subsidiaries.
Under Federal Reserve Board policy, a bank holding company is expected
to act as a source of financial strength to each of its banking subsidiaries and
to commit resources to their support. Such support may be required at times
when, absent this Federal Reserve Board policy, a holding company may not be
inclined to provide it. As discussed below, a bank holding company in certain
circumstances could be required to guarantee the capital plan of an
undercapitalized banking subsidiary.
In the event of a bank holding company's bankruptcy under Chapter 11 of
the U.S. Bankruptcy Code, the trustee will be deemed to have assumed and is
required to cure immediately any deficit under any commitment by the debtor
holding company to any of the federal banking agencies to maintain the capital
of an insured depository institution, and any claim for breach of such
obligation will generally have priority over most other unsecured claims.
Activities "Closely Related" to Banking. The BHCA prohibits a bank
holding company, with certain limited exceptions, from acquiring direct or
indirect ownership or control of any voting shares of any company which is not
a bank or from engaging in any activities other than those of banking, managing
or controlling banks and certain other subsidiaries, or furnishing services to
or performing services for its subsidiaries. One principal exception to these
prohibitions allows the acquisition of interests in companies whose activities
are found by the Federal Reserve Board, by order or regulation, to be so closely
related to banking or managing or controlling banks, as to be a proper incident
to banking. Some of the activities that have been determined by regulation to be
closely related to banking are making or servicing loans, performing certain
data processing services, acting as an investment or financial advisor to
certain investment trusts and investment companies, and providing securities
brokerage services. Other activities approved by the Federal Reserve Board
include consumer financial counseling, tax planning and tax preparation, futures
and options advisory services, check guaranty services, collection agency and
credit bureau services, and personal property appraisals. In approving
acquisitions by bank holding companies of companies engaged in banking-related
activities, the Federal Reserve Board considers a number of factors, and weighs
the expected benefits to the public (such as greater convenience and increased
competition or gains in efficiency) against the risks of possible adverse
effects (such as undue concentration of resources, decreased or unfair
competition or conflicts of interest). The Federal Reserve Board is also
empowered to differentiate between activities commenced de novo and activities
commenced through acquisition of a going concern. Despite prior approval, the
Federal Reserve may order a holding company or its subsidiaries to terminate any
activity, or terminate its ownership or control of any subsidiary, when it has
reasonable cause to believe that continuation of such activity constitutes a
serious risk to the financial safety, soundness or stability of any bank
subsidiary of the bank holding company.
Securities Activities. The Federal Reserve Board has approved
applications by bank holding companies to engage, through nonbank subsidiaries,
in certain securities-related activities (underwriting of municipal revenue
bonds, commercial paper, consumer receivable-related securities and one-to-four
family mortgage-backed securities), provided that the affiliates would not be
"principally engaged" in such activities for purposes of Section 20 of the
Glass-Steagall Act. In limited situations, holding companies may be able to use
such subsidiaries to underwrite and deal in corporate debt and equity
securities.
Safe and Sound Banking Practices. Bank holding companies are not
permitted to engage in unsafe and unsound banking practices. The Federal Reserve
Board's Regulation Y, for example, generally requires a holding company to give
the Federal Reserve Board prior notice of any redemption or repurchase of its
own equity securities, if the consideration to be paid, together with the
consideration paid for any repurchases or redemptions in the preceding year, is
equal to 10% or more of the company's consolidated net worth. The Federal
Reserve Board may oppose the transaction if it believes that the transaction
would constitute an unsafe or unsound practice or would violate any law or
regulation.
The Federal Reserve Board has broad authority to prohibit activities of
bank holding companies and their nonbanking subsidiaries which represent unsafe
and unsound banking practices or which constitute violations of laws
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or regulations, and can assess civil money penalties for certain activities
conducted on a knowing and reckless basis, if those activities caused a
substantial loss to a depository institution. The penalties can be as high as
$1,000,000 for each day the activity continues.
Anti-tying Restrictions. With certain limited exceptions, bank holding
companies and their affiliates are prohibited from tying the provision of
certain services, such as extensions of credit, to other services offered by a
holding company or its affiliates.
Capital Adequacy Requirements. The Federal Reserve Board has adopted a
system using risk-based capital guidelines to evaluate the capital adequacy of
bank holding companies. Under the guidelines, specific categories of assets are
assigned different risk weights, based generally on the perceived credit risk of
the asset. These risk weights are multiplied by corresponding asset balances to
determine a "risk-weighted" asset base. The guidelines require a minimum total
risk-based capital ratio of 8.0% (of which at least 4.0% is required to consist
of Tier 1 capital elements). Total capital is the sum of Tier 1 and Tier 2
capital. As of December 31, 1998, the Company's ratio of Tier 1 capital to total
risk-weighted assets was 14.65% and its ratio of total capital to total
risk-weighted assets was 15.90%. See Note 11 to the Consolidated Financial
Statements.
In addition to the risk-based capital guidelines, the Federal Reserve
Board uses a leverage ratio as an additional tool to evaluate the capital
adequacy of bank holding companies. The leverage ratio is a company's Tier 1
capital divided by its average total consolidated assets (less goodwill and
certain other intangible assets). Certain highly-rated bank holding companies
may maintain a minimum leverage ratio of 3.0%, but other bank holding companies
may be required to maintain a leverage ratio of up to 200 basis points above the
regulatory minimum. As of December 31, 1998, the Company's leverage ratio was
9.55%.
The federal banking agencies' risk-based and leverage ratios are
minimum supervisory ratios generally applicable to banking organizations that
meet certain specified criteria, assuming that they have the highest regulatory
rating. Banking organizations not meeting these criteria are expected to operate
with capital positions well above the minimum ratios. The federal bank
regulatory agencies may set capital requirements for a particular banking
organization that are higher than the minimum ratios when circumstances warrant.
Federal Reserve Board guidelines also provide that banking organizations
experiencing internal growth or making acquisitions will be expected to maintain
strong capital positions substantially above the minimum supervisory levels,
without significant reliance on intangible assets.
Imposition of Liability for Undercapitalized Subsidiaries. Bank
regulators are required to take "prompt corrective action" to resolve problems
associated with insured depository institutions whose capital declines below
certain levels. In the event an institution becomes "undercapitalized," it must
submit a capital restoration plan. The capital restoration plan will not be
accepted by the regulators unless each company having control of the
undercapitalized institution guarantees the subsidiary's compliance with the
capital restoration plan up to a certain specified amount. Any such guarantee
from a depository institution's holding company is entitled to a priority of
payment in bankruptcy.
The aggregate liability of the holding company of an undercapitalized
bank is limited to the lesser of 5% of the institution's assets at the time it
became undercapitalized or the amount necessary to cause the institution to be
"adequately capitalized." The bank regulators have greater power in situations
where an institution becomes "significantly" or "critically" undercapitalized or
fails to submit a capital restoration plan. For example, a bank holding company
controlling such an institution can be required to obtain prior Federal Reserve
Board approval of proposed dividends, or might be required to consent to a
consolidation or to divest the troubled institution or other affiliates.
Acquisitions by Bank Holding Companies. The BHCA requires every bank
holding company to obtain the prior approval of the Federal Reserve Board before
it may acquire all or substantially all of the assets of any bank, or ownership
or control of any voting shares of any bank, if after such acquisition it would
own or control, directly or indirectly, more than 5% of the voting shares of
such bank. In approving bank acquisitions by bank holding companies, the Federal
Reserve Board is required to consider the financial and managerial resources and
future prospects of the bank holding company and the banks concerned, the
convenience and needs of the communities to be served, and various competitive
factors.
Control Acquisitions. The Change in Bank Control Act prohibits a person
or group of persons from acquiring "control" of a bank holding company unless
the Federal Reserve Board has been notified and has not objected to the
transaction. Under a rebuttable presumption established by the Federal Reserve
Board, the acquisition of 10% or more
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of a class of voting stock of a bank holding company with a class of securities
registered under Section 12 of the Exchange Act, such as proposed by the
Company, would, under the circumstances set forth in the presumption, constitute
acquisition of control of the Company.
In addition, any company is required to obtain the approval of the
Federal Reserve Board under the BHCA before acquiring 25% (5% in the case of an
acquiror that is a bank holding company) or more of the outstanding Common Stock
of the Company, or otherwise obtaining control or a "controlling influence" over
the Company.
The Bank. The Bank is a Mississippi chartered banking corporation, the
deposits of which are insured by the Bank Insurance Fund ("BIF") and by the
Savings Association Insurance Fund ("SAIF") of the FDIC. The SAIF insurance
funds resulted from the acquisition of thrift deposits in Purvis and Prentiss.
The Bank is not a member of the Federal Reserve System; the Bank is subject to
supervision and regulation by the FDIC and the Mississippi Department of Banking
and Consumer Finance. Such supervision and regulation subjects the Bank to
special restrictions, requirements, potential enforcement actions and periodic
examination by the FDIC and the Mississippi Department of Banking and Consumer
Finance. Because the Federal Reserve Board regulates the bank holding company
parent of the Bank, the Federal Reserve Board also has supervisory authority
which directly affects the Bank.
Equivalence to National Bank Powers. To the extent that the Mississippi
laws and regulations may have allowed state-chartered banks to engage in a
broader range of activities than national banks, the Federal Deposit Insurance
Act (the "Federal Reserve Act") has been amended to limit this authority. Under
the Federal Reserve Act, no state bank or subsidiary thereof may engage as
principal in any activity not permitted for national banks, unless the
institution complies with applicable capital requirements and the FDIC
determines that the activity poses no significant risk to the insurance fund. In
general, statutory restrictions on the activities of banks are aimed at
protecting the safety and soundness of depository institutions. However, the
provisions of Miss. Code Ann. ss.81-5-1(10) provide state-chartered banks the
right to engage in activities approved for national banks by the Comptroller of
the Currency to provide parity between state chartered and nationally chartered
banks.
Branching. Mississippi law permits a Mississippi chartered bank, with
prior regulatory approval, to establish a branch office in any county in
Mississippi. In addition, a Mississippi chartered bank is permitted to combine
with any other bank or thrift regardless of its location, provided the
Mississippi institution has been in operation for at least five years. The
Mississippi banking statutes also permit a Mississippi bank, with prior
regulatory approval, to engage in an interstate merger transaction, and thereby
establish a branch office outside of Mississippi. In any case, the transaction
must also be approved by the FDIC, which considers a number of factors,
including financial history, capital adequacy, earnings prospects, character of
management, needs of the community and consistency with corporate powers.
Restrictions on Transactions with Affiliates and Insiders. Transactions
between the Bank and its nonbanking affiliates, including the Company, are
subject to Section 23A of the Federal Reserve Act. In general, Section 23A
imposes limits on the amount of such transactions, and also requires certain
levels of collateral for loans to affiliated parties. It also limits the amount
of advances to third parties which are collateralized by the securities or
obligations of the Company or its subsidiaries.
Affiliate transactions are also subject to Section 23B of the Federal
Reserve Act which generally requires that certain transactions between the Bank
and its affiliates be on terms substantially the same, or at least as favorable
to the Bank, as those prevailing at the time for comparable transactions with or
involving other nonaffiliated persons.
The restrictions on loans to directors, executive officers, principal
shareholders and their related interests (collectively referred to herein as
"insiders") contained in the Federal Reserve Act and Regulation O apply to all
insured institutions and their subsidiaries and holding companies. These
restrictions include limits on loans to one borrower and conditions that must be
met before such a loan can be made. There is also an aggregate limitation on all
loans to insiders and their related interests. These loans cannot exceed the
institution's total unimpaired capital and surplus, and the FDIC may determine
that a lesser amount is appropriate. Insiders are subject to enforcement actions
for knowingly accepting loans in violation of applicable restrictions.
Restrictions on Distribution of Subsidiary Bank Dividends and Assets.
Dividends paid by the Bank have provided a substantial part of the Company's
operating funds and for the foreseeable future it is anticipated that dividends
paid by the Bank to the Company will continue to be the Company's principal
source of operating funds. Under Mississippi law, the payment of dividends by
the Bank must be approved by the Mississippi Department of Banking and
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Consumer Finance. Capital adequacy requirements also serve to limit the amount
of dividends that may be paid by the Bank. Under federal law, the Bank cannot
pay a dividend if, after paying the dividend, the Bank will be
"undercapitalized." The FDIC may declare a dividend payment to be unsafe and
unsound even though the Bank would continue to meet its capital requirements
after the dividend.
Because the Company is a legal entity separate and distinct from its
subsidiaries, its right to participate in the distribution of assets of any
subsidiary upon the subsidiary's liquidation or reorganization will be subject
to the prior claims of the subsidiary's creditors. In the event of a liquidation
or other resolution of an insured depository institution, the claims of
depositors and other general or subordinated creditors are entitled to a
priority of payment over the claims of holders of any obligation of the
institution to its shareholders, including any depository institution holding
company (such as the Company) or any shareholder or creditor thereof.
Examinations. The FDIC periodically examines and evaluates insured
banks. Based upon such an evaluation, the FDIC may revalue the assets of the
institution and require that it establish specific reserves to compensate for
the difference between the FDIC-determined value and the book value of such
assets. The Mississippi Department of Banking and Consumer Finance also conducts
examinations of state banks but may accept the results of a federal examination
in lieu of conducting an independent examination.
Audit Reports. Insured institutions with total assets of $500 million
or more must submit annual audit reports prepared by independent auditors to
federal and state regulators. In some instances, the audit report of the
institution's holding company can be used to satisfy this requirement. Auditors
must receive examination reports, supervisory agreements and reports of
enforcement actions. In addition, financial statements prepared in accordance
with generally accepted accounting principles, management's certifications
concerning responsibility for the financial statements, internal controls and
compliance with legal requirements designated by the FDIC, and an attestation by
the auditor regarding the statements of management relating to the internal
controls must be submitted. For institutions with total assets of more than $3
billion, independent auditors may be required to review quarterly financial
statements. The Federal Deposit Insurance Act requires that independent audit
committees be formed, consisting of outside directors only. The committees of
such institutions must include members with experience in banking or financial
management, must have access to outside counsel, and must not include
representatives of large customers.
Capital Adequacy Requirements. The FDIC has adopted regulations
establishing minimum requirements for the capital adequacy of insured
institutions. The FDIC may establish higher minimum requirements if, for
example, a bank has previously received special attention or has a high
susceptibility to interest rate risk.
The FDIC's risk-based capital guidelines generally require state banks
to have a minimum ratio of Tier 1 capital to total risk-weighted assets of 4%
and a ratio of total capital to total risk-weighted assets of 8%. The capital
categories have the same definitions for the Bank as for the Company. As of
December 31, 1998, the Bank's ratio of Tier 1 capital to total risk-weighted
assets was 9.98% and its ratio of total capital to total risk-weighted assets
was 11.23%.
The FDIC's leverage guidelines require state banks to maintain Tier 1
capital of no less than 5% of average total assets, except in the case of
certain highly rated banks for which the requirement is 3% of average total
assets. As of December 31, 1998, the Bank's ratio of Tier 1 capital to average
total assets (leverage ratio) was 7.06%.
Corrective Measures for Capital Deficiencies. The federal banking
regulators are required to take "prompt corrective action" with respect to
capital-deficient institutions. Agency regulations define, for each capital
category, the levels at which institutions are "well capitalized," "adequately
capitalized," "undercapitalized," "significantly undercapitalized" and
"critically undercapitalized." A "well capitalized" bank has a total risk-based
capital ratio of 10% or higher; a Tier 1 risk-based capital ratio of 6% or
higher; a leverage ratio of 5% or higher; and is not subject to any written
agreement, order or directive requiring it to maintain a specific capital level
for any capital measure. An "adequately capitalized" bank has a total risk-based
capital ratio of 8% or higher; a Tier 1 risk-based capital ratio of 4% or
higher; a leverage ratio of 4% or higher (3% or higher if the bank was rated a
CAMEL 1 in its most recent examination report and is not experiencing
significant growth); and does not meet the criteria for a well capitalized bank.
A bank is "undercapitalized" if it fails to meet any one of the ratios required
to be adequately capitalized.
In addition to requiring undercapitalized institutions to submit a
capital restoration plan, agency regulations contain broad restrictions on
certain activities of undercapitalized institutions including asset growth,
acquisitions, branch establishment, and expansion into new lines of business.
With certain exceptions, an insured depository institution is
7
<PAGE>
prohibited from making capital distributions, including dividends, and is
prohibited from paying management fees to control persons if the institution
would be undercapitalized after any such distribution or payment.
As an institution's capital decreases, the FDIC's enforcement powers
become more severe. A significantly undercapitalized institution is subject to
mandated capital raising activities, restrictions on interest rates paid and
transactions with affiliates, removal of management, and other restrictions. The
FDIC has only very limited discretion in dealing with a critically
undercapitalized institution and is virtually required to appoint a receiver or
conservator.
Banks with risk-based capital and leverage ratios below the required
minimums may also be subject to certain administrative actions, including the
termination of deposit insurance upon notice and hearing, or a temporary
suspension of insurance without a hearing in the event the institution has no
tangible capital.
Deposit Insurance Assessments. The Bank must pay assessments to the
FDIC for federal deposit insurance protection. The FDIC has adopted a risk based
assessment system as required by amendments made to the Federal Deposit
Insurance Act. Under this system, FDIC-insured depository institutions pay
insurance premiums at rates based on their risk classification. Institutions
assigned to higher-risk classifications (that is, institutions that pose a
greater risk of loss to their respective deposit insurance funds) pay
assessments at higher rates than institutions that pose a lower risk. An
institution's risk classification is assigned based on its capital levels and
the level of supervisory concern the institution poses to the regulators. In
addition, the FDIC can impose special assessments in certain instances.
After the one-time SAIF assessment in 1996, the assessment rate
disparity between BIF and SAIF members was eliminated. The current range of BIF
and SAIF assessments is between 0% and .27% of deposits. Institutions which
qualify for the 0% assessment category, however, still have to pay the $1,000
minimum semi-annual assessment required by federal statute.
The FDIC established a process for raising or lowering all rates for
insured institutions semi-annually if conditions warrant a change. Under this
new system, the FDIC has the flexibility to adjust the assessment rate schedule
twice a year without seeking prior public comment, but only within a range of
five cents per $100 above or below the premium schedule adopted. Changes in the
rate schedule outside the five cent range above or below the current schedule
can be made by the FDIC only after a full rulemaking with opportunity for public
comment.
On September 30, 1996, a law was enacted that contained a comprehensive
approach to recapitalizing the SAIF and to assure the payment of the Financing
Corporation's ("FICO") bond obligations that were issued by FICO to help shore
up the ailing Federal Savings and Loan Insurance Corporation in 1987. Under this
new act, banks insured under the BIF are required to pay a portion of the
interest due on the FICO bonds. The BIF rate must equal one-fifth of the SAIF
rate through year-end 1999, or until the insurance funds are merged, whichever
occurs first. Thereafter BIF and SAIF payers will be assessed pro rata for the
FICO bond obligations. With regard to the assessment for the FICO obligation,
the current BIF rate is 0.0122% of annual deposits and the SAIF rate is 0.0610%
of annual deposits.
Enforcement Powers. The FDIC and the other federal banking agencies
have broad enforcement powers, including the power to terminate deposit
insurance, impose substantial fines and other civil and criminal penalties and
appoint a conservator or receiver. Failure to comply with applicable laws,
regulations and supervisory agreements could subject the Company or its banking
subsidiaries, as well as officers, directors and other institution-affiliated
parties of these organizations, to administrative sanctions and potentially
substantial civil money penalties. The appropriate federal banking agency may
appoint the FDIC as conservator or receiver for a banking institution (or the
FDIC may appoint itself, under certain circumstances) if any one or more of a
number of circumstances exist, including, without limitation, the fact that the
banking institution is undercapitalized and has no reasonable prospect of
becoming adequately capitalized; fails to become adequately capitalized when
required to do so; fails to submit a timely and acceptable capital restoration
plan; or materially fails to implement an accepted capital restoration plan.
Brokered Deposit Restrictions. Well capitalized institutions may
solicit and accept, renew or roll over brokered deposits without restriction.
Institutions which are adequately capitalized, but not well capitalized, cannot
accept, renew or roll over brokered deposits except with a waiver from the FDIC,
and are subject to restrictions on the interest rates that can be paid on such
deposits. Undercapitalized institutions may not accept, renew, or roll over
brokered deposits.
Cross-guarantee Provisions. The Financial Institutions Reform, Recovery
and Enforcement Act of 1989 ("FIRREA") contains a "cross-guarantee" provision
which generally makes commonly controlled insured depository
8
<PAGE>
institutions liable to the FDIC for any losses incurred in connection with the
failure of a commonly controlled depository institution.
Community Reinvestment Act. The Community Reinvestment Act of 1977
("CRA") and the regulations issued thereunder are intended to encourage banks to
help meet the credit needs of their service area, including low and moderate
income neighborhoods, consistent with the safe and sound operations of the
banks. These regulations also provide for regulatory assessment of a bank's
record in meeting the needs of its service area when considering applications to
establish banking centers, merger applications and applications to acquire the
assets and assume the liabilities of another bank. FIRREA requires federal
banking agencies to make public a rating of a bank's performance under the CRA.
In the case of a bank holding company, the CRA performance record of the banks
involved in the transaction are reviewed in connection with the filing of an
application to acquire ownership or control of shares or assets of a bank or to
merge with any other bank holding company. An unsatisfactory record can
substantially delay or block the transaction.
Consumer Laws and Regulations. In addition to the laws and regulations
discussed herein, the Bank is also subject to certain consumer laws and
regulations that are designed to protect consumers in transactions with banks.
While the list set forth herein is not exhaustive, these laws and regulations
include the Truth in Lending Act, the Truth in Savings Act, the Electronic Funds
Transfer Act, the Expedited Funds Availability Act, the Equal Credit Opportunity
Act, the Real Estate Settlement Procedures Act and the Fair Housing Act, among
others. These laws and regulations mandate certain disclosure requirements and
regulate the manner in which financial institutions must deal with customers
when taking deposits or making loans to such customers. The Bank must comply
with the applicable provisions of these consumer protection laws and regulations
as part of its ongoing customer relations.
Executive Officers of the Registrant
The following table sets forth certain information concerning the executive
officers and directors of the Company.
Name Age Positions with the Company
- ------------------------ ---- ------------------------------------------------
Robert W. Roseberry..... 48 Chairman and Chief Executive Officer, Director
Jane P. Roberts......... 62 Vice Chairman and Secretary, Director
Kenneth M. Lott......... 44 President and Chief Operating Officer, Director
W. H. Macko............. 48 Senior Vice President
Donna T. Rutland........ 32 Chief Financial Officer and Treasurer
Robert W. Roseberry began his career with the Bank in 1971 and has served
in numerous positions. In 1986, he became Chief Executive Officer of the Bank
and the Company. He has served as a director of the Bank since 1971 and as a
director of the Company since its formation in 1986. Robert W. Roseberry and
Monty C. Roseberry are half- brothers.
Jane P. Roberts has worked with the Bank for 35 years. She assumed her
current position of Vice Chairman in 1998. She has served as Secretary since
1986 and was the Secretary/Treasurer from 1986 to July of 1998. She has served
as a director of the Bank since 1981 and as a director of the Company since its
formation in 1986. Ms. Roberts and James R. Pylant are first cousins.
Kenneth M. Lott began his banking career at First Mississippi National Bank
in Hattiesburg in 1976. In 1988, he joined the Bank as Senior Vice President. He
assumed his present position of President and Chief Operating Officer of the
Company in July of 1998. He has served as a director of the Company since 1992.
W. H. Macko has 22 years of banking experience, including loan collections,
commercial and consumer lending, branch administration and loan operations. He
joined the Bank in 1989 as Vice President and Branch Manager and assumed his
present position of Senior Vice President of the Company in July of 1998.
9
<PAGE>
Donna T. Rutland, C.P.A., worked as a staff accountant with the accounting
firm of McArthur, Thames, Slay and Dews, PLLC from 1988 to 1993. In 1993, she
joined the Bank as Internal Auditor. In 1995, Ms. Rutland became Vice President
and Controller of the Bank. In July of 1998, she assumed her present position as
Chief Financial Officer and Treasurer of the Company.
The executive officers of the Company are selected by the Board of Directors and
hold office at the discretion of the Board of Directors.
Quarterly Results of Operations (Unaudited)
Quarter
--------------------------------------------------
In thousands, except per
share amounts First Second Third Fourth
----- ------ ----- ------
1998:
Interest income $ 5,356 $ 5,955 $ 6,252 $ 6,353
Interest expense 3,023 3,500 3,690 3,690
--------- --------- --------- ----------
Net interest income 2,333 2,455 2,562 2,663
Provision for loan losses 169 190 200 226
Other income 726 805 784 929
Securities gains 217 4 1 92
Other expenses 1,869 2,172 2,140 2,551
--------- --------- --------- ----------
Income before income taxes 1,238 902 1,007 907
Income taxes 309 226 252 218
--------- --------- --------- ----------
Net Income $ 929 $ 676 $ 755 $ 689
========= ========= ========= ==========
Net income per common share:
Basic and diluted $ 0.34 $ 0.25 $ 0.27 $ 0.24
========= ========= ========= ==========
1997:
Interest income $ 4,415 $ 4,763 $ 5,009 $ 5,255
Interest expense 2,415 2,610 2,719 2,792
--------- --------- --------- ----------
Net interest income 2,000 2,153 2,290 2,463
Provision for loan losses 142 147 214 222
Other income 642 688 705 667
Securities gains (losses) (20) (11) 20 (2)
Other expenses 1,739 1,909 1,871 2,158
--------- --------- --------- ----------
Income before income taxes 741 774 930 748
Income taxes 198 207 253 196
--------- --------- --------- ----------
Net income $ 543 $ 567 $ 677 $ 552
========= ========= ========= ==========
Net income per common share:
Basic and diluted $ 0.20 $ 0.21 $ 0.26 $ 0.20
========= ========= ========= ==========
ITEM 2. PROPERTIES
The Company's executive offices and principal support and operational
functions are located at 401 Shelby Speights Drive, Purvis, Mississippi 39475.
All of the offices of the subsidiaries of the Company are located in
Mississippi.
10
<PAGE>
<TABLE>
<CAPTION>
Deposits
Square Owned (O)/ Loans as of as of
Bank Offices Footage Leased (L) December 31, 1998 December 31, 1998
- ------------ ------- ---------- ----------------- -----------------
(in thousands) (in thousands)
Purvis
Main Office
<S> <C> <C> <C> <C>
401 Shelby Speights Drive, Purvis....... 19,600 O $59,868 $87,094
#4 Highway 589, Purvis................... 11,203 O 7,507 10,339
Sumrall
1193 Highway 42 East, Sumrall........... 5,000 O 30,048 38,509
Hattiesburg
6052 Highway 98 West, Hattiesburg*...... 16,308 O 49,252 68,928
Turtle Creek Mall Branch Office
1000 Turtle Creek Drive, Space 125,
Hattiesburg.............................. 667 L 0 5,357
Petal
535 Highway 42, Petal................... 16,810 O 36,481 26,478
Prentiss
965 South Columbia Avenue, Prentiss..... 4,822 O 11,823 41,567
<FN>
*Includes Mortgage & Investment Center
located at 6042 Highway 98 West,
Hattiesburg.
</FN>
</TABLE>
Square Owned (O)/ Loans as of
Offices of SFSI Footage Leased (L) December 31, 1998
- --------------- ------- ---------- -----------------
(in thousands)
Hattiesburg
706 Broadway Drive, Hattiesburg......... 3,780 L $ 918
Petal
300 New Richton Road, Petal............. 1,440 L 228
Prentiss
951 South Columbia Avenue, Prentiss..... 1,440 L 587
Purvis
70 Shelby Speights Drive, Purvis........ 2,160 O 1,697
Monticello
863 Highway 84 West, Monticello.......... 1,100 O 768
Poplarville
1235 South Main Street, Poplarville..... 1,500 O 762
11
<PAGE>
Gulfport
1010 Pass Road, Gulfport.................1,100 L 721
Square Owned (O)/
The Mortgage Shop, Inc. Footage Leased (L)
- ----------------------- ------- ----------
Hattiesburg
114 North 40th Avenue,
Suite H, Hattiesburg 950 L
The agreements for the leased facilities have unexpired terms ranging from
May 1999 to 2003, including renewal options. The Bank also acquired property in
June of 1998 which will be used to open a new branch in Hattiesburg, Mississippi
on Hardy Street, a major thoroughfare, near the main campus of the University of
Southern Mississippi. This branch is expected to open in the second half of
1999.
ITEM 3. LEGAL PROCEEDINGS
SFSI is a defendant in a case filed on June 11, 1998, in the Circuit
Court of Forrest County, Mississippi. The complaint alleges that the plaintiff
was not given any choice with respect to the purchase of credit life and
credit disability insurance and that SFSI improperly forced placed property
insurance on the collateral for the plaintiff's loan with SFSI. The plaintiff
asks for actual damages of $50,000 and punitive damages of $500,000. The case
is in the discovery stage. While the ultimate outcome of the lawsuit cannot be
predicted with certainty, management believes the case is without merit,
denies all liability and believes that the ultimate resolution of this matter
will not have a material adverse effect on the Company's financial condition.
In addition, in the ordinary course of operations, the Company's
subsidiaries are parties to various legal proceedings. In the opinion of
management, there is no proceeding pending, or to the knowledge of management
threatened, in which an adverse decision would have a material adverse effect on
the Company's financial condition.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
There were no matters submitted to the Company's shareholders during
the fourth quarter of 1998.
PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON STOCK AND RELATED
STOCKHOLDER MATTERS
Price Range of Common Stock
The Company's common stock is traded on The Nasdaq National Market
under the symbol "LCCO." The following table presents the high and low sales
prices of the Company's common stock for the periods indicated during 1998, as
reported by The Nasdaq National Market. The Company completed its initial public
offering in the fourth quarter of 1998 at a price of $10.00 per share.
Sales Price Per Share
High Low
December 18, 1998 to February 28, 1999 $10.25 $8.25
12
<PAGE>
Dividends
The Company's dividend policy is for holders of Common Stock to be
entitled to receive dividends when, as and if declared by the Company's Board of
Directors out of funds legally available therefore. During 1998, 1997 and 1996,
the Company declared and paid cash dividends per share on its Common Stock as
follows:
For Three Month Period Ended(1) Date Paid Dividends Per Share
---------------------------- ---------------- -------------------
December 31, 1998 January 15, 1999 $.0300
September 30, 1998 October 9, 1998 $.0300
For Six Month Period Ended
--------------------------
June 30, 1998 July 1, 1998 $.0567
December 31, 1997 January 2, 1998 .0547
June 30, 1997 July 1, 1997 .0462
(1) The Company began the regular payment of quarterly cash dividends
on the Common Stock in the third quarter of 1998.
While historically the Company has paid regular cash dividends, there
is no assurance that the Company will pay dividends on the Common Stock in the
future. The declaration and payment of dividends on the Common Stock will depend
upon the earnings and financial condition of the Company, its liquidity and
capital requirements, the general economic and regulatory climate, the Company's
ability to service any equity or debt obligations senior to the Common Stock and
other factors deemed relevant by the Company's Board of Directors. It is the
policy of the Federal Reserve Board that bank holding companies should pay cash
dividends on Common Stock only out of income available over the past year and
only if prospective earnings retention is consistent with the organization's
expected future needs and financial condition. The policy provides that bank
holding companies should not maintain a level of cash dividends that undermines
the bank holding company's ability to serve as a source of strength to its
banking subsidiaries.
The Company's principal source of funds to pay dividends will be cash
dividends that the Company receives from the Bank. The payment of dividends by
the Bank to the Company is subject to certain restrictions imposed by federal
and state banking laws, regulations and authorities. Dividends by the Bank must
be approved by the Mississippi Department of Banking and Consumer Finance.
The federal banking statutes prohibit federally insured banks from
making any capital distributions (including a dividend payment) if, after making
the distribution, the institution would be "undercapitalized" as defined by
statute. In addition, the relevant federal regulatory agencies also have
authority to prohibit an insured bank from engaging in an unsafe or unsound
practice, as determined by the agency, in conducting an activity. The payment
of dividends could be deemed to constitute such an unsafe or unsound practice,
depending on the financial condition of the Bank. Regulatory authorities could
impose stricter limitations on the ability of the Bank to pay dividends to the
Company if such limits were deemed appropriate to preserve certain capital
adequacy requirements.
Holders of Record
As of February 28, 1999, there were 348 stockholders of record of the
common stock.
In December 1998, the Company completed its initial public offering
(the "Offering") of 1,548,636 shares of Common Stock (including 185,000 shares
issued January 11, 1999 in connection with the exercise of the underwriters'
over-allotment option) at a price per share of $10.00.
(1) Effective date of Registration Statement: December 16, 1998 (File No.
333-61355)
(2) The Offering commenced on December 16, 1998 and was consummated on
December 22, 1998.
(3) All securities registered in the Offering were sold.
(4) The managing underwriters of the Offering were Morgan Keegan & Company,
Inc. and Sterne, Agee & Leach, Inc.
13
<PAGE>
(5) Common Stock, $.50 par value.
(6) Amount registered and sold: 1,548,636.
(7) Aggregate purchase price: $15,486,360.
(8) All shares were sold for the account of the Issuer.
(9) $1,084,045 in underwriting discounts and commissions were paid to the
underwriters. $483,081 of other expenses were incurred, including
estimated expenses.
(10) $13,919,234 of net Offering proceeds to the Issuer.
(11) Use of Proceeds: $3,660,288 to retire indebtedness of the Company to Bank
One, New Orleans, Louisiana; $7,500,000 was injected into the capital of
the Bank in order to improve the capital ratios of the Bank so that the
Bank will be positioned to make necessary capital expenditures to
establish two de novo branches in Hattiesburg, Mississippi one of which
the Company expects to be operational in the second half of 1999; and the
remainder of the Offering proceeds are being held by the Company for the
possible future acquisition of other financial institutions or branches
and the contribution of additional capital to the Bank to support loan
growth.
ITEM 6. SELECTED FINANCIAL DATA
<TABLE>
<CAPTION>
As of and for the Years Ended December 31,
---------------------------------------------------
1998 1997 1996 1995 1994
------- ------- ------- ------- -------
(in thousands, except per share data)
Income Statement Data:
<S> <C> <C> <C> <C> <C>
Interest income...................................... $23,916 $19,442 $16,190 $13,903 $11,357
Interest expense..................................... 13,903 10,536 8,429 7,100 5,307
Net interest income.................................. 10,013 8,906 7,761 6,803 6,050
Provision for loan losses............................ 785 725 557 517 638
Non-interest income.................................. 3,558 2,689 2,325 1,751 1,590
Non-interest expense................................. 8,732 7,677 6,890 6,146 5,491
Income before taxes.................................. 4,054 3,193 2,639 1,891 1,511
Net income........................................... 3,049 2,339 2,028 1,474 1,189
Balance Sheet Data:
Total assets......................................... $330,516 $247,022 $207,330 $169,636 $151,895
Total securities..................................... 90,828 58,921 41,562 33,037 32,864
Total loans, net..................................... 197,096 159,552 140,318 119,556 103,268
Allowance for loan losses............................ 3,564 3,101 2,837 2,529 2,427
Total deposits....................................... 278,272 211,498 185,404 156,631 139,209
Other borrowed funds................................. 19,120 17,620 7,000 -- --
Total stockholders' equity........................... 31,331 16,160 13,473 11,765 10,123
Per Share Data:
Net income per share--basic and diluted............... $ 1.09 $ 0.87 $ 0.75 $ 0.54 $ 0.43
Book value........................................... 7.58 5.88 4.97 4.34 3.62
Cash dividends per share............................. .1167 0.1002 0.0923 0.0923 0.0895
14
<PAGE>
Performance Ratios:
Return on average assets............................. 1.03% 1.02% 1.06% 0.90% 0.80%
Return on average equity............................. 17.65 15.69 15.88 13.56 11.66
Net interest margin.................................. 3.65 4.20 4.41 4.50 4.92
Efficiency ratio..................................... 65 66 68 72 72
Asset Quality Ratios:
Allowance for loan losses to nonperforming loans..... 323% 777% 360% 295% 366%
Allowance for loan losses to total loans............. 1.74 1.87 1.93 2.01 2.25
Nonperforming assets to total loans.................. 0.90 0.49 1.06 0.93 0.76
Net loan charge-offs to average loans................ 0.18 0.30 0.19 0.38 0.36
Capital Ratios:
Leverage ratio....................................... 9.55% 6.87% 7.11% 7.19% 7.14%
Average stockholders' equity to average total assets. 5.82 6.49 6.69 6.63 6.82
Tier 1 risk-based capital ratio...................... 14.65 9.84 9.67 10.21 10.50
Total risk-based capital ratio....................... 15.90 11.09 10.92 11.47 9.31
Dividend payout ratio................................ 5 12 12 17 21
</TABLE>
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
Overview
Since 1996, the Company's net income, earning assets and deposits have
increased substantially. Net income grew 30.4% from $2.3 million in 1997 to $3.0
million in 1998. Net income increased 15.3% from $2.0 million in 1996 to $2.3
million in 1997. Total loans rose 40.5% from $140.3 million at December 31, 1996
to $197.1 million at December 31, 1998. Total securities increased 118.5% from
$41.6 million at December 31, 1996 to $90.8 million at December 31, 1998. Total
deposits increased 50.1% from $185.4 million at December 31, 1996 to $278.3
million at December 31, 1998.
The growth in net income has been caused primarily by higher income
resulting from increased volume in earning assets. Loans have increased because
of greater market penetration and strong loan demand in the Company's market
area due to economic growth. Securities have risen because of additional funds
available for investment resulting from increased deposits and other borrowed
funds. Deposits increased because of the Company's strategies to attract new
deposits and strong economic growth in the region. The rise in net income has
been partially offset by a decline in the net interest margin from 4.41% for
1996 to 3.65% for 1998.
For the Years Ended December 31, 1998, 1997 and 1996
RESULTS OF OPERATIONS
Net Interest Income
The principal source of the Company's revenue is net interest income.
Net interest income is the difference between interest income on interest-
earning assets, principally loans and investment securities, and the interest
expense on interest-bearing deposits and borrowings used to fund those assets.
Net interest income is impacted by both changes in the amount and composition of
interest-earning assets and interest-bearing liabilities and the level of
interest rates. The change in net interest income is typically measured by net
interest spread and net interest margin. Net interest spread is the difference
between the average yield on interest-earning assets and the average cost of
interest-bearing liabilities. Net interest margin is determined by dividing net
interest income by average interest-earning assets.
15
<PAGE>
Net interest income increased 12.4% in 1998 as compared to 1997,
following a 14.8% increase in 1997 as compared to 1996. The increase in 1998 is
attributable to an increase in the Company's average interest-earning assets of
29.3%, principally in the loan and investment securities portfolios.
Interest-bearing liabilities and average cost of interest-bearing liabilities
also increased limiting the growth of net interest income. The increase in 1997
was due to growth in the average interest-earning assets of 20.7%, principally
in the investment securities and loan portfolios.
During 1998, average interest-bearing liabilities increased $58.2
million to $251.6 million, an increase of 30.1% over 1997. This was primarily
from increases in other borrowed funds, time deposits and transaction accounts.
In 1997, average interest-bearing liabilities increased 21.8% to $193.4 million.
This increase of $34.7 million was primarily in time deposits and transaction
accounts.
The Company's net interest margin was 3.65% in 1998, 4.20% in 1997 and
4.41% in 1996. The reduction in net interest margin in 1998 from 1997 resulted
from a decrease in yield on interest-earning assets of .45% while the Company's
cost of interest-bearing liabilities increased .08%. The net reduction in net
interest margin in 1997 as compared to 1996 resulted from an increase in yield
on interest-earning assets of .05% offset by an increase in cost of
interest-bearing liabilities of .14%.
The net interest margin may be negatively impacted by the interest rate
environment and changes in the earning asset mix and deposit funding fix.
Approximately $15.0 million of the Company's other borrowings from the FHLB are
adjustable rate advances and are subject to changes in market interest rates.
Increased rates may negatively impact the Company's borrowing and deposit
funding costs.
16
<PAGE>
Table 1 provides detailed information as to average balances, interest
income/expense, and rates by major balance sheet category for years ended
December 31, 1998, 1997 and 1996.
Table 1--Average Balance Sheets and Rates for December 31, 1998, 1997 and 1996
<TABLE>
<CAPTION>
1998 1997 1996
-------------------------------- ------------------------------ ----------------------------
Average Average Average Average Average Average
Balance Interest Rate Balance Interest Rate Balance Interest Rate
---------- -------- ------- --------- -------- ------- --------- -------- -------
(in thousands)
ASSETS
Earning assets:
U.S. Treasury securities and
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
obligations of U.S. agencies. $ 32,753 $ 2,171 6.63% $ 22,110 $ 1,493 6.75% $ 9,875 $ 583 5.90%
Obligations of state and political
subdivisions (1).............. 32,903 2,433 7.39 24,139 1,844 7.64 23,751 1,850 7.79
Mortgage-backed securities....... 14,868 794 5.34 5,985 399 6.66 5,885 361 6.13
Federal Home Loan Bank stock . 822 50 6.08 818 52 6.36 511 31 6.07
Federal funds sold............... 10,721 589 5.49 5,478 297 5.42 3,836 204 5.32
Total loan and fees.............. 182,395 18,706 10.26 153,656 15,984 10.40 131,956 13,790 10.45
--------- ------ ---------- ------- ---------- ------
Total earning assets (1)......... 274,462 24,743 9.02 212,186 20,069 9.46 175,814 16,819 9.57
Less: Allowance for loan losses (3,416) (3,020) (2,767)
Nonearning assets
Cash and due from banks.......... 11,598 7,915 7,732
Premises and equipment, net...... 8,004 6,476 5,399
Other assets..................... 6,298 6,043 4,687
--------- ---------- ----------
Total assets..................... $ 296,946 $ 229,600 $ 190,865
========= ========== ==========
LIABILITIES AND
STOCKHOLDERS' EQUITY
Interest-bearing liabilities:
Transaction accounts............. $ 74,973 3,581 4.78 $ 53,344 2,387 4.47 $ 44,394 1,944 4.38
Savings accounts................. 9,214 243 2.64 8,881 243 2.74 8,763 249 2.84
Time deposits.................... 149,435 8,861 5.93 120,269 7,169 5.96 104,129 6,165 5.92
Other borrowed funds............. 17,985 1,218 6.77 10,866 737 6.78 1,418 71 5.01
-------- ------- -------- ------- ------- --------
Total interest-bearing liabilities 251,607 13,903 5.53 193,360 10,536 5.45 158,704 8,429 5.31
------- ------- ------- ------ -------- ------
Noninterest-bearing liabilities:
Noninterest-bearing deposits..... 25,938 19,524 17,721
Other liabilities................ 2,127 1,813 1,669
Stockholders' equity............. 17,274 14,903 12,771
-------- ----------- ---------
Total liabilities and
stockholders' equity............. $296,946 $ 229,600 $ 190,865
======== ========== =========
Net interest income (1).......... $10,840 $ 9,533 $ 8,390
======= ======= =======
Net interest spread (1).......... 3.49% 4.01% 4.26%
======= ======= ======
Net interest margin (1).......... 3.95% 4.49% 4.77%
======= ======= ======
Note: Calculations include non-accruing loans in the average loan amounts outstanding.
<FN>
(1) The interest earned on non-taxable securities is reflected on a tax
equivalent basis assuming a federal income tax rate of 34% for all years
presented.
</FN>
</TABLE>
17
<PAGE>
Table 2 presents the extent to which changes in interest rates and changes
in the volume of interest-earning assets and interest-bearing liabilities
affected the Company's interest income and interest expense during the years
indicated. Information is provided in each category with respect to: (1) changes
attributable to changes in volume; (2) changes attributable to changes in rate;
and (3) net change.
Table 2--Volume/Rate Variance Analysis
<TABLE>
<CAPTION>
Year Ended December 31, Year Ended December 31,
1998 1997
compared to compared to
Year Ended December 31, Year Ended December 31,
1997 1996
--------------------------- ---------------------------
INCREASE/(DECREASE) INCREASE/(DECREASE)
due to due to
--------------------------- ---------------------------
Total Net Total Net
Change Volume Rate Change Volume Rate
--------- ------ ---- --------- ------ ----
(in thousands)
Interest income(1):
U.S. Treasury securities and obligations of U.S.
<S> <C> <C> <C> <C> <C> <C>
agencies........................................ $ 678 $ 705 $ (27) $ 910 $ 826 $ 84
Obligations of state and political subdivisions.... 589 648 (59) (6) 30 (36)
Mortgage-backed securities......................... 395 474 (79) 38 7 31
Federal Home Loan Bank stock....................... (2) -- (2) 21 20 1
Federal funds sold................................. 292 288 4 93 89 4
Total loans and fees............................... 2,722 2,947 (225) 2,194 2,257 (63)
--------- -------- ------ ------- ------ ----
Total increase (decrease) in interest income....... 4,674 5,062 (388) 3,250 3,229 21
Interest expense:
Interest-bearing liabilities:
Transaction accounts............................... 1,194 1,033 161 443 401 42
Saving accounts.................................... -- 8 (8) (6) 3 (9)
Time deposits...................................... 1,692 1,729 (37) 1,004 962 42
Other borrowed funds............................... 481 482 (1) 666 641 25
-------- --------- ------ -------- ------- -----
Total increase in interest expense................. 3,367 3,252 115 2,107 2,007 100
-------- -------- ------- -------- ------- -----
Increase (decrease) in net interest income......... $ 1,307 $ 1,810 $(503) $ 1,143 $ 1,222 $(79)
======== ======== ===== ======== ======== ====
<FN>
(1) Interest income for loans on non-accrual status has been excluded from
interest income.
</FN>
</TABLE>
Noninterest Income
Table 3 illustrates the Company's primary sources of noninterest income.
Noninterest income increased 32.3% to $3.6 million in 1998 from $2.7 million in
1997. This increase was principally due to the gain on sale of securities
available for sale of $220,000 in February of 1998, which is reflected in other
operating income. The noninterest income for 1997 increased $364,000 or 15.7%
from $2.3 million in 1996.
18
<PAGE>
Table 3--Analysis of Noninterest Income
<TABLE>
<CAPTION>
Percent
Increase
Year Ended December 31, (Decrease)
-------------------------- --------------------
1998 1997 1996 1998/97 1997/96
------ ------ ------ --------- ---------
(in thousands)
<S> <C> <C> <C> <C> <C>
Service charges on deposit accounts...... $1,777 $1,670 $1,519 6.4% 9.9%
Mortgage loan fees....................... 639 362 260 76.5 39.2
Commissions on credit life insurance..... 439 391 320 12.3 22.2
Other operating income................... 703 266 226 164.3 17.7
------- ------- ------
Total.................................... $3,558 $2,689 $2,325 32.3 15.7
======= ======= ======= ========= =======
</TABLE>
Service charges on deposit accounts increased in 1998 as compared to 1997 and
in 1997 as compared to 1996 from increased quantity of transaction accounts.
Mortgage loan fees from 1996 to 1998 have been positively influenced by
increases in secondary market residential loan originations due to historically
low mortgage rates.
Increases in commissions on credit life insurance in 1998 as compared to 1997
and in 1997 as compared to 1996 were due to increased loan originations.
Noninterest Expense
As shown in Table 4, total noninterest expense increased by 13.7% to $8.7
million in 1998, as compared to $7.7 million in 1997. The noninterest expense in
1997 increased $787,000 or 7.7% over the $6.9 million in 1996.
Noninterest expense levels are often measured using an efficiency ratio
(noninterest expense divided by the sum of net interest income and noninterest
income). The efficiency ratio measures the level of expense required to generate
one dollar of revenue. Improvement in the ratio is measured by a reduction in
the percentage reported. The Company's efficiency ratios for 1998, 1997 and 1996
were 64.3%, 66.2% and 68.3%, respectively.
19
<PAGE>
Table 4--Analysis of Noninterest Expense
Percent
Increase
Year Ended December 31, (Decrease)
------------------------- ---------------
1998 1997 1996 1998/97 1997/96
------- ------ ------- -------- -------
(in thousands)
Salaries and employee benefits....... $4,906 $4,173 $3,595 17.6% 16.1%
Occupancy expense.................... 653 610 504 7.0 21.0
Furniture and equipment expense...... 1,007 878 787 14.7 11.6
Other operating expenses............. 2,166 2,016 2,004 7.4 0.6
------- ------- -------
Total................................ $8,732 $7,677 $6,890 13.7 11.4
======= ======= ======= ======= ======
Salary and employee benefits expense increased $733,000 or 17.6% in 1998 as
compared to 1997. The increase is related primarily to staffing increases at the
Petal banking branch, SFSI Petal office, MSI and the brokerage services
department. Salary and employee benefit expense increased $578,000 or 16.1% in
1997 as compared to 1996. The increase reflects the cost of staffing MSI, which
began operations in January of 1997, and additional staffing for the Purvis
banking branch in December of 1996. In addition, these increases also reflect
annual cost of living and merit increases for all employees.
Occupancy expenses rose $43,000 or 7.0% in 1998 as compared to 1997 and
$106,000 or 21.0% in 1997 as compared to 1996. These increases were primarily
due to additional depreciation and building maintenance expenses attributable to
the Purvis and Petal banking branches.
Furniture and equipment expense increased $129,000 or 14.7% for 1998 from
$878,000 in 1997. The increases were primarily due to depreciation and equipment
maintenance expenses related to additional furniture and equipment for the
Purvis and Petal banking branches.
Income Tax Expense
The Company's effective income tax rate increased from 23.2% in 1996 to
26.7% in 1997 and decreased to 24.8% in 1998. The fluctuations in the effective
income tax rate from 1996 through 1998 is primarily attributable to the change
in non-taxable income as a percentage of pretax income.
FINANCIAL CONDITION
Loan Portfolio
The Company continued to experience loan growth throughout its markets in
1998 and 1997. Total loans increased 23.1% to $204.5 million at December 31,
1998, compared to $166.1 million at December 31, 1997. The increase in loans in
1997 was $19.4 million or 13.2% as compared to 1996.
The Company's real estate loan portfolio increased 16.6% to $103.3 million
at December 31, 1998 from $88.6 million at December 31, 1997. In 1997, the real
estate portfolio increased $9.4 million or 11.9% from December 31, 1996. The
Company's increased real estate loan demand has been principally for residential
mortgages in the Bank's market areas. Residential loans increased $5.9 million
from December 31, 1997 to December 31, 1998 and $7.3 million from December 31,
1996 to December 31, 1997. As a result of this increased loan demand, the
Company has hired additional lending personnel. In addition, emphasis has also
been placed on acquiring the deposit relationships from these loan customers.
20
<PAGE>
The Company's commercial loans increased by 54.5% to $39.5 million at
December 31, 1998 from $25.6 million at December 31, 1997. The increase in
commercial loans was $3.6 million or 16.2% at December 31, 1997 as compared to
December 31, 1996. The increases in commercial loans have been principally due
to increased economic activities in the Company's market areas.
The Company's consumer loans increased to $61.7 million, including $5.7
million from SFSI, at December 31, 1998 from $52.0 million, including $5.4
million from SFSI at December 31, 1997. The increase in consumer loans was $6.4
million or 14.1% from 1996 to 1997. These increases are attributable to
increased customer demands and the Company's marketing efforts to increase the
number of consumer loan customers. Substantially all of the consumer loan
portfolio consists of secured loans, the majority of which are collateralized by
automobiles and personal property.
Table 5--Loans by Type
<TABLE>
<CAPTION>
December 31,
---------------------------------------------------
1998 1997 1996 1995 1994
--------- ---------- ---------- --------- ---------
(in thousands)
Real estate:
<S> <C> <C> <C> <C> <C>
Residential....................... $ 61,280 $ 55,406 $ 48,062 $ 41,151 $ 36,005
Mortgage loans held for sale...... 1,053 421 361 1,245 574
Construction...................... 9,095 4,226 4,680 4,479 6,428
Commercial........................ 31,915 28,591 26,125 24,946 22,291
Consumer........................... 61,686 51,965 45,555 36,678 33,668
Commercial......................... 39,493 25,556 21,992 17,082 9,132
-------- --------- --------- --------- ---------
Total loans........................ $204,522 $166,165 $146,775 $125,581 $108,098
======== ========= ========= ========= =========
</TABLE>
The table below illustrates the Company's fixed rate maturities and repricing
frequency for the loan portfolio:
Table 6--Selected Loan Distribution
December 31, 1998
-----------------------------------------
Over One
One Year Through Over Five
Total or Less Five Years Years
-------- -------- ---------- ---------
(in thousands)
Fixed rate maturities................ $189,451 $ 88,987 $ 95,400 $ 5,064
Variable rate repricing frequency.... 15,071 9,199 3,280 2,592
-------- -------- -------- -------
Total................................ $204,522 $ 98,186 $ 98,680 $ 7,656
======== ======== ======== =======
At December 31, 1998, 92.6% of the Company's loans had fixed rate
maturities. Of the fixed rate portfolio, 47.0% of those loans have maturities of
one year or less when originated or renewed. Such maturities allow the Company
to reprice its portfolio frequently.
Allowance and Provision for Loan Losses
The allowance for loan losses is regularly evaluated by management and
approved by the Board of Directors and is maintained at a level believed to be
adequate to absorb future loan losses in the Company's portfolio. The provision
for loan losses is determined in part using an internal watch list developed by
a review of essentially all loans by management. Loans are assigned a rating
based on credit quality as determined by the borrower's payment history, the
financial strength of the borrower or guarantor as measured by the balance
sheet, earnings and cash flow quality,
21
<PAGE>
collateral values and the liquidity and quality of the collateral and assets of
the borrower. Loans with a deterioration of credit quality are placed on the
watch list. The provision for loan losses pertaining to the rated loans is
determined by the amount of loans on the watch list and an allocation for loans
that are not on the watch list based on the Company's historical charge off
percentage. In addition, management considers the potential adverse impact of
the economic trends in the Company's trade area on certain borrowers that are in
cyclical businesses and the loan growth resulting from new loan customers.
Management believes that the allowance for loan losses at December 31, 1998 was
adequate. Although management believes it uses the best information available to
make allowance provisions, future adjustments which could be material may be
necessary if management's assumptions differ from the loan portfolio's actual
future performance.
The allowance for loan losses increased $463,000 to $3.6 million from
December 31, 1997 to December 31, 1998. The increase is primarily attributable
to an increase in the volume of loans. The Company's allowance for loan losses
to total loan ratio decreased from 1.93% at December 31, 1996 to 1.87% at
December 31, 1997 to 1.74% at December 31, 1998.
Net charge-offs were $322,000 during 1998 compared to $461,000 and $249,000
for 1997 and 1996, respectively. Of these net charge-offs, for the same years,
$182,000, $151,000 and $88,000, respectively, pertained to SFSI. The Company's
consumer loan portfolio accounted for the majority of net loan charge-offs for
the years ended December 31, 1998, 1997 and 1996, respectively.
Table 7--Summary of Loan Loss Experience
<TABLE>
<CAPTION>
As of and for the Year Ended December 31,
--------------------------------------------------
1998 1997 1996 1995 1994
-------- -------- -------- -------- --------
(in thousands)
<S> <C> <C> <C> <C> <C>
Allowance for loan losses at beginning of year................... $ 3,101 $ 2,837 $ 2,529 $ 2,427 $ 2,140
Charge-offs:
Real Estate................................................. -- -- (50) (28) --
Consumer.................................................... (475) (400) (270) (516) (120)
Commercial.................................................. (51) (238) (168) (88) (370)
-------- -------- ------- ------- -------
Total.................................................. (526) (638) (488) (632) (490)
Recoveries:
Real Estate................................................. 24 10 -- 4 14
Consumer.................................................... 142 127 229 167 34
Commercial.................................................. 38 40 10 46 91
-------- -------- -------- -------- --------
Total.................................................. 204 177 239 217 139
-------- -------- -------- -------- --------
Net loan charge-offs............................................. (322) (461) (249) (415) (351)
Provision for loan losses........................................ 785 725 557 517 638
-------- -------- -------- -------- --------
Allowance for loan losses at end of year......................... $ 3,564 $ 3,101 $ 2,837 $ 2,529 $ 2,427
======== ======== ======== ======== ========
Ratios:
Allowance for loan losses to total loans.................... 1.74% 1.87% 1.93% 2.01% 2.25%
Net loan charge-offs to average loans outstanding for the
year....................................................... 0.18 0.30 0.19 0.38 0.36
Allowance for loan losses to non-performing loans........... 323 777 360 295 366
</TABLE>
The following table is management's allocation of the allowance for loan
losses by loan type. Allowance allocation is based on management's assessment of
economic conditions, past loss experience, loan volume, loan quality, past due
history and other factors. Since these factors are subject to change, the
allocation is not necessarily predictive of future portfolio performance.
22
<PAGE>
Table 8--Management's Allocation of the Allowance for Loan Losses
<TABLE>
<CAPTION>
December 31,
-----------------------------------------------------------------------------------------------------------------
1998 1997 1996 1995 1994
---------------------- ----------------------- ---------------------- ---------------------- --------------------
Percent Percent Percent Percent Percent
of Loans of Loans of Loans of Loans of Loans
Allocated to Total Allocated to Total Allocated to Total Allocated to Total Allocated to Total
Allowance Loans Allowance Loans Allowance Loans Allowance Loans Allowance Loans
----------- -------- ------------ -------- --------- -------- ---------- -------- --------- --------
(in thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Real Estate $ 997 50.5% $ 936 53.3% $ 881 54.0% $ 817 57.2% $ 754 60.4%
Consumer 1,577 30.2 1,355 31.3 1,293 31.0 1,268 29.2 925 31.2
Commercial 705 19.3 546 15.4 357 15.0 160 13.6 122 8.4
Unallocated 285 264 -- 306 -- 284 -- 626 --
----------- ------- --------- -------- -------- ------- --------- ------- --------- --------
Total $ 3,564 100% $ 3,101 100.0% $ 2,837 100.0% $ 2,529 100.0% $ 2,427 100.0%
=========== ======= ========= ========= ======== ======= ========= ======= ========= ========
</TABLE>
23
<PAGE>
Asset Quality
Loans (including any impaired loans under SFAS 114 and 118) are placed on
non-accrual status when they become past due 90 days or more as to principal or
interest, unless they are adequately secured and in the process of collection.
When loans are placed on non-accrual status, all unpaid accrued interest is
reversed. These loans remain on non-accrual status until the borrower
demonstrates the ability to remain current or the loan is deemed uncollectible
and is charged off. SFSI consumer loans are charged off when they reach 120 days
past due.
Table 9 provides information related to non-performing assets and loans 90
days or more past due. Accruing loans contractually 90 days or more past due
decreased slightly from $252,000 at December 31, 1997, to $172,000 at December
31, 1998. Should the underlying collateral be determined to be insufficient to
satisfy the obligation, the loan is classified and the Company's allowance is
increased accordingly. Historically, the Company's security in residential loans
has been adequate and has acted to limit the Company's exposure to loss. Loans
on non-accrual status increased from $147,000 to $931,000 from December 31, 1997
to December 31, 1998.
Table 9--Non-Performing Assets
December 31,
-----------------------------------------
1998 1997 1996 1995 1994
------ ------- ------- ------- ------
(in thousands)
Loans on non-accrual status(1)(2)..... $ 931 $ 147 $ 400 $ 645 $ 313
Loans past due 90 days or more........ 172 252 387 211 351
------- ------ ------ ------ ------
Total non-performing loans............ 1,103 399 787 856 664
Other real estate owned............... 742 411 767 309 157
------- ------ ------ ------- ------
Total non-performing assets........... $1,845 $ 810 $1,554 $1,165 $ 821
======= ====== ======= ======= ======
Percentage of non-performing loans
to total loans...................... 0.54% 0.24% 0.54% 0.68% 0.61%
Percentage of non-performing assets
to total loans...................... 0.90 0.49 1.06 0.93 0.76
(1) There were no impaired loans for the years indicated.
(2) The interest income that would have been earned and received on non-accrual
loans was not material.
Investment Securities
The investment securities portfolio consists of U.S. Treasury securities,
obligations of U.S. government agencies, obligations of states and political
subdivisions and mortgage-backed securities (MBS). MBS consist of 15 year and 30
year fixed and 7 year balloon mortgage securities, underwritten and guaranteed
by FNMA, FHLMC and GNMA, government-sponsored agencies.
Securities, including those classified as held to maturity and available for
sale, increased from $41.6 million at December 31, 1996 to $58.9 million at
December 31, 1997, to $90.8 million at December 31, 1998.
24
<PAGE>
Table 10--Debt Securities Available For Sale
<TABLE>
<CAPTION>
December 31, 1998
------------------------------------------
Estimated Average Weighted
Carrying Fair Maturity Average
Value Value in Years Yield
--------- --------- -------- ----------
(in thousands)
U. S. Treasury securities and obligations of U.S. government agencies:
<S> <C> <C> <C> <C>
Over one through five years.......................................... $ 2,482 $ 2,482 4.9 5.27%
Over five through ten years.......................................... 13,709 13,709 9.0 6.55
Over ten years....................................................... 11,903 11,903 14.4 6.99
-------- --------
Total........................................................... 28,094 28,094 6.63
Obligations of states and political subdivision:
Within one year...................................................... 201 201 0.3 6.21(1)
Over one through five years.......................................... 3,522 3,522 3.3 7.29(1)
Over five through ten years.......................................... 4,393 4,393 6.9 7.68(1)
Over ten years....................................................... 2,369 2,369 11.1 8.33(1)
-------- --------
Total........................................................... 10,485 10,485 7.67(1)
Mortgage-backed securities............................................. 19,235 19,235 6.24
-------- --------
Total debt securities available for sale............................... $ 57,814 $ 57,814
======== =======
</TABLE>
Table 11--Debt Securities Held to Maturity
<TABLE>
<CAPTION>
December 31, 1998
------------------------------------------
Estimated Average Weighted
Carrying Fair Maturity Average
Value Value in Years Yield
--------- --------- -------- ----------
(in thousands)
U. S. Treasury securities and obligations of U.S. government agencies:
<S> <C> <C> <C> <C>
Over five through ten years....................................... $ 4,076 $ 4,135 2.3 5.65%
Obligations of states and political subdivisions:
Within one year................................................... 1,432 1,445 0.6 7.08(1)
Over one through five years....................................... 7,589 7,675 3.1 7.00(1)
Over five through ten years....................................... 6,935 7,073 7.6 7.21(1)
Over ten years.................................................... 11,564 11,729 12.7 7.21(1)
-------- --------
Total........................................................ 27,520 27,922 7.15(1)
Mortgage-backed securities............................................. 1,418 1,455 6.75
-------- --------
Total debt securities held to maturity................................. $33,014 $33,512
======== ========
<FN>
(1) The weighted average yield on non-taxable securities is reflected on a
tax equivalent basis assuming a federal income tax rate of 34% for all
periods presented.
</FN>
</TABLE>
25
<PAGE>
Table 11A--Analysis of Debt Securities
<TABLE>
<CAPTION>
December 31,
------------------------------
1998 1997 1996
------- -------- ---------
(in thousands)
<S> <C> <C> <C>
U.S. Treasury securities and obligations of U.S. government agencies..... $28,094 $23,696 $ 5,118
Obligations of states and political subdivision.......................... 10,485 9,758 10,740
Mortgage-backed securities............................................... 19,235 3,356 2,802
--------- --------- --------
Total debt securities available for sale................................. $57,814 $36,810 $ 18,660
========= ======== ========
</TABLE>
<TABLE>
<CAPTION>
December 31,
------------------------------
1998 1997 1996
--------- --------- ----------
(in thousands)
<S> <C> <C> <C>
U.S. Treasury securities and obligations of U.S. government agencies..... $ 4,076 $ 4,911 $ 5,658
Obligations of states and political subdivision.......................... 27,520 14,913 13,697
Mortgage-backed securities............................................... 1,418 2,287 3,547
--------- --------- ---------
Total debt securities held to maturity................................... $ 33,014 $ 22,111 $ 22,902
========= ========= =========
</TABLE>
Deposits
Total deposits increased from $211.5 million at December 31, 1997 to $278.3
million at December 31, 1998. Of that increase, time deposits increased by $28.6
million from 1997 to 1998. Management continues to seek retail and commercial
deposits through its marketing initiatives for transaction and savings accounts
and competitive rates for time deposits. As of December 31, 1998, public funds
deposits totaled $45.2 million or 16.3% of total deposits. These deposits are
considered to be a stable source of funds and are targeted in the Company's
deposit marketing initiatives.
Table 12--Deposits
December 31,
---------------------
1998 1997
--------- ----------
(in thousands)
Demand (NOW, SuperNOW and Money Market).............. $ 81,516 $ 50,765
Savings.............................................. 9,437 8,877
Individual retirement accounts....................... 14,127 11,058
Time deposits, $100,000 and over..................... 45,040 35,635
Other time deposits.................................. 100,311 81,112
--------- ----------
Total interest bearing deposits...................... 250,431 187,447
Total non-interest bearing deposits.................. 27,841 24,051
--------- ----------
Total................................................ $278,272 $211,498
======== ========
26
<PAGE>
Table 13--Maturity of Time Deposits $100,000 and over
As of
December 31, 1998
-----------------
(in thousands)
Three months or less........................ $ 9,435
Over three months through six months........ 8,363
Over six months through twelve months....... 6,494
Over twelve months.......................... 20,748
--------
Total....................................... $45,040
========
Other Borrowed Funds
Other borrowed funds increased from $7.0 million at December 31, 1996, to
$17.6 million at December 31, 1997, to $19.1 million at December 31, 1998. The
$10.0 million borrowed from the FHLB was used to purchase debt securities
resulting in a favorable interest rate spread. A $5.0 million revolving line of
credit ($4.1 million outstanding at December 31, 1998) was obtained from Bank of
America during 1997 to finance part of the consumer loan portfolio of SFSI.
Prior to obtaining this line of credit, SFSI's funding was provided by the Bank.
Additional borrowings above current levels will be evaluated by management, with
consideration given to the growth of the Bank's loan portfolio, liquidity needs,
cost of retail deposits, market conditions, and other factors.
Liquidity
The Company maintains sufficient liquidity to fund loan demand, deposit
withdrawals and debt repayments. Liquidity is managed by retaining sufficient
liquid assets in the form of cash and cash equivalents and core deposits to meet
such demand. Funding and cash flows can also be realized from the investment
securities portfolio and pay downs from the loan portfolio. The Bank also
provides access to the retail deposit market. In addition, the Company has funds
available under a line of credit, federal funds lines and additional FHLB
borrowings to address liquidity needs.
The Company's objectives include preserving an adequate liquidity position.
Asset/liability management is designed to ensure safety and soundness, maintain
liquidity and regulatory capital standards, and achieve an acceptable net
interest margin. The Company continues to experience strong loan demand and
management continues to monitor interest rate and liquidity risks while
implementing appropriate funding and balance sheet strategies.
Net cash provided by operating activities and deposits from customers have
historically been primary sources of liquidity for the Company. Net cash
provided by operating activities totaled $6.8 million, $3.6 million and $4.0
million in 1998, 1997 and 1996, respectively. The net cash provided by increases
in deposits was $66.8 million, $26.1 million and $28.8 million in 1998, 1997 and
1996, respectively. Net cash used in investing activities has been primarily for
funding the net increase in loans of $38.1 million, $19.9 million and $22.8
million in 1998, 1997 and 1996, respectively, and in securities of $35.2
million, $16.9 million and $8.8 million in 1998, 1997 and 1996, respectively.
The Company also had net bank borrowings of $1.4 million in 1998, $6.6 million
in 1997 and $7.0 million in 1996.
Capital
Regulatory agencies measure capital adequacy within a framework that makes
capital requirements, in part, dependent on the individual risk profiles of
financial institutions. The Company improved its capital position during 1998
due to the completion of the initial public offering and the increased retained
earnings achieved during the year. The
27
<PAGE>
Company's capital to average assets ratio was 10.55% at December 31, 1998 as
compared to 7.04% at December 31, 1997. At December 31, 1998, the Company
exceeded the Federal Reserve Board's regulatory definition of a "well
capitalized" institution. See Note 11 to the Consolidated Financial Statements.
Asset/Liability Management and Market Risk
Asset/liability management control is designed to ensure safety and
soundness, maintain liquidity and regulatory capital standards, and achieve
acceptable net interest income. Management considers interest rate risk to be
the Company's most significant market risk. Interest rate risk is the exposure
to adverse changes in the net interest income as a result of market fluctuations
in interest rates.
Management regularly monitors interest rate risk in relation to prospective
market and business conditions. The Company's Board of Directors sets policy
guidelines establishing maximum limits on the Company's interest rate risk
exposure. Management monitors and adjusts exposure to interest rate fluctuations
as influenced by the Company's loan, investment and deposit portfolios.
The Company uses an earnings simulation model to analyze net interest
income sensitivity. Potential changes in market interest rates and their
subsequent effect on interest income are then evaluated. The model projects the
effect of instantaneous movements in interest rates of 200 basis points.
Assumptions based on the historical behavior of the Company's deposit rates and
balances in relation to changes in interest rates are also incorporated into the
model. These assumptions are inherently uncertain, and as a result, the model
cannot precisely measure net interest income or precisely predict the impact of
fluctuations in market interest rates on net interest income. Actual results
will differ from the model's simulated results due to timing, magnitude and
frequency of interest rate changes, as well as changes in market conditions and
the application of various management strategies.
Interest rate risk management focuses on maintaining acceptable net
interest income within policy limits approved by the Board of Directors. The
Company's Board of Directors monitors and manages interest rate risk to maintain
an acceptable level of change to net interest income resulting from market
interest rate changes. The Company's interest rate risk policy, as approved by
the Board of Directors, is stated in terms of the change in net interest income
given a 200 basis point immediate and sustained increase or decrease in market
interest rates. The current limits approved by the Board of Directors are plus
or minus 10% of net interest income for a 200 basis point movement.
In 1996, the Company's Board of Directors determined that interest rates
were likely to decline and that this decline could cause net interest income to
fall outside of the 10% range established in the asset/liability policy because
the yield on loans would be adversely affected more than on other earning assets
or the cost of interest bearing liabilities. As a result, in August of 1996 and
January of 1997, the Company purchased interest rate "floors" in a notional
amount of $20 million, which effectively converted approximately 10% of the
Company's loans at December 31, 1998 to a minimum fixed rate basis. A premium of
$258,500 was paid for the floors and is being amortized over the three-year
term. The index used is the three-month LIBOR rate with a 6% floor rate. The
three-month LIBOR rate was 5.00% at December 31, 1998. Through December 31 1998,
the Bank has amortized $190,987 of the premium and received $141,932, which has
been recognized as adjustments to net interest income.
The following table illustrates the Company's estimated annualized earnings
sensitivity profile as of December 31, 1998:
28
<PAGE>
Table 14--Interest Rate Sensitivity
Decrease Increase
in Rates-- in Rates--
200 Basis Points BASE 200 Basis Points
---------------- -------- ----------------
(in thousands)
Projected interest income:
Loans......................... $19,848 $20,932 $22,244
Investment securities......... 4,983 5,296 5,540
Federal funds sold............ 339 443 553
-------- ------- -------
Total interest income......... 25,170 26,671 28,337
Projected interest expense:
Deposits...................... 12,538 13,848 15,202
Other borrowed funds.......... 769 847 925
-------- ------- -------
Total interest expense........ 13,307 14,695 16,127
-------- ------- -------
Net interest income........... $11,863 $11,976 $12,210
======== ======= =======
Change from base.............. $ (113) $ 234
% Change from base............ (.94)% 1.95%
Given an immediate, sustained 200 basis point increase to the yield curve
used in the simulation model, it is estimated net interest income would increase
1.95%. A 200 basis point immediate, sustained decrease to the yield curve would
decrease net interest income by an estimated .94%. These potential changes in
net interest income are within the policy guidelines established by the
Company's Board of Directors.
These interest rate sensitivity profiles of the Company at any point in time
will be affected by a number of factors. These factors include the mix of
interest sensitive assets and liabilities and may not be a precise measurement
of the effect of changing interest rates on the Company in the future.
Year 2000
The Company continues to implement plans to address the Year 2000 issue.
The issue arises from the fact that many existing computer programs were written
to store only two digits of date-related information in order to more
efficiently handle and store data. Thus, the programs were unable to properly
distinguish between the year 1900 and the year 2000. The Company has converted
or replaced various programs, hardware and instrumentation systems to make them
Year 2000 compliant. The Company's Year 2000 project is comprised of two
components - business applications and equipment.
In addressing the Year 2000 problem, the Company has examined its own
software and equipment, potential problems with borrowers, and potential
problems with government entities and others providing services to the Company.
In addition to computer equipment, the Company has addressed possible problems
with micro-processors embedded within operating equipment, such as
telecommunication equipment, vaults, security and alarm systems, and automated
teller machines. The Company continues to monitor the impact of the failure of a
borrower's systems or a borrower's failure to comply with debt covenant terms
regarding Year 2000 issues on the credit quality of the borrower's loan by
communicating with its significant existing and new loan customers and
ascertaining whether the customers need to include remediation and/or
replacement of systems as part of their Year 2000 program and when they will
have that
29
<PAGE>
completed. Presently, the Company has no reason to believe that its borrowers
will not be able to adequately address the Year 2000 issue.
The Company's President is Chairman of its Year 2000 committee. The
Committee has devoted appropriate personnel resources to achieve Year 2000
compliance in a timely manner. Such personnel are working with the Company's
Board of Directors and other members of management in completing its action,
testing and contingency plans. The Company is also subject to oversight by the
FDIC, the Federal Reserve Board and the Mississippi Department of Banking and
Consumer Finance with respect to Year 2000 compliance.
The Company has completed the Year 2000 awareness, assessment, and
remediation phases. Minor implementations will be completed by March 31, 1999.
Service provider testing of critical information systems should be completed for
the majority testing required by March 31, 1999. Testing of all critical systems
and a contingency/business resumption plan should be completed in advance of the
June 30, 1999 regulatory deadline. The Company has expended approximately
$73,000 through December 31, 1998 and projects the additional cost of
remediation will be approximately $75,000. To date, independent analysis of the
Company's Year 2000 exposure has not been obtained. Approximately $50,000 is
projected to be capitalized because certain systems and equipment are being
replaced and these costs are associated with purchasing new systems. Corrective
actions to make the Company's core operating systems Year 2000 compliant have
been made by the Company's software providers under existing licensing
agreements with the Company at no additional expense.
The Year 2000 issue principally involves the installation of selected
software releases which are Year 2000 compliant. Certain of these installations
would have been scheduled for completion by the Year 2000 in the normal course
of business. The Year 2000 compliance of the Company's software suppliers will
be essential for the Company's successful implementation of its Year 2000
objectives.
The Company has examined the Year 2000 issue's impact on services such as
payroll and investment securities operations that are provided by third parties.
The capabilities and readiness for Year 2000 of other vendors have also been
reviewed. Presently, the testing phase provides the Company with no reason to
believe that its software providers, service providers and vendors will not be
able to adequately address the Year 2000 issue. To the extent the software
providers', service providers' and vendors' responses are not satisfactory, the
Company will proceed with the steps outlined in its contingency/business
resumption plan.
The contingency/business resumption plan will include critical Company
areas such as operations, personnel, network and business systems as well as
systems external to the Company. The plan will address various alternatives and
will include assessing a variety of scenarios that could emerge in the year 2000
and require the Company to react.
As an integral part of the plan potential liquidity challenges will be
addressed.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
In response to this Item, the information set forth in Item 7 under the
caption Asset/Liability Management and Market Risk and in Table 14 on pages 28
and 29 is incorporated herein by reference.
30
<PAGE>
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
Report of Independent Auditors........................................... 32
Consolidated Balance Sheets as of December 31, 1998 and 1997............. 33
Consolidated Statements of Income and Comprehensive Income
for the years ended December 31, 1998, 1997 and 1996.................... 35
Consolidated Statements of Changes in Stockholders' Equity
for the years ended December 31, 1998, 1997 and 1996.................... 37
Consolidated Statements of Cash Flows for the years ended
December 31, 1998, 1997 and 1996........................................ 38
Notes to Consolidated Financial Statements............................... 40
31
<PAGE>
REPORT OF INDEPENDENT AUDITORS
The Board of Directors and Stockholders
Lamar Capital Corporation
We have audited the accompanying consolidated balance sheets of Lamar
Capital Corporation and subsidiaries as of December 31, 1998 and 1997, and the
related consolidated statements of income and comprehensive income,
stockholders' equity, and cash flows for each of the three years in the period
ended December 31, 1998. These financial statements are the responsibility of
the Company's management. Our responsibility is to express an opinion on these
financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the 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 financial statements referred to above present fairly,
in all material respects, the consolidated financial position of Lamar Capital
Corporation at December 31, 1998 and 1997, and the results of their operations
and their cash flows for each of the three years in the period ended December
31, 1998 in conformity with generally accepted accounting principles.
ERNST & YOUNG LLP
Jackson, Mississippi
January 22, 1999
32
<PAGE>
LAMAR CAPITAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(in thousands, except share amounts)
December 31,
-------------------
1998 1997
--------- --------
ASSETS
Cash and due from banks.................................. $ 15,038 $ 7,787
Federal funds sold....................................... 11,400 7,950
--------- --------
Cash and cash equivalents................................ 26,438 15,737
Securities available for sale (amortized cost--$57,159
in 1998 and $36,365 in 1997) 57,814 36,810
Securities held to maturity (fair value--$33,512 in 1998
and $22,203 in 1997) 33,014 22,111
Loans (less allowance for loan losses of $3,564 in 1998
and $3,101 in 1997) 197,096 159,552
Accrued interest receivable.............................. 3,256 2,391
Premises and equipment................................... 9,111 6,638
Other real estate........................................ 742 411
Federal Home Loan Bank stock............................. 788 963
Cash surrender value of life insurance................... 1,298 1,233
Deferred income taxes.................................... 760 689
Other assets............................................. 199 487
--------- --------
Total assets................................... $ 330,516 $247,022
========= ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities
Deposits:
Non-interest bearing..................................... $ 27,841 $ 24,051
Interest bearing......................................... 250,431 187,447
---------- ---------
Total deposits................................. 278,272 211,498
Interest payable......................................... 615 812
Dividends payable........................................ 124 150
Other liabilities........................................ 1,054 782
Other borrowed funds..................................... 19,120 17,620
---------- ---------
Total liabilities.............................. 299,185 230,862
33
<PAGE>
Stockholders' equity
Common stock, $.50 par value at December 31, 1998, $10
par value at December 31, 1997, 50,000,000 shares
authorized at December 31, 1998, 100,000 shares
authorized at December 31, 1997; 4,130,707 shares
issued and outstanding at December 31, 1998,
46,569.44 shares issued and outstanding at
December 31, 1997.................................... 2,065 466
Paid-in capital......................................... 15,885 5,374
Retained earnings....................................... 12,970 10,283
Accumulated other comprehensive income.................. 411 279
Treasury stock, none at December 31, 1998 and 763.44
shares at December 31, 1997.......................... -- (242)
--------- --------
Total stockholders' equity.................... 31,331 16,160
--------- --------
Total liabilities and stockholders' equity.... $330,516 $247,022
======== ========
See accompanying notes.
34
<PAGE>
LAMAR CAPITAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME AND COMPREHENSIVE INCOME
(in thousands, except per share amounts)
Year ended December 31,
---------------------------
1998 1997 1996
------- -------- -------
Interest income
Loans, including fees............................ $18,706 $15,984 $13,790
Federal funds sold............................... 589 297 204
Interest on securities
Taxable.......................................... 3,039 1,956 1,029
Non-taxable...................................... 1,582 1,205 1,167
-------- -------- -------
4,621 3,161 2,196
-------- -------- -------
Total interest income............. 23,916 19,442 16,190
Interest expense
Deposits ........................................ 12,685 9,799 8,358
Other borrowed funds............................. 1,218 737 71
-------- -------- -------
Total interest expense............ 13,903 10,536 8,429
-------- -------- -------
Net interest income.............................. 10,013 8,906 7,761
Provision for loan losses........................ 785 725 557
Net interest income after provision for loan -------- -------- -------
losses.......................................... 9,228 8,181 7,204
Other income
Service charges on deposit accounts.............. 1,777 1,670 1,519
Mortgage loan fees............................... 639 362 260
Commissions on credit life insurance............. 439 391 320
Gain (loss) on sale of securities available for
sale............................................ 191 (13) 10
Trading account gains............................ 123 -- --
Other operating income........................... 389 279 216
-------- -------- -------
Total other income................ 3,558 2,689 2,325
Other expense
Salaries and employee benefits................... 4,906 4,173 3,595
Occupancy expense................................ 653 610 504
Furniture and equipment expense.................. 1,007 878 787
Other operating expense.......................... 2,166 2,016 2,004
-------- -------- -------
Total other expense............... 8,732 7,677 6,890
-------- -------- -------
Income before income taxes....................... 4,054 3,193 2,639
Income tax expense............................... 1,005 854 611
-------- -------- -------
Net income .................................. 3,049 2,339 2,028
35
<PAGE>
Other comprehensive income (loss), net of
income taxes
Change in unrealized gain (loss) on securities
available for sale.............................. 132 377 (68)
Reclassification of realized amount.............. (120) 8 (6)
-------- -------- --------
Net unrealized gain (loss) recognized in
comprehensive income............................ 12 385 (74)
-------- -------- --------
Comprehensive income.............. $ 3,061 $ 2,724 $ 1,954
======== ======== ========
Earnings per share--basic and dilutive........... $ 1.09 $ .87 $ .75
======== ========= ========
Weighted average shares outstanding - basic and
dilutive........................................ 2,793 2,687 2,709
======== ========= ========
See accompanying notes.
36
<PAGE>
<TABLE>
<CAPTION>
LAMAR CAPITAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
(in thousands, except for share amounts)
Accumulated
Other Total
Common Stock Paid-in Retained Comprehensive Treasury Stock Stockholders'
Shares Amount Capital Earnings Income Shares Amount Equity
------------- --------- ---------- --------- ------------ ---------- -------- -------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Balance at January 1, 1996............. 46,569.44 $ 466 $ 5,227 $ 6,441 $ (30) 1,409.30 $ (339) $ 11,765
Net income for 1996.................... 2,028 2,028
Dividend ($.09 per share).............. (250) (250)
Purchase of treasury stock............. 8.14 (2) (2)
Change in unrealized gain (loss), net
of income taxes, on securities
available for sale.................. (68) (68)
------------- -------- --------- --------- ---------- ---------- --------- ---------
Balance at December 31, 1996........... 46,569.44 466 5,227 8,219 (98) 1,417.44 (341) 13,473
Net income for 1997.................... 2,339 2,339
Dividend ($.10 per share).............. (275) (275)
Purchase of treasury stock............. 1,374.00 (436) (436)
Sale of treasury stock................. 147 (2,028.00) 535 682
Change in unrealized gain (loss), net
of income taxes, on securities
available for sale.................. 377 377
------------- -------- --------- --------- --------- ---------- --------- ---------
Balance at December 31, 1997........... 46,569.44 466 5,374 10,283 279 763.44 (242) 16,160
Net income for 1998.................... 3,049 3,049
Stock split (60-for-1)................. 2,747,596.96 931 (931) 56,842.96 --
Dividend ($.12 per share).............. (362) (362)
Purchase of treasury stock............. 200.00 (72) (72)
Sale of treasury stock................. 51 (30,711.00) 174 225
Retirement of treasury stock........... (27,095.40) (14) (126) (27,095.40) 140 --
Sale of common stock................... 1,363,636 682 11,517 12,199
Change in unrealized gain (loss), net
of income taxes, on securities
available for sale.................. 132 132
------------- -------- --------- --------- -------- ---------- --------- ---------
Balance at December 31, 1998 4,130,707 $ 2,065 $ 15,885 $ 12,970 $ 411 -- $ -- $ 31,331
============= ======== ========= ========= ======== ========== ========= =========
</TABLE>
See accompanying notes.
37
<PAGE>
LAMAR CAPITAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
Year ended December 31,
------------------------------
1998 1997 1996
-------- -------- --------
Operating Activities
Net income................................... $ 3,049 $ 2,339 $ 2,028
Adjustments to reconcile net income to net
cash provided by operating activities:
Provision for loan losses.................. 785 725 557
Provision for losses on other real estate.. 11 44 18
Deferred income tax benefit................ (149) (89) (108)
Depreciation and amortization expense...... 836 726 654
Amortization of securities premiums........ 254 167 208
Accretion of securities discounts.......... (34) (69) (12)
Increase in cash surrender value of life
insurance................................ (65) (64) (61)
Federal Home Loan Bank dividend............ (48) (49) (30)
(Gain) loss on sales of securities
available for sale....................... (191) 13 (10)
Trading account gains...................... (123) -- --
Proceeds from sales of trading securities.. 3,619 -- --
Gain of sales of other real estate......... (7) (12) (18)
Mortgage loan originations................. (20,730) (13,568) (11,697)
Proceeds from sales of mortgage loans...... 20,099 13,508 12,581
Increase in interest receivable............ (865) (401) (387)
Increase (decrease) in interest payable.... (197) 120 10
Decrease in other assets................... 288 79 81
Increase in other liabilities.............. 272 146 203
-------- --------- ---------
Net cash provided by operating activities...... 6,804 3,615 4,017
Investing activities
Securities held to maturity:
Proceeds from calls, maturities, and
principal reductions..................... 4,672 2,821 3,195
Purchase of securities..................... (18,480) (2,115) (9,823)
Securities available for sale:
Proceeds from calls, maturities, and
principal reductions..................... 14,725 3,554 2,162
Proceeds from sales of securities.......... 9,966 19,618 2,182
Purchases of securities.................... (46,105) (40,746) (6,536)
(Purchases) sales of Federal Home Loan Bank
stock.................................... 223 (375) (29)
Net increase in loans........................ (38,058) (19,899) (22,763)
Proceeds from sales of other real estate..... 25 324 102
38
<PAGE>
Purchases of premises and equipment.......... (3,309) (1,146) (2,548)
--------- --------- ---------
Net cash used in investing activities........ (76,341) (37,964) (34,058)
Financing activities
Net increase in deposits..................... 66,774 26,094 28,773
Net increase in revolving line of credit..... 100 4,020 --
Borrowings from banks........................ 5,000 10,000 7,000
Payments on notes payable to banks........... (3,600) (3,400) --
Proceeds from sale of common stock........... 12,199 -- --
Purchases of treasury stock.................. (72) (436) (2)
Proceeds from sales of treasury stock........ 225 682 --
Dividends paid............................... (388) (250) (250)
--------- --------- ---------
Net cash provided by financing activities.... 80,238 36,710 35,521
--------- --------- ---------
Net increase in cash and cash equivalents.... 10,701 2,361 5,480
Cash and cash equivalents at beginning of
year....................................... 15,737 13,376 7,896
--------- -------- ----------
Cash and cash equivalents at end of year..... $ 26,438 $ 15,737 $ 13,376
========= ======== ==========
See accompanying notes.
39
<PAGE>
LAMAR CAPITAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(in thousands, except share amounts)
Years ended December 31, 1998, 1997 and 1996
1. Summary of Significant Accounting Policies
Consolidation
The consolidated financial statements include the accounts of Lamar Capital
Corporation (the "Company") and its wholly-owned subsidiaries, The Mortgage
Shop, Inc. ("MSI") and Lamar Bank (the "Bank") and its wholly-owned subsidiary,
Southern Financial Services, Inc. ("SFSI"). All significant intercompany
balances and transactions have been eliminated in consolidation.
Business
The Company is a one-bank holding company headquartered in Purvis,
Mississippi. The Company operates seven full service banking locations in retail
banking predominantly in Lamar and Forrest counties in southeastern Mississippi.
SFSI operates a finance company in seven locations in southeastern Mississippi
to provide consumer loans to customers who may not be eligible to obtain
financing from the Bank. The Company's consolidated results of operations are
dependent upon net interest income, which is the difference between the interest
income on interest-earning assets and the interest expense on interest-bearing
liabilities. Principal interest-earning assets are securities and real estate,
consumer and commercial loans. Interest-bearing liabilities consist of
interest-bearing deposit accounts and other borrowed funds.
Other sources of income include fees charged to customers for a variety of
banking services such as deposit account fees and commissions on credit life
insurance. The Company also generates fees in its mortgage banking activities
from the origination and sale of loans and servicing rights of 15 year and 30
year fixed rate loans in the secondary market.
The Company's operating expenses consist primarily of salaries and employee
benefits, occupancy, furniture and equipment expenses, communications costs and
other general and administrative operating expenses. The Company's results of
operations are significantly affected by general economic and competitive
conditions, particularly changes in market interest rates, government policies
and actions of regulatory agencies.
Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the amounts reported in the financial statements and
accompanying notes. Actual results could differ from those estimates.
Cash and Cash Equivalents
Cash and cash equivalents are stated at cost. Federal funds sold have
maturities generally of one day. The Bank is required to maintain average
balances with the Federal Reserve Bank. The required reserve balance at December
31, 1998 was $2,410. Cash paid for interest during the years ended December 31,
1998, 1997 and 1996 was $14,100, $10,416 and $8,419, respectively.
40
<PAGE>
Securities
Debt securities available for sale are carried at estimated fair value. The
amortized cost of debt securities classified as available for sale is adjusted
for amortization of premiums and accretion of discounts to maturity. Unrealized
gains or losses on these debt securities are included in stockholders' equity
net of income taxes. Debt securities which the Bank has the ability and the
intent to hold until maturity are stated at cost, adjusted for amortization of
premiums and accretion of discounts. The adjusted cost of the specific debt
securities sold is used to compute gains or losses on the sale of securities.
Premiums and discounts are recognized in interest income using the interest
method over the period to maturity. Trading account securities consist of debt
securities held for resale in anticipation of short-term market movements and
are carried at estimated fair value. Trading account gains include the effects
of adjustments to fair values. The adjusted cost of the specific securities sold
is used to compute gains or losses on the sale of securities.
Federal Home Loan Bank stock is not considered a marketable equity security
under Statement of Financial Accounting Standards (SFAS) No. 115 "Accounting for
Certain Investments in Debt and Equity Securities" and, therefore, is carried at
cost.
Mortgage Banking Activities
The Company originates first mortgage loans (traditional 15 year and 30
year fixed and variable rate loans) for sale, with the servicing rights, in the
secondary market. The Company limits its interest rate risk on such loans
originated by selling individual loans immediately after the customers lock into
their rate. Origination fees and any gains or losses on the sale of the mortgage
loans and servicing rights, which are not material to the consolidated
operations for the years presented, are included in mortgage loan fees. Mortgage
loans originated and intended for sale in the secondary market are carried at
the lower of aggregate cost or market value, based on the subsequent sales
prices of such loans.
In June of 1996, the Financial Accounting Standards Board ("FASB") issued
SFAS No. 125, "Accounting for Transfers and Servicing of Financial Assets and
Extinguishments of Liabilities," which requires an entity to recognize the
financial and servicing assets it controls and the liabilities it has incurred
and to cease to recognize them as financial assets when control has been
surrendered in accordance with the criteria provided in SFAS No. 125. The
Company adopted the provisions of SFAS No. 125 effective January 1, 1998. The
adoption of SFAS No. 125 did not have a material impact on the consolidated
financial condition or operating results of the Company.
Loans
Loans, other than mortgage loans held for sale, are stated at the principal
amounts outstanding, less unearned income and the reserve for possible loan
losses. Interest on loans and accretion of unearned income are computed by
methods which approximate a level rate of return on recorded principal. Loan
origination fees and certain direct loan origination costs are deferred and
recognized over the average lives of the loans as an adjustment to yield.
Commercial and real estate loans are placed on non-accrual status when they
become past due 90 days or more as to principal or interest unless they are
adequately secured and in the process of collection. All commercial and real
estate nonaccrual loans are considered to be impaired in accordance with SFAS
No. 114, "Accounting by Creditors for Impairment of a Loan." Consumer loans
generally are not placed on nonaccrual status but are reviewed periodically and
charged off when deemed uncollectible or any payment of principal or interest is
more than 120 days delinquent. Interest payments received on nonaccrual loans
are applied to principal if in management's opinion there is doubt as to the
collectibility of the principal; otherwise, these receipts are recorded as
interest income. A loan remains on nonaccrual status until it is current as to
principal and interest and the borrower demonstrates the ability to fulfill the
contractual obligation.
41
<PAGE>
Allowance for Loan Losses
The allowance for loan losses is maintained at a level considered adequate
by management and approved by the Board of Directors to provide for potential
loan losses. Management's determination of the adequacy is based on an
evaluation of the portfolio, past loan loss experience, growth and composition
of the loan portfolio, economic conditions and other relevant factors; actual
losses may vary from the current estimate. The allowance is increased by
provisions for loan losses charged against income. Actual loan losses are
deducted from and subsequent recoveries are added to the allowance.
Premises and Equipment
Premises and equipment are stated at cost less accumulated depreciation.
Depreciation is computed by the modified accelerated cost recovery method for
financial reporting purposes based upon the estimated useful lives of the
assets. Expenditures for major renewals and betterments are capitalized and
those for maintenance and repairs are charged to expense when incurred.
Other Real Estate
Other real estate is stated at the lower of fair value, based on current
market appraisals, or the recorded investment in the related loan.
Long-Lived Assets
The Company accounts for impairment losses on long-lived assets used in
operations when indicators of impairment are present and the undiscounted cash
flows estimated to be generated by those assets are less than the assets'
carrying amount in accordance with SFAS No. 121, "Accounting for the Impairment
of Long-Lived Assets and Assets to be Disposed Of". The Company also accounts
for long-lived assets that are expected to be disposed of in accordance with
SFAS No. 121.
Income Taxes
The Company and its subsidiaries file a consolidated federal and state
income tax return. The Company accounts for income taxes using the liability
method. Temporary differences occur between the financial reporting and tax
bases of assets and liabilities. Deferred tax assets and liabilities are
recorded for these differences based on enacted tax rates and laws that will be
in effect when the differences are expected to reverse.
Comprehensive Income
The Company adopted the provisions of SFAS No. 130, "Reporting
Comprehensive Income," effective for the year ended December 31, 1998. SFAS No.
130 requires the presentation of comprehensive income and establishes standards
for reporting its components (revenue, expenses, gains and losses) in a full set
of general purpose financial statements. The years prior to December 31, 1998
have been restated to meet the current reporting formats.
42
<PAGE>
Derivatives and Hedging Activities
Effective October 1, 1998, the Company adopted the provisions of SFAS No.
133, "Accounting for Derivative Instruments and Hedging Activities". SFAS No.
133 requires the Company to recognize all derivatives on the balance sheet at
fair value. Derivatives that are not hedges must be adjusted to fair value
through income. If the derivative is a hedge, depending on the nature of the
hedge, changes in the fair value of derivatives are either offset against the
change in fair value of assets, liabilities, or firm commitments through income
or recognized in other comprehensive income until the hedged item is recognized
in income. The ineffective portion of a derivative's change in fair value will
be immediately recognized in income. The fair value of the derivatives held at
October 1, 1998 was not material to the Company's consolidated financial
position.
SFAS No. 133 also allowed, upon adoption, the reclassification of
held-to-maturity securities to the available-for- sale or trading portfolios
without tainting the remaining securities in the held-to-maturity portfolio. The
Company reclassified $3,497 of held-to-maturity securities to trading account
securities as of October 1, 1998. The unrealized gain of the transferred
securities was not material to the Company's consolidated financial position or
operations, thus the adoption of SFAS No. 133 did not result in a cumulative
effect adjustment.
Recent Accounting Pronouncements
In June of 1997, the FASB issued SFAS No. 131, "Disclosures about Segments
of an Enterprise and Related Information," which establishes standards for the
reporting of financial information from operating segments in annual and interim
financial statements. SFAS No. 131 requires that financial information be
reported on the same basis that is reported internally for evaluating segment
performance and allocating resources to segments. The Company adopted SFAS No.
131 during 1998, but the adoption did not impact the consolidated financial
position or operating results of the Company.
Net Income per Common Share
Effective May 13, 1998, the Board of Directors adopted and the shareholders
approved an amendment to the Company's Articles of Incorporation to increase the
authorized shares to 2,000,000 shares of Common Stock with a par value of $.50
per share and completed a 20-for-1 stock split of its Common Stock. On August 3,
1998, the Board of Directors approved a 3-for-1 stock split of its Common Stock
and an amendment to the Company's Articles of Incorporation to increase the
authorized shares to 50,000,000 shares of Common Stock with a par value of $.50
per share. The shareholders approved the amendment to increase the authorized
shares on August 25, 1998. Consolidated net income per basic and diluted common
share and dividends per share has been restated for each year presented in the
accompanying consolidated statements of income and changes in stockholders'
equity to reflect the stock splits described above.
Reclassifications
Certain reclassifications have been made in the accompanying consolidated
financial statements from prior presentations.
2. Initial Public Offering
In December 1998, the Company sold 1,363,636 shares of its Common Stock at
$10 per share in an underwritten initial public offering (the "Offering"). Net
proceeds from the Offering were $12,199. In January 1999, the underwriters
43
<PAGE>
exercised their overallotment option and the Company sold 185,000 shares at $10
per share. Net proceeds from the sale of these shares were $1,720.
3. Debt Securities
The aggregate carrying amounts and estimated fair value of debt securities
were as follows:
<TABLE>
<CAPTION>
December 31, 1998
----------------------------------------------
Gross Gross Estimated
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
--------- ---------- ---------- ----------
Debt securities available for sale:
<S> <C> <C> <C> <C>
U.S. Treasury securities and obligations of U.S. government agencies....... $27,781 $ 332 $ (19) $28,094
Obligations of states and political subdivisions........................... 10,177 308 -- 10,485
Mortgage-backed securities................................................. 19,201 81 (47) 19,235
--------- ---------- ---------- ----------
Total debt securities available for sale...................................... $57,159 $ 721 $ (66) $57,814
========= ========== ========== ==========
Debt securities held to maturity:
U.S. Treasury securities and obligations of U.S. government agencies....... $ 4,076 $ 59 $ -- $ 4,135
Obligations of states and political subdivisions........................... 27,520 497 (95) 27,922
Mortgage-backed securities................................................. 1,418 37 -- 1,455
--------- ---------- ---------- -----------
Total debt securities held to maturity........................................ $33,014 $ 593 $ (95) $33,512
========= ========== ========== ==========
</TABLE>
<TABLE>
<CAPTION>
December 31, 1997
----------------------------------------------
Gross Gross Estimated
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
Debt securities available for sale: ---------- ---------- ---------- ----------
U.S. Treasury securities and obligations of U.S.
<S> <C> <C> <C> <C>
government agencies.................................... $ 23,387 $ 314 $ (5) $23,696
Obligations of states and political subdivisions.......... 9,621 165 (28) 9,758
Mortgage-backed securities................................ 3,357 16 (17) 3,356
---------- ---------- ---------- ----------
Total debt securities available for sale..................... $ 36,365 $ 495 $ (50) $36,810
========== ========== ========== ==========
Debt securities held to maturity:
U.S. Treasury securities and obligations of U.S.
government agencies.................................... $ 4,911 $ 3 $ (20) $ 4,894
Obligations of states and political subdivisions.......... 14,913 149 (88) 14,974
Mortgage-backed securities................................ 2,287 49 (1) 2,335
---------- ---------- ---------- ----------
Total debt securities held to maturity....................... $ 22,111 $ 201 $ (109) $22,203
========== ========== ========== ==========
</TABLE>
During the years ended December 31, 1998, 1997 and 1996, available-for-sale
debt securities with a fair value at the date of sale of $9,966, $19,618 and
$2,182, respectively, were sold. The gross realized gains or losses on such
sales totaled $191, $(13) and $10, respectively. The amortized cost and
estimated fair value of debt securities as of December 31, 1998,
44
<PAGE>
by contractual maturity, are shown below. Expected maturities may differ
from contractual maturities because borrowers may have the right to call or
prepay certain obligations with or without call or prepayment penalties.
Estimated
Amortized Fair
Cost Value
---------- ----------
Debt securities available for sale:
Due in one year or less................... $ 200 $ 201
Due after one year through five years..... 5,953 6,004
Due after five years through ten years.... 17,692 18,102
Due after ten years....................... 14,113 14,272
Mortgage-backed securities................ 19,201 19,235
---------- ---------
$ 57,159 $ 57,814
========== =========
Debt securities held to maturity:
Due in one year or less................... $ 1,432 $ 1,445
Due after one year through five years..... 11,665 11,810
Due after five years through ten years.... 6,935 7,073
Due after ten years....................... 11,564 11,729
Mortgage-backed securities................ 1,418 1,455
---------- ---------
$ 33,014 $ 33,512
========== =========
Debt securities having carrying amounts of $63,520 and $38,604 at December
31, 1998 and 1997, respectively, were pledged to secure public deposits and for
other purposes required or permitted by law.
4. Loans
Loans consisted of the following:
December 31,
----------------------
1998 1997
--------- -----------
Real estate:
Residential..................... $ 61,280 $ 55,406
Mortgage loans held for sale.... 1,053 421
Construction.................... 9,095 4,226
Commercial...................... 31,915 28,591
Consumer............................. 61,686 51,965
Commercial........................... 39,493 25,556
--------- ----------
204,522 166,165
Unearned income...................... (3,862) (3,512)
Allowance for loan losses............ (3,564) (3,101)
--------- ----------
Net loans............................ $197,096 $159,552
========= ==========
45
<PAGE>
Loans are made principally to customers in the Company's trade area. The
economy in this trade area is primarily retail, service and medical based. The
Company's loan portfolio is primarily centered in consumer loans and real
estate; therefore, the collections of such loans are dependent on the trade area
economy. The Company's lending policy provides that loans collateralized by real
estate are normally made with loan-to-value ratios of 80% or less. Commercial
loans are typically collateralized by property, equipment, inventories and/or
receivables with loan-to-value ratios from 50% to 80%. Consumer loans are
typically collateralized by automobiles and personal property.
Transactions in the allowance for loan losses are summarized as follows:
As of and for the year ended
December 31,
------------------------------
1998 1997 1996
-------- -------- ---------
Balance at beginning of year ............. $ 3,101 $ 2,837 $ 2,529
Provision for loan losses................. 785 725 557
Loans charged off......................... (526) (638) (488)
Recoveries of loans previously charged
off.................................... 204 177 239
--------- --------- ---------
Balance at end of year ................... $ 3,564 $ 3,101 $ 2,837
========= ========= =========
Non-accrual loans at December 31, 1998 and 1997 were $931 and $147,
respectively.
Certain directors, executive officers, principal shareholders, their
immediate family members and entities in which they or their immediate family
members have principal ownership interests, are customers of and have
transactions with the Company in the ordinary course of business. Loans to these
parties are made on substantially the same terms, including interest rates and
collateral, as those prevailing at the time for comparable third-party
transactions and do not involve more than normal risks of collectibility or
present other unfavorable features.
These related party loan transactions are summarized as follows:
Year ended
December 31, 1998
-----------------
Balance at beginning of year ................... $ 1,436
New loans....................................... 1,283
Repayments...................................... (1,251)
-----------
Balance at end of year.......................... $ 1,468
===========
46
<PAGE>
5. Premises and Equipment
Premises and equipment consisted of the following at:
December 31,
---------------------
1998 1997
--------- ---------
Land................................. $ 2,301 $ 1,657
Bank premises........................ 6,400 4,923
Furniture, fixtures and equipment.... 4,614 3,651
Computer software.................... 798 674
Accumulated depreciation............. (5,002) (4,267)
--------- ---------
$ 9,111 $ 6,638
========= =========
6. Other Real Estate
Other real estate transactions consisted of the following:
As of and for the year ended
December 31,
-------------------------------------
1998 1997 1996
-------- --------- -------
Beginning balance....... $ 411 $ 767 $ 309
Transfers of loans...... 360 24 560
Sales................... (18) (336) (84)
Provision for losses.... (11) (44) (18)
-------- --------- -------
Ending balance.......... $ 742 $ 411 $ 767
======== ========= =======
47
<PAGE>
7. Interest-Bearing Deposits
Interest-bearing deposits consisted of the following:
December 31,
---------------------
1998 1997
--------- ---------
Demand (Now, SuperNow and money market)........... $ 81,516 $ 50,765
Savings........................................... 9,437 8,877
Individual retirement accounts.................... 14,127 11,058
Time deposits, $100,000 and over.................. 45,040 35,635
Other time deposits............................... 100,311 81,112
--------- ---------
$250,431 $187,447
========= =========
Scheduled maturities of time deposits, including individual retirement
accounts, outstanding at December 31, 1998 are as follows:
1999.................... $ 87,925
2000.................... 51,752
2001.................... 9,364
2002.................... 4,518
2003.................... 5,919
--------
$159,478
========
In the normal course of business, the Company has accepted deposits from
certain directors, executive officers, principal shareholders and other related
parties on substantially the same terms, including interest rates, as those
prevailing at the time of comparable transactions with third-party customers.
Such deposits were $746 and $900 at December 31, 1998 and 1997, respectively.
8. Other Borrowed Funds
Other borrowed funds include borrowings of $4,120 and $4,020 at December
31, 1998 and 1997, respectively, under a $5,000 revolving line of credit with an
unrelated bank. Borrowings accrue interest at a variable rate (9.00% at December
31, 1998 and 9.25% at December 31, 1997) with interest paid monthly. The
revolving line of credit expires in December of 1999. Borrowings under the
revolving line of credit are collateralized by substantially all of the assets
of SFSI.
Other borrowed funds include $3,600 at December 31, 1997 to an unrelated
bank that was repaid in December 1998.
Notes payable to banks include advances of $15,000 and $10,000 at December
31, 1998 and 1997, respectively, from Federal Home Loan Bank ("FHLB"). The
advances accrue interest at variable rates (4.89% and 5.66% weighted average
rate at December 31, 1998 and 1997, respectively) with interest paid monthly.
The Company paid $5,000 of the amount outstanding in January 1999 (unaudited).
The $10,000 advance matures in November 2008. The advances are
48
<PAGE>
collateralized by the Bank's investment in FHLB stock, which totaled $788 and
$963 at December 31, 1998 and 1997, respectively, and by a blanket pledge of the
Bank's eligible real estate loans. The Bank had available collateral to borrow
an additional $53,000 from the FHLB at December 31, 1998.
9. Income Taxes
Income tax expense (benefit) consisted of the following:
Year ended December 31,
------------------------------
1998 1997 1996
-------- -------- --------
Current:
Federal.... $ 999 $ 831 $ 627
State...... 155 112 92
-------- -------- --------
1,154 943 719
Deferred........ (149) (89) (108)
-------- -------- --------
$ 1,005 $ 854 $ 611
========= ========= ========
The differences between the Bank's actual income tax expense and amounts
computed at the statutory rates are summarized as follows:
Year ended December 31,
------------------------
1998 1997 1996
------- -------- -------
Amount computed at statutory rate on income before
income taxes....................................... $1,379 $1,086 $ 897
Increase (decrease) in income taxes resulting from:
State income taxes, net of federal benefit....... 89 66 51
Income from non-taxable securities............... (447) (323) (319)
Other............................................ (16) 25 (18)
------- ------- -------
$1,005 $ 854 $ 611
======= ======= ======
The Company made income tax payments of $1,113, $984 and $762 during the
years ended December 31, 1998, 1997 and 1996, respectively.
49
<PAGE>
Deferred income taxes reflect the net tax effects of temporary differences
between the carrying amounts of assets and liabilities for financial reporting
purposes and the amounts used for income tax purposes. Significant components of
the Company's deferred tax assets consisted of the following:
December 31,
--------------
1998 1997
------ -------
Allowance for loan losses.................................. $ 878 $ 706
Other real estate.......................................... 26 23
Deferred compensation...................................... 131 105
Net unrealized gains on securities available for sale...... (244) (166)
Other...................................................... (31) 21
----- ------
Total net deferred tax assets.............................. $ 760 $ 689
====== =======
10. Employment Benefit Plans
The Company has a defined contribution 401(k) plan with a profit sharing
feature which covers substantially all employees. Participants in the 401(k)
plan may contribute up to the maximum allowed by Internal Revenue Service
regulations. The Company matches participants' contributions to the 401(k) plan
up to 3% of each participant's annual salary. The Company may make a profit
sharing contribution as determined by the Company's Board of Directors. The
Company's matching and profit sharing contributions vest 20% annually beginning
with the participant's third year of service. The Company's contributions to the
401(k) plan were $88, $85 and $206 for the years ended December 31, 1998, 1997
and 1996, respectively.
The Company established an employee stock ownership plan ("ESOP") effective
January 1, 1997 which covers substantially all employees. The Company may make
contributions to the ESOP at the discretion of its Board of Directors and may be
made in cash or common stock. The contributions vest 20% annually beginning with
the participant's third year of service. The Company's contributions to the ESOP
were $165 and $150 for the years ended December 31, 1998 and 1997, respectively.
On July 30, 1998, the ESOP purchased 18,711 shares of the Company's Common Stock
included in treasury stock.
In August of 1998, the Company adopted a stock incentive plan under which
it plans to grant stock options for selected employees. As of December 31, 1998,
no stock options had been granted under the plan.
The Company maintains a self-insured medical plan. Under this plan, the
Company self-insures, in part, coverage for substantially all full-time
employees with coverage by insurance carriers for certain stop-loss provisions
for losses greater than $30 for each occurrence up to a maximum benefit of
$1,000. The Company's expenses pertaining to the self-insured medical plan,
including accruals for incurred but not reported claims, were $436, $323 and
$233 for the years ended December 31, 1998, 1997 and 1996, respectively.
The Company has deferred compensation agreements with certain officers for
payments to be made over specified periods beginning when the officers reach age
65. Amounts accrued for these agreements are based upon deferred compensation
earned, discounted over the estimated remaining service life of each officer.
Deferred compensation expense totaled $71, $66 and $62 for the years ended
December 31, 1998, 1997 and 1996, respectively.
11. Regulatory Matters
The Federal Reserve Board has adopted a system using risk-based capital
guidelines to evaluate the capital adequacy of bank holding companies. These
guidelines require a minimum total risk-based capital ratio of 8.0% (of
50
<PAGE>
which at least 4.0% is required to consist of Tier 1 capital elements). The
Federal Reserve Board also utilizes a leverage ratio (Tier 1 capital divided by
average total consolidated assets) to evaluate the capital adequacy of bank
holding companies. The Company's current regulatory ratios placed it in the
"well-capitalized category.
The Company's actual capital amounts and applicable ratios are as follows:
December 31,
-------------------
1998 1997
--------- --------
Capital:
Stockholders' equity............................... $31,331 $16,160
Less unrealized gains on securities, net of
income taxes.................................... (411) (279)
Intangible asset................................... (94) (102)
--------- --------
Tier 1 capital..................................... 30,826 15,779
Qualifying allowance for loan losses............... 2,642 2,009
--------- --------
Total capital...................................... $33,468 $17,788
========= ========
Ratios:
Total capital to risk-weighted assets.............. 15.90% 11.09%
Tier 1 capital to risk-weighted assets............... 14.65 9.84
Tier 1 capital to total average assets (leverage
ratio)............................................ 9.55 6.87
State banking regulations require the Mississippi Department of Banking and
Consumer Finance to approve the payment of any dividends.
12. Off-Balance Sheet Risks, Commitments and Contingent Liabilities
Loan commitments are made to accommodate the financial needs of the
Company's customers. Standby letters of credit commit the Company to make
payments on behalf of customers when certain specified future events occur. They
primarily are issued to support customers' trade transactions.
Both arrangements have credit risk essentially the same as that involved in
extending loans to customers and are subject to the Company's normal credit
policies. Collateral is obtained based on management's credit assessment of the
customer.
The Company's maximum exposure to credit losses for loan commitments
(unused lines of credit) outstanding at December 31, 1998 and expiring during
1999 is $14,946.
The Company uses interest rate floor agreements to effectively convert a
portion of its loans to a minimum fixed rate basis, thus reducing the impact of
lower interest rates on the Company's net interest margin because management
believes that lower interest rates would adversely affect the yield on loans
more than on other earning assets or the cost of interest-bearing liabilities.
At December 31, 1998 approximately 10.0% of the Company's loans were effectively
subject to the Company's interest rate floor agreements that expire at various
dates through January 16, 2000. The notional amount of $20.0 million for these
agreements effectively fixes the Company's minimum variable interest rate on
$20.0 million of loans using a 6% three-month LIBOR rate as the floor. At
December 31, 1998 and 1997, the three-month LIBOR rate was 5.00% and 5.81%,
respectively. The agreements are settled monthly and recognized with the
51
<PAGE>
amortization of the premium as adjustments to interest income. The fair value of
the agreements were immaterial to the Company's consolidated financial position
at December 31, 1998 and 1997.
The Company is involved in certain legal actions and claims arising in the
ordinary course of business. Although the ultimate outcome of these other
actions and claims cannot be ascertained at this time, it is the opinion of
management (based on advice of legal counsel) that such litigation and claims
should be resolved without material effect on the Company's consolidated
financial position or operating results.
13. Parent Company Condensed Financial Information
Balance Sheets
December 31,
---------------------
1998 1997
--------- ---------
Assets:
Cash and cash equivalents....................... $ 8,500 $ --
Investment in subsidiaries...................... 21,729 19,069
Due from subsidiaries........................... 164 660
Premises and equipment.......................... 1,170 1,173
Other........................................... 19 19
--------- ---------
Total assets................................ $ 31,582 $ 20,921
========= =========
Liabilities:
Due to subsidiaries............................. $ -- $ 1,010
Other liabilities............................... 251 151
Other borrowed funds............................ -- 3,600
--------- ---------
Total liabilities........................... 251 4,761
Stockholders' equity:
Common stock.................................... 2,065 466
Paid-in capital................................. 15,885 5,374
Retained earnings............................... 12,970 10,283
Accumulated other comprehensive income.......... 411 279
Treasury stock.................................. -- (242)
--------- ---------
Total stockholders' equity.................... 31,331 16,160
--------- ---------
Total liabilities and stockholders' equity.. $ 31,582 $ 20,921
========= =========
52
<PAGE>
Statements of Income
Year ended December 31,
----------------------------
1998 1997 1996
------- ------- -------
Income:
Dividends from subsidiaries.................. $ 750 $1,110 $ 475
Other ................................... 22 23 1
-------- -------- -------
Total income....................... 772 1,133 476
Expenses:
Interest expense............................. 342 392 1
Other ................................... 55 60 59
-------- -------- -------
Total expenses..................... 397 452 60
------- ------- -------
Income before income taxes................... 375 681 416
Income tax benefit........................... 146 160 22
------- ------- -------
Income before equity in undistributed net
income of subsidiaries..................... 521 841 438
Equity in undistributed net income of
subsidiaries............................... 2,528 1,498 1,590
------- ------- ------
Net income................................... $3,049 $2,339 $2,028
======= ======= ======
Statements of Cash Flows Year ended December 31,
----------------------------
1998 1997 1996
------- -------- --------
Operating activities:
Net income.................................... $ 3,049 $ 2,339 $ 2,028
Adjustments to reconcile net income to
net cash provided by operating
activities:
Undistributed net income of subsidiaries.. (2,528) (1,498) (1,590)
Depreciation expense...................... 9 9 --
(Increase) decrease in due from
subsidiaries............ (514) (298) 815
Increase in other assets.................. -- -- (14)
Increase in other liabilities............. 126 -- 1
-------- -------- --------
Net cash provided by operating
activities............................... 142 552 1,240
Investment activities:
Capital contribution to subsidiary............ -- (150) (3,850)
Purchases of premises and equipment........... (6) (182) (1,000)
-------- -------- --------
Net cash used in investing activities......... (6) (332) (4,850)
Financing activities:
Dividends paid................................ (388) (250) (250)
Borrowings from a bank........................ -- -- 4,000
Payments on note payable to a bank............ (3,600) (400) --
Proceeds from sale of common stock............ 12,199 -- --
Purchases of treasury stock................... (72) (436) (2)
Proceeds from sales of treasury stock......... 225 682 --
-------- -------- --------
Net cash provided by (used in) financing
activities.................................. 8,364 (404) 3,748
-------- -------- --------
Net increase (decrease) in cash and cash
equivalents................................. 8,500 (184) 138
Cash and cash equivalents at beginning of
year........................................ -- 184 46
-------- -------- --------
Cash and cash equivalents at end of year...... $ 8,500 $ -- $ 184
======== ======== ========
53
<PAGE>
14. Fair Values of Financial Instruments
Generally accepted accounting principles require disclosure of fair value
information about financial instruments for which it is practicable to estimate
fair value, whether or not the financial instruments are recognized in the
financial statements. When 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. The derived fair value
estimates cannot be substantiated through comparison to independent markets and,
in many cases, could not be realized in immediate settlement of the instrument.
Certain financial instruments and all non-financial instruments are excluded
from these disclosure requirements. Accordingly, the aggregate fair value
amounts presented do not represent the underlying value of the Company. The use
of different market assumptions and estimation methodologies may have a material
effect on the estimated fair value amounts.
The carrying amount of cash and cash equivalents, non-interest bearing
deposits, other borrowed funds and interest rate floors approximates the
estimated fair value of these financial instruments. The estimated fair value of
securities is based on quoted market prices, dealer quotes and prices obtained
from independent pricing services. The estimated fair value of loans and
interest-bearing deposits is based on present values using applicable
risk-adjusted spreads to the appropriate yield curve to approximate current
interest rates applicable to each category of these financial instruments. The
fair value of the loan commitments to extend credit is based on the difference
between the interest rate at which the Company's committed to make the loans and
the current rates at which similar loans would be made to borrowers with similar
credit ratings and the same maturities. The fair value is not material.
Variances between the carrying amount and the estimated fair value of loans
reflect both credit risk and interest rate risk. The Company is protected
against changes in credit risk by the allowance for loan losses.
The fair value estimates presented are based on information available to
management as of December 31, 1998 and 1997. Although management is not aware of
any factors that would significantly affect the estimated fair value amounts,
these amounts have not been revalued for purposes of these financial statements
since those dates. Therefore, current estimates of fair value may differ
significantly from the amounts presented.
December 31,
------------------------------------------
1998 1997
-------------------- ---------------------
Carrying Fair Carrying Fair
Amount Value Amount Value
--------- --------- --------- ---------
Securities available for sale. $ 57,814 $ 57,814 $ 36,810 $ 36,810
Securities held to maturity.... 33,014 33,512 22,111 22,203
Loans.......................... 197,096 194,672 159,552 158,116
Interest-bearing deposits...... 250,431 252,188 187,447 181,355
15. Subsequent Event
On January 21, 1999, the Bank obtained a $40,000 advance from the FHLB at a
4.49% interest rate (fixed for a three-year term) that matures January 21, 2009.
The note is callable quarterly beginning April 22, 2002. The proceeds from this
advance were used by the Company to purchase securities, which have been
classified as available for sale.
54
<PAGE>
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
Not applicable.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
Information on the directors and executive officers of the Registrant can
be found under Item 1 Description of Business of this Report on Form 10-K and
under the headings "Election of Directors" and Executive Compensation" in the
Proxy Statement to shareholders dated April 12, 1999, and is incorporated herein
by reference.
ITEM 11. EXECUTIVE COMPENSATION
Information required by this item can be found under the heading "Executive
Compensation" in the Proxy Statement dated April 12, 1999, and is incorporated
herein by reference.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
Information regarding security ownership of certain beneficial owners
and the officers and directors can be found under the headings "Stock Ownership
of Principal Stockholder" and "Stock Ownership of Directors and Officers" in the
Proxy Statement dated April 12, 1999, and is incorporated herein by reference.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Information regarding certain relationships and related transactions
can be found under the caption "Other Transactions with Management," in the
Proxy Statement dated April 12, 1999, and is incorporated herein by reference.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
A-1. Financial Statements
Report of Independent Auditors
Consolidated Balance Sheets as of December 31, 1998 and 1997
Consolidated Statements of Income and Comprehensive Income for the years ended
December 31, 1998, 1997 and 1996
55
<PAGE>
Consolidated Statements of Changes in Stockholders' Equity for the years ended
December 31, 1998, 1997 and 1996
Consolidated Statements of Cash Flows for the years ended December 31, 1998,
1997 and 1996
Notes to Consolidated Financial Statements
A-2. Financial Statement Schedules
None.
A-3. Exhibits Required by Item 601 of Regulation S-K
3.1 Articles of Incorporation of Registrant, as amended (1)(2)
3.3 Bylaws of Registrant, as amended(1)
4.1 Provisions of Articles of Incorporation of Registrant defining rights
of security holders (see Articles of Incorporation, as amended, of
Registrant filed as Exhibits 3.1 and 3.3 herein)(1)
4.2 Shareholder Rights Plan(1)
4.3 Specimen Stock Certificate(2)
10.1 Executive Salary Continuation Agreements(1)
10.2 Stock Incentive Plan(2)
21 Subsidiaries of the Registrant(1)
27 Financial Data Schedule
(1) Filed an as an exhibit to the S-1 Registration Statement of the
Company (File No. 333-61355) filed on August 13, 1998 and incorporated by
reference herein.
(2) Filed an as an exhibit to Amendment No. 1 to the S-1 Registration
Statement of the Company (File No. 333-61355) filed on October 1, 1998 and
incorporated by reference herein.
B. Reports on Form 8-K
None
56
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15 (d) of the Securities Exchange
Act of 1934, the Registrant has duly caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized.
BY: /s/ Robert W. Roseberry
--------------------------------------
ROBERT W. ROSEBERRY
CHAIRMAN AND
CHIEF EXECUTIVE OFFICER
(PRINCIPAL EXECUTIVE OFFICER)
DATE: MARCH 29, 1999
----
By: /s/ Donna T. Rutland
--------------------------------------
DONNA T. RUTLAND
CHIEF FINANCIAL OFFICER
(PRINCIPAL FINANCIAL OFFICER AND
PRINCIPAL ACCOUNTING OFFICER)
57
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed by the following persons on behalf of the Registrant and in the
capacities and on the dates indicated:
SIGNATURES CAPACITIES DATE
- ---------- ---------- ----
/s/ O. B. Black, Jr. Director March 29, 1999
- --------------------------- ----
O. B. Black, Jr.
/s/ William H. Jordan Director March 29, 1999
- --------------------------- ----
William H. Jordan
/s/ Kenneth M. Lott Director March 29, 1999
- --------------------------- ----
Kenneth M. Lott
/s/ James R. Pylant Director March 29, 1999
- --------------------------- ----
James R. Pylant
/s/ Jane P. Roberts Director March 29, 1999
- --------------------------- ----
Jane P. Roberts
/s/ Monty C. Roseberry Director March 29, 1999
- --------------------------- ----
Monty C. Roseberry
/s/ Robert W. Roseberry Director (Principal March 29, 1999
- --------------------------- Executive Officer) ----
Robert W. Roseberry
/s/ Donna T. Rutland Chief Financial Officer March 29, 1999
- --------------------------- (Principal Accounting and ----
Donna T. Rutland Financial Officer)
58
<PAGE>
INDEX TO EXHIBITS
3.1 Articles of Incorporation of Registrant, as amended (1)(2)
3.3 Bylaws of Registrant, as amended(1)
4.1 Provisions of Articles of Incorporation of Registrant defining rights
of security holders (see Articles of Incorporation, as amended, of
Registrant filed as Exhibits 3.1 and 3.3 herein)(1)
4.2 Shareholder Rights Plan(1)
4.3 Specimen Stock Certificate(2)
10.1 Executive Salary Continuation Agreements(1)
10.2 Stock Incentive Plan(2)
21 Subsidiaries of the Registrant(1)
27 Financial Data Schedule
(1) Filed an as an exhibit to the S-1 Registration Statement of the
Company (File No. 333-61355) filed on August 13, 1998 and incorporated by
reference herein.
(2) Filed an as an exhibit to Amendment No. 1 to the S-1 Registration
Statement of the Company (File No. 333-61355) filed on October 1, 1998 and
incorporated by reference herein.
59
<TABLE> <S> <C>
<ARTICLE> 9
<LEGEND>
Exhibit 27
Selected Financial Data
</LEGEND>
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<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
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0
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