SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the Fiscal Year Ended June 30, 1996 OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
Commission File Number: 0-22240
FIRST SOUTHEAST FINANCIAL CORPORATION
(Exact name of registrant as specified in its charter)
Delaware 57-0979678
(State or other jurisdiction of incorporation (I.R.S. Employer
or organization) I.D. Number)
201 North Main Street, Anderson, South Carolina 29622
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (864) 224-3401
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 filing requirements for the past 90 days. YES X NO .
Indicate by check mark whether 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 the Registrant's knowledge, in definitive proxy or
other information statements incorporated by reference in Part III of this
Form 10-K or any amendments to this Form 10-K. YES X NO
As of September 13, 1996, there were issued and outstanding 4,388,231
shares of the Registrant's Common Stock. The Registrant's voting stock is
traded over-the-counter and is listed on the Nasdaq National Market under the
symbol "FSFC." The aggregate market value of the voting stock held by
nonaffiliates of the Registrant, based on the closing sales price of the
Registrant's common stock as quoted on the Nasdaq National Market on September
13, 1996, was $33 million.
DOCUMENTS INCORPORATED BY REFERENCE
1. Portions of Annual Report to Stockholders for the Fiscal Year Ended
June 30, 1996 ("Annual Report") (Parts I and II).
2. Portions of Registrant's Definitive Proxy Statement for the 1996
Annual Meeting of Stockholders (Part III).
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PART I
Item 1. Business
General
First Southeast Financial Corporation ("First Southeast" or the
"Corporation"), a Delaware corporation, was organized on June 23, 1993 for the
purpose of becoming the holding company for First Federal Savings and Loan
Association of Anderson ("First Federal" or the "Association") upon First
Federal's conversion from a federal mutual to a federal stock savings and loan
association ("Conversion"). The Conversion was completed on October 7, 1993.
At June 30, 1996, the Corporation had total assets of $332 million, total
deposits of $288 million and stockholders' equity of $34 million. First
Southeast has not engaged in any significant activity other than holding the
stock of First Federal. Accordingly, the information set forth in this
report, including financial statements and related data, relates primarily to
First Federal and its subsidiary.
First Federal was organized in 1922 as a South Carolina mutual savings
and loan association under the name "Anderson Building and Loan Association."
In 1936, the Association converted to a federally chartered savings and loan
association and changed its name to "First Federal Savings and Loan
Association of Anderson." The Association is regulated by the Office of
Thrift Supervision ("OTS") and its deposits are insured up to applicable
limits under the Savings Association Insurance Fund ("SAIF") of the Federal
Deposit Insurance Corporation ("FDIC"). First Federal also is a member of
the Federal Home Loan Bank ("FHLB") System.
The Association's principal business consists of accepting deposits from
the general public through a variety of deposit programs and originating loans
secured primarily by owner-occupied residential properties and consumer loans.
Approximately 88% of the Association's first mortgage loans are secured by
properties located within South Carolina. The Association's residential real
estate and consumer loans amounted to $210 million and $20 million, or 84% and
8%, respectively, of the Association's total loan portfolio at June 30, 1996.
To a significantly lesser extent, the Association also originates residential
construction and commercial real estate and business loans.
Proposed Federal Legislation
Effective January 1, 1996, the FDIC substantially reduced deposit
insurance premiums for well-capitalized, well-managed financial institutions
that are members of the Bank Insurance Fund ("BIF"). Under the new assessment
schedule, approximately 92% of BIF members pay the statutory minimum annual
assessment of $2,000. With respect to financial institutions that are members
of the SAIF, the FDIC has retained the existing rate schedule of 23 to 31
basis points. The Association is a member of the SAIF rather than the BIF.
SAIF premiums may not be reduced for several years because the SAIF has lower
reserves than the BIF. Because deposit insurance premiums are often a
significant component of noninterest expense for insured depository
institutions, the reduction in BIF premiums may place the Association at a
competitive disadvantage since BIF-insured institutions (such as most
commercial banks) may be able to offer more attractive loan rates, deposit
rates, or both.
Proposed federal legislation would recapitalize the SAIF and resolve the
current premium disparity by requiring savings institutions like the
Association to pay a one-time assessment to increase SAIF's reserves to $1.25
per $100 of deposits that is expected to be approximately 70 basis points on
the amount of deposits held by a SAIF-member institution. The payment of a
one-time fee would have the effect of immediately reducing the capital and
pre-tax earnings of SAIF-member institutions by the amount of the fee. Based
on the Association's assessable deposits of $281 million at June 30, 1996, a
one-time assessment of 70 basis points would equal approximately $2 million on
a pre-tax basis, or $1.3 million after tax. Management cannot predict whether
any legislation imposing such a fee will be enacted, or, if enacted, the
amount or timing of any one-time fee or whether ongoing SAIF premiums will be
reduced to a level equal to that of BIF premiums. See "REGULATION."
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Selected Consolidated Financial Information
This information is incorporated by reference from page 2 of the 1996
Annual Report to Stockholders ("Annual Report") attached hereto as Exhibit 13.
Yields Earned and Rates Paid
This information is incorporated by reference from page 8 of the Annual
Report attached hereto as Exhibit 13.
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Interest Rate Sensitivity of Net Portfolio Value
<TABLE>
The table below measures interest rate risk by estimating the change in market value of the Association
assets, liabilities, and off-balance sheet contracts in response to an instantaneous change in the general
level of interest rates. The procedure for measuring interest rate risk was developed by the OTS to replace
the "gap" analysis (the difference between interest-earning assets and interest-bearing liabilities that
mature or reprice within a specific time period). The model first estimates the level of the Association
net portfolio value ("NPV") (market value of assets, less market value of liabilities, plus or minus the
market value of any off-balance sheet items) under the current rate environment. In general, market values
are estimated by discounting the estimated cash flows of each instrument by appropriate discount rates. The
model then recalculates the Association NPV under different interest rate scenarios. The change in NPV
under the different interest rate scenarios provides a measure of the Association exposure to interest rate
risk. The data presented below is as of June 30, 1996.
-400 -300 -200 -100 +100 +200 +300 +400
Basis Basis Basis Basis No Basis Basis Basis Basis
Points Points Points Points Change Points Points Points Points
(In thousands)
ASSETS
Mortgage loans
and
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
securities $259,024 $256,044 $253,104 $248,544 $241,962 $234,222 $225,975 $217,638 $209,464
Non-mortgage
loans 16,193 15,835 15,491 15,161 14,844 14,539 14,247 13,965 13,694
Cash, deposits
and
securities 60,577 58,961 57,420 55,953 54,550 53,162 51,774 50,416 49,112
Repossessed
assets 25 25 25 25 25 25 25 25 25
Premises and
equipment 4,381 4,381 4,381 4,381 4,381 4,381 4,381 4,381 4,381
Other assets 4,553 4,885 5,592 7,056 8,685 10,265 11,746 13,137 14,431
TOTAL $344,753 $340,131 $336,013 $331,120 $324,447 $316,594 $308,148 $299,562 $291,107
LIABILITIES
Deposits $291,068 $289,041 $287,043 $285,096 $283,179 $281,302 $279,460 $277,650 $275,882
Borrowings -- -- -- -- -- -- -- -- --
Other
liabilities 2,754 2,754 2,754 2,754 2,754 2,754 2,754 2,754 2,754
TOTAL $293,822 $291,795 $289,797 $287,850 $285,933 $284,056 $282,214 $280,404 $278,636
OFF BALANCE SHEET
POSITIONS $ 666 $ 505 $ 361 $ 199 $ (17) $ (254) $ (491) $ (720) $ (942)
NET PORTFOLIO
VALUE $ 51,597 $ 48,841 $ 46,577 $ 43,469 $ 38,497 $ 32,284 $ 25,443 $ 18,438 $ 11,529
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Lending Activities
General. First Federal originates loans through its 11 offices located
in Anderson, Abbeville and Greenwood counties of South Carolina. The
Association also originates loans in Oconee, Pickens, Greenville and Laurens
counties of South Carolina. In addition, the Association has agreements with
correspondents to originate loans on its behalf primarily in Greenville,
Columbia and Charleston, South Carolina and Charlotte, North Carolina.
The principal lending activity of the Association is the origination of
conventional mortgage loans (which are not insured or guaranteed by federal
agencies) for the purpose of purchasing, constructing or refinancing
owner-occupied, one- to four- family residential property in its primary
market areas. The Association also originates consumer and commercial loans
in amounts generally less than $500,000.
Since 1982, the Association has placed a growing emphasis on the
origination of adjustable-rate mortgage ("ARM") loan products in order to
increase the interest rate sensitivity of its loan portfolio. At June 30,
1996, ARM loans accounted for 48% of the total loan portfolio compared to 39%
at June 30, 1995. During fiscal 1996, the production of ARM loans surpassed
that of fixed-rate loans.
It is management's intention, subject to market conditions, that First
Federal will remain a retail financial institution originating long-term
mortgage loans for the purchase, construction or refinance of one- to four-
family residential real estate, small commercial and consumer loans.
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<TABLE>
Loan Portfolio Analysis. The following table sets forth the composition of the Association's loan portfolio
at the dates indicated.
At June 30,
1992 1993 1994 1995 1996
Amount Percent Amount Percent Amount Percent Amount Percent Amount Percent
(Dollars in thousands)
Mortgage Loans:
One- to four-
family
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
dwellings $197,183 84% $177,019 84% $156,141 82% $181,119 83% $209,810 84%
Construction 2,429 1 2,457 1 3,444 2 10,600 5 14,220 6
Commercial
real estate 8,062 4 8,178 4 5,262 3 4,070 2 2,022 1
Other real
estate 782 -- 561 -- 494 -- 456 - 686 --
Total
mortgage
loans. 208,456 89 188,215 89 165,341 87 196,245 90 226,738 91
Other Loans:
Home
equity 8,209 3 8,516 4 14,023 8 15,492 7 15,092 6
Automobile
loans 10,958 5 7,477 4 4,463 2 2,966 1 2,669 1
Savings
accounts 1,660 1 1,760 1 1,408 1 1,193 1 1,202 --
Other
consumer loans 2,246 1 2,771 1 2,372 1 1,722 1 1,354 1
Total
consumer
loans 23,073 10 20,524 10 22,266 12 21,373 10 20,317 8
Commercial
loans 2,192 1 2,327 1 1,410 1 1,506 - 3,496 1
Total loans 233,721 100% 211,066 100% 189,017 100% 219,124 100% 250,551 100%
Less:
Undisbursed
loans in
process 2,168 1,187 2,600 6,492 9,059
Unearned
discounts on
consumer and
commercial
loans 2,289 1,293 623 291 141
Unearned
discounts
on loans
purchased 4,012 3,350 2,735 2,123 1,348
Unamortized
loan
origination
fees, net of
direct costs 280 522 657 508 433
Allowance for
loan losses 270 843 914 1,062 1,233
Total loans
receivable,
net $224,702 $203,871 $181,488 $208,648 $238,337
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<TABLE>
The following table sets forth the amount of fixed-rate and adjustable-rate loans included in the
Association's total loan portfolio (net of undisbursed loans in process and unearned discounts on consumer
and commercial loans) at the dates indicated.
At June 30,
1992 1993 1994 1995 1996
Amount Percent Amount Percent Amount Percent Amount Percent Amount Percent
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Fixed rate $149,284 65% $145,146 70% $131,664 71% $128,649 61% $126,088 52%
Adjustable-
rate 79,980 35 63,440 30 54,130 29 83,692 39 115,263 48
Total $229,264 100% $208,586 100% $185,794 100% $212,341 100% $241,351 100%
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One- to Four- Family Residential Loans. The primary lending activity of
the Association is the origination of mortgage loans to enable borrowers to
purchase or construct one- to four- family homes. Management believes that
this policy of focusing on one- to four- family residential mortgage loans
located in its primary market area has been successful in contributing to
interest income while keeping delinquencies and losses to a minimum. At June
30, 1996, approximately $210 million, or 84%, of the Association's total loan
portfolio consisted of loans secured by one- to four- family residential real
estate.
The Association presently originates both fixed-rate mortgage loans and
ARM loans secured by single-family properties with terms of 15 to 30 years.
Borrower demand for ARM loans versus fixed-rate mortgage loans is a function
of the level of interest rates, the expectations of changes in the level of
interest rates and the difference between the initial interest rates and fees
charged for each type of loan. The relative amount of fixed-rate mortgage
loans and ARM loans that can be originated at any time is largely determined
by the demand for each in a competitive environment. Loans to purchase one-
to four- family residences accounted for $29 million, or 45% of total mortgage
loan originations for the year ended June 30, 1996.
The Association qualifies the borrower based on the borrower's ability to
repay the loan using the first year adjusted rate on a one-year ARM loan and
the initial rate on a three-, five- or ten-year ARM loan. As a result, the
potential for delinquencies and defaults on ARM loans is lessened.
The loan fees charged, interest rates and other provisions of the
Association's ARM loans are determined by the Association on the basis of its
own pricing criteria and competitive market conditions. Interest rates and
payments on the Association's ARM loans generally are adjusted annually or
tri-annually after the initial period to a rate typically equal to 275 to 325
basis points above the one-year constant maturity U.S. Treasury index.
The Association began offering ARM loans in the early 1980s and currently
offers ARM loans with initial rates below those which would prevail under the
foregoing computations, determined by the Association based on market factors
and competitive rates for loans having similar features offered by other
lenders for such initial periods. The Association has offered one and three
year ARM loans for several years. In July 1994, the Association began
offering 5/1 and 10/1 ARM loans (i.e., loans with initial rates fixed for five
or 10 years before adjusting on an annual basis thereafter). At June 30,
1996, the initial interest rates on the Association's ARM loans ranged from 6%
to 8% per annum. The periodic interest rate caps (the maximum amount by which
the interest rate may be increased or decreased in a given period) on the
Association's ARM loans is generally 100 to 200 basis points per adjustment
period and the lifetime interest rate cap is generally 450 to 600 basis points
over the initial interest rate of the loan. The Association does not
originate negative amortization loans. The terms and conditions of the ARM
loans offered by the Association, including the index for interest rates, may
vary from time to time. However, the Association intends, subject to market
conditions, to emphasize the origination of ARM loans. The Association
believes that such loans provide protection to the Association against
increases in interest rates. The adjustment feature of such loans also
provides greater flexibility to meet competitive conditions as to initial rate
concessions while preserving the Association's return on equity objectives by
limiting the duration of the initial rate concession.
While single-family residential real estate loans are normally originated
with 15- and 30-year terms and the Association permits its ARM loans to be
assumed by qualified borrowers, such loans typically remain outstanding for
substantially shorter periods. This is because borrowers often prepay their
loans in full upon sale of the property pledged as security or upon
refinancing the original loan. In addition, substantially all mortgage loans
in the Association's loan portfolio contain due-on-sale clauses providing that
the Association may declare the unpaid amount due and payable upon the sale of
the property securing the loan. The Association enforces these due-on-sale
clauses to the extent permitted by law and as business judgement dictates.
Thus, average loan maturity is a function of, among other factors, the level
of purchase and sale activity in the real estate market, prevailing interest
rates and the interest rates payable on outstanding loans.
First Federal originated $44 million of one- to four- family ARM loans
during the fiscal year ended June 30, 1996. The retention of ARM loans in the
Association's loan portfolio helps reduce the Association's exposure
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to changes in the interest rates. There are, however, unquantifiable credit
risks resulting from the potential of increased costs due to changing rates to
be paid by the customer. It is possible that, during periods of rising
interest rates, the risk of default on ARM loans may increase as a result of
repricing and the increased costs to the borrower. Furthermore, as a
marketing incentive, the ARM loans originated by First Federal generally
provide for initial rates of interest below the rates which would apply were
the adjustment index used for pricing initially (discounting). Because of
this, these loans are subject to increased risks of default or delinquency.
Another consideration is that although ARM loans allow the Association to
increase the sensitivity of its asset base to changes in the interest rates,
the extent of this interest sensitivity is limited by the periodic and
lifetime interest rate adjustment limits. Because of these considerations,
the Association has no assurance that yields on ARM loans will be sufficient
to offset increases in the Association's cost of funds.
First Federal also originates conventional fixed-rate mortgage loans on
one- to four- family residential properties. Most fixed-rate products are
underwritten according to the Federal Home Loan Mortgage Corporation's
("FHLMC") guidelines, utilizing their approved documents, so that the loans
qualify for sale in the secondary mortgage market. The Association originates
and holds its fixed-rate mortgage loans as long-term investments, but has the
capacity to sell these loans as deemed necessary by management. First Federal
originated $20 million of fixed-rate mortgage loans during the fiscal year
ending June 30, 1996. Of these, 73% had initial maturities of 15 years or
less.
The Association requires either title insurance or an attorney's title
opinion assuring the status of its lien on all real estate secured loans and
also requires that the fire and extended coverage insurance (and, if
appropriate, flood insurance) be maintained in an amount at least equal to the
outstanding loan balance.
The Association's lending policies generally limit the maximum
loan-to-value ratio on mortgage loans secured by owner-occupied properties to
95% of the lesser of the appraisal value or the purchase price, with the
condition that private mortgage insurance is required on loans with
loan-to-value ratios of greater than 80%. The maximum financing on refinance
loans is limited to either 90% of the appraised value and such loans require
private mortgage insurance above 80% loan to value.
Construction Loans. The Association originates construction mortgage
loans to residential owner-occupants (custom construction loans) and, on a
limited basis, commercial and multi-family properties primarily in the
Association's market area. Approximately $19 million, or 30% of the loans
originated by the Association for the year ended June 30, 1996 were
construction loans. At June 30, 1996, there were $691,000 of commitments to
provide additional construction loans. At June 30, 1996, $14 million, or 6%,
of total loans were construction loans, all of which were
construction/permanent loans (i.e., structured to become permanent loans upon
the completion of the construction). The Association has a program to provide
financing for speculative housing construction to selected contractors on a
limited basis. All construction loans are secured by a first lien on the
property under construction.
Construction lending is generally considered to involve a higher degree
of credit risk than other long-term financing of residential properties. The
Association's risk of loss on a construction loan is dependent largely upon
the accuracy of the initial estimate of the property's value at completion of
construction and the estimated cost (including interest) of construction. The
Association has sought to minimize the risks associated with construction
lending by limiting construction loans to qualified owner-occupied borrowers
with construction performed by qualified state licensed builders located
primarily in the Association's market area.
The Association's underwriting criteria are designed to evaluate and
minimize the risks of each construction loan. Interim construction loans are
qualified at permanent rates in order to ensure the capability of the borrower
to repay the loan.
Loan proceeds are disbursed only as construction progresses and
inspections warrant. These loans are either fixed-rate or ARM loans,
underwritten to the same standards and to the same terms and requirements
except the loans provide for disbursement of funds during a construction
period of up to one year. During this period, the
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borrower is required to make monthly payments of accrued interest on the
outstanding loan balance. Disbursements during the construction period are
limited to no more than 80%. Up to 95% loan to value upon completion of
construction, may be disbursed if private mortgage insurance above 80% loan to
value is in place.
Commercial Real Estate Loans. First Federal has historically engaged in
a limited amount of commercial real estate lending. At June 30, 1996,
commercial real estate loans in First Federal's portfolio totalled $2 million
with most of the properties securing these loans located in South Carolina.
This lending has involved loans secured principally by churches, apartment
buildings, and owner occupied/rental commercial buildings. Generally, these
loans are made for a period of 20 years or less, with a loan-to-value ratio of
80% or less, with a fixed- or adjustable-rate indexed to the One or Three Year
Treasury Index.
At June 30, 1996, the largest single commercial real estate loan was for
expansion and improvements to an existing church facility in Anderson, South
Carolina. The total amount of the commitment is $900,000. At June 30, 1996,
the amount disbursed under the construction agreement was $469,000.
Loans secured by commercial real estate generally are larger and involve
greater risks than one- to four- family residential mortgage loans. Payments
on loans secured by such properties are often dependent on successful
operation or management of the properties. Repayment of such loans may be
subject to a greater extent to adverse conditions in the real estate market or
the economy. The Association seeks to minimize these risks in a variety of
ways, including limiting the size of such loans and strictly scrutinizing the
financial condition of the borrower, the quality of the collateral and the
management of the property securing the loan. The Association also obtains
loan guarantees from financially capable parties. Substantially all of the
properties securing the Association's commercial and multi-family real estate
loans are inspected by the Association's lending personnel before the loan is
made. The Association also obtains appraisals on each property in accordance
with applicable regulations.
Consumer Loans. Consumer lending has been an important part of First
Federal's business. Consumer loans generally have shorter terms to maturity
or repricing and higher interest rates than the long-term, fixed-rate mortgage
loans. The Association's consumer loans consist of automobile loans, loans
secured by mortgages on residences, savings account loans, and unsecured loans
for any personal or household purposes. At June 30, 1996, the Association's
consumer loans totaled approximately $20 million, or 8%, of the Association's
loans receivable. Subject to market conditions, management expects to
continue to market and originate consumer loans as part of its strategy to
provide a wide range of personal financial services to its depository customer
base and as a means to enhance the interest rate sensitivity of the
Association's interest-earning assets and its interest rate spread.
Automobile loans are secured by both new and used cars and light trucks
and are generally limited to 80% of the "sticker price" or dealer invoice, or
the loan value as published by National Automobile Dealers Association or
National Auto Research "Black Book." Automobile loans are only made to the
borrower-owners on a direct basis or indirectly through designated automobile
dealerships using the Association's underwriting standards. New cars are
financed for a period of up to 60 months while used cars are financed for 54
months or less depending on the year and model. Collision and comprehensive
insurance and vendor single interest coverage is required on all automobile
loans. Loans acquired through indirect lending have declined with
management's decision to discontinue indirect lending at this time.
The Association offers closed-end, fixed-rate and open-end, variable rate
home equity loans that are made on the security of residences. Loans normally
do not exceed 80% of the appraised value of the residence, less the
outstanding principal of the first mortgage and have terms of up to 15 years
requiring monthly payments of principal and interest. At June 30, 1996, total
outstanding consumer home equity loans amounted to $15 million, or 6%, of
total loans of the Association.
The Association makes savings account loans for up to 90% of the
depositor's savings account balance. The interest rate is normally 2% above
the rate paid on the savings account but not less than prime, and the account
must be pledged as collateral to secure the loan. Savings account loans are
payable in monthly payments of principal
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and interest or in a single payment. At June 30, 1996, total loans on savings
accounts amounted to $1 million, or less than 1%, of the Association's total
loans.
The Association recently began offering "First Ready Reserve," an
unsecured line of credit to guard against checking customer overdrafts. At
June 30, 1996, outstanding balances totaled $39,000.
Consumer loans entail greater risk than do residential mortgage loans,
particularly in the case of consumer loans which are unsecured or 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. The remaining
deficiency often does not warrant further substantial collection efforts
against the borrower beyond obtaining a deficiency judgment. In addition,
consumer loan collections are dependent on the borrower's continuing financial
stability, and thus are more likely to be adversely affected by job loss,
divorce, illness or personal bankruptcy. Furthermore, the application of
various federal and state laws, including federal and state bankruptcy and
insolvency laws, may limit the amount which can be recovered on such loans.
Such loans may also give rise to claims and defenses by a consumer loan
borrower against an assignee of such loans such as the Association, and a
borrower may be able to assert against such assignee claims and defenses that
it has against the seller of the underlying collateral. At June 30, 1996,
only $15,000 of the Association's consumer loan portfolio was 90 days or more
past due.
Commercial Loans. As a federally chartered savings institution, the
Association is authorized to invest up to 10% of its assets in commercial
loans not secured by real property. First Federal offers a variety of
business loans, including farm loans, equipment loans, inventory loans and
occasionally letters of credit. Commercial loans are primarily offered as an
accommodation to existing customers and are offered on a secured and unsecured
bases. At June 30, 1996, the total commercial loan portfolio was $3 million,
or 1%, of total loans. The largest commercial non-real estate loan was a $1.8
million non-purpose loan secured by class I collateral consisting of stocks
listed on the New York Stock Exchange and bonds. The outstanding balance at
June 30, 1996 was $1.6 million.
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Loan Maturity and Repricing
<TABLE>
The following table sets forth certain information at June 30, 1996 regarding the dollar amount of
loans maturing in the Association's portfolio based on their contractual terms to maturity, but does not
include scheduled payments or potential prepayments. Demand loans and loans having no stated schedule of
repayments and no stated maturity are reported as due in one year or less. Construction loans are presented
net of undisbursed proceeds. Consumer loans are presented net of unearned discounts.
Within After One Year After 3 Years After 5 Years After 10 Years Beyond
One Year Through 3 Years Through 5 Years Through 10 Years Through 20 Years 20 Years Total
(Dollars in thousands)
Real estate
<S> <C> <C> <C> <C> <C> <C> <C>
mortgage $ 72 $ 610 $3,497 $18,522 $68,136 $119,659 $210,496
Commercial
real
estate 209 451 1,194 102 51 15 2,022
Construction 5,161 -- -- -- -- -- 5,161
Consumer 5,627 2,827 2,684 5,361 3,677 -- 20,176
Commercial 2,622 343 272 259 -- -- 3,496
Total
loans $13,691 $4,231 $7,647 $24,244 $71,864 $119,674 $241,351
The amount of loans as of June 30, 1996 due after June 30, 1997, which have fixed interest rates and
have floating or adjustable interest rates were $119 million and $109 million, respectively.
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Loan Solicitation and Processing. Loan applicants come through direct
solicitation by Association personnel, referrals by realtors, builders,
previous and present customers and various media advertising promotions. All
types of loans may be originated in any of the Association's 11 offices.
Processing of mortgage loans are performed in the Greenwood office or in the
main office in Anderson, while consumer loans can be processed by each loan
officer in all 11 offices. All loans are serviced from the main office in
Anderson. Applications for fixed-rate and ARM loans on one- to four- family
properties are primarily underwritten and closed based on FHLMC standards, and
other loan applications are underwritten and closed based on the Association's
own guidelines.
The Association underwrites each individual loan file and performs
ride-by site inspections on 10% to 25% of the loans in each package of loans
that it purchases. Loans selected for site inspections are generally loans
with large principal balances or loan-to-value ratios exceeding 80%.
Upon receipt of a loan application from a prospective borrower, a credit
report and other data are obtained to verify specific information relating to
the loan applicant's employment, income and credit standing. An appraisal of
the real estate offered as collateral is undertaken by a fee appraiser
approved by First Federal and licensed or certified by the State of South
Carolina.
Residential loans up to $150,000 may be approved by any two members of
the Loan Committee. Residential loans between $150,000 and $300,000 must be
approved by two members of the Board of Directors. Residential loans in
excess of $300,000 must be approved by the full Board of Directors or the
Executive Committee acting on behalf of the Board.
Consumer and commercial loans not exceeding $100,000 are approved by loan
officers based on their pre-approved lending limits. Loans over $100,000
through $150,000 require the approval of two members of the Board of
Directors. Loans in excess of $150,000 requires the approval of the Board of
Directors or its appointees.
Loan applicants are promptly notified of the decision of the Association.
Interest rates are subject to change if the approved loan is not closed within
the time of the commitment.
Loan Originations, Sales and Purchases. The Association originates fixed
and adjustable rate residential mortgage loans that meet or exceed the
applicable underwriting requirements of the FHLMC. During the year ended June
30, 1996 the Association did not sell any loans. The total of loans serviced
for others as of June 30, 1996 was approximately $4 million.
During the year ended June 30, 1996, the Association's total mortgage
loan originations were $64 million, of which 69% were subject to periodic
interest rate adjustments and 31% were fixed rate loans.
Beginning in the late 1970s, the Association began purchasing loan
participations because the Association's traditional deposit sources of funds
began to outpace the demand for loans in its primary market area. As interest
rates increased during the 1980s, the Association experienced higher deposit
inflows and reduced loan demand. As a result, the Association purchased a
number of packages of deeply discounted whole loans. During 1985 through
1986, the Association focused on improving the interest rate sensitivity of
its assets and purchased packages of ARM loans. Subsequent to this period,
the Association has established a small network for purchasing ARM loans which
involved institutions located in selected Southeastern states.
In addition to selling loans, First Federal has purchased in the
secondary market ARM loans secured by single-family residential properties
located outside of its primary market area. The Association's purchases in
the secondary market are dependent upon the demand for mortgage credit in the
local market area and the availability of suitable loan product being offered
for sale.
The Association purchases primarily single-family owner-occupied ARM
loans on primary residences. These loans typically have adjustment periods of
from one to three years. The Association seeks loans primarily
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in the Southeast (excluding Florida), but has also purchased selected loans in
areas from Pennsylvania to New England.
During the year ended June 30, 1996, the Association purchased loans
totaling $5 million. At June 30, 1996, 71% of purchased loans were ARM loans.
During the year ended June 30, 1996, the Association's loan portfolio
grew by $30 million, or 14% as a result of increased loan originations.
Mortgage loan originations increased by $11 million over 1995. Principal
repayments increased by $14 million over 1995. Lower mortgage rates and
increased refinancing during the year contributed to the increases in both
originations and repayments.
To supplement the local production, the Association has established a
network of correspondents to originate ARM loans. While the marketplace
favors fixed-rate mortgage products, management seeks the interest rate
sensitivity of the ARM loans to reduce market rate risk. Additionally, to
attempt to increase originations further, the Association offers 3/1, 5/1 and
10/1 ARM loans and open-end home equity loans. These loans have helped
management meet community needs, broaden the Association's customer base and
add additional lines of business. In addition, management is also reviewing
its options for increased production of existing products.
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The following table shows the location of the real estate securing
purchased participation and whole loans and the delinquency experienced on
these loans at the dates indicated.
At June 30,
1994 1995 1996
% of % of % of
Total Total Total
Real Real Real
Estate Estate Estate
Amount Loans Amount Loans Amount Loans
(Dollars in thousands)
Purchased
Participation
Loans
Southeast(1) $ 529 --% $ 402 --% $ 322 --%
South
Carolina 3,601 3 2,927 2 1,372 1
Total $4,130 3% $3,329 2% $1,694 1%
Purchased Whole
Loans
New
England(2) $5,945 4% $5,203 3% $2,206 1%
Midwest(3) 512 -- 406 -- 300 --
Mid
Atlantic(4) 5,641 3 4,292 2 3,425 2
Southeast(1) 13,208 8 10,821 5 7,298 3
South
Carolina 10,221 6 11,313 6 13,889 6
Total $35,527 21% $32,035 16% $27,118 12%
Total purchased
participation
and whole
loans $39,657 24% $35,364 18% $28,812 13%
Percent of
total loans 21% 16% 11%
Purchased
participation
loans 90 days
or more
delinquent $ -- $ -- $ --
Purchase whole
loans 90 days
or more
delinquent 143 646 38
Total purchased
participation
and whole
loans 90 days
or more
delinquent $ 143 $ 646 $ 38
Percent of
total loans .08% .29% .02%
(1) Primarily includes loans secured by properties in Alabama, Florida,
Georgia, North Carolina and Virginia.
(2) Primarily includes loans secured by properties in Connecticut, Maine,
Massachusetts, New Hampshire and Rhode Island.
(3) Primarily includes loans secured by properties in Indiana and North
Dakota.
(4) Primarily includes loans secured by properties in Maryland, New Jersey,
Pennsylvania, West Virginia and the District of Columbia.
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The following table shows total mortgage loans originated, purchased,
sold and repaid during the periods indicated.
Years Ended June 30,
1994 1995 1996
(In thousands)
Total mortgage
loans at
beginning
of period $188,215 $165,341 $196,245
Loans originated:
Single-family
residential 18,371 36,334 44,828
Multi-family
residential and
commercial
real estate -- -- --
Construction
loans 5,773 16,813 19,304
Other loans 145 135 198
Total loans
originated 24,289 53,282 64,330
Single-family
residential
loans purchased -- 3,250 5,428
Total whole
loans sold (1,921) -- --
Mortgage loan
principal
repayments (45,915) (25,720) (39,466)
Other 673 92 201
Net loan
activity (22,874) 30,904 30,493
Total mortgage
loans at end
of period $165,341 $196,245 $226,738
Loan Commitments. The Association issues commitments for fixed- and
adjustable-rate single-family residential mortgage loans conditioned upon the
occurrence of certain events. Such commitments are made in writing on
specified terms and conditions and are honored for up to 60 days from
application. The Association had outstanding loan commitments of
approximately $3.6 million at June 30, 1996. Also, the Association had
undisbursed advances on consumer lines of credit of $6 million at June 30,
1996. See Notes 21 and 22 of the Notes to Consolidated Financial Statements
contained in the Annual Report.
Loan Origination and Other Fees. The Association, in some instances,
receives loan origination fees and discount "points." Loan fees and points
are a percentage of the principal amount of the mortgage loan which are
charged to the borrower for funding the loan. The amount of points charged by
the Association varies, though the range generally is between 0 and 2.5
points. Current accounting standards require fees received (net of certain
loan origination costs) for originating loans to be deferred and amortized
into interest income over the contractual life of the loan. Net deferred fees
associated with loans that are prepaid are recognized as income at the time of
prepayment. The Association had $559,000 of net deferred mortgage loan fees
and $126,000 of deferred consumer loan expense at June 30, 1996.
The Association also receives loan servicing fees on the loans it sells
by retaining servicing responsibilities.
Nonperforming Assets and Delinquencies. When a mortgage loan borrower
fails to make a required payment when due, the Association institutes
collection procedures. The first notice is mailed to the borrower 16 days
after the payment due date and, if necessary, a second written notice follows
by the 10th day of the following month. Attempts to contact the borrower by
telephone generally begin approximately 15 days after the 10th day notice is
mailed to the borrower. If a satisfactory response is not obtained,
continuous follow-up contacts are
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attempted until the loan has been brought current or an agreement is made.
Before the 90th day of delinquency, attempts to interview the borrower,
preferably in person, are made to establish (i) the cause of the delinquency,
(ii) whether the cause is temporary, (iii) the attitude of the borrower toward
the debt, and (iv) a mutually satisfactory arrangement for curing the default.
Also, in the case of second mortgage loans, before the 90th day of
delinquency, all superior lienholders are contacted to determine (a) the
status and unpaid principal balance of each superior lien, (b) whether any
mortgage constituting a superior lien has been sold to any investor, and (c)
whether the borrower is also delinquent under a superior lien and what the
affected lienholder intends to do to resolve the delinquency.
If the borrower cannot be reached and does not respond to collection
efforts, a personal collection visit or property inspection is made. The
physical condition and occupancy status of the property is determined before
recommending further servicing action. Such inspection normally takes place
before the 90th day of delinquency. By the 30th day of delinquency, the
Association notifies the borrower that home ownership counseling is available
for eligible homeowners.
In most cases, delinquencies are cured promptly; however, if by the 90th
day of delinquency, or sooner if the borrower is chronically delinquent and
all reasonable means of obtaining payment on time have been exhausted,
foreclosure, according to the terms of the security instrument and applicable
law, is initiated. Interest income on loans is reduced by the full amount of
accrued and uncollected interest.
When a consumer loan borrower fails to make a required payment on a
consumer loan by the payment due date, the Association institutes collection
procedures. The first notice is mailed to the borrower 11 days following the
payment due date. The borrower is also contacted by the use of collection
letters, phone calls or personal visits to determine the nature of delinquency
and to agree on a method to cure the default.
In most cases, delinquencies are cured promptly; however, if, by the 15th
day following the grace period of delinquency no progress has been made, a
written notice is mailed informing the borrowers of their right to cure the
delinquency within 20 days and of the Association's intent to begin legal
action if the delinquency is not corrected. Depending on the type of property
held as collateral, the Association either obtains a judgment in small claims
court, takes action to repossess the collateral, or initiates a foreclosure
action.
The Association's Board of Directors is informed on a monthly basis as to
the status of all mortgage and consumer loans that are delinquent 30 days or
more, the status on all loans currently in foreclosure, and the status of all
foreclosed and repossessed property owned by the Association.
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The following table sets forth information with respect to the
Association's nonperforming assets at the dates indicated. At the dates
shown, the Association had no restructured loans within the meaning of SFAS
15.
At June 30,
1992 1993 1994 1995 1996
(Dollars in thousands)
Loans accounted for on
a nonaccrual basis:
Real estate -
Residential $397 $471 $179 $704 $584(1)
Commercial -- -- -- -- --
Commercial business -- -- -- -- --
Consumer -- -- -- -- --
Total $397 $471 $179 $704 $584
Accruing loans
which are
contractually
past due 90 days
or more:
Real estate -
Residential $ 89 $ -- $ -- $ -- $ --
Commercial -- -- -- -- --
Commercial
business -- -- -- -- --
Consumer 212 21 17 58 15
Total $301 $ 21 $ 17 $ 58 $ 15
Total of
nonaccrual
and 90 days past
due loans $698 $492 $196 $762 $599
Real estate owned 191 323 229 27 25
Other nonperforming
assets 77 48 5 -- --
Total
nonperforming
assets $966 $863 $430 $789 $624
Total loans delinquent
90 days or more
to total loans 0.30% 0.23% 0.10% 0.35% 0.24%
Total loans delinquent
90 days or more
to total assets 0.22% 0.16% 0.06% 0.22% 0.18%
Total nonperforming
assets to total
assets 0.30% 0.27% 0.13% 0.22% 0.19%
(1) $58,000 of interest income would have been recorded during the year ended
June 30, 1996 if these loans had been current, while only $37,000 was recorded
in net income for the period.
Real Estate Owned. Real estate acquired by the Association as a result
of foreclosure or by deed in lieu of foreclosure is classified as real estate
owned until it is sold. When property is acquired it is recorded at fair
value. Subsequent to foreclosure, the property is carried at the lower of
initial fair value or existing fair value less cost to sell (net realizable
value). Upon receipt of a new appraisal and market analysis, the carrying
value is written down through the establishment of a specific reserve to the
anticipated sales price less selling and holding costs. At June 30, 1996, the
Association had $25,000 of real estate owned.
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Asset Classification. The OTS has adopted various regulations regarding
problem assets of savings institutions. The regulations require that each
insured institution review and classify its assets on a regular basis. In
addition, in connection with examinations of insured institutions, OTS
examiners have authority to identify problem assets and, if appropriate,
require them to be classified. There are three classifications for problem
assets: substandard, doubtful and loss. Substandard assets must have one or
more defined weaknesses and are characterized by the distinct possibility that
the insured institution will sustain some loss if the deficiencies are not
corrected. Doubtful assets have the weaknesses of substandard assets with the
additional characteristic that the weaknesses make collection or liquidation
in full on the basis of currently existing facts, conditions and values
questionable, and there is a high possibility of loss. An asset classified
loss is considered uncollectible and of such little value that continuance as
an asset of the institution is not warranted. The regulations have also
created a special mention category, described as assets which do not currently
expose an insured institution to a sufficient degree of risk to warrant
classification but do possess credit deficiencies or potential weaknesses
deserving management's close attention. If an asset or portion thereof is
classified loss, the insured institution establishes specific allowances for
loan losses for the full amount of the portion of the asset classified loss.
A portion of general loan loss allowances established to cover possible losses
related to assets classified substandard or doubtful may be included in
determining an institution's regulatory capital, while specific valuation
allowances for loan losses generally do not qualify as regulatory capital.
The Association's senior officers meet monthly to review all classified
assets, to approve action plans developed to resolve the problems associated
with the assets and to review recommendations for new classifications, any
changes in classifications and recommendations for reserves.
At June 30, 1996, the Association's classified assets totaled
approximately $816,000 which includes classified loans and other real estate
owned of $791,000 and $25,000, for which specific loss allowances of $16,000
and $0, respectively, have been provided.
At June 30, 1995 and 1996, the aggregate amounts of the Association's
classified assets were as follows:
At June 30,
1995 1996
(In thousands)
Loss $ 7 $ 16
Doubtful -- --
Substandard assets 872 800
Special mention -- --
Loans classified above do not (i) represent or result from trends or
uncertainties which management reasonably expects will materially impact
future operating results, liquidity or capital resources, or (ii) represent
material credits about which management is aware of any information which
causes management to have serious doubts as to the ability of such borrowers
to comply with the loan repayment terms.
Allowance for Loan Losses. The Association has established a systematic
methodology for the determination of provisions for loan losses. The
methodology is set forth in a formal policy and takes into consideration the
need for an overall general valuation allowance as well as specific allowances
that are tied to individual loans.
In originating loans, the Association recognizes that losses will be
experienced and that the risk of loss will vary with among other things, the
type of loan being made, the creditworthiness of the borrower over the term of
the loan, general economic conditions and, in the case of a secured loan, the
quality of the security for the loan. The Association increases its allowance
for loan losses by charging provisions for possible loan losses against the
Association's income.
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At June 30, 1996, the Association's loan portfolio consisted of several
loans that were determined by management to have a certain element of risk
that may require the Association to establish additional allowances. These
loans included $27 million, or 12%, of the Association's loan portfolio that
were secured by properties located outside of the State of South Carolina.
The general valuation allowance is maintained to cover possible but
unidentified losses in the portfolio of performing loans. Management reviews
the adequacy of the allowance at least quarterly based on its knowledge of the
portfolio including current asset classifications, the Association's write-off
history, economic conditions affecting the real estate markets and industry
standards.
Specific valuation allowances are established to absorb losses on loans
for which full collectibility may not be reasonably assured. The amount of
the allowance is based on the estimated value of the collateral securing the
loan and other analyses pertinent to each situation.
A provision for losses is charged against income on a monthly basis to
maintain the allowances. The provisions for losses charged against income for
the years ended June 30, 1994, 1995 and 1996 were $225,000, $180,000 and
$180,000, respectively. At June 30, 1996, the Association had allowances for
loan losses of $1.2 million, which represented .49% of total loans.
Management believes that the amount maintained in the allowances will be
adequate to absorb possible losses in the portfolio.
Although management believes that it uses the best information available
to make such determinations, future adjustments to the allowance for loan
losses may be necessary and results of operations could be significantly and
adversely affected if circumstances differ substantially from the assumptions
used in making the determinations.
At June 30, 1996, based on the information available to the Association
at that time, the Association anticipates that it will have the following
approximate amounts of charge-offs against the Association's income during the
next full year of operations. The numbers in the table set forth below
represent projections based on management's best estimate of anticipated
charge-offs during the next year. No assurance can be given, however, that
the Association's future charge-off experience will match these projections.
Type of Loan Amount
(In thousands)
Mortgage Loans:
One- to four- family $ 20
Construction 10
Commercial real estate 20
Other real estate --
Consumer Loans:
Real estate 20
Automobile 40
Other 50
Commercial 20
Total $180
Charge-offs occur when loans with specific reserves are foreclosed. The
specific reserve, along with any additional amounts necessary to reduce the
carrying value to fair market value, is charged-off. The book value of the
foreclosed asset is thereafter carried at the lower of the asset's book value
or its net realizable value. When the asset is sold, any excess/(deficiency)
over the book value is reflected on the books as a gain/(loss) on the sale of
real estate owned.
The Association's market area is heavily concentrated in manufacturing,
although there are more than 200 different manufacturing firms that employ
over 20,000 people in Anderson County alone. The BMW automotive plant in
nearby Spartanburg County, approximately 45 miles from Anderson County, is
expected to attract additional support manufacturers to the upstate area of
South Carolina, including Anderson County which is in the Interstate-85
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corridor halfway between Atlanta, Georgia and Charlotte, North Carolina. Real
estate values have been stable to slightly increasing over the past three
years.
There can be no assurance as to the future performance of real estate
markets, including those in which the Association primarily operates. A
downturn in the South Carolina real estate markets could have a material
adverse effect on the Association's operations. For example, depressed real
estate values may result in increases in nonperforming assets, hamper
disposition of such nonperforming assets and result in losses upon such
disposition.
While the Association believes it has established its existing allowance
for loan losses in accordance with GAAP, there can be no assurance that
regulators, in reviewing the Association's loan portfolio, will not request
the Association to increase significantly its allowance for loan losses. In
addition, because future events affecting borrowers and collateral cannot be
predicted with certainty, there can be no assurance that the existing
allowance for loan losses is adequate or that substantial increases will not
be necessary should the quality of any loans deteriorate as a result of the
factors discussed above. Any material increase in the allowance for loan
losses may adversely affect the Association's financial condition and results
of operations.
The following table sets forth an analysis of the Association's gross
allowance for possible loan losses for the periods indicated. Where specific
loan loss reserves have been established, any difference between the loss
reserve and the amount of loss realized has been charged or credited to
current income.
Years Ended June 30,
1992 1993 1994 1995 1996
(Dollars in thousands)
Allowance at beginning
of period $369 $270 $843 $ 914 $1,062
Provision for loan
losses 175 805 225 180 180
Recoveries 3 4 30 52 35
Charge-offs:
Mortgage -- -- -- -- 12
Commercial 1 -- -- 25 --
Consumer 276 236 184 59 32
Total charge-offs 277 236 184 84 44
Net charge-offs 274 232 154 32 9
Balance at end
of period $270 $843 $914 $1,062 $1,233
Ratio of allowance
to total loans
outstanding at the
end of the period .12% .40% .48% .48% .49%
Ratio of net charge-
offs to average
net loans outstanding
during the period .11% .11% .08% .02% --
Mortgage-Backed Securities. To supplement lending activities in periods
of deposit growth and/or declining loan demand, the Corporation has invested
in residential mortgage-backed securities. Although such securities are held
for investment, they can serve as collateral for borrowings and, through
repayments, as a source of liquidity. For information regarding the carrying
and market values of the Corporation's mortgage-backed securities portfolio,
see Note 4 of the Notes to Consolidated Financial Statements in the Annual
Report. The Corporation invests in mortgaged-backed securities guaranteed by
FHLMC and the Federal National Mortgage Association ("FNMA").
Mortgage-backed securities are generally fixed- or adjustable-rate
instruments with terms up to 30 years. The value of fixed-rate securities
fluctuates with changes in market interest rates. Also, prepayments of the
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mortgages which collateralize adjustable-rate securities typically increase
during periods of lower interest rates. Increased prepayments affect the
carrying values and yields on these securities.
As of June 30, 1996, the Corporation's portfolio included $18 million of
mortgage-backed securities purchased as investments to supplement the
Corporation's mortgage lending activities. These mortgage-backed securities
were comprised of 84% adjustable-rate and 16% fixed-rate securities. As of
June 30, 1996, the Corporation owned no collateralized mortgage obligations.
Investment Activities
Federal savings and loan associations have authority to invest in various
types of liquid assets, including United States Treasury obligations,
securities of various federal agencies and of state and municipal governments,
deposits at the FHLB-Atlanta, certificates of deposit of federally insured
institutions, certain bankers' acceptances and federal funds. Subject to
various restrictions, such savings institutions may also invest a portion of
their assets in commercial paper, corporate debt securities and mutual funds,
the assets of which conform to the investments that federally chartered
savings institutions are otherwise authorized to make directly. Savings
institutions are also required to maintain minimum levels of liquid assets
which vary from time to time. See "REGULATION -- Federal Home Loan Bank
System." The Association may decide to increase its liquidity above the
required levels depending upon the availability of funds and comparative
yields on investments in relation to return on loans.
The Association is required under federal regulations to maintain a
minimum amount of liquid assets and is also permitted to make certain other
securities investments. See "REGULATION." The balance of the Association's
investments in short-term securities in excess of regulatory requirements
reflects management's response to the significantly increasing percentage of
deposits with short maturities. At June 30, 1996, the Association's
regulatory liquidity was 13%, which exceeds the 5% required by OTS regulations
and the 12% target level established by the Association. It is the intention
of management to hold securities with short-term maturities in the
Association's investment portfolio in order to enable the Association to
provide liquidity and to match more closely the interest-rate sensitivities of
its assets and liabilities.
The Asset Liability Committee ("ALCO"), comprised of the Association's
President, Executive Vice President and other Vice Presidents, determines
appropriate investments in accordance with the Board of Directors' approved
investment policies and procedures.
Investments are made following certain considerations, which include the
Association's liquidity position and anticipated cash needs and sources (which
in turn include outstanding commitments, upcoming maturities, estimated
deposits, anticipated loan amortization and repayments, and amortization of
mortgage-backed securities). Further, the effect that the proposed investment
would have on the Association's "gap" position, credit and interest rate risk,
and risk-based capital is given consideration during the evaluation. The
interest rate, yield, settlement date and maturity are also reviewed.
All book entry securities purchases are settled delivery versus payment
and placed in safekeeping at the Federal Reserve Bank of Richmond
("FRB-Richmond"). Securities not eligible for safekeeping at the FRB-Richmond
are held at a commercial bank. At June 30, 1996, the combined securities
portfolio of the Association and the Corporation totaled approximately $51
million and consisted principally of Treasury securities, U.S. Government
agency securities, mutual funds and insured certificates of deposit.
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The following table sets forth the Corporation's investment securities
portfolio at carrying value at the dates indicated.
At June 30,
1994 1995 1996
Book Percent of Book Percent of Book Percent of
Value(1) Portfolio Value(1) Portfolio Value(1) Portfolio
(Dollars in thousands)
Investment
securities:
Insured
certificates
of deposit $ 9,606 10% $ 6,127 7% $ 5,679 11%
U.S. government
treasury and
obligations
of U.S.
government
agencies 58,741 60 54,933 61 17,995 35
Municipal
bonds 606 1 489 1 -- --
Other debt
securities 1,000 1 -- -- -- --
Subtotal 69,953 72 61,549 69 23,674 46
Securities
available
for sale:
U.S. government
treasury and
obligations
of U.S.
government
agencies -- -- -- -- 27,316 54
Mutual funds 27,825 28 28,285 31 -- --
Subtotal 27,825 28 28,285 31 27,316 54
Total $97,778 100% $ 89,834 100% $50,990 100%
________________
(1) The market value of the Corporation's investment securities
portfolio amounted to $69 million, $61 million and $23 million at
June 30, 1994, 1995 and 1996, respectively.
The following table sets forth the maturities and weighted average yields
of the securities in the Corporation's investment securities portfolio at June
30, 1996.
Less Than One to Five to Greater than
One Year Five Years Ten Years Ten Years
Amount Yield Amount Yield Amount Yield Amount Yield
(Dollars in thousands)
Investment
securities:
Insured certificates
of deposit $5,579 5.20% $ 100 6.10% $ -- --% $ -- --%
U.S. government
treasury and
obligations of
U.S. government
agencies -- -- 1,000 6.33 7,995 6.59 9,000 7.23
Subtotal 5,579 1,100 7,995 9,000
Securities available
for sale:
U.S. government
treasury and
obligations of U.S.
government
agencies 16,126 5.49 6,190 6.96 5,000 8.00 -- --
Total $21,705 $7,290 $12,995 $9,000
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There was no security held by the Association as of June 30, 1996, other
than U.S. Government and agency securities, which had an aggregate book value
in excess of 10% of the Association's retained earnings.
Subsidiary Activities
General. Federal associations generally may invest up to 3% of their
assets in service corporations, provided that at least one-half of any amount
in excess of 1% is used primarily for community, inner-city and community
development projects. The Association's investment in its service corporation
at June 30, 1996 did not exceed the limits applicable to federal savings and
loan associations.
First Federal is the 100% owner of First Master Service Corporation
("First Master"), a South Carolina corporation, which was incorporated in
1984. At June 30, 1996, the Association had $1,000 invested in First Master's
common stock and $271,000 of equity interest in First Master's accumulated
losses. First Master is principally engaged in real estate development and
leasing activities. The Association has advanced funds to First Master for
acquisition of properties and operations. These funds were advanced on an
unsecured basis at a rate of interest indexed to the Association's costs of
funds. The amount of advances outstanding at June 30, 1996 is $987,000. From
November 1984 to November 1987, First Master acquired 45.6 acres of
undeveloped real estate. The property, consisting of 11.6 acres of prime
commercial land and 34 acres of residential or other purpose land,
is located near Anderson, South Carolina. The total amount invested in the
property is $588,000. As a result of failed negotiations with a joint venture
partner, the plans to construct a retirement facility were discontinued in
1987. First Master is currently considering other options for the property.
On December 23, 1985, First Master entered into an agreement to lease other
land and building to an investor for a national restaurant franchise. The
lease term is 20 years. The net amount invested in the property as of June
30, 1996 is $178,000. During the last quarter of the fiscal year, First
Master began the operation of the Investment Center at First Federal. The
Center, which sells uninsured investment products, reached profitable levels
in its fourth month of operations. During the year ended June 30, 1996, First
Master recognized net income of $3,000. The operations of First Master are
included in the Corporation's consolidated financial statements contained in
the Annual Report.
Deposit Activities and Other Sources of Funds
General. Deposits and loan and investment repayments are the major
sources of the Association's funds for lending and other investment purposes.
Scheduled loan repayments and investment maturities are relatively stable
sources of funds, while deposit inflows and outflows and loan prepayments are
influenced significantly by general interest rates and money market
conditions. Borrowings may be used on a short-term basis to compensate for
reductions in the availability of funds from other sources. They may also be
used on a longer-term basis for general business purposes.
Deposit Accounts. Deposits are attracted from within the Association's
primary market area through the offering of a broad selection of deposit
instruments, including NOW accounts, money market deposit accounts, regular
savings accounts, certificates of deposit and retirement savings plans.
Deposit account terms vary, according to the minimum balance required, the
time periods the funds must remain on deposit and the interest rate, among
other factors. In determining the terms of its deposit accounts, the
Association considers current market interest rates, alternative sources of
funds, matching deposit and loan products and its customer preferences and
concerns. The Association generally reviews its deposit mix and pricing
weekly.
23
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<PAGE>
<TABLE>
The following table sets forth information concerning the Association's deposits at June 30, 1996.
Percentage
Interest Minimum of Total
Rates Offered Term Category Amount Balance Deposits
(In thousands)
<S> <C> <C> <C> <C> <C>
2.00 - 2.10% Daily NOW accounts $500/2,500 $ 19,852 7%
None Daily Non-interest checking none 1,577 1
2.75 - 3.75 Daily Money market accounts 500/10,000 15,574 5
2.25 - 2.50 Daily Passbook savings account 50/2,500 27,470 10
Certificates of Deposit(1)
4.80 91 days Fixed term, fixed rate 500 2,624 1
5.15 6 months Fixed term, fixed rate 500 52,184 18
5.25 12 months Fixed term, fixed rate 100 85,977 30
5.30 18 months Fixed term, fixed rate 100 6,041 2
5.30 24 months Fixed term, fixed rate 100 20,250 7
5.30 30 months Fixed term, fixed rate 100 2,961 1
5.30 36 months Fixed term, fixed rate 100 30,922 11
5.40 60 months Fixed term, fixed rate 100 6,514 2
5.40 84 months Fixed term, fixed rate 100 12,089 4
various various Jumbo certificates 100,000 4,200 1
-- -- Less premium on deposits acquired (18) --
Total $288,217 100%
(1) Includes accounts with balances of $100,000 or more with remaining maturities of three months or
less, three to six months, six to 12 months and over 12 months of $12 million, $5 million, $8
million and $8 million, respectively.
24
</TABLE>
PAGE
<PAGE>
Deposit Flow
<TABLE>
The following table sets forth the balances of savings deposits in the various types of savings
accounts offered by the Association at the dates indicated.
At June 30,
1994 1995 1996
Percent Percent Percent
of of Increase of Increase
Amount Total Amount Total (Decrease) Amount Total (Decrease)
(Dollars in thousands)
Non-interest
<S> <C> <C> <C> <C> <C> <C> <C> <C>
bearing $ 845 --% $ 1,222 --% $ 377 1,577 1% $ 355
NOW checking 19,752 7 19,020 7 (732) 19,852 7 832
Passbook savings
accounts 31,435 12 27,634 10 (3,801) 27,470 10 (164)
Money market
deposit 15,619 6 14,700 5 (919) 15,574 5 874
Jumbo certificates 100 -- 2,654 1 2,554 4,200 1 1,546
Other fixed-rate
certificates
which mature:
Within one year 158,363 58 160,744 58 2,381 160,531 56 (213)
Within three
years 31,462 12 43,119 16 11,657 54,810 19 11,691
After three years 14,207 5 9,169 3 (5,038) 4,221 1 (4,948)
Less: Premium on
deposits
acquired (49) -- (31) -- 18 (18) -- 13
Total $271,734 100% $278,231 100% $6,497 $288,217 100% $9,986
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</TABLE>
PAGE
<PAGE>
Time Deposits by Rates
<TABLE>
The following table sets forth the time deposits in the Association classified by rates as of the dates
indicated.
At June 30,
1994 1995 1996
(In thousands)
<S> <C> <C> <C>
3.00% and below $ -- $ -- $ --
3.01 - 4.00% 127,152 4,364 --
4.01 - 5.00% 28,828 44,310 12,887
5.01 - 6.00% 23,113 85,323 163,669
6.01 - 7.00% 4,804 68,534 37,664
7.01 - 9.00% 16,500 12,028 9,542
9.01 - 11.00% 3,735 1,127 --
Total $204,132 $215,686 $223,762
</TABLE>
<TABLE>
The following table sets forth the amount and maturities of time deposits at June 30, 1996.
Amount Due
Percent
of Total
Less Than 1-2 2-3 3-4 After Certificate
One Year Years Years Years 4 Years Total Accounts
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C> <C>
4.01 - 5.00% $ 12,735 $ 152 $ -- $ -- $ -- $ 12,887 6%
5.01 - 6.00% 139,683 14,469 7,572 869 1,076 163,669 73
6.01 - 7.00% 10,954 20,007 4,472 1,477 754 37,664 17
7.01 - 9.00% 1,359 4,114 4,024 -- 45 9,542 4
Total $164,731 $38,742 $16,068 $2,346 $1,875 $223,762 100%
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</TABLE>
<PAGE>
<PAGE>
The following table sets forth the savings activities of the Association
for the periods indicated.
Years Ended June 30,
1994 1995 1996
(In thousands)
Beginning balance $284,704 $271,734 $278,231
Net increase (decrease)
before interest
credited (24,279) (5,102) (4,297)
Interest credited 11,284 11,581 14,270
Net increase (decrease)
in savings deposits (12,995) 6,479 9,973
Deposit premium
amortization 25 18 13
Ending balance $271,734 $278,231 $288,217
In the unlikely event the Association is liquidated, depositors will be
entitled to full payment of their deposit accounts prior to any payment being
made to the Corporation, as stockholder of the Association. Substantially all
of the Association's depositors are residents of South Carolina or Northern
Georgia.
Borrowings. Savings deposits are the primary source of funds for the
Association's lending and investment activities and for its general business
purposes. The Company has entered into an agreement with a broker-dealer to
sell an agency security and to repurchase that security at the maturity of the
agreement. Under this agreement, $5 million was borrowed for two years at a
rate of 6.41%. Additionally, the Association may rely upon advances from the
FHLB-Atlanta to supplement its supply of lendable funds and to meet deposit
withdrawal requirements. The FHLB-Atlanta has, from time to time, served as
one of the Association's primary borrowing sources. Advances from the
FHLB-Atlanta are typically secured by the Association's first mortgage loans.
At June 30, 1996, the Association had no borrowings from the FHLB-Atlanta.
The FHLB-Atlanta functions as a central reserve bank providing credit for
savings and loan associations and certain other member financial institutions.
As a member, the Association is required to own capital stock in the
FHLB-Atlanta and is authorized to apply for advances on the security of such
stock and certain of its mortgage loans and other assets (principally
securities which are obligations of, or guaranteed by, the United States
government) provided certain creditworthiness standards have been met.
Advances are made pursuant to several different credit programs. Each credit
program has its own interest rate and range of maturities. Depending on the
program, limitations on the amount of advances are based on the financial
condition of the member institution and the adequacy of collateral pledged to
secure the credit.
REGULATION
General
The Association is subject to extensive regulation, examination and
supervision by the OTS as its chartering agency, and the FDIC, as the insurer
of its deposits. The activities of federal savings institutions are governed
by the Home Owners' Loan Act, as amended (the "HOLA") and, in certain
respects, the Federal Deposit Insurance Act ("FDIA") and the regulations
issued by the OTS and the FDIC to implement these statutes. These laws and
regulations delineate the nature and extent of the activities in which federal
savings associations may engage. Lending activities and other investments
must comply with various statutory and regulatory capital requirements.
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<PAGE>
In addition, the Association's relationship with its depositors and borrowers
is also regulated to a great extent, especially in such matters as the
ownership of deposit accounts and the form and content of the Association's
mortgage documents. The Association must file reports with the OTS and the
FDIC concerning its activities and financial condition in addition to
obtaining regulatory approvals prior to entering into certain transactions
such as mergers with, or acquisitions of, other financial institutions. There
are periodic examinations by the OTS and the FDIC to review the Association's
compliance with various regulatory requirements. The regulatory structure
also gives the regulatory authorities extensive discretion in connection with
their supervisory and enforcement activities and examination policies,
including policies with respect to the classification of assets and the
establishment of adequate loan loss reserves for regulatory purposes. Any
change in such policies, whether by the OTS, the FDIC or Congress, could have
a material adverse impact on the Corporation, the Association and their
operations. The Corporation, as a savings and loan holding company, is also
required to file certain reports with, and otherwise comply with the rules and
regulations of, the OTS.
Federal Regulation of Savings Associations
Office of Thrift Supervision. The OTS is an office in the Department of
the Treasury subject to the general oversight of the Secretary of the
Treasury. The OTS generally possesses the supervisory and regulatory duties
and responsibilities formerly vested in the Federal Home Loan Bank Board.
Among other functions, the OTS issues and enforces regulations affecting
federally insured savings associations and regularly examines these
institutions.
Federal Home Loan Bank System. The FHLB System, consisting of 12 FHLBs,
is under the jurisdiction of the Federal Housing Finance Board ("FHFB"). The
designated duties of the FHFB are to supervise the FHLBs, to ensure that the
FHLBs carry out their housing finance mission, to ensure that the FHLBs remain
adequately capitalized and able to raise funds in the capital markets, and to
ensure that the FHLBs operate in a safe and sound manner.
The Association, as a member of the FHLB-Atlanta, is required to acquire
and hold shares of capital stock in the FHLB-Atlanta in an amount equal to the
greater of (i) 1.0% of the aggregate outstanding principal amount of
residential mortgage loans, home purchase contracts and similar obligations at
the beginning of each year, or (ii) 1/20 of its advances (borrowings) from the
FHLB-Atlanta. The Association is in compliance with this requirement with an
investment in FHLB-Atlanta stock of $2.7 million at June 30, 1996.
Among other benefits, the FHLB provides a central credit facility
primarily for member institutions. It is funded primarily from proceeds
derived from the sale of consolidated obligations of the FHLB System. It
makes advances to members in accordance with policies and procedures
established by the FHFB and the Board of Directors of the FHLB-Atlanta.
Federal Deposit Insurance Corporation. The FDIC is an independent
federal agency established originally to insure the deposits, up to prescribed
statutory limits, of federally insured banks and to preserve the safety and
soundness of the banking industry. In 1989 the FDIC also became the insurer,
up to the prescribed limits, of the deposit accounts held at federally insured
savings associations and established two separate insurance funds: the BIF and
the SAIF. As insurer of deposits, the FDIC has examination, supervisory and
enforcement authority over all savings associations.
The Association's accounts are insured by the SAIF. The FDIC insures
deposits at the Association to the maximum extent permitted by law. The
Association currently pays deposit insurance premiums to the FDIC based on a
risk-based assessment system established by the FDIC for all SAIF-member
institutions. Under applicable regulations, institutions are assigned to one
of three capital groups that are based solely on the level of an institution's
capital -- "well capitalized," "adequately capitalized," and
"undercapitalized" -- which are defined in the same manner as the regulations
establishing the prompt corrective action system, as discussed below. These
three groups are then divided into three subgroups which reflect varying
levels of supervisory concern, from those which
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<PAGE>
are considered to be healthy to those which are considered to be of
substantial supervisory concern. The matrix so created results in nine
assessment risk classifications, with rates currently ranging from .23% for
well capitalized, financially sound institutions with only a few minor
weaknesses to .31% for undercapitalized institutions that pose a substantial
risk of loss to the SAIF unless effective corrective action is taken. Until
the second half of 1995, the same matrix applied to BIF-member institutions.
The FDIC is authorized to raise assessment rates in certain circumstances.
The Association's assessments expensed for the year ended June 30, 1996,
totalled $640,000. Effective January 1, 1996, the FDIC substantially reduced
deposit insurance premiums for well-capitalized, well-managed financial
institutions that are members of the BIF. Under the new assessment schedule,
rates were reduced to a range of 0 to 27 basis points, with approximately 92%
of BIF members paying the statutory minimum annual assessment rate of $2,000.
With respect to SAIF member institutions, the FDIC has retained the existing
rate schedule of 23 to 31 basis points. The Association is a member of the
SAIF rather than the BIF.
The FDIC may terminate the deposit insurance of any insured depository
institution if it determines after a hearing that the institution has engaged
or is engaging in unsafe or unsound practices, is in an unsafe or unsound
condition to continue operations, or has violated any applicable law,
regulation, order or any condition imposed by an agreement with the FDIC. It
also may suspend deposit insurance temporarily during the hearing process for
the permanent termination of insurance, if the institution has no tangible
capital. If insurance of accounts is terminated, the accounts at the
institution at the time of termination, less subsequent withdrawals, shall
continue to be insured for a period of six months to two years, as determined
by the FDIC. Management is aware of no existing circumstances that could
result in termination of the deposit insurance of the Association.
Liquidity Requirements. Under OTS regulations, each savings institution
is required to maintain an average daily balance of liquid assets (cash,
certain time deposits and savings accounts, bankers' acceptances, and
specified U.S. Government, state or federal agency obligations and certain
other investments) equal to a monthly average of not less than a specified
percentage (currently 5%) of its net withdrawable accounts plus short-term
borrowings. OTS regulations also require each savings institution to maintain
an average daily balance of short-term liquid assets at a specified percentage
(currently 1%) of the total of its net withdrawable savings accounts and
borrowings payable in one year or less. Monetary penalties may be imposed for
failure to meet liquidity requirements.
Prompt Corrective Action. Under the FDIA, each federal banking agency is
required to implement a system of prompt corrective action for institutions
that it regulates. The federal banking agencies have promulgated
substantially similar regulations to implement this system of prompt
corrective action. Under the regulations, an institution shall be deemed to
be (i) "well capitalized" if it has a total risk-based capital ratio of 10% or
more, has a Tier I risk-based capital ratio of 6% or more, has a leverage
ratio of 5% or more and is not subject to specified requirements to meet and
maintain a specific capital level for any capital measure; (ii) "adequately
capitalized" if it has a total risk-based capital ratio of 8% or more, a Tier
I risk-based capital ratio of 4% or more and a leverage ratio of 4% or more
(3% under certain circumstances) and does not meet the definition of "well
capitalized;" (iii) "undercapitalized" if it has a total risk-based capital
ratio that is less than 8%, a Tier I risk-based capital ratio that is less
than 4% or a leverage ratio that is less than 4% (3% under certain
circumstances); (iv) "significantly undercapitalized" if it has a total
risk-based capital ratio that is less than 6%, a Tier I risk-based capital
ratio that is less than 3% or a leverage ratio that is less than 3%; and (v)
"critically undercapitalized" if it has a ratio of tangible equity to total
assets that is equal to or less than 2%.
A federal banking agency may, after notice and an opportunity for a
hearing, reclassify a well capitalized institution as adequately capitalized
and may require an adequately capitalized institution or an undercapitalized
institution to comply with supervisory actions as if it were in the next lower
category if the institution is in an unsafe or unsound condition or has
received in its most recent examination, and has not corrected, a less than
satisfactory rating for asset quality, management, earnings or liquidity.
(The OTS may not, however, reclassify a significantly undercapitalized
institution as critically undercapitalized.)
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<PAGE>
An institution generally must file a written capital restoration plan
that meets specified requirements, as well as a performance guaranty by each
company that controls the institution, with the appropriate federal banking
agency within 45 days of the date that the institution receives notice or is
deemed to have notice that it is undercapitalized, significantly
undercapitalized or critically undercapitalized. Immediately upon becoming
undercapitalized, an institution shall become subject to various mandatory and
discretionary restrictions on its operations.
At June 30, 1996, the Association was categorized as "well capitalized"
under the prompt corrective action regulations of the OTS.
Standards for Safety and Soundness. The FDIA requires the federal
banking regulatory agencies to prescribe, by regulation, standards for all
insured depository institutions relating to: (i) internal controls,
information systems and internal audit systems; (ii) loan documentation; (iii)
credit underwriting; (iv) interest rate risk exposure; (v) asset growth; and
(vi) compensation, fees and benefits. The federal banking agencies adopted
regulations and Interagency Guidelines Prescribing Standards for Safety and
Soundness ("Guidelines") to implement safety and soundness standards required
by the FDIA. The Guidelines set forth the safety and soundness standards that
the federal banking agencies use to identify and address problems at insured
depository institutions before capital becomes impaired. The agencies also
proposed asset quality and earnings standards which, if adopted in final,
would be added to the Guidelines. If the OTS determines that the Association
fails to meet any standard prescribed by the Guidelines, the agency may
require the Association to submit to the agency an acceptable plan to achieve
compliance with the standard, as required by the FDIA. OTS regulations
establish deadlines for the submission and review of such safety and soundness
compliance plans.
Qualified Thrift Lender Test. All savings associations are required to
meet a qualified thrift lender ("QTL") test to avoid certain restrictions on
their operations. A savings institution that fails to become or remain a QTL
shall either become a national bank or be subject to the following
restrictions on its operations: (i) the association may not make any new
investment or engage in activities that would not be permissible for national
banks; (ii) the association may not establish any new branch office where a
national bank located in the savings institution's home state would not be
able to establish a branch office; (iii) the association shall be ineligible
to obtain new advances from any FHLB; and (iv) the payment of dividends by the
association shall be subject to the rules regarding the statutory and
regulatory dividend restrictions applicable to national banks. Also,
beginning three years after the date on which the savings institution ceases
to be a QTL, the savings institution would be prohibited from retaining any
investment or engaging in any activity not permissible for a national bank and
would be required to repay any outstanding advances to any FHLB. In addition,
within one year of the date on which a savings association controlled by a
company ceases to be a QTL, the company must register as a bank holding
company and become subject to the rules applicable to such companies. A
savings institution may requalify as a QTL if it thereafter complies with the
QTL test.
Currently, the QTL test requires that 65% of an institution's "portfolio
assets" (as defined) consist of certain housing and consumer-related assets on
a monthly average basis in nine out of every 12 months. Assets that qualify
without limit for inclusion as part of the 65% requirement are loans made to
purchase, refinance, construct, improve or repair domestic residential housing
and manufactured housing; home equity loans; mortgage-backed securities (where
the mortgages are secured by domestic residential housing or manufactured
housing); FHLB stock; and direct or indirect obligations of the FDIC. In
addition, the following assets, among others, may be included in meeting the
test subject to an overall limit of 20% of the savings institution's portfolio
assets: 50% of residential mortgage loans originated and sold within 90 days
of origination; 100% of consumer and educational loans (limited to 10% of
total portfolio assets); and stock issued by the FHLMC or Fannie Mae.
Portfolio assets consist of total assets minus the sum of (i) goodwill and
other intangible assets, (ii) property used by the savings institution to
conduct its business, and (iii) liquid assets up to 20% of the institution's
total assets. At June 30, 1996, the qualified thrift investments of the
Association were approximately 94% of its portfolio assets.
30
<PAGE>
<PAGE>
Capital Requirements. Under OTS regulations a savings association must
satisfy three minimum capital requirements: core capital, tangible capital and
risk-based capital. Savings associations must meet all of the standards in
order to comply with the capital requirements. The Corporation is not subject
to any minimum capital requirements.
OTS capital regulations establish a 3% core capital or leverage ratio
(defined as the ratio of core capital to adjusted total assets). Core capital
is defined to include common stockholders' equity, noncumulative perpetual
preferred stock and any related surplus, and minority interests in equity
accounts of consolidated subsidiaries, less (i) any intangible assets, except
for certain qualifying intangible assets; (ii) certain mortgage servicing
rights; and (iii) equity and debt investments in subsidiaries that are not
"includable subsidiaries," which is defined as subsidiaries engaged solely in
activities not impermissible for a national bank, engaged in activities
impermissible for a national bank but only as an agent for its customers, or
engaged solely in mortgage-banking activities. In calculating adjusted total
assets, adjustments are made to total assets to give effect to the exclusion
of certain assets from capital and to account appropriately for the
investments in and assets of both includable and nonincludable subsidiaries.
Institutions that fail to meet the core capital requirement would be required
to file with the OTS a capital plan that details the steps they will take to
reach compliance. In addition, the OTS's prompt corrective action regulation
provides that a savings institution that has a leverage ratio of less than 4%
(3% for institutions receiving the highest CAMEL examination rating) will be
deemed to be "undercapitalized" and may be subject to certain restrictions.
See "-- Federal Regulation of Savings Associations -- Prompt Corrective
Action."
As required by federal law, the OTS has proposed a rule revising its
minimum core capital requirement to be no less stringent than that imposed on
national banks. The OTS has proposed that only those savings associations
rated a composite one (the highest rating) under the CAMEL rating system for
savings associations will be permitted to operate at or near the regulatory
minimum leverage ratio of 3%. All other savings associations will be required
to maintain a minimum leverage ratio of 4% to 5%. The OTS will assess each
individual savings association through the supervisory process on a
case-by-case basis to determine the applicable requirement. No assurance can
be given as to the final form of any such regulation, the date of its
effectiveness or the requirement applicable to the Association.
Savings associations also must maintain "tangible capital" not less than
1.5% of the Association's adjusted total assets. "Tangible capital" is
defined, generally, as core capital minus any "intangible assets" other than
purchased mortgage servicing rights.
Each savings institution must maintain total risk-based capital equal to
at least 8% of risk-weighted assets. Total risk-based capital consists of the
sum of core and supplementary capital, provided that supplementary capital
cannot exceed core capital, as previously defined. Supplementary capital
includes (i) permanent capital instruments such as cumulative perpetual
preferred stock, perpetual subordinated debt and mandatory convertible
subordinated debt, (ii) maturing capital instruments such as subordinated
debt, intermediate-term preferred stock and mandatory convertible subordinated
debt, subject to an amortization schedule, and (iii) general valuation loan
and lease loss allowances up to 1.25% of risk-weighted assets.
The risk-based capital regulation assigns each balance sheet asset held
by a savings institution to one of four risk categories based on the amount of
credit risk associated with that particular class of assets. Assets not
included for purposes of calculating capital are not included in calculating
risk-weighted assets. The categories range from 0% for cash and securities
that are backed by the full faith and credit of the U.S. Government to 100%
for repossessed assets or assets more than 90 days past due. Qualifying
residential mortgage loans (including multi-family mortgage loans) are
assigned a 50% risk weight. Consumer, commercial, home equity and residential
construction loans are assigned a 100% risk weight, as are nonqualifying
residential mortgage loans and that portion of land loans and nonresidential
construction loans that do not exceed an 80% loan-to-value ratio. The book
value of assets in each category is multiplied by the weighing factor (from 0%
to 100%) assigned to that category. These products are then totalled to
arrive at total risk-weighted assets. Off-balance sheet items are included in
risk-weighted assets by converting them to an approximate balance sheet
"credit equivalent amount" based on a
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conversion schedule. These credit equivalent amounts are then assigned to
risk categories in the same manner as balance sheet assets and included
risk-weighted assets.
The OTS has incorporated an interest rate risk component into its
regulatory capital rule. Under the rule, savings associations with "above
normal" interest rate risk exposure would be subject to a deduction from total
capital for purposes of calculating their risk-based capital requirements. A
savings association's interest rate risk is measured by the decline in the net
portfolio value of its assets (i.e., the difference between incoming and
outgoing discounted cash flows from assets, liabilities and off-balance sheet
contracts) that would result from a hypothetical 200 basis point increase or
decrease in market interest rates divided by the estimated economic value of
the association's assets, as calculated in accordance with guidelines set
forth by the OTS. A savings association whose measured interest rate risk
exposure exceeds 2% must deduct an interest rate risk component in calculating
its total capital under the risk-based capital rule. The interest rate risk
component is an amount equal to one-half of the difference between the
institution's measured interest rate risk and 2%, multiplied by the estimated
economic value of the association's assets. That dollar amount is deducted
from an association's total capital in calculating compliance with its
risk-based capital requirement. Under the rule, there is a two quarter lag
between the reporting date of an institution's financial data and the
effective date for the new capital requirement based on that data. A savings
association with assets of less than $300 million and risk-based capital
ratios in excess of 12% is not subject to the interest rate risk component,
unless the OTS determines otherwise. The rule also provides that the Director
of the OTS may waive or defer an association's interest rate risk component on
a case-by-case basis. Under certain circumstances, a savings association may
request an adjustment to its interest rate risk component if it believes that
the OTS-calculated interest rate risk component overstates its interest rate
risk exposure. In addition, certain "well-capitalized" institutions may
obtain authorization to use their own interest rate risk model to calculate
their interest rate risk component in lieu of the OTS-calculated amount. The
OTS has postponed the date that the component will first be deducted from an
institution's total capital until savings associations become familiar with
the process for requesting an adjustment to its interest rate risk component.
At June 30, 1996, First Federal's core capital of approximately $34
million, or 10.5% of adjusted total assets, was $24 million in excess of the
OTS requirement of $10 million, or 3% of adjusted total assets. As of such
date, the Association's tangible capital of approximately $34 million, or
10.5% of adjusted total assets, was $29 million in excess of the OTS
requirement of $5 million, or 1.5% of adjusted total assets. Finally, at June
30, 1996, the Association had risk-based capital of approximately $35 million
or 23% of total risk-weighted assets, which was $23 million in excess of the
OTS risk-based capital requirement of $12 million or 8% of risk-weighted
assets.
Limitations on Capital Distributions. OTS regulations impose uniform
limitations on the ability of all savings associations to engage in various
distributions of capital such as dividends, stock repurchases and cash-out
mergers. In addition, OTS regulations require the Association to give the OTS
30 days' advance notice of any proposed declaration of dividends, and the OTS
has the authority under its supervisory powers to prohibit the payment of
dividends. The regulation utilizes a three-tiered approach which permits
various levels of distributions based primarily upon a savings association's
capital level.
A Tier 1 savings association has capital in excess of its fully phased-in
capital requirement (both before and after the proposed capital distribution).
Tier 1 savings association may make (without application but upon prior notice
to, and no objection made by, the OTS) capital distributions during a calendar
year up to 100% of its net income to date during the calendar year plus
one-half its surplus capital ratio (i.e., the amount of capital in excess of
its fully phased-in requirement) at the beginning of the calendar year or the
amount authorized for a Tier 2 association. Capital distributions in excess
of such amount require advance notice to the OTS. A Tier 2 savings
association has capital equal to or in excess of its minimum capital
requirement but below its fully phased-in capital requirement (both before and
after the proposed capital distribution). Such an association may make
(without application) capital distributions up to an amount equal to 75% of
its net income during the previous four quarters depending on how close the
association is to meeting its fully phased-in capital requirement. Capital
distributions exceeding this amount require prior OTS approval. Tier 3
associations are savings associations with capital below
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the minimum capital requirement (either before or after the proposed capital
distribution). Tier 3 associations may not make any capital distributions
without prior approval from the OTS.
The Association is currently meeting the criteria to be designated a Tier
1 association and, consequently, could at its option (after prior notice to,
and no objection made by, the OTS) distribute up to 100% of its net income
during the calendar year plus 50% of its surplus capital ratio at the
beginning of the calendar year less any distributions previously paid during
the year.
Loans to One Borrower. Under the HOLA, savings institutions are
generally subject to the national bank limit on loans to one borrower.
Generally, this limit is 15% of the Association's unimpaired capital and
surplus, plus an additional 10% of unimpaired capital and surplus, if such
loan is secured by readily-marketable collateral, which is defined to include
certain financial instruments and bullion. The OTS by regulation has amended
the loans to one borrower rule to permit savings associations meeting certain
requirements, including capital requirements, to extend loans to one borrower
in additional amounts under circumstances limited essentially to loans to
develop or complete residential housing units. At June 30, 1996, the
Association's limits on loans to one borrower were $5 million, or $9 million,
based on the type of collateral obtained. At June 30, 1996, the Association's
largest aggregate amount of loans to one borrower was $1.6 million.
Activities of Associations and Their Subsidiaries. When a savings
association establishes or acquires a subsidiary or elects to conduct any new
activity through a subsidiary that the association controls, the savings
association must notify the FDIC and the OTS 30 days in advance and provide
the information each agency may, by regulation, require. Savings associations
also must conduct the activities of subsidiaries in accordance with existing
regulations and orders.
The OTS may determine that the continuation by a savings association of
its ownership control of, or its relationship to, the subsidiary constitutes a
serious risk to the safety, soundness or stability of the association or is
inconsistent with sound banking practices or with the purposes of the FDIA.
Based upon that determination, the FDIC or the OTS has the authority to order
the savings association to divest itself of control of the subsidiary. The
FDIC also may determine by regulation or order that any specific activity
poses a serious threat to the SAIF. If so, it may require that no SAIF member
engage in that activity directly.
Transactions with Affiliates. Savings associations must comply with
Sections 23A and 23B of the Federal Reserve Act ("Sections 23A and 23B")
relative to transactions with affiliates in the same manner and to the same
extent as if the savings association were a Federal Reserve member bank. A
savings and loan holding company, its subsidiaries and any other company under
common control are considered affiliates of the subsidiary savings association
under the HOLA. Generally, Sections 23A and 23B: (i) limit the extent to
which the insured association or its subsidiaries may engage in certain
covered transactions with an affiliate to an amount equal to 10% of such
institution's capital and surplus and place an aggregate limit on all such
transactions with affiliates to an amount equal to 20% of such capital and
surplus, and (ii) require that all such transactions be on terms substantially
the same, or at least as favorable to the institution or subsidiary, as those
provided to a non-affiliate. The term "covered transaction" includes the
making of loans, the purchase of assets, the issuance of a guarantee and
similar types of transactions.
Three additional rules apply to savings associations: (i) a savings
association may not make any loan or other extension of credit to an affiliate
unless that affiliate is engaged only in activities permissible for bank
holding companies; (ii) a savings association may not purchase or invest in
securities issued by an affiliate (other than securities of a subsidiary); and
(iii) the OTS may, for reasons of safety and soundness, impose more stringent
restrictions on savings associations but may not exempt transactions from or
otherwise abridge Section 23A or 23B. Exemptions from Section 23A or 23B may
be granted only by the Federal Reserve Board, as is currently the case with
respect to all FDIC-insured banks. The Association has not been significantly
affected by the rules regarding transactions with affiliates.
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The Association's authority to extend credit to executive officers,
directors and 10% shareholders, as well as entities controlled by such
persons, is currently governed by Sections 22(g) and 22(h) of the Federal
Reserve Act, and Regulation O thereunder. Among other things, these
regulations require that such loans be made on terms and conditions
substantially the same as those offered to unaffiliated individuals and not
involve more than the normal risk of repayment. Regulation O also places
individual and aggregate limits on the amount of loans the Association may
make to such persons based, in part, on the Association's capital position,
and requires certain board approval procedures to be followed. The OTS
regulations, with certain minor variances, apply Regulation O to savings
institutions.
Savings and Loan Holding Company Regulations
Holding Company Acquisitions. The HOLA and OTS regulations issued
thereunder generally prohibit a savings and loan holding company, without
prior OTS approval, from acquiring more than 5% of the voting stock of any
other savings association or savings and loan holding company or controlling
the assets thereof. They also prohibit, among other things, any director or
officer of a savings and loan holding company, or any individual who owns or
controls more than 25% of the voting shares of such holding company, from
acquiring control of any savings association not a subsidiary of such savings
and loan holding company, unless the acquisition is approved by the OTS.
Holding Company Activities. As a unitary savings and loan holding
company, the Corporation generally is not subject to activity restrictions.
If the Corporation acquires control of another savings association as a
separate subsidiary other than in a supervisory acquisition, it would become a
multiple savings and loan holding company. There generally are more
restrictions on the activities of a multiple savings and loan holding company
than on those of a unitary savings and loan holding company. The HOLA
provides that, among other things, no multiple savings and loan holding
company or subsidiary thereof which is not an insured association shall
commence or continue for more than two years after becoming a multiple savings
and loan association holding company or subsidiary thereof, any business
activity other than: (i) furnishing or performing management services for a
subsidiary insured institution, (ii) conducting an insurance agency or escrow
business, (iii) holding, managing, or liquidating assets owned by or acquired
from a subsidiary insured institution, (iv) holding or managing properties
used or occupied by a subsidiary insured institution, (v) acting as trustee
under deeds of trust, (vi) those activities previously directly authorized by
regulation as of March 5, 1987 to be engaged in by multiple holding companies
or (vii) those activities authorized by the Federal Reserve Board as
permissible for bank holding companies, unless the OTS by regulation,
prohibits or limits such activities for savings and loan holding companies.
Those activities described in (vii) above also must be approved by the OTS
prior to being engaged in by a multiple holding company.
Qualified Thrift Lender Test. The HOLA requires any savings and loan
holding company that controls a savings association that fails the QTL test,
as explained under "-- Federal Regulation of Savings Associations -- Qualified
Thrift Lender Test," must, within one year after the date on which the
association ceases to be a QTL, register as and be deemed a bank holding
company subject to all applicable laws and regulations.
TAXATION
Federal Taxation
General. The Corporation and the Association report their income on a
fiscal year basis using the accrual method of accounting and will be subject
to federal income taxation in the same manner as other corporations with some
exceptions, including particularly the Association's reserve for bad debts
discussed below. The following discussion of tax matters is intended only as
a summary and does not purport to be a comprehensive description of the tax
rules applicable to the Association or the Corporation.
Tax Bad Debt Reserves. For taxable years beginning prior to January 1,
1996, savings institutions such as the Association which met certain
definitional tests primarily relating to their assets and the nature of their
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business ("qualifying thrifts") were permitted to establish a reserve for bad
debts and to make annual additions thereto, which additions may, within
specified formula limits, have been deducted in arriving at their taxable
income. The Association's deduction with respect to "qualifying loans," which
are generally loans secured by certain interests in real property, may have
been computed using an amount based on the Association's actual loss
experience, or a percentage equal to 8% of the Association's taxable income,
computed with certain modifications and reduced by the amount of any permitted
additions to the nonqualifying reserve. The Association's deduction with
respect to nonqualifying loans was computed under the experience method, which
essentially allows a deduction based on the Association's actual loss
experience over a period of several years. Each year the Association selected
the most favorable way to calculate the deduction attributable to an addition
to the tax bad debt reserve. The Association used the percentage method bad
debt deduction for the taxable years ended June 30, 1995, 1994 and 1993.
Recently enacted legislation repealed the reserve method of accounting
for bad debt reserves for tax years beginning after December 31, 1995. As
result, savings associations will no longer be able to calculate their
deduction for bad debts using the percentage-of-taxable-income method.
Instead, savings associations will be required to compute their deduction
based on specific charge-offs during the taxable year or, if the savings
association or its controlled group had assets of less than $500 million,
based on actual loss experience over a period of years. This legislation also
requires savings associations to recapture into income over a six-year period
their post-1987 additions to their bad debt tax reserves, thereby generating
additional tax liability. At June 30, 1996, the Association's post-1987
reserves totalled approximately $2 million. The recapture may be suspended
for up to two years if, during those years, the institution satisfies a
residential loan requirement. The Association anticipates that it will meet
the residential loan requirement for the taxable year ending June 30, 1997.
Under prior law, if the Association failed to satisfy the qualifying
thrift definitional tests in any taxable year, it would be unable to make
additions to its bad debt reserve. Instead, the Association would be required
to deduct bad debts as they occur and would additionally be required to
recapture its bad debt reserve deductions ratably over a multi-year period.
At June 30, 1996, the Association's total bad debt reserve for tax purposes
was approximately $10 million. Among other things, the qualifying thrift
definitional tests required the Association to hold at least 60% of its assets
as "qualifying assets." Qualifying assets generally include cash, obligations
of the United States or any agency or instrumentality thereof, certain
obligations of a state or political subdivision thereof, loans secured by
interests in improved residential real property or by savings accounts,
student loans and property used by the Association in the conduct of its
banking business. Under current law, a savings association will not be
required to recapture its pre-1988 bad debt reserves if it ceases to meet the
qualifying thrift definitional tests.
Distributions. To the extent that the Association makes "nondividend
distributions" to the Corporation that are considered as made: (i) from the
reserve for losses on qualifying real property loans, to the extent the
reserve for such losses exceeds the amount that would have been allowed under
the experience method; or (ii) from the supplemental reserve for losses on
loans ("Excess Distributions"), then an amount based on the amount distributed
will be included in the Association's taxable income. Nondividend
distributions include distributions in excess of the Association's current and
accumulated earnings and profits, distributions in redemption of stock, and
distributions in partial or complete liquidation. However, dividends paid out
of the Association's current or accumulated earnings and profits, as
calculated for federal income tax purposes, will not be considered to result
in a distribution from the Association's bad debt reserve. Thus, any
dividends to the Corporation that would reduce amounts appropriated to the
Association's bad debt reserve and deducted for federal income tax purposes
would create a tax liability for the Association. The amount of additional
taxable income attributable to an Excess Distribution is an amount that, when
reduced by the tax attributable to the income, is equal to the amount of the
distribution. Thus, if, the Association makes a "nondividend distribution,"
then approximately one and one-half times the amount so used would be
includable in gross income for federal income tax purposes, assuming a 35%
corporate income tax rate (exclusive of state and local taxes). See
"REGULATION" for limits on the payment of dividends by the Association. The
Association does not intend to pay dividends that would result in a recapture
of any portion of its tax bad debt reserve.
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Corporate Alternative Minimum Tax. The Code imposes a tax on alternative
minimum taxable income ("AMTI") at a rate of 20%. The excess of the tax bad
debt reserve deduction using the percentage of taxable income method over the
deduction that would have been allowable under the experience method is
treated as a preference item for purposes of computing the AMTI. In addition,
only 90% of AMTI can be offset by net operating loss carryovers. AMTI is
increased by an amount equal to 75% of the amount by which the Association's
adjusted current earnings exceeds its AMTI (determined without regard to this
preference and prior to reduction for net operating losses). For taxable
years beginning after December 31, 1986, and before January 1, 1996, an
environmental tax of .12% of the excess of AMTI (with certain modification)
over $2.0 million is imposed on corporations, including the Association,
whether or not an Alternative Minimum Tax ("AMT") is paid.
Dividends-Received Deduction and Other Matters. The Corporation may
exclude from its income 100% of dividends received from the Association as a
member of the same affiliated group of corporations. The corporate
dividends-received deduction is generally 70% in the case of dividends
received from unaffiliated corporations with which the Corporation and the
Association will not file a consolidated tax return, except that if the
Corporation or the Association owns more than 20% of the stock of a
corporation distributing a dividend, then 80% of any dividends received may be
deducted.
Other Federal Tax Matters. Other recent changes in the federal tax
system could also affect the business of the Association. These changes
include limitations on the deduction of personal interest paid or accrued by
individual taxpayers, limitations on the deductibility of losses attributable
to investment in certain passive activities and limitations on the
deductibility of contributions to individual retirement accounts. The
Association does not believe these changes will have a material effect on its
operations.
There have not been any IRS audits of the Association's Federal income
tax returns or audits of the Association's state income tax returns during the
past five years.
South Carolina Taxation
Under the laws of South Carolina, the Association is required to pay an
income tax at the rate of 6% of net income as defined in the statute. This
rate of tax is imposed on financial institutions, such as savings and loan
associations, in lieu of the general state business corporation income tax.
Competition
The Association faces strong competition in the attraction of savings
deposits (its primary source of lendable funds) and in the origination of
loans. Its most direct competition for savings deposits has historically come
from other thrift institutions, credit unions and from commercial banks
located in its primary market area. Particularly in times of high interest
rates, the Association has faced additional significant competition for
investors' funds from short-term money market securities and other corporate
and government securities. The Association's competition for loans comes
principally from other thrift institutions, commercial banks, mortgage banking
companies and mortgage brokers.
According to the most current information available, based on total
deposits as of June 30, 1995, the Association had the largest deposit share of
the 24 savings and loan associations, commercial banks and credit unions
located in Anderson County.
Personnel
As of June 30, 1996, the Association had 116 full-time and nine part-time
employees. The employees are not represented by a collective bargaining unit.
The Association believes its relationship with its employees to be good.
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Executive Officers. The executive officers of the Corporation and
Association are as follows:
Age at
June 30, Position
Name 1996 Corporation Association
David C. Wakefield, III 52 Director, President Director, President
and Chief Executive and Chief Executive
Officer Officer
John L. Biediger 38 Executive Vice Executive Vice
President and President and
Treasurer Treasurer
Douglas T. Locke 52 Senior Vice President Senior Vice
President
Carole K. Bain 56 Vice President and Vice President and
Corporate Secretary Corporate Secretary
Henry D. Bone 62 N/A Vice President
Dennis B. Fowler 49 N/A Vice President
David C. Wakefield, III joined First Federal in 1976 and has served as
President and Chief Executive Officer since 1991. Prior to being appointed
President and Chief Executive Officer, Mr. Wakefield has served as Chief
Operating Officer, Executive Vice President and Vice President of the
Association. Mr. Wakefield is a member and past director of the Anderson
Rotary Club, serves on the Board of Visitors for Anderson College, and is a
licensed real estate broker.
John L. Biediger has been with the Association since 1983 and has served
as Executive Vice President and Treasurer since 1991. Prior to being
appointed Executive Vice President and Treasurer, Mr. Biediger served as a
Vice President of the Association. Mr. Biediger is a certified public
accountant and member of both the South Carolina Association and American
Institute of Certified Public Accountants. He is also a past chairman and a
board member of Christmas in April of Anderson, Inc.
Douglas T. Locke joined First Federal in 1965 and currently is Senior
Vice President in charge of the Association's operations. Mr. Locke serves as
a Director of the Broadway Water and Sewer District and is a former director
of the Bank Administration Institute.
Carole K. Bain has been employed by First Federal since 1958 and
currently is Vice President/Savings Division and Corporate Secretary of the
Association. Ms. Bain serves as Treasurer of the Foothills Sertoma Club and
is active in the Anderson YMCA and the Headstart Programs.
Henry D. Bone joined First Federal in 1984 and currently is Vice
President and Manager of the Commercial Banking Division. Mr. Bone is a past
President of the Lakeside Sertoma Club and served as a member of the Anderson
Vision 2002 Committee.
Dennis B. Fowler has been with First Federal since 1976 and currently is
Vice President of Mortgage Lending. Mr. Fowler is Vice President and Director
of the Electric City Lions Club, a Director of the Habitat for Humanity, a
member of the Anderson Board of Realtors and a member of the Homebuilders
Association of Anderson.
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Item 2. Properties
The following table sets forth the location of First Federal's offices
and other facilities used in operations as well as certain additional
information relating to these offices and facilities as of June 30, 1996.
Building Land
Year Building Owned/ Owned/
Location Opened Cost Net Book Value Leased Leased
(Dollars in thousands)
Main Office
201 North Main
Street(1) 1962 $2,782 $1,309 Owned Owned
Anderson, South
Carolina
Branch Offices
2918 North Main
Street 1976 410 245 Owned Owned
Anderson, South
Carolina
2808 South Main
Street 1977 373 221 Owned Owned
Anderson, South
Carolina
Powdersville Centre 1979 172 6 Owned Leased
Intersection of
Hwy. 81 and 153
Greenville, South
Carolina
509 East Greer
Street 1979 317 163 Owned Owned
Honea Path,
South Carolina
306 Hwy. 28
By-Pass 1979 406 275 Owned Owned
Anderson, South
Carolina
205 Savannah
Street 1981 278 146 Owned Owned
Calhoun Falls,
South Carolina
100 West Greenwood
Street 1981 551 240 Owned Owned
Abbeville, South
Carolina
302 Hampton
Street (2) 1981 1,106 964 Owned Owned
Greenwood, South
Carolina
241 O'Neal Street 1986 364 49 Owned Owned
Belton, South
Carolina
1001 South
Mechanic Street 1986 491 265 Owned Owned
Pendleton, South
Carolina
(1) Building expansion completed in 1980.
(2) Relocated from 424 Main Street, Greenwood, South Carolina in November
1992.
The net book value of the Association's investment in office, properties
and equipment totaled $4 million at June 30, 1996. See Note 6 of the Notes to
the Consolidated Financial Statements in the Annual Report.
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Item 3. Legal Proceedings
Periodically, there have been various claims and lawsuits involving the
Association, mainly as a defendant, such as claims to enforce liens,
condemnation proceedings on properties in which the Association holds security
interests, claims involving the making and servicing of real property loans
and other issues incident to the Association's business. The Association is
not a party to any pending legal proceedings that it believes would have a
material adverse effect on the financial condition or operations of the
Association.
Item 4. Submission of Matters to a Vote of Security Holders
No matters were submitted to a vote of security holders during the fourth
quarter of the fiscal year ended June 30, 1996.
PART II
Item 5. Market for the Registrant's Common Equity and Related
Stockholder Matters
The information contained under the caption "Common Stock Information" in
the Annual Report is incorporated herein by reference.
Item 6. Selected Financial Data
The information contained in the table captioned "Selected Consolidated
Financial Condition, Operating and Other Data" in the Annual Report is
incorporated herein by reference.
Item 7. Management's Discussion and Analysis of Financial
Condition and Results of Operations
The information contained in the section captioned "Management's
Discussion and Analysis of Financial Condition and Results of Operations" in
the Annual Report is incorporated herein by reference.
Item 8. Financial Statements and Supplementary Data
The report of independent auditors and consolidated financial statements
contained in the Annual Report which are listed under Item 14 herein, and the
information contained in Note 26 of the Notes to Consolidated Financial
Statements in the Annual Report are incorporated herein by reference.
Item 9. Changes in and Disagreements with Accountants on
Accounting and Financial Disclosure
None.
PART III
Item 10. Directors and Executive Officers of the Registrant
The information contained under the section captioned "Proposal I --
Election of Directors" in the Corporation's definitive proxy statement for the
Corporation's 1996 Annual Meeting of Stockholders (the "Proxy Statement") is
incorporated herein by reference. Information on the Corporation's executive
officers is included in "Part I - Item 1. - Business" in this Form 10-K.
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The information contained under the section captioned "Proposal I --
Executive Compensation -- Compliance with Section 16(a) of the Exchange Act"
in the Corporation's Proxy Statement is incorporated herein by reference.
Item 11. Executive Compensation
The information contained under the section captioned "Proposal I -
Election of Directors -- Executive Compensation" in the Proxy Statement is
incorporated herein by reference.
Item 12. Security Ownership of Certain Beneficial Owners and
Management
(a) Security Ownership of Certain Beneficial Owners
Information required by this item is incorporated herein
by reference to the section captioned "Voting Securities
and Security Ownership of Certain Beneficial Owners and
Management" of the Proxy Statement.
(b) Security Ownership of Management
Information required by this item is incorporated herein
by reference to the sections captioned "Voting
Securities and Security Ownership of Certain Beneficial
Owners and Management" and "Proposal I -- Election of
Directors" of the Proxy Statement.
(c) Changes In Control
The Corporation is not aware of any arrangements,
including any pledge by any person of securities of the
Corporation, the operation of which may at a subsequent
date result in a change in control of the Corporation.
Item 13. Certain Relationships and Related Transactions
The information required by this item is incorporated herein by reference
to the section captioned "Voting Securities and Security Ownership of Certain
Beneficial Owners and Management" and "Proposal I -- Election of Directors" of
the Proxy Statement.
PART IV
Item 14. Exhibits, Financial Statement Schedules, and Reports
on Form 8-K
(a) (1) (2) Independent Auditors' Report
Consolidated Financial Statements
(a) Consolidated Balance Sheets, June 30, 1995
and 1996
(b) Consolidated Statements of Income For the
Years
Ended June 30, 1994, 1995 and 1996
(c) Consolidated Statements of Stockholders'
Equity For the Years Ended June 30, 1994,
1995 and 1996
(d) Consolidated Statements of Cash Flows For the
Years Ended June 30, 1994, 1995 and 1996
(e) Notes to Consolidated Financial Statements
Schedules to the consolidated financial statements have
been omitted as the required information is
inapplicable.
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(3) Exhibits
3.1 Certificate of Incorporation of First
Southeast Financial Corporation*
3.2 Bylaws of First Southeast Financial
Corporation*
10.1 Employment Agreement with David C. Wakefield,
III**
10.2 Employment Agreement with John L. Biediger**
10.2 First Federal Savings and Loan Association of
Anderson 1994 Employee Stock Ownership Plan*
10.3 Southeast Financial Corporation 1993 Stock
Option and Incentive Plan***
10.4 First Federal Savings and Loan Association of
Anderson Management Development and
Recognition Plans***
13. First Southeast Financial Corporation 1996
Annual Report to Stockholders
21. Subsidiaries of Registrant
23. Consent of Independent Auditors
27. Financial Data Schedule
(b) The Corporation filed a Current Report on Form 8-K on
June 20, 1996, which reported the announcement of a
special dividend.
_________________
* Incorporated by reference to the Corporation's Registration
Statement on Form S-1 File No. 33-65102.
** Incorporated by reference to the Corporation's 1995 Annual Report on
Form 10-K for the year ended June 30, 1995.
*** Incorporated by reference to the Corporation's 1993 Annual Meeting
Proxy Statement dated December 29, 1993.
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SIGNATURES
Pursuant to the requirements of section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed
on its behalf by the undersigned, thereunto duly authorized.
FIRST SOUTHEAST FINANCIAL CORPORATION
Date: September 27, 1996 By: /s/ David C. Wakefield, III
___________________________
David C. Wakefield, III
President and Chief
Executive Officer
Pursuant to the Securities Exchange Act of 1934, this report has been
signed below by the following persons on behalf of the registrant and in the
capacities and on the dates indicated.
SIGNATURES TITLE DATE
/s/ David C. Wakefield, III President, Chief September 27, 1996
___________________________
David C. Wakefield, III Executive Officer and
Director (Principal
Executive Officer)
/s/ John L. Biediger Executive Vice President September 27, 1996
___________________________
John L. Biediger and Treasurer
(Principal Financial
and Accounting Officer)
/s/ Charles L. Stuart Chairman of the Board September 27, 1996
___________________________
Charles L. Stuart of Directors
/s/ James H. Barton Director September 27, 1996
___________________________
James H. Barton
/s/ Josiah Crudup, Jr. Director September 27, 1996
___________________________
Josiah Crudup, Jr.
/s/ Vernon E. Merchant, Jr. Director September 27, 1996
___________________________
Vernon E. Merchant, Jr.
/s/ William R. Phillips Director September 27, 1996
___________________________
William R. Phillips
/s/ Aubrey T. Scales Director September 27, 1996
___________________________
Aubrey T. Scales
/s/ A. C. Terry Director September 27, 1996
___________________________
A. C. Terry
<PAGE>
<PAGE>
EXHIBIT 13
1996 Annual Report to Stockholders
<PAGE>
<PAGE>
Logo of
FIRST SOUTHEAST
FINANCIAL CORPORATION
ANNUAL REPORT
1996
<PAGE>
<PAGE>
TABLE OF CONTENTS
Page
Letter to Stockholders. . . . . . . . . . . . 1
Selected Consolidated Financial Data. . . . . 2
Management's Discussion and Analysis. . . . . 4
Independent Auditor's Report. . . . . . . . . 11
Consolidated Financial Statements . . . . . . 12
Notes to Consolidated Financial Statements. . 17
Common Stock Information. . . . . . . . . . . 34
Directors and Officers. . . . . . . . . . . . 35
Corporate Information . . . . . . . . . . . . 36
__________
BUSINESS OF THE COMPANY
First Southeast Financial Corporation ("First Southeast" or the
"Company"), a Delaware corporation, was organized on June 23, 1993 and became
the holding company for First Federal Savings and Loan Association of Anderson
("First Federal" or the "Association") on October 7, 1993 in connection with
First Federal's conversion from a federal mutual to a federal stock savings
and loan association. The Company is engaged primarily in the business of
directing, planning and coordinating the business activities of the
Association.
First Federal was organized in 1922 as a South Carolina mutual savings
and loan association under the name "Anderson Building and Loan Association."
In 1936, the Association converted to a federally chartered savings and loan
association and changed its name to "First Federal Savings and Loan
Association of Anderson." The Association is regulated by the Office of
Thrift Supervision ("OTS") and its deposits are insured up to applicable
limits under the Savings Association Insurance Fund ("SAIF") of the Federal
Deposit Insurance Corporation ("FDIC"). First Federal also is a member of
the Federal Home Loan Bank ("FHLB") System.
The Association's principal business consists of attracting deposits from
the general public through a variety of deposit programs and originating loans
secured primarily by owner-occupied residential properties and consumer loans.
To a significantly lesser extent, the Association also originates commercial
real estate, construction and commercial business loans.
<PAGE>
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Logo of
FIRST SOUTHEAST
FINANCIAL CORPORATION
Dear Fellow Stockholders:
The past twelve months have been important ones for First Southeast
Financial Corporation. After evaluating several strategic alternatives, the
Company moved boldly to restructure its balance sheet by returning a major
portion of its excess capital to stockholders. The Company paid a special
cash dividend of $10 per share on June 27, 1996. This dividend returned almost
$44 million to stockholders and reduced the Company's capital level down to a
more manageable level of about 10%. This restructuring of the Company's
balance sheet will assist in positioning First Southeast to achieve more
industry-typical returns which we, as stockholders, expect. It also
underscores the Board of Directors' paramount commitment to exploring ways to
enhance stockholder value. A stockholder who invested $100 in the Company's
IPO has seen that investment grow to about $208 in less than three years.
This represents an annualized return of almost 27%.
Because the Company sold some investment securities at a loss to fund the
special cash dividend and accelerated the recognition of compensation expense
in connection with the receipt of the dividend payment on unallocated ESOP
shares, earnings per share for fiscal year 1996 were substantially reduced.
It is the Company's belief, however, that acceleration of these costs will
contribute to improved earnings performance.
I would like to highlight several achievements which I believe are
significant and are representative of the continuing efforts being made to
build the Company's franchise value:
. We began operation of The Investment Center at First Federal in April
1996. The Center, which sells uninsured investment products, reached
profitable levels in the fourth month of operation and continues to
contribute earnings to the Company.
. First Federal began offering free checking and club checking accounts
on July 1, 1996. These core deposits generate low cost funds as well
as a customer base for other consumer products which produce fee
income.
. Loans receivable increased almost $30 million in fiscal 1996, an
increase of 14%. At the same time asset quality remains high with
non-performing assets being only .19% of total assets.
. Although the net interest margin for fiscal 1996 was 3.33%, 28 basis
points lower than fiscal 1995, the net interest margin increased 6
and 12 basis points, respectively, in the March and June quarters.
Net interest margin for the June quarter of fiscal 1996 was 3.45%.
One issue which remains unresolved at this writing is the disparity in
deposit insurance premiums between thrift institutions and commercial banks.
Although Congress has yet to find sufficient common ground to pass legislation
which would recapitalize the Savings Association Insurance Fund (SAIF), we are
hopeful this will occur soon. Current proposals have savings institutions
paying approximately 68 cents per $100 of deposits to recapitalize the SAIF.
First Federal would remain a well capitalized institution after paying this
special assessment and anticipates a substantial reduction in deposit
insurance premiums going forward.
We are excited about the future of First Southeast Financial Corporation,
and we are endeavoring to consider every possible avenue to build and preserve
the value of this Company. I appreciate your support as we begin our fourth
year as a public company.
Yours very truly,
David C. Wakefield, III
President and Chief Executive Officer
-1-
<PAGE>
<PAGE>
SELECTED CONSOLIDATED FINANCIAL CONDITION, OPERATING AND OTHER DATA
Since the Company had not commenced operations prior to the mutual to
stock conversion of the Association on October 7, 1993, the financial
information for periods and dates as of and before June 30, 1993 presented
herein is that of the Association and its subsidiary. This information is
qualified in its entirety by reference to the detailed information and
Consolidated Financial Statements and notes thereto appearing elsewhere in
this Report.
At June 30,
1992 1993 1994 1995 1996
(In thousands)
FINANCIAL CONDITION
DATA:
Total assets $321,600 $317,168 $341,853 $352,288 $331,852
Loans receivable,
net 224,702 203,871 181,488 208,648 238,337
Mortgage-backed
securities 13,131 12,707 24,631 20,432 17,598
Cash and due from
banks, interest-
bearing deposits
and securities 73,279 89,760 124,691 112,169 64,313
Deposits 291,503 284,704 271,734 278,231 288,217
Borrowings 2,571 2,239 1,915 1,597 5,000
Total equity 24,696 27,559 66,133 68,924 33,503
Years Ended June 30,
1992 1993 1994 1995 1996
OPERATING DATA: (In thousands)
Interest income $27,534 $24,356 $22,804 $23,950 $25,777
Interest expense 18,488 13,605 11,357 11,965 14,357
Net interest income 9,046 10,751 11,447 11,985 11,420
Provision for
loan losses 175 805 225 180 180
Net interest income
after provision
for loan losses 8,871 9,946 11,222 11,805 11,240
Other income 1,150 1,145 1,018 1,056 110
Other expenses 6,003 6,136 7,756 7,376 9,390
Income before income
taxes, extraordinary
item and cumulative
effect adjustment 4,018 4,955 4,484 5,485 1,960
Income tax expense 1,409 2,092 1,622 1,908 1,021
Income before
extraordinary item
and cumulative effect
adjustment 2,609 2,863 2,862 3,577 939
Extraordinary item 67 -- -- -- --
Income before cumula-
tive effect adjustment 2,676 2,863 2,862 3,577 939
Cumulative effect on
prior years for
accounting change -- -- 39 -- --
Net income $2,676 $2,863 $2,901 $3,577 $939
Per share data:
Net income N/A N/A N/A $ .91 $.23
Cash dividends paid N/A N/A $ .06 $ .27 $ 10.48
Book value N/A N/A $15.83 $16.82 $ 7.63
Shares outstanding
(year end) N/A N/A 4,177 4,097 4,388
Weighted average
shares N/A N/A N/A 3,946 4,061
-2-
<PAGE>
<PAGE>
At June 30,
1992 1993 1994 1995 1996
OTHER DATA:
Number of:
Real estate
loans serviced 3,656 3,446 3,073 3,259 3,516
Deposit accounts 29,880 28,771 27,295 27,091 26,700
Total offices
(all of which
are full service) 11 11 11 11 11
At or for the Years Ended June 30,
1992 1993 1994 1995 1996
KEY OPERATING RATIOS:
Return on average assets
(net income divided by
average assets) .84% .90% .85% 1.04% .26%
Return on average equity
(net income divided by
average equity) 11.46% 10.85% 5.27% 5.31% 1.37%
Average equity to
average assets 7.29% 8.27% 16.13% 19.56% 19.29%
Average interest-earning
assets to average
interest-bearing
liabilities 105% 106% 116% 121% 121%
Interest rate spread
(difference between
average yield on
interest-earning assets
and average cost of
interest-bearing
liabilities) 2.62% 3.24% 2.93% 2.84% 2.43%
Net interest margin
(net interest income
as a percentage of
average interest-
earning assets) 2.93% 3.51% 3.48% 3.61% 3.33%
(Table continued on following page)
-3-
<PAGE>
<PAGE>
At or for the Years Ended June 30,
1992 1993 1994 1995 1996
Non-interest expense
to average assets 1.87% 1.92% 2.27% 2.14% 2.64%
Net charge-offs to
average outstanding
loans during the
period .11% .11% .08% .02% --%
Allowance for loan
losses to total loans
at end of period .12% .40% .48% .48% .49%
Allowance for loan
losses to nonperforming
loans 39% 171% 466% 139% 206%
Allowance for loan
losses to nonperforming
assets(1) 28% 98% 213% 135% 197%
Nonperforming loans to
total loans .30% .23% .10% .35% .24%
Ratio of nonperforming
assets to total
assets(1) .30% .27% .13% .22% .19%
_______________
(1) Nonperforming assets include nonaccrual loans and net other repossessed
assets.
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
General
The following discussion and analysis is intended to assist in
understanding the financial condition and the results of operations of the
Company. Since the operations of the Association significantly impact those
of the Company, the following discussion will include references to both the
Company and the Association.
The Company's total assets decreased by $20 million from $352 million at
June 30, 1995 to $332 million at June 30, 1996 as the net result of the
payment of a special cash dividend which was partially offset by loan growth.
On June 27, 1996, the Company paid a special cash dividend of approximately
$44 million funded primarily from the liquidation of investment securities.
The $30 million increase in loans receivable was funded from maturities in the
investment portfolio and increases in deposit liabilities.
Operating Strategy
The primary goal of management is to increase the Company's profitability
and enhance its return on equity while minimizing risk. The Company's results
of operations are dependent primarily on the Association's continued
profitability. The Association's results of operations are significantly
affected by general economic and competitive conditions, particularly changes
in market interest rates, government legislation and policies concerning
monetary and fiscal affairs, housing and financial institutions and the
attendant actions of the regulatory authorities.
-4-
<PAGE>
<PAGE>
The Association has historically operated as a traditional thrift
institution, accepting deposits and making home and consumer loans. As the
funds provided through the growth in deposits have historically exceeded the
demand for loans, the Association has purchased one- to four- family loans
from other lenders and brokers. The majority of purchased loans have been
secured by properties located outside of the Association's primary lending
area. Since 1986, the Association has only purchased adjustable rate mortgage
("ARM") loans. To a lesser extent, the Association has also engaged in
commercial and consumer lending. In addition, First Federal has maintained a
conservative investment portfolio, investing primarily in interest-bearing
deposits and U.S. Government and agency securities.
In guiding the operations of First Federal, the Association's management
has implemented various strategies designed to continue its profitability
while maintaining the safety and soundness of the Association. These
strategies include: (i) emphasizing one- to four- family lending; (ii)
maintaining asset quality; (iii) managing growth; (iv) controlling operating
expenses; and (v) managing interest-rate risk.
Emphasizing One- to Four- Family Lending. Historically, First Federal
has been predominately a one- to four- family lender. As such, it has
developed expertise in mortgage loan underwriting and origination. First
Federal has established methods to expand its loan originations through
contacts with realtors, homebuilders and past and present customers. The
Association also uses advertising and community involvement to gain exposure
within its market area. First Federal emphasizes the origination and purchase
of ARM loans when available. Loan purchases are made through the secondary
market and through correspondent lending programs.
Maintaining Asset Quality. At June 30, 1996, First Federal's ratio of
non-performing assets to total assets was .19%. Since June 30, 1992,
non-performing assets have not exceeded .30% of total assets. First Federal
has focused on maintaining good asset quality through sound underwriting and
effective collection procedures.
Managing Growth. Historically, First Federal has managed its growth to
maintain a strong capital level. On June 23, 1996, in conjunction with First
Southeast's capital restructuring and payment of a special cash dividend,
First Federal paid a $19.5 million cash dividend to First Southeast. As a
result, First Federal's assets decreased a net of $3 million from June 30,
1995 and the Association's capital-to-assets ratio decreased from 14.6% at
June 30, 1995 to 10.4% at June 30, 1996.
Controlling Operating Expenses. The Association closely monitors its
operating expenses and seeks to control them while maintaining the necessary
personnel to serve its customers properly through its 11-branch network.
Historically, operating expenses have been kept below 2% of average assets.
Since the Company's public offering in fiscal 1994, costs related to the
Company's public operations and its stock-based employee benefits plans have
caused its operating expense ratio to increase to 2.14% in 1995 and 2.64% in
1996.
Managing Interest-Rate Risk. In order to reduce the impact on the
Association's net interest income due to changes in interest rates, First
Federal's management has implemented several techniques. These include (i)
emphasizing the origination and purchase of ARM loans; (ii) maintaining a
short-term investment portfolio; (iii) originating loans with the ability to
be sold in the secondary mortgage market; and (iv) attempting to lengthen
deposit maturities.
Results of Operations
The operating results of the Company depend primarily on its net interest
income, which is the difference between interest income on interest-earning
assets, primarily loans and investment securities, and interest expense on
interest-bearing liabilities, primarily deposits. The Company's net income
also is affected by the establishment of provisions for loan losses and the
level of its other income, including deposit service charges, as well as its
other expenses and income tax provisions.
-5-
<PAGE>
<PAGE>
Comparison of Operating Results for the Fiscal Years Ended June 30, 1995 and
1996
General. Net income for the year ended June 30, 1996 was $939,000
compared to $3.6 million in 1995. Net interest income decreased $565,000 from
1995. In addition, charges were recognized in conjunction with the payment of
a special cash dividend as described below.
On June 27, 1996 the Company paid a special cash dividend of $10 per
share in an effort to reduce the Company's excess capital and to reposition
the Company's balance sheet to enhance future performance. To fund the
payment of this dividend, the Company liquidated securities and recognized a
loss of $891,000. Additionally, the receipt of the dividend payment on the
unallocated shares in the Employee Stock Ownership Plan ("ESOP") accelerated
the recognition of $1.9 million of compensation expense.
Net Interest Income. Net interest income decreased by $565,000 from $12
million for the year ended June 30, 1995 to $11.4 million in 1996. This
decrease in net interest income was the net result of an increase in interest
income and an increase in interest expense as described below.
Interest Income. Interest income increased by $1.8 million from $24
million for the year ended June 30, 1995 to $25.8 million in 1996. This
increase was primarily attributable to increased interest earned on mortgage
loans.
Interest on mortgage loans increased by $1.8 million primarily as a
result of increased outstanding balances. The average net mortgage loans
receivable increased by $22 million from $174 million during the year ended
June 30, 1995 to $196 million in 1996. The average yield on mortgage loans
decreased by 4 basis points from 8.32% for the year ended June 30, 1995 to
8.28% in 1996.
Interest Expense. Interest expense increased by $2.4 million from $12
million for the year ended June 30, 1995 to $14.4 million in 1996 primarily as
a result of increased rates paid on savings deposits. The average rate paid
on deposits increased by 72 basis points from 4.34% to 5.06% and the average
deposit balance grew by $10 million.
Non-interest Expenses. Non-interest expenses increased by $2 million
primarily as a result of increases in the compensation expense related to the
Company's ESOP. The number of shares to be released in the regular annual
allocation for the year increased from 1995 by 8,700 shares and the average
stock price increased by approximately $4 per share attributing to a $300,000
increase in compensation expense. Additionally, as noted above, $1.9 million
of compensation expense was accelerated into 1996 in conjunction with the
payment of the special dividend. See "General." These increases were
partially off-set by a $318,000 decrease in compensation expense associated
with the Company's Management Development and Recognition Plans. See Note 19
of the Notes to Consolidated Financial Statements.
Comparison of Operating Results for the Fiscal Years Ended June 30, 1994 and
1995
General. Net income for fiscal year ended June 30, 1995 increased by
$676,000 to $3,577,000 compared to $2,901,000 in 1994. This increase was due
to the net effect of increased net interest income and reduced expenses.
Net Interest Income. Net interest income increased by $538,000 from $11.4
million for the year ended June 30, 1994 to $12 million in 1995. This
increase in net interest income was the net result of an increase in interest
income and an increase in interest expense as described below.
Interest Income. Interest income increased by $1.1 million from $22.8
million for the year ended June 30, 1994 to $23.9 million in 1995. This
increase was primarily attributable to increased yields on investment
securities and interest-earning deposits.
-6-
<PAGE>
<PAGE>
Interest on mortgage loans increased by $165,000 primarily as a result of
increased outstanding balances. The average net mortgage loans receivable
increased by $5 million from $169 million during the year ended June 30, 1994
to $174 million in 1995 as a net result of a $13 million increase in the
average balance of loans originated by the Company and an $8 million reduction
in the average balance of loans purchased outside of the Company's market
area. The average yield on mortgage loans decreased by 16 basis points from
8.48% for the year ended June 30, 1994 to 8.32% in 1995.
Interest on other loans decreased $178,000 primarily as a result of
reduced yields. The average yield on other loans decreased by 71 basis points
as the Association promoted its lower yielding home equity loans.
Interest on investments increased by a net of $1.2 million primarily as a
result of a 76 basis point increase in the average yield earned from 4.66% in
1994 to 5.42% in 1995. Also, the average portfolio balance increased $8
million from $92 million in 1994 to $100 million in 1995.
Interest Expense. Interest expense increased by $608,000 from $11.4
million for the year ended June 30, 1994 to $12 million in 1995 primarily as a
result of increased rates paid for deposits. The average rate paid on
deposits increased by 37 basis points from 3.97% for the year ended June 30,
1994 to 4.34% in 1995. The higher deposit costs in 1995 reflected higher
prevailing interest rates on new, renewing and variable rate accounts.
Partially offsetting this increased cost was a decrease in interest expense
related to a $9 million decrease in the average deposit balance primarily due
to funds on hand during 1994 related to the Company's stock offering.
Provision for Loan Losses. Provisions for loan losses are charged to
income to bring the total reserve to a level considered adequate by management
to provide for potential losses. The level of the reserve is based on
industry standards, prior loss experience, the volume and type of lending
conducted by the Company, and the past due loans in the Company's portfolio.
Management also considers general economic conditions and other factors
relating to the collectability of the Company's loan portfolio.
The provisions for the years ended June 30, 1994 and 1995 were made based
on management's analyses of the various factors which affect the loan
portfolio and management's desire to maintain the reserve at a level
considered adequate to provide for potential losses. The reserve for loan
losses was $914,000 at June 30, 1994 and $1,062,000 at June 30, 1995,
representing 466% and 139% of total nonperforming loans, respectively.
Non-interest Expenses. Non-interest expenses decreased by $380,000 from
$7.7 million for the year ended June 30, 1994 to $7.4 million in 1995. Costs
related to the Company's stock offering and stock based compensation plans
decreased a net of $239,000 compared to 1994. All other expense categories
decreased a net of $141,000.
Yields Earned and Rates Paid
The earnings of the Company depend largely on the spread between the
yield on interest-earning assets (primarily loans and investments) and the
cost of interest-bearing liabilities (primarily deposit accounts), as well as
the relative size of the Company's interest-earning assets and
interest-bearing liability portfolios.
-7-
PAGE
<PAGE>
<TABLE>
The following table sets forth, for the periods indicated, information regarding average balances of
assets and liabilities as well as the total dollar amounts of interest income from average interest-earning
assets and interest expense on average interest-bearing liabilities, resultant yields, interest rate spread,
net interest margin, and ratio of average interest-earning assets to average interest-bearing liabilities.
Average balances for a period have been calculated using the average of month-end balances during such
period.
Years Ended June 30,
----------------------------------------------------------------------------- At
1994 1995 1996 June 30,
Interest Interest Interest 1996
Average and Yield/ Average and Yield/ Average and Yield/ Yield/
Balance Dividends Cost Balance Dividends Cost Balance Dividends Cost Cost
(Dollars in thousands)
Interest-
earning
assets(1):
Mortgage
loans
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
originated $125,216 $10,215 8.16% $138,559 $10,872 7.85% $165,779 $12,993 7.84% 7.63%
Purchased
mortgage
loans 43,647 4,112 9.42 35,688 3,620 10.14 30,678 3,271 10.66 9.09
Other
loans 23,349 2,215 9.49 23,196 2,037 8.78 24,268 2,122 8.74 9.02
Total
net
loans 192,212 16,542 8.61 97,443 16,529 8.37 220,725 18,386 8.33 7.94
Mortgage-
backed
securities 19,549 1,196 6.12 22,386 1,306 5.84 23,010 1,351 5.87 7.63
Investment
securities 91,843 4,277 4.66 100,485 5,450 5.42 82,210 4,929 6.00 6.47
Daily
interest-
earning
deposits 25,022 789 3.15 11,798 665 5.63 17,432 1,110 6.37 5.35
Total
interest-
earning
assets 328,626 22,804 6.94 332,112 23,950 7.21 343,377 5,776 7.51 7.65
Non-interest
earning
assets:
Office
properties
and
equipment,
net 5,210 5,080 4,562
Real estate,
net 1,040 947 968
Other non-
interest-
earning
assets 6,300 6,159 6,393
Total
assets $341,176 $344,298 $355,300
Interest-
earning
liabilities:
Other
deposits $ 36,119 652 1.81 38,206 817 2.14 $ 38,656 849 2.20 2.44
Passbook
savings 31,104 797 2.56 29,559 744 2.52 26,650 671 2.52 2.47
Certificates
of deposit 213,662 9,716 4.55 203,885 10,240 5.02 215,950 12,705 5.88 5.62
Total
deposits 280,885 11,165 3.97 271,650 11,801 4.34 281,25 14,225 5.06 4.91
Other interest-
bearing
liabilities 2,212 192 8.68 1,887 164 8.69 1,462 131 8.96 6.41
Total
interest-
bearing
liabili-
ties 283,097 1,357 4.01 273,537 11,965 4.37 282,718 14,356 5.08 4.94
Non-interest-
bearing
liabilities:
Non-interest-
bearing
deposits 1,765 1,405 1,590
Other
liabilities 1,769 2,015 2,447
Total
liabili-
ties 286,131 276,957 286,755
Retained
earnings 55,045 67,341 68,545
Total
liabili-
ties and
retained
earnings $341,176 $344,298 $355,300
Net
interest
income $11,447 $11,985 $11,420
Interest
rate spread 2.93% 2.84% 2.43% 2.71%
Net interest
margin 3.48% 3.61% 3.33%
Ratio of
average
interest-
earning
assets to
average
interest-
bearing
liabilities 116% 121% 121%
- -------------------------
(1) Does not include interest on nonaccrual loans or loans 90 days or more past due. Nonaccrual loans are
included in the average balance until such loans are transferred to foreclosed real estate.
-8-
</TABLE>
PAGE
<PAGE>
The following table sets forth the effects of changing rates and volumes
on net interest income of the Company. Information is provided with respect
to (i) effects on interest income attributable to changes in volume (changes
in volume multiplied by prior rate); (ii) effects on interest income
attributable to changes in rate (changes in rate multiplied by prior volume);
and (iii) changes in rate/volume (change in rate multiplied by change in
volume).
1995 Compared to 1994 1996 Compared to 1995
Increase (Decrease) Increase (Decrease)
Due to Due to
---------------------------- -----------------------------
Rate/ Rate/
Rate Volume Volume Net Rate Volume Volume Net
(Dollars in thousands)
Interest-earning
assets:
Mortgage
loans(1). $ (76) $ 340 $ (99) $ 165 $174 $1,627 $(29) $1,772
Other
loans(1) (164) (15) 1 (178) (9) 94 -- 85
Total net
loans (240) 325 (98) (13) 165 1,721 (29) 1,857
Mortgage-
backed
securities (55) 173 (8) 110 7 38 -- 45
Investment
securities 705 402 66 1,173 575 (991) (105) (521)
Daily interest-
earning
deposits 619 (416) (327) (124) 87 316 42 445
Total net
change in
income on
interest-
earning
assets 1,029 484 (367) 1,146 834 1,084 (92) 1,826
Interest-bearing
liabilities:
Interest-
bearing
deposits 1,037 (367) (34) 63 1,938 417 69 2,424
FHLB
advances -- (28) -- (28) 5 (37) (1) (33)
Total net
change in
expense on
interest-
bearing
liabilities 1,037 (395) (34) 608 1,943 380 68 2,391
Net change in
net interest
income $ (8) $ 879 $ (333) $ 538$(1,109) $ 704 $(160) $(565)
- -------------------
(1) Does not include interest on loans 90 days or more past due.
Liquidity and Capital Resources
The Company's primary sources of funds are deposits and proceeds from
principal and interest payments on loans, mortgage-backed and investment
securities. While maturities and scheduled amortization of loans and
mortgage-backed securities are a predictable source of funds, deposit flows
and mortgage prepayments are greatly influenced by general interest rates,
economic conditions and competition.
The primary investing activity of the Company is the origination and
purchase of mortgage loans. During the three years ended June 30, 1996, the
Company originated loans in the amounts of $24 million, $53 million and $64
million, respectively. Other investing activities include the purchase of
securities, which totaled $77 million, $19 million and $20 million during the
three years ended June 30, 1996, respectively. These activities were funded
primarily by principal repayments on loans, mortgage-backed securities and
other securities.
The Company must maintain an adequate level of liquidity to ensure the
availability of sufficient funds to support loan growth and deposit
withdrawals, to satisfy financial commitments and to take advantage of
investment opportunities. The Company's sources of funds include deposits and
principal and interest payments from loans, mortgage-backed securities and
investments. During fiscal years 1994, 1995 and 1996, the Company used its
sources
-9-
<PAGE>
<PAGE>
of funds primarily to fund loan commitments and to pay maturing savings
certificates and deposit withdrawals. At June 30, 1996, the Company had
approved loan commitments totaling $4 million and undisbursed loans in process
totaling $9 million.
At June 30, 1996, savings certificates amounted to $224 million, or 78%,
of the Company's total deposits, including $165 million which were scheduled
to mature by June 30, 1997. During the year ended June 30, 1996, 93% of the
total amount of maturing certificates were retained by the Association.
Management of the Company believes it has adequate resources to fund all loan
commitments by savings deposits and borrowed funds and that it can adjust the
offering rates of savings certificates to retain deposits in changing interest
rate environments.
The OTS requires a savings institution to maintain an average daily
balance of liquid assets (cash and eligible investments) equal to at least 5%
of the average daily balance of its net withdrawable deposits and short-term
borrowings. In addition, short-term liquid assets currently must constitute
1% of the sum of net withdrawable deposit accounts plus short-term borrowings.
The Company's average liquidity ratios were 35%, 35% and 28% during the years
ended June 30, 1994, 1995 and 1996, respectively. The Company's average
short-term liquidity ratios for the same periods were 19%, 19% and 20%,
respectively. The Company's actual long- and short-term liquidity ratios at
June 30, 1996 were 13% and 10%, respectively. The Company consistently
maintains liquidity levels in excess of regulatory requirements, and believes
this is an appropriate strategy for proper asset and liability management.
Effect of Inflation and Changing Prices
The Consolidated Financial Statements and related financial data
presented herein have been prepared in accordance with GAAP, which require the
measurement of financial position and operating results in terms of historical
dollars, without considering the changes in relative purchasing power of money
over time due to inflation. The primary impact of inflation on operations of
the Company is reflected in increased operating costs. Unlike most industrial
companies, virtually all the assets and liabilities of a financial institution
are monetary in nature. As a result, interest rates generally have a more
significant impact on a financial institution's performance than do general
levels of inflation. Interest rates do not necessarily move in the same
direction or to the same extent as the prices of goods and services. During
the current interest rate environment, management believes that the liquidity
and the maturity structure of the Company's assets and liabilities are
critical to the maintenance of acceptable profitability.
-10-
<PAGE>
<PAGE>
Logo of
CRISP HUGHES & CO., L.L.P
Independent Auditors' Report
To the Board of Directors
First Southeast Financial Corporation
We have audited the accompanying consolidated balance sheets of First
Southeast Financial Corporation and Subsidiary (the "Company") as of June 30,
1995 and 1996, and the related consolidated statements of income,
stockholders' equity, and cash flows for each of the three years in the period
ended June 30, 1996. These financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
consolidated financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of the
Company as of June 30, 1995 and 1996, and the results of their operations and
their cash flows for each of the three years in the period ended June 30,
1996, in conformity with generally accepted accounting principles.
Asheville, North Carolina
August 21, 1996
32 Orange Street*P.O. Box 3049*Asheville, North Carolina 28802*
(704) 254-2254*FAX (704) 254-6859
Other Offices: Boone, Burnsville, Sylva, NC and Greenville, SC
Member of: The American Institute of Certified Public Accountants, The
Continental Association of CPA Firms, Inc., The Intercontinental Accounting
Associates and The North Carolina and South Carolina Associations of CPAs
-11-
<PAGE>
<PAGE>
FIRST SOUTHEAST FINANCIAL CORPORATION
AND SUBSIDIARY
Consolidated Balance Sheets
(in thousands)
June 30,
Assets 1995 1996
Cash and due from banks $ 3,976 $ 3,865
Interest-earning deposits 18,359 9,458
Investment securities:
Held to maturity (market value of
$61,309 in 1995 and $22,917 in
1996) 61,549 23,674
Available for sale (amortized cost of
$28,538 in 1995 and $27,218 in 1996) 28,285 27,316
Loans receivable, net 208,648 238,337
Mortgage-backed securities:
Held to maturity (market value of
$19,573 in 1995 and $11,217 in 1996) 20,432 11,508
Available for sale (amortized cost of
$6,155 in 1996) -- 6,090
Office properties and equipment, net 4,741 4,381
Real estate 996 791
Federal Home Loan Bank stock 2,691 2,691
Interest receivable 2,197 2,294
Other 414 1,447
Total assets $352,288 $331,852
Liabilities and Stockholders' Equity
Deposits $278,231 $288,217
Security sold under agreement
to repurchase -- 5,000
Federal Home Loan Bank advances 1,597 --
Advance payments by borrowers for taxes
and insurance 1,636 1,436
Accrued expenses and other liabilities 1,088 3,331
Income taxes payable 812 365
Total liabilities 283,364 298,349
Stockholders' equity:
Preferred stock ($.01 par value,
2,000,000 shares authorized; none
outstanding) -- --
Common stock ($0.1 par value, 8,000,000
shares authorized; 4,388,231 shares
issued; outstanding 4,096,615 at June 30,
1995, and 4,388,231 at June 30, 1996) 43 44
Paid-in capital 42,106 19,137
Retained income, substantially
restricted 32,772 14,300
Unrealized gains (losses) on securities,
net (158) 22
Treasury stock, at cost (229,785 shares
at June 30, 1995) (2,920) --
Unearned compensation:
Employee stock ownership plan (2,662) --
Management development and recognition
plans (257) --
Total stockholders' equity 68,924 33,503
Total liabilities and
stockholders' equity $352,288 $331,852
The accompanying notes are an integral part of these consolidated
financial statements.
-12-
<PAGE>
<PAGE>
FIRST SOUTHEAST FINANCIAL CORPORATION
AND SUBSIDIARY
Consolidated Statements of Income
(in thousands)
Years Ended June 30,
1994 1995 1996
Interest income:
Mortgage loans $14,327 $14,492 $16,265
Mortgage-backed securities 1,196 1,306 1,351
Other loans 2,215 2,037 2,122
Investments 4,277 5,450 4,929
Deposits with other banks 789 665 1,110
Total interest income 22,804 23,950 25,777
Interest expense:
Deposits 11,165 11,801 14,226
Federal Home Loan Bank
advances 192 164 131
Total interest expense 11,357 11,965 14,357
Net interest income 11,447 11,985 11,420
Provision for loan losses 225 180 180
Net interest income after
provision for loan losses 11,222 11,805 11,240
Other income:
Loan fees and service charges 644 622 585
Securities losses (12) (46) (891)
Income from rental of real
estate acquired for devel-
opment or rental 76 88 86
Other 310 392 330
Total other income 1,018 1,056 110
Other expenses:
Compensation and employee
benefits 4,861 4,607 6,643
Net occupancy expense 1,020 979 954
Deposit insurance premiums 673 625 640
Provision for real estate
losses - 21 -
Other 1,202 1,144 1,153
Total other expenses 7,756 7,376 9,390
Income before income
taxes and cumulative
effect adjustment 4,484 5,485 1,960
Income tax expense 1,622 1,908 1,021
Income before cumulative
effect adjustment 2,862 3,577 939
Cumulative effect on prior
years for accounting change 39 - -
Net income $2,901 $3,577 $939
Weighted average common
equivalent shares outstanding N/A 3,946 4,061
Net income per share N/A $.91 $.23
The accompanying notes are an integral part of these consolidated financial
statements.
-13-
PAGE
<PAGE>
FIRST SOUTHEAST FINANCIAL CORPORATION
AND SUBSIDIARY
Consolidated Statements of Stockholders' Equity
(in thousands)
<TABLE>
Un-
Realized Unearned
Common Paid-In Retained Gains Treasury Compensation
Stock Capital Income (Losses) Stock for ESOP for MRPs Total
Balance at
June 30,
<S> <C> <C> <C> <C> <C> <C> <C> <C>
1993 $- $- $27,559 $- $- $- $- $27,559
Net income - - 2,901 - - - - 2,901
Cash
dividends
($.0625
per share) - - (247) - - - - (247)
Net proceeds
on common
stock
issued in
stock con-
version
(4,326,400
shares) 43 41,850 - - - (3,328) (1,664) 36,901
Unrealized
losses on
securities,
net of
taxes of
$245 - - - (399) - - - (399)
Purchase of
treasury
stock
(149,500
shares) - - - - (1,846) - - (1,846)
ESOP and
MRPs com-
pensation
earned - 99 - - - 333 832 1,264
Balance at
June 30,
1994 43 41,949 30,213 (399) (1,846) (2,995) (832) 66,133
Net income - - 3,577 - - - - 3,577
Cash divi-
dends ($.265
per share) - - (1,018) - - - - (1,018)
Unrealized
gains on
securities,
net of
taxes of
$150 - - - 241 - - - 241
Purchase of
treasury
stock
(80,285
shares) - - - - (1,074) - - (1,074)
ESOP and
MRPs com-
pensation
earned - 157 - - - 333 575 1,065
Balance at
June 30,
1995 43 42,106 32,772 (158) (2,920) (2,662) (257) 68,924
Net income - - 939 - - - - 939
Cash divi-
dends
($10.48
per share) - (23,738) (19,411) - - 185 - (42,964)
Unrealized
gains on
securities,
net of
taxes of
$106 - - - 180 - - - 180
Issuance of
common
stock
(61,831
shares) 1 617 - - - - - 618
Issuance
of trea-
sury
stock
(229,785
shares) - (622) - - 2,920 - - 2,298
Tax benefit
of stock
options
exercised - 505 - - - - - 505
ESOP and
MRPs com-
pensation
earned - 269 - - - 2,477 257 3,003
Balance
at June
30, 1996 $44 $19,137 $14,300 $22 $- $- $- $33,503
The accompanying notes are an integral part of these consolidated financial statements.
-14-
</TABLE>
<PAGE>
<PAGE>
FIRST SOUTHEAST FINANCIAL CORPORATION
AND SUBSIDIARY
Consolidated Statements of Cash Flows
(in thousands)
Years Ended June 30,
1994 1995 1996
Operating activities:
Net income $2,901 $3,577 $939
Adjustments to reconcile
net income to net cash
provided (used) by
operating activities:
Depreciation 393 454 418
Provision for loan losses 225 180 180
Provision for losses on
real estate - 21 -
Deferred income taxes (benefit) 236 (11) (250)
Cumulative effect adjustment (39) - -
Gain on sale of equipment - (25) -
Amortization of premium on
savings deposits 25 18 13
FHLB dividends received in
stock (66) - -
Amortization of fees and
discounts on loans (1,150) (1,093) (1,000)
Loss on sale of securities 12 46 891
Gain on sale of mortgage loans (15) - (4)
Net realized gain on real
estate (32) (62) (15)
Amortization of premium on
mortgage-backed securities 65 108 180
Amortization of premiums
(discounts) on investments (104) (215) 26
Amortization of unearned
ESOP and MRP compensation 1,264 1,065 3,003
Increase in accrued interest
receivable (211) (293) (97)
Decrease (increase) in other
assets 256 (416) (1,033)
Increase (decrease) in accrued
expenses and other
liabilities (520) 1,301 2,401
Net cash provided
by operating
activities 3,240 4,655 5,652
Investing activities:
Net (increase) decrease in
insured certificates of
deposit (6) 3,479 448
Purchase of investment
securities held to
maturity (56,194) (17,930) (15,000)
Maturities of investment
securities held to
maturity 35,600 23,063 12,625
Purchase of investment
securities available for
sale (20,386) (1,358) (5,000)
Maturities of investment
securities available for
sale - - 10,550
Proceeds from sale of
investment securities
available for sale 2,130 1,250 34,964
Proceeds from sale of
real estate 332 237 289
Capitalized costs on real
estate (18) (7) (2)
Net loan (originations)
and principal payments 21,187 (22,974) (24,722)
Purchase of loans - (3,250) (5,000)
Proceeds from sale of loans 1,936 - 775
Principal payments on
mortgage-backed securities
held to maturity 6,199 4,091 3,036
Purchase of mortgage-
backed securities held to
maturity (18,188) - (7,041)
Purchase of mortgage-backed
securities available for
sale - - (5,192)
(continued)
-15-
<PAGE>
<PAGE>
FIRST SOUTHEAST FINANCIAL CORPORATION
AND SUBSIDIARY
Consolidated Statements of Cash Flows
(in thousands)
Years Ended June 30,
1994 1995 1996
Investing activities,
continued:
Principal payments on
mortgage-backed
securities available
for sale $ - $ - $ 1,771
Proceeds from sale of
mortgage-backed
securities available
for sale - - 9,706
Purchase of office
properties and equipment (620) (100) (43)
Proceeds from sale of
equipment - 25 -
Net cash provided
(used) by investing
activities (28,028) (13,474) 12,164
Financing activities:
Net increase (decrease)
in deposits (12,995) 6,479 9,973
Increase in security sold
under agreement to
repurchase - - 5,000
Increase (decrease) in
advance payments by
borrowers for taxes and
insurance (34) 299 (200)
Decrease (increase) in
mortgage servicing payments (41) (127) 44
Repayment of FHLB advances (324) (318) (1,597)
Proceeds from issuance of
common stock and treasury
stock 36,901 - 2,916
Purchase of treasury stock (1,846) (1,074) -
Dividends paid (247) (1,018) (42,964)
Net cash provided
(used) by financing
activities 21,414 4,241 (26,828)
Decrease in cash and
cash equivalents (3,374) (4,578) (9,012)
Cash and cash equivalents
at beginning of year 30,287 26,913 22,335
Cash and cash equivalents
at end of year $26,913 $22,335 $13,323
Supplemental disclosures of
cash flow information:
Cash paid during the
period for:
Interest on deposits and
other borrowings $11,452 $11,872 $14,350
Income taxes net of
refunds 1,586 1,353 1,869
Noncash investing and
financing activities:
Real estate acquired in
satisfaction of mortgage
loans $ 229 $ 27 $ 118
Assets acquired in
satisfaction of consumer
loans 5 - -
Loan loss reserve charge-
offs 184 84 44
Unrealized gains (losses)
on securities, net of taxes (399) 241 180
Reclassification of
mortgage-backed securities
to mortgage-backed
securities available for
sale - - 12,749
Reclassification of
investment securities
to securities available
for sale 10,224 - 39,801
Loans originated for real
estate owned disposition 34 60 36
Transfer from office
properties to real estate
held for sale - 210 -
Tax benefit of stock
options exercised - - 505
The accompanying notes are an integral part of these consolidated financial
statements.
-16-
<PAGE>
<PAGE>
FIRST SOUTHEAST FINANCIAL CORPORATION
AND SUBSIDIARY
Notes to Consolidated Financial Statements
June 30, 1994, 1995 and 1996
(Tabular amounts in thousands)
1. Summary of Significant Accounting Policies
The accounting and reporting policies of the Holding Company and the
Association and subsidiary (the "Company") conform, in all material respects,
to generally accepted accounting principles and to general practices within
the savings and loan industry. The following summarize the more significant
of these policies and practices.
Nature of Operations - First Southeast Financial Corporation (the "Holding
Company") was formed on June 23, 1993, as the holding company for First
Federal Savings and Loan Association of Anderson (the "Association") in
connection with the Association's conversion from a federally chartered mutual
savings and loan association to a federally chartered stock savings and loan
association ("Conversion"). On October 7, 1993, the Holding Company completed
its initial public offering ("Offering") and with a portion of the net
proceeds acquired all the issued and outstanding stock of the Association,
which is the Holding Company's only business endeavor. The Association's
principal line of business is originating residential and nonresidential
first mortgage loans. The loans are primarily with individuals; however, some
corporate borrowers have loans at the Association.
Estimates - The preparation of consolidated financial statements in conformity
with generally accepted accounting principles requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the date of
the consolidated financial statements and the reported amounts of revenues and
expenses during the reporting period. Actual results could differ from those
estimates.
Principles of Consolidation - The consolidated financial statements include
the accounts of the Holding Company and its subsidiary, the Association, and
the Association's wholly-owned subsidiary, First Master Service Corporation.
Intercompany balances and transactions have been eliminated.
Loans Receivable - Loans receivable are carried at their unpaid principal
balance less, where applicable, unearned income, net deferred loan fees, and
allowances for losses. Unearned discounts on mortgage loans purchased are
amortized to interest income using the level yield interest method over the
lives of the underlying loans adjusted for anticipated prepayment rates.
Additions to the allowances for losses are based on management's evaluation of
the loan portfolio under current economic conditions and such other factors
which, in management's judgment, deserve recognition in estimating losses.
Interest accrual is discontinued when a loan becomes 90 days delinquent
unless, in management's opinion, the loan is well secured and in process of
collection. Interest income on impaired loans is recognized on a cash basis.
Loan Fees - Loan fees result from the origination of mortgage loans. Such
fees and certain direct incremental costs related to origination of such loans
are deferred ("net deferred loan fees") and reflected as a reduction of the
carrying value of mortgage loans. The net deferred loan fees (or costs) are
amortized using the interest method over the contractual lives of the loans.
Unamortized net deferred loan fees on loans sold prior to maturity are
credited to income at the time of sale.
Investment Securities and Mortgage-Backed Securities - Investment securities
and mortgage-backed securities held to maturity are stated at amortized cost
since the Company has both the ability and intent to hold such securities to
maturity. Premiums and discounts on the investment and mortgage-backed
securities are amortized or accreted into income over the contractual terms of
the securities using a level yield interest method. Gains and losses on the
sale of these securities are calculated based on the specific identification
method.
Investment securities and mortgage-backed securities available for sale are
carried at fair value. The Company has identified their holdings in certain
mutual funds, debt securities, and mortgage-backed securities as securities
available for sale. The unrealized holding gains or losses on securities
available for sale are excluded from income
-17-
<PAGE>
<PAGE>
and reported, net of related income tax effects, as a separate component of
stockholders' equity until realized. Gains or losses on sales of securities
available for sale are based on average cost method for the mutual funds and
specific identification method for all other securities.
Real Estate - Real estate properties acquired through, or in lieu of, loan
foreclosure are initially recorded at fair value at the date of foreclosure.
Subsequent to foreclosure, real estate is recorded at the lower of initial
fair value or existing fair value less estimated cost to sell (net realizable
value). Real estate properties held for development and resale are carried at
the lower of cost, including cost of improvements incurred subsequent to
acquisition, or net realizable value. Costs relating to development and
improvement of properties are capitalized, whereas costs relating to the
holding of property are expensed.
Valuations are periodically performed by management, and an allowance for
losses is established by a charge to income if the carrying value of a
property exceeds its estimated net realizable value.
Office Properties and Equipment - Office properties and equipment are carried
at cost less accumulated depreciation. Depreciation is computed on the
straight-line method over the estimated useful lives of the assets ranging up
to 40 years. The cost of maintenance and repairs is charged to expense as
incurred while expenditures which materially increase property lives are
capitalized.
Federal Home Loan Bank Stock - Investment in stock of a Federal Home Loan Bank
is required by law of every federally insured savings and loan or savings
bank. The investment is carried at cost. No ready market exists for the
stock, and it has no quoted market value.
Income Taxes - The Holding Company and the Association and its subsidiary
follow the practice of filing consolidated federal income tax returns. Income
taxes are allocated to the Association and subsidiary as though separate
returns are being filed. Individual state income tax returns are filed for
each company.
The Company utilizes the liability method of computing income taxes in
accordance with Statement of Financial Accounting Standard No. 109,
"Accounting for Income Taxes" (SFAS 109). Under the liability method,
deferred tax liabilities and assets are established for future tax return
effects of temporary differences between the stated value of assets and
liabilities for financial reporting purposes and their tax basis adjusted for
tax rate changes. The focus is on accruing the appropriate balance sheet
deferred tax amount, with the statement of income effect being the result of
changes in balance sheet amounts from period to period. Current income tax
expense is provided based upon the actual tax liability incurred for tax
return purposes.
Premium on Deposit Acquisitions - The premium on deposit acquisitions is being
amortized over the estimated life of the deposits (primarily thirteen years)
using an interest method. The amount is included in interest expense on
deposits.
Cash Flow Information - As presented in the consolidated statements of cash
flows, cash and cash equivalents include cash on hand and interest-earning
deposits in other banks. The Company considers all highly liquid instruments
with original maturities of three months or less to be cash equivalents.
Earnings Per Share - Because the Company completed its initial public offering
on October 7, 1993, and the common stock was not outstanding the entire fiscal
year, management believes that presentation of earnings per share information
would not be meaningful for the year ended June 30, 1994.
Impact of New Accounting Pronouncements -In March 1995, the FASB issued SFAS
No. 121, "Accounting for the Impairment of Long-Lived Assets and for
Long-Lived Assets to be Disposed Of". SFAS 121 requires that long-lived
assets and certain identifiable intangibles to be held and used by an entity
be reviewed for impairment whenever events or changes in circumstances
indicate that the carrying amount of an asset may not be recoverable. In
evaluating recoverability, if estimated future cash flows, undiscounted and
without interest charges, are less than the carrying amount of the asset, an
impairment loss is recognized. SFAS 121 also requires that certain long-lived
assets and certain identifiable intangibles to be disposed of be reported at
the lower of carrying amount or fair value less cost to sell. SFAS 121
applies prospectively for fiscal years beginning after December 15, 1995.
Management does not expect that adoption of SFAS 121 will have a material
impact on the Company's consolidated financial statements.
-18-
<PAGE>
<PAGE>
In May 1995, the FASB issued SFAS No. 122, "Accounting for Mortgage Servicing
Rights", which will become effective for years beginning after December 15,
1995. This standard allows the capitalization as an asset the rights to
service mortgage loans for others when those rights were acquired either
through loan purchases or loan origination activities. This accounting
statement will significantly change the current accounting under SFAS No. 65.
The capitalized mortgage servicing rights will be amortized in proportion to
and over the period of estimated net service income and should be evaluated
for impairment based upon fair value. The management of the Company believes
that based on current operations, SFAS No. 122, when adopted, will not have a
material effect on the consolidated financial statements.
In October 1995, the FASB issued SFAS No. 123, "Accounting for Stock-Based
Compensation", which applies to all transactions in which an entity acquires
goods or services issuing equity instruments or by incurring liabilities where
the payment amounts are based on the entity's common stock price, except for
employee stock ownership plans (ESOP's). The SFAS covers transactions with
employees and non-employees and is applicable to both public and non-public
entities.
SFAS No. 123 requires that, except for transactions with employees that are
within the scope of APB Opinion No. 25, all transactions in which goods or
services are the consideration received for the issuance of equity instruments
are to be accounted for based on the fair value of the consideration received
or the fair value of the equity instrument issued, whichever is more reliably
measurable. However, it also allows an entity to continue to measure
compensation costs for those plans using the intrinsic value based method of
accounting prescribed by APB Opinion No. 25, "Accounting for Stock Issued to
Employees". Entities electing to follow the accounting methods in Opinion No.
25 must make proforma disclosures of net income and, if presented, earnings
per share, as if the fair value method of accounting defined in the statement
had been applied.
SFAS No. 123 is effective for years beginning after December 15, 1995, or for
an earlier fiscal year for which this statement is initially adopted for
recognizing compensation costs. Proforma disclosures required for entities
that elect to continue to measure compensation cost using Opinion No. 25 must
include the effects of all awards granted in fiscal years that begin after
December 15, 1994.
2. Investment Securities
The carrying values and estimated market values of investment securities are
summarized as follows:
Gross Gross Estimated
Amortized Unrealized Unrealized Market
Cost Gains Losses Value
Held to maturity:
June 30, 1995:
U.S. government
and agency
securities $54,933 $217 $(453) $54,697
Municipal bonds 489 - (4) 485
Insured certifi-
cates of
deposit 6,127 - - 6,127
$61,549 $217 $(457) $61,309
June 30, 1996:
U.S. government
and agency
securities $17,995 $3 $(760) $17,238
Insured certifi-
cates of
deposit 5,679 - - 5,679
$23,674 $3 $(760) $22,917
Available for sale:
June 30, 1995:
Adjustable rate
mortgage fund $20,698 $ - $ (95) $20,603
Other mutual
funds 7,840 - (158) 7,682
$28,538 $ - $(253) $28,285
June 30, 1996:
U.S. government
and agency $27,218 $ 110 $ (12) $27,316
The amortized cost and estimated market values of debt securities by
contractual maturity are as follows:
-19-
<PAGE>
<PAGE>
Amortized Cost Estimated Market Value
1995 1996 1995 1996
Held to maturity:
Due in one year $21,706 $ - $21,663 $ -
Due after one
year through
five years 33,843 6,679 33,770 5,679
Due after five
years through
ten years 6,000 16,995 5,876 17,238
$61,549 $23,674 $61,309 $22,917
Available for sale:
Due in one year $ - $16,114 $ - $16,127
Due after one
year through
five years - 6,104 - 6,189
Due after five
years through
ten years - 5,000 - 5,000
$ - $27,218 $ - $27,316
The adjustable rate mortgage and mutual funds available for sale at June 30,
1995, have no stated maturity date.
The Company had approximately $1,474,000 and $9,000,000 of investment
securities pledged against deposits at June 30, 1995 and 1996, respectively.
There were no investment securities held to maturity sold during the fiscal
years 1994, 1995 and 1996.
For the years ended June 30, 1995 and 1996, proceeds on sales of securities
available for sale were $1,250,000 and $34,964,000, with realized losses of
approximately $38,000 and $582,000, respectively. There were no investment
securities available for sale sold for the year ended June 30, 1994. The
unrealized gains (losses) at June 30, 1995 and 1996, of approximately
$(253,000) and $98,000 net of related income tax expense (benefit) of
$(95,000) and $34,000, are reported as a separate component of stockholders'
equity.
In December 1995, the Company transferred investment securities held to
maturity with an amortized cost of approximately $39,801,000 and market value
of approximately $40,036,000 to the available for sale category. The transfer
was a result of the FASB allowing a one-time reallocation of an entity's
investment portfolio without penalty.
The Company had no commitments to purchase investment securities at June 30,
1995 and 1996.
3. Loans Receivable
Loans receivable are summarized as follows:
June 30,
1995 1996
Real estate first mortgage loans:
One-to-four-family dwellings $181,119 $209,810
Construction 10,600 14,220
Commercial real estate 4,070 2,022
Other real estate 456 686
Total real estate loans 196,245 226,738
Other loans:
Consumer installment loans 21,373 20,317
Commercial loans 1,506 3,496
Total other loans 22,879 23,813
Total loans 219,124 250,551
Less:
Undisbursed portion of loans
in process 6,492 9,059
Unearned discounts on consumer
loans 291 141
Unearned discounts on loans
purchased 2,123 1,348
Net deferred loan fees 508 433
Allowance for loan losses 1,062 1,233
10,476 12,214
$208,648 $238,337
-20-
<PAGE>
<PAGE>
The Company's primary lending area for the origination of mortgage loans
includes parts of six counties in northwestern South Carolina. The Company is
also involved with correspondent lenders that broker loans throughout South
and North Carolina. The Company limits uninsured loans to 80% of the
appraised value of the property securing the loan. Generally, the Company
allows loans covered by private mortgage insurance up to 95% of the appraised
value of the property securing the loan.
The general policy is to limit loans on commercial real estate to 75% of the
lesser of appraised value or construction cost of the property securing the
loan.
The Company's policy requires that consumer and other installment loans be
supported primarily by the borrower's ability to repay the loan and
secondarily by the value of the collateral securing the loan, if any.
Management of the Company believes that its allowances for losses on its loan
portfolio are adequate. However, the estimates used by management in
determining the adequacy of such allowances are susceptible to significant
changes due primarily to changes in economic and market conditions. In
addition, various regulatory agencies periodically review the Company's
allowance for losses as an integral part of their examination processes. Such
agencies may require the Company to recognize additions to the allowances
based on their judgments of information available to them at the time of their
examinations.
In accordance with SFAS No. 114, "Accounting by Creditors for Impairment of a
Loan", no loans in non-homogenous groups were determined to be impaired for
the year ended or as of June 30, 1996. Commercial real estate and other loans
are included in the non-homogenous group.
For the loans in homogeneous groups, loans which are contractually past due
ninety days or more total approximately $852,000 at June 30, 1995 and $791,000
at June 30, 1996. The amount the Company will ultimately realize from these
loans could differ materially from their carrying value because of
unanticipated future developments affecting the underlying collateral or the
borrower's ability to repay the loans. If collection efforts are
unsuccessful, these loans will be subject to foreclosure proceedings in the
ordinary course of business. Management believes that the Company has
adequate collateral on these loans and that the Company will not incur
material losses in the event of foreclosure.
The changes in the allowance for loan losses are summarized as follows:
June 30,
1994 1995 1996
Beginning balance $843 $ 914 $ 1,062
Provision charged to
income 225 180 180
Recoveries 30 52 35
Charge-offs (184) (84) (44)
Ending balance $914 $1,062 $1,233
Mortgage loans serviced for others are not included in the accompanying
consolidated balance sheets. The unpaid principal balances of these loans are
approximately $4,666,000, $4,286,000 and $3,646,000 at June 30, 1994, 1995 and
1996, respectively.
Custodial escrow balances maintained in connection with the foregoing loan
servicing were approximately $40,000, $45,000 and $28,000 at June 30, 1994,
1995 and 1996, respectively.
-21-
<PAGE>
<PAGE>
4. Mortgage-Backed Securities
Mortgage-backed securities are summarized as follows:
Amortized Unrealized Unrealized Market
Cost Gains Losses Value
Held to maturity:
June 30, 1995:
FHLMC Certificates $ 5,876 $30 $(174) $ 5,732
FNMA Certificates 14,556 22 (737) 13,841
$20,432 $52 $(911) $19,573
June 30, 1996:
FHLMC Certificates $2,839 $ 1 $ (14) $ 2,826
FNMA Certificates 4,368 - (240) 4,128
GNMA Certificates 4,301 - (38) 4,263
$11,508 $ 1 $(292) $11,217
Available for sale:
June 30, 1996:
FHLMC Certificates $ 910 $21 $ - $ 931
FNMA Certificates 582 14 - 596
GNMA Certificates 4,663 - (100) 4,563
$6,155 $35 $(100) $6,090
Although mortgage-backed securities are initially issued with a stated
maturity date, the underlying mortgage collateral may be prepaid by the
mortgagee and, therefore, such securities may not reach their maturity date.
The Company had no sales of mortgage-backed securities held to maturity during
the years ended June 30, 1994, 1995 and 1996. No mortgage-backed securities
were pledged at June 30, 1995, and approximately $9 million at June 30, 1996.
For the year ended June 30, 1996, proceeds on sales of mortgage-backed
securities available for sale were approximately $9,706,000, with realized
losses of approximately $309,000. There were no mortgage-backed securities
available for sale sold for the years ended June 30, 1994 and 1995. The
unrealized losses at June 30, 1996 of approximately $65,000, net of related
tax benefit of $23,000, are reported as a separate component of stockholders
equity.
In December 1995, the Company transferred mortgage-backed securities held to
maturity with an amortized cost of approximately $12,749,000 and market value
of approximately $12,610,000 to the available for sale category. The transfer
was a result of the FASB allowing a one-time reallocation of an entity's
investment portfolio without penalty.
5. Real Estate
Real estate is summarized as follows:
June 30,
1995 1996
Real estate acquired on
settlement of loans $ 27 $ 25
Real estate acquired for
development, rental and sale 1,194 984
1,221 1,009
Less:
Accumulated depreciation 204 218
Allowance for loss 21 -
$996 $791
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Real estate acquired for development, rental and sale consists of:
June 30,
1995 1996
Commercial buildings $ 509 $ 350
Improved land 97 46
Unimproved land 588 588
$1,194 $ 984
Real estate acquired for development, rental and sale includes the
Association's subsidiary's investment in commercial rental property located in
Anderson, South Carolina. The subsidiary recognized income from this property
of approximately $76,000, $88,000 and $86,000 during the years ended June 30,
1994, 1995 and 1996, respectively.
In 1995, the Company reclassified improved land and a building of
approximately $210,000 from office properties and equipment to real estate.
This property consists of a former branch office which is no longer used in
operations. The property was sold in 1996, with proceeds on sale of
approximately $164,000, resulting in a realized loss of approximately $23,000.
The changes in the allowance for losses on real estate acquired in settlement
of loans is summarized as follows:
1994 1995 1996
Beginning balance $ 20 $ 12 $ 21
Provision charged to income - 21 -
Charge-offs (8) (12) (21)
Ending balance $12 $21 $ -
6. Office Properties and Equipment
Office properties and equipment are summarized as follows:
June 30,
1995 1996
Land and improvements $1,591 $1,591
Buildings 5,641 5,660
Furniture, fixtures and equipment 3,324 3,348
10,556 10,599
Less accumulated depreciation 5,815 6,218
$4,741 $4,381
7. Interest Receivable
Interest receivable is summarized as follows:
June 30,
1995 1996
Investments $ 905 $ 835
Loans receivable 1,178 1,330
Mortgage-backed securities 114 129
$2,197 $2,294
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8. Deposits
Deposit account balances are summarized as follows:
June 30,
1995 1996
NOW deposits at 1.88% and 1.87%
at June 30, 1995 and 1996
(including non-interest bearing
accounts of $1,222 and $1,577,
respectively) $20,242 $21,424
Money Market deposits with
weighted average rates of 3.21%
and 3.23% at June 30, 1995 and
1996, respectively 14,700 15,574
Passbook deposits at 2.47% at
June 30, 1995 and 1996 27,634 27,470
Fixed rate certificates with
weighted average rates of 5.75%
and 5.62% at June 30, 1995 and
1996, respectively 215,686 223,767
Less premium on deposits acquired (31) (18)
Total deposits $278,231 $288,217
Weighted average cost of deposits 5.01% 4.91%
Contractual maturities of certificate accounts are summarized as follows:
June 30,
1995 1996
12 months or less $163,398 $ 164,736
Over 12 months 52,288 59,031
$215,686 $223,767
The Company had deposit accounts in amounts of $100,000 or more of
approximately $29 and $38 million at June 30, 1995 and 1996, respectively.
The Company paid a $1 million premium for approximately $20 million in
deposits acquired on January 2, 1986. The premium is being amortized over the
estimated thirteen year life of the related deposits as an adjustment to
interest expense.
9. Security Sold Under Agreement to Repurchase
The security, a FNMA note, sold under a reverse repurchase agreement was
delivered to safekeeping with an independent third-party on the Company's
behalf. The broker-dealer has agreed to resell to the Company the identical
security at the maturity of the agreement. The agreement at June 30, 1996,
contains provisions for maturity every 90 days, with a final maturity on June
29, 1998.
Information concerning the security sold under agreement to repurchase is
summarized as follows:
1996
Average balance during the year
(monthly basis) $ 417
Average interest rate 8.0%
Maximum month-end balance during the year $5,000
Investment securities underlying the
agreements at year-end:
Carrying value $5,000
Estimated fair value $5,000
10. Advances from the Federal Home Loan Bank
Advances from the Federal Home Loan Bank are summarized as follows:
June 30,
Interest Rate Maturity Date 1995 1996
8.85 May 1996 $ 841 $ -
8.60 June 1996 756 -
Total $1,597 $ -
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The Federal Home Loan Bank stock and mortgage loans receivable were pledged as
collateral for these advances.
11. Compensation Benefit Agreements
Effective January 9, 1996, the Association established unfunded nonqualified
compensation agreements with its directors providing for fixed benefits for
life. The benefits are payable to those directors beginning the month
following retirement from the Board or, in the event of their death, to their
designated beneficiary for a five year period. The liability for the benefits
has been accrued at the balance sheet date at the net present value of the
expected future benefits. Annual expense is based on the increase in the net
present value of expected future benefits. The expense before income tax
effect associated with these agreements was approximately $46,000 for the year
ending June 30, 1996.
12. Income Taxes
Income tax expense (benefit) is summarized as follows:
Years Ended June 30,
1994 1995 1996
Current $1,386 $1,919 $1,271
Deferred 236 (11) (250)
Total $1,622 $1,908 $1,021
The differences between actual income tax expense and the amount computed by
applying the federal statutory income tax rate of 34% to income before income
taxes and cumulative effect adjustment are reconciled as follows:
Years Ended June 30,
1994 1995 1996
Computed income tax expense $1,530 $1,865 $666
Increase (decrease) result-
ing from:
State income tax, net of
federal benefit 60 49 -
Nondeductible ESOP compen-
sation expense - - 341
Other 32 (6) 14
Actual income tax expense $1,622 $1,908 $1,021
Net deferred tax assets (liabilities) are included in other assets or accrued
expenses and other liabilities in the accompanying consolidated balance
sheets. The components of net deferred tax assets (liabilities) are as
follows:
June 30,
1995 1996
Deferred tax assets:
Loan origination fees $251 $ 67
Deferred compensation and
benefit deductions 269 272
Unrealized losses on securities
available for sale 95 -
Carryforward of capital losses - 234
State net operating loss - 56
Tax credits - 124
Other 28 31
Valuation allowance - -
643 784
Deferred tax liabilities:
Bad debt reserves 261 277
Excess tax depreciation 99 112
FHLB stock dividends 315 315
Excess MRP compensation 76 -
Unrealized gains on securities
available for sale - 11
Other 23 -
774 715
Net deferred tax asset
(liability) $(131) $69
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The Association's annual addition to its reserve for bad debts allowed under
the Internal Revenue Code may differ significantly from the bad debt
experience used for financial statement purposes. Such bad debt deductions
for income tax purposes are included in taxable income of later years only if
the bad debt reserves are used for purposes other than to absorb bad debt
losses. Since the Association does not intend to use the reserve for purposes
other than to absorb losses, no deferred income taxes have been provided on
the amount of bad debt reserves for tax purposes that arose in tax years
beginning before December 31, 1987, in accordance with SFAS No. 109.
Therefore, retained earnings at June 30, 1995 and 1996, includes approximately
$7.8 million, representing such bad debt deductions for which no deferred
income taxes have been provided.
13. Stockholders' Equity
On October 7, 1993, the Holding Company issued and sold 4,326,400 shares of
common stock at $10 per share in its initial public offering, including
332,800 shares to the Association's ESOP (see Note 18) and 166,400 shares to
the Association's MRP's (see Note 19). The net proceeds to the Holding
Company after recognizing the $1.4 million of expenses and underwriting costs
and $5.0 million of employee compensation plans were approximately $36.9
million.
The Holding Company used $20.1 million of the net proceeds to purchase all of
the capital stock of the Association and invest virtually all of the remaining
proceeds in mutual fund investments and mortgage backed securities (after
loaning $3.3 million to the Association's ESOP).
At the time of its conversion to a stock association, the Association
established a liquidation account in an amount equal to its total retained
earnings as of June 30, 1993. The liquidation account will be maintained for
the benefit of eligible account holders who continue to maintain their
accounts at the Association after the conversion. The liquidation account
will be reduced annually to the extent that eligible account holders reduce
their qualifying deposits. Subsequent increases will not restore an eligible
account holder's interest in the liquidation account. In the event of a
complete liquidation, each eligible account holder will be entitled to receive
a distribution from the liquidation account in an amount proportionate to the
current adjusted qualified balances for accounts then held. The balance in
the liquidation account at the date of conversion was approximately $27.6
million dollars. The balance in the liquidation account at June 30, 1996, as
estimated by management, was approximately $14.3 million.
Subsequent to the conversion, the Association may not declare or pay cash
dividends on or repurchase any of its shares of common stock, if the effect
would cause stockholders' equity to be reduced below the amount required for
the liquidation account, applicable regulatory capital maintenance
requirements, or if such declaration and payment would otherwise violate
regulatory requirements.
Unlike the Association, the Company is not subject to these regulatory
restrictions on payment of dividends to its stockholders. However, the source
of future dividends may be dependent upon dividends from the Association. On
June 17, 1996, the Board of Directors of the Holding Company authorized a
one-time special cash dividend of $10 per share to be paid on June 27, 1996,
to stockholders of record on June 21, 1996. The Company's earnings for the
fourth quarter were substantially reduced due to losses that were recognized
upon the liquidation of securities to fund the cash dividend as well as the
recognition of the remaining unearned ESOP compensation. The ESOP expense
recognition was accelerated because the special dividend payment on
unallocated shares provided sufficient funds for the ESOP to repay its
outstanding debt obligation and release the remaining unallocated shares. The
Association received Office of Thrift Supervision approval to provide $19.5
million of dividends to the Holding Company to partially fund the one-time
special dividend.
14. Financial Institutions Reform, Recovery and Enforcement Act (FIRREA) of
1989
FIRREA regulations for savings institutions' minimum-capital requirements went
into effect on December 7, 1989. In addition to the capital requirements,
FIRREA includes provisions for changes in the federal regulatory structure for
institutions, including a new deposit insurance system, increased deposit
insurance premiums, and restricted investment activities with respect to
non-investment-grade corporate debt and certain other investments. FIRREA
also increases the required ratio of housing-related assets needed to qualify
as a savings institution. The regulations require institutions to have
minimum regulatory tangible capital equal to 1.5 percent of total assets, 3
percent leverage capital ratio, and a 8 percent risk-based capital ratio.
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At June 30, 1995 and 1996, the Association met the regulatory
tangible-capital, core-capital, and risk-based capital requirements, as
defined by FIRREA. The Association had the following capital ratios at June
30, 1995 and 1996:
June 30,
1995 1996
Tangible capital to adjusted
total assets 14.4% 10.5%
Core capital to adjusted
total assets 14.4% 10.5%
Risk-based capital to risk-
weighted assets 34.4% 22.7%
The following is a reconciliation of the Association's generally accepted
accounting principles ("GAAP") capital to regulatory capital at June 30, 1996
(in thousands):
Tangible Core Risk-Based
Capital Capital Capital
GAAP capital $34,274 $34,274 $34,274
Adjustments:
Unrealized gains on
securities available
for sale (22) (22) (22)
Investments in and ad-
vances to nonincludable
subsidiary (782) (782) (782)
General valuation allowances - - 1,216
Regulatory capital computed 33,470 33,470 34,686
Minimum capital requirement 4,794 9,588 12,203
Regulatory capital excess $28,676 $23,882 $22,483
15. Stock Option Plans
The Holding Company, in October 1993, adopted a stock option plan for the
benefit of directors, officers, and other key employees. The number of shares
of common stock reserved for issuance under the stock option plan was equal to
approximately 10% of the total number of common shares issued pursuant to the
Company's offering. The plan provides for incentive options for officers and
employees and non-incentive options for directors. The plan is administered
by a committee of three directors appointed by the board of directors. The
option exercise price cannot be less than the fair value of the underlying
common stock as the date of the option grant, and the maximum option term
cannot exceed ten years. The number of shares of common stock authorized
under the stock option and incentive plan is 416,000 and 291,616 were granted
in October 1993 at an exercise price of $10. As of June 30, 1996, incentive
and non-incentive options granted and exercisable totaled 291,616 and all were
exercised at $10 per share in 1996. The non-incentive options exercised
provided the Holding Company with a tax deduction of approximately $1.3
million in 1996, which consisted of the excess of the fair market value over
the exercise price. The tax benefit of that deduction of approximately
$505,000 has been credited to stockholders' equity in 1996.
16. Pension Plan
The Association maintains a Defined Contribution Money Purchase Pension Plan
to supplement its Profit Sharing and Employee Savings Plans. Under this plan,
the Board authorized an annual contribution of 3.5% of eligible salaries.
Eligible employees are the same as those defined in the Profit Sharing and
Employee Savings Plan. The expense for this plan was approximately $77,000,
$79,000 and $76,000 for the years ending June 30, 1994, 1995 and 1996,
respectively.
17. Profit Sharing and Employee Savings Plans
The Association established a qualifying noncontributory profit sharing plan
covering substantially all employees who have completed six months of service
and have attained the age of twenty and one-half. All employer contributions,
as determined by the Board of Directors, are irrevocable and the Association
has reserved the right of amendment and termination of the plan. No
contributions were made to the plan for the years ended June 30, 1994, 1995
and 1996, respectively. Certain officers and other eligible employees are
covered by a non-qualified plan. The expense recognized under this plan was
$46,000, $58,000 and $58,000 for the years ended June 30, 1994, 1995 and 1996,
respectively.
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The Association also sponsors an employee savings plan under Section 401(k) of
the Internal Revenue Code. This plan covers substantially all full-time
employees who have completed six months of service and have attained the age
of twenty and one-half. Employees may contribute a percentage of their annual
gross salary as limited by the federal tax laws. The Association matches
employee contributions based on the plan guidelines. The amount charged
against income was $78,000, $68,000 and $84,000 for the years ended June 30,
1994, 1995 and 1996, respectively.
18. Employee Stock Ownership Plan (ESOP)
The Association has established for eligible employees an Employee Stock
Ownership Plan ("ESOP"). The ESOP borrowed $3.3 million from the Holding
Company and purchased 332,800 common shares issued in the offering. The
Association is expected to make scheduled cash contributions to the ESOP
sufficient to service the amount borrowed. The $3.3 million in stock issued
by the Holding Company is reflected in the accompanying consolidated financial
statements as a charge to unearned compensation and a credit to common stock
and paid-in capital. In accordance with GAAP, the unpaid balance of the ESOP
loan has been eliminated in consolidation and the unamortized balance of
unearned compensation is shown as a reduction in stockholders' equity. For
the years ending June 30, 1994 and 1995, the total contributions to the ESOP
used to fund principal and interest payments on the ESOP debt totaled
approximately $468,000 and $505,000, respectively. For the year ending June
30, 1996, the Association was not required to make any contributions to the
ESOP Plan for debt service due to available funds held by the ESOP.
For the years ending June 30, 1994, 1995 and 1996, compensation from the ESOP
of approximately $432,000, $490,000 and $2,745,000 was expensed, respectively.
Compensation is recognized at the average fair value of the ratably released
shares during the accounting period as the employees performed services. The
ESOP used dividends on allocated and unallocated shares, as determined by plan
administrators, to pay off debt and accrued interest. Additional compensation
expense of approximately $1,967,000 was recognized in 1996 because of the
accelerated debt repayment by the ESOP Plan as disclosed in Note 13.
For the purpose of computing earnings per share, all ESOP shares committed to
be released have been considered outstanding.
19. Management Development and Recognition Plans
The Association has established four management development and recognition
plans ("MRPs") which purchased 166,400 shares of common stock in the offering.
The Association contributed $1.7 million to fund the purchase of the MRP
shares. The shares were awarded to certain officers and directors of the
Association who began vesting on January 1, 1994, and were fully vested on
January 1, 1996. Compensation expense in the amount of the fair value of the
common stock at the date of grant to the officer or director was recognized in
the periods the participants become vested. The unearned compensation is
reflected as a reduction of stockholders' equity. For the years ending June
30, 1994, 1995 and 1996, approximately $832,000, $575,000 and $257,000 of
compensation expense has been recognized, respectively.
20. Employment and Change of Control Agreements
The Association and the Holding Company entered into employment agreements
with certain key officers. The employment agreements provide for three-year
terms. Commencing on the first anniversary date and continuing each
anniversary date thereafter, the respective boards of directors may extend the
agreements for an additional year so that the remaining terms shall be three
years, unless written notice of termination of the agreement is given by the
executive officer. The agreements provide for severance payments and other
benefits in the event of involuntary termination of employment in connection
with any change in control of the employers. Severance payments also will be
provided on a similar basis in connection with voluntary termination of
employment where, subsequent to a change in control, officers are assigned
duties inconsistent with their positions, duties, responsibilities and status
immediately prior to such change in control. The severance payments will
equal 2.99 times the executive officer's average annual compensation during
the preceding five years. Such amount will be paid within five business days
following the termination of employment, unless the officer elects to receive
equal monthly installments over a three-year period. The employment
agreements provide for termination by the Association or the Holding Company
for just cause at any time. The Company has not accrued any benefits under
these postemployment agreements.
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21. Commitments
The Company had outstanding commitments to originate mortgage loans of
approximately $1,830,000 and $3,600,000 at June 30, 1995 and 1996,
respectively. The commitments to originate mortgage loans at June 30, 1995,
were composed of variable-rate loans of $1,118,000 and fixed-rate loans of
$712,000. The fixed-rate loans had interest rates ranging from 7.125% to
8.625% and terms ranging from 10 to 30 years. The commitments to originate
mortgage loans at June 30, 1996, were composed of variable-rate loans of
$3,240,000 and fixed-rate loans of $360,000. The fixed-rate loans had
interest rates ranging from 7.75% to 7.875% and terms ranging from 10 to 15
years.
22. Financial Instruments with Off-Balance-Sheet Risk
The Company is a party to financial instruments with off-balance-sheet risk in
the normal course of business to meet the financing needs of its customers.
These financial instruments include commitments to extend credit and lines of
credit. Those instruments involve, to varying degrees, elements of credit and
interest-rate risk in excess of the amount recognized in the balance sheet.
The contract or notional amounts of those instruments reflect the extent of
the Company's involvement in particular classes of financial instruments.
The Company's exposure to credit loss in the event of nonperformance by the
other party to the financial instrument for commitments to extend credit and
lines of credit 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.
Financial instruments, the contract amounts of which represent credit risk for
lines of credit, totaled approximately $10.4 million at June 30, 1996.
Commitments to extend 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 many of the commitments are expected
to expire without being drawn upon, the total commitment amounts do not
necessarily represent future cash requirements. The Company evaluates each
customer's creditworthiness. The amount of collateral obtained, if it is
deemed necessary by the Company upon extension of credit, is based on
management's credit evaluation of the counterparty. Collateral may include
accounts receivable, inventory, stocks, property, plant, and equipment,
income-producing commercial properties, and first and second mortgages on
single family residences.
The undisbursed advances on customer lines of credit were approximately $6.1
million at June 30, 1996. The Company does not anticipate any losses as a
result of these transactions.
23. Deposit Insurance Premiums
The Association currently pays an insurance premium to the Federal Deposit
Insurance Corporation (FDIC) equal to a percentage of its total deposits as a
member of the Savings Association Insurance Fund (SAIF). In August 1995, the
FDIC announced plans to lower the insurance premium rates for members of the
Bank Insurance Fund (BIF). The disparity in insurance premiums between BIF
and SAIF could create a competitive disadvantage for SAIF members. A proposed
alternative to mitigate the effect is the assessment of a special premium of
approximately .68% of deposits in order to recapitalize the SAIF and a
subsequent lowering of the SAIF insurance premium rates.
If the proposal is realized, the Association would recognize an immediate
charge to income for the amount of the fee which would immediately reduce its
capital. After recapitalization, it is expected that the SAIF premiums would
be more in line with the BIF premiums and therefore provide the Association
with reduced insurance premiums in the future. However, management of the
Association is unable to predict whether this proposal will be enacted or
whether ongoing SAIF premiums will be reduced to a level equal to that of BIF
premiums.
24. Financial Instruments
The approximate stated and estimated fair value of financial instruments are
summarized below (in thousands of dollars):
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June 30,
1995 1996
Stated Estimated Stated Estimated
Amount Fair Value Amount Fair Value
Financial assets:
Cash $22,335 $22,335 $13,323 $13,323
Investment
securities 89,834 89,594 50,990 50,233
Loans receivable,
net 208,648 223,000 238,337 251,403
Mortgage-backed
securities 20,432 19,573 17,598 17,307
Federal Home Loan
Bank stock 2,691 2,691 2,691 2,691
Other assets 2,197 2,197 2,294 2,294
$346,137 $359,390 $325,233 $337,251
Financial liabilities:
Deposits:
Demand accounts $62,576 $62,576 $64,468 $64,468
Certificate
accounts 215,655 217,000 223,749 224,774
Reverse repur-
chase
agreement - - 5,000 5,000
Advances from
Federal Home
Loan Bank 1,597 1,600 - -
Other
liabilities 1,957 1,957 1,764 1,764
$281,785 $283,133 $294,981 $296,006
The Company had off-balance sheet financial commitments, which include
approximately $9.7 million of commitments to originate and fund loans and
unused consumer lines of credit. Since these commitments are based on current
market rates, the commitment amount is considered to be a reasonable estimate
of fair market value.
Statement of Financial Accounting Standards No. 107, "Disclosures about Fair
Value of Financial Instruments" (SFAS 107), requires disclosure of fair value
information about financial instruments, whether or not recognized in the
balance sheet, for which it is practicable to estimate that value. The
following methods and assumptions were used by the Company in estimating its
fair value disclosures for financial instruments:
Cash - The carrying amount of such instruments is deemed to be a reasonable
estimate of fair value.
Investments - Fair values for investment securities are based on quoted market
prices.
Loans - Fair values for loans held for investment are estimated by segregating
the portfolio by type of loan and discounting scheduled cash flows using
interest rates currently being offered for loans with similar terms, reduced
by an estimate of credit losses inherent in the portfolio. A prepayment
assumption is used as an estimate of the portion of loans that will be repaid
prior to their scheduled maturity.
Federal Home Loan Bank Stock - No ready market exists for this stock and it
has no quoted market value. However, redemption of this stock has
historically been at par value. Accordingly, the carrying amount is deemed to
be a reasonable estimate of fair value.
Deposits - The fair values disclosed for demand deposits are, as required by
SFAS 107, equal to the amounts payable on demand at the reporting date (i.e.,
their stated amounts). The fair value of certificates of deposit are
estimated by discounting the amounts payable at the certificate rates using
the rates currently offered for deposits of similar remaining maturities.
Security Sold with Agreement to Repurchase - The estimated fair value of this
short-term debt is based on discounting amounts payable at the contractual
rates using current market rates for debt with a similar maturity.
Advances from the FHLB - The estimated fair value of advances from the FHLB is
based on discounting amounts payable at contractual rates using current market
rates for advances with similar maturities.
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Other Assets and Other Liabilities - Other assets represent accrued interest
receivable; other liabilities represent advances from borrowers for taxes and
insurance and accrued interest payable. Since these financial instruments
will typically be received or paid within three months, the carrying amounts
of such instruments are deemed to be a reasonable estimate of fair value.
Fair value estimates are made at a specific point of time, based on relevant
market information and information about the financial instrument. These
estimates do not reflect any premium or discount that could result from
offering for sale the Company's entire holdings of a particular financial
instrument. Because no active 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,
current interest rates and prepayment trends, risk characteristics of various
financial instruments, and other factors. These estimates are subjective in
nature and involve uncertainties and matters of significant judgment and
therefore cannot be determined with precision. Changes in any of these
assumptions used in calculating fair value also would affect significantly the
estimates. Further, the fair value estimates were calculated as of June 30,
1995 and 1996. Changes in market interest rates and prepayment assumptions
could change significantly the estimated fair value.
Fair value estimates are based on existing on and off-balance sheet 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 assets and
liabilities that are not considered financial assets or liabilities including
deposit franchise value, loan servicing portfolio, real estate, deferred tax
liabilities, and office properties and equipment. 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 any of these estimates.
25. Condensed Parent Company Only Financial Statements
The following condensed balance sheets as of June 30, 1995 and 1996, and
condensed statements of income and cash flows for the period from October 7,
1993 to June 30, 1994 and for the years ended June 30, 1995 and 1996 for First
Southeast Financial Corporation should be read in conjunction with the
consolidated financial statements and the notes thereto.
Parent Company Only June 30,
Balance Sheets (in thousands) 1995 1996
Assets:
Cash and due from banks $ 34 $ 5
Investment securities:
Held to maturity 1,000 -
Available for sale 7,682 -
Loan receivable from ESOP 2,662 -
Mortgage-backed securities,
held to maturity 8,325 -
Equity in net assets of
Association 49,098 34,274
Interest receivable 65 -
Other 70 785
Total assets $68,936 $35,064
Liabilities:
Accrued liabilities $ 12 $ 1,561
Stockholders' equity:
Common stockholders' equity 68,924 33,503
Total liabilities and
stockholders' equity $68,936 $35,064
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Parent Company Only Period Ending June 30,
Statements of Income (in thousands) 1994 1995 1996
Equity in earnings of Association $1,734 $2,971 $ 901
Interest income 741 1,145 906
Loss on sale of investment securities (12) (11) (593)
Other expense (173) (183) (259)
Income tax expense (214) (345) (16)
Net income $2,076 $3,577 $939
The Association subsidiary paid the parent company cash dividends of
$267,000, $1,100,000 and $21,470,000 during the years ending June 30, 1994,
1995 and 1996, respectively.
Parent Company Only Period Ending June 30,
Statements of Cash Flows
(in thousands) 1994 1995 1996
Operating activities:
Net income $2,076 $3,577 $ 939
Adjustments to reconcile net
income to net cash provided
by operating activities:
Undistributed equity earnings
of Association (1,734) (2,971) (901)
Distribution of equity
earnings of Association 267 1,100 5,140
Realized losses on securities 12 11 593
Amortization of premiums on
mortgage-backed securities 29 49 38
Deferred income tax benefit - (11) (219)
(Increase) decrease in
interest receivable (53) (12) 65
Increase in other assets - - 54
Increase (decrease) in
accrued liabilities 189 (177) 1,549
Net cash provided by
operating activities 786 1,566 7,258
Investing activities:
Loan to ESOP (3,328) - -
Principal repayment by ESOP 333 333 2,662
Purchase of investment
securities (9,623) (1,621) -
Proceeds from sale of
investment securities 2,130 250 8,498
Purchase of mortgage-backed
securities (10,999) - -
Principal payments on mortgage-
backed securities 999 1,597 1,606
Proceeds from sale of mortgage-
backed securities - - 6,430
Purchase of capital stock of
Association (20,097) - -
Return of capital from Asso-
ciation - - 16,330
Net cash provided (used) by
investing activities (40,585) 559 35,526
Financing activities:
Proceeds from issuance of
common stock and treasury
stock 41,893 - 2,916
Purchase of treasury stock (1,846) (1,074) -
Dividends paid (247) (1,018) (45,729)
Net cash provided (used)
by financing activities 39,800 (2,092) (42,813)
Net increase (decrease) in cash 1 33 (29)
Cash at beginning of period - 1 34
Cash at end of period $ 1 $ 34 $ 5
(continued)
-32-
<PAGE>
<PAGE>
Parent Company Only Period Ending June 30,
Statements of Cash Flows
(in thousands) 1994 1995 1996
Supplemental disclosures:
Cash paid during the period for
income taxes $ - $ 532 $ 306
Non-cash investing and financing
activities:
Transfer of investment
securities from held to
maturity to available
for sale $ - $ - $1,000
Transfer of mortgage-backed
securities from held to
maturity to available for
sale - - 6,681
Tax benefit from stock options
exercised - - 505
Net change in unrealized gains
on securities, net of taxes
of $59 - - 99
26. First Southeast Financial Corporation and Subsidiary Quarterly Results of
Operations (Unaudited)
Year Ended June 30, 1996
1st 2nd 3rd 4th
Quarter Quarter Quarter Quarter
Interest income $5,683 $5,884 $6,045 $6,338
Interest expense 2,760 2,828 2,997 3,380
Net interest income 2,923 3,056 3,048 2,958
Provision for loan
losses 45 45 45 45
Net interest income
after provision for
loan losses 2,878 3,011 3,003 2,913
Other income 282 238 226 310
Other expense 1,760 1,811 1,923 1,882
Income (loss) before
income tax expense
and cumulative
effect adjustment 1,400 1,438 1,306 1,341
Income tax expense
(benefit) 489 501 466 452
Income (loss) before
cumulative effect
adjustment 911 937 840 889
Cumulative effect
adjustment - - - -
Net income (loss) $911 $937 $840 $889
Year Ended June 30, 1996
1st 2nd 3rd 4th
Quarter Quarter Quarter Quarter
Interest income $6,419 $6,454 $6,442 $6,462
Interest expense 3,622 3,641 3,573 3,521
Net interest income 2,797 2,813 2,869 2,941
Provision for loan
losses 45 45 45 45
Net interest income
after provision for
loan losses 2,752 2,768 2,824 2,896
Other income 244 244 251 (629)
Other expense 1,835 1,941 1,809 3,805
Income (loss) before
income tax expense
and cumulative
effect adjustment 1,161 1,071 1,266 (1,538)
Income tax expense
(benefit) 405 344 446 (174)
Income (loss) before
cumulative effect
adjustment 756 727 820 (1,364)
Cumulative effect
adjustment - - - -
Net income (loss) $756 $727 $820 $(1,364)
Fourth quarter 1996 results include additional expense of approximately
$1,967,000 related to ESOP compensation that was recognized upon the release
of the remaining unallocated shares due to ESOP debt repayment. Realized
losses on securities of $891,000 were recognized upon the liquidation of
investments to fund the Holding Company's special dividend of $10 per share.
-33-
<PAGE>
<PAGE>
COMMON STOCK INFORMATION
The common stock of First Southeast Financial Corporation is traded in
the over-the counter market as reported on the Nasdaq National Market under
the symbol "FSFC." As of September 13, 1996, there were approximately 940
stockholders of record. The Company estimates that, as of September 13, 1996,
there were approximately 2,120 beneficial owners holding stock in nominee or
"street" name.
The Company presently pays quarterly cash dividends on the common stock,
subject to the discretion of the Board of Directors. Dividend payments by the
Company depend primarily on the ability of the Association to pay dividends to
the Company. Under Federal regulations, the dollar amount of dividends a
federal savings association may pay depends upon the association's capital
surplus position and recent net income. Generally, if an association
satisfies its regulatory capital requirements, it may make dividend payments
up to the limits prescribed in the OTS regulations. However, institutions
that have converted to the stock form of ownership may not declare or pay a
dividend on, or repurchase any of, its common stock if the effect thereof
would cause the regulatory capital of the institution to be reduced below the
amount required for the liquidation account which was established in
accordance with OTS regulations and the Association's Plan of Conversion. In
addition, earnings of the Association appropriated to bad debt reserves and
deducted for federal income tax purposes are not available for payment of cash
dividends without payment of taxes at the then current tax rate by the
Association on the amount removed from the reserves for such distributions.
The Association does not contemplate any distribution that would limit the
Association's bad debt deduction or create federal tax liabilities.
The stock prices shown below reflect the initial public offering ("IPO")
price and the high and low prices by quarter from October 7, 1993, the date
the Company became a reporting company under the Securities Exchange Act of
1934, as amended, through the year ended June 30, 1996.
Cash
Market Price Dividends Paid
High Low Per Share
---- ------ ---------------
IPO $10.00 $ -- --
December 31, 1993 14.00 11.75 --
March 31, 1994 13.50 11.88 $ .0625
June 30, 1994 14.75 12.00 --
September 30, 1994 16.25 14.00 .0625
December 31, 1994 15.25 11.75 .0625
March 31, 1995 15.75 12.75 .07
June 30, 1995 19.25 14.25 .07
September 30, 1995 $20.25 $ 17.50 .12
December 31, 1995 20.75 17.25 .12
March 31, 1996 20.25 17.25 .12
June 30, 1996 20.25 9.25 10.12
-34-
<PAGE>
<PAGE>
DIRECTORS AND OFFICERS
FIRST SOUTHEAST FIRST FEDERAL SAVINGS AND LOAN
FINANCIAL CORPORATION ASSOCIATION OF ANDERSON
Directors: Directors:
Charles L. Stuart Charles L. Stuart
Chairman of the Board and Chairman of the Board and
Past President and Past President and
Chief Executive Officer Chief Executive Officer
of the Association of the Association
David C. Wakefield, III David C. Wakefield, III
President and Vice Chairman of the Board
Chief Executive Officer President and Chief Executive
Officer
James H. Barton James H. Barton
Retired President and majority Retired President and majority
stockholder of Barton Grocery Co., stockholder of Barton Grocery
Inc., Anderson and Acme Distributing Co., Inc., Anderson and Acme
Co. of Greenville, Inc. Distributing Co. of
Greenville, Inc.
Josiah Crudup, Jr. Josiah Crudup, Jr.
Retired President, Chief Retired President, Chief
Executive Officer and majority Executive Officer and majority
stockholder of Crudup Oil stockholder of Crudip Oil
Co., Inc. Co., Inc.
Vernon E. Merchant, Jr. Vernon E. Merchant, Jr.
Self-employed physician and surgeon Self-employed physician and
surgeon
William R. Phillips William R. Phillips
Retired stockbroker from J.C. Bradford Retired stockbroker from J.C.
& Co. and a retired colonel of the South Bradford & Co. and a retired
Carolina National Guard colonel of the South Carolina
National Guard
Aubrey T. Scales Aubrey T. Scales
Retired Senior Vice President of the Retired Senior Vice President
Association of the Association
A. C. Terry A. C. Terry
Retired President and owner of Retired President and owner of
Terry Furniture Co., a retail Terry Furniture Co., a retail
furniture company furniture company
-35-
<PAGE>
<PAGE>
FIRST SOUTHEAST FIRST FEDERAL SAVINGS AND LOAN
FINANCIAL CORPORATION ASSOCIATION OF ANDERSON
Officers: Officers:
David C. Wakefield, III David C. Wakefield, III
President and Chief Executive President and Chief Executive
Officer Officer
John L. Biediger John L. Biediger
Executive Vice President Executive Vice President and Treasurer
and Treasurer
Douglas T. Locke Douglas T. Locke
Senior Vice President Senior Vice President
Carole K. Bain Carole K. Bain
Vice President and Corporate Vice President and Corporate
Secretary Secretary
Henry D. Boone
Vice President
Dennis B. Fowler
Vice President
CORPORATE INFORMATION
Corporate Headquarters Transfer Agent
201 North Main Street Wachovia Bank of North Carolina, N.A.
Anderson, South Carolina P.O. Box 8217
Boston, MA 02266
Independent Auditors
Common Stock
Crisp, Hughes & Co., LLP
Ashville, North Carolina Traded Over-the-Counter/
National Market System
General Counsel Nasdaq Symbol: FSFC
Allen and Eakes 10-K Information
Anderson, South Carolina
A copy of the Form 10-K will be
Special Counsel furnished without charge to
Breyer & Aguggia stockholders of record upon written
Washington, D.C. request to the Secretary, First
Southeast Financial Corporation, 201
North Main Street, Anderson, South
Carolina 29621.
_____________________________
Annual Meeting
The Annual Meeting of Stockholders will be held October 29, 1996, at 2:00
p.m., Eastern Time, at the Company's main office located at 201 North Main
Street, Anderson, South Carolina.
-36-
PAGE
<PAGE>
EXHIBIT 21
Subsidiaries of the Registrant
Parent
First Southeast Financial Corporation
Percentage Jurisdiction or
Subsidiaries (1) Owned State of Incorporation
First Federal Savings
and Loan Association of
Anderson 100% Federally chartered
First Master Service Corporation 100% South Carolina
_________________
(1) The operations of the Corporation's subsidiaries are included in the
Corporation's consolidated financial
statements.
<PAGE>
<PAGE>
[Logo of Crisp Hughes & Co., L.L.P.]
CONSENT OF INDEPENDENT AUDITORS
We have issued our report dated August 21, 1996, accompanying the
Consolidated Financial Statements incorporated by reference in the Annual
Report of First Southeast Financial Corporation on Form 10-K for the year
ending June 30, 1996. We hereby consent to the incorporation by reference of
said reports in the Registration Statement of First Southeast Financial
Corporation on Form S-8 (File No. 33-65102, effective March 31, 1994).
/s/Crisp Hughes & Co., L.L.P.
CRISP HUGHES & CO., L.L.P.
Asheville, North Carolina
September 24, 1996
<PAGE>
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