SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-KSB
ANNUAL REPORT UNDER SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934
(FEE REQUIRED)
FOR THE FISCAL YEAR ENDED DECEMBER 31, 1996
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934 (NO FEE REQUIRED)
FOR THE TRANSITION PERIOD FROM __________ TO __________
COMMISSION FILE NO. 33-97422
COUNTY FINANCIAL CORPORATION
(Name of Small Business Issuer in its Charter)
FLORIDA 59-2320497
(State or jurisdiction of (IRS Employer Identification No.)
incorporation or organization)
801 N.E. 167 STREET
NORTH MIAMI BEACH, FLORIDA 33162
(Address of Principal Executive Offices)
ISSUER'S TELEPHONE NUMBER: (305) 651-7110
SECURITIES REGISTERED UNDER SECTION 12(b) OF THE EXCHANGE ACT: NONE
SECURITIES REGISTERED UNDER SECTION 12(g) OF THE EXCHANGE ACT: NONE
Check whether the issuer: (1) has filed all reports required to be filed by
Section 13 or 15(d) of the Exchange Act during the past 12 months (or for
such shorter period that the registrant was required to file such reports),
and (2) has been subject to such filing requirements for past 90 days.
Yes [X] No [ ]
Check if there is no disclosure of delinquent filers in response to Item 405
of Regulation S-B contained in this form, and no disclosure will be
contained, to the best of registrant's knowledge, in the definitive proxy or
information statement incorporated by reference in Part III of this Form
10-KSB or any amendment to this Form 10-KSB.
State issuer's revenues for its most recent fiscal year: $20,915.00
As of March 31, 1997, the registrant had 1,264,328 outstanding shares of
common stock $.01 par value, 685,910 of which were held by non-affiliates of
the issuer. The aggregate market value of the common stock of the registrant
held by non-affiliates was $11,461,556.00. (This amount was based on the
book value per share of $16.71 per share, as of December 31, 1996. This
amount may not accurately reflect the value of the common stock due to the
absence of an established trading market for the common stock).
Transitional Small Business Disclosure Format (check one): Yes [ ] No [X]
Total Pages:_____ Exhibit Index:Page_____
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PART I
ITEM 1. BUSINESS
County Financial Corporation (the "Company") is a Florida corporation
formed in August 1983 for the purpose of becoming a bank holding company and
acquiring all of the outstanding common stock of County National Bank of South
Florida ("CNB"). CNB is the only active subsidiary of the Company.
CNB is a commercial bank which opened for business in 1962. It offers a
diversified range of commercial banking services for customers located
principally in Dade, Broward, and Palm Beach Counties, Florida. CNB classifies
itself as a community banking institution. CNB specifically targets the deposit
and credit needs of small businesses. Its services include the usual depository
products, safe deposit facilities, commercial and personal banking services, and
the making of commercial, interim construction, consumer, residential real
estate, and industrial loans. CNB's principal sources of income are interest on
loans, investments and service fees. Its principal expenses are interest paid on
deposits and general operating expenses.
In January 1996, the Company acquired Carney Bank ("Carney") pursuant
to a merger in which Carney was merged with and into CNB. As a result of the
merger, CNB acquired branches in Boynton Beach, Florida, Delray Beach, Florida,
and Sunrise, Florida. See "Item 1 - Business-Acquisition of Carney."
EMPLOYEES
As of March 14, 1997, CNB had approximately 152 full time equivalent
employees, including 61 officers and 11 part-time employees.
COMPETITION
CNB's principal market areas are Dade, Broward, and Palm Beach
Counties, Florida. The competition among depository institutions in this area is
strong. CNB competes for deposits and loans with both commercial banks and
savings and loans associations and a variety of other financial intermediaries
such as credit unions, mutual funds and brokerage firms.
REGULATION AND SUPERVISION OF THE COMPANY
The Company is a bank holding company registered under the Bank Holding
Company Act of 1956, as amended (the "BHCA"). As a result, the Company is
subject to supervision, examination and regulation by the Board of Governors of
the Federal Reserve System (the "Federal Reserve"). The BHCA and the regulations
of the Federal Reserve impose a variety of restrictions on the activities of
bank holding companies such as the Company. The following summarizes certain
aspects of those laws and regulations that affect the Company.
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ACQUISITIONS OF FINANCIAL INSTITUTIONS
The Company is generally required to obtain prior approval of the
Federal Reserve before it may acquire more than 5% of the outstanding shares of
any class of voting securities or substantially all of the assets of any bank or
bank holding company. However, such prior approval is generally not required in
the case of a merger subject to approval by a federal banking agency (such as
the OCC) under the Bank Merger Act. The Company must provide the Federal Reserve
with at least 30 days prior notice of such merger.
Pursuant to the Riegle-Neal Interstate Banking and Branching Efficiency
Act of 1994 (the "Interstate Banking and Branching Act"), a bank holding company
is now permitted to acquire banks in states other than its home state.
NON-BANKING ACTIVITIES
The Company is prohibited by the BHCA, except in certain statutorily
prescribed instances, from acquiring direct or indirect ownership and control of
more than 5% of the outstanding voting shares of any company that is not a bank
or a bank holding company and from engaging directly or indirectly in activities
other than those of banking, managing and controlling banks or furnishing
services to its subsidiaries. However, the Company may, subject to the prior
approval of the Federal Reserve, engage in, or acquire shares of companies
engaged in, certain activities that are deemed by the Federal Reserve to be so
closely related to banking or managing or controlling banks as to be a proper
incident thereto. In making any such determination, the Federal Reserve is
required to consider whether the performance of such activities by the Company
or an affiliate can reasonably be expected to produce benefits to the public,
such as greater convenience, increased competition or gains in efficiency, that
outweigh possible adverse effects, such as undue concentration of resources,
decreases in competition, conflicts of interest or unsound banking practices.
The Federal Reserve may also require the Company to terminate an activity or
terminate control of, liquidate or divest certain subsidiaries or affiliates
when the Federal Reserve believes that the activity or the control of the
subsidiary or affiliate constitutes a significant risk to the financial safety,
soundness or stability of any of its banking subsidiaries. At the present time,
the Company does not engage in any material non-banking activities and has only
one subsidiary other than CNB, which currently does not engage in any
activities.
CAPITAL STRUCTURE
The Federal Reserve has the authority to regulate provisions of certain
bank holding company debt including authority to impose interest ceilings and
reserve requirements on such debts. Under certain circumstances, the Company
must obtain approval from the Federal Reserve prior to purchasing or redeeming
any of its equity securities. Further, the Company is required by the Federal
Reserve to maintain certain minimum levels of capital.
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REGULATION AND SUPERVISION OF CNB
National banks and many of their affiliates are extensively regulated
under federal law. The following is a brief summary of certain statutes, rules,
and regulations affecting CNB. This summary is qualified in its entirety by
reference to the particular statutory and regulatory provisions referred to
below and is not intended to be an exhaustive description of the statutes or
regulations applicable to the business of CNB. Supervision, regulation, and
examination of banks by regulatory agencies are intended primarily for the
protection of depositors, rather than shareholders.
CNB is chartered under the national banking laws and its deposits are
insured by the Federal Deposit Insurance Corporation (the "FDIC") to the extent
provided by law. CNB is subject to comprehensive regulation, examination and
supervision of the Office of the Comptroller of the Currency (the "OCC") and, to
a limited extent, the supervision of the FDIC and to other laws and regulations
applicable to banks. Such regulations include limitations on loans to a single
borrower and to its directors, officers and employees; restrictions on the
opening and closing of branch offices; the maintenance of required capital and
liquidity ratios; the granting of credit under equal and fair conditions; and
the disclosure of the costs and terms of such credit. CNB is examined
periodically by the OCC, to which it submits periodic reports regarding its
financial condition and other matters. Both the OCC and the FDIC have a broad
range of powers to enforce regulations under their respective jurisdiction, and
to take discretionary actions determined to be for the protection and safety and
soundness of banks, including the institution of cease and desist orders and the
removal of directors and officers. These regulatory agencies also have the
authority to approve or disapprove mergers, consolidations, and similar
corporate actions.
There are various statutory limitations on the ability of CNB to pay
dividends. The OCC also has the general authority to limit the dividend payment
by national banks if such payment may be deemed to constitute an unsafe and
unsound practice.
Under federal law, federally insured banks are subject, with certain
exceptions, to certain restrictions on any extension of credit to their
affiliates, on investments in the stock or other securities of affiliates, and
on the taking of such stock or securities as collateral from any borrower. In
addition, national banks are prohibited from engaging in certain tie-in
arrangements in connection with any extension of credit or the providing of any
property or service.
The Financial Institutions Reform, Recovery and Enforcement Act of 1989
("FIRREA") contains major regulatory reforms, stronger capital standards and
stronger civil and criminal enforcement provisions. FIRREA also provides that a
depository institution insured by the FDIC can be held liable for any loss
incurred by, or reasonably expected to be incurred by, the FDIC in connection
with (i) the default of a commonly controlled FDIC insured depository
institution, or (ii) any assistance provided by the FDIC to a commonly
controlled FDIC insured institution in danger of default.
The FDIC Improvement Act of 1991 ("FDICIA") makes a number of reforms
addressing the safety and soundness of deposit insurance funds, supervision,
accounting, and prompt regulatory action, and also implements other regulatory
improvement. With certain
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exceptions, annual full-scope, on-site examinations are required of all insured
depository institutions. The cost for conducting an examination of an
institution may be assessed to that institution, with special consideration
given to affiliates and any penalties imposed for failure to provide information
requested. FDICIA also required the FDIC to establish a risk-based assessment
system for depository institutions. Insured state banks also are precluded from
engaging as principal in any type of activity that is impermissible for a
national bank, including activities relating to insurance and equity
investments. FDICIA also recodified current law restricting extensions of credit
to insiders under the Federal Reserve Act.
FDICIA also requires the FDIC to implement a risk-based federal deposit
insurance premium system. The FDIC imposes deposit insurance premiums from a
range of $0.04 to $.31 per $100 of deposits, the exact rate for each insured
institution being dependent upon that institution's capital ratios and the
agency's subjective assessment of risks. The highest-rated institutions pay the
statutory annual minimum of $2,000.
Also important in terms of its effect on banks has been the
deregulation of interest rates paid by banks on deposits and the types of
deposit accounts that may be offered by banks. Most regulatory limits on
permissible deposit interest rates and minimum deposit amounts expired several
years ago. The effect of the deregulation of deposit interest rates generally
has been to increase the costs of funds to banks and to make their cost of funds
more sensitive to fluctuations in money market rates. As a result of the
pressure on banks' interest margins due to deregulation, there has been a trend
toward expansion of services offered by banks and an increase in the emphasis
placed on fee or non-interest income.
CAPITAL REQUIREMENTS
The Federal Reserve, the OCC and the FDIC have issued substantially
similar risk-based and leverage capital guidelines applicable to United States
banking organizations. In addition, those regulatory agencies may from time to
time require that a banking organization maintain capital above the minimum
levels, whether because of its financial condition or actual or anticipated
growth.
The Federal Reserve risk-based guidelines define a two-tier capital
framework. Tier 1 capital consists of common and qualifying preferred
shareholders' equity, less certain intangibles and other adjustments. Tier 2
capital consists of subordinated and other qualifying debt, and the allowance
for credit losses up to 1.25 percent of risk-weighted assets. The sum of Tier 1
and Tier 2 capital less investments in unconsolidated subsidiaries represents
qualifying total capital, at least 50 percent of which must consist of Tier 1
capital. Risk-based capital ratios are calculated by dividing Tier 1 and total
capital by risk-weighted assets. Assets and off-balance sheet exposures are
assigned to one of four categories of risk-weights, based primarily on relative
credit risk. The minimum Tier 1 capital ratio is 4 percent and the minimum total
capital ratio is 8 percent. The Company's Tier 1 and total risk-based capital
ratios under these guidelines at December 31, 1996 were 12.7 percent and 14.0
percent, respectively.
The leverage ratio is determined by dividing Tier 1 capital by average
total assets. Although the stated minimum ratio is 3 percent, most banking
organizations are required to maintain ratios of at least 100 to 200 basis
points above 3 percent. The Company's leverage
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ratio at December 31, 1996 was 9.2 percent. The Company's management believes
that the Company meets all of its required capital requirements.
FDICIA contains "prompt corrective action" provisions pursuant to which
banks are to be classified into one of five categories based upon capital
adequacy, ranging from "well capitalized" to "critically undercapitalized" and
which require (subject to certain exceptions) the appropriate federal banking
agency to take prompt corrective action with respect to an institution which
becomes "significantly undercapitalized" or "critically undercapitalized."
The FDIC has issued regulations to implement the "prompt corrective
action" provisions of FDICIA. In general, the regulations define the five
capital categories as follows: (i) an institution is "well capitalized" if it
has a total risk-based capital ratio of 10% or greater, has a Tier 1 risk-based
capital ratio of 6% or greater, has a leverage ratio of 5% or greater and is not
subject to any written capital order or directive to meet and maintain a
specific capital level for any capital measures; (ii) an institution is
"adequately capitalized" if it has a total risk-based capital ratio of 8% or
greater, has a Tier 1 risk-based capital ratio of 4% or greater, and has a
leverage ratio of 4% or greater; (iii) an institution is "undercapitalized" if
it has a total risk-based capital ratio of less than 8%, has a Tier 1 risk-based
capital ratio that is less that 4% or has a leverage ratio that is less than 4%;
(iv) an institution is "significantly undercapitalized" if it has a total
risk-based capital ratio that is less than 6%, a Tier 1 risk-based capital ratio
that is less than 4% or a leverage ratio that is less than 3%; and (v) an
institution is "critically undercapitalized" if its "tangible equity" is equal
to or less than 2% of its total assets. The FDIC also has authority to downgrade
an institution from "well capitalized" to "adequately capitalized" or to subject
an "adequately capitalized" or "undercapitalized" institution to the supervisory
actions applicable to the next lower category, for supervisory concerns.
Additionally, FDICIA requires, among other things, that (i) only a
"well capitalized" depository institution may accept brokers deposits without
prior regulatory approval and (ii) the appropriate federal banking agency
annually examine all insured depository institutions, with some exceptions for
small, "well capitalized" institutions and state-chartered institutions examined
by state regulators. FDICIA also contains a number of consumer banking
provisions, including disclosure requirements and substantive contractual
limitations with respect to deposit accounts.
ENFORCEMENT POWERS
Congress has provided the federal bank regulatory agencies with an
array of powers to enforce laws, rules, regulations and orders. Among other
things, the agencies may require that institutions cease and desist from certain
activities, may preclude persons from participating in the affairs of insured
depository institutions, may suspend or terminate deposit insurance, and may
impose civil money penalties against institution-affiliated parties for certain
violations.
BANK BRANCHING
Banks in Florida are permitted to branch state-wide. Such branch
banking as to national banks, however, is subject to prior approval by the OCC.
Any approval by the OCC
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would take into consideration several factors, including the bank's level of
capital, the prospects and economics of the proposed branch office, the past
performance of the bank in meeting the credit needs of its local communities,
and other conditions deemed relevant by the OCC for purposes of determining
whether approval should be granted to open a branch office.
EFFECT OF GOVERNMENTAL POLICIES
The earnings and business of CNB are affected by the policies of
various regulatory authorities of the United States, especially the Federal
Reserve. The Federal Reserve, among other things, regulates the supply of credit
and deals with general economic conditions within the United States. The
instruments of monetary policy employed by the Federal Reserve for those
purposes influence in various ways the overall level of investments, loans,
other extensions of credit, and deposits, and the interest rates paid on
liabilities and received on assets.
INTERSTATE BANKING AND BRANCHING
Legislation recently enacted by Congress authorizes interstate banking
and interstate branching without geographic restrictions. Among other things,
this legislation will increase competition by allowing financial institutions,
regardless of location, to acquire and operate banks in any state (including
Florida). Generally, the legislation allows interstate banking beginning
September 29, 1995, and interstate branching beginning June 1, 1997.
The Florida legislature also recently enacted a law that allows
out-of-state bank holding companies (located in states that allow Florida bank
holding companies to acquire banks and bank holding companies in that state) to
acquire Florida banks and Florida bank holding companies. The law, which was
effective May 1, 1995, expressly provides for out-of-state entry by acquisition
only (and not by interstate branching) and requires the acquired Florida bank to
have been in existence for at least two years.
ACQUISITION OF CARNEY BANK
On January 12, 1996, the Company and CNB completed the acquisition of
Carney. The acquisition was accomplished through the merger of Carney with and
into CNB, with CNB as the surviving corporation in the merger. The acquisition
was consummated pursuant to the terms of a certain agreement and plan of
reorganization dated as of May 10, 1995, as amended, between the Company, CNB
and Carney (the "Merger Agreement"). Under the terms of the Merger Agreement,
all the outstanding shares of the common stock of Carney were cancelled and, in
exchange therefor, the holder of each share of Common Stock of Carney became
entitled to receive .22029 shares of the common stock of the Company, or an
aggregate of 282,860 shares (except for those persons properly exercising their
right to dissent under 12 U.S.C. ss. 215(a)). Additionally all outstanding
options and warrants to acquire shares of the Common Stock of Carney were
cancelled and, in exchange therefor, the holder of each option or warrant became
entitled to receive .04886 shares of the common stock of the Company, for an
aggregate of 5,240 shares. As a result of the merger, the Company issued a total
of 284,564 shares of its common stock and paid or set aside $60,926 for the
payment of fractional shares and payments to dissenting shareholders.
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Information with respect to the merger is included in the Registration
Statement on Form S-4 (File No. 33-97422) filed by the Company with the
Securities and Exchange Commission in connection with the merger (the
"Registration Statement"). The Registration Statement was declared effective by
the Commission on November 29, 1995.
SETTLEMENT OF PREMIUM LITIGATION
On October 9, 1996, CNB settled certain litigation involving the
Premium Group. Under the terms of the proposed settlement, CNB agreed to pay the
amount of $3,000,000 in exchange for a release of all outstanding claims. This
amount, which was accrued on the Company's balance sheet as of December 31,
1996, was paid in January 1997. For further information regarding this matter
see "Item 3 - Legal Proceedings" and "Item 6 - Managements" Discussion and
Analysis of Results of Operations and Financial Condition."
ITEM 2. PROPERTIES
The executive offices of the Company are located at 801 N.E. 167th
Street, North Miami Beach, Florida, which is also the main branch of CNB. This
facility, which is owned by CNB, consists of a three story office building of
approximately 45,000 square feet and 140 parking spaces. The Company and CNB
utilize approximately 30,850 square feet of this facility. The remaining space
is leased to nine tenants. The building is subject to a mortgage with a balance
of approximately $850,000 as of December 31, 1996.
CNB currently operates 13 branches at the following locations in
Florida: Bay Point, Miami; California Club Mall, Miami; Coral Way, Miami;
Hialeah; Miami Lakes; Aventura, Aventura; Main, North Miami Beach; Fort
Lauderdale; Coral Springs; Sunrise; Delray Beach; Boynton Beach; and Boca Raton.
These branches range in size from 1,400 square feet (at California Club Mall) to
5,934 square feet (at Miami Lakes). The leases on such properties, with the
exception of the Boynton Beach branch, which is owned by CNB, and the Sunrise
branch, the building and improvements on which are owned by CNB, expire between
November 1998 and July 2007 and generally give CNB the right to renew for an
option period. CNB also operates a stand-alone ATM machine at Aventura, Florida.
The Boynton Beach branch, which was acquired from Carney in the Merger,
was originally acquired by Carney on November 1, 1985. The property consists of
an approximately 14,457 square foot building and approximately 1.06 acres of
land. The facility has 2 inside teller stations and 1 drive-through teller
station operated from the main building. CNB occupies approximately 7,972 square
feet and leases approximately 5,708 square feet to others.
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ITEM 3. LEGAL PROCEEDINGS
PREMIUM GROUP LITIGATION
As previously reported, CNB has been a party to several legal
proceedings arising out of the failure of the food " deverting" business owned
and operated by Premium Sales Corporation, Plaza Trading Corporation and certain
of their affiliates and associates (the "Premium Group"). In June 1993, the
Premium Group was forced into bankruptcy and a receiver was appointed for the
principal members of the Premium Group. It appears that the Premium Group
financed a major portion of their operations by attracting funds from private
investors. Many of the investors in the Premium Group have alleged that the
Premium Group was involved in a "Ponzi" scheme in which the Premium Group paid
high rates of return to early investors from funds raised from later investors.
WALCO INVESTMENTS ET AL. V. KENNETH THENEN, ET AL.
In June 1994, certain investors in the Premium Group filed a class
action complaint in the United States District Court for the Southern District
of Florida seeking in excess of $250 million in damages for losses sustained by
them by investing in the Premium Group.
The plaintiffs alleged that CNB, primarily through the actions of one
of its officers, Larry Robinette, facilitated the scheme and is liable for the
plaintiff's losses due to violations of federal and state RICO statutes and
common law fraud. The plaintiffs sought to recover their alleged damages of more
than $250 million as well as treble damages and punitive damages. CNB and Larry
Robinette filed answers to the complaint denying all allegations.
On October 9, 1996, the Class Plaintiffs, CNB, and Harley Tropin as
Trustee and Receiver for certain Premium Group companies agreed to settle all
claims against CNB and Larry Robinnette for $3,000,000. This amount was paid by
CNB in January 1997.
IN RE: PREMIUM SALES CORPORATION ET AL., DEBTOR; HARLEY S. TROPIN, TRUSTEE V.
COUNTY NATIONAL BANK OF SOUTH FLORIDA AND LARRY ROBINETTE.
In July 1995, Harley S. Tropin, as the Chapter 11 trustee for the
estates of Premium Sales Corporation, Plaza Trading Corporation and the
designated corporate representative of Windsor Wholesale Corporation (the
"Premium Debtors"), commenced an adversary proceeding against CNB and Larry
Robinette in the United States Bankruptcy Court for the Southern District of
Florida.
In his complaint, the trustee alleged that various transactions between
CNB and the Premium Debtors represented avoidable transfers under federal
bankruptcy and federal and state fraudulent conveyance laws. He requested a
judgment against CNB for all amounts involved in these transactions. The trustee
further alleged that CNB extended unsecured credit to the Premium Debtors by
providing access to uncollected funds and by permitting certain overdrafts. He
also alleged that CNB should be required to return the profits which it received
from servicing of the Premium Group accounts under a theory of unjust
enrichment. CNB filed an answer denying all of the trustee's allegations.
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In October 1996, CNB and Harley S. Tropin, as trustee, agreed to settle
this case as part of the settlement for the WALCO case described above.
HARLEY S. TROPIN, AS RECEIVER, V. KENNETH THENEN, ET AL.
On December 23, 1993, Harley S. Tropin, as receiver for certain members
of the Premium Group, filed a complaint in the United States District Court for
the Southern District of Florida against various parties seeking to recover
unspecified damages suffered by the Premium Group from the defendant's
participation and assistance in the allegedly fraudulent scheme conducted by the
Premium Group. In October 1995, the receiver amended its complaint to add CNB as
an additional defendant in the litigation. In its complaint, the receiver
alleged that CNB aided, abetted and participated in the fraudulent scheme and,
therefore, was liable to the receiver for the damages suffered by these
corporations as a result of the "Ponzi" scheme.
In October 1996, CNB and Harley S. Tropin, as receiver, agreed to
settle this case as part of the settlement for the WALCO case described above.
GRAND JURY INVESTIGATION
CNB is aware that the U.S. Attorney convened a grand jury to
investigate possible criminal violations with respect to the Premium Group
matter. This has been under investigation for several years. To date, several
directors and officers of CNB have appeared as witnesses before the grand jury.
In August, 1996, a federal grand jury indicted several of the principals of
Premium for fraud. One officer of CNB, Larry Robinette, has also been indicted
for complicity in the fraud. Mr. Robinette has vigorously denied the charges and
is entitled to the constitutional presumption of innocence. No other officer or
director of CNB nor was CNB itself named either as a target of the investigation
or charged with any wrongdoing.
RELATED MATTERS
CNB expended approximately $1,400,000 through December 31, 1996 in
legal fees and other expenses in connection with the legal proceedings related
to the failure of the Premium Group. The Premium Group matter has been highly
publicized in South Florida and widely reported by the local media. This
resulted in adverse publicity for CNB and may have caused a loss of business for
CNB in the form of deposit withdrawals and other customer relationships.
POTENTIAL LITIGATION INVOLVING FLORIDA HOME FINDERS, INC.
In June 1995, CNB made a loan in the amount of $2,000,000 to the
principals of Florida Home Finders, Inc. ("FHF"). The loan was utilized to pay
part of the purchase price of FHF owed by the principals to the former owners of
FHF. The loan was secured by a pledge of a $2,000,000 certificate of deposit
established by FHF at the time of the loan. FHF is a property management
company. As part of its business, it apparently received security deposits from
tenants at properties managed by FHF. It has been alleged that FHF utilized
these tenant security deposits to establish the certificate of deposit at CNB.
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In September, 1995, the Florida Department of Business Regulation (the
"DBR") filed an action in the Circuit Court for St. Lucie County against FHF and
its principals based on the alleged misuse of the tenant security deposits and
other items. As part of this proceeding, the DBR sought a temporary injunction
preventing CNB from offsetting the $2,000,000 certificate of deposit against the
amount of the loan. In seeking the injunction, the DBR alleged that the
certificate of deposit represented tenants' security deposits and that such
funds should have been held in segregated accounts by FHF. The court granted the
temporary injunction without notice to CNB. CNB subsequently intervened in the
proceeding and requested the court to dissolve the injunction because: (i) CNB
had a valid and perfected security interest in the certificate of deposit, (ii)
FHF had the right under Florida law to utilize the security deposits to
establish the certificate of deposit because it had posted a $250,000 bond with
the State of Florida; and (iii) certain other reasons. The court subsequently
held that the injunction would dissolve within 10 days unless the DBR either
posted a bond in the amount of $25,000,000 with the court, or filed a motion
with the appellate court with respect to its obligation to post the bond. The
DBR failed to take either action within the required time period.
In October, 1995, CNB took the position that the injunction against CNB
was dissolved because the DBR had failed to take either of the required actions
within the required time period. Accordingly, CNB applied the certificate of
deposit against the outstanding balance of the loan. The receiver for FHF
subsequently notified CNB that the set off of the certificate of deposit was
improper, and demanded that the certificate of deposit be reestablished.
In August 1996, the receiver for FHF filed an amended complaint against
a variety of plaintiffs with respect to the activities of FHF, including CNB. In
the amended complaint, the receiver sought, among other things, the return of
the $2,000,000 certificate of deposit set off by CNB based upon theories of
fraudulent transfer, negligence and unjust enrichment. In January 1997, the
receiver of FHF voluntarily dismissed (without prejudice) its complaint against
all of the defendants in order, according to the receiver, to conserve the
assets of the estate of FHF. In the event that the receiver renews its legal
proceedings, CFC intends to vigorously defend its position.
CERTAIN ENVIRONMENTAL MATTERS
At the time of the Merger, Carney was involved in an environmental
matter with respect to hazardous substances on certain real property acquired by
Carney through a foreclosure sale. As a result of the Merger, CNB is now subject
to such proceedings as successor in interest to Carney. This matter is described
below.
In 1993, Carney took title to the premises of a former dry cleaner
located in Coral Springs, Florida pursuant to a foreclosure sale. Carney then
arranged to sell the property to a third party. The purchaser required that an
environmental study be performed after the closing and that Carney indemnify the
purchaser against any expenses that might result from the presence of hazardous
substances on the property. After the sale, Carney engaged an independent
consultant to perform an environmental study of the property. This study
indicated that hazardous substances were located at the property. Based on this
study, Carney's environmental consultant prepared a remedial action plan (the
"RAP") and submitted
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it to the Broward County Department of Natural Resource Protection ("Broward
County"). The RAP sets forth a plan to clean up the hazardous substances over a
period of two years. Carney's consultant has estimated that the cost of the plan
will be approximately $178,000. There can be no assurance that the actual cost
of clean up will not exceed the estimate made by Carney's consultant.The RAP has
received final approval from Broward County.
In 1994, the State of Florida established a Dry Cleaning Solvent
Superfund program (the "Program") under which the State of Florida will pay for
the clean-up of certain contaminated dry cleaning sites. The State of Florida
has not yet issued regulations and an application form under the Program. When
the application form becomes available, the Company will apply for inclusion in
the Program. Based on the eligibility criteria set forth in the legislation, the
property would appear to qualify for inclusion in the Program. The Program
preempts local government and private enforcement actions with respect to
contaminated sites eligible for inclusion in the Program.
During 1995, Broward County requested Carney to proceed with the RAP at
Carney's expense. Carney resisted this request because it would jeopardize its
right to receive benefits of the Program. In October, 1995, Carney met with
officials of Broward County to discuss this matter. Based on these discussions,
Carney concluded that it was unlikely that Broward County would institute an
enforcement action with respect to the property.
If Broward County institutes enforcement action against the Company
with respect to the property, the Company intends to vigorously defend such
actions based on applicable provisions of Florida law. Although there can be no
assurance that those defenses would be successful or that the Company would not
be required to pay for the clean up of the Property, the Company believes that
any enforcement action against the Company will not have a material adverse
effect on the business or financial position of the Company.
ITEM 4. SUBMISSION OF MATTERS TO VOTE OF SECURITY HOLDERS
None.
PART II
ITEM 5. MARKET COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
There is no established public trading market for the shares of the
Common Stock. To the knowledge of the Company's management, in 1995 and 1996,
there were no sales of Common Stock and the most recent transaction was the sale
of 526 shares in February, 1997, at a price of $16.53 per share. As of March 31,
1997, the Company had 1,264,328 outstanding shares of Common Stock.
As of March 31, 1997, the outstanding shares of Common Stock were held
of record by approximately 377 persons.
-12-
<PAGE>
The Company has not paid any dividends during its last two fiscal years
and does not currently anticipate that it will pay any dividends in the near
future. The payment of dividends by the Company are subject to the restrictions
set forth in the Florida Business Corporation Act. The Florida Business
Corporation Act provides that a corporation may pay dividends only if it is
solvent and would not be rendered insolvent by a dividend payment. Dividend
payments are dependent upon earnings, financial conditions and other factors,
and there can be no assurance that the Company will be in a position to pay
dividends in the future. The source of funds for dividends will be derived
solely from dividends declared by CNB to the Company. The declaration of
dividends by CNB is subject to various restrictions contained in the National
Bank Act.
-13-
<PAGE>
ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND
FINANCIAL CONDITION FOR THE FISCAL YEARS ENDED DECEMBER 31, 1996 AND
1995
RESTATEMENT OF FINANCIAL STATEMENTS
The Company acquired Carney in January 1996 in a transaction which was
accounted for as a "pooling of interest." As a result, the Company's financial
statements for prior periods have been restated to include the financial
position and results of operation of Carney. This section reflects this
restatement.
RESULTS OF OPERATIONS
CFC's consolidated net income for 1996 was $924,000, or 50% less than
the $1,845,000 earned in 1995. Net income per common share was $.73 in 1996 and
$1.46 in 1995. In 1996, CFC settled the Premium litigation for $3,000,000.
Without this settlement, net income would have been $3,924,000, and net income
per share would have been $3.10.
CFC's performance in 1996 resulted in a return on average stockholders'
equity ("ROE") of 4.3%, compared to 9.5% in 1995. The return on average assets
("ROE") was 0.40% in 1996, compared to 0.81% in 1995. In the absence of the
Premium settlement, ROE would have been 18.2% and ROA 1.70%.
CFC's average assets, which declined from $243 million in 1994 to $227
million in 1995, and grew in 1996 to $231 million. Average liabilities followed
this same pattern, with average liability declining from $226 in 1994 to $208
million, and then increasing to $209 million in 1996. The decrease from 1994 to
1995 was caused by customers moving funds out of deposit accounts at CNB to
other higher yield investment opportunities, such as mutual funds. The growth in
1996 was due to CFC's increase in its loan portfolio.
The following ratios reflect CFC's operating results for 1996 and 1995.
DECEMBER 31
-------------------
1996 1995
----- -----
Return on Assets 0.40% 0.81%
Return on Equity 4.28% 9.47%
Equity to Assets 9.34% 8.56%
NET INTEREST INCOME
Net interest income is defined as the total of interest income on
earning assets less interest expense on deposits and other interest-bearing
liabilities. Earning assets, which consist of loans, investment securities,
federal funds sold and securities purchased under agreements to resell, are
financed by a large base of interest-bearing funds in the form of money market,
NOW, savings and time deposits. Earning assets are also funded by the net amount
of non-interest related funds, which consist of non-interest bearing demand
deposits, the allowance for loan losses and stockholders' equity, reduced by
non-interest earning assets
-14-
<PAGE>
such as cash and due from banks.
The following table sets forth CFC's average balance sheets and related
interest, yield and rate information for the last two fiscal years.
-15-
<PAGE>
<TABLE>
<CAPTION>
AVERAGE BALANCE SHEETS
RESTATED
--------
1995 1996
------------------------------------ ------------------------------------
AVERAGE YIELD/ AVERAGE YIELD/
BALANCE INTEREST RATE BALANCE INTEREST RATE
(AMOUNTS IN THOUSANDS)
ASSETS
- - ----------------------
<S> <C> <C> <C> <C> <C> <C>
EARNING ASSETS:
Loans, net of unearned
income $133,726 $13,822 10.34% $140,854 $14,004 9.94%
Investment Securities 64,431 3,565 5.53% 59,649 3,580 6.00%
Federal funds sold 9,402 552 5.87% 10,366 548 5.29%
-------- ------ -------- -------
Total earning assets $207,559 17,939 8.64% 210,869 18,132 8.60%
-------- ------ -------- -------
NON-INTEREST EARNING
ASSETS:
Cash and due from banks 11,978 12,589
Premises and equipment, net 4,289 4,224
Other Real Estate Owned, net 3,891 3,295
Other assets 2,672 2,646
Allowance for loan losses (2,874) (2,591)
-------- --------
Total non-interest
earning assets 19,956 20,163
-------- --------
TOTAL ASSETS $227,515 $231,032
======== ========
LIABILITIES AND
STOCKHOLDERS EQUITY
INTEREST BEARING LIABILITIES:
Savings accounts $ 25,666 754 2.94% $23,697 679 2.87%
Money market/NOW accounts 73,266 1,949 2.66% 73,617 1,689 2.29%
Time deposits 51,301 2,738 5.34% 51,026 2,725 5.34%
Repurchase agreements 951 45 4.73% 785 63 8.03%
Other borrowings 1,000 99 9.90% 889 89 10.01%
-------- ------ --------
Total interest bearing liabilities $152,184 5,585 3.67% 150,014 5,245 3.50%
-------- ------ -------- -----
NON-INTEREST BEARING LIABILITIES:
Demand deposits $53,993 57,207
Other liabilities 1,855 2,229
-------- --------
Total non-interest bearing
liabilities 55,848 59,436
-------- --------
Total liabilities $208,032 209,450
STOCKHOLDERS' EQUITY 19,483 21,582
-------- --------
TOTAL LIABILITIES AND
STOCKHOLDERS' EQUITY $227,515 $231,032
======== ========
Net Interest Income/Spread $ 12,354 4.97% $12,887 5.10%
======== ======
Net Interest Yield 5.95% 6.11%
</TABLE>
-16-
<PAGE>
Notes:
- The amounts set forth as average balances
are based on daily averages for each fiscal year.
- Loan fees, which are
included in interest income and in
the calculation of average yields,
were $318,000 and $299,000 in 1995
and 1996, respectively.
- Tax exempt income is not calculated on a tax
equivalent basis.
- Non-accruing loans are included in average loans.
Net interest income is primarily affected by changes in the
amounts and types of earning assets, interest-bearing funds and net
non-interest related funds, as well as their relative sensitivity to
interest rate movements. The following chart reflects these factors:
<TABLE>
<CAPTION>
CHANGES IN NET INTEREST INCOME
RESTATED RESTATED
1994 VERSUS 1995 1995 VERSUS 1996
------------------------------------- -----------------------------------------
CHANGE DUE TO: CHANGE DUE TO:
VOLUME RATE TOTAL VOLUME RATE TOTAL
------------------------------------- -----------------------------------------
(AMOUNTS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
Increase (Decrease) in
Interest Income:
Loans $ 303 $ 1,082 $ 1,385 $ 717 $ (535) $ 182
Investment Securities (505) 584 79 (288) 303 15
Federal funds sold (90) 144 54 50 (54) (4)
------- ------- ------- ------- ------- -------
Total interest income (292) 1,810 1,518 479 (286) 193
------- ------- ------- ------- ------- -------
Increase (Decrease) in
Interest Expense:
Savings accounts (171) 129 (42) (57) (18) (75)
Money market/NOW accounts (253) 343 90 11 (271) (260)
Time deposits 393 286 679 (13) -- (13)
Repurchase agreements 16 7 23 (13) 31 18
Other borrowings (10) 0 (10) (10) -- (10)
------- ------- ------- ------- ------- -------
Total Interest Expense (25) 765 740 (82) (258) (340)
------- ------- ------- ------- ------- -------
Increase (Decrease) in Net
Interest Income $ (267) $ 1,045 $ 778 $ 561 $ (28) $ 533
======= ======= ======= ======= ======= =======
</TABLE>
Notes: - To calculate volume change, multiply the change in
volume from current year to prior year times the
prior year's rate.
- To calculate rate change, multiply the change
in rate from current year to prior year times the
prior year's dollar volume.
- Changes which are not due only to volume changes or
rate changes are included in the
changes due to volume column.
Net interest income for 1996 was $12,887,000 up 4.3% from
$12,354,000 in 1995. The growth in net interest income in 1996 was
attributable to an increase of $3,310,000 in average earning assets as
well as a small improvement in CFC's net interest margin, which
-17-
<PAGE>
grew from 5.0% in 1995 to 5.1% in 1996. Average loans (which are CNB's
highest yielding earning assets) grew 5.3%, while investment securities
dropped 7.4%.
NON-INTEREST INCOME
Non-interest income in 1996 totaled $2,783,000, compared with
$2,925,000 in 1995. Customer service charges totaled $2,425,000 in 1996,
down 4.2% from $ 2,526,000 in 1995 due to declining deposit balances.
INVESTMENT SECURITIES GAINS AND LOSSES
At December 31, 1996, CFC held investment securities with a
market value of $56,460,000, which was $91,000 lower than the amortized
cost of the portfolio. This difference consisted of $198,000 of gross
unrealized gains and $289,000 of gross unrealized losses. There were net
losses of $11,000 from sales of securities available for sale in 1996.
date.
PROVISION FOR LOAN LOSSES
The provision for loan losses totaled $24,000 in 1996 and
$259,000 in 1995. See "Allowance and Provision for Loan Losses."
NON-INTEREST EXPENSES
Non-interest expenses for 1996 totaled $14,722,000, which was
up 20.7% from $12,195,000 in 1995. The increase in 1996 was primarily
due to the establishment of a $3,000,000 provision related to the
settlement of the Premium litigation. See AItem 3- Legal Proceedings.@
Non-interest expenses are discussed below in more detail.
PERSONNEL. Personnel expense (which includes salaries and
benefits) represented 37.6% of total non-interest expenses in 1996.
Personnel expenses decrease 2.7% to $5,541,000 in 1996 from $5,693,000
in 1995. Staff on a full-time equivalent basis averaged 158 in 1996
compared to 138 in 1995.
OCCUPANCY EXPENSE. Net occupancy expense in 1996 totaled
$1,604,000, down 5.0% from $1,689,000 in 1995. The principal reason for
the decrease was due to a reduction in maintenance and utilities
expenses.
PREMISES AND EQUIPMENT EXPENSE. Premises and equipment expense,
which includes depreciation and rental, totaled $596,000 in 1996, down
33.7% from $899,000 in 1995. The decrease was due to a reduction in
depreciation expense on equipment fully depreciated in 1995.
OTHER NON-INTEREST EXPENSES. Other non-interest expenses for
1996 totaled $3,981,000, up 1.7% from $3,914,000 in 1995. Other
non-interest expenses in 1996 were impacted by relatively high legal and
professional services fees. Legal fees for the Premium Group matter were
$671,000 in 1996, compared to $340,000 in 1995. In 1996, losses on the
-18-
<PAGE>
sale of OREO were $13,000, compared to $148,000 in 1995, while the
write-down of OREO was $50,000 in 1996 compared to $100,000 in 1995.
PROVISION FOR INCOME TAXES
The income tax provision totaled $-0- in 1996 compared with
$980,000 in 1995. The absence of a provision in 1996 was primarily due
to utilization of Carney's $2,997,000 of net operating losses. See Note
11 to the Consolidated Financial Statements for CFC for more information
regarding the income tax provision.
CAPITAL EXPENDITURES
CFC's capital expenditures are reviewed by its Board of
Directors. CFC makes capital expenditures in order to improve its
ability to provide quality services to its customers. Capital
expenditures for 1996 equaled $406,000 compared to $661,000 in 1995, and
were principally related to equipment purchased for various branch sites
and changes in equipment due to technological advances.
ASSET QUALITY AND CREDIT RISK
INVESTMENT SECURITIES. CFC maintains a high quality investment
portfolio including U.S. Treasury securities, securities of other U.S.
government entities, state and municipal securities, and other
securities such as Federal Reserve Bank stock. Securities issued by the
U.S. Treasury, other U.S. government entities and states constitute
approximately 99% of CFC's investment portfolio. CFC believes that the
securities have very little risk of default. At December 31, 1996, all
of the securities held in CFC's investment portfolio were classified
available for sale and were rated "A" or better (with a majority rated
triple "A"). A rating of "A" or better means that the bonds are of
"upper medium grade, with strong ability to repay, possibly with some
susceptibility to adverse economic conditions or changing
circumstances." Ratings are assigned by independent rating agencies and
are subject to the accuracy of reported information concerning the
issuers and the subjective judgment and analysis of the rating agencies.
Approximately 42.0% of these securities mature in one year or less and
96.4% in five years or less. As such, the risk of significant
fluctuations in value due to changes in the general level of interest
rates is limited.
The following table sets forth information regarding the
composition of the investment portfolio for the last two years (amounts
in thousands).
-19-
<PAGE>
<TABLE>
<CAPTION>
INVESTMENT PORTFOLIO
RESTATED DECEMBER 31,
---------- ------------------------
1995 1995 1996
------- ------- -------
(HELD TO MATURITY) (AVAILABLE FOR SALE)
<S> <C> <C> <C>
U.S. Treasury Securities $41,554 $32,602
Securities of other U.S. Government
agencies and corporations $ 938 14,711 23,238
Obligations of states and political
subdivisions 95 2,197 9
Other securities 602 257 525
------- ------- -------
Total investments $ 1,635 $58,719 $56,460
======= ======= =======
</TABLE>
During 1996, CFC's investment portfolio dropped by 6.3% due to
a decline in CFC's deposits. In recent years, CFC has adjusted the mix
of its investment securities from U.S. Treasury securities to securities
of U.S. Government agencies and municipals to obtain higher yields. U.S.
Treasury securities represented 57.7% in 1996, and 70.8% in 1995, while
securities of U.S. Government agencies and municipals represented 41.2%
in 1996, and 25.9% in 1995.
LOANS. CFC maintains a high quality portfolio of real estate,
commercial and consumer loans. All loans are reviewed and approved by
CFC's loan committee, which ensures that loans comply with applicable
credit standards. In most cases, CFC requires collateral from the
borrower. The type and amount of collateral varies but may include
residential or commercial real estate, deposits held by financial
institutions, U.S. Treasury securities, other marketable securities and
personal property. Collateral values are monitored to ensure that they
are maintained at proper levels.
As of December 31, 1996, approximately 75% of CFC's loans were
real estate loans secured by real estate in South Florida. This level of
concentration could present a potential credit risk to CFC because the
ultimate collectible of these loans is susceptible to adverse changes in
real estate market conditions in this market. CFC has addressed this
risk by limiting most loans to a maximum of 70% of the appraised value
of the underlying real estate and maximum amortization schedules of
twenty (20) years.
The following table divides CFC's loan portfolio into four
categories. Most of the loans are short-term and may be renewed or
rolled over at maturity. At that time, CFC undertakes a complete review
of the borrower's credit worthiness and the value of any collateral. If
these items are satisfactory, CFC will generally renew the loan at
prevailing interest rates.
-20-
<PAGE>
TYPES OF LOANS
DECEMBER 31,
-------------------------
RESTATED
1995 1996
-------- --------
(AMOUNTS IN THOUSANDS)
Commercial, financial and agricultural $ 35,804 $ 35,203
Real estate - construction 8,508 9,868
Real estate - mortgage 92,522 99,415
Installment loans 2,344 1,572
Overdrafts 107 213
-------- --------
Total loans $139,285 $146,271
======== ========
The following table sets forth information regarding the
maturities of CFC's commercial and real estate construction loans. For
purposes of the table, loans are treated as maturing on the final
maturity date provided for in the loan agreement, regardless of whether
payments are amortized over a period of time. Thus, for example, all
amounts payable under a three year loan which is amortized on a monthly
basis will be shown in the table as being payable in the Over One to
Five Years column even though some payments will be made in the first
year. Demand loans are shown as being payable in one year or less. The
entire amount of a balloon loan is treated as maturing in the year that
the balloon payment is due.
-21-
<PAGE>
<TABLE>
<CAPTION>
MATURITIES OF SELECTED LOANS
DECEMBER 31, 1996
------------------------------------------------
ONE YEAR OVER ONE TO OVER FIVE
OR LESS FIVE YEARS YEARS TOTAL
------- ---------- --------- -------
(AMOUNTS IN THOUSANDS)
<S> <C> <C> <C> <C>
COMMERCIAL, FINANCIAL AND AGRICULTURAL:
Fixed $ 2,876 $ 2,796 $ 9 $ 5,681
Variable 16,464 11,804 1,254 29,522
REAL ESTATE - CONSTRUCTION:
Fixed -- $ 1,805 -- $ 1,805
Variable $ 4,251 3,812 -- 8,063
</TABLE>
Commercial, financial and agricultural loans are segmented by
fixed and variable interest rates. At December 31, 1996, the amount of
such loans with a maturity of more than one year which had fixed
interest terms was $2,805,000 and the amount which had variable interest
terms was $13,058,000.
COMMERCIAL, FINANCIAL AND AGRICULTURAL LOANS. CFC makes
commercial, financial and agricultural loans to businesses located in
South Florida. The credit risk associated with business lending is
influenced by general economic conditions, the deterioration in a
borrower's capital position resulting in increasing debt to equity
ratios, deterioration in a borrower's cash position resulting in a
liquidity problem, and decreasing revenues due to inefficient operations
of the borrower. These loans are generally secured by corporate assets,
marketable securities or other liquid financial instruments. These loans
totaled approximately $35,203,000 at December 31, 1996, and $35,792,000
at December 31, 1995. Legally binding commitments to extend credit and
letters of credit for these borrowers totaled $16,588,000 on December
31, 1996.
REAL ESTATE CONSTRUCTION LOANS. CFC makes real estate
construction loans from time to time for real estate projects located in
South Florida. CFC generally requires security in the form of a mortgage
on the underlying real property and the improvements constructed thereon
and personal guarantees. It attempts to limit its credit exposure to 70%
of the appraised value of the underlying real property. On December 31,
1996, construction loans totaled $9,868,000 to thirty borrowers,
including experienced residential builders, and other financially strong
borrowers. Risks associated with construction loans include variations
-22-
<PAGE>
from vacancy projections, delays in construction, environmental factors,
reliability of subcontractors and timing and reliability of inspections,
and costs overruns.
REAL ESTATE MORTGAGE LOANS. CFC makes both commercial and
residential real estate loans. These loans totaled $99,415,000 at
December 31, 1996. Risks associated with real estate mortgage loans
include reliability of appraisals, deterioration of market values,
environmental contamination, and accelerated depreciation of property
due to deferred maintenance.
CFC makes real estate loans secured by commercial real estate,
including loans to acquire or refinance office buildings, warehouses and
apartments. At December 31, 1996, these loans totaled $81 million, or
55.0 % of total loans. Most of these loans have a maturity of five years
or less. Almost all of these loans are secured by real property located
in South Florida. These loans generally require a loan-to-collateral
value of not more than 70%. At December 31, 1996, CFC had $4.0 million
in legally binding commitments to extend credit or standby letters of
credit involving commercial real estate borrowers, compared to $1.6
million at December 31, 1995.
Residential real estate loans totaled $19 million, or 12.8% of
total loans at December 31, 1996, compared with $23 million, or 16.2% at
December 31, 1995. Residential real estate loans are predominately
adjustable rate home mortgages which generally require a
loan-to-collateral value of not more than 70% and equity credit lines
which generally limit the loan-to-collateral value to not more than 70%
to 75%. Most loans have a maximum term of five to seven years. CFC does
not ordinarily charge any points on its real estate loans. Almost all of
the residential real estate loans are secured by homes in South Florida.
Legally binding commitments to extend credit secured by residential
mortgages totaled $2,064,000 as of December 31, 1996 compared to
$964,000 as of December 31, 1995.
INSTALLMENT LOANS. CFC offers consumer loans and personal and
secured loans. The security for these loans ordinarily consists of
automobiles, consumer goods, marketable securities, certificates of
deposit and similar items. These loans totaled approximately $1.6
million, or 1.1% of total loans, on December 31, 1996, compared with
$2.3 million, or 1.7% of total loans, on December 31, 1995. Risks
associated with installment loans include loss of employment of
borrowers, declines in the financial condition of borrowers resulting in
delinquencies, and rapid depreciation of loan collateral.
NON-PERFORMING ASSETS AND PAST DUE LOANS
Non-performing assets consist of non-accrual loans and
residential and commercial properties acquired in partial or total
satisfaction of problem loans which are known as "other real estate
owned" or "OREO." Past due loans are loans that are delinquent 30 days
or more which are still accruing interest.
Maintaining a low level of non-performing assets is important
to the ongoing success of any financial institution. CFC' credit review
and approval process is critical to CFC's ability to minimize
non-performing assets on a long term basis. In addition to the negative
impact on interest income, non-performing assets also increase operating
costs due to the expense
-23-
<PAGE>
of collection efforts. It is CFC's policy to place all loans which are
past due 90 days or more on non-accrual status, subject to exceptions
made on a case by case basis.
The following table presents CFC's non-performing assets and
past due loans for 1995 and 1996.
NON-PERFORMING ASSETS AND 90 DAY PAST DUE LOANS
DECEMBER 31,
-----------------------
Restated
1995 1996
-------- ------
(AMOUNTS IN THOUSANDS)
Non-Accrual Loans $2,441 $2,670
OREO, net 3,329 3,338
------ ------
Total Non Performing Assets $5,770 $6,008
====== ======
Accruing Loans Past Due
90 Days $ 104 $ 0
====== ======
Of the total assets of $245,946 at December 31, 1996,
$6,008,000 or 2.4%, was non-performing, or an increase of $238,000 from
year end 1995. Non-performing loans at December 31, 1996 consisted of
commercial and residential real estate loans. Non-accrual loans
increased by $229,000 and are comprised of five mortgage loans in
foreclosure and one past due commercial loan.
Other real estate owned at December 31, 1996 consisted of
$1,147,000 of residential real estate and $2,191,000 of commercial real
estate. OREO at December 31, 1995 consisted of $1,367,000 of residential
real estate and $1,962,000 of commercial real estate. CFC believes that
the carrying value of its OREO portfolio is realizable.
-24-
<PAGE>
ALLOWANCE AND PROVISION FOR LOAN LOSSES
CFC evaluates the adequacy of its allowance for loan losses as
part of its ongoing credit review and approval process. The review
process is intended to identify, as early as possible, customers who may
be facing financial difficulties. Once identified, the extent of the
client's financial difficulty is carefully monitored by CFC's loan
review officer, who recommends to the loan committee of the Board of
Directors the portion of any credit that needs a specific reserve
allocation or should be charged off. Other factors considered by the
loan committee in evaluating the adequacy of the allowance include
overall loan volume, historical net loan loss experience, the level and
composition of non-accrual and past due loans, local economic
conditions, and value of any collateral. From time to time, specific
amounts of the reserve are designated for certain loans in connection
with the loan committee's review of the officer's analysis of the
adequacy of the allowance for loan losses.
While the largest portion of this allowance is typically
intended to cover specific loan losses, it is considered a general
reserve which is available for all credit-related purposes. The
allowance is not a precise amount, but is derived based upon the above
factors and represents management's best estimate of the amount
necessary to adequately cover probable losses from current credit
exposures. The provision for loan losses is a charge against current
earnings and is determined by management as the amount needed to
maintain an adequate allowance.
Management relied on its assessment of the overall quality of
the loan portfolio, as well as its assessment of the financial condition
of specific clients facing financial difficulties, in permitting the
allowance for loan losses to decline to $2,524,000 at December 31, 1996,
from $3,040,000 at December 31, 1995. The major part of this decline was
the result of $761,000 in charged offs (which primarily relate to former
Carney loans)
On January 1, 1995, C.F.C. adopted Financial Accounting
Standards Board Statements of Financial Accounting Standards ("SFAS")
No. 114, ACCOUNTING BY CREDITORS FOR IMPAIRMENT OF A LOAN, and SFAS No.
118, ACCOUNTING BY CREDITORS FOR IMPAIRMENT OF A LOAN - RECOGNITION AND
DISCLOSURES, an amendment of SFAS No. 114. These standards address the
accounting for impairment of certain loans when it is probable that all
amounts due pursuant to the contractual terms of the loan will not be
collected. Adoption of these standards entailed the identification of
commercial, industrial, real estate commercial and real estate
construction loans which are considered impaired under the provisions of
SFAS No. 114.
Under the provisions of these standards, individually idntified
impaired loans are measured based on the present value of payment
expected to be received, using the historical effective loan rate as
the discount rate. Alternatively, measurement may also be based on
observable market prices or for loans that are solely dependent on the
collateral for repayment, measurement may be based on the fair value of
the collateral. Loans that are to be foreclosed are measured based on
the fair value of the collateral. If the recorded investment in the
impaired loan exceeds the measure of fair value, a valuation allowance
is required as a component of the allowance for loan losses. Changes to
the valuation allowance are recorded as a component of the provision for
loan losses.
At December 31, 1996 and 1995, the recorded investment in loans
that are considered impaired under SFAS No. 114 was approximately
$2,449,000 and $1,780,000, respectively. These impaired loans required
a SFAS No. 114 allowance for loan losses of approximately $364,000 and
$368,000, respectively. The average recorded invesment in impaired loans
during the years December 31, 1996 and 1995 was approximately $1,908,000
and $909,000, respectively. For the years ended December 31, 1996 and
1995, the Bank recognized interest income on these impaired loans of
approximately $166,000 and $153,000, respectively.
-25-
<PAGE>
The following table summarizes the allowance for loan losses
for 1995 and 1996:
ALLOWANCE FOR LOAN LOSSES
DECEMBER 31,
---------------------
Restated
1995 1996
-------- -----
(AMOUNTS IN THOUSANDS)
Balance at beginning of period $ 2,791 $ 3,040
Charge-offs:
Commercial, financial and agricultural 11 547
Real estate - nonfarm, nonresidential 132 0
Real estate - residential 40 211
Installment loans 7 3
------- -------
Total charge-offs 190 761
------- -------
Recoveries:
Commercial, financial and agricultural 161 124
Real estate - construction 3 18
Real estate - nonfarm, nonresidential 11 16
Real estate - residential 2 62
Installment loans 3 1
------- -------
Total recoveries 180 221
------- -------
Net charge-offs 9 540
Provision charged to operations 259 24
------- -------
Balance at end of period $ 3,040 $ 2,524
======= =======
Ratio of net charge-offs during .01% 0.38%
period to average loans outstanding ======= =======
during period
In 1996, net charge offs were $540,000 representing .38% of the
average loan portfolio. In 1995, net charge-offs were $9,000,
representing .01% of the average loan portfolio.
-26-
<PAGE>
CFC's allowance for loan losses decreased to $2,524,000 in 1996
which was approximately 1.7% of total loans ($146.3 million).
During 1996, CFC experienced a higher level of charge-offs than
in prior years due to the Carney Bank merger. The net amounts
charged-off were $758,000 in commercial and real estate loans and $3,000
in installment loans. In addition, CFC had net recoveries of $124,000 in
commercial loans, and $96,000 in real estate loans.
The following table further summarizes the allocation of the
allowance for loan losses by type of loan.
-27-
<PAGE>
<TABLE>
<CAPTION>
ALLOCATION OF ALLOWANCE FOR LOAN LOSSES
(RESTATED)
DECEMBER 31, 1995 DECEMBER 31, 1996
-------------------- --------------------
PERCENT PERCENT
OF LOANS OF LOANS
IN EACH IN EACH
CATEGORY CATEGORY
TO TOTAL TO TOTAL
AMOUNT LOANS AMOUNT LOANS
------ -------- ------ --------
(AMOUNTS IN THOUSANDS)
<S> <C> <C> <C> <C>
Commercial, financial and
agricultural $ 262 25.8% $ 175 24.2%
Real Estate - Construction 29 6.1% 183 6.7%
Real Estate - Mortgage 729 66.4% 522 68.0%
Installment loans and overdrafts 1 1.7% 0 1.1%
Unallocated general reserves 2,019 N/A 1,644 N/A
------ ------ ------ -----
Total allowance for
loan losses $3,040 100% $2,524 100%
====== ====== ====== =====
</TABLE>
FINANCIAL CONDITION
CFC's goal is to maintain a high quality and liquid balance
sheet. CFC seeks to achieve this objective through increases in
collateralized loans, a strong portfolio of real estate loans and a
stable portfolio of investment securities of high quality.
INVESTMENT SECURITIES. In 1996, investment securities averaged
$60.0 million or 28.3% of total earning assets. CFC's management
strategy for its investment account is to maintain a very high quality
portfolio with generally short-term maturities. To maximize after tax
income, investments in municipal securities are utilized but with
somewhat longer maturities. The investment portfolio, all of which has
been classified as available for sale in 1996, decreased 6.5% from $60.4
million in 1995 to $56.5 million at December 31, 1996. The decrease,
resulting primarily from maturities which were not reinvested, was due
to cash requirements arising from a decrease in deposits. The following
table sets forth information regarding the investment portfolio at
December 31, 1996, all of which are available for sale.
-28-
<PAGE>
<TABLE>
<CAPTION>
REMAINING MATURITY AND AVERAGE YIELD OF INVESTMENT SECURITIES
(DECEMBER 31, 1996)
($ AMOUNTS IN THOUSANDS)
ONE YEAR OR LESS ONE TO FIVE YEARS FIVE TO TEN YEARS OVER TEN YEARS
------------------- ------------------ ----------------- --------------
BOOK YIELD BOOK YIELD BOOK YIELD BOOK YIELD TOTAL YIELD
------- ----- ------- ------ ----- ----- ---- ----- ----- -----
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
U.S. Treasury
Securities $12,555 6.41% $20,048 5.94% $32,603 6.12%
Securities of
other U.S.
Governmental
agencies and
corporations 11,080 6.46% 10,653 6.07% 1,504 6.97% 23,237 6.31%
Obligations of
states and
political
subdivisions 95 8.12% 95 8.12%
Other securities $525 5.19% 525 5.19%
------- ----- ------- ----- ------- ----- ---- ----- -------- -----
Total $23,730 6.44% $30,701 5.99% $ 1,504 6.97% $525 5.19% $56,460 6.19%
======= ===== ======= ===== ======= ===== ==== ===== ======= =====
</TABLE>
Note: Yield on tax exempt bonds have not been computed on a
equivalent basis.
LOANS. Loans averaged $140.9 million in 1996 and increased 5.3%
from the prior year. The increase in the loan portfolio reflects an
expanded customer base, favorable economic conditions and increased
business development. See "Asset Quality and Credit Risk -- Loans,"
above.
INTEREST-BEARING LIABILITIES. Total interest-bearing
liabilities averaged $150.0 million in 1996, down from $152.2 million in
1995. The decline in average savings of $2.0 million or 7.7% was due to
lower interest rates which resulted in customers shifting their funds
into higher yielding investments, and increased competition from mutual
funds and credit unions.
The following table sets forth information regarding CFC's
average deposits for the last two years.
-29-
<PAGE>
AVERAGE DEPOSITS
1995 (RESTATED) 1996
----------------- ------------------
AVERAGE AVERAGE
BALANCE RATE BALANCE RATE
------- ---- ------- ----
(AMOUNTS IN THOUSANDS)
Demand deposits-
non-interest bearing $ 53,993 $ 57,207
Savings accounts 25,666 2.94% 23,697 2.87%
Money market and
NOW accounts 73,266 2.66% 73,617 2.29%
Time deposits 51,301 5.34% 51,026 5.34%
-------- --------
Total deposits $204,226 2.66% $205,547 2.48%
======== ========
The following table summarizes the maturity of time deposits
over $100,000:
SUMMARY OF TIME DEPOSITS OVER $100,000 BY MATURITY
DECEMBER 31, 1996
(AMOUNTS IN THOUSANDS)
Three months or less $3,698
Three to Six months 2,456
Six to Twelve months 4,668
Over Twelve months 3,615
-----
Total $14,437
=======
-30-
<PAGE>
LIQUIDITY AND RATE SENSITIVITY
The principal functions of asset and liability management are
to provide for adequate liquidity, to manage interest rate exposure by
maintaining a prudent relationship between rate sensitive assets and
liabilities and to manage the size and composition of the balance sheet
so as to maximize net interest income.
Liquidity is the ability to provide funds at minimal cost to
meet fluctuating deposit withdrawals or loan demand. These demands are
met by maturing assets and the capacity to raise funds from internal and
external sources. CFC primarily utilizes cash, federal funds sold and
securities purchased under repurchase agreements to meet its liquidity
needs. Although not utilized in managing daily liquidity needs, the sale
of investment securities provides a secondary source of liquidity.
Fluctuating interest rates, increased competition and changes
in the regulatory environment continue to significantly affect the
importance of interest-rate sensitivity management. Rate sensitivity
arises when interest rates on assets change in a different period of
time or a different proportion than that of interest rates on
liabilities. The primary objective of interest-rate sensitivity
management is to prudently structure the balance sheet so that movements
of interest rates on assets and liabilities are highly correlated and
produce a reasonable net interest margin even in periods of volatile
interest rates.
Regular monitoring of assets and liabilities that are rate
sensitive within 30 days, 90 days, 180 days and one year is an integral
part of CFC's rate-sensitivity management process. It is CFC's policy to
maintain a reasonable balance of rate-sensitive assets and liabilities
on a cumulative one year basis, thus minimizing net interest income
exposure to changes in interest rates. CFC's sensitivity position at
December 31, 1996 was such that net interest income would decline
modestly if there were an increase in short-term interest rates.
CFC monitors the interest rate risk sensitivity with
traditional gap measurements. The gap table has certain limitations in
its ability to accurately portray interest sensitivity; however, it does
provide a static reading of CFC's interest rate risk exposure.
CFC's gap table at December 31, 1996 is shown on the following
table. This table shows the repricing structure of CFC's balance sheet
with each maturity interval referring to the earliest repricing
opportunity (i.e., the earlier of scheduled contractual maturities or
next reset date) for each asset and liability. As of that date, CFC
remained asset sensitive (interest sensitive assets subject to repricing
exceeded interest sensitive liabilities subject to repricing) on a
365-day basis to the extent of $25.6 million. This positive gap at
December 31, 1996 was 10.3 percent of total assets compared with 7.5
percent at December 31, 1995. The primary cause for this increase in the
gap was the amount of federal funds sold at December 31, 1996, which
were up $7.5 million from 1995. CFC's targeted gap position is in the
range of negative 5 percent to positive 15 percent. CFC measures its gap
position as a percentage of its total assets.
While the absolute level of gap is a measurement of interest
rate risk, the quality of the assets and liabilities in the balance
sheet must be analyzed in order to understand the
-31-
<PAGE>
degree of interest rate risk taken by CFC. CFC does not invest in any
derivative products in order to manage or hedge its interest rate risk.
<TABLE>
<CAPTION>
INTEREST SENSITIVITY TABLE
AS OF DECEMBER 31, 1996
(AMOUNTS IN THOUSANDS)
OVER ONE
TOTAL YEAR AND
0-30 30-90 90-180 180-365 INTEREST NON-INTEREST
DAYS DAY DAYS DAYS SENSITIVE SENSITIVE TOTAL
-------- -------- --------- -------- --------- ------------ --------
Interest Earning Assets:
<S> <C> <C> <C> <C> <C> <C> <C>
Loans $ 92,837 $ 1,646 $ 3,944 $ 5,635 $104,062 $ 42,209 $146,271
Investment Securities 6,285 2,035 4,167 9,250 21,737 34,723 56,460
Federal funds sold 19,585 0 0 0 19,585 0 19,585
-------- -------- -------- -------- -------- -------- --------
$118,707 $ 3,681 $ 8,111 $ 14,885 $145,384 $ 76,932 $222,316
======== ======== ======== ======== ======== ======== ========
Interest Bearing
Liabilities:
Deposits and Repos $ 87,139 $ 8,055 $ 10,406 $ 14,484 $120,084 $ 33,026 $153,110
Borrowings 25 0 25 50 100 750 850
-------- -------- -------- -------- -------- -------- --------
$ 87,164 $ 8,055 $ 10,431 $ 14,534 $120,184 $ 33,776 $153,960
======== ======== ======== ======== ======== ======== ========
Gap 31,543 (4,374) (2,320) 351 25,200
Cumulative Gap 31,543 27,169 24,849 25,200 25,200
Gap as % of Total Assets 12.83% 11.05% 10.10% 10.25% 10.25%
</TABLE>
CAPITAL
One of management's primary objectives is to maintain a strong
capital position to merit the confidence of customers, bank regulators
and stockholders. A strong capital position helps CFC withstand
unforeseen adverse developments and take advantage of attractive lending
and investment opportunities when they raise. During 1996, stockholders'
equity increased by $ 652,000, or 3.2% over 1995.
The Federal Reserve's final rules pertaining to risk-based
capital became effective as of December 31, 1992. Under these rules, at
December 31, 1996, CFC's tier one capital was 12.73% and the total
capital was 13.98% of risk-based assets. These risk-based capital ratios
are well in excess of the minimum requirements of 4% for tier one and 8%
for total risk-based capital ratios.
CFC's leverage ratio (tier one capital to total average
adjusted quarterly assets) of 9.2% on December 31, 1996, is also well
in excess of the minimum 4% requirement. During 1996, equity capital
increased 3.2% and assets increased by 5.1%.
-32-
<PAGE>
<TABLE>
<CAPTION>
The following table sets forth CFC's required and actual
capital amounts and ratios for 1996 and 1995.
COUNTY FINANCIAL CORPORATION
DECEMBER 31, 1996 DECEMBER 31, 1995 (RESTATED)
--------------------------------------- --------------------------------------------
REQUIRED ACTUAL REQUIRED ACTUAL
----------------- ------------------ ------------------- -------------------
AMOUNT RATIO AMOUNT RATIO AMOUNT RATIO AMOUNT RATIO
------ ----- ------ ----- ------ ----- ------ -----
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Tier 1 Capital
(to Risk Weighted
Assets) $ 6,660,000 4.0% $21,196,000 12.7% $ 6,251,000 4.0% $20,265,000 13.0%
Total 1 Capital
(to Risk Weighted
Assets) $13,320,000 8.0% $23,283,000 14.0% $12,502,000 8.0% $22,232,000 14.2%
Tier 1 Capital
(to Average
Assets) $ 9,241,000 4.0% $21,196,000 9.2% $ 9,025,000 4.0% $20,265,000 9.0%
</TABLE>
In October 1996, CFC agreed to settle all of the outstanding
litigation arising from the failure of the Premium Sales Corporation and
certain of its affiliates (the "Premium Group"). Under the terms of the
proposed settlement, CNB paid $3,000,000 to the plaintiffs in January 1997.
This litigation is described in greater detail in Part I - Item 3 - "Legal
Proceedings."
CFC has expensed the entire amount of the settlement for accounting
purposes during the fiscal year ended December 31, 1996. As a result, most of
CFC=s net income for 1996 was entirely offset by the amount of the
settlement. The settlement is also expected to reduce interest income in 1997
due to the decrease in earning assets of CFC. However, this drop is expected
to be substantially offset by reduced legal and professional fees resulting
from the settlement of the case.
For income tax purposes, CFC expects to expense the settlement at
the time of payment (i.e., in January 1997). Assuming that CFC continues its
current level of operating profitability, the $3 million settlement will, for
tax purposes, offset a substantial portion of CFC=s anticipated taxable
income for 1997.
CFC funded the settlement from its existing cash reserves, which
have been maintained at relatively high levels. As a result, the settlement
did not have a significant impact on CFC=s liquidity level.
-33-
<PAGE>
ITEM 7. FINANCIAL STATEMENTS
The consolidated financial statements of the Company, are filed under
this item, beginning on page F-1 of this report.
ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
PART III
ITEM 9. DIRECTORS AND EXECUTIVE OFFICERS OF THE COMPANY
The following table sets forth certain information with respect to the
current directors and executive officers of the Company. A summary of the
background of each director and executive officer is set forth in the
paragraphs following the table.
-34-
<PAGE>
NAME AND POSITIONS AGE AT YEAR FIRST BECAME
WITH THE COMPANY AND CNB DECEMBER 31, 1996 DIRECTOR OF THE COMPANY
------------------------ ----------------- -----------------------
George M. Apelian, 65 1984
Director, President and Chief
Executive Officer
Dr. Julian J. Blitz, 74 1984
Director
Joseph E. Carney, Jr. 64 1984
Director
Peter H. Carney 34 1996
Director
Dr. Thomas F. Carney, 70 1984
Chairman of the Board of
Directors
Harold Diamond, 71 1984
Director
Morton M. Fisher, 81 1984
Director
C. Bernard Jacobs, 78 1996
Director
Richard Arn Kuci, Jr., 40 -
Executive Vice President
of CNB
Thomas J. Langan, 76 1996
Director
Milton Mamber, 71 1984
Director
Eileen A. Salsano, 65 -
Executive Vice President
Dr. Morton Terry, 75 1984
Director
-35
<PAGE>
GEORGE M. APELIAN has served as President and director of the Company
since 1984, and as President, Chief Executive Officer and director of CNB
since 1984.
DR. JULIAN J. BLITZ has served as a director of the Company since 1984
and CNB since 1980. Dr. Blitz has been employed as a physician since 1946
and currently maintains an office in Hollywood, Florida.
JOSEPH E. CARNEY, JR. has served as a director of the Company since 1984
and as a director of CNB since 1978. Mr. Carney is Vice President of PM
Management Group, Inc., a management company for racetracks, President of
Sports Programs, Inc. (a printer of sports programs), Vice-President and
General Manager of Yankee Greyhound Racing, Inc. (the owner and operator of
a greyhound racecourse), and President of Rockingham Venture, Inc. (the
owner and operator of a horse racetrack). Mr. Carney's brother, Dr. Thomas
F. Carney, serves as a director of the Company and CNB.
PETER H. CARNEY has served as a Director of the Company since April,
1996. Mr. Carney is an attorney and is with The Carney Legal Group. Peter
Carney is the son of Dr. Thomas F. Carney, another director of the Company.
DR. THOMAS F. CARNEY has served as Chairman of the Board of the Company
since 1984 and as Chairman of the Board of CNB since 1962. Dr. Carney also
served as a director of Carney. His brother, Joseph E. Carney, Jr., and his
son, Peter Carney, also serve as directors of the Company and CNB.
HAROLD DIAMOND has served as a director of the Company since 1984 and as
a director of CNB since 1962. Mr. Diamond is a private investor.
Additionally, he has been the comptroller of the North Miami Beach
Kampgrounds of America since January 1, 1995. In December 1992, Mr. Diamond
was an officer, director and major shareholder of Azure Lakes, Inc., the
general partner of Azure Lakes, Ltd. This partnership owned and operated an
apartment complex. In December 1992, the partnership defaulted on its
mortgage and filed for bankruptcy. The bankruptcy petition was subsequently
dismissed with prejudice in connection with a settlement between the
partnership and its lender. Under the settlement, the partnership conveyed
the apartment complex to the lender.
MORTON M. FISHER has served as a director of the Company since 1984 and
as a director of CNB since 1962. Fisher is a self employed investor.
C. BERNARD JACOBS served as Chairman of the Board of Directors of Carney
from 1985 until the Merger. He became a director of the Company following
the consummation of the Merger. Mr. Jacobs was Chairman of the Board of
Directors of National City Bancorporation of Minneapolis, Minnesota from
1968 to 1985 and was President of its subsidiary, National City Bank,
Minneapolis, Minnesota, from 1965 to 1968.
RICHARD ARN KUCI, JR. has served as Executive Vice President and Senior
Loan Officer of CNB since 1994. From 1984 to 1993, he served as a Senior
Vice President of CNB.
THOMAS J. LANGAN, JR. served as a Director of Carney from 1991 until the
Merger. He became a director of the Company following the consummation of
the Merger. Mr. Langan is a retired investor.
-36-
<PAGE>
MILTON MAMBER has served as a director of the Company since 1984 and as
the Vice Chairman of the Board of Directors of CNB since 1962. Mr. Mamber is
an attorney and president of the law firm of Mamber, Savage & Singer, P.A.,
which serves as general counsel to the Company and CNB.
DR. MORTON TERRY has served as a director of the Company since 1984 and
as a director of CNB since 1963. From 1980 to 1993, Dr. Terry was President
of Southeastern University, North Miami Beach, Florida. In 1994, Dr. Terry
became Chancellor-Health Professions Division of Nova Southeastern
University.
EILEEN A. SALSANO has been the Executive Vice-President of the Company
since 1984 and as the Executive Vice President/Cashier of CNB since 1983. In
1994, she was also named Chief Operating Officer of CNB.
-37-
<PAGE>
COMPLIANCE WITH SECTION 16(A) OF THE SECURITIES EXCHANGE ACT OF 1934
The officer, directors, and certain beneficial owners of the Company's
outstanding securities are not subject to the reporting obligations set
forth in Section 16(a) of the Securities Exchange Act of 1934.
ITEM 10. EXECUTIVE COMPENSATION
The following table sets forth the compensation which the Company and
its subsidiaries paid to its executive officers for services rendered in the
fiscal years ended December 31, 1994, 1995 and 1996.
SUMMARY COMPENSATION TABLE
--------------------------
ANNUAL COMPENSATION
-------------------
NAME AND ALL OTHER
PRINCIPAL POSITION YEAR SALARY BONUS COMPENSATION
------------------ ---- ------- ------- ------------
George M. Apelian,
President and Chief 1994 $140,000 $12,000 (1)(2)(3)
Executive Officer 1995 $146,538 $15,000
1996 $167,187 $18,000
Eileen A. Salsano,
Executive Vice-President 1994 $ 86,885 $ 8,000 (4)(5)(6)
1995 $ 92,923 $10,000
1996 $101,346 $12,000
---------------
(1) CNB pays the premiums on a $400,000 term life insurance policy on
the life on Mr. Apelian. The policy is payable to Mr. Apelian's
designee. During 1996, the premium on this policy was $3,124.
(2) CNB has entered into an income continuance agreement with Mr.
Apelian under which CNB has agreed to pay Mr. Apelian's designee the
amount of $100,000 if Mr. Apelian should die while employed by CNB.
(3) CNB has entered into a keyman agreement with Mr. Apelian. Under this
agreement, CNB has agreed to purchase a life insurance policy on the
life of Mr. Apelian with a death benefit of $100,000. The policy is
owned by CNB and will be payable to CNB in the event that Mr.
Apelian dies while employed by CNB. CNB intends to use the proceeds
of this policy to make the payment described in Note (2). Upon any
termination of Mr. Apelian's employment with CNB, Mr. Apelian has
the right to purchase CNB's rights in the policy for $1.00. The
policy had a cash value of $40,659 and $49,582 on December 31, 1995
and December 31, 1996, respectively. During 1995 and 1996, CNB paid
premiums of $4,000 on this policy.
(4) CNB pays the premiums on a $300,000 term life insurance policy on
the life of Ms. Salsano. The policy is payable to Ms. Salsano's
designee. During 1996, the premium on this policy was $1,716.
(5) CNB has entered into an income continuance agreement with Ms.
Salsano under which CNB has agreed to pay Ms. Salsano's designee the
amount of $100,000 if Ms. Salsano should die while employed by CNB.
-38-
<PAGE>
(6) CNB has entered into a keyman agreement dated January 20, 1988 with
Ms. Salsano. Under this agreement, CNB has agreed to purchase a life
insurance policy on the life of Ms. Salsano with a death benefit of
$100,000. The policy is owned by CNB and will be payable to CNB in
the event that Ms. Salsano dies while employed by CNB. CNB will
utilize the proceeds to make the payment described in Note (5). Upon
any termination of Ms. Salsano's employment with CNB, Ms. Salsano
has the right to purchase CNB's rights in the policy for $1.00. The
policy had a cash value of $5,445 and $11,521 on December 31, 1995
and December 31, 1996, respectively. During 1995 and 1996, CNB paid
premiums of $3,000 on this policy.
FISCAL YEAR END OPTIONS
The following table sets forth information regarding stock options
for shares of Common Stock held by certain executive officers as of December
31, 1996 and 1995:
NUMBER OF SHARES VALUE OF
UNDERLYING UNEXERCISED UNEXERCISED IN THE
NAME OPTIONS MONEY OPTIONS
----------------- ---------------------- ------------------
George M. Apelian 6,400 (1) (2)
Eileen A. Salsano 2,114 (1) (2)
(1) All options are currently exercisable.
(2) On December 31, 1995, all options were exercisable at the price of
$15.37, representing the book value per share of the Common Stock as
of the end of the Company's fiscal year immediately preceding the
date of exercise. On January 18, 1995, the Board of Directors
granted an extension of three (3) additional years to exercise the
options at a fixed price of $12.00 per share which became effective
January 1, 1996.
EMPLOYMENT AGREEMENT WITH MR. APELIAN
In 1988, George Apelian and CNB entered into an agreement that
obligates CNB to employ Mr. Apelian for three years after any change in
control of CNB at an annual salary at least equal to the salary that Mr.
Apelian is receiving at the time of the change in control. In the event Mr.
Apelian's employment is not continued after the change in control, Mr.
Apelian is entitled to receive a severance payment equal to three years
salary.
COMPENSATION OF DIRECTORS
The directors of the Company receive $7,200 per year for serving as
directors of the Company and CNB, $15,600 per year for serving on the
loan/executive committee of CNB, and $1,800 per year for serving on the audit
committee of the Company and CNB. The chairman of the audit committee
receives an additional $4,200 per year. Total directors fees paid in 1996
were approximately $165,000. CNB also pays Mr. Fisher $300 per month for
certain advertising services.
-39-
<PAGE>
ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
BENEFICIAL OWNERSHIP OF MANAGEMENT
The following table sets forth, as of March 15, 1997, the number of
shares of Common Stock owned beneficially by each director and executive
officer of the Company, and all directors and executive officers of the
Company as a group.
<TABLE>
<CAPTION>
NUMBER OF SHARES PERCENT OF
NAME POSITIONS WITH THE COMPANY BENEFICIALLY OWNED CLASS
---- -------------------------- ------------------ ----------
<S> <C> <C> <C>
George M. Apelian Director and President 7,755(1) .6%
Dr. Julian J. Blitz Director 83,057(2) 6.6%
Joseph E. Carney, Jr. Director 33,013(3) 2.6%
Peter Carney Director 20,316(4) 1.6%
Dr. Thomas F. Carney Chairman of the Board 303,774(5) 24%
Harold Diamond Director 2,992(6) .2%
Morton M. Fisher Director 21,429(7) 1.7%
Richard Arn Kuci, Jr. Executive Vice President 4,426(8) .4%
C. Bernard Jacobs Director 26,026 2%
Thomas J. Langan Director 354 -
Milton Mamber Director 26,278(9) 2.1%
Dr. Morton Terry Director 99,151(10) 7.8%
Eileen A. Salsano Executive Vice President 3,414(11) .3%
All Executive Officers and 926,478(12) 72%
Directors as a Group
(12 persons)
<FN>
- - -------------
(1) This amount consists of 1,355 shares which Mr. Apelian owns jointly
with his wife and 6,400 shares which Mr. Apelian may purchase under
stock options which are currently exercisable.
(2) This amount consists of 48,274 shares which Dr. Blitz owns jointly
with his wife and 34,783 shares owned solely by his wife.
(3) This amount consists of 27,506 shares owned directly by Mr. Carney,
and 5,507 owned by a corporation in which Mr. Carney is a
shareholder and
-40-
<PAGE>
director. It does not include shares owned by Mr. Carney's other family
members.
(4) This amount consists of 19,362 shares owned directly by Mr. Carney,
and 954 owned as trustee for a family trust.
(5) This amount consists of 298,267 shares owned directly by Dr. Carney,
and 5,507 owned by a corporation in which Mr. Carney is a
shareholder and director. It does not include shares owned by other
members of his family.
(6) This amount consists of 629 shares owned jointly with Mr. Diamond's
wife, and 2,363 shares owned by a partnership of which Mr. Diamond
is a general partner.
(7) This amount consists of 21,429 shares owned jointly with Mr.
Fisher's wife.
(8) This amount consists of 2,800 shares which may be purchased by Mr.
Kuci pursuant to stock options which are currently exercisable, 600
shares owned by him directly and 1,026 shares that Mr. Kuci owns
jointly with his wife.
(9) This amount consists of 26,278 shares owned jointly with Mr.
Mamber's wife.
(10) This amount consists of 97,720 shares owned jointly with Dr. Terry's
wife and 1,431 shares owned by Dr. Terry's professional association
pension trust.
(11) This amount consists of 2,114 shares which Ms. Salsano may purchase
pursuant to stock options which are currently exercisable, and 1,300
shares which Ms. Salsano owns jointly with her husband.
(12) This amount includes 11,314 shares which may be purchased by
executive officers of the Company pursuant to options which are
currently exercisable.
</FN>
</TABLE>
-41-
<PAGE>
PRINCIPAL SHAREHOLDERS OF THE COMPANY
The following table sets forth, as of March 15, 1997, the
persons known by the Company to be beneficial owners of more than five
(5%) percent of the outstanding shares of Common Stock.
NAME AND ADDRESS OF NUMBER OF SHARES
BENEFICIAL OWNER BENEFICIALLY OWNED PERCENT OF CLASS
------------------- ------------------ ----------------
Dr. Julian J. Blitz 83,057(1) 6%
19707 Turnberry Way, Apt. 12J
North Miami Beach, FL 33180
Dr. Thomas F. Carney 303,774(2) 24%
801 N.E. 167th Street
North Miami Beach, FL 33162
Roz Kovens 76,234(3) 6%
9999 Collins Avenue, PH 1K
Bal Harbour, FL
33154
Dr. Morton Terry 99,151(4) 7%
20185 E. Country Club Drive,
Apt. 2104
Aventura, FL 33180
- - ---------------
(1) This amount consists of 48,274 owned jointly with Dr. Blitz' wife and
34,783 shares owned solely by his wife. It does not include 1,419
shares owned by Dr. Blitz' other family members.
(2) This amount consists of 298,267 shares owned directly by Dr. Carney,
and 5,507 owned by a corporation in which Dr. Carney is a shareholder
and director. It does not include shares owned by other members of his
family.
(3) This amount consists of 20,062 shares owned directly by Ms. Kovens, and
56,172 shares owned by the Estate of Cal Kovens, which is controlled by
Roz Kovens as personal representative.
(4) This amount consists of 97,720 shares owned jointly with Dr. Terry's
wife, and 1,431 shares owned by Dr. Terry's professional association
pension trust.
-42-
<PAGE>
ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
LENDING TRANSACTIONS
The Company, through its subsidiary CNB, has outstanding loans
to certain of its directors and executive officers, members of their
immediate families and companies and organizations in which a director
or executive officer is a principal officer, partner or shareholder.
These loans were made in the ordinary course of business, remain on
substantially the same terms, including interest rates and collateral,
as those prevailing at the time for comparable transactions with
unrelated persons, and did not involve (in the opinion of management)
more than the normal risk of collectibility or other unfavorable
features.
LEGAL SERVICES
Milton Mamber, a director of the Company and CNB, is a
shareholder in the law firm of Mamber, Savage and Singer, P.A. This firm
serves as general counsel to the Company and CNB. The Company and CNB
paid this firm $379,000 in legal fees in 1996, and $371,000 in 1995.
ACQUISITION OF CARNEY BANK
On January 12, 1996, the Company and CNB completed the
acquisition of Carney Bank. See "ItemCBusinessCAcquisition of Carney."
Dr. Thomas F. Carney is the Chairman of the Board and largest
shareholder of the Company. He was also a director and the largest
shareholder of Carney. In particular, prior to the consummation of the
Merger, he beneficially owned 21.4% of the outstanding common stock of
the Company and 31.8% of the outstanding common stock of Carney.
Additionally, his family (which includes his brothers, sons and a
grandchild) owned an additional 10% of the outstanding shares of the
Company and 7.5% of the outstanding common stock of Carney. He was also
the Chairman of the Board of a corporation which owned an additional 2%
of the outstanding common stock of the Company. Dr. Carney did not
participate in any meetings of the directors of the Company which
involved the consideration of the Merger, nor did he vote as a director
of the Company on the approval of the Merger Agreement.
EMPLOYMENT AGREEMENT WITH JAMES HEARON
In connection with the Merger, the Company and CNB agreed to
employ James Hearon, the former president of Carney, following the
consummation of the Merger. Under the employment agreement, Mr. Hearon
will be employed for a period of 30 months to perform the following
duties: (a) to develop and expand for CNB certain Carney loan programs;
(b) to develop and expand CNB's deposits from real property management
accounts; and (c) to make business development calls to corporate,
commercial and certain other customers located in Palm Beach County.
During the term of his employment, Mr. Hearon will receive an annual
salary of $100,000 per year and reimbursement of expenses. In addition,
he will receive the same benefits, perquisites and benefit programs that
are available to the other officers of CNB, including a life insurance
policy of at least $200,000, medical insurance, disability and accident
insurance and participation in CNB's 401(k) plan.
-43-
<PAGE>
CNB may terminate Mr. Hearon's employment at any time,
notwithstanding the initial 30-month period of the agreement. However,
if Mr. Hearon's employment is terminated within the first 18 months of
the agreement for any reason other than his death, disability or cause,
CNB is obligated to continue to provide Mr. Hearon his salary and
benefits for the balance of such 18 month period.
As part of the employment agreement, Mr. Hearon has agreed that
he will not own, control, manage, be employed by, consult or otherwise
participate in a business involved in banking or of any other activity
which is competitive with the services provided by CNB in Dade, Palm
Beach, Broward and Monroe Counties during the term of his employment and
for the period any payments are made to him under the agreement.
ITEM 13. EXHIBITS AND REPORTS ON FORM 10-KSB
(a) The exhibits set forth in the following Index of Exhibits
are files as a part of this report.
SEQUENTIAL
EXHIBIT NO. DESCRIPTION PAGE NO.
- - ----------- ----------- ----------
3.1 Bylaws of County Financial Corporation *
3.2 Article of Incorporation of County Financial Corporation *
10.1 Income Continuance Agreement dated January 20, 1988,
between George M. Apelian and CFC *
10.2 Keyman Agreement dated January 20, 1988, between
George M. Apelian and CFC *
10.3 Renewal Note dated March 29, 1990 for $1,500,000 in
favor of Life Insurance Company of Georgia *
10.4 Florida Mortgage and Security Agreement dated the 28th
day of December, 1989 between CNB and Southeast
Mortgage Company. *
10.6 Employment Agreement between County Financial
Corporation and James Hearon dated January 11, 1996 *
21.1 Subsidiaries of Registrant *
27 Financial Data Schedule *
*Each of the exhibits to this report on Form 10-KSB are
incorporated by reference from the Company's Registration Statement of
Form S-4 (File No. 33-97422) filed by the Company with the Securities
and Exchange Commission in connection with the acquisition of Carney
Bank. The Registration Statement was declared effective by the
Commission on November 29, 1995.
-44-
<PAGE>
(b) The Company did not file any reports on Form 8-K during the
last quarter of the 1996 fiscal year.
SIGNATURES
In accordance with Section 13 or 15(d) of the Exchange Act, the
registrant caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized in the City of North Miami Beach,
Florida, on April 15, 1997.
COUNTY FINANCIAL CORPORATION
By: /s/ GEORGE M. APELIAN
-------------------------
George M. Apelian, President
In accordance with the Exchange Act, this report has been signed below
by the following persons on behalf of the registrant and in the
capacities and on April 15, 1997.
SIGNATURES TITLE
----------------
/s/ GEORGE M. APELIAN
- - -------------------- President, Chief Executive Officer and Director
George M. Apelian (Principal Executive Officer)
/s/ EILEEN A. SALSANO
- - -------------------- Executive Vice President and Chief Operating Officer
Eileen A. Salsano (Principal Financial Officer and Principal
Accounting Officer)
/s/ DR. JULIAN J. BLITZ
- - -------------------- Director
Dr. Julian J. Blitz
- - -------------------- Director
Joseph E. Carney
/s/ DR. JOSEPH E. CARNEY
- - -------------------- Director
Dr. Thomas F. Carney
- - -------------------- Director
Harold Diamond
- - -------------------- Director
Morton M. Fisher
- - -------------------- Director
C. Bernard Jacobs
- - -------------------- Director
Thomas Langan
/s/ MILTON MAMBER
- - -------------------- Director
Milton Mamber
/s/ DR. MORTON TERRY
- - -------------------- Director
Dr. Morton Terry
/s/ PETER CAREY
- - ------------------- Director
Peter Carey
-45-
<PAGE>
[DELOITTE & TOUCHE LLP LETTERHEAD]
INDEPENDENT AUDITORS' REPORT
To the Board of Directors of
County Financial Corporation:
We have audited the accompanying consolidated balance sheets of County Financial
Corporation and subsidiaries ("the Company"), as of December 31, 1996 and 1995,
and the related consolidated statements of income, stockholders' equity and
cash flows for the years then ended. These consolidated financial statements are
the responsibility of the Company's management. Our responsibility is to express
an opinion on these consolidated financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audits to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, such consolidated financial statements present fairly, in all
material respects, the financial position of the Company as of December 31,
1996 and 1995, and the results of its operations and its cash flows for the
years then ended in conformity with generally accepted accounting principles.
/s/ DELOITTE & TOUCHE LLP
---------------------
Deloitte & Touche LLP
February 21, 1997
-46-
<PAGE>
COUNTY FINANCIAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 1996 AND 1995 (IN THOUSANDS)
- - --------------------------------------------------------------------------------
1996 1995
-------- --------
ASSETS
EARNING ASSETS:
Loans $146,271 $139,285
Less: Unearned income (1) (8)
Allowance for loan losses (2,524) (3,040)
-------- --------
Total loans, net 143,746 136,237
Securities available for sale 56,460 58,719
Securities held to maturity 1,635
Federal funds sold 19,585 12,136
-------- --------
Total earning assets 219,791 208,727
CASH AND DUE FROM BANKS 15,617 14,732
PREMISES AND EQUIPMENT, Net 4,186 4,369
OTHER REAL ESTATE OWNED, Net 3,338 3,329
INTEREST RECEIVABLE 1,450 1,865
OTHER ASSETS 1,564 1,000
-------- --------
TOTAL $245,946 $234,022
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
INTEREST-BEARING LIABILITIES:
Interest-bearing deposits:
Savings accounts $ 24,360 $ 23,479
Interest checking, interest checking plus
and moneyfund accounts 71,288 74,247
Certificates of deposit, $100,000 and over 14,437 12,928
Other certificates of deposit 38,275 40,904
-------- --------
Total interest-bearing deposits 148,360 151,558
Securities sold under repurchase agreements 4,750 1,777
Other borrowings 850 950
-------- --------
Total interest-bearing liabilities 153,960 154,285
Demand deposits 64,950 57,687
-------- --------
Total 218,910 211,972
Interest payable 775 730
Other liabilities 5,122 833
-------- --------
Total liabilities 224,807 213,535
-------- --------
COMMITMENTS AND CONTINGENCIES (Notes 7,9)
STOCKHOLDERS' EQUITY:
Common stock, $0.01 par value; 1,500,000
shares authorized; 1,264,328 issued and
outstanding 13 13
Capital surplus 13,562 13,555
Retained earnings 7,621 6,697
Net unrealized (loss) gain on securities
available for sale, net of taxes (57) 222
-------- --------
Total stockholders' equity 21,139 20,487
-------- --------
TOTAL $245,946 $234,022
======== ========
See accompanying notes to consolidated financial statements.
-47-
<PAGE>
COUNTY FINANCIAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
YEARS ENDED DECEMBER 31, 1996 AND 1995 (IN THOUSANDS, EXCEPT PER SHARE DATA)
- - --------------------------------------------------------------------------------
1996 1995
---------- ----------
INTEREST INCOME:
Interest and fees on loans $ 14,004 $ 13,822
Interest on investment securities:
Taxable 3,565 3,472
Non-taxable 15 93
Interest on federal funds sold 548 552
---------- ----------
Total interest income 18,132 17,939
---------- ----------
INTEREST EXPENSE:
Savings 679 754
Interest checking, interest checking
plus and moneyfund accounts 1,690 1,949
Certificates of deposit, $100,000 and over 725 639
Other certificates of deposit 2,000 2,099
Interest on other borrowings 151 144
---------- ----------
Total interest expense 5,245 5,585
---------- ----------
NET INTEREST INCOME 12,887 12,354
PROVISION FOR LOAN LOSSES 24 259
---------- ----------
Net interest income after provision
for loan losses 12,863 12,095
---------- ----------
NON-INTEREST OPERATING INCOME:
Service charges on deposit accounts 2,425 2,526
Net loss on sale of investment securities (11) (12)
Other 369 411
---------- ----------
Total non-interest operating income 2,783 2,925
---------- ----------
NON-INTEREST OPERATING EXPENSE:
Personnel expense 5,541 5,693
Occupancy expense, net 1,604 1,689
Premises and equipment expense 596 899
Other 3,981 3,914
Provision for litigation settlement 3,000
---------- ----------
Total non-interest operating expense 14,722 12,195
---------- ----------
INCOME BEFORE INCOME TAXES 924 2,825
PROVISION FOR INCOME TAXES 980
---------- ----------
NET INCOME $ 924 $ 1,845
========== ==========
NET INCOME PER COMMON AND COMMON
EQUIVALENT SHARE $ 0.73 $ 1.46
========== ==========
AVERAGE SHARES OUTSTANDING 1,268,316 1,263,617
========== ==========
See accompanying notes to consolidated financial statements.
-48-
<PAGE>
COUNTY FINANCIAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
YEARS ENDED DECEMBER 31, 1996 AND 1995 (IN THOUSANDS)
- - --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
NET
UNREALIZED
GAIN(LOSS)
ON SECURITIES
AVAILABLE FOR
COMMON CAPITAL RETAINED SALE, NET
STOCK SURPLUS EARNINGS OF TAXES TOTAL
------- ------- -------- ------------- --------
<S> <C> <C> <C> <C> <C>
BALANCE, DECEMBER 31, 1994 (as reported) $ 10 $ 4,679 $10,362 $15,051
Merger with Carney Bank 3 8,876 (5,510) 3,369
------ ------- ------- -------
BALANCE, DECEMBER 31, 1994 (as restated) 13 13,555 4,852 18,420
Net change in unrealized gain on
securities available for sale $ 222 222
Net income 1,845 1,845
------ ------- ------- ----- -------
BALANCE, DECEMBER 31,1995 13 13,555 6,697 222 20,487
Net change in unrealized gain on
securities available for sale (279) (279)
Employee stock options exercised 7 7
Net income 924 924
------ ------- ------- ----- -------
BALANCE, DECEMBER 31, 1996 $ 13 $13,562 $ 7,621 $ (57) $21,139
====== ======= ======= ===== ========
</TABLE>
See accompanying notes to consolidated financial statements.
-49-
<PAGE>
COUNTY FINANCIAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31, 1996 AND 1995 (IN THOUSANDS)
- - --------------------------------------------------------------------------------
1996 1995
-------- -------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 924 $ 1,845
Adjustments to reconcile net income to net
cash provided by operating activities:
Provision for loan losses 24 259
Provision for litigation settlement 3,000
Depreciation and amortization 687 800
Deferred income tax benefit (486) (27)
Net loss on sale of assets 11 36
Net loss on sale of investment securities 11 12
Provision for other real estate owned losses 50 102
Decrease (increase) in interest receivable 415 (1)
Decrease (increase) in other assets 59 (8)
Increase in interest payable 45 213
Increase (decrease) in other liabilities 1,289 (229)
-------- --------
Net cash provided by operating activities 6,029 3,002
-------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from sales and maturities of
securities held to maturity 18,306
Proceeds from sales and maturities of
securities available for sale 31,117 12,016
Purchase of securities held to maturity (7,990)
Purchase of securities available for sale (27,692) (12,837)
Increase in loans, net (7,659) (4,526)
Proceeds from sale of other real estate owned 56 1,457
Purchases of premises and equipment, net (406) (661)
-------- --------
Net cash (used in) provided
by investing activities (4,584) 5,765
-------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Increase (decrease) in savings 881 (5,144)
Decrease in interest checking,
interest checking plus and moneyfund (2,959) (3,329)
(Decrease) increase in certificates of deposit (1,120) 9,101
Increase in securities sold
under repurchase agreements 2,973 1,407
Repayment of long-term borrowings (100) (129)
Increase (decrease) in demand deposits 7,263 (1,122)
Proceeds from employee stock options exercised 7
Payments to dissenting shareholders from merger (56)
-------- --------
Net cash provided by financing activities 6,889 784
-------- --------
NET INCREASE IN CASH AND CASH EQUIVALENTS 8,334 9,551
CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR 26,868 17,317
-------- --------
CASH AND CASH EQUIVALENTS AT END OF YEAR $ 35,202 $ 26,868
======== ========
SUPPLEMENTAL DISCLOSURE OF CASH FLOWS INFORMATION:
Cash paid during the year for: $ 4,865 $ 5,398
======== ========
Interest $ 1,187
========
Income taxes
SUPPLEMENTAL SCHEDULE ON NON-CASH INVESTING ACTIVITIES:
Other real estate owned received through foreclosure $ 233 $ 1,113
======== ========
See accompanying notes to consolidated financial statements.
-50-
<PAGE>
COUNTY FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1996 AND 1995
- - --------------------------------------------------------------------------------
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
County Financial Corporation ("C.F.C."), a one Bank holding company, its
wholly-owned banking subsidiary, County National Bank of South Florida (the
"Bank") and its inactive wholly-owned non-banking subsidiary, Carnco
Corporation ("Carnco") are primarily engaged in the traditional banking
practices of gathering deposits and investing in loans and investment
securities. The Bank offers these services through its main office and eleven
branches located in Dade, Broward and Palm Beach counties, Florida.
Substantially all of the Bank's activities are conducted with customers in
South Florida.
MERGER - On January 12, 1996, Carney Bank was merged with and into the Bank
with the Bank being the surviving corporation. The merger was made pursuant
to an Agreement and Plan of Reorganization and related Agreement to Merge
(the "Merger Agreement"), dated May 10, 1995. Under the terms of the Merger
Agreement, the Company issued approximately 285,000 shares of its common
stock in exchange for all outstanding common stock, stock options, and
warrants of Carney Bank. The merger was accounted for as a pooling of
interests and, accordingly, the consolidated financial statements for periods
prior to the merger have been restated to include the financial position and
results of operations of Carney Bank.
The following summarizes amounts previously reported by C.F.C. and Carney
Bank prior to the merger:
YEAR ENDED
DECEMBER 31,
1995
------------
Net interest income:
C.F.C $ 9,794
Carney Bank 2,560
--------
Combined $ 12,354
========
Net income:
C.F.C $ 1,620
Carney Bank 225
--------
Combined $ 1,845
========
Net income per common and common equivalent share:
C.F.C $ 1.28
Carney Bank 0.18
--------
Combined $ 1.46
========
The accounting and reporting policies and practices of C.F.C., the Bank, and
Carnco conform to the practices in the banking industry and generally
accepted accounting principles. The following is a description of the more
significant accounting policies.
-51-
<PAGE>
USE OF ESTIMATES - The preparation of financial statements in conformity with
generally accepted accounting principles requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities as the date
of the financial statements and the reported amounts of revenues and expense
during the reporting period. Actual results could differ from those
estimates.
CONSOLIDATION - The consolidated financial statements include the accounts of
C.F.C., the Bank, and Carnco (inactive). All significant intercompany
transactions and balances have been eliminated in consolidation.
STATEMENT OF CASH FLOWS - For purposes of reporting cash flows, cash and cash
equivalents includes cash on hand, amounts due from banks and federal funds
sold. Generally, federal funds are sold for one-day periods.
LOANS AND ALLOWANCE FOR LOAN LOSSES - Loans are stated at principal amounts
outstanding. Interest on loans is accrued at the applicable interest rate on
the principal amount outstanding.
The allowance for loan losses is established by charges to income through the
provision for loan losses. Loans or portions thereof which are considered by
management to be uncollectible are charged to the allowance and recoveries of
amounts previously charged off are credited to the allowance. The allowance
represents the amount which, in management's judgment, is adequate to absorb
charge-offs of existing loans which may become uncollectible. The adequacy of
the allowance is determined by management's continuing evaluation of the loan
portfolio in light of past loan loss experience, regulatory examinations,
present economic conditions and other factors considered relevant by
management. Anticipated changes in economic factors which may influence the
level of the allowance are considered in the evaluation by management when
the likelihood of the changes can be reasonably determined. While management
uses the best information available to make such evaluations, future
adjustments to the allowance may be necessary as a result of future economic
and other conditions that may be beyond management's control.
On January 1, 1995, C.F.C. adopted Financial Accounting Standards Board
Statements of Financial Accounting Standards ("SFAS") No. 114, ACCOUNTING BY
CREDITORS FOR IMPAIRMENT OF A LOAN, and SFAS No. 118, ACCOUNTING BY CREDITORS
FOR IMPAIRMENT OF A LOAN - RECOGNITION AND DISCLOSURES, an amendment of SFAS
No. 114. These standards address the accounting for impairment of certain
loans when it is probable that all amounts due pursuant to the contractual
terms of the loan will not be collected. Adoption of these standards entailed
the identification of commercial, industrial, real estate commercial and real
estate construction loans which are considered impaired under the provisions
of SFAS No. 114.
Under the provisions of these standards, individually identified impaired
loans are measured based on the present value of payments expected to be
received, using the historical effective loan rate as the discount rate.
Alternatively, measurement may also be based on observable market prices or
for loans that are solely dependent on the collateral for repayment,
measurement may be based on the fair value of the collateral. Loans that are
to be foreclosed are measured based on the fair value of the collateral. If
the recorded investment in the impaired loan exceeds the measure of fair
value, a valuation allowance is required as a component of the allowance for
loan losses. Changes to the valuation allowance are recorded as a component
of the provision for loan losses.
Commercial loans that are past due 90 days or more as to principal or
interest or where reasonable doubt exists as to timely collection, including
loans that are individually identified as being impaired under SFAS No. 114,
are generally classified as nonperforming loans unless based on the
evaluation of management the loan is well secured and in the process of
collection.
-52-
<PAGE>
Interest collections on nonperforming loans, including impaired loans, for
which the ultimate collectibility of principal and interest is uncertain are
applied as reductions in book value. Otherwise, such collections are credited
to income when received.
Installment loans that are past due 90 days or more are not generally
classified as nonperforming assets. Generally, installment loans are
liquidated or charged-off soon after becoming 90 days past due. Income is
generally recognized on past due installment loans until the loan is
charged-off.
At December 31, 1996 and 1995, the recorded investment in loans that are
considered impaired under SFAS No. 114 was approximately $2,449,000 and
$1,780,000, respectively. These impaired loans required a SFAS No. 114
allowance for loan losses of approximately $364,000 and $368,000,
respectively. The average recorded investment in impaired loans during the
years December 31, 1996 and 1995 was approximately $1,908,000 and $909,000,
respectively. For the years ended December 31, 1996 and 1995, the Bank
recognized interest income on these impaired loans of approximately $166,000
and $153,000, respectively.
LOAN FEES - Loan origination and commitment fees and costs are deferred and
recognized as a yield adjustment.
INVESTMENT SECURITIES - Investment securities are accounted for under
Statement of Financial Accounting Standards ("SFAS") No. 115, ACCOUNTING FOR
CERTAIN INVESTMENTS IN DEBT AND EQUITY SECURITIES. Under SFAS No. 115,
investment securities must be classified and accounted for under the
following conditions:
TRADING ACCOUNT SECURITIES - Trading account securities are held in
anticipation of short-term sales or market movements. Trading account
securities are stated at fair value. Gains or losses on the sale of
trading account securities, as well as unrealized fair value adjustments,
are included in operating income. At December 31, 1996 and 1995, the Bank
held no trading account securities.
SECURITIES AVAILABLE FOR SALE - Securities to be held for unspecified
periods of time including securities that management intends to use as
part of its asset/liability strategy, or that may be sold in response to
changes in interest rates, changes in prepayment risk, or other similar
factors are classified as available for sale and are carried at fair
value. Unrealized gains or losses are reported as a net amount in a
separate component of stockholders' equity until realized.
SECURITIES HELD TO MATURITY - Securities that management has a positive
intent and the ability to hold to maturity are carried at cost, adjusted
for amortization of premiums and accretions of discounts over the life of
the securities using a method which approximates the level yield method.
At December 31, 1996, the Bank held no securities classified as
securities held to maturity.
OTHER REAL ESTATE OWNED - Real estate acquired through actual foreclosure is
recorded at the fair value of the property. Subsequently, the property is
carried at the lower of cost as determined above or fair value less disposal
cost.
Costs relating to the development and improvement of other real estate owned
are capitalized, whereas those relating to holding the property are charged
to expense in the period incurred.
The amount the Bank will ultimately recover from other real estate owned
could differ from the amounts used in arriving at the net carrying value of
the property due to future market factors beyond the Bank's control.
Allowance for losses on other real estate owned were approximately $283,000
and $233,000 at December 31, 1996 and 1995.
-53-
<PAGE>
PREMISES AND EQUIPMENT - Bank premises and equipment are stated at cost, less
accumulated depreciation and amortization. Depreciation is computed by the
straight-line method over the estimated useful lives of the related assets.
Leasehold improvements are amortized by the straight-line method over the
remaining term of the applicable leases or their useful lives, whichever is
shorter. Maintenance and repairs are charged to operating expenses as
incurred; improvements and betterments are capitalized. When items are
retired or otherwise disposed of, the related costs and accumulated
depreciation are removed from the accounts and any resulting gains or losses
are credited or charged to operating income.
INCOME TAXES - In accordance with SFAS No. 109, ACCOUNTING FOR INCOME TAXES,
the Bank provides for deferred taxes under the liability method. Under such
method, deferred taxes are adjusted for tax rate changes as they occur.
Deferred income tax assets and liabilities are computed annually for
differences between the financial statements and tax bases of assets and
liabilities that will result in taxable or deductible amounts in the future
based on enacted tax laws and rates applicable to the periods in which the
differences are expected to affect taxable income. Valuation allowances are
established when necessary to reduce deferred tax assets to the amount
expected to be realized. Provision for income taxes is the tax payable or
refundable for the period plus or minus the change during the period in
deferred tax assets and liabilities.
STOCK-BASED COMPENSATION - SFAS No. 123, ACCOUNTING FOR STOCK-BASED
COMPENSATION, encourages, but does not require, companies to record
compensation cost for stock-based employee compensation plans at fair value.
C.F.C. has chosen to continue to account for stock-based compensation to
employees using the intrinsic value method as prescribed by Accounting
Principles Board Opinion ("APB") No. 25, ACCOUNTING FOR STOCK ISSUED TO
EMPLOYEES, and related interpretations. Accordingly, compensation cost for
stock options issued to employees are measured as the excess, if any, of the
fair value of C.F.C.'s stock at the date of grant over the amount an employee
must pay for the stock.
RECLASSIFICATIONS - Formats and certain amounts in the 1995 consolidated
financial statements have been reclassified to conform to the 1996
presentation.
NEW ACCOUNTING PRONOUNCEMENT - In June 1996, the Financial Accounting
Standards Board ("FASB") issued SFAS No. 125, ACCOUNTING FOR TRANSFERS AND
SERVICING OF FINANCIAL ASSETS AND EXTINGUISHMENTS OF LIABILITIES. SFAS No.
125 provides accounting and reporting standards for transfers and servicing
of financial assets and extinguishments of liabilities. These standards are
based on consistent application of a FINANCIAL-COMPONENTS APPROACH that
focuses on control. Under that approach, after a transfer of financial
assets, an entity recognizes the financial and servicing assets it controls
and the liabilities it has incurred, derecognizes financial assets when
control has been surrendered, and derecognizes liabilities when extinguished.
SFAS No. 125 also provides consistent standards for distinguishing transfers
of financial assets that are sales from transfers that are secured
borrowings. SFAS No. 125 is effective for transfers and servicing of
financial assets and extinguishments of liabilities occurring after December
31, 1996, and is to be applied prospectively. C.F.C. is in the process of
evaluating the impact of SFAS No. 125.
-54-
<PAGE>
2. LOANS OUTSTANDING AND LOANS TO RELATED PARTIES
The distribution of loans outstanding, by type, is as follows (in thousands):
1996 1995
-------- --------
Real estate loans $110,094 $ 97,455
Commercial and industrial loans 34,392 39,379
Instalment loans 1,572 2,344
Overdrafts 213 107
-------- --------
Total $146,271 $139,285
======== ========
Substantially all of the Bank's loan activity is with borrowers located
within South Florida. A substantial portion of the Bank's real estate loan
portfolio is secured by various types of commercial real estate and land. A
concentration of the Bank's commercial and industrial loans are to companies
and individuals in the service and trade-related industries, with
approximately 6% of these being unsecured. The collectibility of these loans
is dependent to a large degree on the economic conditions within South
Florida and these industries.
Loans on which the accrual of interest has been discontinued amounted to
$2,670,000 and $1,492,000 at December 31, 1996 and 1995, respectively. The
unrecorded related interest on loans classified as non-accrual for the years
ended December 31, 1996 and 1995 was $285,000 and $36,000, respectively.
There are no commitments to lend additional funds to these borrowers.
Included in loans at December 31, 1996 and 1995 are approximately $551,000
and $1,270,000, respectively, in loans to executive officers, directors,
principal shareholders and their affiliates of C.F.C. and the Bank. In
addition, legal fees totaling $379,000 and $371,000 for the years ended 1996
and 1995, respectively, were paid to the Bank's law firm, in which the
principal owner is a director and shareholder of C.F.C.
3. ALLOWANCE FOR LOAN LOSSES
Transactions in the allowance for loan losses for the years ended December
31, 1996 and 1995 are as follows (in thousands):
1996 1995
------ ------
Balance, beginning of period $3,040 $2,791
Provision charged to operations 24 259
Loan recoveries 221 180
Loan charge-offs (761) (190)
------ ------
Balance, end of period $2,524 $3,040
====== ======
-55-
<PAGE>
4. INVESTMENT SECURITIES
The amortized cost and approximate fair values of investment securities at
December 31, 1996 and 1995 are as follows (in thousands):
1996
------------------------------------
AMORTIZED GROSS UNREALIZED FAIR
COST GAINS LOSSES VALUE
--------- ----- ---------- ------
AVAILABLE FOR SALE:
U.S. Treasury securities $32,553 $125 $ 76 $32,602
U.S. Government agencies 23,378 73 213 23,238
Municipals 95 95
Other 525 525
------- ---- ---- -------
Total $56,551 $198 $289 $56,460
======= ==== ==== =======
1995
------------------------------------
AMORTIZED GROSS UNREALIZED FAIR
COST GAINS LOSSES VALUE
--------- ----- ---------- ------
AVAILABLE FOR SALE:
U.S. Treasury securities $41,278 $346 $70 $41,554
U.S. Government agencies 14,654 74 17 14,711
Municipals 2,186 20 9 2,197
Other 257 257
------- ---- --- -------
Total $58,375 $440 $96 $58,719
======= ==== === =======
1995
------------------------------------
AMORTIZED GROSS UNREALIZED FAIR
COST GAINS LOSSES VALUE
--------- ----- ---------- ------
HELD TO MATURITY:
U.S. Government agencies $ 938 $14 $ 4 $ 948
Municipals 95 2 97
Other 602 103 499
------ --- ---- ------
Total $1,635 $16 $107 $1,544
====== === ==== ======
In December 1995, the Bank transferred approximately $51,702,000 of
securities held to maturity with net unrealized holding gains of
approximately $277,000 to securities available for sale. This transfer was a
result of the Bank adopting the provisions of FASB's Special Report, A GUIDE
TO IMPLEMENTATION OF STATEMENT 115 ON ACCOUNTING FOR CERTAIN INVESTMENTS IN
DEBT AND EQUITY SECURITIES - QUESTIONS AND ANSWERS, issued in November 1995.
In addition, in January 1996, the Bank transferred approximately $1,635,000
of securities held to maturity with net unrealized holding losses of
approximately $91,000 to securities available for sale. The transfer was a
result of the merger with Carney Bank as discussed in Note 1.
U.S. Government agencies at December 31, 1996 and 1995 are GNMA (including
FNMA and FHLMC in 1995) mortgage-backed securities and U.S. Government
sponsored agency securities.
At December 31, 1996 and 1995, investment securities with an approximate book
value of $13,739,000 and $13,239,000, respectively, were pledged as
collateral for repurchase agreements, letters of credit, public and
bankruptcy deposits, federal funds purchased and U.S. Treasury tax and loan
deposits as required by law.
-56-
<PAGE>
As of December 31, 1996, the amortized cost and fair value of investment
securities, by contractual maturity, was as follows (in thousands):
AMORTIZED FAIR
COST VALUE
--------- -------
Within one year $23,672 $23,730
One to five years 30,845 30,701
Five to ten years 1,509 1,504
Over ten years 525 525
------- -------
Total $56,551 $56,460
======= =======
Proceeds from the sales of securities available for sale for the year ended
December 31, 1996 were $14,346,000. Proceeds from the sales of securities
held to maturity for the year ended December 31, 1995 were approximately
$3,990,000. For the years ended December 31, 1996 and 1995, there were gross
losses of $34,000 and $12,000, respectively, and for the year ended December
31, 1996, there were gross gains of $23,000 from sales of these securities.
There were no gross gains in 1995. All securities held to maturity sold were
within three months of their respective maturity date.
5. CASH AND DUE FROM BANKS
Included in cash and due from banks are required federal reserves of
approximately $6,351,000 and $5,506,000 at December 31, 1996 and 1995,
respectively. The required reserves are computed by applying prescribed
ratios to the various classes of average deposit balances. These funds are
held in the form of cash on hand and balances maintained directly with the
Federal Reserve Bank.
6. PREMISES AND EQUIPMENT
Bank premises and equipment are summarized as follows (in thousands):
1996 1995
------- -------
Land $ 925 $ 925
Bank building and improvement 3,631 3,564
Furniture and equipment 5,893 5,632
Leasehold improvements 1,733 1,709
------- -------
Total 12,182 11,830
Less accumulated depreciation and amortization (7,996) (7,461)
------- -------
Total $ 4,186 $ 4,369
======= =======
As of December 31, 1996 and 1995, certain land, building and improvements
with an approximate net book value of $1,258,000 and $1,325,000,
respectively, have been pledged as collateral for certain mortgages (see Note
8).
Depreciation and amortization expense related to premises and equipment for
the years ended December 31, 1996 and 1995 was $589,000 and $682,000,
respectively.
-57-
<PAGE>
7. LEASE AND SUBLEASE COMMITMENTS
The Bank leases certain premises and equipment under various operating lease
agreements. Certain lease agreements provide for renewals and purchase
options and rental escalations based upon the consumer price index, at
specific intervals. Substantially all leases provide that the Bank pay
executory costs such as insurance, maintenance, and taxes applicable to the
lease properties.
As of December 31, 1996, future minimum lease payments for all non-cancelable
operating leases with initial or remaining terms of more than one year are as
follows (in thousands):
DECEMBER 31,
1996
------------
1997 $1,190
1998 1,232
1999 915
2000 745
2001 580
2002 and thereafter 1,423
------
Total $6,085
======
Lease expense amounted to $1,022,000 and $1,016,000 for the years ended
December 31, 1996 and 1995, respectively.
As of December 31, 1996, future minimum lease and sublease rental income for
all non-cancelable leases and subleases with initial or remaining terms of
more than one year are as follows (in thousands):
DECEMBER 31,
1996
------------
1997 $175
1998 82
1999 51
2000 10
----
Total $318
====
Sublease and rental income for the years ended December 31, 1996 and 1995
amounted to $178,000 and $173,000, respectively.
8. OTHER BORROWINGS
In March 1990, the Bank obtained permanent financing of $1,500,000 in the
form of a 15-year first mortgage loan with an unaffiliated financial
institution, at an interest rate of ten percent (10%) payable monthly and
with quarterly principal reductions of $25,000. The mortgage loan is
collateralized by certain Bank premises and contains certain prepayment
restrictions. The proceeds from this borrowing were used to pay off the
C.F.C. long-term credit agreement dated April 1985 and amended in 1989.
Interest expenses on long-term borrowings for the years ended December 31,
1996 and 1995 amounted to $89,000 and $99,000, respectively.
Securities sold under repurchase agreements generally mature within one day
from the transaction date.
-58-
<PAGE>
9. COMMITMENTS AND CONTINGENCIES
In the normal course of business, the Bank utilizes various financial
instruments with off-balance sheet risk to meet the financing needs of its
customers. These off-balance sheet activities include commitments to fund
loans and to extend letters of credit. The credit and market risks associated
with these instruments are generally managed in conjunction with the Bank's
balance sheet activities and are subject to normal credit policies and
monitoring procedures. The Bank's exposure to loss is represented by the
contractual amount of the commitments. Commitments to fund loans and standby
letters of credit amounted to approximately $32,123,000 and $28,207,000 as of
December 31, 1996 and 1995. Management does not anticipate any significant
losses as a result of these transactions.
The Bank was a party to several legal proceedings arising out of the alleged
failure due to fraud of the food "diverting" business owned and operated by
former deposit customers of the Bank, Premium Sales Corporation, Plaza
Trading Corporation, and certain of their affiliates and associates (the
"Premium Group"). These proceedings had been brought by the Chapter 11
trustee for certain members of the Premium Group and others as class actions
on behalf of investors in the Premium Group. On October 9, 1996, the Bank
reached a settlement in the case and agreed to pay $3,000,000 without any
admission of fault. Such amount has been accrued as of December 31, 1996 and
is included in other liabilities in the accompanying consolidated balance
sheet.
10. STOCK OPTION PLAN
C.F.C. maintains an Employee Stock Option Plan (the "Plan") whereby 25,000
shares of C.F.C.'s common stock, which consists of authorized but previously
unissued common stock, may be issued to certain key management employees
pursuant to options granted under the Plan. The option price is the book
value per share as of the end of C.F.C.'s fiscal year immediately preceding
the date of exercise. Options are exercisable after one year and up to ten
years after the date of grant. In July 1985, C.F.C. granted the first options
of 18,200 shares which became exercisable during 1986. On January 18, 1995,
the Board of Directors granted an extension of three (3) additional years to
exercise the options at a fixed price of $12.00 per share which become
effective January 1, 1996.
During 1996, 5,400 stock options were granted, and 700 shares were exercised.
During 1995, no stock options were granted and no shares were exercised. At
December 31, 1996 and 1995, 21,064 and 16,364 options were outstanding and
exercisable at an option price of $12.00 and $15.37, respectively.
The Company applies APB No. 25 and related interpretations in accounting for
its stock options plan to employees as described in Note 1. Accordingly, no
compensation expense has been recognized in the year ended December 31, 1996,
related to the granting of options during the current year. Compensation
costs would have been increased by approximately $34,000 in 1996 had the fair
value of stock options granted been recognized as compensation expense as
prescribed by SFAS No. 123. The fair value of the stock option at the date of
grant were estimated using the minimum value method prescribed by SFAS No.
123.
-59-
<PAGE>
11. INCOME TAXES
The consolidated provision for income taxes is as follows (in thousands):
1996 1995
------ ------
Federal:
Current $ 456 $ 903
Deferred (456) (25)
------ ------
Total - 878
------ ------
State:
Current 30 104
Deferred (30) (2)
------ ------
Total - 102
------ ------
Total $ - $ 980
====== ======
Deferred income taxes are provided for the temporary differences between
financial reporting basis and tax basis of the Company's assets and
liabilities under SFAS No. 109. Temporary differences are as follows (in
thousands):
1996 1995
DEFERRED TAX DEFERRED TAX
---------------------------------------
ASSET LIABILITY ASSET LIABILITY
------- --------- ------- ---------
Net operating loss $ 1,027 $ (53)
Securities available for sale $ 34 $ - (122)
Depreciation 123 159
Deferred loan fees 323 217
Other real estate owned 104 251
Provision for litigation settlement 1,186
Other 290 242
------- ------ ------- --------
Total 2,060 - 1,896 (175)
Less valuation allowance (1,078) - (1,381) -
------- ------ ------- --------
Total 982 $ - 515 $ (175)
------- ====== ------- ========
Net deferred tax asset $ 982 $ 340
======= =======
A reconciliation of the income tax provision to the amount obtained by
applying the effective federal tax rates is as follows (in thousands):
1996 1995
----- ----
Income tax at statutory rate $ 314 $960
Tax-exempt interest, net of related expenses (5) (31)
State taxes net of benefit 67
Change in valuation allowance (303)
Other (6) (16)
----- ----
Total taxes $ - $980
===== ====
-60-
<PAGE>
12. "401(K)" SAVINGS PLAN
The Bank maintains a contributory "401(k)" savings plan for substantially all
of its employees. Employees are eligible to begin participating in the plan
after one year of active employment. Employees participating in the plan may
contribute from one to fifteen percent of their gross wages effective January
1, 1996. During 1995, employee contributions of up to five percent of their
gross wages were matched by a contribution by the Bank of approximately fifty
percent of the employees contribution. Starting July 1, 1996, the first one
percent of the employee contribution has been matched by a Bank's
contribution of one hundred percent of the employees contribution. The Bank
will contribute fifty percent of employee contribution for contributions
between two and six percent of the employee gross wages.
The Bank's contribution to the "401(k)" savings plan for the years ended
December 31, 1996 and 1995 were $101,000 and $78,000, respectively.
Participants vest in the plan funds contributed by the Bank at a cumulative
rate of 25% per year of active service after initial participation in the
plan. Funds contributed by participants are 100% vested.
13. REGULATORY MATTERS
C.F.C. and the Bank are subject to various regulatory capital requirements
administered by the federal banking agencies. Failure to meet minimum capital
requirements can initiate certain mandatory and possibly additional
discretionary actions by regulators that, if undertaken, could have a direct
material effect on C.F.C.'s consolidated financial statements. Under capital
adequacy guidelines, C.F.C. and the Bank must meet specific capital
guidelines that involve quantitative measures of C.F.C.'s and the Bank's
assets, liabilities, and certain off-balance sheet items as calculated under
regulatory accounting practices. C.F.C.'s and the Bank's capital amounts and
the Bank's classification under the regulatory framework for prompt
corrective action are also subject to qualitative judgments by the regulators
about components, risk weightings, and other factors.
Quantitative measures established by regulation to ensure capital adequacy
require C.F.C. and the Bank to maintain minimum amounts and ratios (set forth
in the table below) of total and Tier I capital (as defined in the
regulations) to risk-weighted assets (as defined), and of Tier I capital (as
defined) to average assets (as defined). Management believes, as of December
31, 1996, that C.F.C. and the Bank meets all capital adequacy requirements to
which it is subject.
As of December 31, 1996, the most recent notification from the Office of the
Comptroller of the Currency categorized the Bank as well capitalized under
the regulatory framework for prompt corrective action. To be categorized as
well capitalized, the Bank must maintain minimum total risk-based, Tier I
risk-based, and Tier I leverage ratios as set forth in the table. There are
no conditions or events since that notification that management believes have
changed the institution's category.
C.F.C.'s consolidated and the Bank's actual capital amounts and ratios are
also presented in the table (in thousands):
-61-
<PAGE>
<TABLE>
<CAPTION>
TO BE CONSIDERED WELL
CAPITALIZED UNDER
FOR CAPITAL PROMPT CORRECTIVE
ACTUAL ADEQUACY PURPOSE ACTION PROVISIONS
---------------- ----------------- ---------------------
AMOUNT RATIO AMOUNT RATIO AMOUNT RATIO
------- ------ ------- ----- ---------- --------
<S> <C> <C> <C> <C> <C> <C>
AS OF DECEMBER 31, 1996:
C.F.C.
Total Capital (to Risk Weighted Assets) $23,283 14.0% $13,320 8.0%
======= ==== ======= ===
Tier I Capital (to Risk Weighted Assets) $21,196 12.7% $ 6,660 4.0% Not Applicable
======= ==== ======= ===
Tier I Capital (to Average Assets) $21,196 9.2% $ 9,241 4.0%
======= ==== ======= ===
BANK
Total Capital (to Risk Weighted Assets) $23,283 14.0% $13,320 8.0% $16,650 10.0%
======= ==== ======= === ======= ====
Tier I Capital (to Risk Weighted Assets) $21,196 12.7% $ 6,660 4.0% $ 9,990 6.0%
======= ==== ======= === ======= ====
Tier I Capital (to Average Assets) $21,196 9.2% $ 9,241 4.0% $11,551 5.0%
======= ==== ======= === ======= ====
AS OF DECEMBER 31, 1995:
C.F.C.
Total Capital (to Risk Weighted Assets) $22,232 14.2% $12,502 8.0%
======= ==== ======= ===
Tier I Capital (to Risk Weighted Assets) $20,265 13.0% $ 6,251 4.0% Not Applicable
======= ==== ======= ===
Tier I Capital (to Average Assets) $20,265 9.0% $ 9,025 4.0%
======= ==== ======= ===
BANK
Total Capital (to Risk Weighted Assets) $22,232 14.2% $12,502 8.0% $15,627 10.0%
======= ==== ======= === ======= ====
Tier I Capital (to Risk Weighted Assets) $20,265 13.0% $ 6,251 4.0% $ 9,376 6.0%
======= ==== ======= === ======= ====
Tier I Capital (to Average Assets) $20,265 69.0% $ 9,025 4.0% $11,282 5.0%
======= ==== ======= === ======= ====
</TABLE>
The Bank is subject to certain restrictions on the amount of dividends that
it may declare without prior regulatory approval. At December 31, 1996,
approximately $4,495,000 of retained earnings were available for dividend
declaration without prior regulatory approval. No dividends were declared
and/or paid during the years ended December 31, 1996 and 1995.
14. FAIR VALUE OF FINANCIAL INSTRUMENTS
The estimated fair value amounts have been determined by the Bank using
available market information and appropriate valuation methodologies.
However, considerable judgment is necessarily required to interpret market
data to develop the estimates of fair value. Accordingly, the estimates
presented herein are not necessarily indicative of the amounts the Bank could
realize in a current market exchange. The use of different market assumptions
and/or estimation methodologies may have a material effect on the estimated
fair value amounts.
-62-
<PAGE>
AT DECEMBER 31 (IN THOUSANDS)
----------------------------------------
1996 1995
-------------------- -------------------
CARRYING ESTIMATED CARRYING ESTIMATED
AMOUNT FAIR VALUE AMOUNT FAIR VALUE
-------- ---------- -------- ----------
Assets:
Cash and cash equivalents $ 35,202 $35,202 $ 26,868 $ 26,868
Securities available for sale 56,460 56,460 58,719 58,719
Securities held to maturity 1,635 1,544
Loans, net 143,746 135,813 136,237 132,261
Liabilities:
Savings, demand deposits and
other deposits 160,598 160,598 155,413 155,413
Time deposits 52,712 52,028 53,832 53,103
Securities sold under
repurchase agreements 4,750 4,750 1,777 1,777
Other borrowings 850 723 950 808
Off-balance-sheet unrealized gains:
Standby letters of credit 20 15
Unused commitments 23 20
The fair value of investment securities is based on quoted market prices
obtained from independent pricing services. The fair value of fixed-rate
loans, time deposits, and other financial instruments is estimated based on
the present value method using current entry-value rates applicable to each
category of such financial instruments with maturities more than one year. No
adjustment entry was made to the entry-value interest rates for changes in
credit of performing commercial loans for which there are no known credit
concerns. The fair value of nonperforming loans with a recorded book value of
$6,000,000 was not estimated because it is not practicable to reasonably
assess the credit adjustment that would be applied in the marketplace for
such loans. Demand deposits are shown at their face value. The fair value of
commitments is estimated using the fees currently charged to enter into
similar agreements, taking into account the remaining terms of the
agreements.
The fair value estimates presented herein are based on pertinent information
available to management. Although management is not aware of any factors that
would significantly affect the estimated fair value amounts, such amounts
have not been comprehensively revalued for purposes of these financial
statements since that date and, therefore, current estimates of fair value
may differ significantly from the amounts presented herein.
15. CONDENSED PARENT COMPANY ONLY FINANCIAL STATEMENTS
The following condensed balance sheets as of December 31, 1996 and 1995, and
condensed statements of income and cash flows for the years ended December
31, 1996 and 1995, for County Financial Corporation should be read in
conjunction with the consolidated financial statements and the notes herein:
-63-
<PAGE>
DECEMBER 31,
------------------
1996 1995
------- -------
PARENT COMPANY ONLY
BALANCE SHEETS
(IN THOUSANDS):
ASSETS:
Cash $ 31 $ 80
Investments in subsidiaries 21,108 20,407
------- -------
Total $21,139 $20,487
======= =======
STOCKHOLDERS' EQUITY:
Common stock $ 13 $ 13
Capital surplus 13,562 13,555
Retained earnings 7,621 6,697
Net unrealized gains on securities
available for sale (57) 222
------- -------
Total $21,139 $20,487
======= =======
YEAR ENDED
DECEMBER 31,
-----------------
1996 1995
----- -------
PARENT COMPANY ONLY
STATEMENTS OF INCOME
(IN THOUSANDS):
Equity in undistributed earnings of the
Bank and net income $ 924 $ 1,845
PARENT COMPANY ONLY
STATEMENTS OF CASH FLOWS
(IN THOUSANDS):
Operating activities:
Net income $ 924 $ 1,845
Less equity in earnings of the bank (924) (1,845)
----- -------
Net cash provided by operating activities - -
----- -------
Financing activities:
Proceeds from issuance of common stock 7
Payments to dissenting shareholders from merger (56)
----- -------
Net cash used in financing activities (49)
Net decrease in cash (49) -
Cash at beginning of year 80 80
----- -------
Cash at end of year $ 31 $ 80
===== =======
************
-64-
<PAGE>
INDEX TO EXHIBITS
EXHIBIT
NUMBER DESCRIPTION
- - ------ -----------
27 Financial Data Schedule
<TABLE> <S> <C>
<ARTICLE> 9
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-END> DEC-31-1996
<CASH> 15,617
<INT-BEARING-DEPOSITS> 148,360
<FED-FUNDS-SOLD> 19,585
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 56,460
<INVESTMENTS-CARRYING> 56,460
<INVESTMENTS-MARKET> 56,460
<LOANS> 146,271
<ALLOWANCE> 2,524
<TOTAL-ASSETS> 245,946
<DEPOSITS> 218,910
<SHORT-TERM> 775
<LIABILITIES-OTHER> 5,122
<LONG-TERM> 0
0
0
<COMMON> 13
<OTHER-SE> 21,126
<TOTAL-LIABILITIES-AND-EQUITY> 245,946
<INTEREST-LOAN> 14,004
<INTEREST-INVEST> 3,580
<INTEREST-OTHER> 548
<INTEREST-TOTAL> 18,132
<INTEREST-DEPOSIT> 5,094
<INTEREST-EXPENSE> 5,245
<INTEREST-INCOME-NET> 12,887
<LOAN-LOSSES> 24
<SECURITIES-GAINS> (11)
<EXPENSE-OTHER> 14,722
<INCOME-PRETAX> 924
<INCOME-PRE-EXTRAORDINARY> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 924
<EPS-PRIMARY> .73
<EPS-DILUTED> .73
<YIELD-ACTUAL> 6.11
<LOANS-NON> 2,670
<LOANS-PAST> 0
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 6,008
<ALLOWANCE-OPEN> 2,707
<CHARGE-OFFS> 761
<RECOVERIES> 221
<ALLOWANCE-CLOSE> 2,524
<ALLOWANCE-DOMESTIC> 2,524
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 1,644
</TABLE>
