================================================================================
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-K
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15 (D) OF THE SECURITIES EXCHANGE
ACT OF 1934 [FEE REQUIRED]
FOR THE FISCAL YEAR ENDED JUNE 30, 1997
OR
[ ] 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 NUMBER 0-18918
MAGNA BANCORP, INC.
(Exact name of registrant as specified in its charter)
DELAWARE 64-0793093
- ----------------------------------- -------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
100 WEST FRONT STREET, HATTIESBURG, MISSISSIPPI 39401
- ------------------------------------------------------ -------------------------
(Address of principal executive offices) Zip Code
Registrant's telephone number, including area code: (601) 545-4700
----------------
Securities Registered Pursuant to Section 12 (b) of the Act:
None
Securities Registered Pursuant to Section 12 (g) of the Act:
Common Stock, par value $.01 per share
(Title of class)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports) and (2) has been subject to such
requirements for the past 90 days. YES X . NO .
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [X]
The aggregate market value of the voting stock held by non-affiliates of
the registrant, computed by reference to the average of the high and low prices
of such stock on the Nasdaq Stock Market as of August 29, 1997, was $243.5
million. (The exclusion from such amount of the market value of the shares owned
by any person shall not be deemed an admission by the registrant that such
person is an affiliate of the registrant.)
As of August 29, 1997, there were issued and outstanding 13,754,266 shares
of the Registrant's Common Stock.
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<PAGE>
MAGNA BANCORP, INC..
INDEX
<TABLE>
<CAPTION>
Page
Numbers
PART I
<S> <C> <C>
Item 1. Business ................................................................ 3
Item 2. Properties .............................................................. 47
Item 3. Legal Proceedings ....................................................... 53
Item 4. Submission of Matters to a Vote of Security Holders ..................... 53
PART II
Item 5. Market for Registrant's Common Equity and Related Stockholder Matters ... 54
Item 6. Selected Financial Data ................................................. 55
Item 7. Management's Discussion and Analysis of Financial Condition and Results
of Operations ......................................................... 57
Item 8. Financial Statements and Supplementary Data ............................. 82
Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure .................................................. 129
PART III
Item 10. Directors and Executive Officers of the Registrant ...................... 130
Item 11. Executive Compensation .................................................. 133
Item 12. Security Ownership of Certain Beneficial Owners and Management .......... 137
Item 13. Certain Relationships and Related Transactions .......................... 138
PART IV
Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K ......... 139
2
<PAGE>
PART I
ITEM 1. BUSINESS
GENERAL
Magna Bancorp, Inc. (the "Company") is a Delaware corporation formed in
September 1990 for the purpose of becoming the holding company for Magnolia
Federal Bank for Savings ("Magnolia Federal" or the "Bank"). Magnolia Federal is
a federally chartered savings bank headquartered in Hattiesburg, Mississippi.
The Bank's deposits are insured up to the applicable limits by the Federal
Deposit Insurance Corporation (the "FDIC"). At June 30, 1997 the Company had
total consolidated assets of $1.4 billion, deposits of $915.4 million, and
stockholders' equity of $138.4 million (10.2% of total assets). References
herein to the Company refer to the Company and its subsidiaries on a
consolidated basis.
Magnolia Federal, the primary asset of the Company, is a community-oriented
financial institution offering a variety of financial services to meet the needs
of the communities it serves. The principal business of the Bank consists of
attracting retail deposits from the general public and investing those funds
primarily in one- to four-family residential mortgage loans (and, to a lesser
extent, multi-family, commercial real estate and consumer loans) in the Bank's
market area. The Bank originates a limited number of residential construction
loans, but only with the intention of providing permanent financing upon
completion of the construction. The Bank has also made a limited number of land
acquisition and development loans. The Bank's one- to four-family loans are
primarily secured by low- and moderately-priced homes in Mississippi and
Alabama. The loans originated by the Company for its portfolio generally do not
conform to secondary market standards and typically have a higher risk of
default than conforming loans. See "--Non-Performing Assets of the Company."
The Bank's revenues are derived principally from interest on mortgage loans,
interest and dividends on investment and other securities, income from checking
account service charges, and loan ancillary and servicing fee income. The Bank
does not originate loans to fund leveraged buyouts, has no loans to foreign
corporations or governments, has no investments in non-investment grade
corporate debt securities (i.e., "junk bonds") or high-risk derivative
securities and is not engaged in land development or construction activities
through joint ventures.
Forward-Looking Statements
When used in this Form 10-K and in future filings by the Company with the
Securities and Exchange Commission (the "SEC"), in the Company's press releases
or other public or shareholder communications, and in oral statements made with
the approval of an authorized executive officer, the words or phrases "will
likely result," "are expected to," "will continue," "is anticipated,"
"estimate," "project" or similar expressions are intended to identify
"forward-looking statements" within the meaning of the Private Securities
Litigation Reform Act of 1995. Such statements are subject to certain risks and
uncertainties, including, among other things, changes in economic conditions in
the Company's market area, changes in policies by regulatory agencies,
fluctuations in interest rates, demand for loans in the Company's market area
and competition, that could cause actual results to differ materially from
historical earnings and those presently anticipated or projected. The
3
<PAGE>
Company wishes to caution readers not to place undue reliance on any such
forward-looking statements, which speak only as of the date made. The Company
wishes to advise readers that the factors listed above could affect the
Company's financial performance and could cause the Company's actual results for
future periods to differ materially from any opinions or statements expressed
with respect to future periods in any current statements.
The Company does not undertake--and specifically declines any obligation--to
publicly release the result of any revisions which may be made to any
forward-looking statements to reflect events or circumstances after the date of
such statements or to reflect the occurrence of anticipated or unanticipated
events.
Pending Merger
On May 8, 1997, the Company and Union Planters Corporation ("UPC"), entered into
an Agreement and Plan of Reorganization ("Merger Agreement"), pursuant to which
UPC Merger Subsidiary, Inc., a corporation organized and existing under the laws
of the State of Delaware and a wholly owned subsidiary of UPC, will be merged
with and into the Company. The Company will survive the merger as a wholly owned
subsidiary of UPC.
In accordance with the terms of the Merger Agreement, each share of the
Company's common stock, par value $.01 per share, outstanding immediately prior
to the effective time of the merger will be converted into the right to receive
.5165 shares of common stock, par value $5.00 per share, of UPC. The merger is
intended to constitute a tax-free reorganization under the Internal Revenue Code
of 1986, as amended, and to be accounted for as a pooling-of-interests.
A special meeting of the Company's shareholders was held August 20, 1997, at
which time the merger received shareholder approval. Consummation of the merger
is subject to various conditions, including approval by regulatory authorities,
and is expected to close on November 1, 1997.
MARKET AREA OF THE COMPANY
Based on total assets at June 30, 1997, Magnolia Federal is the largest thrift
institution operating in Alabama and Mississippi and the fifth largest
depository institution headquartered in the state of Mississippi. The executive
offices of the Company are located in the city of Hattiesburg, in southeastern
Mississippi. Through its network of retail banking offices, the Company serves
24 counties in Mississippi, which include the communities of Hattiesburg,
Jackson, Gulfport, Biloxi, Grenada, Waynesboro, Vicksburg, Natchez, Pascagoula,
Greenville, McComb, Picayune, Greenwood and other communities, as well as the
Mobile metropolitan area in Alabama. The Company also offers residential
mortgage loans from loan origination offices located in Orange Grove,
Hattiesburg and Bay St. Louis, Mississippi, and Daphne, Alabama. In recent
years, the Company has been establishing correspondent loan arrangements with
other banks and loan brokers to originate loans throughout the Southeast United
States.
4
<PAGE>
The Company has expanded its market area through a series of mergers and branch
and deposit acquisitions. These acquisitions and the related market areas are
set forth below.
</TABLE>
<TABLE>
<CAPTION>
Acquisition or
Merger Date Mississippi Institution Market
- -------------- ----------------------- ------
<S> <C> <C>
1972 First Federal Savings and Loan Association of Picayune
Picayune
1975 Stone County Savings and Loan Association Wiggins
1975 Magnolia Federal Savings and Loan Association Jackson metro area
1981 Coast Federal Savings and Loan Association Gulf Coast metro area
1982 Washington Federal Savings and Loan Greenville/Leland
1982 Southwest Savings and Loan Association Natchez/Brookhaven
1982 First Federal Savings and Loan Association of Canton/Carthage/Ridgeland
Canton
1982 First Federal Savings and Loan Association of Grenada
Grenada
1983 Pascagoula Building and Loan Association Gulf Coast metro area
1987 First Southern Savings and Loan of Jackson County Gulf Coast metro area
1987 Eastover Bank branch purchase Columbia/Tylertown/Vicksburg
1987 First Federal Savings and Loan Association of McComb
McComb
1989 First Federal Savings and Loan Association of Gulf Coast metro area
Biloxi
1990 SouthBank branch purchase Jackson metro area
1991 Greenwood Federal Savings and Loan Association Greenwood
1991 First Guaranty Bank for Savings Hattiesburg/Gulfport/Collins/
Picayune/McComb/Greenwood
1991 Brookhaven Federal Savings and Loan Association Brookhaven
1991 First City Federal Savings Bank Lucedale/Escatawpa
1991 Charter Savings Bank Hattiesburg/Petal/Pascagoula/
Long Beach
1991 Southern Federal Savings Bank Gulfport/Pass Christian/
D'Iberville/Gautier
1993 Eagle Federal Bank for Savings Waynesboro/Brookhaven/
Hattiesburg
Alabama Institution
-------------------
1994 Altus Federal Savings Bank Mobile/Jackson
</TABLE>
5
<PAGE>
Except for the acquisitions of Southwest Savings and Loan Association and Eagle
Federal Bank for Savings, which were accounted for under the purchase method,
the mergers were accounted for under the pooling-of-interests method, and no
goodwill or intangible assets resulted from the combinations. The premiums paid
for core deposits acquired in branch purchases were recorded as intangible
assets. At June 30, 1997, $3.7 million remained unamortized of premium on
purchased deposits related to the assumption of deposit liabilities from Eagle
Federal Bank for Savings in 1993 and the assumption of deposit liabilities of
Altus Federal Savings Bank in 1994.
The Company's resulting network of 62 offices as of June 30, 1997 is located in
central and southern Mississippi and southern Alabama. This area includes 11
offices in the Jackson metropolitan area (the state capital) and 12 in the Gulf
Coast metropolitan area, which includes the cities of Gulfport, Biloxi,
Pascagoula and other communities. The economy in central and southern
Mississippi is closely tied to the timber, oil, gaming, port facilities and
agricultural industries. The Mississippi market area served by the Company also
includes significant employment in education and manufacturing, and Jackson, the
state's capital, is a center of government employment. The 11 offices located in
the Mobile, Alabama metropolitan area complement the Mississippi Gulf Coast and
Hattiesburg markets. The Mobile economy is based on agriculture, manufacturing,
retail and the Alabama port facilities.
The Company's primary competition is from the large commercial banks located in
its primary market areas and, to a lesser degree, from small commercial banks
and credit unions in the local communities in which it operates. The Company has
also experienced increased competition in the loan origination market from
several mortgage banking companies. See "--Competition."
LENDING ACTIVITIES OF THE COMPANY
General. The Company principally originates fixed-rate and adjustable-rate,
single-family, mortgage loans. Since 1982, however, the Company has emphasized
the origination of non-conforming adjustable-rate mortgage ("ARM") loans and
short-term consumer loans for retention in its portfolio. These loans reprice
more frequently or have shorter maturities, and thus reduce the Company's
interest rate risk and in most cases have higher yields than fixed-rate
conforming mortgage loans.
Virtually all conforming fixed-rate, 30-year mortgage loans originated are sold
in the secondary market, through the issuance of Federal National Mortgage
Association ("FNMA"), Federal Home Loan Mortgage Corporation ("FHLMC") and
Government National Mortgage Association ("GNMA") mortgage-backed securities.
Loans that meet the underwriting and other standards of these secondary market
agencies are described as "conforming loans." Conventional 15-year, fixed-rate
loans that qualify for sale to the secondary market may also be packaged into
mortgage-backed securities for credit and liquidity enhancement and to reduce
risk-based capital requirements. A portion of the 15-year, fixed-rate loans and
mortgage-backed securities may be retained in the Company's portfolio if the
flow of acceptable adjustable-rate loans is inadequate to maintain the loan
portfolio or if there are no other desirable investment alternatives. Of the
Company's loans at June 30, 1997, 50.9% were fixed-rate and 49.1% were
adjustable rate. All of the Company's loans and mortgage-backed securities held
for sale or available for sale at June 30, 1997 were fixed-rate. Loans held for
sale accounted for 5.4% of the total gross loan portfolio at June 30, 1997.
Mortgage-backed securities available for sale accounted for 92.1% of the total
gross mortgage-backed securities portfolio at June 30, 1997.
6
<PAGE>
While the Company has focused its lending activities primarily on the
origination of loans secured by first mortgages on owner-occupied one- to
four-family residences, the Company also originates small multi-family and
commercial real estate loans and consumer loans in its market area. The Company
originates a limited number of residential construction loans (but only with the
intention of providing permanent financing upon completion of the construction),
and has on occasion made land acquisition and development loans. The Company's
one- to four-family loans are primarily secured by low- and moderately-priced
homes in Mississippi and Alabama. At June 30, 1997, the Company's gross loan
portfolio totaled $966.1 million.
All mortgage loan authority is centralized and every loan application is
reviewed by a central underwriting department. Any loan that does not conform to
secondary-market standards is reviewed by a loan committee of senior officers.
All single-family real estate loans over $350,000 are approved by the Board of
Directors of Magnolia Federal.
The following table reflects the principal repayments contractually due
(assuming no prepayments) on the Company's loan portfolio at June 30, 1997.
Management expects prepayments will cause actual maturities to be shorter.
<TABLE>
<CAPTION>
Real Estate Loans
--------------------------------------------------------
Multi-Family Construction
and Commercial and Consumer
One- to Four-Family Real Estate Development Loans Total
------------------- -------------- ------------ -------- ------
Due During Years (Dollars in Thousands)
<S> <C> <C> <C> <C> <C>
Ending June 30
1998 (1) ............ $ 47,764 6,684 16,094 57,320 127,862
1999 ................ 44,180 7,142 - 14,851 66,173
2000 ................ 46,322 5,649 - 9,661 61,632
2001 to 2002 ........ 97,588 11,594 - 8,732 117,914
2003 to 2007 ........ 260,367 25,497 - 4,149 290,013
2008 to 2012 ........ 191,311 10,329 - 416 202,056
2013 and following .. 97,698 2,798 - - 100,496
--------- --------- ------------- ----------- --------
Total .......... $ 785,230 69,693 16,094 95,129 966,146
========= ========= ============= =========== ========
- ----------
<FN>
(1) Includes demand loans, loans having no stated maturity and outstanding
balances under lines of credit.
</FN>
</TABLE>
As of June 30, 1997, 46.5% of the $838.3 million of loans due after June 30,
1998 had fixed interest rates and 53.5% had adjustable interest rates.
7
<PAGE>
Loan Portfolio Composition. The following table sets forth information
concerning the composition of the Company's loan portfolio, in dollar amounts
and in percentages (before deductions for loans in process, deferred fees and
discounts, market adjustments and allowance for possible loan losses) at the
dates indicated.
<TABLE>
<CAPTION>
At June 30
--------------------------------------------------------------------------------
1997 1996 1995
------------------------- -------------------------- ---------------------------
Amount Percent Amount Percent Amount Percent
------------- ----------- -------------- ----------- -------------- ------------
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C>
Real estate loans:
One- to four-family ........................ $ 785,230 81.28% $ 718,382 79.42% $ 670,315 79.80%
Multi-family and commercial real estate .... 69,693 7.21 78,280 8.65 80,793 9.62
Construction ............................... 16,094 1.66 17,007 1.88 7,715 0.92
---------- --------- ---------- --------- ----------- ---------
Total real estate loans, gross ........... 871,017 90.15 813,669 89.95 758,823 90.34
---------- --------- ---------- --------- ----------- ---------
Consumer loans:
Manufactured home .......................... 20,088 2.08 26,624 2.94 35,209 4.18
Savings account ............................ 10,047 1.04 10,664 1.18 10,462 1.25
Personal property .......................... 38,355 3.97 34,519 3.82 20,911 2.49
Line of credit and other ................... 26,639 2.76 19,077 2.11 14,635 1.74
---------- --------- ---------- --------- ----------- ---------
Total consumer loans, gross .............. 95,129 9.85 90,884 10.05 81,217 9.66
---------- --------- ---------- --------- ----------- ---------
Total loans, gross ....................... 966,146 100.00% 904,553 100.00% 840,040 100.00%
========= ========= =========
Less:
Loans in process ........................... (9,939) (9,278) (5,088)
LOCOM adjustment for mortgage loans ........ - (148) -
Deferred fees and discounts ................ (17,690) (21,913) (27,153)
Allowance for possible loan losses ......... (10,424) (9,452) (9,213)
---------- ---------- -----------
Total loans, net ....................... $ 928,093 $ 863,762 $ 798,586
========== ========== ===========
<CAPTION>
At June 30
-------------------------------------------------------
1994 1993
---------------------------- --------------------------
Amount Percent Amount Percent
--------------- ------------ -------------- -----------
(Dollars in Thousands)
<S> <C> <C> <C> <C>
Real estate loans:
One- to four-family ........................ $ 595,168 78.85% $ 603,517 78.42%
Multi-family and commercial real estate .... 77,291 10.24 84,028 10.92
Construction ............................... 5,472 0.72 2,611 0.34
--------------- ------------ -------------- -----------
Total real estate loans, gross ........... 677,931 89.81 690,156 89.68
--------------- ------------ -------------- -----------
Consumer loans:
Manufactured home .......................... 41,836 5.54 46,789 6.08
Savings account ............................ 10,445 1.38 11,621 1.51
Personal property .......................... 16,504 2.19 13,450 1.75
Line of credit and other ................... 8,116 1.08 7,579 0.98
--------------- ------------ -------------- -----------
Total consumer loans, gross .............. 76,901 10.19 79,439 10.32
--------------- ------------ -------------- -----------
Total loans, gross ....................... 754,832 100.00% 769,595 100.00%
============ ===========
Less:
Loans in process ........................... (3,665) (2,909)
LOCOM adjustment for mortgage loans ........ (123) -
Deferred fees and discounts ................ (26,306) (22,354)
Allowance for possible loan losses ......... (9,781) (9,661)
--------------- --------------
Total loans, net ....................... $ 714,957 $ 734,671
=============== ==============
</TABLE>
8
<PAGE>
The following table sets forth the composition of the Company's loan portfolio
by fixed- and adjustable-rate categories at the dates indicated.
<TABLE>
<CAPTION>
At June 30
-------------------------------------------------------------------------------------
1997 1996 1995
--------------------------- --------------------------- --------------------------
Amount Percent Amount Percent Amount Percent
------------- ------------ --------------- ----------- -------------- -----------
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C>
Fixed-rate loans:
Real estate:
One- to four-family ...................... $ 361,774 37.45% $ 344,422 38.08% $ 329,901 39.27%
Multi-family and commercial real estate .. 31,230 3.23 37,721 4.17 37,922 4.51
Construction ............................. 16,094 1.66 17,007 1.88 7,715 0.92
------------- ------------ --------------- ----------- -------------- -----------
Total real estate loans ................ 409,098 42.34 399,150 44.13 375,538 44.70
Consumer ................................... 82,883 8.58 73,692 8.15 58,194 6.93
------------- ------------ --------------- ----------- -------------- -----------
Total fixed-rate loans, gross .......... 491,981 50.92 472,842 52.28 433,732 51.63
------------- ------------ --------------- ----------- -------------- -----------
Adjustable-rate loans:
Real estate:
One- to four-family ...................... 423,456 43.83 373,960 41.34 340,414 40.53
Multi-family and commercial real estate .. 38,463 3.98 40,559 4.48 42,871 5.10
------------- ------------ --------------- ----------- -------------- -----------
Total real estate loans ................ 461,919 47.81 414,519 45.82 383,285 45.63
Consumer ................................. 12,246 1.27 17,192 1.90 23,023 2.74
------------- ------------ --------------- ----------- -------------- -----------
Total adjustable-rate loans, gross ..... 474,165 49.08 431,711 47.72 406,308 48.37
------------- ------------ --------------- ----------- -------------- -----------
Total loans, gross ................... 966,146 100.00% 904,553 100.00% 840,040 100.00%
============ =========== ===========
Less:
Loans in process ......................... (9,939) (9,278) (5,088)
LOCOM adjustment for mortgage loans ...... - (148) -
Deferred fees and discounts .............. (17,690) (21,913) (27,153)
Allowance for possible loan losses ....... (10,424) (9,452) (9,213)
------------- --------------- --------------
Total loans, net ................... $ 928,093 $ 863,762 $ 798,586
============= =============== ==============
<CAPTION>
At June 30
-----------------------------------------------------
1994 1993
------------------------- -------------------------
Amount Percent Amount Percent
------------- ----------- ------------ -----------
(Dollars in Thousands)
<S> <C> <C> <C> <C>
Fixed-rate loans:
Real estate:
One- to four-family ...................... $ 294,334 38.99% $ 310,969 40.41%
Multi-family and commercial real estate .. 32,225 4.27 31,112 4.04
Construction ............................. 5,472 0.73 2,611 0.34
------------- ----------- ------------ -----------
Total real estate loans ................ 332,031 43.99 344,692 44.79
Consumer ................................... 50,893 6.74 53,383 6.94
------------- ----------- ------------ -----------
Total fixed-rate loans, gross .......... 382,924 50.73 398,075 51.73
------------- ----------- ------------ -----------
Adjustable-rate loans:
Real estate:
One- to four-family ...................... 300,834 39.85 292,548 38.01
Multi-family and commercial real estate .. 45,066 5.97 52,916 6.88
------------- ----------- ------------ -----------
Total real estate loans ................ 345,900 45.82 345,464 44.89
Consumer ................................. 26,008 3.45 26,056 3.38
------------- ----------- ------------ -----------
Total adjustable-rate loans, gross ..... 371,908 49.27 371,520 48.27
------------- ----------- ------------ -----------
Total loans, gross ................... 754,832 100.00% 769,595 100.00%
=========== ===========
Less:
Loans in process ......................... (3,665) (2,909)
LOCOM adjustment for mortgage loans ...... (123) -
Deferred fees and discounts .............. (26,306) (22,354)
Allowance for possible loan losses ....... (9,781) (9,661)
------------- ------------
Total loans, net ................... $ 714,957 $ 734,671
============= ============
</TABLE>
9
<PAGE>
One- to Four-Family Residential Mortgage Lending. Residential loans are
generated by the Company's marketing efforts, its present customers,
correspondent network and referrals from real estate brokers and builders. The
Company has focused its lending efforts primarily on the origination of loans
secured by first mortgages on owner-occupied, one- to four-family residences. At
June 30, 1997, the Company's one- to four-family residential mortgage loans
totaled $785.2 million, or 81.3% of the Company's total mortgage loan portfolio.
The Company's primary target market for its one- to four-family portfolio
lending program is the low- and moderately-priced sector of the housing market,
with an average purchase price between $30,000 and $90,000. Management believes
that this market includes a majority of the homes in its lending area.
The Company emphasizes the origination of non-conforming, conventional ARM loans
for retention in its portfolio and conforming fixed-rate loans qualifying for
sale in the secondary market. During the year ended June 30, 1997, the Company
originated $138.6 million of one- to four-family residential ARM loans,
representing 30.5% of the total mortgage loans originated. During the same
period, the Company originated $307.9 million of fixed-rate, one- to four-family
residential mortgage loans, representing 67.6% of the total mortgage loans
originated. The volume of fixed-rate loans originated in the current year was
less than the $378.2 million in the prior fiscal year primarily because of
higher long-term interest rates in effect during the current year. Originations
of multi-family and commercial loans accounted for only 1.9% of the total
mortgage loans originated. The Company's one- to four-family residential
mortgage originations are predominantly in its market area.
The Company generally makes one- to four-family residential mortgage loans in
amounts up to 80% of the appraised value of the property securing the loan and
only exceeds this loan-to-value ratio if the borrower has a superb credit rating
or in order to facilitate the sale of foreclosed property. The Company's loan
programs are targeted to customers who either do not meet the credit
requirements of the secondary market to qualify for a fixed-rate loan or who
prefer not to comply with the documentation requirements of the secondary market
or require a loan that exceed the lending agencies' limits. The Company markets
a 15-year loan with a single rate adjustment at the Company's option at the end
of the fifth year. The initial rate charged for the loan is determined by the
Company on a loan-by-loan basis in accordance with market and competitive
factors and by reference to the customer's empirically derived credit score. The
one-time rate adjustment after five years is based on a 2% margin over the FNMA
required net yield for certain 15-year fixed rate whole loans subject to a
60-day mandatory delivery, with a 6% cap. Qualifying customers are also offered
a 20-year loan with similar rate adjustments at the Company's option every fifth
year. Borrowers under this program are subject to more stringent credit
requirements thereby limiting the credit risk associated with longer-term loans.
The Company also offers a non-conforming ARM loan with a negotiated margin that
is generally at least 500 basis points over the one-year Treasury bill rate. The
loan provides for a 2% annual interest rate cap and a lifetime cap of 5% over
the fully-indexed rate calculated at the date of origination. As a consequence
of using caps, the interest rates on these loans are not necessarily as rate
sensitive as is the Company's cost of funds. The loan also provides for a
floating floor rate of not less than 500 basis points above the nationwide
average cost of funds for savings institutions. The initial rate charged for the
loan is typically not below the fully-indexed rate and is determined by the
Company on a loan-by-loan basis in accordance with market factors and by
reference to an empirically derived credit score provided by an outside credit
bureau. The loan provides for annual rate adjustments and the loan term is
limited to a maximum of 15 years.
10
<PAGE>
Generally, the Company's ARMs are not convertible into fixed-rate loans and do
not permit negative amortization of principal. By law, there is no prepayment
penalty. The Company has determined, through experience, that ARMs are subject
to increased risk of delinquency or default as fully-indexed rates of interest
are increased to higher levels. As a result, the Company varies the
loan-to-value ratios at the time of origination from a low of 50% to a maximum
of 90%, depending upon the borrower's credit score, and limits the loan term to
20 years or less in an effort to offset the additional risk of default from
non-conforming ARM loans. Mortgage insurance and the borrower's down payment
facilitate the sharing of risk in the event of default. The Company, however, is
substantially dependent upon the underlying collateral for recovery and special
emphasis is placed on the property appraisal in the underwriting process. While
the Company evaluates the borrower's ability to make monthly payments in
underwriting ARM loans, the major emphasis is placed on the best estimate of the
distressed liquidation value of the property by the Company's loan committee.
The Company attempts not to lend more on its portfolio loans than it estimates
the property securing the loan will bring at a distress sale as these loans
typically do not meet the more stringent secondary market standards.
The Company offers fixed-rate 15- and 30-year mortgage loans that conform to
secondary market standards (i.e., FNMA, GNMA, FHLMC, Federal Housing
Administration ("FHA") and Veterans Administration ("VA") standards). Interest
rates charged on these fixed-rate loans are competitively priced on a daily
basis according to market conditions. By law, the Company's fixed-rate
residential loans do not include prepayment penalties. The 30-year loans are
generally securitized into mortgage-backed securities and the mortgage-backed
securities are sold to generate liquidity for additional lending purposes and to
mitigate interest rate risk. Depending on the volume of loan production and the
Company's liquidity requirements, the 15-year loans also may be securitized into
mortgage-backed securities to be sold or used as collateral for borrowings.
Upon the receipt of a completed loan application from a prospective borrower,
the Company determines if the loan should be processed as a fixed-rate secondary
market loan or as an ARM loan. All ARM loans are intended to be retained in the
Company's portfolio. All fixed-rate secondary market loans follow standards and
procedures specified by the federally-sponsored agency. The Company and/or
selected loan underwriters of the Company have been approved as direct
underwriters for all federally-sponsored agencies (i.e., FNMA, FHLMC, the FHA
and the VA) and have been granted authority to approve qualified loans on behalf
of the agencies without further review, provided the loans meet all of the
required standards. Requirements for title insurance, hazard insurance, escrow,
loan closing and other terms are all specified by the agencies in written policy
and must be followed by the Company in processing, closing and servicing of the
loan.
An appraisal or value estimate of the property securing the loan is obtained on
all loan applications, usually from Realty Services Inc., a wholly-owned
appraisal subsidiary of the Company. The completed loan application file is
submitted to the central underwriting department for review. The Company's loan
committee, which consists of senior officers, reviews each non-conforming loan
application and establishes the conditions of each approved loan. The interest
rate offered on each loan is directly related to the credit score of the
borrower. A pre-determined matrix relating a credit score range to the type of
loan, maximum loan-to-value ratio and interest rate is used by the loan
committee on a regular basis in order to assure consistency in the rate and
terms offered to borrowers. All loans are tracked and closed using a central
on-line tracking and closing system. Following closing, loan files and
disbursements are audited by Company personnel independent of the loan
origination and closing functions. Mortgagee title insurance is generally
obtained on all loans originated by the Company. Borrowers must obtain hazard
11
<PAGE>
insurance prior to closing. The Company also requires flood insurance on
property located in special flood hazard areas. Generally, borrowers are
required to advance funds on a monthly basis, together with each payment of
principal and interest, through a mortgage escrow account from which the Company
makes disbursements for items such as real estate taxes and hazard insurance
premiums as they become due.
Beginning in 1990, the Company initiated a strategy of purchasing seasoned and
performing fixed-rate and adjustable-rate loans secured by single-family homes
from the Resolution Trust Corporation ("RTC") and others. The Company originally
purchased loans from the RTC to supplement its loan origination volume, due to
weak loan demand in the Company's market areas, and to facilitate the investment
of funds received from the acquisition of deposits from RTC institutions
liquidated in the Company's primary market area. The availability of loans
meeting the Company's purchase criteria has been substantially reduced in recent
years, but the Company continues to evaluate and bid on loan packages from
various entities as they become available. In fiscal 1997, the Company purchased
$15.4 million of mortgage loans in order to supplement its loan origination
volume. Each loan purchase is on a bid basis after Company personnel perform a
review of the available information in the loan files and selected property
examinations as considered necessary. The Company does not order a new appraisal
of the collateral property. All bids for loan packages exceeding $350,000 are
approved by the Board of Directors of Magnolia Federal. Loan purchases have
generally been limited to loans secured by properties located in the
southeastern United States due to management's familiarity with the laws of such
states and to promote operating efficiencies. The Company purchases an
occasional loan secured by property outside these states if required by the
seller in order to purchase an entire loan package. The Company also purchases a
substantial number of individual loans from others that were originated
primarily from owner-financed sales transactions. On these purchases the Company
obtains a value estimate of the property, a title opinion, verification of the
loan amount with the borrower and approval of two loan committee members.
Acquisition prices for all loans purchased depend upon market interest rates,
loan quality, and delinquency status and are typically discounted to a yield
commensurate with the associated interest rate risk and credit risk.
GNMA permits servicers of GNMA mortgage-backed securities to purchase from GNMA
pools any FHA/VA insured/guaranteed mortgages that are delinquent 90 days or
more. During the year, the Company purchased approximately $5.4 million of
delinquent FHA/VA insured/guaranteed loans from its GNMA mortgage loan servicing
portfolio at par to eliminate the cost of advancing funds to the security
holders on these relatively high-rate loans. With an average interest rate of
over 10.5%, these loans supplement the Bank's average non-conforming portfolio
rate with virtually no increase in credit risk due to their insured/guaranteed
status.
The weighted average yield to maturity on all loans purchased during the year
ended June 30, 1997, consisting primarily of one- to four-family loans, was
approximately 10.2%. See also "--Originations, Purchases, Sales and Servicing of
Mortgage Loans and Mortgage-Backed Securities of the Company."
The Company's residential mortgage loans customarily include due-on-sale clauses
giving the Company the right to declare the loan immediately due and payable in
the event the borrower sells or otherwise disposes of the property subject to
the mortgage. Loans insured by the FHA prior to December 1989 or partially
guaranteed by the VA prior to March 1988 do not contain due-on-sale clauses. The
Company has exercised due-on-sale clauses in its mortgage contracts for the
purpose of credit evaluation of the purchaser and also increasing its loan
portfolio yield. The yield increase is obtained through the
12
<PAGE>
authorization of assumptions of existing loans at higher rates of interest and
the imposition of assumption fees. ARM loans may be assumed provided home buyers
meet the Company's underwriting standards and the applicable fees are paid.
Multi-Family and Commercial Real Estate Lending. Prior to 1989, the Company
engaged in a limited amount of multi-family and commercial real estate lending,
primarily in its market area in Mississippi. Because of market and regulatory
conditions, in 1989 the Company discontinued making multi-family and commercial
real estate loans in excess of $500,000, unless necessary to facilitate the sale
of Company assets, and imposed additional restrictions on borrowers with total
loans outstanding in excess of $1 million, regardless of security.
The Company has purchased seasoned and performing multi-family and commercial
real estate loans. The bid and underwriting procedures for purchases of
multi-family and commercial real estate loans is substantially similar to the
procedures used for one- to four-family loans as described earlier, except that
an inspection is performed by Company personnel on each property securing a
multi-family or commercial loan with a significant outstanding principal
balance. Large-dollar loans must be secured by properties located in the
southeastern United States before being considered for purchase. The Company
purchased $1.1 million of multi-family and commercial real estate loans during
the year ended June 30, 1997.
Loans secured by multi-family and commercial real estate properties are
generally originated for greater amounts and involve a greater degree of risk
than one- to four-family residential mortgage loans. Because payments on loans
secured by multi-family and commercial real estate properties are often
dependent on the successful operation or management of the properties, repayment
of such loans may be subject to adverse conditions in the real estate market or
the economy. If the cash flow from the project is reduced (for example, if
leases are not obtained or renewed), the borrower's ability to repay the loan
may be impaired. The Company attempts to minimize these risks by lending
primarily on seasoned and occupied income-producing properties and generally
restricting such loans to property in Mississippi or Alabama. At June 30, 1997,
only $354,000, or 0.5% of the Company's multi-family and commercial real estate
portfolio, was 90 days or more delinquent. See "--Non-Performing Assets of the
Company."
The Company's multi-family and commercial real estate loans are negotiated on a
case-by-case basis. The Company has a variety of rate adjustment features, call
provisions and other terms in its multi-family and commercial real estate loan
portfolio. The Company analyzes the financial condition of the borrower and the
reliability and predictability of the net income generated by the property
securing the loan in determining whether to extend credit. In addition, the
Company generally requires a net operating income-to-debt servicing ratio of at
least 1.15-to-1. Appraisals on properties securing multi-family and commercial
real estate loans originated by the Company are performed or reviewed by Realty
Services, Inc.
13
<PAGE>
The following table sets forth by type of collateral the number, outstanding
principal balance and weighted average interest rate of the Company's
multi-family and commercial real estate loans at June 30, 1997. At such date,
the Company had $69.7 million of multi-family and commercial real estate loans,
which represented 7.2% of the Company's loan portfolio. At June 30, 1997, 64.4%
of the Company's multi-family and commercial real estate loan portfolio was
secured by properties located in Mississippi.
<TABLE>
<CAPTION>
Number Principal Average
Type of Collateral of Loans Balance Rate
- ------------------ -------- -------------- --------
(Dollars in Thousands)
<S> <C> <C> <C>
Apartments .......................... 78 $16,192,292 9.09%
Nursing homes ....................... 3 4,318,868 9.41
Shopping center ..................... 13 9,630,183 9.32
Office buildings .................... 49 5,607,599 9.36
Developed lots and unimproved land .. 445 10,375,107 10.56
Churches ............................ 99 8,615,664 9.30
Warehouses .......................... 15 2,728,959 9.24
Motels and hotels ................... 2 1,092,286 9.53
Farms ............................... 72 4,233,643 10.05
Retail stores ....................... 24 1,063,586 10.19
Trailer parks ....................... 4 600,547 10.34
Restaurants ......................... 6 342,292 9.46
Medical clinics and hospitals ....... 3 615,042 8.97
Other ............................... 33 4,277,420 9.69
----------- ----------- --------
846 $69,693,488 9.54%
=========== =========== ========
</TABLE>
Limitation of the Bank's non-residential real estate lending (i.e., commercial
real estate lending, other than lending on certain multi-family residences) is
not expected to materially affect the Company's operations. See
"--Regulation--Federal Regulation of Savings Associations".
At June 30, 1997, the largest amount outstanding to any one borrower or group of
affiliated borrowers was $8.3 million. This amount represented loans to ten
entities with common principals, secured by completed and occupied
single-family, multi-family and commercial real estate properties located in
Hattiesburg, Jackson and Oxford, Mississippi. At June 30, 1997, the Company had
no other loans in excess of $5.0 million to any borrower or group of related
borrowers.
Consumer Lending. Management considers consumer lending to be an important
component of its lending activities. Specifically, consumer loans generally have
shorter terms to maturity or demand features (thus reducing the Company's
exposure to changes in interest rates) and carry higher rates of interest than
one- to four-family residential mortgage loans. In addition, management believes
that the offering of consumer loan products helps to expand and create stronger
ties to its existing customer base by increasing the number of customer
relationships and providing cross-marketing opportunities.
14
<PAGE>
The Company offers a variety of secured consumer loans, including loans secured
by savings deposits and direct automobile loans. In addition, the Company offers
home improvement loans and unsecured consumer loans. The Company currently
originates all of its consumer loans in Mississippi and Alabama.
The Company's consumer loan originations are predominantly short-term,
fixed-rate, simple interest loans. At June 30, 1997, the Company's consumer loan
balances totaled $95.1 million, or 9.9% of its gross loan portfolio. Of the
consumer loan balance at June 30, 1997, 87.1% in principal balance were
fixed-rate loans and 12.9% were longer term adjustable-rate loans secured by
manufactured homes.
Consumer loan terms vary according to the type of collateral, length of contract
and creditworthiness of the borrower. Terms to maturity range up to 15 years for
manufactured home loans and 60 months for other secured and unsecured consumer
loans. The Company offers both open- and closed-end credit. Open-end credit is
extended through lines of credit that are tied to a negotiable order of
withdrawal ("NOW") or demand account. The credit lines bear interest rates up to
21% and may be approved up to $5,000. Higher lines of credit may be approved in
special cases or if the borrower secures the loan with collateral.
Branch lending officers of the Bank are authorized to approve consumer loans to
borrowers with credit scores above a pre-established level and have the
authority to approve all loans secured by savings deposits. Loans to borrowers
with credit scores below the level required for branch approval authority are
reviewed and approval is determined by a central underwriting department. The
underwriting standards employed on loans to borrowers who do not qualify for
branch approval include a determination of the applicant's payment history on
other debts and an assessment of the ability to meet existing obligations and
payments on the proposed loan. Although creditworthiness of the applicant is the
primary consideration, the underwriting process also includes a comparison of
the value of the security, if any, to the proposed loan amount.
The Company's manufactured home loan portfolio as of June 30, 1997 was $20.1
million, or 2.1% of the total loan portfolio. Dealer participations or purchase
discounts totaled $1.2 million at June 30, 1997. All manufactured home loans,
which typically have a higher yield and shorter maturity than one- to
four-family residential mortgage loans, were originated in Mississippi or
Alabama and substantially all were for terms of 15 years or less. The Company
discontinued its indirect lending program in 1996 due to increased competition.
Indirect manufactured home loans had been made since 1980 with adjustable rates
of interest while direct loans were made with fixed rates. Generally, the
maximum loan amount for manufactured housing does not exceed 90% of the buyer's
cost that can include such items as freight, itemized set-up charges, physical
damage insurance, sales tax and filing and recording fees. Value estimates based
on personal inspection and NADA book values are performed to substantiate
current market values on used manufactured homes.
Consumer loans may entail greater risk than residential mortgage loans,
particularly loans that are unsecured or are secured by rapidly depreciating
assets, such as automobiles. In such cases, any repossessed collateral for a
defaulted consumer loan may not provide an adequate source of repayment of the
outstanding loan balance as a result of the greater likelihood of damage, loss
or depreciation. In addition, consumer loan collections are dependent on the
borrower's continuing financial stability, and thus are more likely to be
affected by adverse personal circumstances. Furthermore, various federal and
state laws, including bankruptcy and insolvency laws, may limit the amount that
can be recovered on such loans. Recently the level of delinquencies in the
Company's consumer loan portfolio has increased (at
15
<PAGE>
June 30, 1997, $1.0 million, or approximately 1.1%, of the consumer loan
portfolio was 90 days or more delinquent) and has resulted in higher charge-offs
during the current fiscal year, compared to the prior year. See
"--Non-Performing Assets--".
Construction Lending. The Company originates a limited number of loans to
finance the construction of one- to four-family residences and, to a lesser
extent, commercial real estate. Most construction loans are for individuals who
want a custom-built home on property of their selection and require a permanent
loan on such home. All construction and development lending are limited to
properties located in the states of Mississippi and Alabama. At June 30, 1997,
the Company had loans to finance construction totaling $16.1 million, which
represented approximately 1.7% of the Company's loan portfolio.
Construction loans generally have terms of up to 18 months at fixed interest
rates. Loan proceeds are disbursed in increments as construction progresses and
as inspections warrant. The Company finances the construction of individual,
owner-occupied houses on the basis of underwriting and construction loan
management guidelines. The Company engages in some tract development and
construction lending for builders with underwriting emphasis on the borrower's
capital and the collateral's value. Construction loans are structured to be
converted to permanent loans at the end of the construction phase.
Construction and development lending involve greater risk and expense than does
one- to four-family residential lending, principally because of the difficulty
in evaluating accurately the total funds required to complete a project and the
post-completion value of the project. As a result, the Company places a strong
emphasis upon the borrower's ability to complete the project and repay principal
and interest.
ORIGINATIONS, PURCHASES, SALES AND SERVICING OF MORTGAGE LOANS AND
MORTGAGE-BACKED SECURITIES OF THE COMPANY
In January 1995, Magnolia Federal transferred all loan servicing and loan
origination responsibilities to its subsidiary, Magna Mortgage Company ("Magna
Mortgage"). Real estate loans are originated by Magnolia Federal's staff of loan
officers working in 31 branch offices and four loan origination offices and a
network of approximately 99 correspondent banks and brokers. Loan applications
are taken in each office in the name of the Bank and then immediately forwarded
to Hattiesburg for processing, underwriting and approval. Walk-in and mail-in
customers and referrals from real estate brokers and builders are important
sources of loan originations.
The Company originates both adjustable-rate and fixed-rate loans. Its ability to
originate loans is dependent upon the relative customer demand for fixed-rate or
ARM loans in the origination market, which is affected by the term structure
(short-term compared to long-term) of interest rates as well as the current and
expected future level of interest rates. The Company pools most of its 30-year
fixed-rate loan production into mortgage-backed securities for sale to FNMA,
FHLMC and GNMA to generate liquidity for further lending and to avoid the
interest rate risk attendant to long-term fixed-rate assets. The 15-year
fixed-rate loans may be pooled into mortgage-backed securities and sold or used
as collateral for borrowings, depending upon the volume of loan production and
liquidity requirements.
Occasionally, the Company may also pool loans from its existing seasoned
portfolio to create mortgage-backed securities to enhance liquidity. The Company
sells its mortgage-backed securities without recourse and subject to retention
of the loan servicing (i.e., handling collection of principal and interest
16
<PAGE>
payments), for which it generally receives a fee of .25% to .44% per annum of
the unpaid balance of each loan. In fiscal 1997, 1996 and 1995 the Company sold
$205.7 million, $207.1 million and $115.9 million, respectively, of
mortgage-backed securities that had been created from pooling its fixed-rate
loan production.
As of June 30, 1997, the Company held $10.5 million of fixed-rate, 15-year
mortgage-backed securities that it originated and designated as held for
investment. As of such date, these securities had a fair value of $10.8 million.
These mortgage-backed securities can serve as collateral for borrowings and,
through repayments, as a source of liquidity and will also qualify for
regulatory liquidity when the contractual maturity is five years or less. As of
June 30, 1997, the Company also held $122.4 million of mortgage-backed
securities as available for sale that are carried at fair value.
From time to time, the Company has purchased real estate and consumer loans and
mortgage-backed securities in accordance with its ongoing asset/liability
management objectives. In fiscal 1997, 1996 and 1995 the Company purchased or
pooled $208.7 million, $362.6 million and $236.7 million of loans and
mortgage-backed securities, respectively. The Company purchases loans on the
basis similar to the underwriting standards it employs for ARM loans intended to
be retained in its portfolio.
In June 1986, the Company initiated a program of purchasing loan servicing in
addition to its regular program of generating servicing through the origination
and sale of secondary market loans. At June 30, 1997, the Company's total
portfolio of loans serviced for others contained 76,365 loans, with an aggregate
principal balance of $3.1 billion including both purchased and originated
mortgage servicing. The unamortized cost of mortgage servicing rights was $8.6
million at June 30, 1997. The Company amortizes the cost of these rights over
terms of three to six years using an accelerated method and measures impairment
quarterly in accordance with Statement of Financial Accounting Standards No.
122, "Accounting for Mortgage Servicing Rights."
17
<PAGE>
The following table sets forth the loan origination, purchase, sale and
repayment activities of the Company for the periods indicated. Mortgage loans
that are pooled in mortgage-backed securities are included as sales of real
estate loans.
<TABLE>
<CAPTION>
Years Ended June 30
-------------------------------------------------
1997 1996 1995
------------- -------------- ------------
(Dollars in Thousands)
<S> <C> <C> <C>
Loan originations:
Adjustable-rate:
Real estate:
One- to four-family ................................... $ 138,590 114,491 98,581
Multi-family and commercial ........................... 3,566 4,381 3,554
Consumer ................................................. - 676 3,616
------------- -------------- ------------
Total adjustable-rate ............................... 142,156 119,548 105,751
------------- -------------- ------------
Fixed-rate:
Real estate:
One- to four-family ................................... 307,913 378,153 131,508
Multi-family and commercial ........................... 5,158 5,665 4,714
Consumer ................................................. 94,702 87,333 60,741
------------- -------------- ------------
Total fixed-rate .................................... 407,773 471,151 196,963
------------- -------------- ------------
Total loans originated ........................... 549,929 590,699 302,714
------------- -------------- ------------
Purchases:
Real estate loans .......................................... 15,425 45,517 89,310
Consumer loans ............................................. - 15 818
------------- -------------- ------------
Total purchased .................................. 15,425 45,532 90,128
------------- -------------- ------------
Real estate loan sales ........................................... 196,096 291,872 92,482
------------- -------------- ------------
Principal repayments ............................................. 307,665 279,846 215,152
------------- -------------- ------------
Total reductions ............................. 503,761 571,718 307,634
------------- -------------- ------------
Net increase ............................ $ 61,593 64,513 85,208
============= ============== ============
</TABLE>
18
<PAGE>
The following table summarizes certain information regarding the Company's loan
servicing portfolio at the dates shown.
<TABLE>
<CAPTION>
At June 30
------------------------------------------------------------------------------------------------------------
1997 1996 1995
------------------------------------ ---------------------------------- ------------------------------------
% of % of % of
Number Amount Total Number Amount Total Number Amount Total
---------- ------------ -------- -------- ------------ ---------- -------- ------------- ----------
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Loans owned by
the Company ..... 27,300 $ 871,017 22.01% 27,765 $ 813,669 21.50% 27,864 $ 758,823 18.08%
Loans serviced
for others ...... 76,365 3,087,072 77.99 79,440 2,970,445 78.50 89,652 3,438,445 81.92
---------- ------------ -------- -------- ------------ ---------- -------- ------------- ----------
Total mortgage
loans serviced .. 103,665 $3,958,089 100.00% 107,205 $ 3,784,114 100.00% 117,516 $ 4,197,268 100.00%
========== ============ ======== ========= ============ ========== ======== ============= ==========
Unamortized
mortgage
servicing rights.. $ 8,548 $ 5,788 $ 9,380
============ ============ =============
Percent of
unamortized
mortgage
servicing rights,
net, to loans
serviced for
others. ......... 0.28% 0.19% 0.27%
============ ============ =============
Amortization of
mortgage
servicing rights
recognized for
the year ........ $ 4,648 $ 4,823 $ 7,686
============ ============ =============
</TABLE>
NON-PERFORMING ASSETS OF THE COMPANY
When a borrower fails to make a required payment by the end of the loan's grace
period for the payment, the Company generally institutes collection procedures.
In most cases, delinquencies are cured promptly; however, if a loan has been
delinquent for more than 30 days, the Company contacts the borrower in order to
determine the reason for the delinquency and to effect a cure and, where
appropriate, reviews the condition of the property and the financial
circumstances of the borrower. If the delinquency is not cured after 90 days,
the Company will initiate foreclosure proceedings in virtually all cases. On
occasion, however, the Company may: (i) accept a repayment program for the
arrearage from the borrower or (ii) seek evidence, in the form of a listing
contract, of efforts by the borrower to sell the property if the borrower has
stated that he or she is attempting to sell.
After a conventional one- to four-family, commercial, or multi-family real
estate loan becomes 90 days delinquent, all unpaid interest is fully reserved
and future interest income is offset by an allowance for uncollected interest
until the loan is returned to current status, regardless of the collateral
value. Loans are placed on non-accrual status when it becomes necessary to
reserve for unpaid interest with respect to such loans. In addition, depending
upon the Company's evaluation of the probability of collecting all amounts due
according to the contractual terms of the loan agreement, real estate loans
could be considered for partial charge-off or classified and a related allowance
for possible loan losses be established. This determination is based upon the
following factors: (i) whether repayment of the loan
19
<PAGE>
can be expected to come only from the operation or sale of the collateral; (ii)
whether the borrower has effectively abandoned control of the collateral; and
(iii) whether the borrower appears to have the ability to rebuild the equity in
the collateral or can otherwise repay the loan in the foreseeable future. If
collection of the funds due is not probable, the Company will determine the
required valuation allowance based on the difference between the fair value of
the collateral and the recorded investment in the loan.
GNMA allows the servicer to purchase FHA and VA loans out of the GNMA pools at
par value when loans become delinquent 90 days. Interest continues to accrue as
the risk of loss is minimal since the loans are all insured or guaranteed by the
FHA or VA. A program of purchasing selected delinquent loans was initiated by
the Company during fiscal 1993 to eliminate the cost of advancing funds to
holders of GNMA securities on relatively high-rate delinquent FHA/VA loans
serviced by the Company.
At June 30, 1997, 1996, 1995, 1994, and 1993 the amount established as a reserve
for uncollected interest on non-accruing loans amounted to $1.6 million, $1.8
million, $1.8 million, $1.6 million, and $659,000, respectively.
The table below sets forth the amounts and categories of non-performing assets
and accruing loans delinquent 90 days or more in the Company's loan and
foreclosed asset portfolios at the dates indicated. As permitted by the Bank's
regulatory agency to achieve conformity with delinquency reporting of other
regulated financial institutions, loan balances at June 30, 1997 and 1996 are
stated net of discounts, deferred fees and loans in process. All other prior
year loan balances are stated at outstanding principal balances. Non-performing
assets include non-accruing loans, troubled debt restructurings accounted for
under Statements of Financial Accounting Standards No. 15, No. 114 and No. 118,
and foreclosed assets, which include assets acquired in settlement of loans.
<TABLE>
<CAPTION>
At June 30
---------------------------------------------------------------------
1997 1996 1995 1994 1993
------------- ------------ ------------ ------------ ------------
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C>
Non-accruing loans:
One- to four-family .................................. $17,558 21,696 20,724 20,474 7,725
Multi-family and commercial real estate .............. 354 265 328 442 787
Construction ......................................... - 151 84 - -
Consumer ............................................. 524 185 79 29 14
------- ------- ------- ------- -------
Total ........................................... 18,436 22,297 21,215 20,945 8,526
------- ------- ------- ------- -------
Foreclosed assets:
One- to four-family .................................. 8,923 9,630 6,325 3,414 4,300
Multi-family and commercial real estate .............. 209 562 23 1,229 4,554
Consumer ............................................. 197 39 149 319 89
------- ------- ------- ------- -------
Total ........................................... 9,329 10,231 6,497 4,962 8,943
------- ------- ------- ------- -------
Troubled debt restructurings ............................ 332 428 683 569 904
------- ------- ------- ------- -------
Total non-performing assets ....................... $28,097 32,956 28,395 26,476 18,373
======= ======= ======= ======= =======
Total non-performing assets as a percentage
of total assets ...................................... 2.08% 2.52% 2.45% 2.37% 1.76%
======= ======= ======= ======= =======
Accruing loans delinquent 90 days or more:
One- to four-family .................................. $10,855 18,767 30,394 35,812 34,924
Consumer ............................................. 506 689 1,122 1,436 2,140
------- ------- ------- ------- -------
Total accruing loans delinquent
90 days or more ................................ $11,361 19,456 31,516 37,248 37,064
======= ======= ======= ======= =======
</TABLE>
20
<PAGE>
Non-Accruing Loans. At June 30, 1997, the Company had $18.4 million in
non-accruing loans, none of which exceeded $500,000 in carrying value. The
Company occasionally purchases packages of one- to four-family delinquent loans
at discounts considered to be sufficient to provide an adequate yield
recognizing the additional risk incurred on these loans and to allow for
possible losses. In October 1993, the Bank purchased a package of approximately
$32 million of such delinquent loans either directly or indirectly from the
FDIC. The delinquency status of this package was the primary reason for the
increase in non-accruing loans in fiscal 1994. At June 30, 1997, several of
these loans had been foreclosed and $2.8 million were non-accruing one- to
four-family loans.
For the fiscal year ended June 30, 1997, gross interest income that would have
been recognized with respect to non-accruing loans, had the non-accruing loans
been current in accordance with their original terms, amounted to $820,000. The
amount that was included in interest income and not offset on such loans for the
fiscal year ended June 30, 1997 was $603,000.
Foreclosed Assets. As of June 30, 1997, the Company had $9.3 million in
foreclosed assets. One- to four-family properties in the foreclosure inventory
consisted of 313 widely scattered, small, affordable homes. The inventory of
foreclosed properties at June 30, 1997 included 69 homes foreclosed from the
package of delinquent loans purchased at a substantial discount in fiscal 1994.
The sale of a 114,000 square foot shopping center with a carrying value of $1.3
million located in Moss Point, Mississippi, during fiscal 1995 resulted in the
decrease in foreclosed commercial assets at June 30, 1995 compared to June 30,
1994. Undeveloped land with a net book value of $29,000 was included as
foreclosed property at June 30, 1997 and the balance of foreclosed consumer
property at June 30, 1997 consisted of 16 manufactured homes and a small amount
of other property held for sale.
Troubled Debt Restructurings. Troubled debt restructurings of $332,000 at June
30, 1997 were related primarily to indebtedness of $894,000 that is
collateralized by a first mortgage on a commercial tract in Jackson,
Mississippi. Repayment of this loan is expected to come from the sale and/or
lease of the property. The OTS in 1992 determined that the estimated value of
the acreage was $235,000 and the remaining balance was charged off. Two loans
secured by single-family residences account for the remaining balance and,
although the borrowers have been occasionally slow in payment, the Company does
not anticipate foreclosure at this time.
Accruing Loans Delinquent 90 Days or More. At June 30, 1997, the Company had
$11.4 million in accruing loans delinquent 90 days or more, none of which
exceeded $500,000 in carrying value. Delinquent one- to four-family FHA/VA
insured/guaranteed loans totaled $10.9 million and were primarily loans
purchased from GNMA pools serviced by the Company that represent minimal risk of
loss due to the government/government-agency guarantees. For several years the
Company engaged in the practice of purchasing delinquent loans from GNMA in
order to reduce the cost incurred in advancing interest to GNMA security holders
on high rate delinquent loans. During the prior fiscal year, the Company reduced
the volume of these delinquent loans by limiting repurchases to loans with
higher interest rates. The adjustment in strategy was due to the interest rate
risk of holding long-term, fixed-rate loans in portfolio. By purchasing only
high-yielding loans, the interest rate risk associated with such loans was
offset by above-market yields. Non-accruing consumer loans consisted primarily
of loans with recourse agreements to third parties.
21
<PAGE>
Other Loans of Concern. In addition to the non-performing assets set forth in
the table presented, as of June 30, 1997 there were also eight loans to one
borrower with a carrying value of $566,000 secured by residential rental
properties located in Hattiesburg, Mississippi that were classified as
substandard at June 30, 1997. The borrower has been slow in remitting payments
and specific valuation allowances of $50,000 have been established. Due to the
borrower's equity in the property, the Company does not anticipate further
losses or expect foreclosure.
22
<PAGE>
Delinquent Loans. The following table sets forth information concerning
delinquent mortgage and other loans at June 30, 1997. The amounts presented
represent the total carrying balances of the related loans, rather than the
actual payment amounts which are overdue. The percentages represent the ratio of
the carrying balances in each category to the total carrying value of loans
outstanding. The table includes delinquent FHA/VA insured/guaranteed loans.
There were no delinquent construction loans at June 30, 1997.
<TABLE>
<CAPTION>
One- to Four-Family Multi-Family and
Commercial Real Estate Consumer
---------------------------------- --------------------------------- -------------------------------
Number Amount % Number Amount % Number Amount %
------ ------ - ------ ------ - ------ ------ -
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Loans delinquent for:
30-89 days ............... 687 $20,963 2.17% 25 $ 828 0.09% 1,029 $ 1,878 0.19%
90 days and over ......... 774 28,413 2.94 10 354 0.04 466 1,030 0.11
------- ------- ---- ----- ------- ---- ------ ------- ----
Total delinquent
loans ................ 1,461 $49,376 5.11% 35 $ 1,182 0.13% 1,495 $ 2,908 0.30%
======= ======= ==== ===== ======= ==== ====== ======= ====
<CAPTION>
Total Loans
------------------------------
Number Amount %
------ ------ -
(Dollars in Thousands)
<C> <C> <C>
Loans delinquent for:
30-89 days ............... 1,741 $ 23,669 2.45%
90 days and over ......... 1,250 29,797 3.09
------ ------- ----
Total delinquent
loans ................ 2,991 $ 53,466 5.54%
====== ======= ====
</TABLE>
23
<PAGE>
Classified Assets. Under the classification system of the OTS, problem assets of
insured institutions are classified as "substandard," "doubtful" or "loss." An
asset is considered "substandard" if it is inadequately protected by the current
net worth and paying capacity of the obligor or by the collateral pledged, if
any. "Substandard" assets include those characterized by the "distinct
possibility" that the insured institution will sustain "some loss" if the
deficiencies are not corrected. Assets classified as "doubtful" have all of the
weaknesses inherent in those classified "substandard," with the added
characteristic that the weaknesses present make "collection or liquidation in
full," on the basis of currently existing facts, conditions, and values, "highly
questionable and improbable." Assets classified as "loss" are those considered
"uncollectable" and of such little value that their continuance as assets
without the establishment of a specific loss reserve is not warranted.
When an insured institution classifies problem assets as either substandard or
doubtful, it may establish general allowances for loan losses in an amount
deemed prudent by management. General allowances represent loss allowances that
have been established to recognize the inherent risk associated with lending
activities, but which, unlike specific allowances, have not been allocated to
particular problem assets. When an insured institution classifies problem assets
as "loss," it is required either to establish a specific allowance for losses
equal to 100% of that portion of the asset so classified or to charge off such
amount. An institution's determination as to the classification of its assets
and the amount of its valuation allowances is subject to review by the
institution's principal supervisory agent, who may order the establishment of
additional general or specific loss allowances.
The Company classifies loans as substandard when known information about the
possible credit problems of the borrowers or the cash flows of the collateral
properties cause management to have doubts as to the ability of the borrowers to
comply with present loan repayment terms and which may result in the future
inclusion of such items in the non-performing asset categories.
In connection with the filing of its periodic reports with the OTS and in
accordance with its classification of assets policy, the Bank regularly reviews
the problem loans in its portfolio to determine whether any loans require
classification in accordance with applicable regulations. Total classified
assets, including foreclosed or repossessed assets, at June 30, 1997 were $28.1
million.
Allowance for Possible Loan Losses. The allowance for possible loan losses is
established through a provision for possible loan losses based on management's
evaluation of the risk inherent in its loan portfolio and changes in the nature
and volume of its loan activity. Such evaluation, which includes a review of
certain loans of which full collectibility may not be reasonably assured,
considers among other matters, the estimated fair market value of the underlying
collateral, economic conditions, historical loan loss experience and other
factors that warrant recognition in providing for an adequate loan loss
allowance.
In fiscal 1994, valuation allowances were established for anticipated losses on
purchased delinquent loans. The subsequent charge-offs associated with these
loans partially accounted for the increased one- to four-family charge-offs in
the more current fiscal years. The Company's increased consumer lending volume,
especially in unsecured lines of credit was a significant factor in the
increased consumer loan charge-offs during the years presented in the analysis
of the Company's allowance for possible loan losses. Net charge-offs of lines of
credit tied to transaction deposit accounts were $1.1 million in fiscal 1997 due
to increased outstanding loan balances at June 30, 1997, compared to June 30,
1996. Yields on the line
24
<PAGE>
of credit portfolio exceed the Company's other loan products and sufficiently
cover experienced charge-offs while producing a profitable net investment
return.
The following table sets forth an analysis of the Company's allowance for
possible loan losses for the periods indicated.
<TABLE>
<CAPTION>
Years Ended June 30
-----------------------------------------------------------
1997 1996 1995 1994 1993
----------- --------- --------- --------- ---------
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C>
Balance at beginning of year $ 9,452 9,213 9,781 9,661 8,496
----------- --------- --------- --------- ---------
Charge-offs:
One- to four-family ........................... 735 659 568 260 123
Multi-family and commercial real estate ....... - - - - 35
Consumer ...................................... 1,679 914 540 393 310
----------- --------- --------- --------- ---------
Total ....................................... 2,414 1,573 1,108 653 468
----------- --------- --------- --------- ---------
Recoveries:
Consumer ...................................... 250 179 122 85 60
----------- --------- --------- --------- ---------
Net charge-offs ............................. 2,164 1,394 986 568 408
----------- --------- --------- --------- ---------
Additions:
Charged to operations ......................... 3,136 1,633 418 688 1,573
----------- --------- --------- --------- ---------
Balance at end of year .......................... $ 10,424 9,452 9,213 9,781 9,661
=========== ========= ========= ========= =========
Net charge-offs during the period as a
percentage of average loans outstanding ....... 0.24% 0.16% 0.13% 0.08% 0.05%
=========== ========= ========= ========= =========
Allowance for possible loan losses as a
percentage of loans receivable at the end
of the year ................................... 1.11% 1.08% 1.14% 1.35% 1.30%
=========== ========= ========= ========= =========
</TABLE>
The allowance for possible loan losses by category and the percentage to loans
receivable in each category at the dates indicated are summarized as follows:
<TABLE>
<CAPTION>
At June 30
-----------------------------------------------------------------------------------------------------------------
1997 1996 1995 1994 1993
---------------------- -------------------- --------------------- --------------------- -----------------------
% of % of % of % of % of
Allowance Loans Allowance Loans Allowance Loans Allowance Loans Allowance Loans
----------- ---------- ----------- -------- ----------- --------- ----------- --------- ------------ ----------
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Real estate .... $ 7,837 90.15% $ 7,955 89.95% $ 7,984 90.33% $ 8,725 89.81% $ 8,925 89.68%
Consumer ....... 2,587 9.85 1,497 10.05 1,229 9.67 1,056 10.19 736 10.32
======= ====== ======= ====== ======= ====== ======= ====== ======= ======
Total .......... $10,424 100.00% $ 9,452 100.00% $ 9,213 100.00% $ 9,781 100.00% $ 9,661 100.00%
======= ====== ======= ====== ======= ====== ======= ====== ======= ======
</TABLE>
INVESTMENT ACTIVITIES
Magnolia Federal must maintain minimum levels of investments that qualify as
liquid assets under OTS regulations. Liquidity may increase or decrease
depending upon the availability of funds and comparative yields on investments
in relation to the return on loans. Historically, the Bank has maintained liquid
assets at levels above the minimum requirements imposed by the OTS regulations
and at levels believed
25
<PAGE>
adequate to meet the requirements of normal operations, including repayments of
maturing debt and potential deposit outflows. Cash flow projections are
regularly reviewed and updated to assure that adequate liquidity is maintained.
As of June 30, 1997, the Bank's liquidity ratio (liquid assets as a percentage
of net withdrawable savings deposits and current borrowings) was 9.3%. See
"--Regulation--Liquidity."
Federally chartered savings institutions have the authority to invest in various
types of liquid assets, including United States Treasury obligations, securities
of various federal agencies, certain certificates of deposit of insured banks
and savings institutions, certain bankers' acceptances, repurchase agreements
and federal funds. Subject to various restrictions, federally chartered savings
institutions may also invest their assets in commercial paper, investment grade
corporate debt securities and mutual funds whose assets conform to the
investments that a federally chartered savings institution is otherwise
authorized to make directly.
Generally, the investment policy of the Company is to invest funds among various
categories of investments and maturities based upon the Company's
asset/liability management policies, investment quality and marketability,
liquidity needs and performance objectives.
At June 30, 1997, the Company's interest-earning deposits totaled $28.7 million,
or 2.1% of its total assets, mortgage-backed securities totaled $132.9 million,
or 9.8% of its total assets, and other securities, including FHLB of Dallas
stock, totaled $89.5 million, or 6.6% of its total assets. Mortgage-backed
securities are primarily securitization of the Company's loan origination.
Purchases of these securities are rare. However, it is the Company's general
policy to purchase other securities that are U.S. government securities or
federal agency obligations and other investment-grade securities.
26
<PAGE>
The following table sets forth the composition of the Company's securities
portfolio at the dates indicated.
<TABLE>
<CAPTION>
At June 30
-----------------------------------------------------------------------------
1997 1996 1995
------------------------ ------------------------ ------------------------
Carrying % of Carrying % of Carrying % of
Value Total Value Total Value Total
----------- ----------- ----------- ----------- ----------- -----------
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C>
Interest-bearing deposits with banks ............. $ 28,705 100.00% $ 10,746 100.00% $ 23,562 100.00%
=========== =========== =========== =========== =========== ===========
Securities held to maturity:
U.S. government securities ..................... $ 556 0.25% $ 3,609 1.43% $ 10,492 6.07%
Federal agency obligations ..................... 52,061 23.41 62,645 24.78 71,924 41.61
Federal agency mortgage-backed securities ...... 10,526 4.73 12,727 5.03 52,243 30.23
Corporate debt securities ...................... 1,128 0.51 1,161 0.46 1,137 0.66
Other .......................................... 47 0.02 71 0.03 95 0.05
----------- ----------- ----------- ----------- ----------- -----------
Total securities held to maturity ...... 64,318 28.92 80,213 31.73 135,891 78.62
----------- ----------- ----------- ----------- ----------- -----------
Securities available for sale:
U.S. government securities ..................... 4,203 1.89 4,161 1.65 - -
Federal agency obligations ..................... 2,936 1.32 2,888 1.14 - -
Federal agency mortgage-backed securities ...... 122,385 55.03 118,873 47.02 18,567 10.74
Equity securities .............................. 9,538 4.29 139 0.06 - -
----------- ----------- ----------- ----------- ----------- -----------
Total securities available for sale .... 139,062 62.53 126,061 49.87 18,567 10.74
----------- ----------- ----------- ----------- ----------- -----------
Securities held for trading:
Federal agency mortgage-backed securities ...... - - 34,487 13.64 10,454 6.05
Equity securities .............................. 3,386 1.52 - - - -
----------- ----------- ----------- ----------- ----------- -----------
Total securities held for trading ...... 3,386 1.52 34,487 13.64 10,454 6.05
----------- ----------- ----------- ----------- ----------- -----------
FHLB of Dallas stock ............................. 15,627 7.03 12,027 4.76 7,926 4.59
----------- ----------- ----------- ----------- ----------- -----------
Total investment securities and FHLB of
Dallas stock ......................... $222,393 100.00% $252,788 100.00% $172,838 100.00%
=========== =========== =========== =========== =========== ===========
</TABLE>
27
<PAGE>
The composition and maturities of the securities portfolio at June 30, 1997,
excluding FHLB of Dallas stock and other equity securities, are indicated in the
following table. Maturities of mortgage-backed securities are also not shown
because such securities are not due at a single maturity date. Actual maturities
of mortgage-backed securities would differ from contractual maturities because
borrowers have the right to prepay obligations.
<TABLE>
<CAPTION>
Less Than 1 to 5 Over 5 to Over Total
1 Year Years 10 Years 10 Years Securities
------------ ------------ ------------ ------------ -------------------------
Estimated
Amortized Amortized Amortized Amortized Amortized Fair
Cost Cost Cost Cost Cost Value
------------ ------------ ------------ ------------ ------------- ----------
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C>
Securities held to maturity:
U.S. government securities ............... $ - 182 373 - 555 595
Federal agency obligations ............... - 1,999 35,629 14,433 52,061 54,871
Corporate debt securities ................ 40 505 584 - 1,129 1,137
Other .................................... 47 - - - 47 47
------------ ------------ ------------ ------------ ------------- ----------
Total securities held to maturity ..... 87 2,686 36,586 14,433 53,792 56,650
------------ ------------ ------------ ------------ ------------- ----------
Securities available for sale:
U.S. government securities ............... - 237 4,019 - 4,256 4,203
Federal agency obligations ............... - - 3,000 - 3,000 2,936
------------ ------------ ------------ ------------ ------------- ----------
Total securities available for sale ... - 237 7,019 - 7,256 7,139
------------ ------------ ------------ ------------ ------------- ----------
Total securities ................... $ 87 2,922 43,606 14,433 61,048 63,789
============ ============ ============ ============ ============= ==========
Weighted average yield ............. 5.03% 7.96% 7.22% 7.90% 7.41%
============ ============ ============ ============ =============
</TABLE>
The Company's securities portfolio at June 30, 1997 contained neither tax-exempt
securities nor securities of any issuer with an aggregate book value in excess
of 10% of the Company's retained earnings, excluding those issued by the United
States government or its agencies. The Company's investment securities portfolio
has no non-investment grade corporate debt securities (i.e., "junk bonds") or
any high-risk derivative securities.
As of June 30, 1997, the Company's $64.3 million securities portfolio intended
to be held to maturity was accounted for at amortized cost. As of such date,
these securities had a fair value of $67.5 million. The Company's portfolio of
securities available for sale are carried at the fair value of $139.1 million
and have an amortized cost of $138.9 million.
SOURCES OF FUNDS
General. The Company's primary sources of funds are deposits, amortization and
prepayment of loan principal (including mortgage-backed securities), borrowings,
proceeds from sales of loans and mortgage-backed securities, maturities of
investment securities, and funds provided from operations.
Borrowings, predominantly from the FHLB of Dallas, may be used on a short-term
basis to compensate for seasonal reductions in deposits or deposit inflows at
less than projected levels, and may be used on a
28
<PAGE>
longer-term basis to support expanded lending activities. The availability of
funds from sales and prepayments of loans and mortgage-backed securities is
influenced by the general level of interest rates.
Deposits. The Company offers a variety of deposit accounts having a wide range
of interest rates and terms. The Company's deposits consist of passbook,
statement, NOW, checking, money market and certificates of deposit. The Company
only solicits deposits from its market area and does not use brokers to obtain
deposits. The Company relies primarily on competitive pricing policies,
advertising, and customer service to attract and retain these deposits.
The flow of deposits is influenced significantly by general economic conditions,
changes in the money market and prevailing interest rates and competition.
The following table sets forth the dollar amount of savings deposits in the
various types of deposit programs offered by the Company at the dates indicated.
<TABLE>
<CAPTION>
At June 30
---------------------------------------------------------------------------------------
1997 1996 1995
--------------------------- ------------------------------ --------------------------
% % %
Amount of Total Amount of Total Amount of Total
------------ ------------- ------------- --------------- ------------ ------------
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C>
Certificates of deposit:
0.00% - 3.99% .............. $ 1,549 0.17% $ 2,928 0.32% $ 16,460 1.79%
4.00 - 5.99 .............. 440,438 48.11 383,101 41.53 369,196 40.23
6.00 - 7.99 .............. 29,999 3.28 95,905 10.40 90,586 9.87
8.00 - 11.99 .............. 342 .04 828 0.09 1,419 0.16
------------ ------------- ------------- --------------- ------------ ------------
Total certificates of deposit ... 472,328 51.60 482,762 52.34 477,661 52.05
------------ ------------- ------------- --------------- ------------ ------------
Other accounts:
Passbook and statement ......... 126,807 13.85 133,326 14.46 133,296 14.52
Money market ................... 30,753 3.36 33,601 3.64 36,410 3.97
NOW ........................... 121,705 13.30 112,360 12.18 112,966 12.31
Noninterest-bearing checking ... 163,802 17.89 160,321 17.38 157,385 17.15
------------ ------------- ------------- --------------- ------------ ------------
Total other accounts ........... 443,067 48.40 439,608 47.66 440,057 47.95
------------ ------------- ------------- --------------- ------------ ------------
Total deposits ................. $ 915,395 100.00% $ 922,370 100.00% $ 917,718 100.00%
============ ============= ============= =============== ============ ============
</TABLE>
The variety of deposit accounts offered by the Company has allowed it to be
competitive in obtaining funds and to respond with flexibility to changes in
consumer demand. Management believes the Company has become more susceptible to
short-term fluctuations in deposit flows, as customers have become more interest
rate conscious. The Company manages the pricing of its deposits in keeping with
its asset/liability management and profitability objectives. Based on its
experience, the Company believes that its statement savings, money market, NOW
and checking accounts are relatively stable sources of deposits. However, the
ability of the Company to attract and maintain certificates of deposit, and the
rates paid on these deposits, have been and will continue to be significantly
affected by market conditions.
29
<PAGE>
The following table sets forth the savings flows of the Company for the periods
indicated. Net increase (decrease) refers to the amount of deposits during a
period less the amount of withdrawals during the period. Deposit flows at
savings institutions may be influenced by external factors such as government
credit policies, depositors' perceptions of the adequacy of federal insurance of
accounts and, particularly in recent periods, the interest rates offered on
deposits compared with other sources of investment revenue. During fiscal 1995
net decreases (before interest credits) included decreases in certificates of
deposit of $37.3 million as customers sought higher-yielding investment
alternatives, as well as declines in balances of custodial funds of $13.1
million as the level of repayment activity subsided and the number of serviced
loans decreased. Further declines in balances of custodial funds of $11.3
million contributed to a net decrease (before interest credits) during fiscal
1996. During fiscal 1997, excluding the sale of $5.8 million in deposits related
to an Alabama branch, deposits decreased $27.0 million (before interest
credits), primarily in certificates of deposit which continue to compete with
other investment alternatives.
Years Ended June 30
-----------------------------------------
1997 1996 1995
---------- --------------- ------------
(Dollars in Thousands)
Opening balance ................... $ 922,370 917,718 972,644
Net decrease ...................... (32,789) (20,412) (76,968)
Interest credited ................. 25,814 25,064 22,042
--------- --------- ---------
Ending balance .................... $ 915,395 922,370 917,718
========= ========= =========
Net increase (decrease) ........... $ (6,975) 4,652 (54,926)
========= ========= =========
Percentage increase (decrease) .... (0.76)% 0.51% (5.65)%
========= ========= =========
The following table sets forth rate and maturity information for the Company's
certificates of deposit as of June 30, 1997.
<TABLE>
<CAPTION>
0.00- 4.00- 6.00- 8.00- Percent
3.99% 5.99% 7.99% & Over Total of Total
----- ----- ----- ------ ----- --------
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C>
Certificates of deposit
maturing in quarter ending:
September 30, 1997 ........... $ 150 111,854 4,818 18 116,840 24.74%
December 31, 1997 ............ - 96,094 4,886 6 100,986 21.38
March 31, 1998 ............... 50 65,531 2,967 7 68,555 14.51
June 30, 1998 ................ 26 55,464 3,077 36 58,603 12.41
September 30, 1998 ........... 305 35,208 4,148 200 39,861 8.44
December 31, 1998 ............ - 16,973 1,778 - 18,751 3.97
March 31, 1999 ............... 58 7,256 483 31 7,828 1.66
June 30, 1999 ................ - 14,347 2,385 - 16,732 3.54
September 30, 1999 ........... - 19,876 1,974 - 21,850 4.62
December 31, 1999 ............ 14 4,928 438 - 5,380 1.14
March 31, 2000 ............... 1 5,350 232 - 5,583 1.18
June 30, 2000 ................ 38 2,352 378 - 2,768 0.59
Thereafter ................... 907 5,205 2,435 44 8,591 1.82
------- -------- ------- ------- -------- ------
Total dollar amount .. $ 1,549 440,438 29,999 342 472,328
======= ======== ======= ======= ========
Total percentage ..... 0.33% 93.25% 6.35% 0.07% 100.00% 100.00%
======= ======== ======= ======= ======== ========
</TABLE>
30
<PAGE>
The following table sets forth the amounts of certificates of deposit by time
remaining until maturity as of June 30, 1997.
<TABLE>
<CAPTION>
Maturity
------------------------------------------------------------------------------------
3 Months Over 3 to 6 Over 6 to 12 Over 12
or Less Months Months Months Total
-------------- -------------- -------------- -------------- --------------
(In Thousands)
<S> <C> <C> <C> <C> <C>
Certificates of deposit
less than $100,000 ................ $103,802 88,357 109,743 109,745 411,647
Certificates of deposit of
$ 100,000 or more (1) ................ 12,938 12,495 17,213 17,599 60,245
Public funds (2) ..................... 100 134 202 - 436
-------- -------- -------- -------- --------
Total certificates of deposit ........ $116,840 100,986 127,158 127,344 472,328
======== ======== ======== ======== ========
- ----------
<FN>
(1) Of the $60.2 million total certificates of deposit of $100,000 or more,
$5.7 million consisted of negotiated rate certificates.
(2) Deposits from governmental and other public entities of which $200,000 was
in certificate accounts of $100,000 and more.
</FN>
</TABLE>
Borrowings. Although deposits are its primary source of funds, the Company's
policy has been to utilize borrowings when they are a less costly source of
funds or can be invested at a positive rate of return. In addition, the Company
has relied upon selective borrowings for short-term liquidity needs.
Magnolia Federal obtains advances from the Federal Home Loan Bank ("FHLB") of
Dallas upon the security of certain of its mortgage loans. Such advances are
made pursuant to several different credit programs, each of which has its own
interest rate and range of maturities. At June 30, 1997, the Bank had borrowings
outstanding from the FHLB of Dallas totaling $258.4 million of which $165.3
million was due within one year.
The Company occasionally enters into transactions in which securities are sold
under agreements to repurchase the same securities with nationally recognized
primary securities dealers and financial institutions. These agreements are
accounted for as borrowings by the Company and the carrying value of securities
underlying the agreements remains in the investment accounts. The proceeds of
these transactions are used to purchase investments yielding a higher rate than
the borrowed funds and to meet cash flow needs of the Company. The Company
typically depends upon this borrowing capacity to fund short-term cash needs. At
June 30, 1997, the Company had no securities sold under agreements to
repurchase.
31
<PAGE>
The following table sets forth the maximum month-end and average balances of
borrowings from the FHLB of Dallas, securities sold under agreements to
repurchase and other borrowings for the years indicated.
<TABLE>
<CAPTION>
Years Ended June 30
---------------------------------------------------
1997 1996 1995
-------------- -------------- --------------
(Dollars in Thousands)
<S> <C> <C> <C>
Maximum month-end balance:
Borrowings from the FHLB of Dallas ................. $296,734 221,961 150,000
Securities sold under agreements to repurchase ..... - - 50,000
Other long-term borrowings ......................... - - 591
Average balance:
Borrowings from the FHLB of Dallas ................. $244,451 163,149 64,795
Securities sold under agreements to repurchase ..... - - 29,961
Other long-term borrowings ......................... - - 290
Weighted average interest rate of borrowings from the
FHLB of Dallas ......................................... 6.12% 6.38% 6.65%
Weighted average interest rate of securities sold
under agreements to repurchase ......................... N/A N/A 5.41%
Weighted average interest rate of other long-term
borrowings ............................................. N/A N/A 14.00%
</TABLE>
The following table sets forth certain information as to borrowings from the
FHLB of Dallas and other debt at the dates indicated.
<TABLE>
<CAPTION>
At June 30
------------------------------------------------------------
1997 1996 1995
------------------- -------------------- -------------------
(Dollars in Thousands)
<S> <C> <C> <C>
Borrowings from the FHLB of Dallas:
Short-term .................................. $165,299 125,000 100,000
Long-term ................................... 93,150 96,961 -
-------- -------- --------
Total borrowings ............................ $258,449 221,961 100,000
======== ======== ========
Weighted average interest rate of short-term
borrowings from the FHLB of Dallas ............. 5.84% 6.08% 6.87%
Weighted average interest rate of long-term
borrowings from the FHLB of Dallas ............. 6.42% 6.42% N/A
</TABLE>
SUBSIDIARY ACTIVITIES
Magna Insurance Company ("Magna Insurance"), a majority-owned subsidiary of the
Company, is a life insurance company and writes a portfolio of the usual forms
of mortgage protection, credit life and accident and health coverage through its
agent, Magnolia Federal. It also offers tax-deferred annuities to the Bank's
depositors and the general public. In December 1994, the Company acquired a
small, inactive
32
<PAGE>
life insurance company licensed to do business in 13 states in which Magna
Insurance was not previously authorized. Magna Insurance was merged with the new
company in June 1995 and the surviving entity changed its name to Magna
Insurance Company. Magna Insurance is managed by Financial Insurance Management
Corporation located in Metairie, Louisiana, and operates under regulations
prescribed by the Insurance Department of the State of Mississippi. In June
1996, the Company sold a 21% interest in Magna Insurance to a single investor
and in so doing, Magna Insurance is allowed to take advantage of a small life
insurance company deduction on its tax return, thereby lowering its effective
tax rate. During fiscal 1996, the Company also acquired 100% of another
insurance company that was subsequently merged with Magna Insurance. At June 30,
1997, Magna Insurance had total consolidated assets of $9.1 million and
stockholder's equity of $6.2 million.
Magna Financial Services, Inc. was acquired by Magnolia Federal in 1982 in
connection with the merger of First Federal Savings and Loan Association of
Canton. In May 1993, the Company acquired this subsidiary through a non-cash
dividend from Magnolia Federal. This subsidiary owns three income-producing
properties with an aggregate net book value at June 30, 1997 of $1.1 million.
Realty Services, Inc. is a wholly-owned subsidiary of Magna Bancorp, Inc.
acquired from Magnolia Federal through a non-cash dividend in July 1993 and is
engaged in performing real estate appraisals primarily for loan customers of
Magnolia Federal.
Comserv, Inc., a wholly-owned subsidiary of Magna Bancorp, Inc. that was
acquired through a non-cash dividend from Magnolia Federal in October 1993, is
an insurance agency serving as an agent for hazard insurance coverage on
property subject to Company liens.
The Bank's wholly-owned operating subsidiary, Magna Mortgage Company, was formed
as a mortgage banking company to which all the Bank's loan processing,
underwriting and servicing responsibilities were transferred as of January 1,
1995. At June 30, 1997, Magna Mortgage serviced $871.5 million of loans for the
Company and $3.1 billion of mortgage loans for others. As of such date, the net
book value of Magnolia Federal's investment in Magna Mortgage Company was $12.3
million.
COMPETITION
The Company faces strong competition, both in originating real estate and other
loans and in attracting deposits. Competition in originating real estate loans
comes primarily from commercial banks and mortgage bankers making loans secured
by real estate located in the Company's market areas. Commercial banks and
finance companies provide vigorous competition in consumer lending. The Company
competes for ARM loans it intends to retain in its portfolio principally on the
basis of the types of loans it originates and the quality of services it
provides to borrowers. The Company competes for fixed-rate loans it intends to
sell in the secondary market principally on the basis of the interest rates and
loan fees it charges.
The Company attracts all of its deposits through its branch offices, primarily
from the communities in which those branch offices are located; therefore,
competition for those deposits is principally from commercial banks located in
the same communities. The Company competes for these deposits by offering a
variety of deposit accounts and other services at competitive rates, convenient
business hours,
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and convenient branch locations with interbranch deposit and withdrawal
privileges at each. Automated teller machine ("ATM") facilities are available at
all retail branch locations.
EMPLOYEES
At June 30, 1997, the Company had a total of 1,134 employees, including 176
part-time employees. The Bank's employees are not represented by any collective
bargaining group. Management considers its employee relations to be good. The
Bank serves as the master employer of the Company and all subsidiaries. Employee
costs paid by the Bank are allocated to the Company or appropriate subsidiary
and the Bank is reimbursed monthly. Magna Insurance and Magna Financial
Services, Inc. do not have salaried employees.
REGULATION
General. Magnolia Federal is a federally chartered savings bank, the deposits of
which are insured and backed by the full faith and credit of the United States
government. Accordingly, Magnolia Federal is subject to broad federal regulation
and oversight extending to all its operations. The Bank is a member of the FHLB
of Dallas and is subject to certain limited regulation by the Board of Governors
of the Federal Reserve System ("Federal Reserve Board"). As the savings and loan
holding company of Magnolia Federal, the Company also is subject to federal
regulation and oversight. The purpose of the regulation of the Company and other
holding companies is to protect subsidiary savings associations. The Bank is a
member of the Savings Association Insurance Fund ("SAIF") and the deposits of
the Bank are insured by the FDIC. As a result, the FDIC has certain regulatory
and examination authority over Magnolia Federal.
Certain of these regulatory requirements and restrictions are discussed below or
elsewhere in this document.
Federal Regulation of Savings Associations. The OTS has extensive authority over
the operations of savings associations. As part of this authority, Magnolia
Federal is required to file periodic reports with the OTS and is subject to
periodic examinations by the OTS and the FDIC. A limited safety and soundness
examination focused on asset quality was conducted by the OTS as of June 30,
1997. The Bank's financial statements as of June 30, 1997 fully reflect the
results of this examination related to asset classifications and loan loss
allowances. The last regular examination of Magnolia Federal by the FDIC was a
joint examination with the OTS conducted as of March 1993.
The OTS has established a schedule for the assessment of fees upon all savings
associations to fund the operations of the OTS. The general assessment, to be
paid on a semi-annual basis, is computed upon the savings association's total
assets as reported in the association's latest quarterly thrift financial
report. Savings associations that (unlike the Bank) are classified as "troubled"
(i.e., having a supervisory rating of "4" or "5" or in conservatorship) are
required to pay a 50% premium over the standard assessment. The Bank's
semi-annual OTS assessment for the six-month period ended June 30, 1997, based
upon its September 30, 1996 total assets of $1.3 billion, was $122,000.
Subsequent to June 30, 1997, the Bank was assessed $126,000 for the six-month
period ending December 31, 1997.
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The OTS also has extensive enforcement authority over all savings institutions
and their holding companies, including Magnolia Federal and the Company. This
enforcement authority includes, among other things, the ability to assess civil
money penalties, to issue cease-and-desist or removal orders and to initiate
injunctive actions. In general, these enforcement actions may be initiated for
violations of laws and regulations and unsafe or unsound practices. Other
actions or inactions may provide the basis for enforcement action, including
misleading or untimely reports filed with the OTS. Except under certain
circumstances, public disclosure of final enforcement actions by the OTS is
required.
In addition, the investment, lending and branching authority of the Bank is
prescribed by federal laws and regulations, and it is prohibited from engaging
in any activities not permitted by such laws and regulations. For instance, no
savings institution may invest in non-investment grade corporate debt
securities. In addition, the permissible level of investment by federal
associations in loans secured by non-residential real property may not exceed
400% of total capital, except with approval of the OTS. Federal savings
associations are also generally authorized to branch nationwide. Magnolia
Federal is in compliance with the noted restrictions.
The Bank's permissible lending limit for loans-to-one-borrower is equal to the
greater of $500,000 or 15% of unimpaired capital and surplus (except for loans
fully secured by certain readily marketable collateral, in which case this limit
is increased to 25% of unimpaired capital and surplus). At June 30, 1997, the
Bank's lending limit under this restriction was $18.3 million. Magnolia Federal
is in compliance with the loans-to-one-borrower limitation.
The OTS, as well as the other federal banking agencies, have issued safety and
soundness standards effective August 9, 1995 on matters such as loan
underwriting and documentation, internal controls and audit systems, interest
rate risk exposure, asset quality, earnings standards, asset growth and
compensation and other employee benefits. These rules only apply to the Bank and
are not applicable to the holding company or affiliates. The standards are
general and flexible in nature and are not deemed to be overly restrictive,
however, any institution that is determined to be out of compliance with these
standards may be required to submit a compliance plan. A failure to submit a
plan or to comply with an approved plan will subject the institution to further
enforcement action. The regulation also requires savings and loan holding
companies to ensure that transactions and relationships with their subsidiary
savings associations do not have a detrimental effect on the safe and sound
operation of the association.
Insurance of Accounts and Regulation by the FDIC. Magnolia Federal is a member
of the SAIF, which is administered by the FDIC. Deposits are insured up to
applicable limits by the FDIC and such insurance is backed by the full faith and
credit of the United States government. As insurer, the FDIC imposes deposit
insurance premiums and is authorized to conduct examinations of and to require
reporting by FDIC-insured institutions. It also may prohibit any FDIC-insured
institution from engaging in any activity the FDIC determines by regulation or
order to pose a serious risk to the FDIC. The FDIC also has the authority to
initiate enforcement actions against savings associations, after giving the OTS
an opportunity to take such action, and may terminate the deposit insurance if
it determines that the institution has engaged or is engaging in unsafe or
unsound practices, or is in an unsafe or unsound condition.
The FDIC's deposit insurance premiums are assessed through a risk-based system
under which all insured depository institutions are placed into one of nine
categories and assessed insurance premiums, ranging from 0% to .27% of deposits,
based upon their level of capital and supervisory evaluation. Under the
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system, institutions classified as well capitalized (i.e., those with a core
capital ratio of at least 5%, a ratio of Tier 1 or core capital to risk-weighted
assets ("Tier 1 risk-based capital") of at least 6% and a risk-based capital
ratio of at least 10%) and considered healthy pay the lowest premium while
institutions that are less than adequately capitalized (i.e., those with core
and Tier 1 risk-based capital ratios of less than 4% or a risk-based capital
ratio of less than 8%) and considered of substantial supervisory concern pay the
highest premium. Risk classification of all insured institutions is made by the
FDIC semi-annually. Assessments are paid quarterly. For the three month period
ending September 30, 1997, the Bank was assessed .01575% of deposits, or
$142,000.
The FDIC is authorized to increase assessment rates, on a semiannual basis, if
it determines that the reserve ratio of the SAIF will be less than the
designated reserve ratio of 1.25% of SAIF insured deposits. In setting these
increased assessments, the FDIC must seek to restore the reserve ratio to that
designated reserve level, or such higher reserve ratio as established by the
FDIC. In addition, under FDICIA, the FDIC may impose special assessments on SAIF
members to repay amounts borrowed from the United States Treasury or for any
other reason deemed necessary by the FDIC.
The Bank Insurance Fund ("BIF") is also administered by the FDIC. On August 8,
1995, the FDIC revised the premium schedule for BIF-insured banks to provide a
range of 0.04% to 0.31% of deposits (as compared to the previous range of 0.23%
to 0.31% of deposits for both BIF and SAIF-insured institutions) in anticipation
of the BIF achieving its statutory reserve ratio. As a result, BIF members
generally paid lower premiums than the SAIF members. It was anticipated that the
SAIF would not be adequately recapitalized until 2002, absent a substantial
increase in premium rates or the imposition of special assessments or other
significant developments, such as a merger of the SAIF and the BIF. As a result
of this disparity, SAIF members were at a significant competitive disadvantage
to BIF members due to higher costs for deposit insurance. Legislation adopted
September 30, 1996, provided for a one-time assessment of 0.68% to be imposed on
all deposits insured by the SAIF as of March 31, 1995. This one time assessment
translated to a $5.9 million charge to the Company's pre-tax earnings in the
1997 fiscal year. However, subsequent periods reflected reduced annual deposit
insurance premiums, to as low as 0.06% from the 0.23% of deposits previously
paid by the Bank, creating a savings to the Company of approximately $1.5
million before tax.
All SAIF-insured institutions are required to pay an assessment for the
repayment of interest on obligations issued by a federally chartered corporation
to provide financing ("FICO") for resolving the thrift crisis in the 1980s, in
an amount equal to 6.48 basis points for each $100 in domestic deposits. As a
result of the recent legislation discussed above, BIF-insured institutions are
also required to pay an assessment for the repayment of interest on the FICO
bonds, in an amount equal to 1.52 basis points for each $100 in domestic
deposits. The assessment on SAIF-insured institutions is expected to be reduced
to 2.43 basis points for each $100 in domestic deposits no later than January 1,
2000, by which point BIF-insured institutions will participate fully in the FICO
bond interest repayment. These assessments, which may be revised based upon the
level of BIF and SAIF deposits, will continue until the bonds mature in 2017.
Regulatory Capital Requirements. Federally insured savings associations, such as
the Bank, are required to maintain a minimum level of regulatory capital. The
OTS has established capital standards, including a tangible capital requirement,
a leverage ratio (or core capital) requirement and a risk-based capital
requirement applicable to such savings associations. These capital requirements
must be generally as stringent as the comparable capital requirements for
national banks. The OTS is also authorized to
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impose capital requirements in excess of these standards on individual
associations on a case-by-case basis.
The capital regulations require tangible capital of at least 1.5% of adjusted
total assets (as defined by regulation). Tangible capital generally includes
common stockholders' equity and retained income, and certain noncumulative
perpetual preferred stock and related income. In addition, all intangible
assets, other than a limited amount of purchased or originated mortgage
servicing rights, must be deducted from tangible capital. At June 30, 1997, the
Bank had $3.7 million in core deposit intangibles that was required to be
deducted from equity capital in calculating tangible capital. At that date the
Bank had tangible capital of $113.3 million, or 8.48% of adjusted total assets,
which is approximately $93.3 million above the minimum requirement of 1.5% of
adjusted total assets in effect on that date. At June 30, 1997, Magnolia Federal
also had $8.5 million of unamortized mortgage servicing rights, none of which
was required to be deducted from tangible capital. The OTS limits the amount of
mortgage and non-mortgage servicing rights, together with purchased credit card
receivables, includable as tangible and core capital to 50% of core capital.
Under SFAS No. 115, which was effective for fiscal years beginning after
December 31, 1993, debt securities available for sale and held for trading must
be reported at their fair value, which may be more or less than amortized cost.
Such debt securities not held for trading will be considered available for sale
unless the institution can demonstrate that it has the positive intent and
ability to hold the security until maturity. The OTS issued a policy statement
in November 1994 requiring that an association must value available-for-sale
securities at amortized cost for regulatory capital purposes. At June 30, 1997,
an adjustment was made to regulatory capital for the $678,000 in unrealized
losses on securities available for sale, net of income taxes, included in the
Bank's equity capital.
The OTS regulations establish special capitalization requirements for savings
associations that own subsidiaries. Under these regulations certain subsidiaries
are consolidated for capital purposes and others are excluded from assets and
capital. In determining compliance with the capital requirements, all
subsidiaries engaged solely in activities permissible for national banks, or
engaged in certain other activities solely as agent for its customers are
"includable" subsidiaries that are consolidated for capital purposes in
proportion to the association's level of ownership, including the assets of
includable subsidiaries in which the association has a minority interest that is
not consolidated for GAAP purposes. For excludable subsidiaries the debt and
equity investments in such subsidiaries are deducted from assets and capital.
The only subsidiary of the Bank is an includable subsidiary.
The capital standards also require core capital equal to at least 3% of adjusted
total assets (as defined by regulation). Core capital generally consists of
tangible capital plus certain intangible assets and a limited amount of
purchased credit card relationships. As a result of the prompt corrective action
provisions of FDICIA discussed below, however, a savings association must
maintain a core capital ratio of at least 4% to be considered adequately
capitalized unless its supervisory condition is such to allow it to maintain a
3% ratio. At June 30, 1997, the Bank's core deposit intangible of $3.7 million
was not included in the calculation of core capital. Mortgage servicing rights
includable as core capital are limited to 50% of such capital. At June 30, 1997
the Bank was not required to deduct any portion of its investment in this asset.
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At June 30, 1997, the Bank had core capital equal to $113.3 million, or 8.48% of
adjusted total assets, which is $73.3 million above the minimum leverage ratio
requirement of 3% as in effect on that date and $59.9 million above the minimum
leverage ratio of 4% required to be classified as adequately capitalized.
The OTS risk-based requirement requires savings associations to have total
capital of at least 8% of risk-weighted assets. Total capital consists of core
capital, as defined above, and supplementary capital. Supplementary capital
consists of certain permanent and maturing capital instruments that do not
qualify as core capital and general valuation loan and lease loss allowances up
to a maximum of 1.25% of risk-weighted assets. Supplementary capital may be used
to satisfy the risk-based requirement only to the extent of core capital. At
June 30, 1997, Magnolia Federal had $9.7 million of general loan loss reserves,
which exceeded 1.25% of risk-weighted assets and, therefore, only $9.0 million
qualified as risk-based capital. Certain exclusions from capital and assets are
required to be made for the purpose of calculating total capital. Such
exclusions consist of equity investments (as defined by regulation) and that
portion of land loans and nonresidential construction loans in excess of an 80%
loan-to-value ratio and reciprocal holdings of qualifying capital instruments.
Magnolia Federal had $75,000 of such exclusions from capital and assets at June
30, 1997.
In determining the amount of risk-weighted assets, all assets, including certain
off-balance sheet items, will be multiplied by a risk weight, ranging from 0% to
100%, based on the risks inherent in the type of asset. For example, the OTS has
assigned a risk weight of 50% for prudently underwritten permanent one- to
four-family first lien mortgage loans not more than 90 days delinquent and
having a loan to value ratio of not more than 80% at origination unless insured
to such ratio by an insurer approved by FNMA or FHLMC, or has been paid down
subsequent to origination to a loan-to-value ratio of less than 80%.
On June 30, 1997, the Bank had total capital of $122.3 million (including $113.3
million in core capital and $9.0 million in qualifying supplementary capital)
and risk-weighted assets of $723.8 million (including $10.3 million in converted
off-balance sheet assets); or total capital of 16.90% of risk-weighted assets.
This amount was $64.4 million above the 8.0% requirement in effect on that date.
The OTS has adopted a final rule that requires every savings association with
more than normal interest rate risk to deduct from its total capital, for
purposes of determining compliance with such requirement, an amount equal to 50%
of its interest rate risk exposure multiplied by the present value of its
assets. This exposure is a measure of the potential decline in the net portfolio
value of a savings association, greater than 2% of the present value of its
assets, based upon a hypothetical 200 basis point increase or decrease in
interest rates (whichever results in a greater decline). Net portfolio value is
the present value of expected cash flows from assets, liabilities and
off-balance sheet contracts. The rule provides for a two quarter lag between
calculating interest rate risk and recognizing any deduction from capital. The
interest rate risk capital deduction, which was to go into effect on September
30, 1994 has been delayed until the OTS evaluates the process under which
institutions may appeal such capital deductions. It is uncertain as to when this
evaluation will be completed. Any savings association with less than $300
million in assets and a total capital ratio in excess of 12% is exempt from this
requirement unless the OTS determines otherwise. The Company does not anticipate
any significant adjustments to the Bank's present capital requirements due to
the expected implementation of this interest rate risk rule.
The OTS and the FDIC are authorized and, under certain circumstances, required
to take certain actions against associations that fail to meet their capital
requirements. The OTS is generally required to take
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action to restrict the activities of an "undercapitalized association"
(generally defined to be one with less than either a 4% core capital ratio, a 4%
Tier 1 risked-based capital ratio or an 8% risk-based capital ratio). Any such
association must submit a capital restoration plan and, until such plan is
approved by the OTS, may not increase its assets, acquire another institution,
establish a branch or engage in any new activities, and generally may not make
capital distributions. The OTS is authorized to impose the additional
restrictions, discussed below, that are applicable to significantly
undercapitalized associations.
As a condition to the approval of the capital restoration plan, any company
controlling an undercapitalized association must agree that it will enter into a
limited capital maintenance guarantee with respect to the institution's
achievement of its capital requirements.
Any savings association that fails to comply with its capital plan or is
"significantly undercapitalized" (i.e., Tier 1 risk-based or core capital ratios
of less than 3% or a risk-based capital ratio of less than 6%) will be subjected
to one or more of additional specified actions and operating restrictions
mandated by FDICIA. These actions and restrictions include requiring the
issuance of additional voting securities; limitations on asset growth; mandated
asset reduction; changes in senior management; divestiture, merger or
acquisition of the association; restrictions on executive compensation; and any
other action the OTS deems appropriate.
An association that becomes "critically undercapitalized" (i.e., a tangible
capital ratio of 2% or less) is subject to further mandatory restrictions on its
activities in addition to those applicable to significantly undercapitalized
associations. In addition, the OTS must appoint a receiver (or conservator with
the concurrence of the FDIC) for a savings association, with certain limited
exceptions, within 90 days after it becomes critically undercapitalized.
If the OTS determines that an association is in an unsafe or unsound condition
or is engaged in an unsafe or unsound practice it is authorized to reclassify a
well-capitalized association as an adequately capitalized association and if the
association is adequately capitalized, to impose the restrictions applicable to
an undercapitalized association. If the association is undercapitalized, the OTS
is authorized to impose the restrictions applicable to a significantly
undercapitalized association.
Any undercapitalized association is also subject to other possible enforcement
actions by the OTS or the FDIC. Such actions could include a capital directive,
a cease-and-desist order, civil money penalties, the establishment of
restrictions on all aspects of the association's operations or the appointment
of a receiver or conservator or a forced merger into another institution.
The imposition by the OTS or the FDIC of any of these measures on the Bank may
have a substantial adverse effect on the Bank's operations and profitability. If
the OTS or the FDIC require the Company to raise additional capital through the
issuance of common stock or other instruments, such issuance may result in the
dilution of the Company's shareholders' ownership interest since shareholders do
not have preemptive rights.
Limitations on Dividends and Other Capital Distributions of the Bank. OTS
regulations impose various restrictions or requirements on associations with
respect to their ability to pay dividends or make other distributions of
capital. OTS regulations prohibit an association from declaring or paying any
dividends or from repurchasing any of its stock if, as a result, the regulatory
capital of the association would be
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reduced below the amount required to be maintained for the liquidation account
established in connection with its mutual to stock conversion.
The OTS utilizes a three-tiered approach to permit associations, based on their
capital level and supervisory condition, to make capital distributions that
include dividends, stock redemptions or repurchases, cash-out mergers and other
transactions charged to the capital account. See "--Regulatory Capital
Requirements."
Generally, Tier 1 associations, which are associations that before and after the
proposed distribution meet their capital requirements, may make capital
distributions during any calendar year equal to the greater of 100% of net
income for the year-to-date plus 50% of the amount by which the lesser of the
association's tangible, core or risk-based capital exceeds its fully phased-in
capital requirement for such capital component, as measured at the beginning of
the calendar year, or the amount authorized for a Tier 2 association. However, a
Tier 1 association deemed to be in need of more than normal supervision by the
OTS may be downgraded to a Tier 2 or Tier 3 association as a result of such a
determination. The Bank meets the requirements for a Tier 1 association and has
not been notified of a need for more than normal supervision. Tier 2
associations may make capital distributions of up to 75% of net income over the
most recent four quarter periods.
Tier 3 associations (which are associations that do not meet current minimum
capital requirements) that propose to make any capital distribution and Tier 2
associations that propose to make a capital distribution in excess of the noted
safe harbor level must obtain OTS approval prior to making such distribution.
Tier 2 associations proposing to make a capital distribution within the safe
harbor provisions and Tier 1 associations proposing to make any capital
distribution need only submit written notice to the OTS 30 days prior to such
distribution. As a subsidiary of the Company, the Bank will also be required to
give the OTS 30 days' notice prior to declaring any dividend on its stock. The
OTS may object to the distribution during that 30-day period based on safety and
soundness concerns.
The OTS has proposed regulations that would revise the current capital
distribution restrictions. The proposal eliminates the current tiered structure
and the safe-harbor percentage limitations. Under the proposal a savings
association may make a capital distribution without notice to the OTS (unless it
is a subsidiary of a holding company) provided that it has a CAMEL 1 or 2
rating, is not in troubled condition (as defined by regulation) and would remain
adequately capitalized (as defined in the OTS prompt corrective action
regulations) following the proposed distribution. Savings associations that
would remain adequately capitalized following the proposed distribution but do
not meet the other noted requirements must notify the OTS 30 days prior to
declaring a capital distribution. The OTS stated it will generally regard as
permissible that amount of capital distributions that do not exceed 50% of the
institution's excess regulatory capital plus net income to date during the
calendar year. A savings association may not make a capital distribution without
prior approval of the OTS and the FDIC if it is undercapitalized before, or as a
result of, such a distribution. As under the current rule, the OTS may object to
a capital distribution if it would constitute an unsafe or unsound practice. No
assurance may be given as to whether or in what form the regulations may be
adopted.
Liquidity. All savings associations, including Magnolia Federal, are required to
maintain an average daily balance of liquid assets equal to a certain percentage
of the sum of its average daily balance of net withdrawable deposit accounts and
borrowings payable in one year or less. This liquid asset ratio requirement may
vary from time to time (between 4% and 10%) depending upon economic conditions
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and savings flows of all savings associations. At the present time, the minimum
liquid asset ratio is 5.0%, but there has been some discussion by the OTS of
lowering this rate to 4.0%.
In addition, short-term liquid assets (e.g., cash, certain time deposits,
certain bankers acceptances and short-term United States Treasury obligations)
currently must constitute at least 1% of the association's average daily balance
of net withdrawable deposit accounts and current borrowings. Penalties may be
imposed upon associations for violations of either liquid asset ratio
requirement. At June 30, 1997, the Bank was in compliance with both
requirements, with an overall liquid asset ratio of 9.31% and a short-term
liquid assets ratio of 9.13%.
Accounting. An OTS policy statement applicable to all savings associations
clarifies and re-emphasizes that the investment activities of a savings
association must be in compliance with approved and documented investment
policies and strategies, and must be accounted for in accordance with GAAP.
Under the policy statement, management must support its classification of and
accounting for loans and securities (i.e., whether held for investment, sale or
trading) with appropriate documentation. The Bank is in compliance with these
amended rules.
The OTS has adopted an amendment to its accounting regulations, which may be
made more stringent than GAAP by the OTS, to require that transactions be
reported in a manner that best reflects their underlying economic substance and
inherent risk and that financial reports must incorporate any other accounting
regulations or orders prescribed by the OTS.
Qualified Thrift Lender Test. All savings associations, including the Bank, are
required to meet a qualified thrift lender ("QTL") test to avoid certain
restrictions on their operations. This test requires a savings association to
have at least 65% of its portfolio assets as defined by regulation in qualified
thrift investments on a monthly average for nine out of every 12 months on a
rolling basis. As an alternative, a savings association may maintain 60% of its
assets in those assets specified in Section 7701(a)(19) of the Internal Revenue
Code of 1986, as amended (the "Code"). Under either test, such assets primarily
consist of residential housing related loans and investments. As of June 30,
1997, the Bank met the QTL test, and it has always been in compliance with the
QTL requirement.
Any savings association that fails to meet the QTL test must convert to a
national bank charter, unless it requalifies as a QTL and thereafter remains a
QTL. If an association does not requalify and converts to a national bank
charter, it must remain SAIF insured until the FDIC permits it to transfer to
the BIF. If an association that fails the test has not yet requalified and has
not converted to a national bank, its new investments and activities are limited
to those permissible for both a savings association and a national bank, and it
is limited to national bank branching rights in its home state. In addition, the
association is immediately ineligible to receive any new FHLB borrowings and is
subject to national bank limits for payment of dividends. If such association
has not requalified or converted to a national bank within three years after the
failure, it must divest of all investments and cease all activities not
permissible for a national bank. In addition, it must repay promptly any
outstanding FHLB borrowings, which may result in prepayment penalties. If any
association that fails the QTL test is controlled by a holding company, then
within one year after the failure, the holding company must register as a bank
holding company and becomes subject to all restrictions on bank holding
companies. See "--Holding Company Regulation."
Community Reinvestment Act. Under the Community Reinvestment Act ("CRA"), every
FDIC insured institution has a continuing and affirmative obligation consistent
with safe and sound banking practices to
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help meet the credit needs of its entire community, including low and moderate
income neighborhoods. The CRA does not establish specific lending requirements
or programs for financial institutions nor does it limit an institution's
discretion to develop the types of products and services that it believes are
best suited to its particular community. The CRA requires the OTS, in connection
with the examination of Magnolia Federal, to assess the institution's record of
meeting the credit needs of its community and to take such record into account
in its evaluation of certain applications, such as a merger or the establishment
of a branch, by Magnolia Federal. An unsatisfactory rating may be used as the
basis for the denial of an application by the OTS.
The federal banking agencies, including the OTS, have recently revised the CRA
regulations and the methodology for determining an institution's compliance with
the CRA. Due to the heightened attention being given to the CRA in the past few
years, the Bank may be required to devote additional funds for investment and
lending in its local community. The Bank was examined for CRA compliance as of
March 31, 1995 and received a rating of outstanding.
Transactions with Affiliates. Generally, transactions between a savings
association or its subsidiaries and its affiliates are required to be on terms
as favorable to the association as transactions with non-affiliates. In
addition, certain of these transactions are restricted to a percentage of the
association's capital. Affiliates of Magnolia Federal include the Company and
any company that is under common control with the Bank. In addition, a savings
association may not lend to any affiliate engaged in activities not permissible
for a bank holding company or acquire the securities of most affiliates.
Magnolia Federal's subsidiary is not deemed an affiliate; however, the OTS has
the discretion to treat subsidiaries of savings associations as affiliates on a
case by case basis.
Certain transactions with directors, officers or controlling persons are also
subject to conflict of interest regulations enforced by the OTS. These conflicts
of interest regulations and other statutes also impose restrictions on loans to
such persons and their related interests. Among other things, such loans must be
made on terms substantially the same as for loans to unaffiliated individuals.
Holding Company Regulation. The Company is a unitary savings and loan holding
company subject to regulatory oversight by the OTS. As such, the Company is
required to register and file reports with the OTS and is subject to regulation
and examination by the OTS. In addition, the OTS has enforcement authority over
the Company and its non-savings association subsidiaries that also permits the
OTS to restrict or prohibit activities that are determined to be a serious risk
to the subsidiary savings association.
As a unitary savings and loan holding company, the Company generally is not
subject to activity restrictions. If the Company acquires control of another
savings association as a separate subsidiary, it would become a multiple savings
and loan holding company, and the activities of the Company and any of its
subsidiaries (other than the Bank or any other SAIF-insured savings association)
would become subject to such restrictions unless such other associations each
qualify as a QTL and were acquired in a supervisory acquisition.
If the Bank fails the QTL test, the Company must obtain the approval of the OTS
prior to continuing after such failure, directly or through its other
subsidiaries, any business activity other than those approved for multiple
savings and loan holding companies or their subsidiaries. In addition, within
one year of such failure the Company must register as, and will become subject
to, the restrictions applicable to bank holding companies. The activities
authorized for a bank holding company are more limited than
42
<PAGE>
are the activities authorized for a unitary or multiple savings and loan holding
company. See "--Qualified Thrift Lender Test."
The Company must obtain approval from the OTS before acquiring control of any
other SAIF-insured association. Such acquisitions are generally prohibited if
they result in a multiple savings and loan holding company controlling savings
associations in more than one state. However, such interstate acquisitions are
permitted based on specific state authorization or in a supervisory acquisition
of a failing savings association.
Federal Securities Law. The stock of the Company is registered with the
Securities and Exchange Commission (the "SEC") under the Securities Exchange Act
of 1934, as amended (the "Exchange Act"). The Company is subject to the
information, proxy solicitation, insider trading restrictions and other
requirements of the SEC under the Exchange Act.
Company stock held by persons who are affiliates (generally officers, directors
and principal stockholders) of the Company may not be resold without
registration or unless sold in accordance with certain resale restrictions. If
the Company meets specified current public information requirements, each
affiliate of the Company is able to sell in the public market, without
registration, a limited number of shares in any three-month period.
Federal Reserve System. The Federal Reserve Board requires all depository
institutions to maintain non-interest-bearing reserves at specified levels
against their transaction accounts (primarily checking, NOW and Super NOW
checking accounts). At June 30, 1997, the Bank was in compliance with these
reserve requirements. The balances maintained to meet the reserve requirements
imposed by the Federal Reserve Board may be used to satisfy liquidity
requirements that may be imposed by the OTS. See "--Liquidity."
Savings associations are authorized to borrow from the Federal Reserve Bank
"discount window," but Federal Reserve Board regulations require associations to
exhaust other reasonable alternative sources of funds, including FHLB
borrowings, before borrowing from the Federal Reserve Bank.
Federal Home Loan Bank System. The Bank is a member of the FHLB of Dallas, which
is one of 12 regional FHLBs that administers the home financing credit function
of savings associations. Each FHLB serves as a reserve or central bank for its
members within its assigned region. It is funded primarily from proceeds derived
from the sale of consolidated obligations of the FHLB System. It makes loans to
members (i.e., advances) in accordance with policies and procedures established
by the board of directors of the FHLB. These policies and procedures are subject
to the regulation and oversight of the Federal Housing Finance Board. All
advances from the FHLB are required to be fully secured by sufficient collateral
as determined by the FHLB. In addition, all long-term advances are required to
provide funds for residential home financing.
As a member, Magnolia Federal is required to purchase and maintain stock in the
FHLB of Dallas. At June 30, 1997, Magnolia Federal had $15.6 million in FHLB
stock, which was in compliance with this requirement. In past years, the Bank
has received substantial dividends on its FHLB stock. Over the past five
calendar years such dividends have averaged 4.98% and were 6.15% for calendar
year 1996.
Under federal law, the FHLBs are required to provide funds for the resolution of
troubled savings associations and to contribute to low- and moderately-priced
housing programs through direct loans or
43
<PAGE>
interest subsidies on advances targeted for community investment and low- and
moderate-income housing projects. These contributions have affected adversely
the level of FHLB dividends paid and could continue to do so in the future.
These contributions could also have an adverse effect on the value of FHLB stock
in the future. A reduction in value of the Bank's FHLB stock may result in a
corresponding reduction in Magnolia Federal's capital.
For the year ended December 31, 1996 dividends paid by the FHLB of Dallas to
Magnolia Federal totaled $636,800 which constitute a $87,600 increase over the
amount of dividends received in calendar year 1995. The $229,100 stock dividend
received for the quarter ended June 30, 1997 reflected an annualized rate of
6.0%, compared to a rate of 6.15% for calendar 1996.
Federal and State Taxation. Prior to the enactment of recent legislation,
savings associations such as the Bank that met certain definitional tests
relating to the composition of assets and other conditions prescribed by the
Code were permitted to establish reserves for bad debts and to make annual
additions thereto which could, within specified formula limits, be taken as a
deduction in computing taxable income for federal income tax purposes. The
amount of this bad debt reserve deduction for "non-qualifying loans" was
computed under the experience method. The amount of the bad debt reserve
deduction for "qualifying real property loans" (generally loans secured by
improved real estate) was computed under either the experience method or the
percentage of taxable income method (based on an annual election). Legislation
signed into law in August 1996 eliminated the percentage of taxable income
method in future years and will require recapture of approximately $10.4 million
post-1987 bad debt reserves over a six-year period. The Bank has provided for
the related taxes as a deferred tax liability and payment of income taxes on the
recapture of post-1987 bad debt reserves will not have a material effect on
future earnings. The Bank delayed the recapture of bad debt reserves for fiscal
1997, and may delay recapture another year if it meets certain loan origination
tests. The amount of bad debt deduction claimed pre-1988 of approximately $13.5
million will not be subject to tax recapture unless the Bank or its' successor
is liquidated at some future date.
In addition to the regular income tax, corporations, including the Company,
generally are subject to a minimum tax. An alternative minimum tax is imposed at
a minimum tax rate of 20% on alternative minimum taxable income, which is the
sum of a corporation's regular taxable income (with certain adjustments) and tax
preference items, less any available exemption. The alternative minimum tax is
imposed to the extent it exceeds the corporation's regular income tax and net
operating losses can offset no more than 90% of alternative minimum taxable
income. For taxable years beginning after 1986 and before 1996, corporations,
including the Company, are also subject to an environmental tax equal to 0.12%
of the excess of alternative minimum taxable income for the taxable year
(determined without regard to net operating losses and the deduction for the
environmental tax) over $2 million.
To the extent earnings appropriated to a savings association's bad debt reserves
for "qualifying real property loans" and deducted for federal income tax
purposes exceed the allowable amount of such reserves based on loss experience
and to the extent of the association's supplemental reserves for losses on loans
("Excess"), such Excess may not, without adverse tax consequences, be utilized
for the payment of cash dividends or other distributions to a shareholder
(including distributions on redemption, dissolution or liquidation) or for any
other purpose (except to absorb bad debt losses). As of June 30, 1997, the
Bank's Excess for tax purposes totaled approximately $23.4 million.
44
<PAGE>
The Company and its subsidiaries file consolidated federal income tax returns on
a fiscal year basis using the accrual method of accounting. Savings
associations, such as the Bank, that file federal income tax returns as part of
a consolidated group are required by applicable Treasury regulations to reduce
their taxable income for purposes of computing the percentage bad debt deduction
for losses attributable to activities of the non-savings association members of
the consolidated group that are functionally related to the activities of the
savings association member.
The Company and its consolidated subsidiaries were audited by the IRS with
respect to consolidated federal income tax returns for the three years ended
June 30, 1993. With respect to the years examined and concluded by the IRS all
deficiencies have been satisfied.
Mississippi Taxation. The Company and the Bank and its subsidiaries are subject
to the Mississippi corporate income tax and franchise tax to the extent that
such corporations are engaged in business in the state of Mississippi or have
income that is generated in the state. The franchise tax is imposed at a rate of
$2.50 per $1,000, or fractional part thereof, of capital, surplus, undivided
profits and reserves employed in Mississippi. The income tax is imposed at a
rate of 3% on the first $5,000 of taxable income, 4% on the next $5,000 of
taxable income and 5% on taxable income in excess of $10,000. A Mississippi
combination return of corporate income tax must be filed annually.
Alabama Taxation. The Bank is subject to Alabama financial institution excise
tax to the extent of income generated by the retail branches and loan
origination offices located in the state. The excise tax is imposed at a rate of
6%.
Delaware Taxation. As a Delaware holding company, the Company is exempted from
Delaware corporate income tax but is required to file an annual report with and
pay an annual fee to the State of Delaware. The Company is also subject to an
annual franchise tax imposed by the State of Delaware.
EXECUTIVE OFFICERS OF THE COMPANY
The following paragraphs set forth the name, age and biographical sketch of each
of the executive officers of the Company as of June 30, 1997.
Robert S. Duncan, age 61, served as President of the Company from 1991 until his
selection in 1993 as Chairman of the Board of the Company. Since 1991 he has
served as the Company's Chief Executive Officer. Mr. Duncan joined the Bank in
1968 as an Assistant Secretary, became an Executive Vice President in 1972, and
President in 1977. He was Chief Executive Officer of the Bank from 1983 until
March 1996, and has served as Chairman of the Board since 1984. For eight years
prior to joining Magnolia Federal, Mr. Duncan served as a manager for the
accounting firm of KPMG Peat Marwick LLP. Mr. Duncan is a past Director of the
FHLB of Dallas and former State Director of the Savings and Loan Foundation and
the Institute of Financial Education. He is past President of the Mississippi
League of Savings Institutions and the Mississippi Financial Managers Society
and currently serves on the Board of Directors of the Mississippi Bankers
Association. He has been active with the America's Community Bankers
organization, serving several years on the Executive Committee, and as a
Co-Chairman of the Governmental Affairs Committee. Mr. Duncan has served on the
Thrift Institutions Advisory Council of the Federal Reserve Board, the SAIF of
the FDIC and the Federal Reserve Board of Atlanta. Mr. Duncan holds a B.S.
degree from Auburn University. He has attended the Graduate School of Savings
45
<PAGE>
and Loans at Indiana University and the Savings and Loan School for Executive
Development at the University of Georgia.
Lou Ann Poynter, age 51, served as the Treasurer of the Company from 1991 until
June 30, 1993, and previously served as Executive Vice President and Treasurer
of Magnolia Federal. As of July 1, 1993, Ms. Poynter became President and Chief
Operating Officer of the Company and of Magnolia Federal. She accepted the
position of the Bank's Chief Executive Officer effective March 20, 1996. She
joined the Bank in 1972, became Treasurer in 1975, and Senior Vice President in
1985. She was promoted to Executive Vice President and Treasurer in 1988 and
served in that capacity until she became President on July 1, 1993. Ms. Poynter
has served on the Thrift Industry Accounting Committee and as a National
Director of the Financial Managers Society, Inc. She is past President of the
Mississippi Financial Managers Society and has served on the Mississippi State
Board of Public Accountancy. She currently serves on the Board of Directors and
the Government Affairs Council of America's Community Bankers. She is a member
of the Mississippi Society of Certified Public Accountants and the American
Institute of Certified Public Accountants. Ms. Poynter received her B.S. degree
in Business Administration and M.S. degree in Accounting from the University of
Southern Mississippi.
H. A. Moore, III, age 48, has been the Secretary of the Company since 1991 and
served as outside General Counsel to the Bank from 1976 until February 1997 when
he became Executive Vice-President and General Counsel to the Bank. Mr. Moore
was the managing partner of the law firm of Moore and Jones, Hattiesburg,
Mississippi prior to coming to Magnolia Federal, and has practiced law with the
firm beginning in 1972. He received his B.A. and J.D. degree from the University
of Mississippi in 1970 and 1972, respectively. He is a member of Omicron Delta
Kappa honorary fraternity and Phi Alpha Delta legal fraternity. Mr. Moore has
actively participated as a member and officer of the South Central Mississippi
Bar Association and as a member and director of the Mississippi Bar Association.
He has served as President of the Young Lawyers Division of the Mississippi Bar
Association and has served on several committees of the Mississippi Bar,
including the Ethics Committee. He is a member of the Mississippi Bar Foundation
and has served as one of its directors. Mr. Moore is also a member of the
American College of Mortgage Attorneys, the American Judicature Society, the
American Bar Association and the South Mississippi Estate Planning Association.
Mr. Moore has been an active member of the Attorney's Committee of America's
Community Bankers.
Karen K. Griffis, age 38, has served as Treasurer of the Company since 1993. Ms.
Griffis joined the Bank in 1982 and has been Treasurer and Chief Financial
Officer of the Bank since 1993 and Senior Vice President since 1994. She
presently serves on the Financial Institutions Accounting Committee of the
Financial Managers Society, Inc. and on the Taxation Committee of the American
Bankers Association. She is a member of the Mississippi Society of Certified
Public Accountants and the American Institute of Certified Public Accountants.
Ms. Griffis received her B.S. degree in Business Administration and Master of
Business Administration degree from the University of Southern Mississippi.
46
<PAGE>
ITEM 2. PROPERTIES
The Company conducts its business through 62 retail banking offices and four
loan origination offices located throughout Mississippi and Alabama, with the
executive and administrative offices located in Hattiesburg, Mississippi and a
data processing center in Jackson, Mississippi. The total net book value of the
Company's premises and equipment at June 30, 1997 was $44.0 million. The
following table sets forth information relating to each of the Bank's offices as
of June 30, 1997.
<TABLE>
<CAPTION>
DATE LEASED NET BOOK VALUE
LOCATION OR ACQUIRED AT JUNE 30, 1997
-------- ----------- ----------------
<S> <C> <C>
Magnolia Plaza Office Building 1981 $ 1,091,594
100 West Front Street
Hattiesburg, MS 39401
(Administrative offices)
Forrest Tower Office Building 1992 6,377,781
Forrest Street
Hattiesburg, MS 39401
(Executive offices)
Kress Office Building 1994 2,059,243
101 West Front Street
Hattiesburg, MS 39401
Parking (corner Main & Pine Streets) 1993 264,436
Hattiesburg, MS 39401
Office Building 1993 238,671
213 West Pine Street
Hattiesburg, MS 39401 (Parking/Purchasing)
Office Building 1985 994,784
480 Yazoo Street
Jackson, MS 39201 (Data Center offices)
Branches
--------
Southern Division
-----------------
130 West Front Street 1957 625,271
Hattiesburg, MS 39401
47
<PAGE>
<CAPTION>
DATE LEASED NET BOOK VALUE
LOCATION OR ACQUIRED AT JUNE 30, 1997
-------- ----------- ----------------
<C> <C> <C>
949 Broadway Drive 1971 397,408
Hattiesburg, MS 39401 (16th section ground
lease to 2046)
3318 Hardy Street 1983 364,566
Hattiesburg, MS 39401
4800 Hardy Street 1992 603,861
Hattiesburg, MS 39401
Highway 98 West, Wal-Mart Supercenter 1994 37,200
Hattiesburg, MS 39401 (Leased with options
to 2009)
120 South Main Street 1976 34,495
Petal, MS 39465
704 Main Street 1983 211,301
Collins, MS 39428
11283 Highway 63 South 1991 322,212
Lucedale, MS 39452
125 West College Avenue 1976 71,257
Wiggins, MS 39577
407 Highway 11 South 1991 292,679
Picayune, MS 39466
801 Spring Street 1993 317,631
Waynesboro, MS 39360
Coast Division
--------------
2200 14th Street 1969 370,937
Gulfport, MS 39501
15380 at Dedeaux Road 1974 201,546
Gulfport, MS 39503
602 Courthouse Road 1990 307,781
Gulfport, MS 39501
110 West Beach Boulevard 1975 239,466
Long Beach, MS 39560
48
<PAGE>
<CAPTION>
DATE LEASED NET BOOK VALUE
LOCATION OR ACQUIRED AT JUNE 30, 1997
-------- ----------- ----------------
<C> <C> <C>
1201 Jackson Avenue 1972 242,382
Pascagoula, MS 39567
125 Lameuse Street 1962 226,108
Biloxi, MS 39530
210 Eisenhower Drive 1986 239,200
Biloxi, MS 39530
10359 D'Iberville Boulevard 1992 265,958
D'Iberville, MS 39531
811 Bienville Boulevard 1974 353,661
Ocean Springs, MS 39564
4303 Gautier-Vancleave Road 1988 142,656
Gautier, MS 39553
3436 Main Street 1992 230,175
Moss Point, MS 39563 (Leased with options
to 2010)
113 Davis Avenue 1991 93,707
Pass Christian, MS 39571
Capital Division
----------------
200 North Congress Street 1960 1,791,723
Jackson, MS 39205
(Property consists of one block near the
Capitol in downtown Jackson with
six-story office building and other building.)
2925 Terry Road 1980 183,196
Jackson, MS 39212
4270 Robinson Road 1980 449,155
Jackson, MS 39209
4325 North State Street 1985 744,860
Jackson, MS 39206
49
<PAGE>
<CAPTION>
DATE LEASED NET BOOK VALUE
LOCATION OR ACQUIRED AT JUNE 30, 1997
-------- ----------- ----------------
<C> <C> <C>
5260 I-55 North 1974 21,595
Jackson, MS 39211 (Leased to May 1999)
1280 East County Line Road 1991 833,550
Ridgeland, MS 39157
1520 West Government Street 1985 430,081
Brandon, MS 39042
609 Highway 80 East 1989 242,952
Clinton, MS 39056 (Leased with options to 2049)
147 East Peace Street 1974 77,102
Canton, MS 39046
Highway 51 North, Kroger Marketplace 1994 37,135
Madison, MS 39130 (Leased with options to 2009)
3101 Highway 80 East 1994 335,363
Pearl, MS 39208 (Leased with options to 2013)
1050 Parkway Boulevard 1995 628,619
Flowood, MS 39208
Delta Division
--------------
536 Washington Avenue 1966 382,946
Greenville, MS 38701
1531 Highway 1 South 1992 620,949
Greenville, MS 38701
104 North Broad Street 1988 332,041
Leland, MS 38756
215 Highway 82 West 1987 307,439
Indianola, MS 38751
254 South Main Street 1964 202,410
Grenada, MS 38901
606 West Park 1991 276,962
Greenwood, MS 38930
50
<PAGE>
<CAPTION>
DATE LEASED NET BOOK VALUE
LOCATION OR ACQUIRED AT JUNE 30, 1997
-------- ----------- ----------------
Southwest Division
------------------
<C> <C> <C>
210 State Street 1965 297,864
McComb, MS 39648
1324 Delaware Ave 1996 452,438
McComb, MS 39648
1000 Highway 13 North 1993 393,456
Columbia, MS 39429
513 State Street 1982 134,441
Natchez, MS 39120
148 North Shields Lane 1997 731,099
Natchez, MS 39120
2000 Drummond Street 1987 269,724
Vicksburg, MS 39180
2150 South Frontage Road 1996 684,187
Vicksburg, MS 39180
714A Halbert Heights Road 1987 402,327
Brookhaven, MS 39601
South Alabama Division
----------------------
851 South Beltline Highway 1994 5,125,666
Mobile, AL 36606 (Also includes a 10-story
office building and parking)
4546 St. Stephens Road 1994 98,322
Mobile, AL 36613
1950 Government Boulevard 1994 555,762
Mobile, AL 36606
3960 Government Boulevard 1994 41,581
Mobile, AL 36609
103 South Highway 43 1994 199,667
Mobile, AL 36571
51
<PAGE>
<CAPTION>
DATE LEASED NET BOOK VALUE
LOCATION OR ACQUIRED AT JUNE 30, 1997
-------- ----------- ----------------
<C> <C> <C>
5416 Highway 90 West 1994 507,480
Mobile, AL 36619
5127 Moffat Road 1994 111,042
Mobile, AL 36618
7690 Airport Boulevard 1994 117,711
Mobile, AL 36608
701 Hillcrest Road 1994 296,719
Mobile, AL 36609
2861 Springhill Avenue 1994 292,371
Mobile, AL 36607
1808 South Craft Highway 1994 5,349
Chickasaw, AL 36611 (Leased with options
to 2005)
1190 S. McKenzie Street 1994 85,000
Foley, AL 36535 (Leased with options
to 1997)
Highway 98, Wal-Mart Supercenter 1995 46,154
Daphne, AL 36526 (Leased with options
to 2010)
Loan Origination Offices
------------------------
110 S. 37th Avenue 1990 283,186
Hattiesburg, MS 39401
11477 Highway 49 North 1995 -
Gulfport, MS 39503 (Monthly lease)
28186 Highway 98 1993 -
Daphne, AL 36526 (Leased with options to 2000)
837A Highway 90 1995 -
Bay St. Louis, MS 39520 (Leased with options
to 2001)
</TABLE>
52
<PAGE>
The Company owns the majority of its branch offices. At June 30, 1997, the
Company had completed the process of renovating a ten-story office building in
downtown Hattiesburg, Mississippi, that was purchased in 1992 for expansion of
its administrative offices. Approximately $5.8 million was invested in the
building renovation and restoration. The Company also completed an upgrade to
its automated teller and platform systems during fiscal 1997 at a cost of
approximately $3.6 million for customized software, related hardware and an
enhanced data communications network.
The Company maintains an on-line data base of depositor and borrower customer
information. The net book value of the data processing and computer equipment
utilized by the Company at June 30, 1997 was $3.4 million.
ITEM 3. LEGAL PROCEEDINGS
The Company and its subsidiaries are involved as plaintiff or defendant in
various legal actions arising in the normal course of their businesses. While
the ultimate outcome of these proceedings cannot be predicted with certainty, it
is the opinion of management, after consultation with counsel representing the
Company in the proceedings, that the resolution of these proceedings will not
have a material effect on the Company's consolidated financial statements.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
(a) A Special Meeting of Stockholders was held on August 20, 1997.
(b) At this Special Meeting of Stockholders, the Stockholders considered a
proposal to adopt the Agreement and Plan of reorganization, dated as of May
8, 1997, by and between Magna and Union Planters Corporation, a Tennessee
corporation ("UPC"), and the related Plan of Merger (the "Plan of Merger"),
by and between Magna and UPC Merger Subsidiary, Inc., a wholly-owned
subsidiary of UPC ("UPC Merger Subsidiary"), pursuant to which (i) Magna
will merge (the "Merger") with UPC Merger Subsidiary, with the effect that
Magna will be the surviving corporation resulting from the Merger, (ii)
each share of the $.01 par value common stock of Magna issued and
outstanding at the effective time of the Merger will be converted into
0.5165 of a share of the $5.00 par value common stock of UPC, and the
associated "Preferred Share Rights" (as defined in the accompanying Proxy
Statement/Prospectus), subject to possible adjustment, and cash in lieu of
any fractional share, and (iii) UPC will assume the obligations of Magna
under various stock plans and adopt substitute plans where appropriate.
The vote on the proposed merger was as follows:
FOR AGAINST ABSTAIN BROKER NON-VOTES
--- ------- ------- ----------------
10,483,958 84,993 6,561 0
53
<PAGE>
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
Stock Information
The Company's common stock is traded over-the-counter via the Nasdaq National
Market under the symbol MGNL. At June 30, 1997, its 13,754,266 outstanding
shares were owned by 1,240 shareholders of record. The table below indicates the
high and low common stock prices as reported on the Nasdaq National Market each
quarter for the past two fiscal years, adjusted for stock dividends.
<TABLE>
<CAPTION>
Prices*
------------------------
Quarter Ended High Low
-------------------- ------------ ----------
<S> <C> <C>
September 30, 1995 $ 15.500 $ 12.375
December 31, 1995 15.000 14.250
March 31, 1996 15.875 14.375
June 30, 1996 18.625 14.500
September 30, 1996 22.500 17.500
December 31, 1996 20.750 17.000
March 31, 1997 20.250 17.000
June 30, 1997 27.500 16.750
</TABLE>
*Adjusted for two-for-one stock split in the form of a 100% stock
dividend declared on July 17, 1996 and paid on August 15, 1996.
Cash Dividends
The Company paid quarterly cash dividends (without restatement for stock splits
and stock dividend) of $0.085 per share from June 30, 1991, the end of the first
quarter after completing its initial public offering through September 30, 1994;
it paid $0.10 per share each quarter from December 31, 1994 through September
30, 1995, and it has paid $0.15 per share each quarter since December 31, 1995.
The Board of Directors intends to continue the payment of quarterly cash
dividends, dependent on the future earnings and financial condition of the
Company until the merger with Union Planters Corporation becomes effective. The
Company's ability to pay dividends is dependent on the dividend payments it
receives from its subsidiary, Magnolia Federal Bank for Savings, which are
subject to regulations and the Bank's continued compliance with regulatory
capital requirements.
54
<PAGE>
ITEM 6. SELECTED FINANCIAL DATA
Magna Bancorp, Inc.
Selected Consolidated Financial and Other Data
<TABLE>
<CAPTION>
At June 30
-------------------------------------------------------------------------------
1997 1996 1995 1994 1993
-------------------------------------------------------------------------------
(In Thousands)
Selected Consolidated Financial Data
<S> <C> <C> <C> <C> <C>
Total assets ............................. $1,353,242 1,308,658 1,159,423 1,115,169 1,046,099
Loans receivable, net .................... 928,093 863,762 798,586 714,957 734,671
Mortgage-backed securities ............... 132,912 166,087 81,264 114,068 72,105
Other securities ......................... 73,854 74,675 83,648 90,695 51,882
Deposits ................................. 915,395 922,370 917,718 972,644 926,918
Borrowings from FHLB of Dallas
and others:
Short-term .......................... 165,299 125,000 100,000 - -
Long-term ........................... 93,150 96,961 - 571 498
Stockholders' equity ..................... 138,372 125,819 115,319 96,238 78,771
</TABLE>
<TABLE>
<CAPTION>
Years Ended June 30
-------------------------------------------------------------------------------
1997 1996 1995 1994 1993
-------------------------------------------------------------------------------
(In Thousands)
Selected Consolidated Operations Data
<S> <C> <C> <C> <C> <C>
Total interest income ......................... $ 111,924 106,747 96,844 85,767 85,919
Total interest expense ........................ 46,246 41,653 34,136 25,019 29,035
--------- --------- --------- --------- ---------
Net interest income ....................... 65,678 65,094 62,708 60,748 56,884
Provision for possible loan losses ............ 3,136 1,633 418 688 1,573
--------- --------- --------- --------- ---------
Net interest income after provision for
possible loan losses ..................... 62,542 63,461 62,290 60,060 55,311
Loan servicing income, net .................... 12,128 12,424 12,080 4,357 1,903
Service fees on deposits ...................... 18,738 16,407 13,362 10,875 9,494
Unrealized holding gains(losses) on trading
securities and loans held for sale, net ...... 2,412 (1,293) 864 (881) -
Gains on sales of loans and securities ........ 521 1,537 843 752 4,931
Other noninterest income ...................... 5,338 8,541 8,097 8,928 2,343
Special SAIF deposit insurance assessment ..... (5,917) - - - -
Noninterest expense ........................... (65,738) (68,026) (66,310) (58,527) (48,566)
--------- --------- --------- --------- ---------
Earnings before income taxes .............. 30,024 33,051 31,226 25,564 25,416
Income tax expense ............................ 11,465 11,942 12,201 9,930 9,415
--------- --------- --------- --------- ---------
Earnings before cumulative effect of
accounting changes ........................ 18,559 21,109 19,025 15,634 16,001
Cumulative effect of accounting changes ....... - - - 3,868 -
--------- --------- --------- --------- ---------
Net earnings ............................... $ 18,559 21,109 19,025 19,502 16,001
========= ========= ========= ========= =========
</TABLE>
55
<PAGE>
SELECTED FINANCIAL DATA, CONTINUED
<TABLE>
<CAPTION>
At and For the Years Ended June 30
-----------------------------------------------------------------------------
1997 1996 1995 1994 1993
-----------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Per Share Data (1)
Book value (end of year) ....................... $ 10.06 9.18 8.20 6.85 5.61
Earnings per share before cumulative
effect of accounting changes ................. 1.34 1.50 1.33 1.10 1.15
Cumulative effect of accounting changes ........ - - - 0.27 -
Earnings per share after cumulative
effect of accounting changes ................. 1.34 1.50 1.33 1.37 1.15
Cash dividends ................................. 0.60 0.25 0.18 0.08 0.04
Other Data
Net interest margin (2) ........................ 5.64% 6.02% 6.21% 6.47% 6.53%
Return on average assets ....................... 1.40% 1.72% 1.66% 1.83% 1.65%
Return on average assets, excluding
cumulative effect of accounting changes ...... 1.40% 1.72% 1.66% 1.47% 1.65%
Return on average equity ....................... 14.27% 17.34% 18.28% 21.88% 22.69%
Return on average equity, excluding
cumulative effect of accounting changes ...... 14.27% 17.34% 18.28% 17.54% 22.69%
Average stockholders' equity as a
percentage of average total assets ........... 9.83% 9.93% 9.07% 8.39% 7.27%
Stockholders' equity as a percentage
of total assets (end of year) ................ 10.23% 9.61% 9.95% 8.63% 7.53%
Non-performing assets as a percentage
of total assets (end of year) (3) ............ 2.08% 2.52% 2.45% 2.37% 1.76%
Net charge-offs as a percentage
of average loans ............................. 0.24% 0.16% 0.13% 0.08% 0.06%
Allowance for possible loan losses
as a percentage of loans (end of year) ....... 1.11% 1.08% 1.14% 1.35% 1.30%
Dividend payout percentage ..................... 44.78% 16.67% 13.86% 6.20% 3.41%
Number of full-service offices ................. 62 61 60 57 45
Number of NOW and checking accounts ............ 160,804 154,704 139,100 126,943 107,680
Number of other deposit accounts ............... 113,448 112,157 108,494 110,646 94,553
Number of mortgage loans serviced
for others ................................... 76,365 79,440 89,652 96,052 86,099
<FN>
(1) Per share data has been adjusted for a two-for-one stock split in the form
of a 100% dividend declared in July 1996.
(2) Net interest income divided by interest-earning assets.
(3) Non-performing assets, net of unearned discounts, deferred loan fees and
undisbursed loan funds, consist of non- accruing loans, troubled debt
restructurings and foreclosed real estate. Non-performing assets do not
include accruing loans that are in a delinquent status.
</FN>
</TABLE>
56
<PAGE>
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
GENERAL
Magna Bancorp, Inc. (the "Company") was incorporated on September 10, 1990 under
the laws of the State of Delaware and became the holding company of Magnolia
Federal Bank for Savings ("Magnolia Federal" or the "Bank") on March 8, 1991 in
connection with the conversion of the Bank from a mutual to a stock savings
bank. The Company's other operations consist of Magna Insurance Company ("Magna
Insurance"), a life insurance company; Realty Services, Inc., an appraisal
company; Comserv, Inc., a title and hazard insurance agency; and Magna Financial
Services, Inc., an investment company. Each company's operations are designed to
cohesively serve and enhance the profitability and operations of Magna Bancorp,
Inc.
Magnolia Federal is a federally chartered, stock savings bank with its
headquarters in Hattiesburg, Mississippi. Founded in 1934, Magnolia Federal
serves its Mississippi and Alabama markets through a network of 62 retail
banking offices and four home loan origination offices that stretch from the
northern Mississippi Delta and Jackson metropolitan area to the Mississippi Gulf
Coast and Mobile, Alabama.
As the Company's primary source of revenue, Magnolia Federal meets the financial
requirements of the communities it serves by offering a variety of competitively
priced products and services to meet the needs of its various market segments.
Its deposits are insured up to applicable limits by the Federal Deposit
Insurance Corporation ("FDIC"). For over 60 years, the Bank has attracted
deposits from the general public that serve as the primary source of funding for
the origination of one- to four-family residential loans and consumer loans.
Through several successful mergers and deposit acquisitions over the past 25
years, the Bank has expanded its operations and enhanced its market stability,
diversity and opportunity for profitability.
Magna Mortgage Company ("Magna Mortgage"), a subsidiary of Magnolia Federal,
provides mortgage loan processing, closing and servicing functions to the Bank
and also services approximately $3.1 billion of loans for others. Through a
broker/correspondent network, Magna Mortgage has extended the Bank's mortgage
lending capability throughout the southeastern United States.
Mortgage protection, credit life and disability insurance coverage are provided
to Magnolia Federal's loan customers through Magna Insurance, which also offers
tax-deferred annuities and final expense (burial) insurance to the Bank's
depositors and the general public. Appraisal services are offered by Realty
Services, Inc. to loan customers of Magnolia Federal. Comserv, Inc. is a title
and hazard insurance agency that represents several title insurance companies,
and offers limited, specialized hazard insurance coverage.
The following discussion of the results of operations and financial condition of
the Company's consolidated organization should be read in conjunction with the
Consolidated Financial Statements and related Notes included in this Annual
Report on Form 10-K.
57
<PAGE>
COMPARISON OF OPERATING RESULTS FOR THE YEARS ENDED JUNE 30, 1997 AND 1996
General
Consolidated net earnings were $18.6 million for the year ended June 30, 1997,
representing a return on average assets of 1.40% and a return on average equity
of 14.27%. Net earnings for the current year included recognition of a $5.9
million pretax expense for a one-time, special deposit insurance assessment
required of SAIF-insured savings institutions, such as Magnolia Federal, of
0.657% of deposits. Excluding the effect of the expense for the one-time,
special assessment, net earnings for the year ended June 30, 1997 were $22.2
million, or $1.60 per share, and annualized return on average assets and return
on average equity were 1.68% and 17.08%, respectively. For the year ended June
30, 1996, net earnings were $21.1 million, return on average assets was 1.72%
and return on average equity was 17.34%. Although the Company experienced a
decline in net interest margin to 5.64%, compared to 6.02% the prior fiscal
year, net interest income increased slightly due to increased interest-earning
assets. The provision for possible loan losses increased in the current year due
to increased consumer loan and credit line charge-offs. Service fees on deposits
increased from fiscal 1996, and net realized and unrealized gains on securities
and loans were also higher in the current year. Declines in loan originations
resulted in lower fees and other income related to loan originations. Expenses
related to the Company's pending merger were incurred during the fiscal year
that partially offset the decrease in compensation, advertising and deposit
premium amortization experienced during fiscal 1997, compared to the prior year
period.
Interest Income
Interest income totaled $111.9 million for the year ended June 30, 1997,
reflecting increased balances in average interest-earning assets. The yield on
interest-earning assets declined to 9.61% in fiscal 1997, compared to 9.87% in
fiscal 1996, due to higher average balances in lower-yielding mortgage-backed
securities and an overall decline in the Company's loan yields. The increase in
average interest-earning assets to $1.2 billion in fiscal 1997 from $1.1 billion
in fiscal 1996 was primarily due to growth in the Company's portfolio of loans
to $889.9 million in fiscal 1997, compared to $851.7 million in fiscal 1996. A
decline in the average loan yield to 10.47% in fiscal 1997 from 10.63% in fiscal
1996 reflected the impact of holding $226.2 million of secondary-market mortgage
loans originated at an average interest rate of 7.67% in the portfolio prior to
packaging these loans into mortgage-backed securities. The lower yield on these
fixed-rate loans, which were retained on a short-term basis, was partially
offset by the repricing of the Company's adjustable-rate loans at slightly
higher short-term interest rates. Average balances of mortgage-backed securities
also increased in the current year, compared to the prior year, as investments
were made in mortgage-backed securities originated by the Company. The
investment in other securities declined during fiscal 1997, as funds from
maturing securities were partially reinvested in lower-yielding equity
securities.
Interest Expense
For the year ended June 30, 1997, interest expense increased to $46.2 million,
compared to $41.7 million in fiscal 1996, as a result of increased average
balances in interest-bearing, non-deposit liabilities that carry comparatively
higher interest rates than insured deposit accounts. The higher rates paid on
and greater volume of borrowings from the Federal Home Loan Bank of Dallas
("FHLB of Dallas") increased
58
<PAGE>
the weighted average cost of interest-bearing liabilities to 4.64% in fiscal
1997 from 4.52% in fiscal 1996. Funding for the Company's expanding loan
portfolio was primarily provided by an average balance increase in
interest-bearing liabilities to $997.2 million in the current year, compared to
$921.4 million in the prior year. FHLB of Dallas borrowings, the major funding
source for new loan originations, increased to $244.5 million during 1997 at an
average rate of 6.12%, compared to $163.1 million at an average rate of 6.38%
during fiscal 1996.
Net Interest Income
Net interest income, the fundamental source of a financial institution's
earnings, represents the difference between income on interest-earning assets
and expense on interest-bearing liabilities. Net interest income is impacted by
changes in the volume of interest-earning assets and interest-bearing
liabilities and by changes in the corresponding interest rates.
During fiscal 1997, net interest income increased $600,000, or 0.9%, to $65.7
million, compared to $65.1 million in fiscal 1996, due to increases in the
Company's average loan and mortgage-backed securities portfolios that were
offset by a decrease in the average net yield. Growth in average
interest-earning assets was $82.3 million, or 7.6%, in fiscal 1997, while
average balances of interest-bearing liabilities increased $75.7 million, or
8.2%, from the prior year. Funding for the asset growth was provided by
non-deposit borrowings, which increased $81.3 million, or 49.8%, from the prior
year average. The Company's net interest margin decreased to 5.64% during fiscal
1997 from 6.02% in the prior year, primarily due to a decline in the Company's
net interest rate spread to 4.98% for fiscal 1997 from 5.35% for the prior year
from the combined impact of a decrease in the average yield on interest-earning
assets of 25 basis points and a 12-basis-point increase in the average rate paid
on interest-bearing liabilities.
59
<PAGE>
The following table sets forth, for the periods indicated, the total dollar
amount of interest income from average interest-earning assets and the resultant
yields, together with the interest expense on average interest-bearing
liabilities, expressed both in dollars and rates, and the net interest margin.
The table does not reflect any effect of income taxes. Average balances are
daily average balances. Interest-earning assets include nonaccruing loans and
assets held for sale, available for sale and held for trading and exclude
allowances for possible loan losses and fair value adjustments on certain loans
and securities. Interest earned includes the accretion of loan origination fees
and purchase discounts.
TABLE 1. ANALYSIS OF YIELD/RATE ON INTEREST-EARNING ASSETS AND INTEREST-BEARING
LIABILITIES
<TABLE>
<CAPTION>
Years Ended June 30
---------------------------------------------------------------------------------------------
1997 1996 1995
------------------------------- ------------------------------- -----------------------------
At
June Average Interest Average Interest Average Interest
30, Outstanding Earned/ Yield/ Outstanding Earned/ Yield/ Outstanding Earned/ Yield/
1997 Balance Paid Rate Balance Paid Rate Balance Paid Rate
-------- ------------------------------- ------------------------------- -----------------------------
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
ASSETS
Interest-earning assets:
Loans receivable ....... 9.82% $ 889,878 $ 93,147 10.47% $ 851,749 90,540 10.63% $ 769,397 $ 79,631 10.35%
Mortgage-backed
securities ........... 6.87 177,665 12,130 6.83 109,859 7,845 7.14 121,697 8,788 7.22
Other securities and
interest-earning assets .. 6.04 96,222 6,647 6.91 119,861 8,362 6.98 119,125 8,425 7.07
--------- --------- --------- --------- ------- -------- --------- -------- ------
Total interest-
earning assets (1) 9.13 1,163,765 111,924 9.62 1,081,469 106,747 9.87 1,010,219 96,844 9.59
--------- --------- --------- --------- ------- -------- --------- -------- ------
Noninterest-earning
assets ............... 159,478 144,172 136,731
---------- --------- ---------
Total assets ....... $ 1,323,243 $1,225,641 $ 1,146,950
========== ========= ===========
LIABILITIES AND STOCKHOLDERS'
EQUITY
Interest-bearing
liabilities:
NOW accounts ........... 2.08% $ 116,388 2,171 1.87 $ 111,484 1,943 1.74 $ 114,572 1,979 1.73
Money market accounts .. 2.99 32,734 1,055 3.22 34,328 891 2.60 44,208 1,108 2.51
Passbook and statement
accounts ............. 2.52 127,872 3,350 2.62 131,269 3,407 2.60 134,501 3,257 2.42
Certificates of deposit. 5.31 475,722 24,708 5.19 481,213 25,008 5.20 489,127 21,817 4.46
Borrowings from the FHLB
of Dallas and other ... 6.05 244,451 14,962 6.12 163,149 10,403 6.38 95,046 5,975 6.29
--------- --------- --------- --------- ------- -------- --------- -------- -----
Total interest-
bearing liabilities 4.69 997,167 46,246 4.64 921,443 41,652 4.52 877,454 34,136 3.89
--------- --------- --------- --------- ------- -------- --------- -------- -----
Noninterest-bearing
liabilities:
Deposits ............. 147,384 170,536 137,471
Other liabilities..... 48,605 11,900 27,943
---------- --------- ---------
Total liabilities.... 1,193,156 1,103,879 1,042,868
Stockholders' equity ...... 130,087 121,762 104,082
---------- --------- ---------
Total liabilities and
stockholders' equity $ 1,323,243 $1,225,641 $ 1,146,950
========== ========= ===========
Net interest income/
Net interest rate spread (2) $ 65,678 4.98% $65,095 5.35% $62,708 5.70%
========= ===== ======= ===== ======= =====
Net interest margin (3) ...... 5.64% 6.02% 6.21%
===== ===== =====
Ratio of average interest-
earning assets to
average interest-
bearing liabilities ...... 1.17x 1.17x 1.15x
<FN>
(1) Does not include mark-to-market adjustments on assets held for sale,
available for sale or held for trading and allowance for possible loan
losses.
(2) Net interest rate spread is the difference between the average yield on
interest-earning assets and the average cost of interest-bearing
liabilities.
(3) Net interest margin is net interest income divided by average
interest-earning assets.
</FN>
</TABLE>
60
<PAGE>
The table below illustrates the extent to which changes in interest rates and
changes in volumes of interest-earning assets and interest-bearing liabilities
have affected the Company's interest income and interest expense during the
periods indicated. It distinguishes between differences in interest income and
expense related to changes in outstanding balances and the variation due to
movements in interest rates. For each category of interest-earning assets and
interest-bearing liabilities, information is provided with respect to (i)
changes in rate (multiplied by prior volume) and (ii) changes in volume
(multiplied by prior rate). Differences attributable to the combined impact of
rate and volume have been allocated proportionately to the change due to rate
and the change due to volume.
Table 2. Analysis of Changes in Net Interest Income
<TABLE>
<CAPTION>
Years Ended June 30
---------------------------------------------------------------------------------------
1997 vs. 1996 1996 vs. 1995
-------------------------------------------- ------------------------------------------
Increase (Decrease) Total Increase (Decrease) Total
Due to Increase Due to Increase
----------------------------- ---------------------------
Volume Rate (Decrease) Volume Rate (Decrease)
--------------- ------------- -------------- ------------- ------------ --------------
(In Thousands)
<S> <C> <C> <C> <C> <C> <C>
Interest-earning assets:
Loans receivable ......................... $ 3,991 (1,384) 2,607 8,708 2,201 10,909
Mortgage-backed securities ............... 4,640 (355) 4,285 (847) (96) (943)
Other securities and interest-earning
assets ................................. (1,632) (83) (1,715) 49 (112) (63)
------- ------- ------- ------- ------- -------
Total interest-earning assets ........ 6,999 (1,822) 5,177 7,910 1,993 9,903
------- ------- ------- ------- ------- -------
Interest-bearing liabilities:
NOW accounts ............................. 84 144 228 (48) 12 (36)
Money market accounts .................... (43) 207 164 (256) 39 (217)
Passbook and statement accounts .......... (84) 27 (57) (82) 232 150
Certificates of deposit .................. (257) (43) (300) (360) 3,551 3,191
Borrowings from the FHLB of
Dallas ................................. 4,999 (440) 4,559 4,341 87 4,428
------- ------- ------- ------- ------- -------
Total interest-bearing liabilities ... 4,699 (105) 4,594 3,595 3,921 7,516
------- ------- ------- ------- ------- -------
Increase (decrease) in net interest
income ................................... $ 2,300 (1,717) 583 4,315 (1,928) 2,387
======= ======= ======= ======= ======= =======
</TABLE>
Provision for Possible Loan Losses
The provision for possible loan losses was increased to $3.1 million in fiscal
1997, compared to $1.6 million in fiscal 1996, resulting in an allowance for
possible loan losses at June 30, 1997 of $10.4 million, or 1.11% of total loans
receivable. The increase in the current year's provision was primarily due to
increased consumer loan charge-offs and increases in the allowance for possible
losses attributable to such loans. Management continually evaluates the
allowance for possible loan losses and adjusts the provision based on the
growth, composition and performance of the loan portfolio, giving consideration
to loss experience, current economic conditions and other factors. Although
management uses available information to recognize possible loan losses and to
determine that the carrying value of real estate owned does not exceed fair
value, future additions to the allowance for possible loan losses or future
writedowns to real estate owned may be necessary based on changes in economic or
market conditions.
61
<PAGE>
As discussed more fully under "Asset Quality," nonperforming assets decreased to
$28.1 million at June 30, 1997, compared to $33.0 million at June 30, 1996. The
decrease was primarily in one- to four-family residential mortgage loans and
foreclosed properties. In previous periods, a substantial portion of the
foreclosed properties and delinquent one- to four-family residential loans were
related to a portfolio of high-yielding, delinquent, single-family mortgage
loans purchased by the Bank in fiscal 1994 at a substantial discount. The Bank
continues to aggressively service these loans to improve the delinquent status
or foreclose on the property and does not anticipate any significant losses. A
substantial portion of the increased provision for loan losses was due to
increased charge-offs in the consumer loan portfolio. Net consumer charge-offs
during fiscal 1997 nearly doubled to $1.4 million, compared to the prior year,
and additional provisions were made to cover possible future losses. Accruing
loans delinquent 90 days or more, consisting primarily of FHA/VA
insured/guaranteed loans that have limited risk of loss, declined to $11.4
million at June 30, 1997 from $19.5 million at June 30, 1996. The Company
curtailed the repurchase of delinquent FHA/VA insured/guaranteed loans from its
servicing portfolio in fiscal 1997, by limiting repurchases to loans with higher
interest rates, as discussed more fully under "Asset Quality." The portfolio of
FHA/VA loans serviced declined significantly due to a sale in fiscal 1996 of
$168.4 million of servicing rights on such loans which limited the availability
of loans for repurchase. During the course of a limited scope examination of the
Bank as of June 30, 1997, that focused primarily on asset quality, the Office of
Thrift Supervision ("OTS") reviewed the Bank's allowance for possible loan
losses and determined it adequate to absorb foreseeable loan losses considering
present and expected future economic conditions.
Noninterest Income
Noninterest income is comprised of ancillary income and fees from deposit
accounts, loan originations, loan servicing, real estate and investment sales.
Total noninterest income increased $1.5 million, or 4.0%, to $39.1 million for
fiscal 1997, from $37.6 million for fiscal 1996, primarily from increases in
service fees on deposits and the net gains, realized and unrealized, on assets
held for sale or held for trading.
Service fees on deposits increased 14.2% to $18.7 million in fiscal 1997 from
$16.4 million in fiscal 1996. The average number of NOW and checking accounts
increased to approximately 160,000 accounts for the year ended June 30, 1997,
compared to 150,000 the prior year, with an average annual service fee collected
per account of $117 during fiscal 1997, compared to $110 during fiscal 1996. The
increased average number of deposit customers also contributed to the increase
in other service fees and commissions on non-deposit products and services.
Unrealized holding gains were $2.4 million in fiscal 1997, compared to $1.3
million of net losses in fiscal 1996. Included in unrealized holding gains was a
$1.3 million gain on equity securities the Company purchased and held in the
trading portfolio. The sale of the Company's portfolio of mortgage-backed
securities held for trading in the current fiscal year resulted in a reversal of
a prior year net unrealized loss of $920,000 on such securities. Realized gains
on sales of assets held for sale or trading decreased to $520,000 in fiscal
1997, compared to $1.5 million in fiscal 1996, primarily due to increased direct
deferred costs of originating loans that increased the carrying value of newly
originated mortgage-backed securities. The volume of sales remained fairly
steady between the two fiscal periods.
Other income, net, decreased $2.5 million, or 61.2%, during fiscal 1997 to $1.6
million, compared to $4.1 million in the prior fiscal year. Other income in
fiscal 1996 included a net gain of $1.0 million on the sale of $168.4 million of
FHA/VA mortgage loan servicing rights. The decline in the Company's
62
<PAGE>
mortgage loan origination volume to $455.3 million in fiscal 1997 from $502.7
million in fiscal 1996 resulted in a decline in appraisal fees, insurance
commissions and other loan-related income. Increased originations through the
Company's broker/correspondent network were partially offset by a 22.4% decline
in the origination volume from the Bank's internal network of originators in the
current year, compared to fiscal 1996.
Net loan servicing income decreased $295,000, or 2.4%, to $12.1 million in
fiscal 1997, compared to $12.4 million in fiscal 1996. Amortization of the cost
of purchased mortgage servicing rights ("PMSR") in the current year was $3.7
million, compared to $4.5 million in fiscal 1996. Amortization of originated
mortgage servicing rights ("OMSR") was $1.0 million in fiscal 1997, compared to
$349,000 the prior year. The decline in servicing fees collected resulted from
the combined impact of a two-basis-point decrease in the Company's average
servicing fee rate and a reduction in the average balance of loans serviced to
$3.1 billion in fiscal 1997 from $3.2 billion in the prior year. The unamortized
cost of PMSR and OMSR at June 30, 1997 was $5.7 million and $2.9 million,
respectively, representing a combined 0.28% of the $3.1 billion portfolio of
mortgage loans serviced for others.
The net losses on sales and operations of foreclosed assets increased $432,000
in fiscal 1997 to $1.9 million from $1.4 million in the prior year as a result
of the increased number of foreclosures during the year and the related expenses
incurred to repair the properties. Immediately upon acquiring title to
foreclosed property, the Company incurs the expense of making necessary repairs
to the property and restoring it to a salable condition. The Company generally
does not sell foreclosed property in "as is" condition at distressed sales
prices. By making the necessary expenditures to repair the property, the Company
is able to minimize its losses on the ultimate sale of the property at market
prices. Approximately 270 foreclosed, single-family properties were repaired and
sold during fiscal 1997, and an additional 170 properties were repaired and made
available for sale.
Noninterest Expense
The deposits of savings associations such as Magnolia Federal are insured by the
Savings Association Insurance Fund ("SAIF"), which together with the Bank
Insurance Fund ("BIF"), are the two insurance funds administered by the Federal
Deposit Insurance Corporation ("FDIC"). In 1995, the FDIC recognized that the
BIF was fully capitalized at its statutory reserve ratio and reduced the premium
schedule for BIF insured banks to a rate as low as zero percent in 1996. The
SAIF rates, however, were not adjusted because the SAIF had not yet attained its
required reserve ratio. To eliminate the disparity between premiums paid by BIF
and SAIF member institutions and any resulting competitive advantage of
BIF-insured institutions over SAIF-insured institutions, federal legislation was
enacted on September 30, 1996 providing for a one-time, special assessment of
0.657% imposed on all SAIF deposits held as of March 31, 1995 in order to
recapitalize the SAIF. The legislation also provides for the merger of the BIF
and the SAIF on January 1, 1999 if no savings associations then exist. This
one-time assessment resulted in a $5.9 million charge to the Company's pretax
earnings for the fiscal year ended June 30, 1997. The SAIF recapitalization plan
also provides for a reduction in annual SAIF assessment rates in future periods
that will result in an estimated annual benefit to the Company of $1.5 million
before income taxes.
Noninterest expense, exclusive of the FDIC's special insurance assessment,
decreased $2.3 million, or 3.4%, to $65.7 million for fiscal 1997 from $68.0
million for fiscal 1996. Compensation and related expenses decreased $396,000,
or 1.3%, to $30.3 million during fiscal 1997, compared to the prior year. The
Company's focus on efficiency was reflected by declines in the number of
employees and overtime
63
<PAGE>
hours worked. Cost savings in compensation were offset by the higher costs of
enhanced employee benefit plans of $2.3 million compared to $1.8 million in the
prior year. Expenditures for advertising decreased $1.0 million to $1.5 million
for the year ended June 30, 1997, compared to $2.5 million the prior year.
Subsequent to January 1, 1997, the Company was assessed lower deposit insurance
premiums by the FDIC due to the special, one-time premium paid in September 1996
which resulted in a lower cost for deposit insurance in fiscal 1997 of $1.3
million compared to $2.1 million in the prior year. The amortization of premium
on purchased deposits related to the acquisition of Altus Federal Savings Bank
("Altus") from the Resolution Trust Corporation ("RTC") in 1995 declined
$888,000 to $2.9 million in fiscal 1997 from $3.8 million the prior year. The
Company experienced reductions in mortgage servicing costs, partially due to the
Company's decreased portfolio of FHA/VA loans serviced for others. Professional
fees increased to $3.8 million in fiscal 1997, compared to $2.9 million in
fiscal 1996, primarily due to expenses related to the Company's pending merger
with Union Planters Corporation. Rent and other occupancy expense increased
during the current fiscal year due to utilization of a recently renovated
ten-story corporate office building. Equipment and fixtures expense reflected
increased costs due to the installation of a new teller platform system during
fiscal 1997.
The Company continued its efforts in fiscal 1997 to streamline operations to
reduce expenses and generate earnings at lower costs without sacrificing quality
or customer service. The Company's efficiency ratio, which measures the
percentage of operating income, net of interest expense, required to cover
operating expenses decreased to 57.97% for fiscal 1997 from 59.64% for fiscal
1996. The percentage of noninterest expense, excluding the amortization of
intangibles and the special FDIC insurance assessment, to total average assets
declined to 4.75% for fiscal 1997, compared to 5.24% for fiscal 1996. The
relatively high level of the Company's expenses results from (i) its retail
deposit strategy and costs related to maintaining a large number of retail
offices and servicing a significant base of checking accounts and (ii) costs
related to loans serviced for others. While loan servicing expenses are included
in noninterest expense, the balances of serviced loans are not included in
average assets. Both its retail deposit strategy and loan servicing activity
generate a substantial amount of non-rate-sensitive fee income to offset the
higher costs attendant to these operations. The percentage of noninterest
expense, net of noninterest income, to average interest-earning assets was 1.73%
and 2.00% for fiscal years 1997 and 1996, respectively. The ratio is calculated
net of non-recurring income and amortization of purchased deposit cost and
mortgage servicing rights.
Income Tax Expense
Federal and state income taxes totaled $11.5 million and $11.9 million in fiscal
1997 and 1996, respectively. Settlement of pending tax issues in conjunction
with an examination of the Company's income tax returns for the years 1991
through 1993 resulted in a decrease in the prior year's ratio of income tax
expense to earnings before such taxes, compared to the current fiscal year.
CHANGES IN ACCOUNTING PRINCIPLES
Statement of Financial Accounting Standards No. 121, "Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed Of"
("SFAS No. 121") was adopted by the Company July 1, 1996. SFAS No. 121
prescribes the accounting for the impairment of certain assets, such as
64
<PAGE>
property, plant and equipment; identifiable intangibles and goodwill related to
those assets. It does not apply to deferred tax assets, mortgage servicing
rights ("MSR") and financial instruments. The Company did not have a material
impact on its financial statements due to the adoption of SFAS No. 121 since
similar policies for determining impairment of such assets already existed.
During fiscal 1996 and 1997, the Company did not grant any employee stock-based
compensation and, therefore, was not affected by the adoption of Statement of
Financial Accounting Standards No. 123, "Accounting for Stock-Based
Compensation." The statement encourages the adoption of a new fair value method
of accounting for stock plans in place of the intrinsic value method required by
previous guidance. Disclosures of the impact on net income and earnings per
share as if the fair value method of accounting was adopted is required of
companies that do not follow the new valuation procedure.
In June of 1996, the FASB issued Statement of Financial Accounting Standards No.
125, "Accounting for Transfers and Servicing of Financial Assets and
Extinguishments of Liabilities" ("SFAS No. 125"). SFAS No. 125 established
accounting and reporting standards for transfers and pledges of financial assets
and measurement of servicing assets and liabilities. The statement provides
consistent standards for distinguishing financial asset transfers that are sales
from transfers that are secured borrowings. It also addresses the recognition of
servicing assets and liabilities. The impact of the adoption of this statement,
which was effective for transactions occurring after December 31, 1996, was not
material to the financial statements of the Company.
COMPARISON OF OPERATING RESULTS FOR THE YEARS ENDED JUNE 30, 1996 AND 1995
General
Consolidated net earnings were $21.1 million for the year ended June 30, 1996,
representing a return on average assets of 1.72% and return on average equity of
17.34%. For the year ended June 30, 1995, net earnings were $19.0 million,
return on average assets was 1.66% and return on average equity was 18.28%. The
$2.1 million, or 11.0%, increase in earnings was influenced by several factors,
including an increase in the average yield on a higher volume of
interest-earning assets, a sizable gain on the sale of mortgage servicing rights
and an increase in deposit service fees. Current net earnings were also impacted
by the adoption of Statement of Financial Accounting Standards No. 122,
"Accounting for Mortgage Servicing Rights" ("SFAS No. 122"), which had a
favorable effect on gains and losses on sales of mortgage-backed securities.
Income gains were partially offset by the higher level of general and
administrative expenses required to service a larger volume of portfolio loan
and deposit customers and the decline in the market values of the Company's
interest-earning assets intended for sale.
Interest Income
Interest income totaled $106.7 million for the year ended June 30, 1996,
reflecting the combined impact of an increase in yields and higher balances of
average interest-earning assets. An increase in average loan yields to 10.63% in
fiscal 1996 from 10.35% in fiscal 1995, was primarily a result of the repricing
of the Company's adjustable-rate loans at comparatively higher short-term
interest rates and the origination of $119.5 million in portfolio mortgage loans
at an average rate of 9.83%. The increase in average
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interest-earning assets to $1.1 billion in fiscal 1996 from $1.0 billion in
fiscal 1995 was primarily due to growth in the Company's portfolio of
non-conforming loans and was reflected by an increase in average balances of
loans to $851.7 million in fiscal 1996 from $769.4 million in fiscal 1995.
Average balances of mortgage-backed securities declined slightly in the current
period, compared to the prior year as minimal investments were made to replace
repayments of the portfolio during the first half of fiscal 1996. New
investments in long-term United States Government securities were nominal, and
yields declined slightly on average balances of investment and other securities
of $119.9 million during fiscal 1996.
Interest Expense
For the year ended June 30, 1996, interest expense increased to $41.7 million,
compared to $34.1 million in fiscal 1995, as a result of increased average
balances of interest-bearing liabilities and higher levels of short-term market
interest rates. The higher rates paid on certificate of deposit accounts and a
greater volume of borrowings from other sources increased the weighted average
cost of interest-bearing liabilities to 4.52% in fiscal 1996 from 3.89% in
fiscal 1995. Funding for the Company's expanding loan portfolio was partially
provided by an increase in the average balance of interest-bearing liabilities
to $921.4 million in the current year, compared to $877.5 million in the prior
year. FHLB of Dallas borrowings also served as a major funding source for new
loan originations, increasing 71.7% to $163.1 million during 1996 at an average
rate of 6.38%.
Net Interest Income
During fiscal 1996, net interest income increased $2.4 million, or 3.8%, to
$65.1 million, compared to $62.7 million in fiscal 1995, due to an increase in
the Company's loan portfolio and a corresponding increase in the average loan
yield. Growth in average interest-earning assets was $71.3 million, or 7.1%, in
fiscal 1996, while average balances of interest-bearing liabilities increased
only $44.0 million, or 5.0%, from the prior year. Funding for the growth in
loans was provided, in part, by noninterest-bearing deposits, which increased
$33.1 million as the Company aggressively marketed and pursued these low-cost
accounts. The Company's net interest margin decreased to 6.02% during fiscal
1996 from 6.21% in the prior year, primarily from higher rates paid on
certificates of deposit and FHLB of Dallas funding. Over the last several years,
short-term interest rates have increased more than long-term interest rates,
which has led to a tightening of the Company's net interest margin. The net
interest rate spread decreased to 5.35% for fiscal 1996 from 5.70% for the prior
year as the average yield on interest-earning assets increased 28 basis points,
compared to a 63-basis-point increase in the average rate paid on
interest-bearing liabilities.
Provision for Possible Loan Losses
The provision for possible loan losses was increased to $1.6 million in fiscal
1996, compared to $418,000 in fiscal 1995, resulting in an allowance for
possible loan losses at June 30, 1996 of $9.5 million, or 1.08% of total loans
receivable. Nonperforming assets increased to $33.0 million at June 30, 1996,
compared to $28.4 million at June 30, 1995. The increase was primarily in one-
to four-family residential mortgage loans and foreclosed properties that
individually expose the Bank to minimal risk of loss. Many of the foreclosed
properties and delinquent, one- to four-family residential loans are related to
a portfolio of high-yielding, delinquent, single-family mortgage loans purchased
by the Bank in fiscal 1994 at a
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substantial discount. The status of a loan's contractual delinquency, not its
bankruptcy status, affects the provisions for possible loan loss and the timing
of the loan's nonaccrual status. While a large number of these borrowers are in
bankruptcy, the Bank is aggressively servicing the non-bankruptcy loans to
improve the delinquent status or foreclose the property and does not anticipate
any significant losses. Loans of borrowers in bankruptcy are continually
monitored for compliance with the bankruptcy court's payment requirements. The
Company takes legal action for relief from the court's restrictions if the
borrower deviates from the requirements set forth in the bankruptcy plan. In
fiscal 1996, the Company reduced the volume of delinquent FHA/VA
insured/guaranteed loans repurchased from GNMA pools by limiting repurchases to
loans with higher interest rates. See "Asset Quality". Consequently, accruing
loans delinquent 90 days or more declined to $19.5 million at June 30, 1996 from
$31.5 million at June 30, 1995. During the course of its regular examination of
the Bank as of March 31, 1996, the Office of Thrift Supervision ("OTS") reviewed
the Bank's allowance for possible loan losses and determined it adequate to
absorb reasonably foreseeable loan losses considering current and expected
future economic conditions.
Noninterest Income
Total noninterest income increased $2.4 million, or 6.7%, to $37.6 million for
fiscal 1996 from $35.2 million for fiscal 1995, primarily from increases in
service fees on deposits and the gain recognized on the sale of loan servicing.
Service fees on deposits increased to $16.4 million, or 22.8%, in fiscal 1996
from $13.4 million in fiscal 1995. Through an aggressive marketing campaign, the
Company's number of NOW and checking accounts increased by 16,000 to a total of
approximately 155,000 accounts at June 30, 1996. The average annual service fee
collected per account was $110 during fiscal 1996, compared to $100 during
fiscal 1995. The increased number of deposit customers also contributed to the
increase in other service fees and commissions on non-deposit products and
services.
The substantial increase in the Company's loan origination volume in fiscal 1996
resulted in an increase in appraisal fees of $663,000, or 101.7%, to $1.3
million compared to the prior year. Net insurance commissions decreased
$485,000, or 14.1%, to $3.0 million in fiscal 1996, compared to fiscal 1995, due
to the increased costs of attaining new business. Other income, net, which was
also favorably impacted by the Company's loan origination volume, increased $1.1
million, or 40.3%, during fiscal 1996 to $4.0 million, compared to $2.9 million
in the prior fiscal year. Included in other income in fiscal 1995 was a net gain
of $510,000 from the sale of branch deposits and properties. Other income in
fiscal 1996 included a net gain of $1.0 million on the sale of $168.4 million of
mortgage loan servicing rights. In recent years, the Company acquired numerous
packages of mortgage loan servicing rights concentrated primarily in the
southeastern United States; however, an accumulation of GNMA pools of FHA/VA
loans with high levels of delinquency in other states also resulted. The
servicing rights to these FHA/VA loans were sold to reduce costs and improve
efficiency of the Company's overall servicing operation.
Net loan servicing income increased $343,000, or 2.8%, to $12.4 million in
fiscal 1996, compared to $12.1 million in fiscal 1995. Amortization of the cost
of PMSR in the current year was $4.5 million, compared to amortization of $7.7
million in fiscal 1995. As of July 1, 1995, the Company adopted SFAS No. 122,
which requires that the value of mortgage servicing rights on loans originated
and intended for sale be capitalized and amortized in future periods. OMSR of
$2.1 million was capitalized during fiscal 1996 with amortization of $349,000
recorded during the year. The unamortized cost of PMSR and
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OMSR at June 30, 1996 was $4.1 million and $1.7 million, respectively,
representing a combined 0.19% of the $3.0 billion portfolio of mortgage loans
serviced for others.
Capitalization of OMSR in accordance with SFAS No. 122 reduced the Company's
basis in originated mortgage-backed securities by the $2.1 million of
capitalized rights and contributed to net gains on sales of loans and securities
of $1.5 million recognized in fiscal 1996, compared to net gains of $843,000 in
the prior year. Mortgage-backed securities were sold from the Company's trading
portfolio to fund new loan originations and to limit the interest rate risk
attendant to holding long-term, fixed-rate loans. The Company limits the
interest rate risk of fixed-rate loans in its mortgage pipeline by selling
forward the majority of long-term qualifying secondary market loans at the time
of the Company's commitment to originate such loans. Unrealized holding losses
on trading securities and loans intended for sale were $1.3 million, compared to
unrealized gains of $864,000 recorded in fiscal 1995, representing a $2.2
million reduction in noninterest income in fiscal 1996. The net losses on sales
and operations of foreclosed assets increased $1.3 million in fiscal 1996 to
$1.4 million from $146,000 in the prior year as a result of increased
foreclosures during the year. Fiscal 1996 expenses included the cost to repair
151 more foreclosed single-family properties than in fiscal 1995.
Noninterest Expense
Noninterest expense increased $1.7 million, or 2.6%, to $68.0 million for fiscal
1996 from $66.3 million for fiscal 1995. Compensation and related expenses
increased $2.7 million, or 9.6%, to $30.7 million during fiscal 1996, partially
as a result of changes in employee benefit plans and additional compensation
cost incurred during the conversion of mortgage loan data processing to an
outside service provider on December 31, 1995. Data processing costs in the
current fiscal year increased $709,000, or 29.7%, compared to the prior fiscal
year, primarily due to conversion-related expenses. The amortization of premium
on purchased deposits related to the acquisition from the RTC in 1994 declined
$844,000 to $3.8 million in fiscal 1996 from $4.6 million the prior year. The
Company realized reductions in equipment and fixtures expense; communication,
postage, printing and office supplies; professional fees and mortgage servicing
costs during the 1996 fiscal year. Other noninterest expenses were fairly
stable, with slight increases in the current fiscal year, compared to the prior
period.
The Company's efficiency ratio, which measures the percentage of operating
income, net of interest expense, required to cover operating expenses increased
slightly to 59.64% for fiscal 1996 from 59.27% for fiscal 1995. The ratio is
calculated net of non-recurring income and amortization of purchased deposit
cost and mortgage servicing rights. The percentage of noninterest expense,
excluding the amortization of intangibles, to total average assets declined to
5.24% for fiscal 1996, compared to 5.38% for fiscal 1995. The relatively high
level of the Company's expenses results from costs related to maintaining a
large number of retail offices, servicing a significant base of checking
accounts and servicing a number of loans for others. While loan servicing
expenses are included in noninterest expense, the balances of serviced loans are
not included in average assets. Both its retail deposit strategy and loan
servicing activity generate a substantial amount of non-rate-sensitive fee
income to offset the higher costs attendant to these operations. The percentage
of recurring noninterest expense, net of recurring noninterest income, to
interest-earning assets was 2.00% and 2.01% for fiscal 1996 and 1995,
respectively.
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<PAGE>
Income Tax Expense
Federal and state income taxes totaled $11.9 million and $12.2 million in fiscal
1996 and 1995, respectively. Settlement of pending tax issues in conjunction
with an examination of the Company's income tax returns for the years 1991
through 1993 resulted in a decrease in the current year's ratio of income tax
expense to earnings before such taxes, compared to the prior fiscal year.
FINANCIAL CONDITION
The Company's consolidated assets were $1.4 billion at June 30, 1997, an
increase of $44.6 million, or 3.4%, from June 30, 1996. Enhanced marketing of
its non-conforming loan products resulted in the growth of the Company's loan
portfolio. The asset growth was primarily funded by increases in borrowings from
the FHLB of Dallas.
Loans
As a result of the increased demand for the Bank's non-conforming loan products
in the fiscal year, loans held for investment increased $40.2 million, or 4.8%,
to $876.5 million at June 30, 1997 from $836.3 million at June 30, 1996. The
Company's portfolio of loans held for sale increased to $51.6 million at June
30, 1997, compared to $27.5 million at June 30, 1996, and investments in
adjustable-rate loans increased to $474.2 million at June 30, 1997, compared to
$431.7 million at June 30, 1996. Fixed- and adjustable-rate mortgage loans
originated during fiscal 1997 were $313.1 million and $142.2 million,
respectively, and totaled $455.3 million. Mortgage loan originations totaled
$502.7 million in fiscal 1996, of which $383.8 million were fixed-rate loans and
$118.9 million were adjustable-rate loans. To provide funds for additional
lending and limit interest-rate risk, $193.3 million of fixed-rate loans
originated during fiscal 1997 were packaged into mortgage-backed securities and
sold. See "Mortgage-Backed Securities."
The portfolio of multi-family and commercial loans decreased to $69.7 million in
fiscal 1997, compared to $78.3 million in fiscal 1996. The Company restricts the
originations of such loans to principal amounts of $500,000 or less, except for
loans made to finance sales of previously foreclosed multi-family and commercial
properties. Consumer loan originations during the current fiscal year were $94.7
million, compared to $88.0 million in the prior year, and resulted in an
increase of $4.2 million, or 4.7%, in the consumer loan portfolio to $95.1
million at June 30, 1997.
Mortgage-Backed Securities
The Company's total investment in mortgage-backed securities decreased $33.2
million, or 20.0%, to $132.9 million at June 30, 1997. No new investments were
made during the current fiscal year. As a result, mortgage-backed securities
that the Company plans to hold to maturity decreased $2.2 million to $10.5
million. As of June 30, 1997, the Company's investment in 15-year
mortgage-backed securities held in the available-for-sale portfolio was slightly
higher than the prior year, and there were no mortgage-backed securities in its
trading portfolio. Facilitated by the Company's loan originations,
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$193.3 million in loans were packaged into mortgage-backed securities during the
current fiscal year. Sales of $206.2 million of these securities during fiscal
1997 provided cash to fund additional loans and served to limit the interest
rate risk attendant to holding long-term, fixed-rate investments. Unrealized
gains and losses on securities that are available for sale are recorded in
stockholders' equity, and unrealized fair value adjustments on securities held
for trading are reflected in net earnings.
Other Securities
The Company's portfolio of other securities totaled $73.9 million at June 30,
1997, reflecting a slight decrease of $820,000, or 1.1%, from $74.7 million at
June 30, 1996. The Company's investment portfolio is comprised primarily of U.S.
Treasury and government-agency securities with staggered maturities that do not
extend beyond 15 years. Maturities of these government and government-agency
securities were replaced with investments in equity securities.
The Company's investment in FHLB of Dallas stock increased to $15.6 million at
June 30, 1997, compared to $12.0 million at June 30, 1996, due to increased
borrowings from the FHLB of Dallas. Minimum required stock ownership in the FHLB
of Dallas is determined annually based upon total outstanding residential
mortgages and mortgage-backed securities held by the Bank and the amount of
outstanding FHLB borrowings.
Mortgage Servicing Rights, Net
Mortgage servicing rights, net, increased $2.8 million, or 47.7%, to $8.5
million at June 30, 1997 from $5.8 million at June 30, 1996. The Company
recognizes the value of originated servicing rights in its financial statements
along with servicing rights acquired in purchase transactions. The Company's
portfolio of serviced loans increased to $3.1 billion at June 30, 1997, compared
to $3.0 billion at June 30, 1996. During the current fiscal year, $5.3 million
in mortgage servicing was purchased and $2.1 million was recognized as
originated servicing rights. The Company amortizes the cost of MSR using an
accelerated method over management's estimate of the periods to be benefited by
the servicing rights. The Company determines the fair value of capitalized MSR
by estimating the present value of net future servicing income on these loans
using a discounted cash flow analysis on a disaggregated basis. No valuation
allowances were necessary at fiscal year end 1997 or 1996.
Deposits
The Company's deposits decreased $7.0 million, or 0.8%, to $915.4 million during
fiscal 1997, compared to the prior year, primarily due to the sale of $5.8
million in deposits of a branch located outside the Company's primary market
area. Adjusting for the sale, transaction account balances increased $4.7
million, and certificates of deposits decreased $5.9 million. Decreases in
deposits are primarily attributable to increased competition for certificates of
deposit. Balances of custodial funds held in trust for investors and borrower
escrow deposits on loans serviced by the Company declined $5.7 million due to
normal fluctuations in prepayments of principal and interest unremitted to
investors.
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Borrowings from the FHLB of Dallas
Borrowings outstanding from the FHLB of Dallas totaled $258.4 million at June
30, 1997, an increase from the $222.0 million balance at June 30, 1996. Funds
with an average outstanding balance of $244.4 million were borrowed periodically
during the current fiscal year for additional investments in loans and
mortgage-backed securities. With the sale of its portfolio of mortgage-backed
securities held for trading late in the current fiscal year, the Company was
able to liquidate approximately $38.0 million of short-term borrowings from the
FHLB of Dallas. Subsequent to the 1997 fiscal year end, $97.0 million of
lower-yielding securities from the available-for-sale portfolio were sold, and
the outstanding balances of borrowed funds were further reduced.
ASSET QUALITY
The Company specializes in the origination and servicing of non-conforming
mortgage loans. The Company's non-conforming lending program has evolved over a
number of years and reflects necessary modifications to appropriately account
for changing credit patterns and demographics in the Company's lending area. The
Company offers a variety of loan products to consumers who either cannot meet
the credit quality standards of agencies such as FHA, VA or Federal National
Mortgage Association, or who prefer not to comply with the documentation
requirements of the agencies. These loans, intended for the Company's portfolio
of loans held for investment, contain a greater degree of credit risk than
conforming loan products, and the Company has included appropriate safeguards in
its various loan programs to limit the risk of default and loss. Portfolio loan
terms are normally limited to 15 years which, along with initial minimum down
payments, allow the borrower to rapidly build equity in the property. Limited
loan-to-value ("LTV") ratios and careful monitoring of appraised values of
property used as collateral are essential to minimize the risk of default. The
percentage of the Company's annual net charge-offs to average loans was 0.24%
for fiscal 1997 and 0.16% for fiscal 1996. The increase in net charge-offs was
primarily in consumer loans, which increased to $1.4 million in 1997, compared
to $735,000 in 1996. Investments in the consumer loan portfolio account for only
9.9% of the Company's loan portfolio; however, losses experienced on such loans
accounted for 66.0% of the Company's 1997 net charge-offs. Since June 30, 1995,
the Company has increased the portfolio of unsecured lines of credit from $12.1
million to $20.9 million at June 30, 1997. The average yield associated with
such loans of 19.0% in fiscal 1997 compensates for the higher costs to service
these loans and the increased charge-offs. Net losses on lines of credit for
fiscal 1997 were $1.1 million, compared to $547,000 for fiscal 1996 and $249,000
for fiscal 1995.
Nonperforming assets include nonaccruing loans, real estate acquired through
foreclosure and restructured loans whose terms were modified due to the
borrowers' inability to pay under the original contract terms (troubled debt
restructurings). The Company's nonperforming assets decreased to $28.1 million
at June 30, 1997, compared to $33.0 million at June 30, 1996. The percentage of
nonperforming assets to total assets was 2.08% at 1997 fiscal year end, compared
to 2.52% at 1996 fiscal year end, primarily as a result of a $4.1 million
decrease in nonaccruing, one- to four-family home loans and a $707,000 decrease
in foreclosed, one- to four-family homes during the year. The delinquent loans
and foreclosed properties are geographically dispersed throughout the Company's
lending area and individually present only minimal risk of loss to the Company.
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Accruing loans delinquent 90 days or more were $11.4 million at June 30, 1997,
compared to $19.5 million at June 30, 1996. Beginning in 1993, the Company
implemented a program of purchasing FHA/VA loans from GNMA pools it services
when the loans become over 90 days delinquent to eliminate the cost of advancing
funds to holders of GNMA securities. The Company benefits from the net interest
rate differential between the coupon rate payable to the GNMA security holder
and the Company's cost of funds. While the risk of credit loss is minimal
because the loans are insured or guaranteed by the government agencies, there is
an interest rate risk involved in holding these long-term, fixed-rate loans.
Therefore, the Company modified this program in fiscal 1996 to only repurchase
delinquent FHA/VA loans with high coupon rates. If the FHA/VA loan later pays
current, the company has a high-yielding asset that compensates for the
attendant interest-rate risk. During fiscal 1997, $5.4 million in such loans
were repurchased, and at June 30, 1997, $10.9 million of FHA/VA loans were
delinquent 90 days or more. Other accruing, delinquent loans are collateralized
consumer loans for which valuation allowances have been established and the
possible impact on earnings is considered minimal, primarily due to recourse
agreements.
Conventional real estate loans, including residential, multi-family and
commercial loans, are placed on nonaccrual status when they become 90 days
delinquent, regardless of collateral value. Although a loan may be current
within a plan dictated by the bankruptcy court, if the loan is contractually
delinquent 90 days or more, it will be placed on a nonaccrual status.
Nonaccruing loans in bankruptcy totaled $10.9 million at June 30, 1997. All
consumer loans more than 90 days delinquent are charged against the allowance
for possible loan losses unless the loan is insured or otherwise secured.
Currently, consumer loans that do not have recourse agreements with third
parties are placed on nonaccrual status when they become 90 days delinquent. The
following table sets forth the carrying amounts and categories of nonperforming
and delinquent assets on the dates indicated. Balances are stated net of
discounts, deferred fees and loans in process.
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Table 3. Nonperforming Assets
<TABLE>
<CAPTION>
At June 30
------------------------------------------------------------------------------
1997 1996 1995 1994 1993
--------------- ---------------- --------------- --------------- -------------
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C>
Nonaccruing loans:
One- to four-family ..................... $17,558 21,696 20,724 20,474 7,725
Multi-family and
commercial real estate ................ 354 265 328 442 787
Construction ............................ - 151 84 - -
Consumer ................................ 524 185 79 29 14
------- ------- ------- ------- -------
Total ................................. 18,436 22,297 21,215 20,945 8,526
------- ------- ------- ------- -------
Foreclosed assets:
One- to four-family ..................... 8,923 9,630 6,325 3,414 4,300
Multi-family and
commercial real estate ................ 209 562 23 1,229 4,554
Consumer ................................ 197 39 149 319 89
------- ------- ------- ------- -------
Total ................................. 9,329 10,231 6,497 4,962 8,943
------- ------- ------- ------- -------
Troubled debt restructurings .............. 332 428 683 569 904
------- ------- ------- ------- -------
Total nonperforming assets ................ $28,097 32,956 28,395 26,476 18,373
======= ======= ======= ======= =======
Total nonperforming assets as a
percentage of total assets ............ 2.08% 2.52% 2.45% 2.37% 1.76%
======= ======= ======= ======= =======
Accruing loans delinquent 90 days or more:
One- to four-family ..................... $10,855 18,767 30,394 35,812 34,924
Consumer ................................ 506 689 1,122 1,436 2,140
------- ------- ------- ------- -------
Total accruing loans
delinquent 90 days or more ............ $11,361 19,456 31,516 37,248 37,064
======= ======= ======= ======= =======
</TABLE>
Nonaccruing, one- to four-family loans decreased to $17.6 million at June 30,
1997, compared to $21.7 million at June 30, 1996. The Company has aggressively
sought to reduce recent trends in mortgage delinquencies through tightened
credit requirements at loan origination, more stringent loan terms, consistently
administered collection procedures and earlier intervention in the first stage
of delinquency.
Foreclosed assets also decreased during the current fiscal year to $9.3 million,
compared to $10.2 million the prior year. During the current fiscal year the
Company made a concerted effort to either have chronic delinquencies paid
current or take legal action for collateral foreclosure. As a result, the
Company has recently experienced decreased delinquencies and foreclosures
associated with problem accounts.
The Company evaluates the loan portfolio quarterly to identify loss potential
and determine the adequacy of the allowance for possible loan losses. In
addition to its nonperforming assets at June 30, 1997, the Bank had loans of
approximately $1.7 million that were performing, but which management determined
need to be closely monitored due to potential credit problems of the borrowers
or inadequate cash flows of the underlying properties. These loans were
considered in determining the adequacy of the allowance
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for possible loan losses that is established based on management's evaluation of
the risk inherent in the loan portfolio and overall changes in the nature and
volume of loan activity. Such evaluation includes a review of certain loans for
which full collection may not be reasonably assured and considers the value of
the underlying collateral, economic conditions, historical loan loss experience
and other factors that warrant recognition in providing for an adequate loan
loss allowance. The allowance for possible loan losses increased to $10.4
million, or 1.11% of total loans receivable, at June 30, 1997 from $9.5 million,
or 1.08% of total loans receivable, at June 30, 1996. Management intends to
maintain the allowance at approximately this level to provide adequate
protection against any possible losses in the loan portfolio. The allowance for
possible loan losses by category at the dates indicated is summarized in the
following table.
Table 4. Allowance for Possible Loan Losses
<TABLE>
<CAPTION>
At June 30
-----------------------------------------------------------------------------------------------------------------
1997 1996 1995 1994 1993
---------------------- -------------------- --------------------- --------------------- ---------------------
% of % of % of % of % of
Allowance Loans Allowance Loans Allowance Loans Allowance Loans Allowance Loans
----------- ---------- ---------- --------- ----------- --------- ----------- --------- ----------- ----------
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Real estate .. $ 7,837 90.15% $ 7,955 89.95% $ 7,984 90.33% $ 8,725 89.81% $ 8,925 89.68%
Consumer ..... 2,587 9.85 1,497 10.05 1,229 9.67 1,056 10.19 736 10.32
----------- ---------- ---------- --------- ----------- --------- ----------- --------- ----------- ----------
Total ........ $10,424 100.00% $ 9,452 100.00% $ 9,213 100.00% $ 9,781 100.00% $ 9,661 100.00%
=========== ========== ========== ========== ========== ========= ========== ========= ========== ==========
</TABLE>
ASSET/LIABILITY MANAGEMENT
Magnolia Federal's asset/liability management strategy is directed toward
structuring its balance sheet to reduce exposure to interest rate fluctuations.
The Bank's policy is to maintain the cumulative difference between
interest-earning assets anticipated to mature or reprice within one year, based
on certain assumptions, and interest-bearing liabilities anticipated to mature
or reprice within one year, based on certain assumptions, ("one-year gap")
within a range of negative 15.0% to positive 15.0% of total assets. At June 30,
1997, Magnolia Federal's cumulative one-year gap was negative 4.52%, compared to
a cumulative one-year gap of negative 3.43% at June 30, 1996.
Operating with a negative gap means the amount of interest-bearing liabilities
maturing or repricing within a given period is more than the amount of
interest-earning assets maturing or repricing within the same period. In a
declining interest rate environment, net interest income will generally tend to
improve because the costs of liabilities decline faster than the yield on
assets. Conversely, rising interest rates will generally result in reduced
earnings because the cost of funds will generally increase to a greater degree
than the yield on assets. Changes in interest rates generally have the opposite
effect on an institution with a positive gap. A declining interest rate
environment imposes risks on an institution with a positive gap because the
decrease in the yield of its assets will generally exceed the decrease in
interest cost on its liabilities.
74
<PAGE>
Rather than depending on external hedging products to manage interest rate risk,
the Bank emphasizes the origination of adjustable-rate loans with terms up to 20
years and other loans that have shorter terms to maturity or that reprice more
frequently than longer term, fixed-rate mortgage loans. This strategy has been
instrumental in minimizing earnings sensitivity to interest rates, while
providing a positive margin over the cost of funds. At June 30, 1997,
adjustable-rate loans totaled $474.2 million, or 49.1%, of the Bank's total loan
portfolio. The Bank offers fixed-rate mortgages in response to market demand,
but sells the majority of these loans in the secondary market to maintain its
interest rate sensitivity within targeted ranges. If the demand for
adjustable-rate loans is not adequate for the Bank's portfolio requirements, a
portion of the 15-year mortgage-backed securities originated from current loan
production may be held in the Bank's available-for-sale portfolio. Substantially
all new 30-year, fixed-rate loans originated are immediately securitized and
sold.
Critical to the Company's asset/liability program is a strategy to build a
retail base of checking and other transaction accounts to lower its cost of
funds and reduce the interest rate risk of funding its operations with
certificates of deposit. The retail deposit base was comprised of NOW and
noninterest-bearing checking accounts totaling $222.2 million, or 24.3% of total
deposits, at June 30, 1997, compared to $203.6 million, or 22.1% of total
deposits, at June 30, 1996. The Company's portfolio of loans serviced for others
requires that funds be deposited to custodial accounts that are pending
remittance to investors or being held in escrow pending disbursement for taxes
or insurance. These deposits totaled $63.3 million and represented 6.9% of the
Company's total deposit balances at June 30, 1997, compared to $69.0 million, or
7.5%, at June 30, 1996.
The next table sets forth the scheduled repricing or maturity of the Company's
assets and liabilities at June 30, 1997. The assumed prepayment rates of
fixed-rate mortgages and mortgage-backed securities are based on the Company's
assessment of market conditions on that date. The withdrawal rates assumed for
passbook, statement and other transaction accounts are determined from analyses
of actual withdrawal experience with these accounts. Actual prepayments and
withdrawals may differ from assumptions because they are subject to changing
economic circumstances and consumer behavior. Assets and liabilities may have
similar repricing periods or maturity dates and still react in different degrees
to interest rate changes. Certain assets and liabilities may have interest-rate
features that restrict changes in response to fluctuations in market interest
rates or that change subsequent to fluctuations in market interest rates.
75
<PAGE>
Table 5. Interest Rate Sensitivity Analysis
<TABLE>
<CAPTION>
Maturing or Repricing
----------------------------------------------------------------------------------
0-3 4-12 13-36 37-60 61 Months/
Months Months Months Months Over Total
--------- --------- --------- --------- --------- ---------
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C>
Interest-earning assets, gross:
Mortgage loans ............................. $ 91,175 249,247 216,436 227,605 86,554 871,017
Consumer loans ............................. 17,455 47,113 26,027 2,355 2,179 95,129
Mortgage-backed securities ................. 5,760 16,329 37,253 29,697 44,859 133,898
Other assets(1) ............................ 28,704 87 2,814 111 61,315 93,031
--------- --------- --------- --------- --------- ---------
Total interest-earning assets, gross ......... 143,094 312,776 282,530 259,768 194,907 1,193,075
--------- --------- --------- --------- --------- ---------
Interest-bearing liabilities:
NOW accounts ............................... 1,515 4,433 11,038 9,985 94,734 121,705
Money market accounts ...................... 913 2,581 5,842 4,590 16,827 30,753
Passbook and statement accounts ............ 2,519 7,261 17,356 14,782 84,889 126,807
Certificates of deposit (2) ................ 121,529 232,943 114,618 1,785 1,453 472,328
Borrowings from the FHLB of Dallas ......... 66,307 103,124 59,174 10,381 19,463 258,449
--------- --------- --------- --------- --------- ---------
Total interest-bearing liabilities ........... 192,783 350,342 208,028 41,523 217,366 1,010,042
--------- --------- --------- --------- --------- ---------
Interest-earning assets less interest-
bearing liabilities ........................ $ (49,689) (37,566) 74,502 218,245 (22,459) 183,033
========= ========= ========= ========= ========= =========
Cumulative interest rate sensitivity gap ..... $ (49,689) (87,255) (12,753) 205,492 183,033
========= ========= ========= ========= =========
Cumulative interest rate sensitivity gap
as a percentage of total assets ............ (3.67)% (6.45)% (0.94)% 15.19% 13.53%
========= ========= ========= ========= =========
<FN>
(1) Does not include equity securities.
(2) Includes retirement accounts which reprice every three months.
</FN>
</TABLE>
MARKET RISK INHERENT IN FINANCIAL INSTRUMENTS
Market risk is the risk of loss due to adverse changes in market prices and
rates. The management of this risk, coupled with directives to build Company
value and profitability, is an integral part of the Company's overall operating
strategy. The Company's approach to risk management, primarily interest rate
risk management, is quite basic and concentrates on fundamental strategies to
restructure the balance sheet and composition of assets and liabilities.
Inherent in this strategy is recognition of the value of non-interest rate
sensitive fee income in mitigating the impact on the income statement from
unfavorable swings in interest rates. Since the Company does not utilize
interest rate futures, swaps or options transactions, its asset/liability
profile is not complex. It reflects a simple approach to managing risk through
the use of three basic strategies: (i) adjustable-rate lending, (ii) shorter
loan terms and (iii) encouraging checking accounts to generate rate-insensitive
liabilities that produce substantial fee income. Company policy includes
required limits on the sensitivity of net interest income and net portfolio
value under various interest rate scenarios.
The assets and liabilities of the Company are comprised primarily of financial
instruments which give rise to cash flows. By projecting the timing and amount
of future net cash flows of such instruments and by
76
<PAGE>
using appropriate market discount rates to discount those cash flows, an
estimated value of that asset or liability can be determined. Market values of
the Company's investment in loans and debt securities fluctuate with movements
in market interest rates. Prepayments of principal are closely correlated with
interest rates and affect expected future cash flows of the Company's financial
instruments. Certain deposits and other borrowings of the Company are also
sensitive to interest rate changes.
The following table sets forth an analysis of the Company's assumed market value
risk inherent in its interest-rate-sensitive instruments as it relates to
interest-rate swings of 200 basis points, both above and below current levels.
Fair value estimates are subjective in nature and involve uncertainties and
matters of significant judgment and, therefore, cannot be determined with
precision. Assumptions have been made as to appropriate discount rates,
prepayment speeds, expected cash flows and other variables. Changes in
assumptions significantly affect the estimates and, as such, the derived fair
value may not be indicative of the value negotiated in an actual sale or
comparable to that reported by other financial institutions. In addition, the
fair value estimates are based on existing financial instruments without
attempting to estimate the value of anticipated future business. The tax
ramifications related to the realization of the unrealized gains and losses can
have a significant effect on fair value estimates and have not been considered
in the estimates.
The current fair value of loans held for investment is calculated by discounting
the expected future cash flows. Loans are segregated by type of loan and by
interest type, such as variable or fixed. Fixed-rate loans are further
categorized by original term to maturity and stratified by interest rate ranges.
Loans are discounted using the current new loan rate applicable to each type.
Adjustable-rate loans are valued based on scheduled repricing and discounted
using the current rate at which similar loans would be made to borrowers with
similar credit ratings. Future cash flows are estimated by using OTS nationwide
average prepayment speeds applicable to each type. The fair value of loans held
for sale is based on quoted market prices, assuming the loans will be packaged
and sold in the secondary market. The fair value of mortgage-backed and other
debt securities is based on quoted market prices, where available. If a quoted
market price is not available, fair value is estimated using quoted market
values of similar securities.
For deposit liabilities with no defined maturities, expected future cash flows
have been estimated based on decay rates. It is assumed that decay rates would
be applied to the account balance in the current rate model as well as rate
shocks up and down. The decay rate assumptions reflect that some customers will
withdraw their funds when faced with higher-rate alternatives and also
recognizes normal non-rate related movement of funds. The use of decay rates
reflects the long-term nature of transaction accounts and results in theses
funds being discounted at comparable maturity borrowing rates. An in-house
analysis of the Company's average attrition rate was used to support the
applications of decay factors. The fair value of certificates of deposit and
borrowings from the FHLB of Dallas are calculated by discounting the expected
future cash flows using the FHLB advance rate for comparable terms to maturity.
Expected future cash flows for certificates of deposit are based on the maturity
dates of the certificates, assuming no withdrawals prior to maturity.
The Company determines the fair value of mortgage servicing rights by estimating
the present value of net future servicing income using a discounted cash flow
analysis on a disaggregated basis. Average prepayment assumptions based on the
consensus view of a network of major broker/dealers available in the market are
used, taking into consideration loan type, original and remaining maturity, and
weighted average interest rate. Discount rates are used to approximate an
acceptable rate of return based in
77
<PAGE>
investor type. The current fair value of forward sales commitments of
mortgage-backed securities is based on quoted market prices.
The market value of financial instruments under an immediate rate shock of 200
basis points up and down is calculated utilizing vendor modeling software which
calculates expected cash flows under each rate environment at applicable
discount rates.
Projected net interest income of a twelve-month period is also calculated by the
model assuming customers will reinvest maturing deposit accounts and the Company
will originate a certain amount of new loans. Excess cash is invested in
overnight deposit accounts with other banks or utilized to pay maturing
advances. Cash shortfalls are covered through additional borrowing from the FHLB
of Dallas.
Table 6. Market Risk Inherent in Financial Instruments
<TABLE>
<CAPTION>
Fair Value
---------------------------------------------------------
Carrying Value No Change -200 Basis Points +200 Basis Points
(Dollars in Thousands)
<S> <C> <C> <C> <C>
Rate sensitive assets and liabilities:
Interest-earning assets:
Loans receivable, fixed rate .................... $ 467,726 492,221 505,178 460,743
Loans receivable, adjustable rate ............... 460,367 485,524 496,533 470,091
Mortgage-backed securities ...................... 132,912 133,206 135,017 132,672
Other debt securities ........................... 60,931 63,788 73,043 58,053
Interest-bearing deposits with banks ............ 28,705 28,705 28,705 28,705
---------- ---------- ---------- ----------
Total interest-earning assets ................. 1,150,641 1,203,444 1,238,476 1,150,264
---------- ---------- ---------- ----------
Interest-bearing liabilities:
NOW accounts .................................... 121,705 71,641 85,199 61,562
Passbook, statement and money market
accounts ...................................... 157,560 133,498 138,013 130,125
Certificates of deposit ......................... 472,328 470,175 477,987 462,882
Borrowings from the FHLB of Dallas .............. 258,449 257,921 263,561 252,718
---------- ---------- ---------- ----------
Total interest-bearing liabilities ............ 1,010,042 933,235 964,760 907,287
---------- ---------- ---------- ----------
Mortgage servicing rights ......................... 8,548 37,943 43,478 27,241
Off-balance sheet items ........................... - (68) (849) 162
---------- ---------- ---------- ----------
Net rate sensitive assets and liabilities ....... $ 149,147 308,084 316,345 270,380
========== ========== ========== ==========
Projected net interest income .................... $ 63,193 69,412 59,964
========== ========== ==========
</TABLE>
The Company's strategy to limit interest rate risk has been, and continues to
be, an emphasis on core deposit transaction accounts as a funding source for a
repricable portfolio of loans because such accounts generally are not
interest-rate sensitive or exhibit limited interest-rate sensitivity. The
Company does not invest in third-party hedging products, but relies on natural
hedges within its balance sheet composition to limit interest rate risks to a
level acceptable to management. As a fixed-rate lender, however, the Company
does engage in the practice of selling forward securitized loans anticipated
from its pipeline of loan applications and commitments. Virtually all
anticipated 30-year loan originations are sold forward to limit the risk of any
sudden change in market interest rates.
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<PAGE>
LIQUIDITY AND CAPITAL RESOURCES
Liquidity
The Company's primary sources of funds are deposits, repayments on loans and
mortgage-backed securities, maturities of investment securities, proceeds from
the sale of mortgage-backed securities and funds provided by operations.
Scheduled loan and mortgage-backed security repayments and maturing investments
are relatively predictable sources of funds; however, the general level of
interest rates, economic conditions and competition influence deposit flows and
loan prepayments. Pricing of deposits, consistent with asset/liability
objectives, is determined primarily by local competition and the Company's
funding requirements. When excess cash is available, funds are generally
invested overnight in interest-bearing deposits at the FHLB of Dallas.
The Bank is required by regulation to maintain specific minimum levels of liquid
assets. The required percentage is currently 5.0% of the preceding calendar
month's net withdrawable savings deposits and borrowings payable on demand or in
one year or less. Liquid assets for purposes of this ratio include cash, certain
time deposits, United States Government and corporate securities and other
obligations generally having maturities of less than five years. The Bank has
historically maintained its liquidity ratio at levels in excess of those
required. At June 30, 1997, the Bank's liquidity ratio was 9.3%.
The Company's liquidity is a product of its operating, investing and financing
activities. During fiscal 1997, cash provided by operations, sales of
mortgage-backed securities and advances from the FHLB of Dallas were used to
fund the origination of mortgage loans and investment in mortgage-backed
securities. Due to the Company's loan servicing operations, monthly cyclical
fluctuations of cash flows necessitated short-term borrowings that were
generally made and repaid within the same month.
Managing liquidity is a daily and long-term responsibility of management. The
Bank adjusts its investments in liquid assets based on an assessment of (i)
expected loan demand, (ii) projected sales of loans and mortgage-backed
securities, (iii) expected deposit flows, (iv) yields available on
interest-bearing deposits and (v) the objectives of its asset/liability
management program. Excess liquidity is generally invested in interest-earning,
overnight deposits and other short-term government and agency obligations. If
the Bank requires funds beyond its ability to generate them internally, it has
additional borrowing capacity with the FHLB of Dallas and collateral eligible
for reverse repurchase agreements.
The Company anticipates that it will have sufficient funds available to meet
current loan commitments and fund capital investments. At June 30, 1997, the
Company had outstanding commitments to originate loans of $52.2 million and
commitments to purchase loans of $720,000. Forward sale commitments of $57.4
million in mortgage-backed securities were outstanding at June 30, 1997. No
significant capital expenditures are expected in the near term and sufficient
funds are available to cover anticipated cash flows.
Certificates of deposit scheduled to mature within one year at June 30, 1997
totaled $345.0 million. Because certificates of deposit are priced competitively
with other investment alternatives, management anticipates that the majority of
these maturing deposits will be reinvested with the Bank. Management plans to
continue its strategy of replacing withdrawn deposits with retail checking and
other transaction accounts.
79
<PAGE>
Capital
Magnolia Federal's current capital position is well in excess of the minimum
regulatory requirements. The regulations require institutions to have minimum
regulatory tangible capital equal to 1.5% of total assets and a minimum 3.0%
core capital ratio. At June 30, 1997, the Bank's tangible and core capital ratio
was 8.48%. Additionally, institutions are required to meet a risk-based capital
requirement equaling 8.0% of the amount of risk-weighted assets. At June 30,
1997, the Bank's risk-based capital was 16.90% of risk-weighted assets. Due to
implementation issues and measurement consistency, the effective date of an
interest rate risk component to the risk-based capital calculation has not been
finalized. Interest rate risk is measured as the change in an institution's net
portfolio value as a result of a hypothetical 200 basis point increase or
decrease in market interest rates. A "normal level" of interest rate risk is any
decline in net portfolio value of up to 2.0% of the institution's assets.
Institutions with a risk profile in excess of such level may be required to
deduct from their risk-based capital an amount equal to one-half the difference
between the institution's measured risk and 2.0% of assets. Based on the
Company's current asset/liability structure, management does not anticipate any
material impact on its risk-based capital levels.
ACCOUNTING DEVELOPMENTS
Recently issued Statement of Financial Accounting Standards No. 128 "Earnings
per Share" ("SFAS No. 128") supersedes Accounting Principles Board Opinion No.
15, "Earnings per Share," and specifies the computation, presentation and
disclosure requirements for earnings per share ("EPS") for entities with
publicly held common stock or potential common stock. It replaces Primary EPS
and Fully Diluted EPS with Basic EPS and Diluted EPS. Dual presentation of Basic
EPS and Diluted EPS on the face of the income statement for all entities with
complex capital structures is required. Reconciliation of the Basic EPS
computation to the Diluted EPS computation is also required. SFAS No. 128 is
effective for financial statements for both interim and annual periods ending
after December 15, 1997. Earlier application is not permitted. Further
disclosures of an entity's capital structure are required for years ending after
December 15, 1997 by Statement of Financial Accounting Standards No. 129
"Disclosure of Information about Capital Structure" ("SFAS No. 129"). The
disclosure of pertinent information concerning the rights and privileges of an
entity's outstanding securities is required for entities with complex capital
structures. Because the Company's capital structure is not complex, the adoption
of these Statements would not be of significance.
Standards for reporting and display of comprehensive income, or the total of net
income and all other non-owner equity changes, was addressed in Statement of
Financial Accounting Standards No. 130 "Reporting Comprehensive Income." Changes
in the Company's unrealized holding gains and losses on available-for-sale
securities would be a component of comprehensive income for which greater
disclosures would be required in years beginning after December 15, 1997.
The Statement of Financial Accounting Standards No. 131 "Disclosure about
Segments of an Enterprise and Related Information" ("SFAS No. 131") was issued
on June 30, 1997 and requires specific disclosures about segments of an
enterprise. Effective for fiscal years beginning after December 15, 1997, SFAS
No. 131 introduces a "management approach" for segment reporting. The management
80
<PAGE>
approach is based on how the chief operating decision maker organizes segments
within a company for making operating decisions and assessing performance.
IMPACT OF INFLATION AND CHANGING PRICES
The Consolidated Financial Statements and Notes thereto presented herein have
been prepared in accordance with generally accepted accounting principles that
require the measurement of financial position and operating results in terms of
historical dollars without considering the change in the relative purchasing
power of money over time due to inflation. The impact of inflation is reflected
in the increased cost of the Company's operations. Unlike most industrial
companies, nearly all the assets and liabilities of the Company are monetary. As
a result, interest rates have a greater impact on the Company's performance than
general levels of inflation. Interest rates do not necessarily move in the same
direction or to the same extent as the price of goods and services.
81
<PAGE>
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
82
<PAGE>
MAGNA BANCORP, INC. AND SUBSIDIARIES
Index to Consolidated Financial Statements
Independent Auditors' Report ................................... 84
Consolidated Financial Statements:
Consolidated Statements of Financial Condition
as of June 30, 1997 and 1996 .......................... 85
Consolidated Statements of Earnings for the
Years Ended June 30, 1997, 1996 and 1995 .............. 86
Consolidated Statements of Stockholders' Equity for
the Years Ended June 30, 1997, 1996 and 1995 .......... 88
Consolidated Statements of Cash Flows for the
Years Ended June 30, 1997, 1996 and 1995 .............. 89
Notes to Consolidated Financial Statements .................... 92
83
<PAGE>
Independent Auditors' Report
The Board of Directors and Stockholders
Magna Bancorp, Inc.:
We have audited the accompanying consolidated statements of financial condition
of Magna Bancorp, Inc. and subsidiaries as of June 30, 1997 and 1996, and the
related consolidated statements of earnings, stockholders' equity and cash flows
for each of the years in the three-year period ended June 30, 1997. 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 audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Magna Bancorp, Inc.
and subsidiaries as of June 30, 1997 and 1996, and the results of their
operations and their cash flows for each of the years in the three-year period
ended June 30, 1997, in conformity with generally accepted accounting
principles.
As discussed in note 1 to the consolidated financial statements, the Company
changed its method of accounting for mortgage servicing rights in 1996 to adopt
the provisions of Statement of Financial Accounting Standards No. 122,
"Accounting for Mortgage Servicing Rights."
/s/ KPMG PEAT MARWICK LLP
August 29, 1997
Jackson, Mississippi
84
<PAGE>
MAGNA BANCORP, INC. AND SUBSIDIARIES
Consolidated Statements of Financial Condition
June 30, 1997 and 1996
<TABLE>
<CAPTION>
Assets 1997 1996
------ ----------------- ----------------
<S> <C> <C>
Cash and due from banks $ 69,504,187 70,548,661
Interest-bearing deposits with banks 28,704,668 10,745,849
Mortgage-backed securities held for trading - 34,486,798
Other securities held for trading 3,386,250 -
Mortgage-backed securities available for sale 122,385,386 118,872,676
Other securities available for sale 16,676,744 7,188,768
Mortgage-backed securities held to maturity 10,526,158 12,727,245
Other securities held to maturity 53,791,261 67,485,783
Stock in Federal Home Loan Bank of Dallas 15,627,418 12,027,000
Loans held for sale, net of unrealized losses of $148,201 in 1996 51,556,780 27,475,284
Loans receivable, net of allowance for possible loan losses of
$10,423,693 in 1997 and $9,451,693 in 1996 876,536,687 836,286,838
Accrued interest receivable 9,911,115 11,059,971
Premises and equipment, net 44,049,820 43,160,425
Foreclosed assets 9,328,501 10,230,943
Mortgage servicing rights, net 8,547,688 5,788,245
Premium on purchased deposits, net 3,702,731 6,778,400
Prepaid expenses and other assets 29,007,066 33,794,935
----------------- ----------------
$ 1,353,242,460 1,308,657,821
================= ================
Liabilities and Stockholders' Equity
------------------------------------
Liabilities:
Deposits $ 915,394,878 922,370,122
Borrowings from Federal Home Loan Bank of Dallas:
Short-term 165,298,412 125,000,000
Long-term 93,150,183 96,961,222
Advance by borrowers for property taxes, insurance and other 10,612,972 11,219,490
Interest payable on deposits 5,352,575 5,320,261
Accrued expenses and other liabilities (including
clearing balances of collections on serviced loans
of $10,795,604 in 1997 and $7,386,427 in 1996) 25,061,714 21,968,146
----------------- ----------------
Total liabilities 1,214,870,734 1,182,839,241
----------------- ----------------
Stockholders' equity:
Serial preferred stock, $.01 par value, 500,000
authorized shares, none issued and outstanding - -
Common stock, $.01 par value. Authorized 14,500,000; issued and
outstanding 13,754,266 in 1997 and 13,702,656 in 1996 137,543 68,514
Additional paid-in capital 18,735,227 18,373,306
Retained earnings, substantially restricted 119,340,749 109,096,579
Unrealized gains (losses) on securities available for sale,
net of deferred income taxes 158,207 (1,719,819)
----------------- ----------------
Total stockholders' equity 138,371,726 125,818,580
----------------- ----------------
$ 1,353,242,460 1,308,657,821
================= ================
</TABLE>
See accompanying notes to consolidated financial statements.
85
<PAGE>
MAGNA BANCORP, INC. AND SUBSIDIARIES
Consolidated Statements of Earnings
Years Ended June 30, 1997, 1996 and 1995
<TABLE>
<CAPTION>
1997 1996 1995
----------- ----------- -----------
<S> <C> <C> <C>
Interest income:
Loans $ 93,147,812 90,540,068 79,630,506
Mortgage-backed securities:
Held to maturity 927,065 2,400,797 4,125,469
Available for sale 8,199,053 3,565,094 4,077,283
Held for trading 3,003,799 1,879,477 585,278
Other securities:
Held to maturity 4,993,934 5,882,877 6,766,160
Available for sale 332,578 227,834 -
Held for trading 31,501 - -
Interest-bearing deposits with banks 491,592 1,704,272 1,151,540
Other investments 796,924 546,544 507,597
---------- ----------- -----------
Total interest income 111,924,258 106,746,963 96,843,833
----------- ----------- -----------
Interest expense:
Deposits 31,284,154 31,249,387 28,161,097
Borrowings from Federal Home Loan Bank of Dallas:
Short-term 8,876,459 1,445,723 1,664,159
Long-term 6,085,760 8,957,741 4,310,755
------------ ----------- -----------
Total interest expense 46,246,373 41,652,851 34,136,011
------------ ----------- -----------
Net interest income 65,677,885 65,094,112 62,707,822
Provision for possible loan losses 3,135,643 1,633,241 418,169
------------ ----------- ----------
Net interest income after provision
for possible loan losses 62,542,242 63,460,871 62,289,653
------------ ----------- ----------
Noninterest income (loss):
Loan servicing income, net 12,128,395 12,423,681 12,080,316
Service fees on deposits 18,737,746 16,406,674 13,361,644
Other service fees and commissions 1,956,534 1,671,424 1,265,354
Unrealized holding gains (losses) on trading securities
and loans held for sale, net 2,412,242 (1,293,133) 864,262
Gains on sales of assets held for sale, available
for sale or held for trading, net 521,176 1,536,637 842,746
Losses on sales and operations of
foreclosed assets, net (1,881,785) (1,449,500) (146,481)
Insurance fees, commissions and premiums, net 2,732,607 2,956,356 3,441,493
Appraisal fees, net 959,285 1,315,326 651,960
Other income, net 1,570,504 4,048,725 2,885,039
------------ ----------- -----------
Total noninterest income, net 39,136,704 37,616,190 35,246,333
------------ ----------- -----------
</TABLE>
(Continued)
86
<PAGE>
MAGNA BANCORP, INC. AND SUBSIDIARIES
Consolidated Statements of Earnings
<TABLE>
<CAPTION>
1997 1996 1995
--------------- ------------- -----------
<S> <C> <C> <C>
Noninterest expense:
Compensation, payroll taxes and fringe benefits 30,289,765 30,685,273 27,997,306
Rent and other occupancy expense 6,274,486 6,147,413 6,007,513
Equipment and fixtures expense 4,793,930 4,585,444 4,815,490
Communication, postage, printing and office supplies 6,531,208 6,523,050 6,825,888
Deposit and other insurance premiums 1,696,881 2,542,993 2,702,475
Special SAIF deposit insurance assessment 5,917,174 - -
Advertising 1,485,678 2,523,988 2,363,588
Expenses of officers, directors and employees,
including directors' fees 1,619,701 1,530,392 1,548,613
Data processing expense 3,063,105 3,091,750 2,383,221
Amortization of premium on purchased deposits 2,889,644 3,777,427 4,621,236
Professional fees 3,769,341 2,886,827 3,079,351
Other loan servicing costs 2,239,665 2,503,874 2,791,324
Other expenses 1,084,147 1,227,471 1,174,141
------------ ------------- -----------
Total noninterest expense 71,654,725 68,025,902 66,310,146
------------ ------------- -----------
Earnings before income taxes 30,024,221 33,051,159 31,225,840
Income tax expense 11,464,747 11,941,810 12,200,817
------------- ------------- -----------
Net earnings $ 18,559,474 21,109,349 19,025,023
============= ============= ===========
Earnings per common share $ 1.34 1.50 1.33
============= ============= ===========
</TABLE>
See accompanying notes to consolidated financial statements.
87
<PAGE>
MAGNA BANCORP, INC. AND SUBSIDIARIES
Consolidated Statements of Stockholders' Equity
Years Ended June 30, 1997, 1996 and 1995
<TABLE>
<CAPTION>
1997 1996 1995
-------------- ---------------- --------------
<S> <C> <C> <C>
Common stock:
Balance at beginning of year $ 68,514 70,280 70,298
Purchase and retirement of 134 shares in 1997,
372,634 shares in 1996 and 14,902 shares in 1995 (1) (1,863) (74)
Stock issued upon exercise of stock options 324 97 56
Two-for-one stock split 68,706 - -
-------------- --------------- --------------
Balance at end of year $ 137,543 68,514 70,280
============== =============== ==============
Additional paid-in capital:
Balance at beginning of year $ 18,373,306 23,546,336 23,176,296
Purchase and retirement of 134 shares in 1997,
372,634 shares in 1996 and 14,902 shares in 1995 (2,181) (5,764,021) (182,816)
Stock issued upon exercise of stock options 45,492 16,989 9,861
Tax benefit of restricted stock awards
and stock options 318,610 574,002 542,995
-------------- --------------- --------------
Balance at end of year $ 18,735,227 18,373,306 23,546,336
============== =============== ==============
Retained earnings, substantially restricted:
Balance at beginning of year $ 109,096,579 91,466,279 75,042,859
Net earnings 18,559,474 21,109,349 19,025,023
Cash dividends paid at $0.60 per share for 1997,
$0.25 per share for 1996 and $0.19 per share
for 1995 (8,246,598) (3,479,049) (2,601,603)
Two-for-one stock split (68,706) - -
-------------- --------------- --------------
Balance at end of year $ 119,340,749 109,096,579 91,466,279
============== =============== ==============
Unrealized gains (losses) on securities available for sale:
Balance at beginning of year $ (1,719,819) 319,186 (1,712,462)
Change in unrealized gains (losses) on securities
available for sale, net of deferred income taxes 1,878,026 (2,039,005) 2,031,648
-------------- --------------- --------------
Balance at end of year $ 158,207 (1,719,819) 319,186
============== =============== ==============
Unearned compensation - restricted stock awards:
Balance at beginning of year $ - (82,842) (338,786)
Amortization of unearned compensation - 82,842 255,944
-------------- --------------- --------------
Balance at end of year $ - - (82,842)
============== =============== ==============
</TABLE>
See accompanying notes to consolidated financial statements.
88
<PAGE>
MAGNA BANCORP, INC. AND SUBSIDIARIES
Consolidated Statements of Cash Flows
Years Ended June 30, 1997, 1996 and 1995
<TABLE>
<CAPTION>
1997 1996 1995
--------------- --------------- ----------
<S> <C> <C> <C>
Cash flows from operating activities:
Net earnings $ 18,559,474 21,109,349 19,025,023
Adjustments to reconcile net earnings to net
cash provided (used) by operating activities:
Provision for possible loan losses 3,135,643 1,633,241 418,169
Depreciation and amortization 9,520,636 9,440,623 12,483,411
Amortization of premium on purchased deposits 2,889,644 3,777,427 4,621,236
Decrease (increase) in prepaid expenses
and other assets 3,723,421 (2,816,675) 1,464,276
Increase (decrease) in accrued expenses
and other liabilities 3,125,882 7,755,326 (20,128,552)
Unrealized holding (gains) losses on trading
securities and loans held for sale, net (2,412,242) 1,293,133 (864,262)
Gains on sales of assets held for sale, available
for sale or held for trading, net (521,176) (1,536,637) (842,746)
Gains on sales of premises and equipment, (119,413) (6,247) (276,940)
Gains on sales of foreclosed assets, net (2,272,882) (816,094) (858,523)
Accretion of deferred fees, discounts and
premiums, net (5,004,491) (6,021,473) (1,778,933)
Other, net 1,083,109 409,706 (379,032)
Proceeds from sales of assets held for sale
or held for trading 209,005,673 209,383,921 69,481,016
Principal payments on mortgage-backed securities
held for trading 3,576,806 1,891,226 342,308
Purchases of mortgage-backed and other securities
held for trading (2,042,145) (6,987,813) (2,011,288)
Origination of loans held for sale (223,105,837) (244,445,656) (88,764,420)
----------- ----------- -----------
Net cash provided (used) by
operating activities 19,142,102 (5,936,643) (8,069,257)
----------- ----------- -----------
</TABLE>
(Continued)
89
<PAGE>
MAGNA BANCORP, INC. AND SUBSIDIARIES
Consolidated Statements of Cash Flows
<TABLE>
<CAPTION>
1997 1996 1995
--------------- --------------- ---------------
<S> <C> <C> <C>
Cash flows from investing activities:
Net decrease (increase) in interest-bearing
deposits with banks (17,958,819) 12,816,429 (3,604,017)
Net increase in loans (20,577,400) (69,786,564) (2,474,568)
Purchases of loans (15,454,517) (44,663,350) (88,016,776)
Proceeds from sales of mortgage-backed securities
available for sale - 2,155,965 99,949,098
Proceeds from maturities of other securities 14,284,400 9,157,500 11,000,000
Principal payments on mortgage-backed
and other securities 16,716,028 12,910,043 14,227,606
Purchases of mortgage-backed and other securities
available for sale (8,423,860) (20,961,852) (50,294,800)
Purchases of mortgage-backed and other securities
held to maturity - (722,278) (5,530,443)
Proceeds from sales of foreclosed assets 4,737,067 4,486,670 4,105,093
Purchases of mortgage servicing rights (5,287,479) (12,087) (1,016,946)
Redemption (purchase) of stock in Federal
Home Loan Bank of Dallas (3,600,418) (4,101,500) 164,200
Proceeds from sales of premises and equipment 572,247 67,333 740,610
Additions to premises and equipment (6,215,083) (9,110,395) (7,581,989)
-------------- ------------- --------------
Net cash used by investing activities (41,207,834) (107,764,086) (28,332,932)
-------------- ------------- --------------
Cash flows from financing activities:
Net increase (decrease) in deposits (6,975,244) 4,652,137 (54,925,771)
Net increase in borrowings from Federal Home
Loan Bank of Dallas 36,487,373 121,961,222 100,000,000
Issuance of common stock 45,816 17,085 9,917
Repurchase of common stock (2,181) (5,765,883) (182,890)
Tax benefit of restricted stock
awards and stock options 318,610 574,002 542,995
Cash dividends paid (8,246,598) (3,479,049) (2,601,603)
Increase (decrease) in advance payments by
borrowers for property taxes, insurance
and other (606,518) 4,460,699 226,983
-------------- ------------- --------------
Net cash provided by financing activities 21,021,258 122,420,213 43,069,631
-------------- ------------- --------------
</TABLE>
(Continued)
90
<PAGE>
MAGNA BANCORP, INC. AND SUBSIDIARIES
Consolidated Statements of Cash Flows
<TABLE>
<CAPTION>
1997 1996 1995
--------------- --------------- ---------------
<S> <C> <C> <C>
Net increase (decrease) in cash
and due from banks (1,044,474) 8,719,484 6,667,442
Cash and due from banks at beginning of year 70,548,661 61,829,177 55,161,735
--------------- ---------------- ---------------
Cash and due from banks at end of year $ 69,504,187 70,548,661 61,829,177
=============== ================ ===============
Supplemental disclosures of cash flow information:
Cash paid during the year for:
Interest on deposits, advances and
other borrowings $ 45,942,763 40,718,840 33,399,339
=============== ================ ===============
Income taxes 12,488,884 11,190,000 12,211,893
============== ================ ===============
Noncash investing and financing activities
during the year for:
Foreclosures 15,031,391 13,688,286 8,864,995
============== ================ ===============
Securitization of mortgage loans $ 193,294,179 289,707,302 89,231,963
============== ================ ===============
Loans originated to facilitate sales of
foreclosed assets $ 12,270,777 5,414,831 3,901,912
============== ================ ===============
</TABLE>
See accompanying notes to consolidated financial statements.
91
<PAGE>
MAGNA BANCORP, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
June 30, 1997, 1996 and 1995
(1) Summary of Significant Accounting Policies
The accounting and reporting policies of Magna Bancorp, Inc. (the
"Company") and subsidiaries conform to generally accepted accounting
principles and to general practices within the thrift industry. The
following is a description of the more significant of those policies
that the Company follows in preparing and presenting its consolidated
financial statements.
(a) Principles of Consolidation
The accompanying consolidated financial statements include the
accounts of the Company, its wholly-owned or majority-owned
subsidiaries, Magna Financial Services, Inc.; Comserv, Inc.; Realty
Services, Inc.; Magnolia Federal Bank for Savings (the "Bank"); and
Magna Insurance Company. All significant intercompany transactions
and balances have been eliminated in consolidation.
(b) Basis of Financial Statement Presentation
The financial statements have been prepared in conformity with
generally accepted accounting principles. In preparing the financial
statements, management is required to make estimates and assumptions
that affect the reported amounts of assets and liabilities and
revenues and expenses. Actual results could differ significantly
from those estimates. Significant estimates that are susceptible to
change relate to the determination of the allowance for possible
loan losses, the valuation of real estate acquired in connection
with foreclosures or in satisfaction of loans and the valuation of
capitalized mortgage servicing rights.
Management believes that the allowance for possible loan losses is
adequate and the carrying value of real estate owned is recoverable.
While management uses available information to recognize possible
loan losses and to determine that the carrying value of real estate
owned does not exceed its fair value less estimated selling costs,
future additions to the allowance or future writedowns to real
estate owned may be necessary based on changes in economic or market
conditions.
Management also believes the carrying value of capitalized mortgage
servicing rights is recoverable. While management uses available
information to estimate the fair value, future additions to the
valuation allowance may be necessary based on changes in economic or
market conditions.
(Continued)
92
<PAGE>
MAGNA BANCORP, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
In addition, various regulatory agencies, as an integral part of their
examination process, periodically review the Company's allowance for
possible loan losses, the carrying value of real estate owned and
the valuation of capitalized mortgage servicing rights. Such
agencies may require the Company to recognize adjustments to the
allowance for possible loan losses, allowance for valuation of
capitalized servicing rights or carrying value of real estate owned
based on their judgments about information available to them at the
time of their examination.
(c) Mortgage-backed Securities and Other Securities
Securities are classified as either held to maturity, held for
trading or available for sale. Securities held to maturity are those
which the Company has the ability and positive intent to hold until
maturity. Trading securities are bought or originated and held
principally for the purpose of selling them in the near term. All
other securities are classified as available for sale. Securities
held to maturity are reported at amortized cost. Securities held for
trading are reported at fair value with unrealized gains and losses
included in earnings. Securities available for sale are reported at
fair value with unrealized gains and losses excluded from earnings
and reported, net of the related tax effect, as a separate component
of stockholders' equity.
Securities transferred from held for trading to either held to
maturity or available for sale are transferred at fair value at the
date of transfer.
Premiums and discounts are amortized using the interest method over
the remaining period of contractual maturity, adjusted for actual
prepayments. Gains and losses on the sale of debt securities are
determined using the specific identification method.
(d) Stock in Federal Home Loan Bank of Dallas
Investment in stock of a Federal Home Loan Bank ("FHLB") is required
by law of every savings and loan association or savings bank insured
by the Savings Association Insurance Fund ("SAIF") of the Federal
Deposit Insurance Corporation ("FDIC"). The investment is carried at
cost. No ready market exists for the stock, and it has no quoted
market value.
(Continued)
93
<PAGE>
MAGNA BANCORP, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(e) Loans
Loans held for investment are stated at unpaid principal balances
less unearned discounts, net deferred loan origination fees and
allowance for possible loan losses, because the Company has the
intent and ability to hold such loans for the foreseeable future or
until maturity. Loans held for sale are carried at the lower of cost
or estimated fair value. Estimated fair value is based on quoted
market prices, assuming the loans will be packaged and sold in the
secondary market.
If, at the time of origination, a 15-year term loan qualifies for
sale in the secondary market and has a stated interest rate that
falls within a designated range, it is usually classified as held
for sale. All loans originated with a 30-year term that qualify for
sale in the secondary market are classified as held for sale. Loans
transferred from the held-for-sale category to the
held-for-investment category are transferred at the lower of cost or
estimated fair value at the date of transfer.
Loans purchased are recorded at the unpaid principal balance, and a
discount is recorded for the difference between the unpaid principal
balance and the net purchase price.
The Company provides a valuation allowance for possible losses on
loans. The allowance includes specific amounts for identified losses
and general amounts for unidentified losses as determined by
management through an evaluation of the loan portfolio, a review of
historical loss experience and consideration of other factors.
Additions to the allowance are charged to operations. Unsecured
consumer loans which are 120 days delinquent are charged against the
valuation allowance.
While management uses available information in establishing the
allowance for possible loan losses, future adjustments to the
allowance may be necessary if economic and other conditions differ
substantially from assumptions used in making evaluations. Should it
become necessary for the Company to convert the underlying
collateral to cash, the amounts received may differ from carrying
values indicated depending on market conditions at the time.
Impaired and restructured loans are measured at the present value
of expected future cash flows, discounted at the loan's effective
rate or, as a practical expedient, at the loan's observable market
price or the fair value of the underlying collateral if the loan is
collateral dependent. A loan is considered impaired when it is
probable that the Company will be unable to collect all amounts due
according to the contractual terms of the loan.
(Continued)
94
<PAGE>
MAGNA BANCORP, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
Interest is accrued only if it is deemed collectible. The Company's
policy is not to accrue interest on mortgage or consumer loans that
are delinquent more than 90 days and that are not insured or
guaranteed by government agencies or are not covered for losses
under recourse agreements. Payments received on non-accruing loans
are recorded as if received timely in accordance with the
contractual provisions of the loans.
(f) Premises and Equipment
Premises and equipment are stated at cost less accumulated
depreciation.
Depreciation is provided over the estimated useful lives of the
respective assets. Buildings and improvements are depreciated on the
straight-line method. Furniture and equipment are depreciated using
the declining balance method.
(g) Foreclosed Assets
Real estate properties acquired in settlement of loans are initially
recorded at the lower of the related loan balance, less any specific
allowance for loss, or fair value less estimated selling costs at
the date of acquisition. When a reduction from carrying value to
fair value is required at the time of foreclosure, the difference is
charged to the allowance for possible loan losses. Costs associated
with the acquisition and repair of real estate properties acquired
in settlement of loans are expensed when incurred.
Valuations are performed periodically by qualified appraisers. If
the carrying value of a property exceeds its estimated fair value,
less estimated costs to sell, the difference is charged to
operations.
(h) Mortgage Servicing Rights
Statement of Financial Accounting Standards No. 122, "Accounting for
Mortgage Servicing Rights" ("SFAS No. 122") was adopted by the
Company as of July 1, 1995. This statement requires that the cost
basis of a loan be allocated between the loan and the related right
to service the loan based on their relative fair values. Impairment
provisions of the statement require that a valuation allowance be
established at the time the recorded value of the servicing rights
exceeds the fair value. Prior to fiscal 1996, only the cost of
purchased rights to service mortgage loans was recorded as an asset.
Effective January 1, 1997, the Company adopted
(Continued)
95
<PAGE>
MAGNA BANCORP, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
Statement of Financial Accounting Standard No. 125, "Accounting for
Transfers and Servicing of Financial Assets and Extingushments of
Liabilities" ("SFAS No. 125"), which addresses the recognition and
measurement of servicing assets and liabilities. The adoption of
SFAS No. 125 did not materially impact the Company's financial
statements.
The Company determines the fair value of capitalized mortgage
servicing rights by estimating the present value of net future
servicing income using a discounted cash flow analysis on a
disaggregated basis. Average prepayment assumptions based on the
consensus view of a network of major broker/dealers available in the
market are used, taking into consideration loan type, original and
remaining maturity, and weighted average interest rate. Discount
rates are used to approximate an acceptable rate of return based on
investor type. Ancillary income and servicing costs were estimated
based on industry average data. For the purpose of evaluating and
measuring impairment of capitalized mortgage servicing rights, the
Company stratifies the rights by loan type, original term and coupon
rate.
Capitalized servicing rights are amortized using the
sum-of-the-months-digits method generally over six years. This
method does not differ materially from amortization in proportion
to, and over the period of, the estimated net servicing income as
required by SFAS No. 125.
(i) Premium on Purchased Deposits
Premium on purchased deposits is amortized using the sum-of-the-months
digits method over six years.
(j) Income Taxes
Deferred tax assets and liabilities are established for the
temporary differences between the financial reporting basis and the
tax basis of the Company's assets and liabilities at enacted tax
rates expected to be in effect when such amounts are realized or
settled. Under the statement, the effect of a change in tax rates on
deferred tax assets and liabilities is recognized as income or
expense in the period that includes the enactment date.
(k) Loan Fees and Discounts
The Company defers loan origination and commitment fees, discount
points and direct loan origination costs and recognizes these over
the life of the loan as an adjustment to the yield.
(Continued)
96
<PAGE>
MAGNA BANCORP, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
Deferred fees and costs on loans pooled as mortgage-backed securities
are recorded as an adjustment to the basis in the securities.
Unamortized fees and costs related to loans sold in the secondary
market are recognized in income at the date of sale.
Discounts on loans purchased include price adjustments related to the
the yield on purchased loans and impairment of the underlying
collateral and are accreted using the interest method over the
contractual terms of the loans.
Unearned discounts on property improvement, consumer and mobile home
loans are amortized using the interest method over the remaining
contractual maturity of the loans.
(l) Reclassifications
Certain prior year amounts have been reclassified to conform with the
1997 presentation.
(m) Accounting Developments
Recently issued Statement of Financial Accounting Standards No. 128
"Earnings per Share" ("SFAS No. 128") supersedes Accounting
Principles Board Opinion No. 15, "Earnings per Share," and specifies
the computation, presentation and disclosure requirements for
earnings per share ("EPS") for entities with publicly held common
stock or potential common stock. It replaces Primary EPS and Fully
Diluted EPS with Basic EPS and Diluted EPS. Dual presentation of
Basic EPS and Diluted EPS on the face of the income statement for
all entities with complex capital structures is required.
Reconciliation of the Basic EPS computation to the Diluted EPS
computation is also required. SFAS No. 128 is effective for
financial statements for both interim and annual periods ending
after December 15, 1997. Earlier application is not permitted.
Further disclosures of an entity's capital structure are required
for years ending after December 15, 1997 by Statement of Financial
Accounting Standards No. 129 "Disclosure of Information about
Capital Structure." Disclosures of pertinent information concerning
the rights and privileges of an entity's outstanding securities are
required. Because the Company's capital structure is not complex,
the adoption of these Statements is not expected to be of
significance.
(Continued)
97
<PAGE>
MAGNA BANCORP, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
Standards for reporting and displaying comprehensive income, or the
total of net income and all other non-owner equity changes, was
addressed in Statement of Financial Accounting Standards No. 130
"Reporting Comprehensive Income." Changes in the Company's
unrealized holding gains and losses on available-for-sale securities
would be a component of comprehensive income for which greater
disclosures would be required in years beginning after December 15,
1997.
Statement of Financial Accounting Standards No. 131 ("SFAS No. 131")
was issued on June 30, 1997 and requires specific disclosures about
segments of an enterprise. Effective for fiscal years beginning
after December 15, 1997, SFAS No. 131 introduces a "management
approach" for segment reporting. The management approach is based on
how the chief operating decision maker organizes segments within a
company for making operating decisions and assessing performance.
(2) Merger
On May 8, 1997, the Company and Union Planters Corporation ("UPC"),
entered into an Agreement and Plan of Reorganization ("Merger
Agreement"), pursuant to which UPC Merger Subsidiary, Inc. a
corporation organized and existing under the laws of the State of
Delaware and a wholly owned subsidiary of UPC, will be merged with and
into the Company.
In accordance with the terms of the Merger Agreement, each share of the
Company's common stock, par value $.01 per share, outstanding
immediately prior to the effective time of the Merger will be
converted into the right to receive .5165 shares of common stock, par
value $5.00 per share, of UPC. The merger is intended to constitute a
tax-free reorganization under the Internal Revenue Code of 1986, as
amended, and to be accounted for as a pooling-of-interests.
A special meeting of the Company's shareholders was held August 20, 1997,
at which time the merger received shareholder approval. Consummation
of the Merger is subject to various conditions, and approval by
regulatory authorities and is expected to close on November 1, 1997.
(3) Cash and Due From Banks
The Company is required to set aside specified amounts of cash as reserves
against transaction account deposits. The reserve is satisfied by
vault cash and a reserve balance maintained with the Federal Reserve
Bank. The average amount of the reserve balance maintained with the
Federal Reserve Bank for the year ended June 30, 1997 was
approximately $52,000.
(Continued)
98
<PAGE>
MAGNA BANCORP, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
The Company also maintains a clearing account balance of $1,000,000 with
the Federal Reserve Bank in order to purchase Federal Reserve Bank
services.
(4) Mortgage-backed Securities
The amortized cost and estimated fair value of mortgage-backed securities
follow:
<TABLE>
<CAPTION>
Gross Gross
Amortized Unrealized Unrealized Estimated
Cost Gains Losses Fair Value
----------- ---------- ------------ ---------------
<S> <C> <C> <C> <C>
June 30, 1997:
Held to maturity, by issuer:
GNMA $ 2,758,980 120,600 - 2,879,580
FNMA 2,226,271 99,082 - 2,325,353
FHLMC 5,540,907 74,360 - 5,615,267
----------- ---------- ------------ ---------------
$ 10,526,158 294,042 - 10,820,200
=========== ========== ============ ===============
Available for sale, by issuer:
GNMA $ 6,134,013 89,053 (63,754) 6,159,312
FNMA 110,574,107 635,054 (1,627,341) 109,581,820
FHLMC 6,660,421 43,372 (59,539) 6,644,254
------------ ---------- ------------ ---------------
$123,368,541 767,479 (1,750,634) 122,385,386
============ ========== ============ ===============
June 30, 1996:
Held to maturity, by issuer:
GNMA $ 3,460,946 144,313 - 3,605,259
FNMA 2,898,094 108,637 - 3,006,731
FHLMC 6,368,205 63,692 (20,626) 6,411,271
------------ ------------ ------------ ---------------
$ 12,727,245 316,642 (20,626) 13,023,261
============ ============ ============ ===============
Available for sale, by issuer:
GNMA $ 7,153,516 82,665 (135,904) 7,100,277
FNMA 107,006,418 578,139 (3,010,876) 104,573,681
FHLMC 7,288,816 44,920 (135,018) 7,198,718
------------ ------------ ------------- ---------------
$121,448,750 705,724 (3,281,798) 118,872,676
============ ============ ============ ===============
Held for trading, by issuer:
GNMA $ 2,107,593 27,411 - 2,135,004
FNMA 33,299,141 87,871 (1,035,218) 32,351,794
------------ ------------ ------------ ---------------
$ 35,406,734 115,282 (1,035,218) 34,486,798
============ ============ ============ ===============
</TABLE>
(Continued)
99
<PAGE>
MAGNA BANCORP, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
The average rate on the total mortgage-backed securities portfolio at
June 30, 1997 and 1996 was 6.87% and 6.86%, respectively.
During 1996, mortgage-backed securities with a carrying value of
$34,098,258 and an estimated fair value of $34,671,819 were
transferred from the held-to-maturity category to the
available-for-sale category, as provided for under the Financial
Accounting Standards Board's ("FASB's") Special Report, "A Guide to
Implementation of Statement 115 on Accounting for Certain
Investments in Debt and Equity Securities." The adjustment to
estimated fair value of $573,561, net of related deferred income
taxes, was recorded as a separate component of stockholders' equity.
Gross gains of $36,331 were realized on sales of mortgage-backed
securities available for sale during 1996. Gross losses of
$1,020,569 were realized on sales of mortgage-backed securities
available for sale during 1995. No sales of mortgage-backed
securities available for sale occurred during 1997. No sales of
mortgage-backed securities held to maturity occurred during 1997,
1996 or 1995.
The net unrealized holding loss on mortgage-backed securities held for
trading was $1,144,932 during 1996. The net unrealized holding gain
was $919,936 and $740,745 during 1997 and 1995, respectively.
Maturities of mortgage-backed securities held to maturity, available for
sale or held for trading are not shown because such securities are
not due at a single maturity date. Actual maturities would differ
from contractual maturities because borrowers have the right to
prepay obligations with or without prepayment penalties.
At June 30, 1997 mortgage-backed securities with a carrying value of
$35,725,746 were pledged to FHLB of Dallas as security on borrowings
from the FHLB of Dallas.
(Continued)
100
<PAGE>
MAGNA BANCORP, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(5) Other Securities
The amortized cost and estimated fair value of other securities follow:
<TABLE>
<CAPTION>
Gross Gross Estimated
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
-------------- ------------ ---------- --------------
<S> <C> <C> <C> <C>
June 30, 1997:
Held to maturity:
United States government
and agency obligations $ 52,615,616 2,855,344 (4,977) 55,465,983
Corporate debt securities 1,128,444 25,148 (17,054) 1,136,538
Other 47,201 - - 47,201
-------------- ------------ ---------- --------------
$ 53,791,261 2,880,492 (22,031) 56,649,722
============== ============ ========== ==============
Available for sale:
United States government
and agency obligations $ 7,256,408 - (117,151) 7,139,257
Equity securities 8,277,809 1,306,473 (46,795) 9,537,487
-------------- ------------ ---------- --------------
$ 15,534,217 1,306,473 (163,946) 16,676,744
============== ============ ======= ==============
Held for trading:
Equity securities $ 2,042,145 1,344,105 - 3,386,250
============== ============ ========== ==============
June 30, 1996:
Held to maturity:
United States government
and agency obligations $ 66,253,859 2,321,733 (527) 68,575,065
Corporate debt securities 1,161,023 53,306 (7,307) 1,207,022
Other 70,901 - - 70,901
-------------- ------------ ---------- --------------
$ 67,485,783 2,375,039 (7,834) 69,852,988
============== ============ ========== ==============
Available for sale:
United States government
and agency obligations $ 7,259,166 - (209,437) 7,049,729
Equity securities 136,631 6,691 (4,283) 139,039
-------------- ------------ ---------- --------------
$ 7,395,797 6,691 (213,720) 7,188,768
============== ============ ======= ==============
</TABLE>
(Continued)
101
<PAGE>
MAGNA BANCORP, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
The amortized cost and estimated fair value at June 30, 1997 of other
securities, by contractual maturity, are shown below.
<TABLE>
<CAPTION>
Amortized Estimated
Cost Fair Value
<S> <C> <C>
Held to maturity:
Within 12 months $ 86,751 86,463
Beyond 12 months but within 5 years 2,685,681 2,785,063
Beyond 5 years but within 10 years 36,586,151 38,157,437
Beyond 10 years 14,432,678 15,620,759
-------------- ---------------
$ 53,791,261 56,649,722
============== ===============
Available for sale:
Beyond 12 months but within 5 years $ 236,916 234,258
Beyond 5 years but within 10 years 7,019,492 6,905,000
Equity securities 8,277,809 9,537,486
-------------- ---------------
$ 15,534,217 16,676,744
============== ===============
Held for trading:
Equity securities $ 2,042,145 3,386,250
============== ===============
</TABLE>
During 1996, other securities with a carrying value of $7,323,431 and an
estimated fair value of $7,527,528 were transferred from the
held-to-maturity category to the available-for-sale category, as
provided for under the FASB's Special Report, "A Guide to
Implementation of Statement 115 on Accounting for Certain
Investments in Debt and Equity Securities." The adjustment to
estimated fair value of $204,097, net of related deferred income
taxes, was recorded as a separate component of stockholders' equity.
No sales of other securities held to maturity or available for sale
occurred during 1997, 1996 or 1995.
At June 30, 1997, other securities with a carrying value of $31,688,718
were pledged to various parties as security in the event of
contractual default.
(Continued)
102
<PAGE>
MAGNA BANCORP, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(6) Loans
Loans held for investment and held for sale consist of the following:
<TABLE>
<CAPTION>
June 30
-----------------------------------
1997 1996
---------------- ----------------
<S> <C> <C>
Loans held for investment:
Real estate loans:
Conventional loans and participations $ 729,386,695 684,221,707
Construction loans 16,093,955 17,007,191
Loans and participations insured, guaranteed
or partially guaranteed by an agency or
instrumentality of the United States 73,706,020 84,777,075
--------------- ----------------
819,186,670 786,005,973
Undisbursed loan funds (9,009,100) (9,017,466)
Unearned discounts on purchased loans (14,437,704) (18,400,347)
Deferred loan fees, net (2,620,598) (2,792,679)
--------------- ----------------
793,119,268 755,795,481
Other loans:
Manufactured home loans 20,087,473 26,623,976
Personal property loans 38,355,428 34,518,725
Savings account loans 10,047,300 10,663,653
Other loans 26,639,028 19,077,902
--------------- ----------------
95,129,229 90,884,256
Undisbursed loan funds (930,047) (260,219)
Unearned discounts on purchased loans (358,070) (680,987)
--------------- ----------------
93,841,112 89,943,050
886,960,380 845,738,531
Allowance for possible loan losses (10,423,693) (9,451,693)
--------------- ----------------
Total loans held for investment $ 876,536,687 836,286,838
=============== ================
Loans held for sale:
Single-family real estate loans $ 51,830,013 27,662,294
Deferred loan fees, net (273,233) (38,809)
Adjustment to lower of cost or fair value - (148,201)
--------------- ----------------
Total loans held for sale $ 51,556,780 27,475,284
=============== ================
</TABLE>
(Continued)
103
<PAGE>
MAGNA BANCORP, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
Included in the loans held for investment portfolio are adjustable-rate
loans with principal balances of $474,165,000 and $431,711,000 at
June 30, 1997 and 1996, respectively.
Net gains and losses realized on the sale of loans held for sale were
immaterial during 1997, 1996 and 1995.
Changes in the allowance for possible loan losses are summarized as
follows:
<TABLE>
<CAPTION>
Years Ended June 30
--------------------------------------------
1997 1996 1995
------------ ------------ ------------
<S> <C> <C> <C>
Balance at beginning of year $ 9,451,693 9,213,496 9,780,887
Loans charged off, net of recoveries of
$250,092 in 1997, $177,727 in 1996
and $122,175 in 1995 (2,163,643) (1,395,044) (985,560)
Provision charged to operations 3,135,643 1,633,241 418,169
--------------- ------------ -------------
Balance at end of year $ 10,423,693 9,451,693 9,213,496
=============== ============ =============
</TABLE>
Loans at June 30, 1997 and 1996 include approximately $18,436,000 and
$22,297,000, respectively, of mortgage loans for which the accrual
of interest has been ceased or reduced. In such cases, an allowance
for possible loan losses has generally been established based upon
the fair value of the underlying collateral. For a substantial
portion of these mortgage loans, the Company has initiated or
intends to initiate foreclosure proceedings in order to acquire the
related collateral. During 1997, 1996 and 1995, interest income of
$816,000, $1,066,000 and $932,000, respectively, would have been
recognized on loans accounted for on a non-accrual basis had such
loans been current in accordance with their original terms. Included
in interest income for 1997, 1996 and 1995 was $603,000, $1,370,000
and, $1,267,000, respectively, related to such loans. At June 30,
1997, no commitments were outstanding to lend additional funds to
such borrowers.
The aggregate outstanding balance for mortgage loans on which the terms
have been modified by reducing interest rates and/or modifying
payment terms under troubled debt restructurings was immaterial for
each period presented. Interest income forfeited on modified loans
was also immaterial. At June 30, 1997, no commitments were
outstanding to lend additional funds to borrowers with such loans.
(Continued)
104
<PAGE>
MAGNA BANCORP, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
The net investment balance of impaired loans at June 30, 1997 and 1996,
totaled approximately $19,433,000 and $23,217,000, respectively. Of
this balance, individually evaluated impaired loans aggregated
approximately $997,000 and $1,015,000, with a related allowance for
possible loan losses of $109,200 and $131,600, at June 30, 1997 and
1996, respectively. The remaining $18,436,000 and $22,202,000 of the
impaired, non-accrual, smaller-balance loans at June 30, 1997 and
1996, respectively, were categorized in homogenous groups and
collectively evaluated. An allowance for possible loan losses was
available to absorb anticipated losses on these and other loans. The
average recorded investment in impaired loans for the years ended
June 30, 1997 and 1996 was approximately $21,500,000 and
$25,200,000, respectively.
(7) Accrued Interest Receivable
A summary of accrued interest receivable follows:
<TABLE>
<CAPTION>
June 30
---------------------------------
1997 1996
--------------- ---------------
<S> <C> <C>
Loans $ 8,200,590 8,791,705
Mortgage-backed securities 776,087 983,925
Other securities and interest-bearing cash balances 934,438 1,284,341
-------------- ---------------
$ 9,911,115 11,059,971
============== ===============
</TABLE>
(8) Premises and Equipment, Net
A summary of premises and equipment follows:
<TABLE>
<CAPTION>
June 30
---------------------------------
1997 1996
--------------- ---------------
<S> <C> <C>
Land $ 9,656,987 9,756,591
Office buildings and improvements 42,325,533 40,934,955
Furniture and equipment 26,128,898 24,843,848
Construction in progress 292,602 305,240
-------------- ---------------
78,404,020 75,840,634
Accumulated depreciation (34,354,200) (32,680,209)
-------------- ---------------
$ 44,049,820 43,160,425
============== ===============
</TABLE>
(Continued)
105
<PAGE>
MAGNA BANCORP, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(9) Foreclosed Assets
A summary of foreclosed assets follows:
<TABLE>
<CAPTION>
June 30
----------------------------------
1997 1996
--------------- ----------------
<S> <C> <C>
Single-family residential $ 8,922,401 9,763,265
Commercial buildings and land 209,000 428,387
Mobile homes 148,420 29,192
Other personal property 48,680 10,099
------------ ---------------
$ 9,328,501 10,230,943
============ ===============
</TABLE>
Writedowns of foreclosed assets totaled $743,286, $413,573 and $31,693
for 1997, 1996 and 1995, respectively.
(10) Mortgage Servicing Rights, Net
Mortgage servicing rights represent the right to service mortgage loans
owned by others. These rights entitle the Company to collect
mortgage payments, maintain escrow accounts and provide other
services in exchange for service fees, ancillary income and access
to a low cost financing source. For years prior to 1996, the cost
associated with mortgage servicing rights on originated loans was
not capitalized.
The unamortized cost of mortgage servicing rights is summarized as
follows:
<TABLE>
<CAPTION>
Years Ended June 30
--------------------------------------------------
1997 1996 1995
------------ ------------- ---------------
<S> <C> <C> <C>
Balance at beginning of year $ 5,788,245 9,379,877 16,048,946
Mortgage servicing rights originated 2,119,746 2,060,971 -
Mortgage servicing rights acquired 5,287,479 12,087 1,016,946
Sale of mortgage servicing rights - (841,552) -
Amortization (4,647,782) (4,823,138) (7,686,015)
------------ ------------- ---------------
Balance at end of year $ 8,547,688 5,788,245 9,379,877
============ ============= ===============
</TABLE>
During 1996, a gain of $1,014,000 was recorded on the sale of servicing
rights.
(Continued)
106
<PAGE>
MAGNA BANCORP, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
The fair value of capitalized mortgage servicing rights at June 30,
1997 was approximately $30,000,000. There was no valuation
allowance for impairment of capitalized mortgage servicing rights
during the years ended June 30, 1997 and 1996.
The Company was servicing loans for others aggregating approximately
$3,087,072,000, $2,970,445,000 and $3,438,445,000 at June 30, 1997,
1996 and 1995, respectively. Loan servicing purchased with recourse
provisions totaled $20,662,000 at June 30, 1997.
(11) Deposits
A summary of deposits by category is presented below:
<TABLE>
<CAPTION>
June 30, 1997 June 30, 1996
-------------------------- ----------------------------
Weighted Weighted
Average Average
Rate Balance Rate Balance
--------- ------- ---- -------
<S> <C> <C> <C> <C>
Transaction accounts:
Passbook and statement 2.52% $ 126,806,722 2.57% $ 133,326,307
Money market 2.99 30,753,190 3.25 33,600,664
NOW 2.08 121,704,953 1.77 112,359,800
Noninterest-bearing - 163,802,277 - 160,321,101
----------- -------------
443,067,142 439,607,872
----------- -------------
Certificates of deposit:
3 month 4.14 13,453,272 4.12 15,220,975
6 month 4.84 73,367,250 4.77 91,775,052
9 month 5.40 35,110,551 4.79 1,249,855
1 year 5.08 67,965,107 5.13 82,194,236
16 month 5.01 4,622,177 5.14 5,955,527
1-1/2 year 5.74 78,795,443 5.17 18,369,705
20 month 5.24 32,669,124 6.13 77,186,569
2 year 5.51 13,456,583 5.31 12,221,971
28 month 5.97 16,462,681 5.49 1,241,348
2-1/2 year 5.35 14,708,879 5.04 17,014,437
3 year 5.56 55,629,910 5.51 77,467,395
3-1/2 year 5.45 4,529,210 4.96 4,133,081
4 year and over 5.54 16,085,863 5.64 25,397,368
</TABLE>
(Continued)
107
<PAGE>
MAGNA BANCORP, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(11), Continued
<TABLE>
<CAPTION>
June 30, 1997 June 30, 1996
-------------------------- -------------------------
Weighted Weighted
Average Average
Rate Balance Rate Balance
-------- ------- -------- -------
<S> <C> <C> <C> <C>
Certificates of deposit, cont.:
Retirement (3 month) 5.03 28,259,944 4.88 29,524,142
Negotiated 5.30 5,723,632 5.29 7,567,652
Other 6.04 11,488,110 6.25 16,242,937
------------- -------------
472,327,736 482,762,250
------------- -------------
3.47% $ 915,394,878 3.47% $ 922,370,122
============= =============
</TABLE>
A summary of certificates of deposit by interest rate follows:
<TABLE>
<CAPTION>
June 30, 1997 June 30, 1996
---------------------------------------- -----------------------------------------
Interest Average Average
Rate Number Balance Balance Number Balance Balance
---------- ------ ------- ------- ------ ------- -------
<S> <C> <C> <C> <C> <C> <C>
Less than 3.00% 87 $ 1,399,358 16,085 247 $ 1,408,072 5,701
3.00 - 3.99% 1 150,000 150,000 150 1,520,212 10,135
4.00 - 4.99% 7,981 89,200,652 11,177 14,977 168,169,037 11,228
5.00 - 5.99% 24,255 351,237,156 14,481 14,313 214,931,867 15,017
6.00 - 6.99% 1,078 28,562,512 26,496 3,565 74,864,628 21,000
7.00 - 7.99% 85 1,436,039 16,895 955 21,039,894 22,031
8.00 - over 18 342,019 19,001 39 828,540 21,245
--------- --------------- -------- ---------------
33,505 $ 472,327,736 14,097 34,246 $ 482,762,250 14,097
========= =============== ======== ===============
</TABLE>
Scheduled maturities of certificates of deposit follow:
<TABLE>
<CAPTION>
June 30
-----------------------------------
1997 1996
---------------- ----------------
<S> <C> <C>
Within 12 months $ 344,984,271 371,588,122
12 months to 24 months 83,171,446 79,271,045
24 months to 36 months 35,581,089 22,410,246
36 months to 48 months 6,375,397 6,625,013
Over 48 months 2,215,533 2,867,824
--------------- ----------------
$ 472,327,736 482,762,250
=============== ================
</TABLE>
Certificates of deposit in excess of $100,000 outstanding at June 30,
1997 and 1996, were approximately $30,345,100 and $30,948,664,
respectively.
(Continued)
108
<PAGE>
MAGNA BANCORP, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
A summary of interest expense by category is presented below:
<TABLE>
<CAPTION>
Years Ended June 30
----------------------------------------------------
1997 1996 1995
------------- -------------- ---------------
<S> <C> <C> <C>
Passbook and statement accounts $ 3,349,811 3,406,730 3,256,914
Money market accounts 1,054,820 891,697 1,108,031
NOW accounts 2,171,407 1,943,116 1,978,955
Certificates of deposit 24,708,116 25,007,844 21,817,197
-------------- -------------- ---------------
$ 31,284,154 31,249,387 28,161,097
============== ============== ===============
</TABLE>
Deposits of the Bank are insured by the SAIF, a fund of the FDIC. Because
the SAIF was substantially undercapitalized, legislation was enacted
that required thrifts to make a contribution to fully capitalize the
SAIF. This special assessment of $5.9 million was paid by the
Company during the year ended June 30, 1997.
(12) Borrowings from FHLB of Dallas
A summary of borrowings from FHLB of Dallas follows:
<TABLE>
<CAPTION>
<S> <C>
June 30, 1997:
Short-term:
5.48%, Short-term financing repaid July 1997 $ 65,000,000
6.13%, Advances due September 1997 298,412
6.00%, Advance due October 1997 50,000,000
6.15%, Advance due March 1998 50,000,000
Long-term:
6.33%, Advance due July 1998 50,000,000
6.36%, Advance due September 1998 59,803
6.52%, Advance due in monthly installments through August 2005 43,090,380
-----------
$ 258,448,595
===========
</TABLE>
(Continued)
109
<PAGE>
MAGNA BANCORP, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(12), Continued
<TABLE>
<CAPTION>
<S> <C>
June 30, 1996:
Short-term:
5.38%, Short-term financing repaid July 1996 $ 25,000,000
6.26%, Advance repaid March 1997 100,000,000
Long-term:
6.33%, Advance due July 1998 50,000,000
6.52%, Advance due in monthly installments through August 2005 46,961,222
-------------
$ 221,961,222
=============
</TABLE>
To secure the short-term financing at June 30, 1997, the Company has
pledged mortgage-backed securities and other securities with a
carrying value of $64,675,000. To secure the outstanding advances at
June 30, 1997, the Company has pledged approximately $297,700,000 of
unencumbered one- to four-family mortgage loans to the FHLB of
Dallas. The FHLB will advance 65% of the pledged unencumbered one-
to four-family mortgage loans.
(13) Income Taxes
<TABLE>
<CAPTION>
Components of income tax expense (benefit) follow:
Years Ended June 30
---------------------------------------------------
1997 1996 1995
--------------- --------------- ------------
<S> <C> <C> <C>
Current:
Federal $ 10,764,659 9,641,900 11,761,599
State 1,445,088 1,449,910 1,405,218
Deferred:
Federal (648,000) 739,000 (840,000)
State (97,000) 111,000 (126,000)
-------------- -------------- -------------
$ 11,464,747 11,941,810 12,200,817
============== ============== =============
</TABLE>
Deferred income tax expense (benefit) allocated to stockholders' equity
for the change in unrealized gains (losses) on securities available
for sale aggregated $1,064,450, $(1,260,997) and $1,258,470 in 1997,
1996 and 1995, respectively. As of June 30, 1997 and 1996,
unrealized gains (losses) on securities available for sale included
in stockholders' equity are net of a deferred income tax expense
(benefit) of $1,167 and ($1,063,283), respectively.
(Continued)
110
<PAGE>
MAGNA BANCORP, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
The differences between the expected federal corporate tax rate and the
effective tax rate follow:
<TABLE>
<CAPTION>
Years Ended June 30
--------------------------------------------------------------------------------
1997 1996 1995
---------------------------- -------------------------- ---------------------
% of % of % of
Pretax Pretax Pretax
Amount Income Amount Income Amount Income
------ ------ ------ ------ ------ ------
<S> <C> <C> <C> <C> <C> <C>
Expected tax rate $ 10,508,477 35.0% $ 11,567,906 35.0% $ 10,929,044 35.0%
Increase (decrease)
resulting from:
State income taxes,
net of federal
income tax
benefit 876,257 2.9 1,014,592 3.0 831,492 2.7
Other, net 80,013 .3 (640,688) (1.9) 440,281 1.4
-------------- ---- ----------- ---- ----------- ----
$ 11,464,747 38.2% $ 11,941,810 36.1% $ 12,200,817 39.1%
============== ==== =========== ==== =========== ====
</TABLE>
The tax effects of temporary differences that give rise to significant
portions of the deferred tax assets and the deferred tax liabilities
follow:
<TABLE>
<CAPTION>
June 30
-------------------------------
1997 1996
-------------- ------------
<S> <C> <C>
Deferred tax assets:
Allowance for possible loan losses $ 172,262 -
Deferred loan fees and unearned discount
on mortgage-backed securities 608,038 682,616
Fair value adjustment on assets held for sale,
available for sale or held for trading, net - 632,611
Premium on purchased deposits 3,181,257 2,639,000
Interest on nonaccrual loans 618,089 684,979
Mortgage servicing rights 3,236,229 3,544,618
Accumulated depreciation 1,457,518 1,242,166
Accrued retirement benefits 66,288 405,111
Foreclosed assets 227,757 -
Vacation accrual 269,780 185,361
Other 367,241 310,002
-------------- --------------
Total gross deferred tax assets 10,204,459 10,326,464
-------------- --------------
</TABLE>
(Continued)
111
<PAGE>
MAGNA BANCORP, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(13), Continued
<TABLE>
<CAPTION>
June 30
----------------------
1997 1996
----------- -------
<S> <C> <C>
Deferred tax liabilities:
Fair value adjustment on assets held for
sale or available for sale, net 66,282 -
FHLB of Dallas stock dividends 957,668 798,567
Allowance for possible loan losses - 255,322
Prepaid retirement contributions 217,002 72,045
Other 82,086 -
----------- ---------
Total gross deferred tax liabilities 1,323,038 1,125,934
----------- ---------
Net deferred tax asset $ 8,881,421 9,200,530
=========== =========
</TABLE>
The ultimate realization of deferred tax assets is dependent upon the
generation of future taxable income during the periods in which
those temporary differences become deductible. Management considers
the scheduled reversal of deferred tax liabilities and projected
future taxable income in making this assessment. In order to fully
realize the net deferred tax asset, the Company will need to
generate future taxable income of approximately $23.0 million,
principally through the year ended June 30, 2036. Taxable income for
the years ended June 30, 1997, 1996 and 1995 was $31.0 million,
$28.0 million and $31.7 million, respectively. Based upon the level
of historical taxable income and anticipated future taxable income
over the periods which the deferred tax assets are deductible,
management believes it is more likely than not that the Company will
realize the benefits of these deductible differences. There can be
no assurance, however, that the Company will generate any earnings
or any specific level of continued earnings in future years.
Legislation enacted effective for taxable years beginning after December
31, 1995, requires a thrift to recapture "applicable excess
reserves," defined as the excess of its qualifying and
non-qualifying bad debt reserves as of the close of the thrift's
last taxable year beginning before January 1, 1996, over the lesser
of (1) the base year reserves as of the thrift's last taxable year
beginning before January 1, 1988; or (2) the balance of pre-1988
reserves. The amount of the applicable excess reserves must be taken
into income ratably over a six-taxable year period, beginning with
the first taxable year after 1995, subject to a "residential loan
requirement delay." The time of the recapture may be delayed for a
one- or two-year period to the extent the residential loan
requirement is met. The Company met the residential loan requirement
for 1997.
(Continued)
112
<PAGE>
MAGNA BANCORP, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
Cumulative allocations of income to bad debt deductions, or applicable
excess reserves, for tax purposes subsequent to 1987 total
approximately $9,973,000, which will result in approximately
$3,815,000 of additional taxes, payable in the years the reserves
are recaptured. The Company has provided for the income tax effect
of recapturing these reserves since 1987.
No provision for federal income tax has been made for a portion
(approximately $13,500,000) of retained earnings at June 30, 1997
that are the result of cumulative allocations of income to bad debt
deductions for tax purposes only, prior to 1988. Under the provision
of the legislation described above, these reserves are frozen and
are not subject to recapture, except under certain rare
circumstances to be determined by regulation.
(14) Stock Conversion
In 1991, the Bank completed a conversion from a federal mutual savings
bank to a federal stock savings bank. At the time of conversion, the
Bank established a liquidation account in the amount of
approximately $36,958,000. The liquidation account was established
to provide a limited priority claim to the assets of the Bank to
qualifying depositors ("Eligible Account Holders") at March 31, 1990
who continue to maintain deposits at the Bank after conversion. In
the unlikely event of a complete liquidation of the Bank, and only
in such event, each Eligible Account Holder would receive from the
liquidation account a liquidation distribution based on his or her
proportionate share of the then remaining qualifying deposits.
Undercurrent regulations, the Bank is not permitted to pay dividends on
its stock after the conversion if its regulatory capital would
thereby be reduced below the amount then required for the
aforementioned liquidation account.
(15) Stock Dividend and Stock Splits
On July 17, 1996, the Company declared a two-for-one stock split in the
form of a 100% stock dividend payable on August 15, 1996. This split
increased the number of shares outstanding from 6,870,509 to
13,741,018. All references to per common share amounts in the
accompanying financial statements, as well as weighted average
number and number of common shares, have been adjusted for the stock
split.
(Continued)
113
<PAGE>
MAGNA BANCORP, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(16) Earnings Per Share
Earnings per share amounts have been computed based on the weighted
average number of common shares outstanding. The weighted average
number of common shares outstanding was 13,881,494, 14,098,509 and
14,260,984 for the years ended June 30, 1997, 1996 and 1995,
respectively.
(17) Regulatory Capital
Current Office of Thrift Supervision ("OTS") regulations require thrift
institutions to have a minimum regulatory tangible capital equal to
1.5% of adjusted total assets and a minimum 3% leverage (core)
capital ratio. Additionally, institutions must meet a risk-based
capital requirement consisting of 8% of risk-weighted assets. The
OTS and the FDIC are authorized and, under certain circumstances,
required to take certain actions against associations that fail to
meet their capital requirements. As of March 31, 1996, the OTS
categorized the Bank as well capitalized under the regulatory
framework for prompt corrective action. Subsequent to this
notification, management is not aware of any circumstances that
would have changed the Bank's category.
As a "well-capitalized" institution, the Bank may make capital
distributions without prior OTS approval in any calendar year up to
the greater (i) 100% of its net earnings during such calendar year
plus the amount that would reduce by one-half the amount by which
its capital exceeds its requirements at the beginning of such
calendar year or (ii) 75% of its net income over the most recent
four-quarter period. Cash and stock dividends paid by the Bank to
the Company during the years ended June 30, 1997, 1996 and 1995
amounted to $8,525,368, $8,852,402 and $4,855,205, respectively.
The following table summarizes the Bank's regulatory capital and minimum
capital requirements (dollars in thousands):
<TABLE>
<CAPTION>
To be Well
Capitalized Under
For Capital Prompt Corrective
Actual Adequacy Purposes Action Provisions
------------------- ----------------- ------------------
Amount Ratio Amount Ratio Amount Ratio
----- ----- ------ ----- ------ -----
<S> <C> <C> <C> <C> <C> <C>
June 30, 1997:
Bank capital, and ratio
to total assets $ 116,363 8.69% - - - -
Unrealized losses on
certain available-for-
sale securities 678 - - - - -
</TABLE>
(Continued)
114
<PAGE>
MAGNA BANCORP, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(17), Continued
<TABLE>
<CAPTION>
To be Well
Capitalized Under
For Capital Prompt Corrective
Actual Adequacy Purposes Action Provisions
------------------ ------------------ ------------------
Amount Ratio Amount Ratio Amount Ratio
------ ----- ------ ----- ------ -----
June 30, 1997, cont:
-------------------
<S> <C> <C> <C> <C> <C> <C>
Premium on purchased
deposits (3,703) - - - - -
------------
Tangible capital, and
ratio to adjusted
total assets $ 113,338 8.48% $ 20,044 1.50% - -
============ =========
Core (Tier 1) capital,
and ratio to adjusted
total assets $ 113,338 8.48% $ 40,088 3.00% $ 66,813 5.00%
============ ========= ========
Core (Tier 1) capital,
and ratio to risk-
weighted assets $ 113,338 15.66% - - $ 43,425 6.00%
========
Allowance for loan
losses 9,047 - - - - -
Other (75) - - - - -
------------
Risk based capital,
and ratio to risk-
weighted assets $ 122,310 16.90% $ 57,900 8.00% $ 72,375 10.00%
============ ========= ========
Total assets $ 1,339,279
============
Adjusted total assets $ 1,336,254
============
Risk-weighted assets $ 723,750
============
June 30, 1996:
Bank capital, and ratio
to total assets $ 106,247 8.14% - - - -
Unrealized losses on
certain available-for-
sale securities 1,717 - - - - -
Premium on purchased
deposits (6,778) - - - - -
------------
Tangible capital, and
ratio to adjusted
total assets $ 101,186 7.78% $ 19,508 1.50% - -
============ =========
Core (Tier 1) capital,
and ratio to adjusted
total assets $ 101,186 7.78% $ 39,017 3.00% $ 65,028 5.00%
============ ========= ========
</TABLE>
(Continued)
115
<PAGE>
MAGNA BANCORP, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(17), Continued
<TABLE>
<CAPTION>
To be Well
Capitalized Under
For Capital Prompt Corrective
Actual Adequacy Purposes Action Provisions
------------------- ------------------ ------------------
Amount Ratio Amount Ratio Amount Ratio
----- ----- ------ ----- ------ -----
June 30, 1996, cont:
-------------------
<S> <C> <C> <C> <C> <C> <C>
Core (Tier 1) capital,
and ratio to risk-
weighted assets $ 101,186 14.73% - - $ 41,204 6.00%
========
Allowance for loan
losses 8,589 - - - - -
Other (65) - - - - -
------------
Risk based capital,
and ratio to risk-
weighted assets $ 109,710 15.98% $ 54,939 8.00% $ 68,674 10.00%
============ ======== ========
Total assets $ 1,305,625
============
Adjusted total assets $ 1,300,564
============
Risk-weighted assets $ 686,737
============
</TABLE>
(18) Employee Benefit Plans
(a) Pension Plan
The Company maintained a defined benefit pension plan ("Pension
Plan") covering all full-time employees of the Company who had
attained age 21 and completed one year of service during which
they worked at least 1,000 hours. Benefits were based on salary
and years of service. The Company's funding policy was
consistent with the funding requirements of federal law and
regulations. Contributions were intended to provide for benefits
attributed to service to-date and for those expected to be
earned in the future. No contributions were made in 1997, 1996
or 1995.
Subject to regulatory approval, the Pension Plan will be terminated
effective July 31, 1997 and all benefits and vesting were frozen
June 30, 1997. In accordance with the provisions of the Pension
Plan, all excess assets of the Pension Plan will be distributed
to the Pension Plan's active participants as of July 31, 1997.
Accordingly, an estimated curtailment gain of $4.1 million will
not be recognized by the Company.
(Continued)
116
<PAGE>
MAGNA BANCORP, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
Net pension cost (credit) includes the following components:
<TABLE>
<CAPTION>
Years Ended June 30
---------------------------------------------
1997 1996 1995
------------ ------------ ----------
<S> <C> <C> <C>
Service cost - benefits earned during the year $ 770,886 705,542 699,049
Interest cost on projected benefit obligation 987,023 908,012 917,289
Actual return on plan assets (6,901,170) (4,634,747) (2,530,714)
Net amortization and deferral 4,764,289 3,042,248 1,070,087
------------ ------------ ----------
Net periodic pension cost (credit) $ (378,972) 21,055 155,711
============ ============ ==========
</TABLE>
The following table sets forth the Pension Plan's funded status and
amount recognized in the Company's consolidated statements of
financial condition:
<TABLE>
<CAPTION>
June 30
-------------------------------
1997 1996
--------------- ------------
<S> <C> <C>
Actuarial present value of benefit obligations:
Accumulated benefit obligation, including vested benefits of
$9,894,806 in 1997 and $9,679,913 in 1996 and a $4,082,724
curtailment gain allocated to participants in 1997
$ 13,977,530 11,061,867
=============== ============
Projected benefit obligation for service rendered to date,
including $4,082,724 curtailment gain allocated to
participants in 1997 $ (13,977,530) (13,127,430)
Plan assets at fair value 26,109,794 20,428,167
--------------- ------------
Plan assets in excess of projected benefit obligation 12,132,264 7,300,737
Unrecognized net gain from past experience
different from that assumed (11,190,836) (6,280,189)
Unrecognized prior service cost - (395,742)
Unrecognized net transitional cost (374,100) (436,450)
--------------- ------------
Prepaid pension cost included
in other assets $ 567,328 188,356
=============== ============
</TABLE>
The weighted average discount rate used in determining the actuarial
present value of the projected benefit obligation was 7.75% and
7.50% in 1997 and 1996, respectively. The rate of increase in
future compensation levels was 4.5% in 1997 and 1996. The
expected long-term rate of return on assets was 8.5% in 1997 and
1996.
Plan assets consist primarily of U. S. government securities,
mortgage-backed securities, common stock of the Company and
certificates of deposit. At June 30, 1997 and 1996, plan assets
included $18,488,418 and $12,578,879, respectively, of common
stock of the Company and $866,841 and $813,594, respectively, of
interest-earning deposits in the Bank.
(Continued)
117
<PAGE>
MAGNA BANCORP, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(b) Salary Continuation Plan
The Company established a salary continuation plan ("Salary Plan")
for thirteen of its executives effective July 1, 1994 and
purchased life insurance contracts which the Bank owns and is
the named beneficiary. In June, 1997 the executives and the
Company agreed to terminate the Salary Plan and funds related to
the accrued liability at the date of termination were disbursed
to participants. The life insurance contracts with a cash
surrender value of $3,987,210 were included in the Company's
assets on June 30, 1997.
(c) 401(k) Profit Sharing Plan
The Company established a 401(k) Profit Sharing Plan ("401(k) Plan")
effective January 1, 1996 covering all full-time employees who
have attained age 21 and completed one year of service during
which they worked at least 1,000 hours. Participants may elect
to defer a percentage of their compensation each year, in an
amount that does not exceed a dollar limit set by law. A
matching contribution equal to a percentage amount of the salary
reduction deferred by participants, not to exceed 6.0% of total
eligible compensation, is determined annually at the discretion
of the Board of Directors. Contributions of $470,557 and $91,800
were made to the 401(k) Plan in 1997 and 1996, respectively.
(d) Employee Stock Ownership Plan
The Company maintained an employee stock ownership plan ("ESOP")
covering all full-time employees of the Company who had attained
age 21 and completed one year of service during which they
worked at least 1,000 hours. Annual contributions were limited
to the maximum tax-deductible amount and amounts necessary to
ensure continued compliance with the Bank's regulatory capital
requirements. Contributions of $25,000 and $1,181,430 were made
to the ESOP for 1996 and 1995, respectively. No contributions
were made for 1997. Contributions were determined at the
discretion of the Board of Directors.
The ESOP was amended in April 1996 to provide for in-service
distributions of plan assets to vested participants and merger
of the ESOP with the 401(k) Plan. During 1997 all of the plan
assets were distributed to participants or were merged into the
401(k) Plan.
(Continued)
118
<PAGE>
MAGNA BANCORP, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(e) Stock Option and Incentive Plan
The Board of Directors of the Company adopted a stock option and
incentive plan ("Option Plan") that was approved by
stockholders. Pursuant to the Option Plan, stock options and
restricted stock awards covering 1,257,868 shares were granted
to directors and officers of the Company in 1991. Options
granted under the Option Plan were either options that qualify
as Incentive Stock Options, as defined in the Internal Revenue
Code of 1986, as amended, or options that do not qualify.
Upon conversion of the Bank to a stock savings bank in 1991,
restricted stock awards were made totaling 911,404 shares. All
of these shares were vested by June 30, 1996. The aggregate
purchase price of these shares was reflected as a reduction of
the Company's stockholders' equity and was amortized as the
Company's directors and officers became vested in their stock
awards. During 1995, $90,248 was amortized as compensation
expense. The Company received an income tax benefit as a result
of the taxable income reported by the directors and officers for
the restricted stock awards and passed the tax benefit through
to the directors and officers. During 1995, the tax pass-through
recorded as compensation expense was $384,114.
Also, non-qualified stock options were granted for the purchase of
346,464 shares in 1991. Such options were immediately
exercisable at the market price of $0.89 per share at the date
of grant. The options expire in 2001. During 1997, 1996 and
1995, stock options of 51,744, 19,296 and 11,200 were exercised,
respectively. At June 30, 1997, options were outstanding for
119,136 shares.
(f) Recognition and Retention Plan
The Board of Directors of the Company adopted a recognition and
retention plan ("Retention Plan") that was approved by
stockholders. Pursuant to the Retention Plan, 378,730 shares of
restricted stock were granted to directors and officers of the
Company during 1992. All shares were vested by June 30, 1996.
The aggregate purchase price of these shares was reflected as a
reduction of the Company's stockholders' equity and was
amortized as the Company's directors and officers became vested
in their stock awards. During 1996 and 1995, $82,842 and
$165,696 was amortized as compensation expense, respectively.
(Continued)
119
<PAGE>
MAGNA BANCORP, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(19) Off-Balance-Sheet Risk
The Company focuses its lending activities primarily on the origination
of loans secured by first mortgages on owner-occupied, single-family
residences located within Mississippi and Alabama and the purchase
of performing loans secured by single-family homes located in the
southeastern United States. A limited volume of multi-family and
commercial real estate loans is originated and is secured primarily
by properties located in Mississippi. Seasoned and performing
commercial loans secured by properties located in the Company's
market area are also considered for purchase. Occasionally, the Bank
will also purchase at a discount limited amounts of non-performing,
single-family loans in the southeastern United States.
In the normal course of business, the Company enters into commitments
with off-balance-sheet risk to meet the financing needs of its
customers and to reduce its own exposure to fluctuations in interest
rates. Commitments to extend credit, to purchase loans and to sell
mortgage-backed securities involve elements of credit and interest
rate risk in excess of the amount recognized in the consolidated
statement of financial condition.
The Company's exposure to credit loss for commitments in the event of
nonperformance by the other party to the financial instrument is
represented by the contractual notional amount of those instruments.
The Company uses the same credit policies in making commitments and
conditional obligations as it does for on-balance-sheet instruments.
Commitments to extend credit, generally mortgage loan commitments, lines
of credit or overdraft lines of credit, are agreements to lend to a
customer as long as there is no violation of any condition
established in the contract. Commitments generally have fixed
expiration dates or other termination clauses and may require
payment of a fee. Since some of the commitments may expire without
being drawn upon, the total commitment amounts do not necessarily
represent future cash requirements. The Company evaluates each
customer's creditworthiness on a case-by-case basis. The amount of
collateral obtained by the Company is determined by the amount of
credit extended and management's credit evaluation of the customer.
Generally, single-family residential real estate is obtained as
collateral upon extension of credit under loan commitments and lines
of credit. Lines of credit are generally unsecured.
Commitments to purchase loans generally have fixed expiration dates. The
Company evaluates such loan portfolios on a case-by-case basis and
determines the purchase price by reviewing the credit histories,
collateral and loan documentation.
(Continued)
120
<PAGE>
MAGNA BANCORP, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
Forward sales commitments for mortgage-backed securities are contracts
for delayed delivery of securities in which the Company agrees to
make delivery at a specified future date of a specified instrument,
at a specified price or yield. Risks arise from the possible
inability of the counterparties to meet the terms of their contracts
and from movements in securities values and interest rates.
Outstanding mortgage loan commitments at June 30, 1997 aggregated
approximately $31,804,000 for fixed-rate loans (rates ranging from
7.00% to 14.50%) and $20,439,000 for variable-rate loans (rates
ranging from 7.13% to 14.25%). Commitments outstanding at June 30,
1997 under unsecured lines of credit were $63,313,000, and other
lines of credit were $2,495,000. Also at June 30, 1997, the Company
was committed to purchase approximately $793,000 of loans. Forward
sales commitments of $57,350,000 in mortgage-backed securities were
outstanding at June 30, 1997.
(20) Fair Value of Financial Instruments
Estimates of fair value of financial instruments are subjective in nature
and involve uncertainties and matters of significant judgment and,
therefore, cannot be determined with precision. Changes in
assumptions significantly affect the estimates and, as such, the
derived fair value may not be indicative of the value negotiated in
an actual sale and may not be comparable to that reported by other
financial institutions. Because no market exists for a significant
portion of the Company's financial instruments, fair value estimates
are based on judgments regarding future expected loss experience,
current economic conditions and other factors.
In addition, the fair value estimates are based on existing financial
instruments without attempting to estimate the value of anticipated
future business and the value of assets and liabilities that are not
considered financial instruments. For example, the Company has
significant fee generation businesses that are not considered
financial instruments and their value has not been incorporated into
the fair value estimates. Significant assets that are not considered
financial assets include mortgage servicing rights, deferred tax
assets, premises and equipment, and core deposit intangibles. In
addition, the tax ramifications related to the realization of the
unrealized gains and losses can have a significant effect on fair
value estimates and have not been considered in the estimates.
(Continued)
121
<PAGE>
MAGNA BANCORP, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
The following table sets forth the estimated fair value of the Company's
financial instruments at June 30, 1997 and 1996:
<TABLE>
<CAPTION>
Carrying Estimated
Value Fair Value
--------- ----------
June 30, 1997:
-------------
<S> <C> <C>
Assets:
Loans receivable $ 928,093,467 977,745,000
Mortgage-backed securities 132,911,544 133,205,586
Other securities 73,854,255 76,712,716
Stock in FHLB of Dallas 15,627,418 15,627,418
Cash and due from banks 69,504,187 69,504,187
Interest-bearing deposits with banks 28,704,668 28,704,668
Liabilities:
Deposits (915,394,878) (913,242,000)
Borrowings from FHLB of Dallas (258,448,595) (257,921,000)
Off-balance-sheet activities:
Commitments to sell mortgage-backed
securities - (68,328)
June 30, 1996:
-------------
Assets:
Loans receivable $ 863,762,122 902,339,000
Mortgage-backed securities 166,086,719 166,382,735
Other securities 74,674,551 77,041,756
Stock in FHLB of Dallas 12,027,000 12,027,000
Cash and due from banks 70,548,661 70,548,661
Interest-bearing deposits with banks 10,745,849 10,745,849
Liabilities:
Deposits (922,370,122) (920,275,000)
Borrowings from FHLB of Dallas (221,961,222) (221,439,000)
Off-balance-sheet activities:
Commitments to sell mortgage-backed
securities - 176,475
</TABLE>
(Continued)
122
<PAGE>
MAGNA BANCORP, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(a) Loans Receivable
The fair value of loans held for investment is calculated by
discounting the expected future cash flows. Loans are segregated
by type of loan and by interest type, such as variable or fixed.
Fixed-rate loans are further categorized by original term to
maturity and stratified by interest rate ranges. Loans are
discounted using the current new loan rate applicable to each
type. Adjustable-rate loans are valued based on scheduled
repricing and discounted using the current rate at which similar
loans would be made to borrowers with similar credit ratings.
Future cash flows are estimated by using OTS nationwide average
prepayment speeds applicable to each type.
The fair value of loans held for sale is based on quoted market
prices, assuming the loans will be packaged and sold in the
secondary market.
(b) Mortgage-backed Securities
The fair value of mortgage-backed securities is based on quoted
market prices, where available. If a quoted market price is not
available, fair value is estimated using quoted market values of
similar securities.
(c) Other Securities
The fair value of other securities is based on quoted market prices,
where available. If a quoted market price is not available, fair
value is estimated using quoted market values of similar
securities.
(d) Stock in FHLB
The fair value is the carrying value. The investment in FHLB stock
is a requirement of membership in the FHLB system and can only
be redeemed by the FHLB at face value.
(e) Cash and Interest-Bearing Deposits
The carrying amount is the reasonable estimate of fair value for
cash and interest-bearing bank balances.
(Continued)
123
<PAGE>
MAGNA BANCORP, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(f) Deposits
For deposit liabilities with no defined maturities, the fair value
is reported at the amount payable on demand in accordance with
the relevant accounting standards.
The fair value of certificates of deposit is calculated by
discounting the expected future cash flows using the FHLB
advance rate for comparable terms to maturity. Expected future
cash flows for certificates of deposit are based on the maturity
dates of the certificates, assuming no withdrawals prior to
maturity.
(g) Borrowings from FHLB of Dallas
The fair value of borrowings from FHLB of Dallas is calculated by
discounting the expected future cash flows at maturity using the
FHLB advance rate for comparable terms to maturity.
(h) Off-Balance-Sheet Activities
The Company's off-balance-sheet commitments consist primarily of
mortgage origination and securitization activities. Commitments
to originate loans and commitments under lines of credit are
obligations of the Company, but not of the customer, and may
expire without being drawn upon. Therefore, no value is
attributed to those instruments. The fair value of forward sales
commitments of mortgage-backed securities is based on quoted
market prices. Commitments to purchase mortgage servicing rights
are at market rates and have various termination clauses. These
commitments are not considered to have a determinable fair
value.
(21) Contingencies
The Company is involved in various claims and legal actions arising in
the ordinary course of business. In the opinion of management, based
upon consultation with legal counsel, the ultimate disposition of
these matters will not have a material adverse effect on the
Company's consolidated financial statements.
(22) Subsequent Events
During July 1997, the Company entered into agreements to sell four
branches with deposits totaling $42,021,362 at June 30, 1997 to
other banks for a gain of approximately $4 million. Such branch
sales are anticipated to close during October 1997.
(Continued)
124
<PAGE>
MAGNA BANCORP, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(23) Segment Information
The Company's primary business segments are retail banking and
originating and servicing one- to four-family mortgage loans. The
following table provides summarized information by business
segments:
<TABLE>
<CAPTION>
Years Ended June 30
-------------------------------------------------------------
1997 1996 1995
------------------- ------------------- -----------------
Total revenue:
<S> <C> <C> <C>
Mortgage banking $ 28,108,243 28,132,126 25,164,903
Retail banking and other 137,606,848 130,484,851 120,001,088
------------------ ----------------- -----------------
165,715,091 158,616,977 145,165,991
Elimination of intersegment
revenue (10,983,457) (9,430,685) (5,389,810)
------------------ ----------------- -----------------
Consolidated $ 154,731,634 149,186,292 139,776,181
================== ================= =================
Operating profit (loss):
Mortgage banking $ 3,059,760 3,014,550 (509,143)
Retail banking and other 26,964,461 30,036,609 31,734,983
------------------ ----------------- -----------------
Consolidated $ 30,024,221 33,051,159 31,225,840
================== ================= =================
At June 30
-------------------------------------------------------------
1997 1996 1995
------------------ ----------------- -----------------
Identifiable assets:
Mortgage banking $ 41,083,682 41,363,849 24,548,720
Retail banking and other 1,315,013,398 1,269,446,369 1,134,874,184
------------------ ----------------- -----------------
1,356,097,080 1,310,810,218 1,159,422,904
Elimination of intersegment assets (2,854,620) (2,152,397) -
------------------ ----------------- -----------------
Consolidated $ 1,353,242,460 1,308,657,821 1,159,422,904
================== ================= =================
</TABLE>
Revenues are comprised of interest income, loan fees and service charges,
loan servicing revenues, net gains on interest-earning assets and
real estate activities, deposit account operations and other income.
Intersegment revenue consists of loan servicing income from
servicing Company-owned loans, gains related to originated servicing
rights of loans transferred to the retail banking segment and
interest income on custodial funds on deposit with the Bank. This
revenue is eliminated in consolidation.
(Continued)
125
<PAGE>
MAGNA BANCORP, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
Operating profit (loss) is revenue less interest expense, provisions for
losses, amortization of purchased mortgage servicing rights and
operating expenses. General corporate overhead expenses not directly
attributable to a segment are allocated to both segments.
Identifiable assets by segment are those assets that are used exclusively
by such segment.
(24) Financial Information of Magna Bancorp, Inc. (Parent Only)
MagnaBancorp, Inc.'s unconsolidated statements of financial condition as
of June 30, 1997 and 1996 and related statements of earnings and
cash flows for the years ended June 30, 1997, 1996 and 1995 follow:
<TABLE>
<CAPTION>
Statements of Financial Condition
Assets 1997 1996
------ ---------------- -------------------
<S> <C> <C>
Cash on deposit with bank subsidiary $ 3,006,823 9,516,843
Investment in bank subsidiary 116,363,478 106,247,207
Investment in and advances to other subsidiaries 5,934,805 6,844,414
Other securities held for trading 3,386,250 -
Other securities available for sale 9,037,878 -
Other assets 1,271,650 3,305,196
------------------- ---------------
$ 139,000,884 125,913,660
================ ===============
Liabilities and Stockholders' Equity
------------------------------------
Liabilities $ 629,158 95,080
---------------- ---------------
Stockholders' equity:
Common stock 137,543 68,514
Additional paid-in capital 18,735,227 18,373,306
Retained earnings 119,340,749 109,096,579
Unrealized gains (losses) on securities available
for sale, net of deferred income taxes 158,207 (1,719,819)
---------------- ---------------
138,371,726 125,818,580
$ 139,000,884 125,913,660
================ ===============
</TABLE>
(Continued)
126
<PAGE>
MAGNA BANCORP, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(24), Continued
<TABLE>
<CAPTION>
Statements of Earnings
1997 1996 1995
--------------- --------------- --------------
<S> <C> <C> <C>
Cash dividends from subsidiaries $ 9,275,368 9,802,402 4,855,205
Equity in undistributed earnings of
bank subsidiary 9,077,527 10,758,247 13,171,226
Equity in undistributed earnings
of other subsidiaries 146,650 543,293 1,074,834
Interest income 430,225 446,145 683,730
Unrealized holding gain on trading securities 1,344,105 - -
Compensation expense (494,632) (202,842) (854,829)
Other expenses (766,383) (234,546) (58,933)
Income tax benefit (expense) (453,386) (3,350) 153,790
-------------- --------------- --------------
Net earnings $ 18,559,474 21,109,349 19,025,023
============== =============== ==============
</TABLE>
(Continued)
127
<PAGE>
MAGNA BANCORP, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(24), Continued
Statements of Cash Flows
<TABLE>
<CAPTION>
1997 1996 1995
--------------- --------------- --------------
Cash flows from operating activities:
<S> <C> <C> <C>
Net earnings $ 18,559,474 21,109,349 19,025,023
Adjustments to reconcile net earnings to
cash provided by operations:
Amortization of unearned compensation - 82,842 255,944
Equity in undistributed earnings
of subsidiaries (9,224,177) (11,301,540) (14,246,060)
Increase (decrease) in liabilities 534,078 60,720 (217,611)
Decrease (increase) in other assets 2,033,546 (2,595,592) 40,530
Unrealized holding gain on trading
securities (1,344,105) - -
Tax benefit of deductible restricted stock
awards and stock options over cost 318,610 574,002 542,995
Purchase of equity securities held
for trading (2,042,145) - -
Other, net (420,158) - -
-------------- --------------- --------------
Net cash provided by
operating activities 8,415,123 7,929,781 5,400,821
-------------- --------------- --------------
Cash flows from investing activities:
Advances to subsidiaries 1,215,000 (285,000) (570,000)
Investments in subsidiaries - 1,100,000 (4,722,328)
Repayment of subordinated debentures
from bank subsidiary - 4,000,000 -
Return of capital from subsidiary - - 2,500,000
Purchase of equity securities available for sale (7,937,180) - -
-------------- --------------- --------------
Net cash provided (used) by
investing activities (6,722,180) 4,815,000 (2,792,328)
-------------- --------------- --------------
Cash flows from financing activities:
Proceeds from sale of common stock 45,816 17,085 9,917
Purchase and retirement of common stock (2,181) (5,765,883) (182,890)
Cash dividends paid (8,246,598) (3,479,049) (2,601,603)
-------------- -------------- --------------
Net cash used by financing
activities (8,202,963) (9,227,847) (2,774,576)
-------------- --------------- --------------
Net increase (decrease) in cash (6,510,020) 3,516,934 (166,083)
Cash at beginning of year 9,516,843 5,999,909 6,165,992
-------------- --------------- --------------
Cash at end of year $ 3,006,823 9,516,843 5,999,909
============== =============== ==============
</TABLE>
128
<PAGE>
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
There has been no Current Report on Form 8-K filed within 24 months prior to the
date of the most recent financial statements reporting a change of accountants
and/or reporting disagreements on any matter of accounting principle or
financial statement disclosure.
129
<PAGE>
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The Company's Board of Directors currently consists of five members. The Board
is divided into three classes, each of which contains approximately one-third of
the Board. Approximately one-third of the directors are elected annually.
Directors of the Company are generally elected to serve for three-year terms or
until their respective successors are elected and qualified.
The table below sets forth certain information, as of August 29, 1997, regarding
the composition of the Company's Board of Directors, including terms of office.
There are no arrangements or understandings between any director and any other
person pursuant to which such director was selected.
<TABLE>
<CAPTION>
TERM SHARES OF COMMON PERCENT
POSITION(S) HELD DIRECTOR TO STOCK BENEFICIALLY OF
NAME AGE IN THE COMPANY SINCE (1) EXPIRE OWNED CLASS
---- --- -------------- --------- ------ ------------------ -----
<S> <C> <C> <C> <C> <C>
Robert S. Duncan 61 Director and Chairman 1974 1999 779,273 (2) 5.67%
Zach T. Hederman, Jr. 49 Director 1983 1999 371,726 (3) 2.70
H. A. Moore, III 48 Director and Secretary 1990 1997 428,884 (4) 3.12
Lou Ann Poynter 51 Director and President 1990 1998 569,927 (5) 4.14
George P. Hopkins, Jr. 71 Director 1981 1998 148,966 (6) 1.08
</TABLE>
- ----------
(1) Includes service as a director of the Bank.
(2) Mr. Duncan shares voting and investment power over 334,080 shares with his
wife and shares with the 401(k) Trustee investment power over 1,278 shares
allocated to his account under the 401(k). The number of shares reported
for Mr. Duncan includes 68,000 shares held by the Irrevocable Trust for Lou
Ann and Louis G. Poynter, a family trust for which he serves as Trustee,
which, under applicable securities laws, may be deemed to be beneficially
owned by Mr. Duncan.
(3) Mr. Hederman shares voting and investment power over 266,648 shares with
Trustmark National Bank, custodian for the ZTH Trust for Zach Hederman, Jr.
(4) Mr. Moore shares voting and investment power over 11,520 shares with one of
his sons, and he is deemed to beneficially own 44,672 shares held
collectively by his three children. As a partner in the law firm of Moore &
Jones, Mr. Moore has a beneficial interest in 57,030 of the 126,895 shares
held by Legg Mason Wood Walker, Inc. as fund manager for the Trust for the
Moore & Jones Profit Sharing Plan, a self-directed plan for which Mr. Moore
serves as one of three trustees and as designated administrator; he has no
ownership interest in or investment control or voting power over 69,865
shares held for other participants in the plan.
130
<PAGE>
(5) Ms. Poynter shares voting and investment power over 138,936 shares with her
husband and 960 shares with her daughter. She shares with the 401(k)
Trustee investment power over 741 shares allocated to her account under the
401(k). Ms. Poynter is also deemed to beneficially own 61,976 shares held
in her husband's IRA and 39,998 shares for which she serves as custodian
for her daughter's trust established under the Mississippi Uniform Gift to
Minor's Act. The number of shares reported for Ms. Poynter includes 90,400
shares held by the Irrevocable Trust for Robert S. and Judy W. Duncan, a
family trust for which she serves as Trustee, which, under applicable
securities laws, may be deemed to be beneficially owned by Ms. Poynter.
(6) Includes 38,496 shares subject to a presently exercisable option granted
under the Company's Stock Option Plan and 5,200 shares held by his wife.
The business experience of each director of the Company is set forth below. All
directors have held their present position for at least seven years unless
otherwise indicated.
Robert S. Duncan is Chairman of the Board and Chief Executive Officer of the
Company and Chairman of the Board of Magnolia Federal. Mr. Duncan joined the
Bank in 1968 as an Assistant Secretary, became Executive Vice President in 1972,
and President in 1977. He was Chief Executive Officer of the Bank from 1983
until March, 1996, and has served as Chairman of the Board of the Bank since
1984. For eight years prior to joining Magnolia Federal, Mr. Duncan served as a
manager for the accounting firm of KPMG Peat Marwick LLP. Mr. Duncan is a past
Director of the FHLB of Dallas, and former State Director of the Savings and
Loan Foundation and the Institute of Financial Education. He is past President
of the Mississippi League of Savings Institutions and the Mississippi Financial
Managers Society and currently serves on the Board of Directors of the
Mississippi Bankers Association. He has been active with the America's Community
Bankers organization, serving several years on the Executive Committee, and as
Co-Chairman of the Governmental Affairs Committee. Mr. Duncan has served on the
Thrift Institutions Advisory Council of the Federal Reserve Board, the SAIF of
the FDIC and the Federal Reserve Board of Atlanta. Mr. Duncan holds a B.S.
degree from Auburn University. He has attended the Graduate School of Savings
and Loan at Indiana University and the Savings and Loan School for Executive
Development at the University of Georgia.
Zach T. Hederman, Jr. is President of Zach T. Hederman, Jr. Properties, Inc.,
which engages in land development and utilities. He is the General Partner of
Baycastle Properties, L.P., Annandale Properties, L.P. and Cypress Lake
Properties, L.P. He received a Bachelor of Arts degree from the University of
Mississippi, an M.B.A. from Mississippi College and a P.M.D. (Program for
Management Development) from the Harvard University Graduate School of Business.
H. A. Moore, III is Secretary of the Company and served as outside General
Counsel to the Bank from 1976 until February, 1997, when he became Executive
Vice President and General Counsel for the Bank. Mr. Moore received his B.A. and
J.D. degrees from the University of Mississippi in 1970 and 1972, respectively.
He is a member of Omicron Delta Kappa honorary fraternity and Phi Alpha Delta
legal fraternity. Mr. Moore began practicing law in 1972 with the law firm of
Moore and Jones in Hattiesburg, Mississippi. He served as managing partner of
the firm until February 1997. Mr. Moore's legal practice has been concentrated
in real estate, mortgage, business, commercial, estate, probate and civil
litigation. Mr. Moore has actively participated as a member and President of the
South Central Mississippi Bar Association and as a member and director of the
Mississippi Bar Association. He has served as President of the Young Lawyers
division of the Mississippi Bar Association and has served on several committees
131
<PAGE>
of the Mississippi Bar. He is a member of the Mississippi Bar Foundation and has
served as one of its directors. Mr. Moore is also a member of the American
College of Mortgage Attorneys, the American Judicature Society, the American Bar
Association and the South Mississippi Estate Planning Association. Mr. Moore has
been an active member of the Attorney's Committee of the America's Community
Bankers.
Lou Ann Poynter is President and Chief Operating Officer of the Company and
President and Chief Executive Officer of Magnolia Federal. She joined the Bank
in 1972, became Treasurer in 1975, and Senior Vice President in 1985. She became
Executive Vice President and Treasurer in 1988 and served in that capacity until
she became President on July 1, 1993. Ms. Poynter was appointed Chief Executive
Officer of the Bank in March, 1996. She has served on the Thrift Industry
Accounting Committee and as a National Director of the Financial Managers
Society, Inc. She is past President of the Mississippi Financial Managers
Society and has served on the Mississippi State Board of Public Accountancy. She
currently serves on the Board of Directors of the Government Affairs Council of
the America's Community Bankers. She serves as Chairman of the Mortgage Lending
Committee and as a member of the Federal and State Legislative Committees of the
Mississippi Bankers Association. She also is a member of the Mississippi Society
of Certified Public Accountants and the American Institute of Certified Public
Accountants. Ms. Poynter received her B.S. degree in Business Administration and
M.S. degree in Accounting from the University of Southern Mississippi.
George P. Hopkins, Jr. is owner and President of George P. Hopkins, Inc.
Contractors-Engineers, a general contractor. He holds a B.S. degree in Civil
Engineering from the University of Mississippi. He served as a Director of Coast
Federal Savings and Loan Association from 1961 until 1981, when it was merged
into Magnolia Federal Bank for Savings. He is a past Director of the New Orleans
Branch of the Federal Reserve Bank of Atlanta and has served as a Director and
Member of the Executive Committee of the former Gulf National Bank, Gulfport,
Mississippi. He is currently President and a Director of Mississippi Coast
Marine, Inc., Gulfport, Mississippi.
The Board of Directors of the Bank currently consists of 12 directors, including
five of the directors of the Company. The Board is divided into three classes
and approximately one-third of the directors are elected annually. Because the
Company owns all of the issued and outstanding shares of capital stock of the
Bank, the Company elects the directors of the Bank.
Information concerning the executive officers of the Company is provided under
Item 1 of Part I of this report and is incorporated by reference herein.
132
<PAGE>
ITEM 11. EXECUTIVE COMPENSATION
During fiscal 1997, R. S. Duncan received compensation from the Company for
services performed. The Company's other officers did not receive any
compensation from the Company in fiscal 1997 for services performed in their
capacities as officers of the Company.
The following table sets forth information concerning the compensation of the
Chief Executive Officer and the four other highest paid executive officers whose
salary and bonus for fiscal 1997 exceeded $100,000 (the "named officers") for
services in all capacities to the Company and Magnolia Federal for the years
ended June 30, 1997, 1996, and 1995.
<TABLE>
<CAPTION>
Summary Compensation Table
Annual Compensation
- ------------------------------------------------------------------------------------------------------------------------------
Other Annual All Other
Name Year Salary Bonus (1) Compensation (2) Compensation (3)
- ----------------------------- -------- ----------------- -------------- ------------------- -------------------
<S> <C> <C> <C> <C> <C>
Robert S. Duncan 1997 $ 199,000 $ 160,000 $ 120,368 $ 12,662
1996 199,000 97,000 - 30,197
1995 199,000 130,000 171,542 71,050
Lou Ann Poynter 1997 225,000 200,000 223,319 27,232
1996 190,385 90,000 - 29,002
1995 156,199 80,000 86,251 50,141
J. Hershel Parker 1997 136,502 65,000 82,577 6,975
1996 130,003 38,000 - 3,360
1995 124,499 36,000 64,245 27,342
Thomas L. Cousins 1997 126,000 65,000 224,225 6,007
1996 120,000 38,000 - 2,761
1995 108,499 36,000 21,105 22,422
Barbara S. Ellender 1997 86,000 40,000 143,270 3,922
1996 81,000 26,000 - 1,615
1995 73,000 25,000 21,105 11,769
</TABLE>
(1) Paid pursuant to the Bank's incentive compensation plan, with 100% of the
bonus accrual paid in 1997.
(2) Amounts for fiscal 1997 represent lump sum payment under the Bank's Salary
Continuation Plan upon termination of the Plan effective June 30, 1997,
which was based upon the present value of benefits the participant was
entitled to under the Plan using a 60% accelerated vesting rate due to
pending change of control of the Company.
Amounts for fiscal 1995 represent cash bonuses paid to the named officers
in accordance with the terms of the Stock Option Plan approved by the
stockholders on November 13, 1991, which provided for a pass-through to
plan participants of the tax benefit received by the Company as a result of
the ordinary income recognized and tax paid by the recipients as the
restricted stock granted under the Stock Option Plan vested. All
participants elected each year to have the cash bonus paid directly to the
state and federal governments as partial satisfaction of income taxes due
and, accordingly, no cash was paid directly to the named officers.
133
<PAGE>
(3) Amounts for fiscal 1997 include $5,422, $5,512, $5,850, $5,287, and $3,462
contributed by Magnolia Federal Bank to the 401(k) Plan for fiscal 1997 on
behalf of Mr. Duncan, Ms. Poynter, Mr. Parker, Mr. Cousins and Ms.
Ellender, plus the imputed value of employee life insurance reported to the
IRS as income in the amount of $240, $720, $1,125, $720, and $460,
respectively. The amount also includes director fees paid by the Company
and the Bank in the amount of $7,000 to Mr. Duncan and $21,000 to Ms.
Poynter.
Amounts for fiscal 1996 include $744, $329, $494, $387 and $235 contributed
by Magnolia Federal to the Employee Stock Option Plan ("ESOP") and $3,828,
$3,738, $1,740, $1,694 and $1,154 contributed to the 401(k) Plan on behalf
of Mr. Duncan, Ms. Poynter, Mr. Parker, Mr. Cousins and Ms. Ellender, plus
the imputed value of employee life insurance reported to the IRS as income
in the amount of $1,125, $435, $1,125, $680 and $226, respectively. The
amount also includes director fees paid by the Company and the Bank in the
amount of $24,500 each to Mr. Duncan and Ms. Poynter.
Amounts for fiscal 1995 include $27,925, $17,706, $26,622, $21,788 and
$11,568 contributed by Magnolia Federal to the ESOP on behalf of Mr.
Duncan, Ms. Poynter, Mr. Parker, Mr. Cousins and Ms. Ellender, as well as
director fees paid by the Company and the Bank in the amount of $42,000
each to Mr. Duncan and Ms. Poynter.
RETIREMENT PLANS
Defined Benefit Pension Plan. The Bank sponsors the Pension Plan, a defined
benefit pension plan. Eligible employees participate in the Plan after they
attain age 21 and following the completion of 12 months of service, provided the
employee has completed as least 1,000 hours of work during such 12-month period.
The Pension Plan is funded solely through contributions made by Magnolia
Federal.
Annual Pension Benefit Based on Years of Service
---------------------------------------------------------
Average Annual
Compensation 10 20 30 40
- --------------------- ----------- ------------ ------------ ------------
$ 100,000 $ 20,595 $ 41,190 $ 46,190 $ 51,190
150,000 31,845 63,690 71,190 78,690
200,000 34,095 68,190 76,190 84,190
250,000 34,095 68,190 76,190 84,190
300,000 34,095 68,190 76,190 84,190
350,000 34,095 68,190 76,190 84,190
The preceding table sets forth, as of June 30, 1997, estimated annual pension
benefits for individuals at age 65 payable in the form of a life annuity under
the most advantageous plan provisions for various levels of compensation and
years of service. The figures in this table are based upon the assumption that
the Pension Plan continues in its present form and reflects offsets for Social
Security benefits. At June 30, 1997, the estimated credited years of service of
Robert S. Duncan, Lou Ann Poynter, Hershel Parker, Thomas L. Cousins and Barbara
S. Ellender were 28, 25, 24, 13, and 11, respectively.
Compensation covered by the Pension Plan includes base salary and bonus paid
pursuant to the Bank's incentive compensation plan and excludes the value of any
restricted stock awards and the related income tax benefit pass-through and
Salary Continuation Plan payments paid as other annual compensation.
134
<PAGE>
Based on the amounts reported as salary and bonus in the Summary Compensation
Table for each of the named officers, the benefits payable at normal retirement
at age 65 determined in accordance with the plan benefit formula applicable to
each would be as follows: Robert S. Duncan, $87,536; Lou Ann Poynter, $54,621;
Hershel Parker, $71,034; Thomas L. Cousins, $43,866; and Barbara S. Ellender,
$35,531. The defined benefit pension plan will be terminated effective July 31,
1997 and assets of the Plan will be distributed to active participants employed
as of July 31, 1997. The amount of distribution is undetermined at the time of
this writing.
Salary Continuation Plan. Effective June 30, 1997, the Bank terminated its
Salary Continuation Plan (the "Salary Plan"), a non-qualified, executive benefit
plan adopted by the Board of Directors of the Bank on July 1, 1994. The Bank
executed a non-qualified deferred compensation agreement with each of the 14
executives designated by the Board of Directors of the Bank to participate in
the Salary Plan. Supplemental retirement benefits payable under the Salary Plan
were to range from 40% to 60% of final base salary, less benefits payable to
each executive under the Pension Plan. Upon termination of the Salary Plan, each
executive received a lump sum cash payment based on the present value of
benefits the executive was entitled to receive under the Salary Plan. The
amounts paid to the named officers as a result of the termination of the Salary
Plan are provided in the Summary Compensation Table under the column captioned
"Other Annual Compensation."
EMPLOYMENT AGREEMENTS
Employment Agreements (the "Agreements") were entered into between the Company
and its two senior executives, Robert S. Duncan and Lou Ann Poynter, effective
December 20, 1995. The Agreements provide for salaries as determined by the
Board of Directors, but in no event shall the salaries be less than the salaries
as of the Agreements' commencement date. The Agreements provide for
participation in benefit plans to the same extent as executive officers of the
Company generally. In the event of involuntary termination, Mr. Duncan and Ms.
Poynter would be entitled to receive liquidated damages on a monthly basis for
the remaining term of the Agreement equal to one-twelfth of the average annual
amount of salary, bonus and incentive compensation earned during the two fiscal
years prior to the date of termination. In the event of involuntary termination
within 24 months following a change in control, Mr. Duncan and Ms. Poynter would
be entitled to, in addition to any liquidated damages due, (i) a lump sum
payment equal to 299% of the executive's "base amount" for purposes of Section
280G of the Internal Revenue Code of 1986 and (ii) in the event Mr. Duncan or
Ms. Poynter would receive any "excess parachute payments" for purposes of
Section 280G, a "gross-up" payment to compensate the executive for the cost of
any excise taxes and taxes attributable to the gross-up. In addition, the
Agreements provide for lifetime life insurance and medical benefits in the event
of any separation of service from the Company (other than for cause). The
Agreements currently have an expiration date of December 19, 1999.
KEY EMPLOYEE SEVERANCE PLAN
In December 1995, the Company and the Bank adopted a severance plan (the
"Severance Plan") for selected key employees as designated by the Board from
time to time. The Plan was amended on March 19, 1997 to include all officers of
the Company and its subsidiaries and to limit the total amount payable under the
Plan to a total of $1.8 million. The amount to be paid in the event of
termination with 18 months following a 25% or more change in control of the
Company is based on a formula that includes base salary, years of service and
corporate title. A severance amount equal to one year's salary is to be paid to
officers at the level of Senior Vice President and above. Other benefits under
the Severance Plan
135
<PAGE>
include an extension of health and welfare benefits for one and a half years
after termination. Mr. Duncan and Ms. Poynter are excluded from the Severance
Plan. Termination benefits payable to Mr. Parker, Mr. Cousins, and Ms. Ellender,
based on calculations as of June 30, 1997, would be $136,500, $126,000 and
$86,000 respectively.
DIRECTOR COMPENSATION
Directors' Fees. Each director of the Company is paid $2,000 per month for
service as a director of the Company. Members of the Audit committee of the
Board of Directors of the Company are each paid an annual retainer fee of
$18,000 for their service as members of such committee, in addition to their
monthly fees for service as directors of the Company. Each director of the Bank
is paid $1,500 for service as a director of the Bank. In addition, an annual fee
of $6,000 is paid to each non-employee director of the Bank for service on
committees of the Board of Directors of the Bank.
Stock in Lieu of Cash Compensation Plan. In 1996, the Company and the Bank
adopted the Stock in Lieu of Cash Compensation Plan for Directors (the "Stock in
Lieu of Cash Plan"). The Stock in Lieu of Cash Plan provides for the deferral of
compensation earned by directors of the Company and the Bank (for services
performed as directors) in the form of Stock Units ("Stock Units") in a Stock
Unit account ("Stock Unit Account"). Directors may elect to have up to 100% of
their fees deferred and converted into Stock Units.
For dividends paid with respect to the Company's common stock, each director has
credited to his or her Stock Unit Account an additional number of Stock Units in
an amount determined under the Stock in Lieu of Cash Plan. Each director's Stock
Unit Account shall be settled by delivering to the director (or his beneficiary)
the number of shares of Company common stock equal to the number of whole Stock
Units then credited to the non-employee director's Stock Unit Account, in either
(i) a lump sum or (ii) substantially equal annual installments over a period not
to exceed ten years.
136
<PAGE>
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
As of August 29, 1997, the Company had 13,754,266 shares of Common Stock issued
and outstanding.
The following table sets forth, as of August 29, 1997, certain information as to
(i) those persons who were known by management to be beneficial owners of more
than 5% of the Company's outstanding shares of Common Stock, (ii) the shares of
Common Stock beneficially owned by the Chief Executive Officer and the four
other highest paid executive officers who earned in excess of $100,000 during
fiscal 1997 (the "named officers") and (iii) all executive officers and
directors of the Company and the Bank as a group. Information regarding share
ownership of the directors of the Company is contained under Item 10 of this
report.
<TABLE>
<CAPTION>
SHARES OF
COMMON STOCK
BENEFICIALLY PERCENT OF
BENEFICIAL OWNER (1) OWNED CLASS
- -------------------- ------------ ---------
<S> <C> <C>
Robert S. Duncan ........................................... 779,273 5.67%
Lou Ann Poynter ............................................ 569,927 4.14
Hershel Parker ............................................. 199,815 (2) 1.45
Thomas L. Cousins .......................................... 29,413 (3) 0.21
Barbara S. Ellender ........................................ 75,627 (4) 0.55
All directors and executive officers as a group (24 persons)(5) 4,204,845 (6) 30.57
</TABLE>
- ----------
(1) The address of each of the beneficial owners is 100 West Front Street,
Hattiesburg, Mississippi 39401.
(2) Mr. Parker shares voting and investment power over 48,480 shares with his
wife and shares with the 401(k) Trustee investment power over 1,029 shares
allocated to his account under the 401(k). Mr. Parker is deemed to
beneficially own 19,883 shares held in his wife's IRA.
(3) Mr. Cousins shares with the 401(k) Trustee investment power over 709 shares
allocated to his account under the 401(k).
(4) Ms. Ellender shares voting and investment power over 29,016 shares with her
husband and shares with the 401(k) Trustee investment power over 637 shares
allocated to her account under the 401(k). Ms. Ellender is deemed to
beneficially own 7,243 shares held in her husband's IRA and 1,920 shares
held collectively by her two children.
(5) Includes directors and executive officers of the Company and the Bank.
(6) Includes shares held directly, as well as 105,888 shares subject to options
which are exercisable within 60 days of August 29, 1997 granted under the
1990 Stock Option and Incentive Plan ("the Stock Option Plan"), as well as
shares held in retirement accounts, held by certain members of the named
individuals' families, or held by trusts of which the named individual is a
trustee or substantial beneficiary, with respect to which shares the
respective directors and officers may be deemed to have sole or shared
voting or investment power. The number of shares reported includes 675,376
shares held by the Defined Benefit Pension Plan for Employees of Magnolia
Federal Bank for Savings Trust (the "Pension Plan") which, under applicable
securities laws, may be deemed to be beneficially owned by those officers
who serve as Trustees for the Trust.
137
<PAGE>
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The Bank has followed a policy of granting to officers, directors and employees
only loans that are secured by the borrower's personal residence and small
consumer loans. Loans to senior officers and directors must be approved by the
Board of Directors and loans to other employees must be approved by the Bank's
Chief Executive Officer, President or Executive Vice President. All loans to the
Bank's officers, directors and employees have been in the past and will continue
to be made in the future in the ordinary course of business and on the same
terms and conditions as those of comparable transactions prevailing at the time,
and do not involve more than the normal risk of collectibility or present other
unfavorable features. All loans by the Bank to its directors and executive
officers are subject to regulations of the Office of Thrift Supervision
restricting loans and other transactions with affiliated persons of the Bank.
H. A. Moore, III, Secretary and Director of the Company, was a partner in the
law firm of Moore and Jones, which was comprised of six practicing lawyers until
February 1997 when he became Executive Vice President and General Counsel of the
Bank. During the period from July 1, 1996 to February 1, 1997, the firm received
total fees of $203,032 for general legal services to the Company, the Bank and
their affiliates. In addition, the firm also received fees in an amount in
excess of 5% of the firm's gross revenues for title work, bankruptcies,
foreclosures and repossessions that pass through the Bank or a subsidiary of the
Company and which fees are substantially collected from Bank customers.
David K. Hemeter, Director of the Bank, has performed architectural services for
the Bank for several years and received $61,787 in architectural fees during
fiscal 1997. Payments to Mr. Hemeter were based on a percentage of the
construction cost at the standard rates suggested by the American Institute of
Architects.
138
<PAGE>
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
(a) (1) Financial Statements
Financial statements filed on this Form 10-K under Item 8 are hereby
incorporated for reference.
(a) (2) Financial Statement Schedules
All financial statement schedules have been omitted as the required information
is inapplicable or has been included in the Notes to Consolidated Financial
Statements filed under Item 8 of this Form 10-K.
(a) (3) Exhibits
<TABLE>
<CAPTION>
Regulation S-K Reference to Prior Filing or
Exhibit Number Document Exhibit Number Attached Hereto
- -------------- -------- ------------------------------
<S> <C> <C>
2 Plan of acquisition, reorganization, arrangement, liquidation or *
succession
3(a) Articles of Incorporation ****
3(b) By-laws **
4 Instruments defining the rights of security holders, including **
indentures
9 Voting trust agreement None
10 Material contracts:
(a) Stock Option and Incentive Plan **
(b) Incentive Compensation Plan **
(c) Form of Salary Continuation Agreement ***
(d) Employment Agreement with Robert S. Duncan ****
(e) Employment Agreement with Lou Ann Poynter ****
(g) Change in Control Severance Plan ****
(h) Amendment to Change in Control Severance Plan 10(h)
11 Statement re computation of per share earnings 11
12 Statements re computation of ratios Not required
13 Annual report to security holders None
16 Letter re change in certifying accountant None
18 Letter re change in accounting principles None
21 Subsidiaries of the registrant 21
22 Published report regarding matters submitted to vote of security None
holders
23 Consents of experts and counsel 23
24 Power of attorney Not required
27 Financial Data Schedule 27
99 Additional exhibits None
</TABLE>
- ----------
139
<PAGE>
* Filed as an exhibit to the Company's Form 8-K current report filed on May
14, 1997 (File No. 0-18918) pursuant to the Securities Exchange Act of
1934. Such previously filed document is hereby incorporated by reference in
accordance with Item 601 of Regulation S-K.
** Filed as exhibits to the Company's Form S-1 registration statement filed on
October 1, 1990 (File No. 33-37016) pursuant to Section 5 of the Securities
Act of 1933. All of such previously filed documents are hereby incorporated
herein by reference in accordance with Item 601 of Regulation S-K.
*** Filed as Exhibit 10(c) to the Company's Form 10-K annual report filed on
September 25, 1995 (File No. 0-18918) pursuant to the Securities Exchange
Act of 1934. Such previously filed document is hereby incorporated by
reference in accordance with Item 601 of Regulation S-K.
**** Filed as exhibits to the Company's Form 10-K Annual Report filed on
September 27, 1996 (File No. 0-18918) pursuant to the Securities Exchange
Act of 1934. Such previously filed documents are hereby incorporated by
reference in accordance with Item 601 of Regulation S-K.
(b) Reports on Form 8-K
During the three month period ended June 30, 1997, the Company did file a report
on Form 8-K on May 14, 1997 (File No. 0-18918).
140
<PAGE>
SIGNATURES
----------
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Company has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
MAGNA BANCORP, INC.
Date: September 26, 1997 By: /s/ Lou Ann Poynter
------------------------------- --------------------
Lou Ann Poynter
President and Director
(Duly Authorized Representative)
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of Magna
Bancorp, Inc. and in the capacities and on the dates indicated below.
By: /s/ Robert S. Duncan By: /s/ Karen K. Griffis
------------------------------- ----------------------------
Robert S. Duncan Karen K. Griffis
Chairman of the Board Treasurer
and Director (Principal Financial and
(Principal Executive Officer) Accounting Officer)
Date: September 26, 1997 Date: September 26, 1997
------------------------------- ----------------------
By: /s/ Lou Ann Poynter By: /s/ Zach T. Hederman, Jr.
------------------------------- ----------------------------
Lou Ann Poynter Zach T. Hederman, Jr.
President and Director Director
Date: September 26, 1997 Date: September 26, 1997
------------------------------- ----------------------
By: /s/ H.A. Moore, III By: /s/ George P. Hopkins, Jr.
------------------------------- ----------------------------
H. A. Moore, III George P. Hopkins, Jr.
Secretary and Director Director
Date: September 26, 1997 Date: September 26, 1997
------------------------------- ----------------------
141
<PAGE>
INDEX TO EXHIBITS
Exhibit Number
10(h) Amendment to Change in Control Severance Plan
11 Statement re Computation of per Share Earnings
21 Subsidiaries of the Registrant
23 Consents of Experts and Counsel
27 Financial Data Schedule
EXHIBIT 10(H)
AMENDMENT TO CHANGE IN CONTROL SEVERANCE PLAN
<PAGE>
AMENDMENT ONE
TO MAGNA BANCORP, INC.
CHANGE IN CONTROL SEVERANCE PLAN
EFFECTIVE MARCH 19, 1997
The Magna Bancorp, Inc. Change in Control Severance Plan ("the Plan") is
hereby amended effective March 19, 1997, as follows:
(a) include all officers of the Company and its subsidiaries, (b) pay a
flat one year's salary to senior vice presidents and above who experience a
change in control separation of service, (c) pay severance only to those
persons who experience a change in control separation of service, i.e., an
involuntary termination without cause in connection with or within 18
months after a change in control, and (d) provide that the maximum
severance pool will be $1.8 million to be applied on a "first come, first
serve" termination date basis.
IN WITNESS WHEREOF, MAGNA BANCORP, INC. caused this instrument to be
executed by its duly authorized officers on this 15th day of September, 1997,
effective as of March 19, 1997.
MAGNA BANCORP, INC.
(CORPORATE SEAL)
BY: /s/ Lou Ann Poynter
---------------------------
LOU ANN POYNTER, PRESIDENT
ATTEST:
BY: /s/ Thelma Beeson
THELMA BEESON
ASSISTANT SECRETARY
EXHIBIT 11
STATEMENT RE COMPUTATION OF PER SHARE EARNINGS
<PAGE>
MAGNA BANCORP, INC. AND SUBSIDIARIES
Computation of per Share Earnings
For the Years Ended June 30
1997 1996
------------ ------------
Weighted average number of shares
outstanding ............................. 13,746,087 14,055,994
Weighted average common stock equivalents:
Stock options ............................. 127,517 182,047
Shares issuable as compensation ........... 8,091 --
Common stock repurchased .................. (201) (139,532)
------------ ------------
Weighted average shares, primary and
fully diluted ........................... 13,881,494 14,098,509
============ ============
Computation of net per share earnings:
Net earnings ............................ $ 18,559,474 21,109,349
============ ============
Per share earnings, primary and
fully diluted ........................... $ 1.34 1.50
============ ============
EXHIBIT 21
SUBSIDIARIES OF THE REGISTRANT
<PAGE>
SUBSIDIARIES OF THE REGISTRANT
<TABLE>
<CAPTION>
Percent State of
of Incorporation
Parent Subsidiary Ownership or Organization
------ ---------- --------- ---------------
<S> <C> <C> <C>
Magna Bancorp, Inc. Magnolia Federal Bank for Savings 100% Federal
Magna Insurance Company 79% South Carolina
Magna Financial Services., Inc. 100% Mississippi
Realty Services, Inc. 100% Mississippi
Comserv, Inc. 100% Mississippi
Magnolia Federal Bank for Savings Magna Mortgage Company 100% Mississippi
</TABLE>
EXHIBIT 23
CONSENT OF KPMG PEAT MARWICK LLP
<PAGE>
INDEPENDENT AUDITORS' CONSENT
The Board of Directors
Magna Bancorp, Inc.
We consent to incorporation by reference in the Registration Statements on Form
S-8 (Nos. 33-50302, 33-50304 and 333-3308) of our report dated August 29, 1997,
relating to the consolidated financial statements of Magna Bancorp, Inc. and
subsidiaries as of June 30, 1997 and 1996 and for each of the years in the
three-year period ended June 30, 1997, which report appears in the Annual Report
on Form 10-K of Magna Bancorp, Inc. for the fiscal year ended June 30, 1997. Our
report refers to a change in the method of accounting for mortgage servicing
rights in 1996.
/s/ KPMG PEAT MARWICK LLP
-------------------------
Jackson, Mississippi KPMG PEAT MARWICK LLP
September 25, 1997
WARNING: THE EDGAR SYSTEM ENCOUNTERED ERROR(S) WHILE PROCESSING THIS SCHEDULE.
<TABLE> <S> <C>
<ARTICLE> 9
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM CONSOLIDATED
STATEMENTS OF FINANCIAL CONDITION, CONSOLIDATED STATEMENTS OF EARNINGS, SELECTED
CONSOLIDATED FINANCIAL DATA AND NOTES TO CONSOLIDATED FINANCIAL STATEMENTS AND
IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS AND
NOTES.
</LEGEND>
<MULTIPLIER> 1
<CURRENCY> US DOLLARS
<S> <C> <C>
<PERIOD-TYPE> 3-MOS YEAR
<FISCAL-YEAR-END> JUN-30-1997 JUN-30-1997
<PERIOD-START> APR-01-1997 JUL-01-1996
<PERIOD-END> JUN-30-1997 JUN-30-1997
<EXCHANGE-RATE> 1 1
<CASH> 69,504,187 69,504,187
<INT-BEARING-DEPOSITS> 28,704,668 28,704,668
<FED-FUNDS-SOLD> 0 0
<TRADING-ASSETS> 3,386,250 3,386,250
<INVESTMENTS-HELD-FOR-SALE> 139,062,130 139,062,130
<INVESTMENTS-CARRYING> 64,317,419 64,317,419
<INVESTMENTS-MARKET> 67,469,922 67,469,922
<LOANS> 938,517,160 938,517,160
<ALLOWANCE> 10,423,693 10,423,693
<TOTAL-ASSETS> 1,353,242,460 1,353,242,460
<DEPOSITS> 915,394,878 915,394,878
<SHORT-TERM> 165,298,412 165,298,412
<LIABILITIES-OTHER> 41,027,261 41,027,261
<LONG-TERM> 93,150,183 93,150,183
0 0
0 0
<COMMON> 137,543 137,543
<OTHER-SE> 138,234,183 138,234,183
<TOTAL-LIABILITIES-AND-EQUITY> 1,353,242,460 1,353,242,460
<INTEREST-LOAN> 23,836,374 93,147,812
<INTEREST-INVEST>(1) 4,570,062 18,284,854
<INTEREST-OTHER> 237,343 491,592
<INTEREST-TOTAL> 28,643,779 111,924,258
<INTEREST-DEPOSIT> 7,818,329 31,284,154
<INTEREST-EXPENSE> 11,928,560 46,246,373
<INTEREST-INCOME-NET> 16,715,219 65,677,885
<LOAN-LOSSES> 801,543 3,135,643
<SECURITIES-GAINS> (210,985) 521,176
<EXPENSE-OTHER> 16,814,620 71,654,725
<INCOME-PRETAX> 9,865,140 30,024,221
<INCOME-PRE-EXTRAORDINARY> 5,698,471 18,559,474
<EXTRAORDINARY> 0 0
<CHANGES> 0 0
<NET-INCOME> 5,698,471 18,559,474
<EPS-PRIMARY> 0.41 1.34
<EPS-DILUTED> 0.41 1.34
<YIELD-ACTUAL> 5.56 5.64
<LOANS-NON> 18,436,419 18,436,419
<LOANS-PAST> 11,360,798 11,360,798
<LOANS-TROUBLED> 331,730 331,730
<LOANS-PROBLEM> 0 0
<ALLOWANCE-OPEN> 10,180,693 9,451,693
<CHARGE-OFFS> 618,730 2,413,735
<RECOVERIES> 60,187 250,092
<ALLOWANCE-CLOSE> 10,423,693 10,423,693
<ALLOWANCE-DOMESTIC> 10,423,693 10,423,693
<ALLOWANCE-FOREIGN> 0 0
<ALLOWANCE-UNALLOCATED> 0 0
<FN>
- ----------
(1) Includes trading account interest.
</FN>
</TABLE>
