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MISSISSIPPI 64-0733976
(State or other jurisdiction of incorporation of organization) (I.R.S. Employer Identification Number)
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. [X]
The aggregate market value of the voting stock held by nonaffiliates of the Registrant on March 17, 2000 was $26,500,000.
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 March 17, 2000
Common stock, $.50 par value 4,315,707 Shares
Portions of the following documents are incorporated by reference to Part I, II, and III of the Form 10-K report: Proxy Statement dated March 29, 2000 for Registrant's Annual Meeting of Stockholders to be held April 26, 2000 (Part III).
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 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET
RISKS 15
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA 31
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
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 of Financial Conditions and Results of Operations." 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 projections 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. BUSINESSLamar 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 December of 1999, the Bank opened its third branch office in Hattiesburg at 2007 Lincoln Road in the cloverleaf area. A modular branch is being utilized until plans for a permanent facility are finalized, with construction expected to begin in approximately two years. In March of 2000, the Bank opened its fourth branch in Hattiesburg, Mississippi on Hardy Street, a major thoroughfare, near the main campus of the University of Southern Mississippi.
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. In 1998, 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.
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:
° 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.
° 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.
° 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.
° 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 offfers 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.
° 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.
° 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 a committee consisting of executive management
in accordance with policies approved by the Company’s Board of
Directors. The committee is advised by Smith Shellnut Wilson, LLC,
an independent investment counsel and management firm.
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.
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.
As of December 31, 1999, the Bank had 145 employees of whom 133 were full-time and 12 part-time. MSI has three full-time employees and SFSI has 19 employees of whom 18 were full-time and one 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. The Company also 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.
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 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
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 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, 1999, the Company's ratio of Tier 1 capital to total risk-weighted assets was 14.38% and its ratio of total capital to total risk-weighted assets was 15.57%. 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, 1999, the Company's leverage ratio was 9.23%.
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 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 has been amended to limit this authority. Under the Federal Deposit Insurance 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 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, 1999, the Bank's ratio of Tier 1 capital to total risk-weighted assets was 13.14% and its ratio of total capital to total risk-weighted assets was 14.40%.
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, 1999, the Bank's ratio of Tier 1 capital to average total assets (leverage ratio) was 8.42%.
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
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 0.0212% of annual deposits and the SAIF rate is 0.0212% 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 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.
On November 12, 1999, President Clinton signed into law the Gramm- Leach-Bliley Act of 1999 (the “Financial Services Modernization Act”). The Financial Services Modernization Act repeals the two affiliation provisions of the Glass-Steagall Act: Section 20, which restricted the affiliation of Federal Reserve Member Banks with firms “engaged principally” in specified securities activities; and Section 32, which restricts officer, director, or employee interlocks between a member bank and any company or person “primarily engaged” in specified securities activities. In addition, the Financial Services Modernization Act also contains provisions that expressly preempt any state law restricting the establishment of financial affiliations, primarily related to insurance. The general effect of the law is to establish a comprehensive framework to permit affiliations among commercial banks, insurance companies, securities firms, and other financial service providers by revising and expanding the BHCA framework to permit a holding company system to engage in a full range of financial activities through a new entity known as a Financial Holding Company. “Financial activities” is broadly defined to include not only banking, insurance, and securities activities, but also merchant banking and additional activities that the Federal Reserve, in consultation with the Secretary of the Treasury, determines to be financial in nature, incidental to such financial activities, or complementary activities that do not pose a substantial risk to the safety and soundness of depository institutions or the financial system generally.
Generally, the Financial Services Modernization Act:
o Repeals historical restrictions on, and eliminates many federal and state law barriers to,
affiliations among banks, securities firms, insurance companies, and other financial service
providers;
o Provides a uniform framework for the functional regulation of the activities of banks,
savings institutions, and their holding companies;
o Broadens the activities that may be conducted by national banks, banking subsidiaries of
bank holding companies, and their financial subsidiaries;
o Provides an enhanced framework for protecting the privacy of consumer information;
o Adopts a number of provisions related to the capitalization, membership, corporate
governance, and other measures designed to modernize the Federal Home Loan Bank
system;
o Modifies the laws governing the implementation of the Community Reinvestment Act
("CRA"); and
o Addresses a variety of other legal and regulatory issues affecting both day-to-day operations
and long-term activities of financial institutions.
In order for the Company to take advantage of the ability to affiliate with other financial services providers, the Company must become a “Financial Holding Company” as permitted under an amendment to the BHCA. To become a Financial Holding Company, the Company would file a declaration with the Federal Reserve, electing to engage in activities permissible for Financial Holding Companies and certifying that it is eligible to do so because all of its insured depository institution subsidiaries are well-capitalized and
well-managed. In addition, the Federal Reserve must also determine that each insured depository institution subsidiary of the Company has at least a “satisfactory” CRA rating. The Company currently meets the requirements to make an election to become a Financial Holding Company.
The Financial Services Modernization Act also permits national banks to engage in expanded activities through the formation of financial subsidiaries. A national bank may have a subsidiary engaged in any activity authorized for national banks directly or any financial activity, except for insurance underwriting, insurance investments, real estate investment or development, or merchant banking, which may only be conducted through a subsidiary of a Financial Holding Company. Financial activities include all activities permitted under new sections of the BHCA or permitted by regulation.
A national bank seeking to have a financial subsidiary, and each of its depository institution affiliates, must be “well-capitalized” and “well-managed.” The total assets of all financial subsidiaries may not exceed the lesser of 45% of a bank’s total assets, or $50 billion. A national bank must exclude from its assets and equity all equity investments, including retained earnings, in a financial subsidiary. The assets of the subsidiary may not be consolidated with the bank’s assets. The bank must also have policies and procedures to assess financial subsidiary risk and protect the bank from such risks and potential liabilities.
The Financial Services Modernization Act also includes a new section of the Federal Deposit Insurance Act governing subsidiaries of state banks that engage in “activities as principal that would only be permissible” for a national bank to conduct in a financial subsidiary. It expressly preserves the ability of a state bank to retain all existing subsidiaries. Because Mississippi permits commercial banks chartered by the state to engage in any activity permissible for national banks, the state bank competitors of the Hattiesburg Bank and the Laurel Bank will be permitted to form subsidiaries to engage in the activities authorized by the Financial Services Modernization Act, to the same extent as the Hattiesburg Bank and the Laurel Bank. In order to form a financial subsidiary, a state bank must be well-capitalized, and the state bank would be subject to the same capital deduction, risk management and affiliate transaction rules as applicable to national banks.
The Company’s management has not determined at this time whether it will seek an election to become a Financial Holding Company or will seek to form a financial subsidiary. The Company is examining its strategic business plan to determine whether, based on market conditions, the relative financial conditions of the Company and its subsidiaries, regulatory capital requirements, general economic conditions, and other factors, the Company desires to utilize any of its expanded powers provided in the Financial Services Modernization Act.
The Company and the Banks do not believe that the Financial Services Modernization Act will have a material adverse effect on operations in the near-term. However, to the extent that it permits banks, securities firms, and insurance companies to affiliate, the financial services industry may experience further consolidation. The Financial Services Modernization Act is intended to grant to community banks certain powers as a matter of right that larger institutions have accumulated on an ad hoc basis. Nevertheless, this act may have the result of increasing the amount of competition that the Company and the Banks face from larger institutions and other types of companies offering financial products, many of which may have substantially more financial resources than the Company and the Banks.
Executive Officers of the Registrant
Name Age Positions with the Company
Robert W. Roseberry 49 Chairman and Chief Executive Officer, Director
Jane P. Roberts 63 Vice Chairman and Secretary, Director
Kenneth M. Lott 45 President and Chief Operating Officer, Director
W. H. Macko 49 Senior Vice President
Donna T. Rutland 33 Chief Financial Officer and Treasurer
Sam B. Kendricks 40 Chief Credit Officer
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 36 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 23 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.
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.
Sam B. Kendricks has 20 years of banking experience, 15 of which was with the largest bank holding company headquartered in Mississippi. His experience has primarily been in commercial lending, but also includes management of a community bank region. Sam joined the Bank in December of 1999 as Chief Credit Officer.
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
1999: ----- ------ ----- ------
Interest income $ 6,994 $ 7,453 $ 7,773 $ 7,938
Interest expense 3,941 4,113 4,328 4,427
--------- --------- --------- ---------
Net interest income 3,053 3,340 3,445 3,511
Provision for loan losses 172 217 415 618
Other income 736 943 941 901
Securities gains 2 4 _
Other expenses 2,112 2,650 2,632 2,394
--------- --------- --------- ---------
Income before income taxes 1,507 1,420 1,339 1,400
Income taxes 399 376 355 365
--------- --------- --------- ---------
Net income $ 1,108 $ 1,044 $ 984 $ 1,035
========== ========== ======== =========
Net income per common share:
Basic and diluted $ 0.26 $ 0.24 $ 0.23 $ 0.24
========== ========== ======== =========
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
========== ========== ======== =========
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.
Deposits
--------
Square Owned (O)/ Loans as of as of
Bank Offices ------ ---------- ----------- -----
------------ Footage Leased (L) December 31, 1999 December 31, 1999
------- ---------- ----------------- -----------------
(in thousands) (in thousands)
Purvis
Main Office
401 Shelby Speights Drive, Purvis 19,600 O $72,355 $87,521
#4 Highway 589, Purvis 11,203 O 10,670 11,850
Sumrall
1193 Highway 42 East, Sumrall 5,000 O 26,259 41,653
Hattiesburg
6052 Highway 98 West, Hattiesburg* 16,308 O 50,531 84,730
Turtle Creek Mall Branch Office
1000 Turtle Creek Drive, Space 125,
Hattiesburg 667 L __ 4,882
2007 Lincoln Rd, Hattiesburg 900 L 8,434 1,131
3301 Hardy Street, Hattiesburg 5,000 O __ __
Petal
535 Highway 42, Petal 16,810 O 46,367 36,272
Prentiss
965 South Columbia Avenue, Prentiss 4,822 O 14,921 40,425
*Includes Mortgage & Investment Center located
at 6042 Highway 98 West, Hattiesburg
Square Owned (O)/ Loans as of
------ ---------- -----------
Offices of SFSI Footage Leased (L) December 31, 1999
--------------- ------- ---------- -----------------
(in thousands)
Hattiesburg
1715 Hardy St, Suite 10, Hattiesburg 1,500 L $ 683
Petal
300 New Richton Road, Petal 1,440 L 479
Prentiss
1705 Columbia Avenue, Prentiss 1,440 O 527
Purvis
70 Shelby Speights Drive, Purvis 2,160 O 1,800
Monticello
863 Highway 84 West, Monticello 1,100 O 835
Poplarville
1235 South Main Street, Poplarville 1,500 O 803
Gulfport
1010 Pass Road, Gulfport 1,100 L 739
Square Owned (O)/
------ ----------
The Mortgage Shop, Inc. Footage Leased (L)
----------------------- ------- ----------
Hattiesburg
1715 Hardy St, Suite 10, Hattiesburg 950 L
The agreements for the leased facilities have unexpired terms ranging from April 2000 to the year 2003, including renewal options. In June of 1998, the Bank aquired property in Hattiesburg, Mississippi on Hardy Street, a major thoroughfare, near the main campus of the University of Southern Mississippi. This property was used to open a new branch . This branch was opened in March 2000. The Bank also aquired property on Lincoln Road in Hattiesburg, near the Cloverleaf area in August of 1999. A modular branch is currently in operation with plans for a permanent facility to begin construction in approximately 2 years.
ITEM 3. LEGAL PROCEEDINGSSFSI 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. This case is ready for trial. SFSI is also a defendant in another case filed on March 23, 1999, in the Circuit Court of Jefferson Davis County, Mississippi. The allegations contained in the complaint in this suit are substantially similar to those in the case filed in Forrest County. The plaintiff asks for actual damages of $100,000 and punitive damages of $1,000,000. This case in is the discovery stage. While the ultimate outcome of these lawsuits cannot be predicted with certainty, management believes the cases are without merit, denies all liability and believes that the ultimate resolution of these matters will not have a material adverse effect on the Company's consolidated financial position or operations.
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 HOLDERSThere were no matters submitted to the Company's shareholders during the fourth quarter of 1999.
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 1999, 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
---- ----
1999
First Quarter 10 1/4 8 1/4
Second Quarter 10 1/8 9
Third Quarter 12 3/4 9 1/2
Fourth Quarter 11 3/4 10 1/4
1998
First Quarter Not traded
Second Quarter Not traded
Third Quarter Not traded
Fourth Quarter 10 9 3/4
***
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 1999 and
1998, 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, 1999 January 14, 2000 $.0500
September 30, 1999 October 15, 1999 $.0500
June 30, 1999 July 15, 1999 $.0400
March 31, 1999 April 15, 1999 $.0400
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
(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.
ITEM 6. SELECTED FINANCIAL DATA
As of and for the Years Ended December 31,
------------------------------------------
1999 1998 1997 1996 1995
---- ---- ---- ---- ----
(in thousands, except per share data)
Income Statement Data:
Interest income $30,158 $23,916 $19,442 $16,190 $13,903
Interest expense 16,809 13,903 10,536 8,429 7,100
Net interest income 13,349 10,013 8,906 7,761 6,803
Provision for loan losses 1,422 785 725 557 517
Non-interest income 3,527 3,558 2,689 2,325 1,751
Non-interest expense 9,788 8,732 7,677 6,890 6,146
Income before taxes 5,666 4,054 3,193 2,639 1,891
Net income 4,171 3,049 2,339 2,028 1,474
Balance Sheet Data:
Total assets $412,750 $330,516 $247,022 $207,330 $169,636
Total securities 126,059 90,828 58,921 41,562 33,037
Total loans, net 231,133 197,096 159,552 140,318 119,556
Allowance for loan losses 4,270 3,564 3,101 2,837 2,529
Total deposits 308,464 278,272 211,498 185,404 156,631
Other borrowed funds 70,000 19,120 17,620 7,000 --
Total stockholders' equity 31,902 31,331 16,160 13,473 11,765
Per Share Data:
Net income per share-basic and diluted $ .97 $ 1.09 $ 0.87 $ 0.75 $ 0.54
Book value 7.39 7.58 5.88 4.97 4.34
Cash dividends per share 0.1800 0.1167 0.1002 0.0923 0.0923
Performance Ratios:
Return on average assets 1.07% 1.03% 1.02% 1.06% 0.90%
Return on average equity 12.51 17.65 15.69 15.88 13.56
Net interest margin 3.69 3.65 4.20 4.41 4.50
Efficiency ratio 58 65 66 68 72
Asset Quality Ratios:
Allowance for loan losses to nonperforming loans 216% 323% 777% 360% 295%
Allowance for loan losses to total loans 1.81 1.74 1.87 1.93 2.01
Nonperforming assets to total loans 1.06 0.90 0.49 1.06 0.93
Net loan charge-offs to average loans 0.32 0.18 0.30 0.19 0.38
Capital Ratios:
Leverage ratio 9.23% 9.55% 6.87% 7.11% 7.19%
Average stockholders' equity to average total assets 8.56 5.82 6.49 6.69 6.63
Tier 1 risk-based capital ratio 14.38 14.65 9.84 9.67 10.21
Total risk-based capital ratio 15.57 15.90 11.09 10.92 11.47
Dividend payout ratio 16 5 12 12 17
Since 1997, the Company's net income, earning assets and deposits have increased substantially. Net income grew 36.8% from $3.0 million in 1998 to $4.2 million in 1999. Net income increased 30.4% from $2.3 million in 1997 to $3.0 million in 1998. Total loans rose 44.9% from $159.6 million at December 31, 1997, to $231.1 million at December 31, 1999. Total securities increased 113.9% from $58.9 million at December 31, 1997, to $126.1 million at December 31, 1999. Total deposits increased 45.8% from $211.4 million at December 31, 1997, to $308.5 million at December 31, 1999.
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 the continued strong economic growth in the region. The net interest margin has declined from 4.20% for 1997 to 3.69% for 1999 as a result of decreases in yields on interest- earning assets that have not been offset by similar decreases in cost of interest-bearing liabilities.
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 affected 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.
Net interest income increased 33.3% in 1999 compared with 1998, following a 12.4% increase in 1998 compared with 1997. The increase in 1999 and 1998 is attributable to an increase in the Company's average interest-earning assets of 31.9% and 29.3%, respectively, principally in the loan and investment securities portfolios.
During 1999, average interest-bearing liabilities increased $69.7 million to $321.3 million, an increase of 27.7% over 1998. This was primarily from increases in other borrowed funds, time deposits and transaction accounts. In 1998, average interest-bearing liabilities increased 30.1% to $251.6 million. This increase of $58.2 million was primarily in time deposits and transaction accounts.
The Company's net interest margin was 3.69% in 1999, 3.65% in 1998, and 4.20% in 1997. The increase in net interest margin in 1999 from 1998 resulted from a decrease in yield on interest-earning assets of .40% while the Company's cost of interest-bearing liabilities decreased .30%. The net reduction in net interest margin in 1998 compared with 1997 resulted from a decrease in yield on interest-earning assets of .45% and an increase in cost of interest-bearing liabilities of .08%.
The net interest margin may be negatively affected by the interest rate environment and changes in the earning asset mix and deposit funding mix. Increased rates may have a negative impact on the Company's borrowing and deposit funding costs.
Table 1-Average Balance Sheets and Rates for December 31, 1999, 1998 and 1997
1999 1998 1997
---------------------------- --------------------------- ----------------------------
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
Obligations of U.S. agencies $39,755 $ 2,590 6.51% $32,753 $ 2,171 6.63% $ 22,110 $ 1,493 6.75%
Obligations of state and political
Subdivisions (1) 39,029 2,852 7.31 32,903 2,433 7.39 24,139 1,844 7.64
Mortgage-backed securities 49,556 3,204 6.47 14,868 794 5.34 5,985 399 6.66
Federal Home Loan Bank stock 3,152 181 5.74 822 50 6.08 818 52 6.36
Federal funds sold 8,478 422 4.98 10,721 589 5.49 5,478 297 5.42
Total loan and fees 222,148 21,879 9.85 182,395 18,706 10.26 153,656 15,984 10.40
------- ------- ------- ------- ------- -------
Total earning assets (1) 362,118 31,128 8.60 274,462 24,743 9.02 212,186 20,069 9.46
Less: Allowance for loan losses (3,805) (3,416) (3,020)
Nonearning assets
Cash and due from banks 14,686 11,598 7,915
Premises and equipment, net 9,566 8,004 6,476
Other assets 7,079 6,298 6,043
------- ------- -------
Total assets $389,644 $ 296,946 $ 229,600
======== ======== ========
LIABILITIES AND
STOCKHOLDERS' EQUITY
Interest-bearing liabilities:
Transaction accounts $ 85,955 4,185 4.87 $ 74,973 3,581 4.78 $ 53,344 2,387 4.47
Savings accounts 9,909 262 2.64 9,214 243 2.64 8,881 243 2.74
Time deposits 165,251 9,297 5.63 149,435 8,861 5.93 120,269 7,169 5.96
Other borrowed funds 60,153 3,065 5.10 17,985 1,218 6.77 10,866 737 6.78
------- ------- ------- ------ ------- -------
Total interest-bearing liabilities 321,268 16,809 5.23 251,607 13,903 5.53 193,360 10,536 5.45
------- ----- ------ ---- ------- -----
Noninterest-bearing liabilities:
Noninterest-bearing deposits 33,660 25,938 19,524
Other liabilities 1,378 2,127 1,813
Stockholders' equity 33,338 17,274 14,903
------- ------- -------
Total liabilities and
stockholders' equity $389,644 $ 296,946 $ 229,600
======== ======== ========
Net interest income (1) $14,319 $ 10,840 $ 9,533
======= ======== =======
Net interest spread (1) 3.37% 3.49% 4.01%
====== ===== =====
Net interest margin (1) 3.95% 3.95% 4.49%
====== ===== =====
Note: Calculations include non-accruing loans in the average loan amounts outstanding.
(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.
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
Table 2-Volume/Rate Variance Analysis
Year Ended December 31, Year Ended December 31,
----------------------- -----------------------
1999 1998
---- ----
Compared with Compared with
------------- -------------
Year Ended December 31, Year Ended December 31,
----------------------- -----------------------
1998 1997
---- ----
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.
Agencies $ 419 $ 456 $ 678 $ 705 $ (27)
$ (37)
Obligations of state and political subdivisions 419 448 (29) 589 648 (59)
Mortgage-backed securities 2,410 2,244 166 395 474 (79)
Federal Home Loan Bank stock 131 134 (3) (2) --- (2)
Federal funds sold (167) (112) (55) 292 288 4
Total loans and fees 3,173 3,915 (742) 2,722 2,947 (225)
------ ------ ------ ------ ------ -----
Total increase (decrease) in interest income 6,385 7,085 (700) 4,674 5,062 (388)
Interest expense:
Interest-bearing liabilities:
Transaction accounts 604 535 69 1,194 1,033 161
Saving accounts 19 19 --- --- 8 (8)
Time deposits 436 889 (453) 1,692 1,729 (37)
Other borrowed funds 1,847 2,149 (302) 481 482 (1)
------ ------ ------ ------ ------ -----
Total increase (decrease) in interest expense 2,906 3,592 (686) 3,367 3,252 115
------ ------ ------ ------ ------ -----
Increase (decrease) in net interest income $ 3,479 $ 3,493 $ (14) $ 1,307 $ 1,810 $(503)
======== ======= ====== ======== ======== =====
(1) Interest income for loans on non-accrual status has been excluded from interest income.
Noninterest Income
Table 3 illustrates the Company's primary sources of noninterest income. Noninterest income decreased 0.9% to
$3.5 million in 1999 from $3.6 million in 1998. This decrease was principally due to a decline in mortgage loan fees
and other operating income. The noninterest income for 1998 increased $869,000 or 32.3% from $2.7 million in 1997.
Table 3-Analysis of Noninterest Income
Percent
-------
Increase
--------
Year Ended December 31, (Decrease)
----------------------- ----------
1999 1998 1997 1999/98 1998/97
---- ---- ---- ------- -------
(in thousands)
Service charges on deposit accounts $2,116 $1,777 $1,670 19.1% 6.4%
Mortgage loan fees 544 639 362 (14.9) 76.5
Commissions on credit life insurance 369 439 391 (15.9) 12.3
Other operating income 498 703 266 (29.2) 164.3
----- ----- -----
Total $3,527 $3,558 $2,689 (0.9) 32.3
====== ====== ====== ====== ======
Service charges on deposit accounts increased in 1999 compared with 1998 and in 1998 compared with 1997 from an increase in the number of transaction accounts and in the fee structure.
Mortgage loan fees declined in 1999 compared with 1998. The increase in mortgage loan rates during 1999 resulted in fewer secondary market residential loan originations and a decrease in mortgage loan fees. Mortgage loan fees in 1998 were positively influenced by a decline in mortgage loan rates.
Decreases in commissions on credit life insurance in 1999 compared with 1998 were due to a slight decrease in the insurance commission structure. Increases in 1998 compared with 1997 were due to increased loan originations.
Other operating income declined from 1998 to 1999 as a result of $314 of trading account gains and gains on sales of securities available for sale realized in 1998 as compared to $6 in 1999.
As shown in Table 4, total noninterest expense increased by 12.1% to $9.8 million in 1999, compared with $8.7 million in 1998. The noninterest expense in 1998 increased $1.1 million or 13.7% from $7.7 million in 1997.
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 1999, 1998 and 1997 were 58.0%, 64.3% and 66.2%, respectively.
Table 4-Analysis of Noninterest Expense
Percent
-------
Increase
--------
Year Ended December 31, (Decrease)
------------------------ ----------
1999 1998 1997 1999/98 1998/97
---- ---- ---- ------- -------
(in thousands)
Salaries and employee benefits $5,342 $4,906 $4,173 8.9% 17.6%
Occupancy expense 720 653 610 10.3 7.0
Furniture and equipment expense 1,159 1,007 878 15.1 14.7
Other operating expenses 2,567 2,166 2,016 18.5 7.4
------ ------ ------
Total $9,788 $8,732 $7,677 12.1 13.7
====== ====== ====== ==== ====
Salary and employee benefits expense increased $436,000, or 8.9%, in 1999 compared with 1998. The increase was related primarily to staffing requirements at the new Lincoln Road and Hardy Street banking branches. Salary and employee benefit expense increased $733,000, or 17.6%, in 1998 compared with 1997. The increase reflected the cost of additional staffing at the Petal banking branch, SFSI Petal office, MSI and the brokerage services department. In addition, these increases also reflected annual cost of living and merit increases for all employees.
Occupancy expenses rose $67,000 or 10.3% in 1999 compared with 1998 and $43,000, or 7.0%, in 1998 compared with 1997. These increases were primarily due to additional depreciation and building maintenance expenses attributable to the two new banking branches in Hattiesburg.
Furniture and equipment expense increased $152,000, or 15.1%, for 1999 from $1.0 million in 1998. The increase was primarily due to depreciation and equipment maintenance expenses related to additional furniture and equipment for the two new banking branches in Hattiesburg.
The Company's effective income tax rates were 26.7% in 1997, 24.8% in 1998 and 26.4% in 1999. The fluctuations in the effective income tax rate from 1997 through 1999 are primarily attributable to the change in non-taxable income as a percentage of pretax income.
FINANCIAL CONDITIONThe Company continued to experience loan growth throughout its markets in 1999 and 1998. Total loans increased 16.1% to $237.5 million at December 31, 1999, compared with $204.5 million at December 31, 1998. The increase in loans in 1998 was $38.4 million, or 23.1%, compared with 1997.
The Company's real estate loan portfolio increased 14.6% to $118.4 million at December 31, 1999, from $103.3 million at December 31, 1998. In 1997, the real estate portfolio increased $14.7 million, or 16.6%, from December 31, 1997. The increased real estate loan demand was principally for residential mortgages in the Bank's market areas. Residential loans increased $11.4 million from December 31, 1998, to December 31, 1999, and $5.9 million from December 31, 1997, to December 31, 1998. As a result of this increased loan demand, the Company hired additional lending personnel and placed emphasis on acquiring the deposit relationships from these loan customers.
The Company's commercial loans increased by 25.5% to $49.6 million at December 31, 1999, from $39.5 million at December 31, 1998. The increase in commercial loans was $13.9 million, or 54.5%, at December 31, 1998, compared
The Company's consumer loans increased to $69.5 million, including $5.9 million from SFSI, at December 31, 1999, from $61.7 million, including $5.7 million from SFSI at December 31, 1998. The increase in consumer loans was $9.7 million, or 18.7%, from 1997 to 1998. 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
December 31,
----------------------------------------------------------------------
1999 1998 1997 1996 1995
----------- ----------- ----------- ----------- ----------
(in thousands)
Real estate:
Residential $ 72,695 $ 61,280 $ 55,406 $ 48,062 $ 41,151
Mortgage loans held for sale 426 1,053 421 361 1,245
Construction 10,743 9,095 4,226 4,680 4,479
Commercial 34,559 31,915 28,591 26,125 24,946
Consumer 69,542 61,686 51,965 45,555 36,678
Commercial 49,554 39,493 25,556 21,992 17,082
-------- -------- -------- -------- --------
Total loans $237,519 $204,522 $166,165 $146,775 $125,581
======== ======== ======== ======== ========
The table below illustrates the Company's fixed rate maturities and repricing frequency for the loan portfolio:
Table 6-Selected Loan Distribution
December 31, 1999
------------------------------------------------------------------
Over One
--------
One Year Through Over Five
-------- ------- ---------
Total or Less Five Years Years
-------- ------- ---------- -----
(in thousands)
Fixed rate maturities $221,164 $102,726 $111,184 $ 7,254
Variable rate repricing frequency 16,355 9,204 5,474 1,677
------- ------- ------- ------
Total $237,519 $111,930 $116,658 $ 8,931
======== ======== ======== =======
At December 31, 1999, 93.1% of the Company's loans had fixed rate maturities. Of the fixed rate portfolio, 46.4% of those loans have maturities of one year or less when originated or renewed. Such maturities allow the Company to reprice its portfolio frequently.
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, 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, 1999, 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 $706,000 to $4.3 million from December 31, 1998, to December 31, 1999. The increase was primarily attributable to an increase in the volume of loans. The Company's allowance for loan losses to total loan ratio decreased from 1.87% at December 31, 1997, to 1.74% at December 31, 1998, and increased to 1.81% at December 31, 1999.
Net charge-offs were $716,000 during 1999 compared with $322,000 and $461,000 for 1998 and 1997, respectively. Of these net charge-offs for the same years, $324,000, $182,000 and $151,000, 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, 1999, 1998 and 1997, respectively.
Table 7-Summary of Loan Loss Experience
As of and for the Year Ended December 31,
-------------------------------------------------------
1999 1998 1997 1996 1995
---------- --------- --------- --------- ---------
(in thousands)
Allowance for loan losses at beginning of year $ 3,564 $ 3,101 $ 2,837 $ 2,529 $ 2,427
Charge-offs:
Real estate (72) -- ---- (50) (28)
Consumer (841) (475) (400) (270) (516)
Commercial (145) (51) (238) (168) (88)
-------- -------- -------- -------- --------
Total (1,058) (526) (638) (488) (632)
Recoveries:
Real estate ---- 24 10 --- 4
Consumer 323 142 127 229 167
Commercial 19 38 40 10 46
-------- -------- -------- -------- --------
Total 342 204 177 239 217
-------- -------- -------- -------- --------
Net loan charge-offs (716) (322) (461) (249) (415)
Provision for loan losses 1,422 785 725 557 517
-------- -------- -------- -------- --------
Allowance for loan losses at end of year $ 4,270 $ 3,564 $ 3,101 $ 2,837 $ 2,529
======= ======== ======= ======= =======
Ratios:
Allowance for loan losses to total loans 1.81% 1.74% 1.87% 1.93% 2.01%
Net loan charge-offs to average loans outstanding for the
year 0.32 0.18 0.30 0.19 0.38
Allowance for loan losses to non-performing loans 216 323 777 360 295
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.
December 31,
------------
1999 1998 1997 1996 1995
--------------------- --------------------- ---------------------- ----------------------- --------------------
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)
Real Estate $ 1,058 49.8% $ 997 50.5% $ 936 53.3% $ 881 54.0% $ 817 57.2%
Consumer 1,980 29.3 1,577 30.2 1,355 31.3 1,293 31.0 1,268 29.2
Commercial 975 20.9 705 19.3 546 15.4 357 15.0 160 13.6
Unallocated 257 --- 285 -- 264 -- 306 -- 284 --
-------- ------ ------- ------ ------- ------ -------- ------ ------- ------
Total $ 4,270 100.0% $ 3,564 100.0% $ 3,101 100.0% $ 2,837 100.0% $ 2,529 100.0%
========= ====== ======= ====== ======= ====== ======== ====== ======= ======
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 increased from $172,000 at December 31, 1998, to $450,000 at December 31, 1999. 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 $931,000 to $1.5 million from December 31, 1998, to December 31, 1999.
Table 9-Non-Performing Assets
December 31,
----------------------------------------------------------
1999 1998 1997 1996 1995
-------- -------- -------- ------- -------- (in thousands)
(in thousands)
Loans on non-accrual status(1)(2) $1,525 $ 931 $ 147 $ 400 $ 645
Loans past due 90 days or more 450 172 252 387 211
------ ----- ------ ------ ------
Total non-performing loans 1,975 1,103 399 787 856
Other real estate owned 541 742 411 767 309
------ ----- ------ ------ ------
Total non-performing assets $2,516 $1,845 $ 810 $1,554 $1,165
====== ====== ====== ====== ======
Percentage of non-performing loans to total loans 0.83% 0.54% 0.24% 0.54% 0.68%
Percentage of non-performing assets to total loans 1.06 0.90 0.49 1.06 0.93
(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.
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 $58.9 million at December 31, 1997, to $90.8 million at December 31, 1998, to $126.1 million at December 31, 1999.
Table 10-Securities Available For Sale
December 31, 1999
-----------------
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:
Over one through five years $ 2,362 $ 2,362 3.9 5.27%
Over five through ten years 15,390 15,390 8.2 6.55
Over ten years 14,364 14,364 13.7 6.95
------ ------
Total 32,116 32,116 6.64
Obligations of states and political subdivision:
Within one year 915 915 0.7 6.74(1)
Over one through five years 3,138 3,138 3.2 7.50(1)
Over five through ten years 4,059 4,059 6.4 7.76(1)
Over ten years 1,619 1,619 11.3 8.20(1)
------ ------
Total 9,731 9,731 7.65(1)
Mortgage-backed securities 46,608 46,608 6.46
Equity securities 3,393 3,393
----- -----
Total securities available for sale $91,848 $91,848
======= =======
Table 11--Securities Held to Maturity
December 31, 1999
-----------------
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:
Over one through five years $ 4,047 $ 4,011 1.3 5.65%
Obligations of states and political subdivisions:
Within one year 1,344 1,345 0.4 6.85(1)
Over one through five years 6,875 6,814 2.8 7.06(1)
Over five through ten years 9,393 9,050 7.6 7.29(1)
Over ten years 11,659 10,739 12.1 7.23(1)
------ ------
Total 29,271 27,948 7.20(1)
Mortgage-backed securities 893 902 7.57
---- ----
Total securities held to maturity $34,211 $32,861
======= =======
(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.
Table 11A-Analysis of Securities
December 31,
------------
1999 1998 1997
-------- -------- --------
(in thousands)
U.S. Treasury securities and obligations of U.S. government agencies $32,116 $28,094 $ 23,696
Obligations of states and political subdivision 9,731 10,485 9,758
Mortgage-backed securities 46,608 19,235 3,356
Equity securities 3,393 - -
------ ------- ------
Total securities available for sale $91,848 $57,814 $36,810
======= ======= =======
December 31,
------------
1999 1998 1997
-------- -------- --------
(in thousands)
U.S. Treasury securities and obligations of U.S. government agencies $ 4,047 $ 4,076 $ 4,911
Obligations of states and political subdivision 29,271 27,520 14,913
Mortgage-backed securities 893 1,418 2,287
------ ------- ------
Total securities held to maturity $34,211 $33,014 $22,111
======= ======= =======
Deposits
Total deposits increased from $278.3 million at December 31, 1998, to $308.5 million at December 31, 1999.
Of that increase, time deposits increased by $18.9 million from 1998 to 1999. 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, 1999, public funds deposits totaled $41.3 million or 13.4% 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,
--------------
1999 1998
----------- -----------
(in thousands)
Demand (NOW, SuperNOW and money market) $ 84,875 $ 81,516
Savings 9,448 9,437
Individual retirement accounts 16,279 14,127
Time deposits, $100,000 and over 65,389 45,040
Other time deposits 98,836 100,311
------- --------
Total interest-bearing deposits 274,827 250,431
Total noninterest-bearing deposits 33,637 27,841
------- --------
Total $308,464 $278,272
======== ========
Table 13--Maturity of Time Deposits $100,000 and over
As of
-----
December 31, 1999
---------------------
(in thousands)
Three months or less $ 14,805
Over three months through six months 9,748
Over six months through twelve months 18,081
Over twelve months 22,775
------
Total $ 65,389
=========
Other borrowed funds increased from $17.6 million at December 31, 1997, to $19.1 million at December 31, 1998, to $70.0 million at December 31, 1999. In 1999, the Company borrowed $40.0 million from the FHLB to purchase debt securities resulting in a favorable interest rate spread. An additional $20 million was borrowed from the FHLB to fund the Bank's loan growth and liquidity needs. The $5.0 million revolving line of credit ($4.1 million outstanding at December 31, 1998) with Bank of America matured in 1999. SFSI's funding has been provided by the Bank since the maturity of the line of credit. Additional borrowings by the bank 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.
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 the Bank's 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, $6.8 million and $3.6 million in 1999, 1998 and 1997, respectively. The net cash provided by increases in deposits was $30.2 million, $66.8 million and $26.1 million in 1999, 1998 and 1997, respectively. Net cash used in investing activities has been primarily for funding the net increase in loans of $36.2 million, $38.1 million and $19.9 million in 1999, 1998 and 1997, respectively, and in securities of $42.6 million, $35.2 million and $16.9 million in 1999, 1998 and 1997, respectively. The Company also had net bank borrowings of $55.0 million in 1999, $1.4 million in 1998 and $6.6 million in 1997.
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 raised $12.2 million in 1998 and $1.7 million in 1999 in connection with its initial public offering. The Company's capital to average assets ratio was 8.30% at December 31, 1999 compared with 10.55% at December 31, 1998. At December 31, 1999, 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 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 August of 1996 and January of 1997, the Company purchased interest rate "floors" for three years in notional amounts of $10 million each, which effectively converted less than 1% of the Company's loans at December 31, 1999, to a minimum fixed rate basis. A premium of $258,500 was paid for the floors and amortized over the terms of each. The index used is the three-month LIBOR rate with a 6% floor rate. The three-month LIBOR rate was 6.00% at December 31, 1999. Through December 31 1999, the Bank has amortized $256,487 of the premium and received $286,020, 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, 1999:
Table 14-Interest Rate Sensitivity
Decrease Increase
-------- --------
in Rates-- in Rates--
---------- ----------
200 Basis Points BASE 200 Basis Points
---------------- ---- ----------------
(in thousands)
Projected interest income:
Loans $22,690 $24,512 $26,333
Investment securities 9,017 9,603 9,834
Federal funds sold 405 360 474
------ ------ ------
Total interest income 32,112 34,475 36,641
Projected interest expense:
Deposits 13,765 15,523 17,329
Other borrowed funds 4,198 4,209 4,261
------ ------ ------
Total interest expense 17,963 19,732 21,590
------ ------ ------
Net interest income $14,149 $14,743 $15,051
======= ======= =======
Change from base $ (594) $ 308
% Change from base (4.03) % 2.09 %
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 2.09%. A 200-basis point immediate, sustained decrease to the yield curve would decrease net interest income by an estimated 4.03%. 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 2000In prior years, the Company discussed the nature and progress of its plans to become Year 2000 ready. In 1999, the Company completed its remediation and testing of systems. As a result of those planning and implementation efforts, the Company experienced no significant disruptions in mission critical information technology and non-information technology systems and believes those systems successfully responded to the Year 2000 date change. The total project cost was approximately $120,000 for the purchase of new software and hardware and the modification of existing software and hardware with $50,000 of the total capitalized and the remaining $70,000 expensed during 1999. The Company is not aware of any material problems resulting from Year 2000 issues, either with its products, its internal systems, or the products and services of third parties. The Company will continue to monitor its mission critical computer applications and those of its suppliers and vendors throughout the year 2000 to ensure that any latent Year 2000 matters that may arise are addressed promptly.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISKIn 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.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
Report of Independent Auditors 32
Consolidated Balance Sheets as of December 31, 1999 and 1998 33
Consolidated Statements of Income and Comprehensive Income for the years ended December 31, 1999, 1998
and 1997 35
Consolidated Statements of Changes in Stockholders' Equity for the years ended December 31, 1999, 1998 and
1997 37
Consolidated Statements of Cash Flows for the years ended December 31, 1999, 1998 and 1997 38
Notes to Consolidated Financial Statements 40
The Board of Directors and
Stockholders
LamarCapital Corporation
We have audited the accompanying consolidated balance sheets of Lamar Capital Corporation and subsidiaries as of December 31, 1999 and 1998, 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, 1999. 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 auditing standards generally accepted in the United States. 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 and subsidiaries at December 31, 1999 and 1998, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 1999 in conformity with accounting principles generally accepted in the United States.
/s/Ernst & Young LLPJackson, Mississippi
LAMAR CAPITAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(in thousands, except share and per share amounts)
December 31,
------------
1999 1998
---------- ----------
ASSETS
Cash and due from banks $ 14,195 $ 15,038
Federal funds sold 17,680 11,400
-------- --------
Cash and cash equivalents 31,875 26,438
Securities available for sale (amortized cost--$98,438 in 1999 and
$57,159 in 1998) 91,848 57,814
Securities held to maturity (fair value--$32,861 in 1999 and
$33,512 in 1998) 34,211 33,014
Loans (less allowance for loan losses of $4,270 in 1999 and
$3,564 in 1998) 231,133 197,096
Accrued interest receivable 3,901 3,256
Premises and equipment, net 10,450 9,111
Other real estate 541 742
Federal Home Loan Bank stock 3,596 788
Cash surrender value of life insurance 1,362 1,298
Deferred income taxes 3,666 760
Other assets 167 199
-------- --------
Total assets $ 412,750 $330,516
========= ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities
Deposits:
Non-interest bearing $ 33,637 $ 27,841
Interest bearing 274,827 250,431
-------- --------
Total deposits 308,464 278,272
Interest payable 947 615
Dividends payable 216 124
Other liabilities 1,221 1,054
Other borrowed funds 70,000 19,120
-------- --------
Total liabilities 380,848 299,185
======== ========
Stockholders' equity
Common Stock, $.50 par value, 50,000,000 shares authorized;
4,315,707 shares issued and outstanding at December 31, 1999,
4,130,707 shares issued and outstanding at December 31, 1998 2,158 2,065
Paid-in capital 17,513 15,885
Retained earnings 16,364 12,970
Accumulated other comprehensive income (loss) (4,133) 411
-------- --------
Total stockholders' equity 31,902 31,331
-------- --------
Total liabilities and stockholders' equity $412,750 $330,516
======== ========
See accompanying notes.
LAMAR CAPITAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME AND COMPREHENSIVE INCOME
(in thousands, except per share amounts)
Year ended December 31,
------------------------------------
1999 1998 1997
-------- -------- --------
Interest income
Loans, including fees $21,879 $18,706 $15,984
Federal funds sold 422 589 297
Interest on securities:
Taxable 6,107 3,039 1,956
Non-taxable 1,750 1,582 1,205
------ ------ ------
7,857 4,621 3,161
------ ------ ------
Total interest income 30,158 23,916 19,442
Interest expense
Deposits 13,744 12,685 9,799
Other borrowed funds 3,065 1,218 737
------ ------ ------
Total interest expense 16,809 13,903 10,536
------ ------ ------
Net interest income 13,349 10,013 8,906
Provision for loan losses 1,422 785 725
------ ------ ------
Net interest income after provision for loan losses 11,927 9,228 8,181
Other income
Service charges on deposit accounts 2,116 1,777 1,670
Mortgage loan fees 544 639 362
Commissions on credit life insurance 369 439 391
Gain (loss) on sale of securities available for sale 6 191 (13)
Trading account gains --- 123 --
Other operating income 492 389 279
------ ------ ------
Total other income 3,527 3,558 2,689
Other expense
Salaries and employee benefits 5,342 4,906 4,173
Occupancy expense 720 653 610
Furniture and equipment expense 1,159 1,007 878
Other operating expense 2,567 2,166 2,016
------ ------- ------
Total other expense 9,788 8,732 7,677
------ ------- ------
Income before income taxes 5,666 4,054 3,193
Income tax expense 1,495 1,005 854
------ ------ ------
Net income 4,171 3,049 2,339
Other comprehensive income (loss), net of income taxes
Change in unrealized gain (loss) on securities available for
sale (4,544) 132 377
Reclassification of realized amount (4) (120) 8
------ ------ ------
Net unrealized gain (loss) recognized in comprehensive
income (loss) (4,548) 12 385
------ ------ ------
Comprehensive income (loss) $ (377) $ 3,061 $ 2,724
========= ======== ========
Earnings per share--basic and diluted $ .97 $ 1.09 $ .87
========= ======== ========
Weighted average shares outstanding - basic and diluted 4,310 2,793 2,687
========= ======== ========
See accompanying notes.
LAMAR CAPITAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
(in thousands, except for share and per share amounts)
Accumulated
-----------
Other Total
----- -----
Common Stock Paid-in Retained Comprehensive Treasury Stock Stockholders'
------------ ------- -------- ------------- -------------- ------------
Shares Amount Capital Earnings Income (Loss) Shares Amount Equity
------ ------ ------- -------- ------------- ------ ------ ------
Balance at January 1, 1997 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
Net income for 1999 4,171 4,171
Dividend ($.18 per share) (777) (777)
Sale of Common Stock 185,000 93 1,628 1,721
Change in unrealized gain (loss), net (4,544) (4,544)
of income taxes, on securities
available for sale ---------- ----- ------- --------- ------- ----------- ----- ------
Balance at December 31, 1999 4,315,707 $2,158 $ 17,513 $ 16,364 $(4,133) - $ - $ 31,902
========== ====== ======== ========== ======= =========== ====== =========
See accompanying notes.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
Year ended December 31,
-----------------------
1999 1998 1997
------- ------ ------
Operating Activities
Net income $ 4,171 $ 3,049 $ 2,339
Adjustments to reconcile net income to net cash
Provided by operating activities:
Provision for loan losses 1,422 785 725
Provision for losses on other real estate 16 11 44
Deferred income tax benefit (204) (149) (89)
Depreciation and amortization expense 955 836 726
Amortization of securities premiums 203 254 167
Accretion of securities discounts (48) (34) (69)
Increase in cash surrender value of life
Insurance (64) (65) (64)
Federal Home Loan Bank dividend (173) (48) (49)
(Gain) loss on sales of securities available
for sale (6) (191) 13
Trading account gains - (123) -
Proceeds from sales of trading securities - 3,619 -
(Gain) loss on sales of other real estate 6 (7) (12)
Mortgage loan originations (17,142) (20,730) (13,568)
Proceeds from sales of mortgage loans 17,769 20,099 13,508
Gain on sale of premises and equipment (10) - -
Increase in interest receivable (645) (865) (401)
Increase (decrease) in interest payable 332 (197) 120
Decrease in other assets 32 288 79
Increase in other liabilities 167 272 146
------ ------ ------
Net cash provided by operating activities 6,781 6,804 3,615
Investing activities
Securities held to maturity:
Proceeds from calls, maturities, and
principal reductions 1,963 4,672 2,821
Purchases of securities (2,465) (18,480) (2,115)
Securities available for sale:
Proceeds from calls, maturities, and
principal reductions 4,274 14,725 3,554
Proceeds from sales of securities 10,498 9,966 19,618
Purchases of securities (56,896) (46,105) (40,746)
(Purchases) sales of Federal Home Loan Bank stock (2,635) 223 (375)
Net increase in loans (36,220) (38,058) (19,899)
Proceeds from sales of other real estate 313 25 324
Proceeds from sales of premises and equipment 53 - -
Purchases of premises and equipment (2,337) (3,309) (1,146)
------- ------- -------
Net cash used in investing activities (83,452) (76,341) (37,964)
Financing activities
Net increase in deposits 30,192 66,774 26,094
Net increase (decrease) in revolving line of credit (4,120) 100 4,020
Borrowings from banks 70,000 5,000 10,000
Payments on notes payable to banks (15,000) (3,600) (3,400)
Proceeds from sales of Common Stock 1,721 12,199 -
Purchases of treasury stock - (72) (436)
Proceeds from sales of treasury stock - 225 682
Dividends paid (685) (388) (250)
------ ------ ------
Net cash provided by financing activities 82,108 80,238 36,710
------ ------ ------
Net increase in cash and cash equivalents 5,437 10,701 2,361
Cash and cash equivalents at beginning of year 26,438 15,737 13,376
------ ------ ------
Cash and cash equivalents at end of year $ 31,875 $ 26,438 $ 15,737
======== ======== ========
See accompanying notes.
The consolidated financial statements include the accounts of Lamar Capital Corporation (the "Company") and its wholly-owned subsidiaries, The Mortgage Shop, Inc. ("MSI"), Lamar Bank (the "Bank") and Southern Financial Services, Inc. ("SFSI"). All significant intercompany balances and transactions have been eliminated in consolidation.
BusinessThe Company is a one-bank holding company headquartered in Purvis, Mississippi. The Company operates eight 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, real estate and 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 EstimatesThe 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 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, 1999, was $1,204. Cash paid for interest during the years ended December 31, 1999, 1998 and 1997, was $16,477, $14,100 and $10,416, respectively.
SecuritiesSecurities available for sale are carried at estimated fair value in accordance with Statement of Financial Accounting Standards (SFAS) No. 115 "Accounting for Certain Investment in Debt and Equity Securities." The amortized cost of securities classified as available for sale is adjusted for amortization of premiums and accretion of discounts to maturity. Unrealized gains or losses on these securities are included in stockholders' equity net of income taxes. 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 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 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 SFAS No. 115 and, therefore, is carried at cost.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.
The Company accounts for the mortgage loan sales in accordance with 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.
LoansLoans, 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.
Allowance for Loan LossesThe 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 EquipmentPremises 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 EstateOther 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 AssetsThe 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.
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 IncomeSFAS 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.
Derivatives and Hedging ActivitiesEffective 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.
Net Income per Common ShareEffective 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 in the accompanying consolidated statements of income and changes in stockholders' equity to reflect the stock splits described above.
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 exercised their overallotment option, and the Company sold 185,000 shares at $10 per share. Net proceeds from the sale of these shares were $1,721.
The aggregate carrying amounts and estimated fair value of securities were as follows:
December 31, 1999
-----------------------------------------------
Gross Gross Estimated
----- ----- ---------
Amortized Unrealized Unrealized Fair
--------- ---------- ---------- ----
Cost Gains Losses Value
---- ----- ------ -----
Securities available for sale
U.S. Treasury securities and obligations of U.S. government agencies $34,415 $ --- $(2,299) $32,116
Obligations of states and political subdivisions 9,770 29 (68) 9,731
Mortgage-backed securities 49,891 5 (3,288) 46,608
------- ------- ------- -------
Total debt securities 94,076 34 (5,655) 88,455
Equity securities 4,362 --- (969) 3,393
------- ------- ------- -------
Total securities available for sale $98,438 $ 34 $(6,624) $91,848
======= ======= ======= =======
Securities held to maturity:
U.S. Treasury securities and obligations of U.S. government agencies $ 4,047 $ --- $ (36) $ 4,011
Obligations of states and political subdivisions 29,271 32 (1,355) 27,948
Mortgage-backed securities 893 15 (6) 902
------- ------- ------- -------
Total securities held to maturity $34,211 $ 47 $(1,397) $32,861
======= ======= ======= =======
December 31, 1998
-------------------------------------------------
Gross Gross Estimated
----- ----- ---------
Amortized Unrealized Unrealized Fair
--------- ---------- ---------- ----
Cost Gains Losses Value
---- ----- ------ -----
Securities available for sale:
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 securities available for sale $ 57,159 $ 721 $ (66) $57,814
======= ======= ======= =======
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 securities held to maturity $ 33,014 $ 593 $ (95) $33,512
======= ======= ======= =======
During the years ended December 31, 1999, 1998 and 1997, available-for-sale securities with a fair value at
the date of sale of $10,498, $9,966 and $19,618, respectively, were sold. The gross realized gains or losses on such
sales totaled $6, $191 and $(13), respectively. The amortized cost and estimated fair value of securities as of
December 31, 1999, 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
---- -----
Securities available for sale:
Due in one year or less $ 915 $ 915
Due after one year through five
years 5,631 5,500
Due after five years through ten
years 20,515 19,449
Due after ten years 17,124 15,983
Mortgage-backed securities 49,891 46,608
Equity securities 4,362 3,393
------ ------
$ 98,438 $ 91,848
======== ========
Securities held to maturity:
Due in one year or less $ 1,344 $ 1,345
Due after one year through five
years 10,922 10,825
Due after five years through ten
years 9,393 9,050
Due after ten years 11,659 10,739
Mortgage-backed securities 893 902
------ ------
$ 34,211 $ 32,861
======== ========
Securities having carrying amounts of $97,894 and $64,539 at December 31, 1999 and 1998, 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,
------------
1999 1998
---- ----
Real estate:
Residential $ 72,695 $ 61,280
Mortgage loans held for
sale 426 1,053
Construction 10,743 9,095
Commercial 34,559 31,915
Consumer 69,542 61,686
Commercial 49,554 39,493
------- -------
237,519 204,522
Unearned income (2,116) (3,862)
Allowance for loan losses (4,270) (3,564)
------- -------
Net loans $231,133 $197,096
======== ========
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.
As of and for the year ended
----------------------------
December 31,
------------
1999 1998 1997
---- ---- ----
Balance at beginning of year $ 3,564 $ 3,101 $ 2,837
Provision for loan losses 1,422 785 725
Loans charged off (1,058) (526) (638)
Recoveries of loans previously charged
off 342 204 177
------- ------- -------
Balance at end of year $ 4,270 $ 3,564 $ 3,101
======= ======= =========
Non-accrual loans at December 31, 1999 and 1998 were $1,525 and $931, 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,
------------
1999 1998
---- ----
Balance at beginning of year $ 1,468 $ 1,436
New loans 1,170 1,283
Repayments (1,183) (1,251)
--------- -------
Balance at end of year $ 1,455 $ 1,468
======== ==========
5. Premises and Equipment
Premises and equipment consisted of the following at:
December 31,
------------
1999 1998
---- ----
Land $ 2,915 $ 2,301
Bank premises 7,046 6,400
Furniture, fixtures and equipment 5,339 4,614
Computer software 1,039 798
Accumulated depreciation (5,889) (5,002)
------- -------
$ 10,450 $ 9,111
======== =======
6. Other Real Estate
Other real estate transactions consisted of the following:
As of and for the year ended
----------------------------
December 31,
------------
1999 1998 1997
---- ---- ----
Beginning balance $ 742 $ 411 $ 767
Transfers of loans 134 360 24
Sales (319) (18) (336)
Provision for losses (16) (11) (44)
-------- ------- -------
Ending balance $ 541 $ 742 $ 411
======== ======= =======
7. Interest-Bearing Deposits
Interest-bearing deposits consisted of the following:
December 31,
------------
1999 1998
---- ----
Demand (Now, SuperNow and money market) $ 84,875 $ 81,516
Savings 9,448 9,437
Individual retirement accounts 16,279 14,127
Time deposits, $100,000 and over 65,389 45,040
Other time deposits 98,836 100,311
-------- --------
$274,827 $250,431
======== ========
Scheduled maturities of time deposits, including individual retirement accounts, outstanding at December 31,
1999, are as follows:
2000 $ 126,153
2001 37,808
2002 5,573
2003 9,804
2004 1,166
-------
$180,504
========
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 $791and $746 at December 31, 1999 and 1998, respectively.
Other borrowed funds include advances of $70,000 and $15,000 at December 31, 1999 and 1998, respectively, from Federal Home Loan Bank ("FHLB"). The advances include $30,000 which accrue interest at fixed rates varying from 4.75% through 6.29% with interest paid monthly and maturities through November 2008. The Bank has a $40,000 advance from the FHLB at a 4.49% interest rate (fixed for a three-year term) that matures January 21, 2009. Interest is due monthly and 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. The advances are collateralized by the Bank's investment in FHLB stock, which totaled $3,596 and $788 at December 31, 1999 and 1998, respectively, and by a blanket pledge of the Bank's eligible real estate loans. The Bank had available collateral to borrow an additional $2,000 from the FHLB at December 31, 1999.
Other borrowed funds included borrowings $4,120 under a revolving line of credit at December 31, 1998. The revolving line of credit with an unrelated bank matured in December of 1999.
9. Income Taxes
Income tax expense (benefit) consisted of the following:
Year ended December 31,
------------------------
1999 1998 1997
---- ---- ----
Current:
Federal $ 1,470 $ 999 $ 831
State 229 155 112
------ ------ ------
1,699 1,154 943
Deferred (204) (149) (89)
------ ------ ------
$ 1,495 $ 1,005 $ 854
======= ======= =======
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,
-----------------------
1999 1998 1997
---- ---- ----
Amount computed at statutory rate on income before
income taxes $ 1,926 $ 1,379 $ 1,086
Increase (decrease) in income taxes resulting from:
State income taxes, net of federal benefit 133 89 66
Income from non-taxable securities (517) (447) (323)
Other (47) (16) 25
------ ------ ------
$ 1,495 $ 1,005 $ 854
======= ======= =======
The Company made income tax payments of $1,495, $1,113 and $984 during the years ended December
31, 1999, 1998 and 1997, respectively.
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,
------------
1999 1998
---- ----
Allowance for loan losses $1,117 $ 878
Other real estate 32 26
Deferred compensation 160 131
Net unrealized (gain) loss on securities available for sale 2,458 (244)
Other (101) (31)
------ -----
Total net deferred tax assets $3,666 $ 760
====== =====
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 $144, $88 and $85 for the years ended December 31, 1999, 1998 and 1997, respectively.
The Company has an employee stock ownership plan ("ESOP") 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 $60, $165 and $150 for the years ended December 31, 1999, 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, 1999, 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 $405, $436 and $323 for the years ended December 31, 1999, 1998 and 1997, 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 $76, $71 and $66 for the years ended December 31, 1999, 1998 and 1997, respectively.
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 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.
December 31,
------------
1999 1998
---- ----
Capital:
Stockholders' equity $31,902 $31,331
Less unrealized (gain) loss on securities, net of
Income taxes 4,133 (411)
Intangible asset (87) (94)
------- -------
Tier 1 capital 35,948 30,826
Qualifying allowance for loan losses 3,138 2,642
------- -------
Total capital $39,086 $33,468
======= =======
Ratios:
Total capital to risk-weighted assets 15.57% 15.90%
Tier 1 capital to risk-weighted assets 14.38 14.65
Tier 1 capital to total average assets (leverage ratio) 9.23 10.38
State banking regulations require the Mississippi Department of Banking and Consumer Finance to approve the payment of any dividends.
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, 1999 and expiring during 2000 is $14,800.
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. This case is ready for trial. SFSI is also a defendant in another case filed on March 23, 1999, in the Circuit Court of Jefferson Davis County, Mississippi. The allegations contained in the complaint in this suit are substantially similar to those in the case filed in Forrest County. The plaintiff asks for actual damages of $100,000 and punitive damages of $1,000,000. This case in is the discovery stage. While the ultimate outcome of these lawsuits cannot be predicted with certainty, management believes the cases are without merit, denies all liability and believes that the ultimate resolution of these matters will not have a material adverse effect on the Company's consolidated financial position or operations.
The Company is also 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.
Balance Sheets
December 31,
------------
1999 1998
---- ----
Assets:
Cash and cash equivalents $ 1,878 $ 8,500
Investment in subsidiaries 28,984 21,729
Due from subsidiaries 76 164
Premises and equipment 1,161 1,170
Other 19 19
------- -------
Total assets $ 32,118 $ 31,582
======== ========
Liabilities $ 216 $ 251
Stockholders' equity:
Common stock 2,158 2,065
Paid-in capital 17,513 15,885
Retained earnings 16,364 12,970
Accumulated other comprehensive income (loss) (4,133) 411
------- -------
Total stockholders' equity 31,902 31,331
------- -------
Total liabilities and stockholders' equity $ 32,118 $ 31,582
======== ========
Statements of Income Year ended December 31,
-----------------------
1999 1998 1997
---- ---- ----
Income:
Dividends from subsidiaries $ --- $ 750 $ 1,110
Other 22 22 23
------ ------ --------
Total income 22 772 1,133
Expenses:
Interest expense --- 342 392
Other 204 55 60
------ ------ --------
Total expenses 204 397 452
Income (loss) before income taxes (182) 375 681
Income tax benefit 54 146 160
------ ------ --------
Income (loss) before equity in undistributed net income of
Subsidiaries (128) 521 841
Equity in undistributed net income of subsidiaries 4,299 2,528 1,498
------ ------ --------
Net income $4,171 $3,049 $2,339
====== ====== =======
Statements of Cash Flows Year ended December 31,
-----------------------
1999 1998 1997
---- ---- ----
Operating activities:
Net income $4,171 $3,049 $2,339
Adjustments to reconcile net income to net cash provided
by (used in) operating activities:
Undistributed net income of subsidiaries (4,299) (2,528) (1,498)
Depreciation expense 9 9 9
(Increase) decrease in due from subsidiaries 88 (514) (298)
Increase (decrease) in other liabilities (127) 126 -
------ ------ --------
Net cash provided by (used in) operating activities (158) 142 552
Investment activities:
Capital contribution to subsidiary (7,500) - (150)
Purchases of premises and equipment - (6) (182)
------ ------ -------
Net cash used in investing activities (7,500) (6) (332)
Financing activities:
Dividends paid (685) (388) (250)
Payments on note payable to a bank - (3,600) (400)
Proceeds from sale of common stock 1,721 12,199 -
Purchases of treasury stock - (72) (436)
Proceeds from sales of treasury stock - 225 682
------ ------ --------
Net cash provided by (used in) financing activities 1,036 8,364 (404)
------ ------ --------
Net increase (decrease) in cash and cash equivalents (6,622) 8,500 (184)
Cash and cash equivalents at beginning of year 8,500 - 184
------ ------ --------
Cash and cash equivalents at end of year $ 1,878 $ 8,500 $ -
======= ======= ========
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, 1999 and 1998. 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,
-----------------------------------------------------
1999 1998
------------------------ -----------------------
Carrying Fair Carrying Fair
-------- ---- -------- ----
Amount Value Amount Value
------ ----- ------ -----
Securities available for sale $91,848 $91,848 $ 57,814 $ 57,814
Securities held to maturity 34,211 32,861 33,014 33,512
Loans 231,133 231,460 197,096 194,672
Interest-bearing deposits 274,827 276,584 250,431 252,188
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 March 29, 2000, and is incorporated herein by reference.
ITEM 11. EXECUTIVE COMPENSATIONInformation required by this item can be found under the heading "Executive Compensation" in the Proxy Statement dated March 29, 2000, and is incorporated herein by reference.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENTInformation 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 March 29, 2000, and is incorporated herein by reference.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONSInformation regarding certain relationships and related transactions can be found under the caption "Other Transactions with Management," in the Proxy Statement dated March 29, 2000, 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, 1999 and 1998
Consolidated Statements of Income and Comprehensive Income for the years ended December 31, 1999, 1998
and 1997
Consolidated Statements of Changes in Stockholders' Equity for the years ended December 31, 1999, 1998 and
1997
Consolidated Statements of Cash Flows for the years ended December 31, 1999, 1998 and 1997
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)
23 Consent of Ernst & Young LLP
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
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, 2000
By:/s/ Donna T. Rutland
DONNA T. RUTLAND
CHIEF FINANCIAL OFFICER
(PRINCIPAL FINANCIAL OFFICER AND
PRINCIPAL ACCOUNTING OFFICER)
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, 2000
O. B. Black, Jr.
/s/ William H. Jordan Director March 29, 2000
William H. Jordan
/s/ Kenneth M. Lott Director March 29, 2000
Kenneth M. Lott
/s/ James R. Pylant Director March 29, 2000
James R. Pylant
/s/ Jane P. Roberts Director March 29, 2000
Jane P. Roberts
/s/ Monty C. Roseberry Director March 29, 2000
Monty C. Roseberry
/s/ Robert W. Roseberry Director (Principal March 29, 2000
Robert W. Roseberry Executive Officer)
/s/ Donna T. Rutland Chief Financial Officer March 29, 2000
Donna T. Rutland (Principal Accounting and
Financial Officer)
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)
23 Consent of Ernst & Young LLP
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.
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