U.S. SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-KSB
/X/ Annual report under Section 13 or 15(d) of the Securities Exchange
Act of 1934 (Fee required) For fiscal year ended December 31, 1996
/_/ Transition report under Section 13 or 15(d) of the Securities
Exchange Act of 1934 (No fee required) For the transition period from
____________ to _____________
Commission file number: 0-25440
M & M FINANCIAL CORPORATION
(Name of Small Business Issuer in Its Charter)
South Carolina 57-0771433
(State or Other Jurisdiction of (I.R.S. Employer
Incorporation or Organization) Identification No.)
307 N. Main Street
Marion, South Carolina 29571
(Address of Principal Executive Offices) (Zip Code)
(803) 431-1000
(Issuer's Telephone Number, Including Area Code)
Securities registered under Section 12(g) of the Exchange Act:
Common Shares (Title of Class)
Check whether the issuer: (1) filed all reports required to be filed
by Section 13 or 15(d) of the Securities Exchange Act during the past 12 months
(or for such shorter period that the registrant was required to file such
reports), and (2) has been subject to such filing requirements for the past 90
days. Yes X No
Check if there is no disclosure of delinquent filers in response to
Item 405 of Regulation S-B contained in this form, and no disclosure will be
contained, to the best of registrant's knowledge, in definitive proxy or
information statements incorporated by reference in Part III of this Form 10-KSB
or any amendment to this Form 10-KSB. /X/
State issuer's revenues for its most recent fiscal year. $10,462,809
State the aggregate market value of the voting stock held by
non-affiliates computed by reference to the price at which the stock was sold,
or the average bid and asked prices of such stock, as of a specified date within
the past 60 days. (See definition of affiliate in Rule 12b-2 of the Exchange
Act.) $13,414,880 as of December 31, 1996
State the number of shares outstanding of each of the issuer's classes
of common equity, as of the latest practicable date. 335,372 common shares as of
March 3, 1997
<PAGE>
DOCUMENTS INCORPORATED BY REFERENCE
The following documents are incorporated by reference to the parts indicated of
this Form 10-KSB:
1. Portions of the Annual Report to Security Holders for the
fiscal year ended December 31, 1996 are incorporated by
reference in Part II, Items 6 and 7; and
2. Portions of the Proxy Statement dated and to be mailed to
stockholders of the Company on April 4, 1997 ("1997 Proxy
Statement") are incorporated herein by reference in Part III,
Items 9, 10, 11, and 12.
<PAGE>
PART I
Item 1. Description of Business.
General. M&M Financial Corporation (formerly "Marion National Corporation"), a
registered bank holding company, was incorporated February 24, 1984 under the
laws of the State of South Carolina. The purpose for incorporation was to
acquire Marion National Bank (now "First National South") and to invest in other
bank related businesses. M&M Financial Corporation (the "Company" or
"Registrant") provides its customers with banking services through its
subsidiary, First National South (the "Bank"). The Company provides no active
services through its subsidiary Marion National Investment Corporation. The
Company owes 100% of the issued and outstanding stock of the Bank and Marion
National Investment Corporation.
Subsidiaries. The Bank was organized in 1911 as a national bank and acquired by
the Company through a bank holding company reorganization in 1984. As the
Company's principle subsidiary, the Bank accounted for 99.78% of total
consolidated assets as of December 31, 1996, and 97.63% of total net income for
1996. The Bank conducts its business from its main bank building on Main Street,
Marion, South Carolina, and its other offices at 402 South Main Street, Mullins,
South Carolina, 1207 East Godbold Street, Marion, South Carolina and offices in
Nichols, Myrtle Beach and Florence, South Carolina.
The Bank offers a full range of banking services to both businesses and
individuals in its market areas. These services include regular and interest
checking, money market, savings and time deposit accounts as well as personal
and business loans. The Bank also provides automated 24-hour banking for the
convenience of its customers.
Marion National Investment Corporation is a wholly-owned subsidiary of the
Company that operated as a non-banking subsidiary insurance agency until
September 1990. At that time, certain assets of Marion National Investment
Corporation were sold to four individuals for a purchase price payable over 10
years. Marion National Investment Corporation continues to exist as a
corporation to receive payments from the sale of its assets and to hold title to
and own its furniture, equipment and premises.
Employees. At March 3, 1997, the Company and the Bank employed 79 full-time
employees and 11 part-time employees. Neither the Company nor the Bank is a
party to a collective bargaining agreement, and they consider their relations
with employees to be good.
Competition and Market Area. The primary market areas of the Company and the
Bank are the cities of Marion and Mullins, South Carolina. Approximately 45.52%
of the Bank's total deposits come from the City of Marion and approximately
33.73% of its deposits come from the City of Mullins. The greater market area
for the Bank includes Marion County
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and various areas within Horry County, South Carolina, with a large part of that
volume concentrated in the eastern and northwestern portions of Horry County.
On December 31, 1996, the Bank had total deposits of $107,619,013 and total
assets of $133,614,156. As such, the Bank ranked as the largest financial
institution in Marion County, South Carolina. In the City of Marion, the
competition for the Bank includes Wachovia Bank of South Carolina, N.A. (a super
regional), First Citizens Bank & Trust Company of South Carolina and Pee Dee
Federal Savings and Loan Association. In the City of Mullins, the competition
for the Bank includes Anderson Brothers Bank, Carolina Bank & Trust Company, and
a branch of Pee Dee Federal Savings and Loan Association.
The Bank faces competition for deposits in its primary market areas from these
institutions as well as from other companies such as brokerage firms and
insurance companies. The larger financial institutions in the Bank's market area
have certain advantages over the Bank, including their ability to finance
extensive advertising campaigns and to allocate investment assets to regions of
highest yield and demand. In addition, by virtue of these institutions' greater
total capitalization, they have higher lending limits than the Bank. The City of
Mullins is an agricultural community whose livelihood is tied to farm products,
particularly tobacco. The City of Marion has an economy that is manufacturing
based.
Supervision and Regulation.
General. The Company is a bank holding company within the meaning of the Bank
Holding Company Act of 1956, as amended (the "Act"), and is registered with the
Board of Governors of the Federal Reserve System (the "Federal Reserve Board")
and the South Carolina State Board of Financial Institutions (the "State
Board"). The Company is required to file semi-annual reports with the Federal
Reserve Board and such additional information as that Board may require pursuant
to the Act, and to file annual reports with the State Board.
The Company also is subject to examination by the Federal Reserve Board and the
State Board and is required to obtain Federal Reserve Board and State Board
approval prior to acquiring, directly or indirectly, ownership or control of any
voting shares of a bank if, after such acquisition, it would own or control,
directly or indirectly, more than 5% of the voting stock of such bank, unless it
already owns a majority of the voting stock of such bank. Furthermore, a bank
holding company is, with limited exceptions, prohibited from acquiring direct or
indirect ownership or control of any voting stock of any company which is not a
bank or a bank holding company and must engage only in the business of banking
or managing and controlling banks or furnishing services to or performing
services for its subsidiary banks. One of the exceptions to this prohibition is
the ownership of shares of a company, the activities of which the Federal
Reserve Board has determined to be so closely related to banking or managing or
controlling banks as to be a proper incident thereto.
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Interstate Act. On September 29, 1994, President Clinton signed into law the
Riegle-Neal Interstate Banking and Branching Efficiency Act of 1994 ("Interstate
Act"). The Interstate Act provides for nationwide interstate banking and
branching with certain limitations. The Interstate Act permits bank holding
companies to acquire banks without regard to state boundaries after September
29, 1995. The Federal Reserve may approve an interstate acquisition only if, as
a result of the acquisition, the bank holding company would control less than
10% of the total amount of insured deposits in the United States or 30% of the
deposits in the home state of the bank being acquired. The home state can waive
the 30% limit as long as there is no discrimination against out-of-state
institutions.
Pursuant to the Interstate Act, interstate branching will take effect on June 1,
1997, except under certain circumstances. Once a bank has established branches
in a host state (a state other than its headquarters state) through an
interstate merger transaction, the bank may establish and acquire additional
branches at any location in the host state where any bank involved in the
interstate merger transaction could have established or acquired branches under
applicable federal or state law. The Interstate Act further provides that
individual states may opt out of interstate branching. If a state does not opt
out of interstate branching prior to May 31, 1997, then a bank in that state may
merge with a bank in another state provided that neither of the states have
opted out. States may either enact laws opting out of interstate branching
before June 1, 1997 or permit interstate merger transactions earlier than June
1, 1997 by statute at their option. A state also may impose conditions on any
interstate merger transaction that occurs before June 1, 1997 if the conditions
do not discriminate against out-of-state banks, are not preempted by federal
law, and do not apply or require performance after May 31, 1997.
Transactions with Affiliates. There are various legal restrictions on the extent
to which the Company and any future nonbank subsidiaries can borrow or otherwise
obtain credit from the Bank. There also are legal restrictions on the Bank's
purchase of or investments in the securities of and purchases of assets from the
Company and any of its future nonbank subsidiaries, a bank's loans or extensions
of credit to third parties collateralized by the securities or obligations of
the Company and any of its future nonbank subsidiaries, the issuance of
guaranties, acceptances and letters of credit on behalf of the Company and any
of its future nonbank subsidiaries, and certain bank transactions with the
Company and any of its future nonbank subsidiaries, or with respect to which the
Company and nonbank subsidiaries, act as agent, participate or have a financial
interest. Subject to certain limited exceptions, the Bank may not extend credit
to the Company or to any other affiliate in an amount which exceeds 10% of the
Bank's capital stock and surplus and may not extend credit in the aggregate to
such affiliates in an amount which exceeds 20% of its capital stock and surplus.
Further, there are legal requirements as to the type, amount and quality of
collateral which must secure such extensions of credit transactions between the
Bank and the Company or such other affiliates, and such transactions must be on
terms and under circumstances, including credit standards, that are
substantially the same or at least as favorable to the Bank as those prevailing
at the time for comparable transactions with non-affiliated companies. Also, the
Company and its subsidiaries are prohibited from engaging
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in certain tie-in arrangements in connection with any extension of credit, lease
or sale of property or furnishing of services.
Capital Adequacy. The federal banking agencies have adopted risk-based capital
guidelines for banks and bank holding companies. The minimum guideline for the
ratio of total capital ("Total Capital") to risk-weighted assets (including
certain off-balance-sheet items, such as standby letters of credit) is 8%. The
minimum ratio of Tier I Capital must be composed of common stock, minority
interests in the equity accounts of consolidated subsidiaries, noncumulative
perpetual preferred stock and a limited amount of cumulative perpetual preferred
stock, less goodwill and certain other intangible assets ("Tier I Capital"). The
remainder may consist of subordinated debt, other preferred stock and a limited
amount of loan loss reserves.
In addition, the federal banking agencies have established minimum leverage
ratio guidelines for banks and bank holding companies. Their guidelines provide
for a minimum ratio of Tier I Capital to average assets, less goodwill and
certain other intangible assets (the "Leverage Ratio"), of 3% for banks that
meet certain specific criteria, including having the highest regulatory rating.
All other banks generally are required to maintain a Leverage Ratio of at least
3%, plus an additional cushion of 100 to 200 basis points. The guidelines also
provide that banks experiencing internal growth or making acquisitions will be
expected to maintain a strong capital position substantially above the minimum
supervisory levels without significant reliance on intangible assets.
Furthermore, the Federal Reserve Board has indicated that it will consider a
"Tangible Tier I Capital Leverage Ratio" (deducting all intangibles) and other
indicia of capital strength in evaluating proposals for expansion or new
activities.
Failure to meet capital guidelines could subject a bank to a variety of
enforcement remedies,including the termination of deposit insurance by the FDIC,
and to certain restrictions on its business. All the federal banking agencies
have proposed regulations that would add an additional risk-based capital
requirement based upon the amount of an institution's exposure to interest rate
risk. In addition, bank regulators continue to indicate their desire generally
to raise capital requirements applicable to banking organizations beyond their
current levels.
Holding Company Structure and Support of the Bank. Because the Company is the
parent holding company of the Bank, its right to participate in the assets of
any subsidiary upon the latter's liquidation or reorganization will be subject
to the prior claims of the subsidiary's creditors (including depositors in the
case of bank subsidiaries) except to the extent that the Bank may itself be a
creditor with recognized claims against the subsidiary.
Under the Federal Reserve policy, the Company is expected to act as a source of
financial strength to, and commit resources to support, the Bank. This support
may be required at times when, absent such Federal Reserve policy, the Company
may not be inclined to provide it. In addition, any capital loans by a bank
holding company to any of its subsidiary banks are subordinate in right of
payment to deposits and to certain other indebtedness of such subsidiary bank.
In the event of a bank holding company's bankruptcy, any
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commitment by the bank holding company to a federal bank regulatory agency to
maintain the capital of a subsidiary bank will be assumed by the bankruptcy
trustee and entitled to a priority of payment.
Under the Federal Deposit Insurance Act (the "FDIA"), a depository institution
insured by the FDIC can be held liable for any loss incurred by, or reasonably
expected to be incurred by, the FDIC after August 9, 1989 in connection with (i)
the default of a commonly- controlled FDIC-insured depository institution or
(ii) any assistance provided by the FDIC to any commonly-controlled FDIC-insured
depository institution "in danger of default." "Default" is defined generally as
the appointment of a conservator or receiver and "in danger of default" is
defined generally as the existence of certain conditions indicating that a
default is likely to occur in the absence of regulatory assistance. The FDIC's
claim for damages is superior to claims of depositors, secured creditors and
holders of subordinated debt (other than affiliates) of the commonly-controlled
insured depository institution. The Bank is subject to these cross-guarantee
provisions; however, the Company has no present plans to have any bank
subsidiaries other than the Bank.
FDICIA. The Federal Deposit Insurance Corporation Improvement Act of 1991
("FDICIA") which was enacted on December 19, 1991, substantially revised the
depository institution regulatory and funding provisions of the FDIA and made
revisions to several other federal banking statutes. Among other things, FDICIA
requires the federal banking regulators to take "prompt corrective action" in
respect of FDIC-insured depository institutions that do not meet minimum capital
requirements. FDICIA established five capital tiers: "well capitalized,"
"adequately capitalized," "undercapitalized," "significantly undercapitalized"
and "critically undercapitalized." Under applicable regulations, a FDIC- insured
depository institution is defined to be well capitalized if it maintains a
Leverage Ratio of at least 5%, a risk adjusted Tier I Capital Ratio of at least
6% and a Total Capital Ratio of at least 10% and is not subject to a directive,
order or written agreement to meet and maintain specific capital levels. An
insured depository institution is defined to be adequately capitalized if it
meets all of its minimum capital requirements as described above. In addition,
an insured depository institution will be considered undercapitalized if it
fails to meet any minimum required measure, significantly undercapitalized if it
is significantly below any such measure, and critically undercapitalized if it
fails to maintain a level of tangible equity equal to not less than 2% of total
assets. An insured depository institution may be deemed to be in a
capitalization category that is lower than is indicated by its actual capital
position if it receives an unsatisfactory examination rating.
The capital-based prompt corrective action provisions of FDICIA and their
implementing regulations apply to FDIC-insured depository institutions and are
not directly applicable to holding companies which control such institution.
However, the Federal Reserve has indicated that, in regulating bank holding
companies, it will take appropriate action at the holding company level based on
an assessment of the effectiveness of supervisory actions imposed upon
subsidiary depository institutions pursuant to such provisions and regulations.
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FDICIA generally prohibits an FDIC-insured depository institution from making
any capital distribution (including payment of dividends) or paying any
management fee to its holding company if the depository institution would
thereafter be undercapitalized. Undercapitalized depository institutions are
subject to restrictions on borrowing from the Federal Reserve. In addition,
undercapitalized depository institutions are subject to growth limitations and
are required to submit capital restoration plans. A depository institution's
holding company must guarantee the capital plan, up to an amount equal to the
lesser of 5% of the depository institution's assets at the time it becomes
undercapitalized or the amount of the capital deficiency when the institution
fails to comply with the plan. The federal banking agencies may not accept a
capital plan without determining, among other things, that the plan is based on
realistic assumptions and is likely to succeed in restoring the depository
institution's capital. If a depository institution fails to submit an acceptable
plan, it is treated as if it is significantly undercapitalized.
Significantly undercapitalized depository institutions may be subject to a
number of requirements and restrictions, including orders to sell sufficient
voting stock to become adequately capitalized, requirements to reduce total
assets and cessation of receipt of deposits from correspondent banks. Critically
undercapitalized depository institutions are subject to appointment of a
receiver or conservator.
FDICIA contains numerous other provisions, including new accounting, audit and
reporting requirements, termination of the "too big to fail" doctrine except in
special cases, limitations on the FDIC's payment of deposits at foreign
branches, new regulatory standards in such areas as asset quality, earnings and
compensation and revised regulatory standards for, among other things, powers of
state banks, real estate lending and capital adequacy. FDICIA also requires that
a depository institution provide 90 days prior notice of the closing of any
branches.
Various other legislation, including proposals to revise the bank regulatory
system and to limit the investments that a depository institution may make with
insured funds, is from time to time introduced in Congress.
FDIC Insurance Premiums. The Bank is required to pay semiannual FDIC deposit
insurance assessments. However, the FDIC has recently lowered assessment rates
in recognition of the fact that the Bank Insurance Fund has achieved its legally
mandated reserve ratio. Under the new rate structure, the most financially sound
banks have had their assessment lowered from 23 cents per $100 of insured
deposits to 4 cents per $100 of insured deposits. Each financial institution is
assigned to one of three capital groups -- well capitalized, adequately
capitalized or undercapitalized -- and further assigned to one of three
subgroups with a capital group, on the basis of supervisory evaluations by the
institution's primary federal and, if applicable, state supervisors and other
information relevant to the institution's financial condition and the risk posed
to the applicable FDIC deposit insurance fund. The actual assessment rate
applicable to a particular institution (and any applicable refund) will,
therefore, depend in part upon the risk assessment
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classification so assigned to the institution by the FDIC. The FDIC is
authorized by federal law to raise insurance premiums in certain circumstances.
Any increase in premiums would have an adverse effect on the Bank and the
Company's earnings. Under the FDIA, insurance of deposits may be terminated by
the FDIC upon a finding that the institution has engaged in unsafe and unsound
practices, is in an unsafe or unsound condition to continue operations or has
violated any applicable law, regulation, rule, order or condition imposed by a
federal bank regulatory agency.
Payment of Dividends. The Company is a legal entity separate and distinct from
the Bank. The principal source of cash flow of the Company, including cash flow
to pay dividends on its stock or principal and interest on debt, if any, is
dividends from the Bank. There are statutory and regulatory limitations on the
payment of dividends by the Bank to the Company, as well as by the Company to
its shareholders. Stockholders of the Company's common stock are entitled to
receive dividends as and when declared by the Company's Board of Directors out
of funds legally available therefore under the laws of the State of South
Carolina. The Company's ability to pay dividends is dependent on the amount of
dividends paid by the Bank and any other subsidiary to the Company.
The Company cannot predict what other legislation might be enacted or what other
regulations might be adopted, or if enacted or adopted, the affect thereof on
the Company and/or the Bank.
Sources and Availability of Funds. The resources essential to the business of
the Company and its subsidiary, the Bank, consist primarily of funds derived
from deposits. The Company's banking subsidiary uses these funds to make loans
and to fund its investment portfolio. The availability of such funds is
primarily dependent upon the economic policies of the government, the economy in
general and the general credit market for loans.
Monetary Policy and Economic Controls. The earnings of the Company's subsidiary
bank, and therefore, to a large extent the earnings of the Company, are affected
by the policies of regulatory authorities, including the Federal Reserve System.
An important function of the Federal Reserve System is to regulate the national
supply of bank credit in order to combat recession and curb inflation. Among the
instruments used to attain these objectives are open market operations in U. S.
Government securities and changes in the reserve requirements applicable to
member bank deposits. These instruments are used in varying combinations to
influence overall growth and distribution of bank loans, investments and
deposits, and their use also may affect interest rates charged on loans or paid
for deposits.
Dependence Upon Single Customer or Group of Customers. Neither the Company nor
the Bank is dependent upon a single customer or a group of a few customers.
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Item 2. Description of Property
The main office of the Bank, which also serves as the principle office of the
Company, is located at 307 N. Main Street, Marion, South Carolina. The main
office is an approximately 15,000 square foot, two-story brick building that is
owned by the Bank.
The Bank also operates a major office at 402 South Main Street, Mullins, South
Carolina in a building owned by the Bank. This two-story, brick building
contains approximately 7,840 square feet and was constructed in 1971.
The Bank has four other branches, including a branch located at 1207 East
Godbold Street in Marion and branches in Nichols, Myrtle Beach and Florence,
South Carolina. All four of these branch buildings are owned by the Bank and are
located in one-story, brick buildings.
The Bank also owns a building in Marion which is utilized for the operations
center of the Bank.
Item 3. Legal Proceedings.
The nature of the Company's business and that of the Bank generates a certain
amount of litigation involving matters arising in the ordinary course of
business. In the opinion of management of the Company, none of the legal
proceedings currently pending or threatened to which the Company or its
subsidiary Bank is a party or of which any of their properties is subject, is
reasonably likely to have any material adverse effect on the business or
financial condition of the Company or the Bank.
Item 4. Submission of Matters to a Vote of Security Holders.
No matters were submitted to a vote of security holders in the fourth quarter of
1996.
PART II
Item 5. Market for Common Equity and Related Stockholder Matters.
As of December 31, 1996, there were 703 holders of the Company's Common Stock.
Currently, there is no established trading market for the Company's Common
Stock. Based on information known to management of the Company, during the
period from March 1, 1996 until March 1, 1997, the Common Stock of the Company
has traded in the range of $38.00 to $40.00 per share.
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Holders of the Company's Common Stock are entitled to such dividends as may be
declared from time to time by the Board of Directors out of funds legally
available therefor. The Company paid cash dividends of $1.00 and $.90 per share
during 1996 and 1995, respectively. Any cash dividends paid by the Bank are paid
to the Company as the sole shareholder of the Bank.
No representations can be made as to if or when the Bank will pay cash dividends
in the future. The Company's ability to pay dividends to its shareholders
depends on the amount of dividends paid by the Bank to the Company. Although the
Company expects to pay cash dividends in the future comparable to the dividends
paid in the prior two years, as a result of the Company's dependence on the
Bank, and the present requirement that the Bank seek prior regulatory approval
for the payment of any dividend to the Company, management cannot represent with
certainty that the Company will pay dividends in the future or the amount of
such dividends, if any.
Item 6. Management's Discussion and Analysis or Plan of Operation.
The information appearing on pages 1 through 14 of Exhibit 13 as
excerpts from the Company's 1996 Annual Report to Shareholders of the Company is
incorporated herein by reference.
Item 7. Financial Statements.
The information appearing on pages F-1 through F-21 of Exhibit 13 as
excerpts from the Company's 1996 Annual Report to Shareholders of the Company is
incorporated herein by reference.
Item 8. Changes in and Disagreements with Accountants on Accounting
and Financial Disclosures.
Not applicable.
PART III
Item 9. Directors, Executive Officers, Promoters and Control Persons;
Compliance with Section 16(a) of the Exchange Act.
Incorporated by reference to the Company's definitive Proxy Statement relating
to the 1997 Annual Meeting of Stockholders of the Company.
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Item 10. Executive Compensation
Incorporated by reference to the Company's definitive Proxy Statement relating
to the 1997 Annual Meeting of Stockholders of the Company.
Item 11. Security Ownership of Certain Beneficial Owners and Management.
Incorporated by reference to the Company's definitive Proxy Statement relating
to the 1997 Annual Meeting of Stockholders of the Company.
Item 12. Certain Relationships and Related Transactions.
Incorporated by reference to the Company's definitive Proxy Statement relating
to the 1997 Annual Meeting of Stockholders of the Company.
Item 13. Exhibits and Report on Form 8-K.
(a)
3 (i) Articles of Incorporation, as amended*
(ii) Bylaws, as amended*
10 (a) Marion National Bank 401(k) Plan Summary*
(b) Marion National Bank Pension Plan Summary*
(c) Executive Employment Agreement with George H. Hardwick*
13 Portions of 1996 Annual Report to Stockholders for year
ended December 31, 1996
21 Subsidiaries of the Registrant
(b) No reports were filed on Form 8-K
- ------------
* Incorporated herein by reference to exhibits filed with Form S-4 Registration
Statement under the Securities Act of 1933, Registration No. 33-75344.
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SIGNATURES
In accordance with Section 13 or 15(d) of the Exchange Act, the registrant
caused this report to be signed on its behalf by the undersigned, thereunto duly
authorized.
M & M FINANCIAL CORPORATION
Date: 3/25/97 By: /s/
Chester A. Duke
Chairman, President and
Chief Executive Officer
Date: 3/25/97 By: /s/
Marion E. Freeman
Assistant President
(Chief Financial Officer)
In accordance with the Exchange Act, this report has been signed by the
following persons on behalf of the registrant and in the capacities and on the
dates indicated.
<TABLE>
<CAPTION>
Name Position Date
<S> <C> <C>
/s/
Chester A. Duke Chairman, President, Director 3/25/97
(Chief Executive Officer)
/s/
Charles B. McElveen Director 3/25/97
/s/
J.M. McLendon Director 3/25/97
/s/
Bruce Seigal Director 3/25/97
/s/
Nancy B. Williams Director 3/25/97
</TABLE>
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EXHIBIT INDEX
Exhibit Exhibit Title
3(i) Articles of Incorporation, as amended*
(ii) Bylaws, as amended*
10(a) Marion National Bank 401(k) Plan Summary*
(b) Marion National Bank Pension Plan Summary*
(c) Executive Employment Agreement with George H. Hardwick*
13 Portions of 1996 Annual Report to Stockholders for year ended
December 31, 1996
21 Subsidiaries of the Registrant
23 Consent of Tourville, Simpson & Henderson, Certified Public
Accountants
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* Incorporated herein by reference to exhibits filed with Form S-4 Registration
Statement under the Securities Act of 1933, Registration No. 33-75344.
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EXHIBIT 13
M & M FINANCIAL CORPORATION
SELECTED FINANCIAL DATA
The following table sets forth certain selected financial data concerning M & M
Financial Corporation ("the Company"). The financial data selected by the
Company has been derived from the audited consolidated financial statements.
This information should be read in conjunction with Management's Discussion and
Analysis of Financial Condition and Results of Operations.
<TABLE>
<CAPTION>
(DOLLARS IN THOUSANDS
EXCEPT PER SHARE AMOUNTS) 1996 1995 1994 1993 1992
---------- ---------- ----------- ----------- --------
INCOME STATEMENT DATA:
<S> <C> <C> <C> <C> <C>
Interest income $ 9,420 $ 8,233 $ 7,121 $ 7,585 $ 9,047
Interest expense 4,357 3,839 2,919 3,088 4,133
Net interest income 5,063 4,394 4,202 4,497 4,914
Provision for loan losses 180 39 274 885 695
Net interest income after
provision for loan losses 4,883 4,355 3,928 3,612 4,219
Noninterest income 1,330 1,276 1,270 1,511 1,252
Noninterest expense 5,091 4,851 5,462 4,672 4,412
Income tax expense (benefit) 263 187 (203) 20 236
Net income (loss) 859 593 (61) 431 824
Net income (loss) per share 2.56 1.77 (.18) 1.28 2.46
Cash dividends paid 335 302 314 280 340
Cash dividends per share 1.00 .90 .93 .83 1.01
Weighted average common
shares outstanding 335,372 335,372 335,372 335,372 335,372
BALANCE SHEET DATA:
Assets $ 133,914 $ 117,815 $ 113,616 $ 115,213 $ 116,057
Gross loans outstanding 80,923 61,344 43,607 50,599 61,321
Allowance for loan losses 1,027 819 726 1,467 1,419
Time deposits in other banks 800 300 300 1,150 1,877
Investment securities 38,342 40,625 55,544 47,802 39,961
Deposits
Interest-bearing 89,548 78,714 73,316 77,976 88,785
Noninterest-bearing 17,925 17,370 18,004 17,173 14,601
Stockholders' equity 10,822 10,158 9,327 10,517 10,366
OTHER DATA:
Nonperforming loans $ 723 $ 855 $ 1,859 $ 2,009 $ 2,795
Loan loss reserve to
nonperforming loans 142.15% 95.79% 39.05% 73.0% 50.1%
</TABLE>
1
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATION
This discussion and analysis is intended to assist the reader in understanding
the financial condition and results of operations of the Company and its
subsidiaries, First National South (the "Bank") and Marion National Investment
Corporation. This commentary should be read in conjunction with the consolidated
financial statements and the related notes and the other statistical information
contained herein.
On July 27, 1994, the stockholders of Davis National Bank (Davis), a national
banking association headquartered in Mullins, South Carolina, approved a merger
of Davis with and into the Company's wholly-owned banking subsidiary. Under the
terms of the agreement, Davis stockholders received .5 shares of the Company's
common stock for each share of Davis National Bank stock held. As permitted by
the merger agreement, certain Davis stockholders exercised their rights not to
exchange their shares and were paid cash. Regulatory assistance was not
associated with the merger.
The merger qualified as a tax-free reorganization and was accounted for as a
pooling-of-interests. The Company's financial statements were restated to
include the results of Davis for all periods presented prior to the merger.
RESULTS OF OPERATIONS
1996 COMPARED TO 1995
For the year ended December 31, 1996, the Company's net income was $858,763, or
$2.56 per share, an increase of $265,945 from the 1995 net income of $592,818.
The increase relates primarily to the increase in interest income which
increased $1,187,089 or 14.4% to $9,420,467 in 1996 from the 1995 amount of
$8,233,378. The improvement is primarily attributable to increases in both the
volume of loans and the percentage of average loans to average interest-earning
assets. Interest expense also increased $517,710 to $4,356,928 in 1996 from
$3,839,218 in 1995. The 1996 provision for loan losses was $180,000 or $141,110
higher than in 1995. Net interest income after the loan loss provision increased
by $528,269 or 12.1% from the 1995 amount of $4,355,270. The largest noninterest
expense categories to increase in 1996 were salaries and employee benefits,
marketing and advertising costs, and professional fees. Salaries and employee
benefits increased $135,182 to $2,784,779 in 1996 from $2,649,597 in 1995.
Marketing and advertising costs increased $76,175 to $182,774, and professional
fees increased $55,743 to $167,446. The largest decrease in noninterest expense
was in the cost of federal deposit insurance which decreased $104,729 to $2,054
in 1996 from $106,783 in 1995.
1995 COMPARED TO 1994
For the year ended December 31, 1995, the Company's net income was $592,818, or
$1.77 per share, an increase of $653,553 from the 1994 net loss of $60,735. The
increase relates primarily to the reduction in noninterest expense which
decreased $610,716 or 11.2% from the 1994 amount of $5,462,111. Interest income
increased by $1,111,878 or 15.6% from the 1994 amount of $7,121,500. Interest
expense also increased by $919,960 from $2,919,258 in 1994 to $3,839,216 in
1995. The 1995 provision for loan losses was $38,890 or 85.8% lower than in
1994. Net interest income after loan loss provision increased by $426,999 or
10.9% from the 1994 amount of $3,928,271. The largest noninterest expense
categories to decrease in 1995 were the costs incurred for professional
services, principally related to the merger of Marion and Davis and the cost of
federal deposit insurance. In 1995, professional fees decreased $477,752 from
the 1994 amount of $589,455 and federal deposit insurance decreased $115,490
from the 1994 amount of $208,703. Salaries and benefits increased $174,409, or
7.1%, primarily as a result of salary adjustments. These factors combined to
increase net income for the year ended December 31, 1995 to $592,818.
2
<PAGE>
NET INTEREST INCOME
Earnings are dependent, to a large degree, on net interest income. It represents
the difference between gross interest earned on earning assets, primarily loans
and investment securities, and interest incurred on deposits and borrowed funds.
Net interest income is affected by the interest rates earned or paid and by
volume changes in loans, investment securities, deposits and borrowed funds.
For the year ended December 31, 1996, net interest income was $5,063,539, an
increase of $669,379, or 15.2%, from the prior year. Management attributes the
increase to a continuing favorable mix of interest earning assets in 1996.
Investments in securities have been reduced, and more emphasis is being placed
on increasing loans which traditionally have higher returns than other
interest-earning assets. During 1996, the Company earned 8.25% on earning
assets, an increase of 46 basis points from 1995. The Company's interest rate
spread for the year ended December 31, 1996 was 3.74% and was 31 basis points
higher than for the year ended December 31, 1995. The net interest margin in
1996 was 4.43% compared to 4.16% in 1995. The improvements in the interest rate
spread and the net interest margin were primarily affected by the volume
increase in loans.
For the year ended December 31, 1995, net interest income was $4,394,160, an
increase of $191,918, or 4.6%, from the prior year. Management attributes the
increase to a more favorable mix of interest earning assets in 1995 compared to
the 1994 amounts. The changes in the mix of earning assets to higher yielding
loans negated the negative impact of the rise in interest rates paid by the
Company during 1995. Expressed in percentage terms, during 1995, the Company
earned 7.79% on earning assets, an increase of 1.10% from 1994. The Company's
interest rate spread for the year ended December 31, 1995 was 3.43% and was 13
basis points higher than for the year ended December 31, 1994.
3
<PAGE>
COMPARATIVE AVERAGE BALANCES, YIELDS AND RATES
The following tables, "Comparative Average Balances, Yields and Rate" and
"Rate/Volume Analysis," provide information on specific factors affecting the
Company's net interest income.
<TABLE>
<CAPTION>
1996 1995
-------------------------------------------------------------------
AVERAGE YIELD/ AVERAGE YIELD/
(DOLLARS IN THOUSANDS) BALANCE INTEREST RATE BALANCE INTEREST RATE
--------- -------- ------- ---------- -------- -------------
<S> <C> <C> <C> <C> <C> <C>
ASSETS:
Interest-earning deposits in other banks $ 1,448 $ 118 8.15% $ 1,1 $ 56 5.07%
Taxable securities (2) 34,390 2,078 6.04 43,234 2,548 5.89
Tax-exempt securities 4,848 296 6.11 5,780 355 6.14
Federal funds sold 3,146 195 6.20 2,925 147 5.03
Loans (1) 70,406 6,733 9.56 52,662 5,127 9.74
--------- -------- ---------- ---------
Total interest-earning assets 114,238 9,420 8.25 105,705 8,233 7.79
-------- ------- --------- -------
Cash and due from banks 5,037 4,759
Allowance for loan losses (928) (784)
Premises and equipment 3,823 3,988
Other real estate owned 49 165
Other assets 3,494 2,779
--------- ----------
Total assets $ 125,713 $ 116,612
========= ==========
LIABILITIES AND STOCKHOLDERS' EQUITY:
Interest-bearing deposits $ 84,091 3,717 4.42% $ 75,477 3,202 4.24%
Advances from FHLB 3,060 181 5.92 1,220 80 6.56
Other borrowings 9,592 459 4.79 11,414 557 4.88
--------- -------- ---------- ---------
Total interest-bearing liabilities 96,743 4,357 4.50 88,111 3,839 4.36
---------- ---------- ---------- ---------
Noninterest-bearing deposits 16,937 17,261
Accrued interest and other liabilities 1,430 1,498
Stockholders' equity 10,603 9,742
--------- ----------
Total liabilities and
stockholders' equity $ 125,713 $ 116,612
============= ==========
Net interest income/interest rate spread $ 5,063 3.74% $ 4,394 3.43%
========== ========= ========= ====
Net interest margin 4.43% 4.16%
========== ====
</TABLE>
(1) The effects of loans in non-accrual status and fees collected are not
significant to the computations.
(2) Yields on securities are computed at their
nominal rates and have not been adjusted for tax rate differences.
4
<PAGE>
RATE/VOLUME ANALYSIS
The following table describes the extent to which changes in interest rates and
changes in the volume of earning assets and interest bearing liabilities have
affected the Company's interest income and interest expense during the periods
indicated. Information is provided on changes in each category attributable to
(a) changes due to volume (change in volume multiplied by prior period rate),
(b) changes due to rates (change in rates multiplied by prior period volume) and
(c) changes in rate and volume (change in rate multiplied by the change in
volume).
1996 COMPARED TO 1995
DUE TO INCREASE (DECREASE) IN
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C>
VOLUME/
(DOLLARS IN THOUSANDS) VOLUME RATE RATE TOTAL
INTEREST INCOME:
Time deposits in other banks $ 17 $ 34 $ 11 $ 62
Taxable securities (521) 64 (13) (470)
Tax-exempt securities (57) (2) 0 (59)
Federal funds sold 11 34 3 48
Loans 1,727 (91) (30) 1,606
-------- --------- --------- ---------
Total interest income 1,177 39 (29) 1,187
-------- --------- --------- ---------
INTEREST EXPENSE:
Interest bearing deposits 365 134 16 515
Advances from FHLB 121 (8) (12) 101
Other borrowings (89) (11) 2 (98)
-------- --------- --------- ---------
Total interest expense 397 115 6 518
-------- --------- --------- ---------
Net interest income $ 780 $ (76) $ (35) $ 669
======== ========= ========= =========
</TABLE>
1995 COMPARED TO 1994
DUE TO INCREASE (DECREASE) IN
<TABLE>
<CAPTION>
VOLUME/
(DOLLARS IN THOUSANDS) VOLUME RATE RATE TOTAL
INTEREST INCOME:
<S> <C> <C> <C> <C>
Time deposits in other banks $ 1 $ 9 $ - $ 10
Taxable securities (217) 366 (32) 117
Tax-exempt securities (55) 29 (4) (30)
Federal funds sold (39) 43 (11) (7)
Loans 473 492 56 1021
-------- --------- --------- ---------
Total interest income 163 939 9 1,111
-------- --------- --------- ---------
INTEREST EXPENSE:
Interest bearing deposits (13) 673 (3) 657
Advances from FHLB - - 80 80
Other borrowings 40 128 14 182
-------- --------- --------- ---------
Total interest expense 27 801 91 919
-------- --------- --------- ---------
Net interest income $ 136 $ 138 $ (82) $ 192
======== ========= ========= =========
</TABLE>
5
<PAGE>
INTEREST RATE RISK AND SENSITIVITY
Interest rates paid on deposits and borrowed funds and interest rates earned on
loans and investments have generally followed the fluctuations in market rates
in 1996 and 1995. However, fluctuations in market interest rates do not
necessarily have a significant impact on net interest income, depending on the
Company's sensitivity position. A rate-sensitive asset or liability is one that
can be repriced either up or down in interest rate within a certain time
interval. When a proper balance exists between rate-sensitive assets and
rate-sensitive liabilities, market interest rate fluctuations should not have a
significant impact on liquidity and earnings. The larger the imbalance, the
greater the interest rate risk assumed and the greater the positive or negative
impact of interest fluctuations on liquidity and earnings.
Interest rate sensitivity management is concerned with the management of both
the timing and the magnitude of repricing characteristics of interest-earning
assets and interest-bearing liabilities and is an important part of
asset/liability management. The objectives of interest rate sensitivity
management are to insure the adequacy of net interest income and to control the
risks to net interest income associated with movements in interest rates. The
following table, "Interest Rate Sensitivity Analysis," indicates that, on a
cumulative basis through twelve months, rate sensitive liabilities exceeded rate
sensitive assets, resulting in a liability sensitive position at the end of 1996
of $53,859,000. For a bank with a liability sensitive position, or negative gap,
falling interest rates would generally be expected to have a positive effect on
net interest income and rising interest rates would generally be expected to
have the opposite effect.
The following table presents the Company's interest rate exposure at each of the
time intervals indicated as of December 31, 1996. The table may not be
indicative of the Company's position at other points in time.
INTEREST RATE SENSITIVITY ANALYSIS
<TABLE>
<CAPTION>
INTEREST SENSITIVE NON INTEREST SENSITIVE
LESS THAN 4-6 7-12 1-5 OVER 5
(DOLLARS IN THOUSANDS) 3 MONTHS MONTHS MONTHS YEARS YEARS TOTAL
-------- -------- -------- -------- -------- ----------
<S> <C> <C> <C> <C> <C> <C>
INTEREST-EARNING ASSETS:
Federal funds sold $ 700 $ - $ - $ - $ - $ 700
Deposits in other banks 841 - 200 - - 1,041
Investment securities (1) 916 107 3,811 18,065 15,443 38,342
Loans 32,569 2,278 3,213 42,862 - 80,922
---------- ---------- ---------- ----------- ----------- ----------
Total 35,026 2,385 7,224 $ 60,927 $ 15,443 $ 121,005
---------- ---------- ---------- =========== =========== ==========
INTEREST-BEARING LIABILITIES:
Interest-bearing deposits 66,169 9,120 9,122 $ 5,128 $ 8 $ 89,547
Advance from FHLB - 5,000 - - - 5,000
Short-term borrowings 9,083 - - - - 9,083
----- ---- ----- ---- ---- ----------
Total 75,252 14,120 9,122 $ 5,128 $ 8 $ 103,630
---------- ---------- ---------- =========== =========== ==========
INTEREST SENSITIVITY GAP $(40,226) $(11,735) $(1,898)
======== ======== =======
CUMULATIVE INTEREST
SENSITIVITY GAP $ (40,226) $ (51,961) $ (53,859)
========== ========== ==========
GAP RATIO .47 .17 .79
CUMULATIVE GAP RATIO .47 .42 .45
</TABLE>
(1) Mortgage-backed securities are included based on their contractual
maturity dates.
6
<PAGE>
PROVISION FOR LOAN LOSSES
Additions to the allowance for loan losses, which are expensed as the provision
for loan losses on the Company's statement of income, are made periodically to
maintain the allowance at an appropriate level based on management's analysis of
the potential risk in the loan portfolio. The amount of the provision is a
function of the level of loans outstanding, the level of nonperforming loans,
historical loan loss experience, and current and anticipated economic
conditions. For the year ended December 31, 1996, the provision for possible
loan losses was $180,000, an increase of $141,110 from the 1995 provision.
During 1996, management charged off $36,485 in loans and recovered $65,203 in
loans previously charged off. Please refer to the section "Loan Portfolio" for a
discussion of management's evaluation of the adequacy of the allowances for loan
losses.
NONINTEREST INCOME
Noninterest income is derived primarily from service fees charged to customers.
Management believes the service fee pricing structure is competitive in the
marketplace and, at present, adequately compensates the Company for the services
provided. The Company does not offer trust services, originate residential
mortgage loans for resale, or service residential mortgage loans for the benefit
of others.
Noninterest income increased $53,125 to $1,329,418 in 1996 from $1,276,293 in
1995. Commissions on sales of mutual funds and annuities during 1996 were
$101,387, an increase of $72,582 over the amount recorded in 1995, and were the
primary source of noninterest income contributing to this increase. The Company
also realized a $25,369 gain on the sale of foreclosed property in 1996. Other
categories of noninterest income increased due to the growth of the Company. The
increases were offset by the $45,595 decrease in service charges on deposit
accounts due to a new fee structure on checks drawn on insufficient funds and
overdrawn accounts and by the $139,544 decrease in the gain on the sale of
securities because there were no sales of securities during 1996.
In 1995, noninterest income increased $6,551, or 0.5% over the 1994 income of
$1,269,742. The Company realized a decrease of $109,895, or a 12.8% decline, in
fees collected on deposit accounts. This decline resulted primarily from the
reduction in the number of demand deposit accounts in 1995 as compared to 1994.
Income realized on the sale of securities increased between the two years by
$189,630.
NONINTEREST EXPENSES
For the year ended December 31, 1996, noninterest expense was $5,090,851, an
increase of $239,456, or 4.9%, over the $4,851,395 recorded in 1995. The
increase in salaries and employee benefits was $135,182 and was the principal
component of the increase in noninterest expense in 1996. Other categories of
noninterest expense increased due to the growth of the Company. Management
believes that the Company's budgeting process has contributed to its ability to
control noninterest costs during the growth of the Company during the past year.
The cost of federal deposit insurance decreased $104,729 to $2,054 in 1996 from
$106,783 in 1995 due to an industry-wide reduction in the insurance assessment.
For the year ended December 31, 1995, noninterest expense was $4,851,395, a
decrease of $610,716, or 11.2%, under $5,462,111 recorded in 1994. The largest
noninterest expense categories to decrease in 1995 were the costs incurred for
professional services, principally related to the merger of Marion and Davis and
the cost of federal deposit insurance. In 1995, professional fees decreased
$477,752 from the 1994 amount of $589,455 and federal deposit insurance
decreased $115,490 from the 1994 amount of $222,273. Salaries and benefits
increased $174,409, or 7.1%, primarily as a result of salary adjustments.
7
<PAGE>
INCOME TAXES
The Company's total income tax expense for 1996 was $263,343, an increase of
$75,993 from the 1995 income tax expense of $187,350. This increase results
primarily from increased income before taxes. The effective tax rate for 1996
and 1995 was 23.5% and 24.0%, respectively.
LIQUIDITY
Liquidity is the ability to meet cash obligations through the maturity of assets
or the acquisition of liabilities. The Company manages liquidity at the banking
subsidiary level. Adequate liquidity is necessary to meet the requirements of
customers for loans and deposit withdrawals in the most timely and economical
manner. Some liquidity is ensured by maintaining assets which may be converted
into cash at minimal cost; these assets include amounts due from banks and
federal funds sold. Some liquidity is provided from maturing loans; however, the
most manageable source of liquidity is liabilities, with the primary focus of
liquidity management being on the ability to obtain deposits within the
Company's market area. Core deposits, which are all deposits except certificates
of deposit in excess of $100,000, are a relatively stable source of liquidity.
Certificates of deposit in excess of $100,000 are a less stable source of
liquidity because they are more sensitive to interest rate changes than are
other deposit accounts. As of December 31, 1996, the Bank also has unused lines
of credit to purchase federal funds from unrelated banks totaling $8,500,000 and
an unused commitment from the Federal Home Loan Bank totaling $5,000,000
available to it as secondary sources of liquidity. Management believes the
Company's liquidity sources adequately meet its operational needs.
The Bank is required by regulation to maintain an average cash reserve balance
computed as a percentage of deposits. This requirement is met by vault and
teller cash and amounts due from the Federal Reserve Bank, both of which are
reported as cash equivalents on the Company's consolidated balance sheet.
As a bank holding company, the Company's ability to pay dividends and meet its
cash obligations is primarily dependent upon the earnings of the Bank. Cash
dividends have been paid in the past, and future dividends will be paid from the
earnings of the Bank. For a national bank, prior approval of the Comptroller of
the Currency is required if the total of all dividends declared in any year
exceed the Bank's net profits (as defined) for that year combined with its
retained net profits (as defined) for the two preceding years.
CAPITAL RESOURCES
The Company uses several ratios as indicators of capital strength. The most
commonly used measure is average common equity to average assets which was 8.4%
at December 31, 1996 and 1995.
The Bank is subject to various regulatory capital requirements administered by
the federal banking agencies. Failure to meet minimum capital requirements can
initiate certain mandatory and possibly additional discretionary actions by
regulators that, if undertaken, could have a material effect on the Company's
financial statements. Under capital adequacy guidelines and the regulatory
framework for prompt corrective action, the Bank must meet specific capital
guidelines that involve quantitative measures of the Bank's assets, liabilities,
and certain off-balance-sheet items as calculated under regulatory accounting
practices. The Bank's capital amounts and classifications are also subject to
qualitative judgements by the regulators about components, risk weightings, and
other factors.
Quantitative measures established by regulation to ensure capital adequacy
require the Bank to maintain minimum ratios of Tier 1 and total capital as a
percentage of assets and off-balance-sheet exposures, adjusted for risk weights
ranging from 0% to 100%. Tier 1 capital of the Bank consists of common
stockholders' equity, excluding the unrealized gain or loss on securities
available-for-sale, minus certain intangible assets. The Bank's Tier 2 capital
consists of the allowance for loan losses subject to certain limitations. Total
capital for purposes of computing the capital ratios consists of the sum of Tier
1 and Tier 2 capital. The regulatory minimum requirements are 4% for Tier 1 and
8% for total risk-based capital.
8
<PAGE>
CAPITAL RESOURCES - CONTINUED
The Bank is also required to maintain capital at a minimum level based on total
assets, which is known as the leverage ratio. Only the strongest banks are
allowed to maintain capital at the minimum requirement of 3%.
All others are subject to maintaining ratios 1% to 2% above the minimum.
As of December 31, 1996, the most recent notification from the Bank's primary
regulator categorized the Bank as well-capitalized under the regulatory
framework for prompt corrective action. There are no conditions or events that
management believes have changed the Bank's category.
The following table summarizes the capital ratios of the Bank and the regulatory
minimum requirements at December 31, 1996.
Tier 1 Total Tier 1
Risk-Based Risk-Based Leverage
Actual ratios: 11.82 % 13.00 % 7.76 %
Regulatory minimum:
For capital adequacy purposes 4.00 8.00 4.00
To be well capitalized under
prompt corrective action provisions 6.00 10.00 5.00
The Federal Reserve Board has similar requirements for bank holding companies.
The Company is currently not subject to these requirements because the Federal
Reserve guidelines contain an exemption for bank holding companies with less
than $150,000,000 in consolidated assets.
At December 31, 1996, the Company's consolidated stockholders' equity was
$10,821,712, an increase of $663,353 from December 31, 1995, resulting from the
net income for the year ended December 31, 1996, cash dividends paid to
stockholders, and the positive effects of the valuation allowance on securities
available- for-sale in the amount of $139,962.
At December 31, 1996, the Company had no significant commitments for capital
expenditures.
IMPACT OF INFLATION AND CHANGING PRICES
The consolidated financial statements and related financial data presented
herein have been prepared in accordance with generally accepted accounting
principles which require the measurement of financial position and operating
results in terms of historical dollars, without considering changes in relative
purchasing power over time due to inflation. Unlike most industrial companies,
virtually all of the assets and the 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 does the effect
of inflation.
While the effect of inflation on a bank is normally not as significant as its
influence on those businesses that have large investments in plant and
inventories, it does have an effect. Interest rates generally increase as the
rate of inflation increases, but the magnitude of the change in rates may not be
the same. While interest rates have traditionally moved with inflation, the
effect on income is diminished because both interest earned on assets and
interest paid on liabilities vary directly with each other. Also, general
increases in the price of goods and services will result in increased operating
expenses.
9
<PAGE>
INVESTMENT SECURITIES
The following table summarizes the carrying value, maturities and weighted
average yields of the Company's investment securities at December 31, 1996.
Yields on tax-exempt securities are stated at their nominal rates and have not
been adjusted for tax rate differences.
<TABLE>
<CAPTION>
AVAILABLE-FOR-SALE HELD-TO-MATURITY
CARRYING CARRYING
U.S. TREASURY SECURITIES AMOUNT YIELD AMOUNT YIELD
--------------- ----- --------------- -----
<S> <C> <C> <C> <C>
Due in one year or less $ 1,466,063 6.96%
Due after one year but within five years 1,018,437 7.37
---------
Total 2,484,500 7.13
---------------
SECURITIES OF OTHER U.S. GOVERNMENT
AGENCIES AND CORPORATIONS
Due in one year or less 2,232,388 4.56
Due after one year but within five years 7,578,427 6.17
Due after five years but within ten years - -
Due after ten years 4,622,003 5.34
---------------
Total 14,432,818 5.66
---------------
OBLIGATIONS OF STATES AND LOCAL GOVERNMENTS
Due in one year or less 240,884 7.30 240,187 6.58%
Due after one year but within five years 1,096,657 7.06 2,502,545 6.22
Due after five years but within ten years - 419,190 4.88
Due after ten years - 182,500 6.06
--------------- ---------------
Total 1,337,541 7.10 3,344,422 6.07
--------------- ---------------
TOTAL SECURITIES
Due in one year or less 3,939,335 5.61 240,187 6.58
Due after one year but within five years 9,693,521 6.39 2,502,545 6.22
Due after five years but within ten years - 419,190 4.88
Due after ten years 4,622,003 5.34 182,500 6.06
Mortgage-backed securities 16,421,148 6.70 -
Equity securities 321,816 6.10 -
--------------- ---------------
Total securities $ 34,997,823 6.31 $ 3,344,422 6.07
=============== ===============
LOAN PORTFOLIO
</TABLE>
The Company extends credit to consumers and small businesses in three contiguous
but distinctly different counties in eastern South Carolina. The service area is
mixed in nature. The economy in Marion County includes agriculture, timber,
light manufacturing, and local government activities. Marion County is adjacent
to Horry County, a county dominated by tourist, recreational and retirement
activities. Florence County is also adjacent to Marion County. Florence County
is a regional business center whose economy contains elements of medium and
light manufacturing, higher education, regional health care and distribution
facilities. The Company is affected by the economic influences of the components
of its market area. Except for recent increases in commercial and residential
construction activity in the Myrtle Beach area of Horry County, no particular
category or segment of these economies previously described are expected to grow
or contract disproportionately in 1997.
Management believes the loan portfolio is adequately diversified. There are no
foreign loans, and agricultural lending is limited to seasonal activity. Real
estate loans are primarily construction loans and loans secured by real estate.
Commercial loans are spread across a variety of industries with no significant
concentrations existing by industry or customer type.
10
<PAGE>
LOAN PORTFOLIO - CONTINUED
Loans, the largest component of earning assets, represented 61.6% of average
earning assets and 56.0% of average total assets during 1996 compared with 49.8%
and 45.2%, respectively, during 1995. With the completion of the merger with
Davis the Company focused on growth in its market area, loan quality and
expansion of existing customer relationships. These efforts caused an increase
of 31.9% in loans at December 31, 1996 to $80,922,947 over the $61,344,204
reported in 1995.
MATURITIES AND SENSITIVITY OF LOANS TO CHANGES IN INTEREST RATES
The following table summarizes the loan maturity distribution, by type, at
December 31, 1996 and related interest rate characteristics:
<TABLE>
<CAPTION>
LESS THAN ONE TO AFTER
ONE YEAR FIVE YEARS FIVE YEARS TOTAL
<S> <C> <C> <C> <C>
Commercial loans $ 12,717,358 $ 31,131,058 $ 11,451,954 $ 55,300,370
Real estate, construction 2,257,732 1,038,307 - 3,296,039
Consumer and other 6,884,460 13,827,690 1,614,388 22,326,538
-------------- -------------- -------------- --------------
$ 21,859,550 $ 45,997,055 $ 13,066,342 $ 80,922,947
============== ============== ============== ==============
Loans maturing after one year with:
Fixed interest rates $ 42,825,295
Variable interest rates 16,238,102
--------------
Total $ 59,063,397
==============
</TABLE>
RISK ELEMENTS
The Company adopted Statement of Financial Accounting Standards No. 114 (SFAS
114), "Accounting by Creditors for the Impairment of a Loan," as of January 1,
1995. Loans are defined as impaired when it is probable that a creditor will be
unable to collect all amounts due according to the contractual terms of the loan
agreement. Under SFAS 114, impairment of a loan is based on the present value of
the expected future cash flows discounted at the loan's effective interest rate
or at the fair value of the collateral if the loan is collateral dependent. As
of December 31, 1996, management did not identify any loans as being impaired
that would have a material impact on the Company's consolidated financial
statements.
The following is a summary of nonperforming assets at December 31, 1996 and
1995:
1996 1995
-------------- ---------
Nonaccrual loans - (all loans are
collateralized) $ 710,834 $ 784,388
Accruing loans 90 days or more past due 11,916 70,611
Loans impaired - -
Restructured loans - -
Other real estate owned - 129,494
-------------- --------------
Total nonperforming assets $ 722,750 $ 984,493
============== ==============
Nonperforming assets have decreased significantly in recent years. These
decreases were primarily the result of the disposal of other real estate owned
and improved loan quality. As of December 31, 1996 and 1995, nonperforming
assets to total loans and other real estate owned was .89% and 1.60%,
respectively.
11
<PAGE>
ALLOWANCE FOR LOAN LOSSES
The allowance for losses is established and maintained through charges to
expense in the form of a provision for loan losses. Loan losses and recoveries
are charged or credited directly to the allowance. The following is an analysis
of activity in the allowance for loan losses for the years ended December 31,
1996 and 1995:
SUMMARY OF LOAN LOSS EXPERIENCE
<TABLE>
<CAPTION>
1996 1995
-------------- ----------
<S> <C> <C>
Net loans outstanding at the end of the year $ 80,922,947 $ 61,344,204
============== ==============
Average amount of loans outstanding during the year $ 70,406,181 $ 52,662,094
============== ===============
Allowance for loan losses, beginning of year $ 818,637 $ 726,097
-------------- --------------
Loans charged off:
Commercial 17,004 76,315
Real estate, construction - 130,324
Consumer 19,481 54,509
-------------- --------------
Total loans charged off 36,485 261,148
-------------- --------------
Recoveries of loans previously charged off 65,203 314,798
-------------- --------------
Net charge-offs (28,718) (53,650)
-------------- --------------
Provision charged to operations 180,000 38,890
-------------- --------------
Allowance for loan losses, end of year $ 1,027,355 $ 818,637
============== ==============
Nonperforming loans, end of year $ 722,750 $ 854,999
============== ==============
Ratios
Net charge-offs to average loans outstanding -.04% -.10%
Net charge-offs to loans at end of year -.04 -.09
Allowance for loan losses to average loans outstanding 1.46 1.55
Allowance for loan losses to loans, end of year 1.27 1.33
Net charge-offs to allowance for loan losses -2.80 -6.55
Net charge-offs to provisions for loan losses -15.95 -137.95
Allowance for loan losses to nonperforming loans 142.15 95.75
</TABLE>
In 1996, the Company increased the allowance for loan losses by a charge to
operations of $180,000. The Company has concluded that this provision, combined
with the quality of its loan underwriting processes, its loan monitoring and
administration mechanisms, and its aggressive charge off policy, is sufficient
to maintain its allowance for loan losses at an adequate level. Measured as a
percentage of loans outstanding, the allowance for loan losses at the end of the
year decreased from 1.33% at December 31, 1995 to 1.27% at December 31, 1996.
For 1996 the Company had net recoveries of $28,718 in loans charged off,
compared to net recoveries of $53,650 for 1995. Management does not believe that
the decrease in net loan recoveries between the two periods is indicative of any
future trend. Although management cannot determine the amount of loans to be
charged off in the future, it knows loans will continue to be charged off due to
the risks associated with the extending of credit.
12
<PAGE>
ALLOWANCE FOR LOAN LOSSES - CONTINUED
At December 31, 1996 and 1995, the Company's internal review mechanism had
identified $4,066,439 and $4,159,406, respectively, of criticized and classified
loans. Included in this amount are $1,751,459 and $1,296,087, respectively, of
loans graded by the Company as "other loans especially mentioned", the least
severe credit grading category. The Company is not aware of any common condition
or problem among the potentially problem borrowers. The results of this internal
review process, along with the results of the independent loan review performed
by the Company's consultant and discussions with the OCC, are the primary
determining factors in management's assessment of the adequacy of the allowance
for loan losses. Except for the information used by management in its internal
review process, management is not aware of any further information about any
material credits which causes management to have serious doubts as to the
ability of borrowers' to comply with the loan repayment terms. The Company does
not allocate the allowance for loan losses to specific categories of loans but
evaluates the adequacy on an overall portfolio basis utilizing its risk grading
system.
The Company's provision and allowance for loan losses is subjective in nature
and relies on judgments and assumptions of risk elements in the portfolio, the
Company's charge-off history, future economic conditions and other factors
affecting borrowers. The process includes identification and analysis of loss
potential in various portfolio segments utilizing a credit risk grading process,
and specific reviews and evaluations of significant problem credits. In
addition, management monitors the overall economic conditions in the service
area. Management is not aware of any trends, material risks or uncertainties
affecting the loan portfolio nor is management aware of any information about
any significant borrowers which causes serious doubts as to the ability of the
borrower to comply with the loan repayment terms. It should be noted however
that no assurances can be made that future charges to the allowance for loan
losses or provisions for loan losses may not be significant to a particular
accounting period. At December 31, 1996 and 1995, management considers the
allowances for loan losses adequate based on its judgements, evaluations and
analysis of the loan portfolio.
AVERAGE DAILY DEPOSITS
The following table summarizes the Company's average daily deposits for the
years ended December 31, 1996 and 1995. The 1996 totals include certificates of
deposit over $100,000 which at December 31, 1996 total approximately
$10,106,220. Of this total, $6,680,160 had scheduled maturities within three
months, $1,419,545 within four to six months, $1,419,545 within seven to twelve
months and $586,970 thereafter.
<TABLE>
<CAPTION>
1996 1995
-------------------------------------------------------
AVERAGE AVERAGE AVERAGE AVERAGE
AMOUNT RATE PAID AMOUNT RATE PAID
<S> <C> <C> <C> <C>
Noninterest-bearing demand $ 16,937,418 -% $ 17,260,609 -%
Interest-bearing transaction
accounts 21,623,547 3.13 18,217,049 3.02
Savings 15,656,646 3.00 18,143,186 3.00
Certificates of deposit 46,810,808 5.49 39,279,356 5.36
--------------- --------------
Total $ 101,028,419 $ 92,900,200
=============== ==============
</TABLE>
13
<PAGE>
RETURN ON EQUITY AND ASSETS
The following table shows the return on average assets (net income divided by
average total assets), return on average equity (net income divided by average
equity), dividend payout ratio (dividends declared per share divided by net
income per share) and equity to assets ratio (average equity divided by average
total assets) for the period indicated.
1996 1995
------ -----
Return on average assets .68% .51%
Return on average equity 8.10 6.09
Dividend payout ratio 39.05 50.92
Equity to assets ratio 8.43 8.35
SHORT-TERM BORROWINGS
At December 31, 1996 and 1995, the Company had borrowings characterized as
securities sold under agreements to repurchase to local government entities
aggregating $8,534,279 and $9,777,892, respectively. During 1996 and 1995, the
maximum amounts outstanding at any month end were $11,797,184 and $10,183,140,
respectively. The weighted average interest rate paid was 4.76% and 4.69%, for
the years ended December 31, 1996 and 1995, respectively.
ACCOUNTING AND FINANCIAL REPORTING ISSUES
Management is not aware of any new accounting pronouncements which will have a
material affect on the financial position or results of operations for 1997.
14
REPORT OF INDEPENDENT ACCOUNTANTS
The Board of Directors
M & M Financial Corporation
Marion, South Carolina
We have audited the accompanying consolidated balance sheets of M & M Financial
Corporation as of December 31, 1996 and 1995, and the related consolidated
statements of income, changes in stockholders' equity and cash flows for each of
the three years in the period ended December 31, 1996. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and the significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the consolidated financial position of M & M Financial
Corporation as of December 31, 1996 and 1995, and the consolidated results of
its operations and its cash flows for each of the three years in the period
ended December 31, 1996, in conformity with generally accepted accounting
principles.
/s/ Tourville, Simpson & Henderson
Columbia, South Carolina
March 5, 1997
F-1
<PAGE>
M & M FINANCIAL CORPORATION
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 1996 AND 1995
ASSETS
<TABLE>
<CAPTION>
1996 1995
-------------- ----------
<S> <C> <C>
Cash and cash equivalents:
Cash and due from banks $ 7,022,370 $ 4,775,802
Interest-bearing demand accounts with other banks 241,458 1,822,442
Federal funds sold 700,000 2,750,000
-------------- --------------
Total cash and cash equivalents 7,963,828 9,348,244
Time deposits with other banks 800,000 300,000
Investment securities:
Securities available-for-sale 34,997,823 36,564,801
Securities held-to-maturity (estimated market value of $3,463,852 and
$4,228,844 at December 31, 1996 and 1995, respectively) 3,344,422 4,060,676
----------- -----------
Total investment securities 38,342,245 40,625,477
Loans receivable 80,922,947 61,344,204
Less allowance for loan losses (1,027,355) (818,637)
-------------- --------------
Loans, net 79,895,592 60,525,567
Premises and equipment, net 3,708,575 3,883,968
Other real estate owned - 129,494
Accrued interest receivable 1,207,411 989,126
Other assets 1,996,546 2,013,044
-------------- --------------
Total assets $ 133,914,197 $ 117,814,920
============== ==============
LIABILITIES AND STOCKHOLDERS' EQUITY
LIABILITIES:
Deposits:
Noninterest-bearing demand deposits $ 17,925,223 $ 17,369,811
Interest-bearing demand deposits 23,412,310 19,508,460
Savings deposits 15,164,905 15,081,219
Time deposits 50,970,568 44,124,623
-------------- --------------
Total deposits 107,473,006 96,084,113
Short-term borrowings 549,095 470,577
Securities sold under repurchase agreements 8,534,279 9,777,892
Advance from the Federal Home Loan Bank 5,000,000 -
Accrued interest and other liabilities 1,536,105 1,323,979
-------------- --------------
Total liabilities 123,092,485 107,656,561
-------------- --------------
STOCKHOLDERS' EQUITY:
Common stock, $5 par value; 800,000 shares authorized; 335,372
shares issued and outstanding 1,676,860 1,676,860
Capital surplus 2,483,783 2,483,783
Unrealized gain on securities available-for-sale, net 140,568 606
Retained earnings 6,520,501 5,997,110
-------------- --------------
Total stockholders' equity 10,821,712 10,158,359
-------------- --------------
Total liabilities and stockholders' equity $ 133,914,197 $ 117,814,920
============== ==============
</TABLE>
The accompanying notes are an integral part of the consolidated
financial statements.
F-2
<PAGE>
M & M FINANCIAL CORPORATION
CONSOLIDATED STATEMENTS OF INCOME
FOR THE YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
<TABLE>
<CAPTION>
1996 1995 1994
-------------- -------------- ----------
<S> <C> <C> <C>
INTEREST INCOME:
Loans, including fees $ 6,732,695 $ 5,126,826 $ 4,105,714
Securities, nontaxable 295,842 355,059 384,928
Securities, taxable 2,078,500 2,548,207 2,431,496
Federal funds sold 195,563 147,178 153,772
Time deposits with other banks and other 117,867 56,108 45,590
-------------- -------------- --------------
Total interest income 9,420,467 8,233,378 7,121,500
-------------- -------------- --------------
INTEREST EXPENSE:
Deposits 3,717,409 3,202,304 2,544,708
Advance from the Federal Home Loan Bank 181,066 80,306 -
Federal funds purchased and securities sold
under repurchase agreements and other borrowings 458,453 556,608 374,550
--------- --------- -------------
Total interest expense 4,356,928 3,839,218 2,919,258
-------------- -------------- --------------
NET INTEREST INCOME 5,063,539 4,394,160 4,202,242
Provision for loan losses 180,000 38,890 273,971
-------------- -------------- --------------
NET INTEREST INCOME AFTER PROVISION FOR LOAN LOSSES 4,883,539 4,355,270 3,928,271
----------- ----------- -------------
OTHER INCOME:
Service charges on deposit accounts 735,481 781,076 890,971
Gain (loss) on sales of securities available-for-sale - 139,544 (50,086)
Commissions on sales of mutual funds and annuities 101,387 28,805 -
Other income 492,550 326,868 428,857
-------------- -------------- --------------
Total other income 1,329,418 1,276,293 1,269,742
-------------- -------------- --------------
OTHER EXPENSE:
Salaries and employee benefits 2,784,779 2,649,597 2,475,188
Occupancy expense of premises 279,833 270,831 270,158
Furniture and equipment expense 564,280 516,303 484,924
Other operating expense 1,461,959 1,414,664 2,231,841
-------------- -------------- --------------
Total other expense 5,090,851 4,851,395 5,462,111
-------------- -------------- --------------
INCOME (LOSS) BEFORE INCOME TAXES 1,122,106 780,168 (264,098)
Income tax provision (benefit) 263,343 187,350 (203,363)
-------------- -------------- ---------------
NET INCOME (LOSS) $ 858,763 $ 592,818 $ (60,735)
============== ============== ===============
Net income (loss) per common share $ 2.56 $ 1.77 $ (.18)
Average common shares outstanding 335,372 335,372 335,372
</TABLE>
The accompanying notes are an integral part of the consolidated
financial statements.
F-3
<PAGE>
M & M FINANCIAL CORPORATION
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
FOR THE YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
<TABLE>
<CAPTION>
Unrealized
Gain on
Securities Total
Common Stock Capital Available- Retained Stockholders'
Shares Amount Surplus for-Sale, net Earnings Equity
<S> <C> <C> <C> <C> <C> <C>
BALANCE, DECEMBER 31, 1993 335,372 $ 1,676,860 $ 2,759,301 $ -- $ 6,080,423 $ 10,516,584
Adoption of accounting principle -- -- -- 326,138 -- 326,138
Payments to dissenters -- -- (274,044) -- -- (274,044)
Payments for fractional shares -- -- (1,474) -- -- (1,474)
Cash dividends, $.93 per share -- -- -- -- (313,561) (313,561)
Change in fair value for the period -- -- -- (865,755) -- (865,755)
Net loss for 1994 ------------ ------------ ------------ ------------ ------------ -----------
BALANCE, DECEMBER 31, 1994 335,372 1,676,860 2,483,783 (539,617) 5,706,127 9,327,153
Cash dividends, $.90 per share -- -- -- -- (301,835) (301,835)
Change in fair value for the period -- -- -- 540,223 -- 540,223
Net income for 1995 -- -- -- -- 592,818 592,818
------------ ------------ ------------ ------------ ------------ ---------
BALANCE, DECEMBER 31, 1995 335,372 1,676,860 2,483,783 606 5,997,110 10,158,359
Cash dividends, $1.00 per share -- -- -- -- (335,372) (335,372)
Change in fair value for the period -- -- -- 139,962 -- 139,962
Net income for 1996 -- -- -- -- 858,763 858,763
------------ ------------ ------------ ------------ ------------ ------------
BALANCE, DECEMBER 31, 1996 335,372 $ 1,676,860 $ 2,483,783 $ 140,568 $ 6,520,501 $10,821,712
============ ============ ============ ============ ============ ============
</TABLE>
The accompanying notes are an integral part of the
consolidated financial statements.
F-4
<PAGE>
M & M FINANCIAL CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
<TABLE>
<CAPTION>
1996 1995 1994
-------------- -------------- -------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) $ 858,763 $ 592,818 $ (60,735)
Adjustments to reconcile net income (loss) to net
cash provided by operating activities:
Depreciation and amortization 429,692 409,519 333,431
(Gain) loss on sale of securities -- (139,544) 50,086
Provision for loan losses 180,000 38,890 273,971
Amortization less accretion on securities 26,993 (69,006) 198,142
Deferred income taxes (35,961) 17,483 48,357
Foreclosed asset valuation expense -- 18,417 4,224
Gain on disposition of foreclosed assets (25,369) -- --
(Increase) decrease in interest receivable (218,285) 179,951 533,145
Increase (decrease) in interest payable 293,749 267,081 (26,760)
Increase in other assets (105,976) (982,995) (549,107)
Increase (decrease) in other liabilities (81,623) (238,673) 477,146
------------ ------------ ------------
Net cash provided by operating activities 1,321,983 93,941 1,281,900
------------ ------------ ------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from sales of securities available-for-sale -- 21,702,952 4,762,694
Proceeds from maturities of securities available-for-sale 10,798,945 7,389,026 2,593,361
Purchases of securities available-for-sale (8,954,269) (16,154,008) (13,866,752)
Proceeds from maturities of securities held-to-maturity 702,500 8,976,276 12,358,460
Purchases of securities held-to-maturity -- (5,908,470) (14,715,798)
Net (increase) decrease in loans made to customers (19,550,025) (17,770,768) 5,895,906
Net (increase) decrease in deposits in other banks (500,000) -- 850,000
Purchases of premises and equipment (200,564) (240,523) (595,282)
Proceeds on disposition of foreclosed assets 108,588 218,353 391,691
Proceeds from sale of premises and equipment -- -- 5,587
Net cash used by investing activities (17,594,825) (1,787,162) (2,320,133)
------------ ------------ ------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net increase (decrease) in deposit accounts 11,388,893 4,764,235 (3,830,392)
Net increase (decrease) in securities sold under
repurchase agreements and short-term borrowings (1,165,095) (1,073,534) 2,972,405
Proceeds of advances from the Federal Home Loan Bank 5,000,000 -- --
Payments to merger dissenters -- -- (274,044)
Payments for fractional shares -- -- (1,474)
Cash dividends paid (335,372) (301,835) (313,561)
------------ ------------ ------------
Net cash provided (used) by financing activities 14,888,426 3,388,866 (1,447,066)
------------ ------------ ------------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS (1,384,416) 1,695,645 (2,485,299)
CASH AND CASH EQUIVALENTS, BEGINNING OF YEAR 9,348,244 7,652,599 10,137,898
------------ ------------ ------------
CASH AND CASH EQUIVALENTS, END OF YEAR $ 7,963,828 $ 9,348,244 $ 7,652,599
============ ============ ============
</TABLE>
The accompanying notes are an integral part of the consolidated
financial statements.
F-5
<PAGE>
M & M FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
CONSOLIDATION - The accompanying consolidated financial statements include the
accounts of M&M Financial Corporation (the Company), a bank holding company, and
its wholly-owned subsidiaries; First National South (the Bank), and Marion
National Investment Corporation. The principal business activity of the Company
and the Bank is to provide commercial banking services to domestic markets,
principally in the counties of Marion, Horry and Florence, South Carolina. In
consolidation, all significant intercompany items and transactions have been
eliminated.
USE OF ESTIMATES - In preparing the financial statements, management is required
to make estimates and assumptions that affect the reported amounts of assets and
liabilities as of the balance sheet date and revenues and expenses for the
period. Actual results could differ significantly from those estimates.
Material estimates that are particularly susceptible to significant change
relate to the determination of the allowance for loan losses, including
valuation allowances for impaired loans, and the carrying amount of real estate
acquired in connection with foreclosures or in satisfaction of loans. Management
must also make estimates in determining the estimated useful lives and methods
for depreciating premises and equipment.
While management uses available information to recognize losses on loans and
foreclosed real estate, future additions to the allowance may be necessary based
on changes in local economic conditions. In addition, regulatory agencies, as an
integral part of their examination process, periodically review the Bank's
allowances for losses on loans and foreclosed real estate. Such agencies may
require the Bank to recognize additions to the allowances based on their
judgements about information available to them at the time of their examination.
Because of these factors, it is reasonably possible that the allowances for
losses on loans and foreclosed real estate may change materially in the near
term.
SECURITIES HELD-TO-MATURITY - Investment securities classified as
held-to-maturity are carried at cost adjusted for amortization of premiums and
accretion of discounts, both computed by the straight - line method. Management
has the intent and the Company has the ability to hold designated investment
securities to maturity. Reductions in market value considered by management to
be other than temporary are reported as a realized loss and a reduction in the
cost basis of the security.
SECURITIES AVAILABLE-FOR-SALE - Securities classified as available-for-sale by
the Company are carried at amortized cost and adjusted to estimated fair value
by recording the aggregate unrealized gain or loss in a valuation account.
Management does not actively trade and may not hold securities
available-for-sale until maturity. The adjusted cost basis of securities
available-for-sale is determined by specific identification and is used in
computing the gain or loss from a sales transaction.
LOANS - Loans are stated at their unpaid principal balance. Substantially all
interest income is computed using the simple interest method and is recorded in
the period earned. When serious doubt exists as to the collectibility of a loan
or a loan is 90 days past due, the accrual of interest income is generally
discontinued unless the estimated net realizable value of the collateral is
sufficient to assure collection of the principal balance and accrued interest.
When interest accruals are discontinued, income in the current year is reversed,
and interest accrued in prior years is charged to the allowance for loan losses.
Impairment of a loan is measured based on the present value of expected future
cash flows discounted at the loan's effective interest rate or fair value of the
collateral if the loan is collateral dependent. When management determines that
a loan is impaired, the difference between the Company's investment in the
related loan and the present value of the expected future cash flows, or the
fair value of the collateral, is charged to bad debt expense with a
corresponding entry to a valuation account. The accrual of interest is
discontinued on an impaired loan when management determines that the borrower
may be unable to meet payments as they become due.
F-6
<PAGE>
M & M FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES- CONTINUED
ALLOWANCE FOR LOAN LOSSES - Management provides for losses on loans through
specific and general charges to operations and credits such charges to the
allowance for loan losses. Specific provision for losses is determined for
identified loans based upon estimates of the excess of the loan's carrying value
over the net realizable value of the underlying collateral. General provision
for loan losses is estimated by management based upon factors including industry
loss experience for similar lending categories, actual loss experience,
delinquency trends, as well as prevailing and anticipated economic conditions.
While management uses the best information available to make evaluations, future
adjustment to the allowance may be necessary if economic conditions differ
substantially from the assumptions used in making the evaluation. Delinquent
loans are charged against the allowance at the time they are determined to be
uncollectible. Recoveries are added to the allowance.
PREMISES AND EQUIPMENT - Premises and equipment are stated at cost less
accumulated depreciation. Gain or loss on retirement of premises and equipment
is recognized in the statements of income when incurred. Expenditures for
maintenance and repairs are charged to expense; betterments and improvements are
capitalized. Depreciation charges are computed on both the straight-line and
accelerated methods over the estimated useful lives as follows:
Building and improvements - 15-33 years
Furniture, fixtures and equipment - 5-20 years
OTHER REAL ESTATE OWNED - Other real estate owned includes real estate acquired
through foreclosure and loans accounted for as in-substance foreclosures.
Collateral is considered foreclosed in-substance when the borrower has little or
no equity in the fair value of the collateral, proceeds for repayment of the
debt can be expected to come only from the sale of the collateral, and it is
doubtful that the borrower can rebuild equity or otherwise repay the loan in the
foreseeable future. Other real estate owned is carried at the lower of cost
(fair value at the date of foreclosure) or estimated fair value minus estimated
costs to sell. Any write-downs at the date of acquisition are charged to the
allowance for possible loan losses. Expenses to maintain such assets, subsequent
changes in the valuation allowance, and gains and losses on disposal are
included in other expenses.
INVESTMENTS IN EQUITY SECURITIES - Other assets include the costs of the
Company's investments in the stock of the Federal Reserve Bank and the Federal
Home Loan Bank. The stocks have no quoted market value and no ready market
exists. Investment in Federal Reserve Bank stock is required for national banks.
Investment in Federal Home Loan Bank stock is a condition of borrowing from the
Federal Home Loan Bank, and the stock is pledged to secure the borrowings. At
December 31, 1996 and 1995, the investment in Federal Reserve Bank stock was
$113,300. At December 31, 1996 and 1995, the investment in Federal Home Loan
Bank stock was $735,300 and $489,800, respectively. Dividends received on
Federal Reserve Bank stock and Federal Home Loan Bank stock are included in
other income.
INCOME TAXES - The income tax provision is the sum of amounts currently payable
to taxing authorities and the net changes in income taxes payable or refundable
in future years. Income taxes deferred to future years are determined utilizing
a liability approach. This method gives consideration to the future tax
consequences associated with differences between the financial accounting and
tax bases of certain assets and liabilities, principally the allowance for loan
losses, depreciable premises and equipment, deferred compensation, and the
unrealized gain or loss on securities available-for-sale. Deferred tax assets
are reduced by a valuation allowance when, in the opinion of management, it is
more likely than not that some portion or all of the deferred tax assets will
not be realized.
F-7
<PAGE>
M & M FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES- CONTINUED
CASH FLOW INFORMATION - For purposes of reporting cash flows in the consolidated
financial statements, the Company considers certain highly liquid debt
instruments purchased with a maturity of three months or less to be cash
equivalents. Cash equivalents include cash and due from banks and federal funds
sold. Generally, federal funds are sold for one-day periods.
During 1996, 1995 and 1994, the Company paid $4,063,179, $3,572,137, and
$2,946,018 respectively, for interest. In 1996, 1995 and 1994, the Company made
tax payments of $119,000, $3,952 and $151,891, respectively.
Supplemental noncash investing and financing activities are as follows:
During 1996, the Company transferred property with a carrying amount of $46,275
from other real estate owned to premises and equipment. During 1995 and 1994,
the Company transferred loans totaling $68,219, and $81,777, respectively, to
other real estate owned.
OFF-BALANCE-SHEET FINANCIAL INSTRUMENTS - In the ordinary course of business,
the Company has entered into off-balance- sheet financial instruments consisting
of commitments to extend credit, commitments under credit card arrangements and
letters of credit. These financial instruments are recorded in the financial
statements when they become payable by the customer.
CONCENTRATIONS OF CREDIT RISK - Financial instruments which potentially subject
the Company to concentrations of credit risk consist principally of time
deposits in other banks, loans receivable, securities, federal funds sold and
amounts due from banks. Management is not aware of any concentrations of loans
to classes of borrowers or industries that would be similarly affected by
economic conditions. Although the Company's loan portfolio is diversified, a
substantial portion of its borrowers' ability to honor the terms of their loans
is dependent on business and economic conditions in Marion, Horry and Florence
Counties, South Carolina and surrounding areas. Management does not believe
credit risk is associated with obligations of the United States, its agencies or
its corporations. The Company places its deposits and correspondent accounts
with and sells its federal funds to high credit quality institutions. Management
believes credit risk associated with correspondent accounts is not significant.
PER SHARE AMOUNTS - Net income (loss) per common share is computed by dividing
net income (loss) by the weighted average number of shares of common stock
outstanding during the period.
RECLASSIFICATIONS - Certain captions and amounts in the 1995 and 1994
consolidated financial statements were reclassified to conform with the 1996
presentation.
During 1996, certain equity securities owned by the Company began trading on a
national exchange creating a ready market for the shares. The Company's
investment was included in other assets at cost as of December 31, 1995 and
1994. In 1996, the investment was reclassified to securities available-for-sale
and is carried at its fair value as of December 31, 1996.
NOTE 2 - RESTRICTIONS ON CASH AND DUE FROM BANKS
The Bank is required to maintain average reserve balances with the Federal
Reserve Bank computed as a percentage of deposits. At December 31, 1996 and
1995, the required cash reserve was $971,000 and $833,000, respectively, and was
satisfied by vault cash on hand and amounts due from the Federal Reserve Bank,
both of which are reported in the financial statements as cash and cash
equivalents.
F-8
<PAGE>
M & M FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 3 - BUSINESS COMBINATION
Effective July 27, 1994, the Company completed the acquisition of Davis National
Bank (Davis) with assets totaling $57,394,016. The Company issued 144,232 shares
of its common stock for all of the issued and outstanding shares of Davis. This
acquisition was accounted for as a pooling of interests. Accordingly, the
Company's financial statements reflect the results of Davis for all periods
presented prior to the merger.
NOTE 4 - INVESTMENT SECURITIES
Securities available-for-sale at December 31, 1996 and 1995 consist of the
following:
<TABLE>
<CAPTION>
Gross Gross Estimated
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
<S> <C> <C> <C> <C>
DECEMBER 31, 1996
Equity securities $ 67,468 $ 254,348 $ -- $ 321,816
U.S. Treasury securities 2,448,037 36,463 -- 2,484,500
Securities of other U.S. Government
agencies and corporations 14,446,568 -- 13,750 14,432,818
Obligations of states and local government 1,297,629 39,912 -- 1,337,541
Mortgage-backed securities 16,509,555 -- 88,407 16,421,148
----------- ----------- ----------- -----------
Total $34,769,257 $ 330,723 $ 102,157 $34,997,823
=========== =========== =========== ===========
DECEMBER 31, 1995
U.S. Treasury securities $ 6,058,815 $ 70,279 $ -- $ 6,129,094
Securities of other U.S. Government
agencies and corporations 11,154,357 -- 52,225 11,102,132
Obligations of states and local government 1,299,787 71,014 -- 1,370,801
Mortgage-backed securities 18,050,857 141,621 229,704 17,962,774
----------- ----------- ----------- -----------
Total $36,563,816 $ 282,914 $ 281,929 $36,564,801
=========== =========== =========== ===========
</TABLE>
There were no sales of securities available-for-sale in 1996. For the years
ended December 31, 1995 and 1994, aggregate realized gains on sales of
securities available-for-sale were $179,804 and $0, respectively. Aggregate
realized losses were $40,260 and $50,086 in 1995 and 1994, respectively.
Proceeds from sales of securities available-for-sale were $21,702,952 and
$4,762,694 in 1995 and 1994, respectively.
Securities held-to-maturity at December 31, 1996 and 1995 consist of the
following:
<TABLE>
<CAPTION>
Gross Gross Estimated
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
<S> <C> <C> <C> <C>
DECEMBER 31, 1996:
Obligations of states and local government $3,344,422 $119,430 $ - $3,463,852
========== ======== ===== ==========
DECEMBER 31, 1995:
Obligations of states and local government $4,060,676 $170,687 $2,519 $4,228,844
========== ======== ====== ==========
</TABLE>
For the years ended December 31, 1996, 1995, and 1994, there were no sales of
securities held-to-maturity.
F-9
<PAGE>
M & M FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 4 - INVESTMENT SECURITIES - CONTINUED
The following table summarizes the maturities of securities available-for-sale
and held-to-maturity as of December 31, 1996, based on the contractual
maturities. Actual maturities may differ from the contractual maturities because
borrowers may have the right to call or prepay obligations with or without
penalty.
<TABLE>
<CAPTION>
Securities Securities
Available-for-Sale Held-to-Maturity
Estimated Estimated
Amortized Fair Amortized Fair
Cost Value Cost Value
<S> <C> <C> <C> <C>
Due in one year or less $ 3,938,001 $ 3,939,335 $ 240,187 $ 241,489
Due after one year but within five years 9,638,593 9,693,521 2,502,545 2,586,565
Due after five years but within ten years -- -- 419,190 423,719
Due after ten years 4,615,640 4,622,003 182,500 212,079
Mortgage-backed securities 16,509,555 16,421,148 -- --
Equity securities 67,468 321,816 -- --
----------- ----------- ----------- -----------
Total $34,769,257 $34,997,823 $ 3,344,422 $ 3,463,852
=========== =========== =========== ===========
</TABLE>
Effective November 15, 1995, the Financial Accounting Standards Board permitted
a one-time opportunity for financial institutions to reassess their investment
portfolios and change the classification of their debt securities from held-to-
maturity to available-for-sale without bringing into question the intent to hold
other securities to maturity. In response, management transferred securities
having an amortized cost of $18,606,148 from the held-to-maturity to
available-for-sale category. The redesignation of securities had no effect on
net income or earnings per share.
At December 31, 1996 and 1995, investment securities having an amortized cost of
approximately $23,350,545 and $21,808,000, respectively, and an estimated market
value of approximately $23,405,919 and $21,892,000, respectively, were pledged
to secure public deposits and for other purposes as required and permitted by
law.
NOTE 5 - LOANS RECEIVABLE
Loans receivable at December 31, 1996 and 1995, are summarized as follows:
1996 1995
-------------- ----------
Commercial $ 55,300,370 $ 49,966,753
Real estate - construction 3,296,039 1,127,091
Consumers 22,326,538 10,250,360
-------------- --------------
Total loans $ 80,922,947 $ 61,344,204
============== ==============
The Company adopted Statement of Financial Accounting Standards No. 114,
"Accounting by Creditors for the Impairment of a Loan", and Statement of
Financial Accounting Standards No. 118, "Accounting By Creditors for Impairment
of a Loan - Income Recognition and Disclosures" as of January 1, 1995. These
statements identify how creditors should measure and account for impaired loans.
Under SFAS 114 and 118, impairment of loans should be measured at the present
value of the expected future cash flows discounted at the loan's effective
interest rate or at fair value of the collateral if the loan is collateral
dependent.
F-10
<PAGE>
M & M FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 5 - LOANS RECEIVABLE - CONTINUED
Loans are defined as impaired when "based on current information and events, it
is probable that a creditor will be unable to collect all amounts due according
to the contractual terms of the loan agreement." All loans are subject to this
criteria except for "smaller-balance homogeneous loans that are collectively
evaluated for impairment" and loans "measured at fair value or at the lower of
cost or fair value." The Company considers its consumer installment portfolio,
credit cards and home equity lines as meeting this criteria. Therefore, the real
estate and commercial loan portfolios are primarily affected by these
Statements.
The Company identifies impaired loans through its normal internal loan review
process. Loans on the Company's problem loan watch list are considered
potentially impaired loans. These loans are evaluated in determining whether all
outstanding principal and interest are expected to be collected. Loans are not
considered impaired if a minimal delay occurs and all amounts due, including
accrued interest at the contractual interest rate for the period of delay, are
expected to be collected. At December 31, 1996 and 1995, management reviewed its
problem loan watch list and determined that no impairment on loans existed that
would have a material effect on the Company's consolidated financial statements.
The accrual of interest is discontinued on impaired loans when management
anticipates that a borrower may be unable to meet the obligations of the note.
Accrued interest through the date the interest is discontinued is reversed.
Subsequent interest earned is recognized only to the point that cash payments
are received. All payments are applied to principal if the ultimate amount of
principal is not expected to be collected.
As of December 31, 1996 and 1995, management had placed loans totaling $710,834
and $784,388, respectively, in nonaccrual status because the loans were not
performing as originally contracted. However, no impairment has been recognized
because management has determined that the discounted value of expected proceeds
from the sale of collateral, typically real estate, exceeds the carrying amount
of these loans. Loans that were past due 90 days or more and still accruing
interest were $11,916 and $70,611 for December 31, 1996 and 1995, respectively.
An analysis of the allowance for loan losses for the years ended December 31,
1996, 1995 and 1994, is as follows:
<TABLE>
<CAPTION>
1996 1995 1994
-------------- -------------- ----------
<S> <C> <C> <C>
Balance, beginning of year $ 818,637 $ 726,097 $ 1,466,894
Provision for loan losses 180,000 38,890 273,971
Recoveries of charged-off loans 65,203 314,798 89,392
Loans charged off (36,485) (261,148) (1,104,160)
-------------- -------------- --------------
Balance, end of year $ 1,027,355 $ 818,637 $ 726,097
============== ============== ==============
</TABLE>
In the normal course of business, the Company is a party to financial
instruments with off-balance-sheet risk. These financial instruments are
commitments to extend credit and letters of credit and have elements of risk in
excess of the amount recognized in the balance sheet. 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.
A commitment involves, to varying degrees, elements of credit and interest rate
risk in excess of the amount recognized in the balance sheets. The Company's
exposure to credit loss in the event of non-performance by the other party to
the instrument is represented by the contractual amount of the instrument. Since
certain commitments are expected to expire without being drawn upon, the total
commitment amounts do not necessarily represent future cash requirements.
Letters of credit are conditional commitments issued to guarantee a customer's
performance to a third party and have essentially the same credit risk as other
lending facilities. The Company uses the same credit policies in making
commitments to extend credit as it does for on-balance-sheet instruments.
At December 31, 1996 and 1995, the Company had unfunded commitments, including
standby letters of credit, to extend credit totaling $17,682,492 and
$14,198,442, respectively. At December 31, 1996 the Company was not committed to
lend additional funds to borrowers owing nonaccrual loans.
F-11
<PAGE>
M & M FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 6 - PREMISES AND EQUIPMENT
Premises and equipment at December 31, 1996 and 1995, consists of the following:
1996 1995
-------------- -----------
Land $ 720,764 $ 674,489
Office and buildings 3,515,952 3,437,671
Furniture and equipment 3,183,260 3,064,687
Construction in process 3,000 -
-------------- --------------
Total 7,422,976 7,176,847
Less, accumulated depreciation 3,714,401 3,292,879
-------------- --------------
Premises and equipment, net $ 3,708,575 $ 3,883,968
============== ==============
Depreciation expense for the years ended December 31, 1996, 1995 and 1994 was
$422,232, $408,809 and $333,431, respectively.
NOTE 7 - DEPOSITS
At December 31, 1996 and 1995, certificates of deposit of $100,000 or more
totaled approximately $10,106,220 and $8,118,000, respectively. Interest expense
on these deposits was approximately $464,938, $361,900 and $223,700 in 1996,
1995 and 1994, respectively.
At December 31, 1996, the scheduled maturities of certificates of deposit are as
follows:
1997 $ 45,834,775
1998 4,576,836
1999 416,262
2000 112,716
2001 and thereafter 29,980
--------------
Total $ 50,970,569
==============
NOTE 8 - SHORT-TERM BORROWINGS
Securities sold under agreements to repurchase generally mature within one to
fourteen days from the transaction date. During 1996, the daily average of
securities sold under repurchase agreements was $9,126,157, and the maximum
amount outstanding at any month end was $11,797,184. A third party provides
safekeeping services for the Company and maintains possession of the securities.
As of December 31, 1996, the amortized cost and market value of the securities
underlying the agreement were $11,880,811 and $11,842,726, respectively.
At December 31, 1996, the Bank had unused lines of credit to purchase federal
funds from unrelated banks totaling $8,500,000. These lines of credit are
available on a one to seven day basis for general corporate purposes. The
Company also had available to it an unused commitment from the Federal Home Loan
Bank totaling $5,000,000.
F-12
<PAGE>
M & M FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 9 - ADVANCE FROM THE FEDERAL HOME LOAN BANK
As of December 31, 1996, the Bank owes $5,000,000 on an advance from the Federal
Home Loan Bank which originated on May 22, 1996. The terms of the agreement are
monthly interest payments based on a fixed interest rate of 5.82%. The principal
payment on the borrowing is due May 22, 1997. As collateral, the Bank has
pledged its portfolio of first mortgage loans on one-to-four family residential
properties aggregating approximately $13,236,481 and its investment in Federal
Home Loan bank stock which is included in other assets.
NOTE 10 - RELATED PARTY TRANSACTIONS:
Certain parties (primarily directors, executive officers, principal stockholders
and their associates) were loan customers and had other transactions in the
normal course of business with the Bank. Related party loans are made on
substantially the same terms, including interest rates and collateral, as those
prevailing at the time for comparable transactions with unrelated persons and
generally do not involve more than normal risk of collectibility. Total loans
and commitments outstanding to related parties at December 31, 1996 and 1995,
were $1,166,826 and $1,227,222, respectively. During 1996, $1,411,225 of new
loans were made to related parties and repayments totaled $1,471,621.
NOTE 11 - CONTINGENCIES
In the ordinary course of business, the Company may, from time to time, become a
party to legal claims and disputes. At December 31, 1996, management is not
aware of any unaccrued pending or threatened litigation, or unasserted claims
that could result in losses, if any, that would be material to the consolidated
financial statements.
NOTE 12 - RESTRICTION ON SUBSIDIARY DIVIDENDS
Banking regulations restrict the amount of dividends the Bank may pay to the
Company. Dividends paid by the Bank to the Company are payable from undivided
profits. Prior approval of the Comptroller of the Currency is required if the
total of all dividends declared by a national bank in any year exceeds the
bank's net profits (as defined) for that year combined with its retained net
profits (as defined) for the two preceding years. Under Federal Reserve Board
regulations, the amounts of loans or advances from the Bank to the Company are
restricted.
F-13
<PAGE>
M & M FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 13 - INCOME TAXES
Income tax expense included in the income statements for the years ended
December 31, 1996, 1995 and 1994 is summarized as follows:
<TABLE>
<CAPTION>
1996 1995 1994
-------------- -------------- --------
<S> <C> <C> <C>
Currently payable:
Federal $ 255,457 $ 141,052 $ (259,672)
State 43,847 28,815 7,952
-------------- -------------- --------------
299,304 169,867 (251,720)
-------------- -------------- --------------
Deferred:
Federal 38,141 317,595 (220,152)
State 13,518 38,076 (69,300)
-------------- -------------- --------------
51,659 355,671 (289,452)
-------------- -------------- --------------
Income tax expense (benefit) $ 350,963 $ 525,538 $ (541,172)
============== ============== ==============
Income tax expense is allocated as follows:
To continuing operations $ 263,343 $ 187,350 $ (203,363)
To stockholders' equity 87,620 338,188 (337,809)
-------------- -------------- --------------
Income tax expense (benefit) $ 350,963 $ 525,538 $ (541,172)
============== ============== ==============
</TABLE>
A summary of the Company's deferred tax accounts as of December 31, 1996 and
1995 follows:
1996 1995
-------------- --------
Deferred tax assets $ 546,549 $ 480,773
Deferred tax liabilities 200,388 82,953
Valuation allowance 193,764 193,764
The principal sources of temporary differences in 1996, 1995, and 1994, and the
related deferred tax effects are as follows:
<TABLE>
<CAPTION>
1996 1995 1994
-------------- -------------- --------
<S> <C> <C> <C>
Provision for bad debts $ (29,904) $ 9,805 $ 269,400
Tax depreciation in excess of book depreciation 32,206 (697) (19,990)
Valuation allowance on foreclosed property 22,083 (13,774) 32,477
Alternative minimum tax 36,940 18,602 4,798
Retirement plans 37,093 10,922 (141,673)
Other net (134,379) (7,375) 11,938
--------- --------- ---------
Temporary differences attributable to
continuing operations (35,961) 17,483 156,950
Change in valuation allowance -- -- (108,593)
--------- --------- ---------
Deferred tax expense (benefit) attributable to
continuing operations (35,961) 17,483 48,357
Deferred tax expense (benefit) attributable to
stockholders' equity 87,620 338,188 (337,809)
--------- --------- ---------
Change in deferred income taxes $ 51,659 $ 355,671 $(289,452)
========= ========= =========
</TABLE>
F-14
<PAGE>
M & M FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 13 - INCOME TAXES - CONTINUED
A reconciliation of the income tax provision and the amount computed by
applying the Federal statutory rate of 34% to income before income taxes
follows:
<TABLE>
<CAPTION>
1996 1995 1994
-------------- -------------- --------
<S> <C> <C> <C>
Income tax at the statutory rate $ 381,516 $ 265,257 $ (89,793)
State income tax, net of federal benefit 32,859 44,148 17,168
Tax exempt interest income (106,594) (124,745) (130,876)
Disallowed interest expense 22,038 17,787 12,022
Merger expenses - - 124,779
Change in valuation allowance - - (108,593)
Other, net (66,476) (15,097) (28,070)
-------------- -------------- --------------
Total $ 263,343 $ 187,350 $ (203,363)
============== ============== ==============
</TABLE>
NOTE 14 - OTHER OPERATING EXPENSES
Other operating expenses for the years ended December 31, 1996, 1995 and 1994
are summarized below:
<TABLE>
<CAPTION>
1996 1995 1994
-------------- -------------- -----------
<S> <C> <C> <C>
Stationary and banking supplies $ 199,714 $ 185,669 $ 208,703
Federal deposit insurance assessment 2,054 106,783 222,273
Directors' fees 97,718 96,450 88,900
Professional fees 167,446 111,703 589,455
Marketing and advertising 182,774 106,599 67,003
Insurance and bonds 68,330 81,484 88,788
Other real estate expense - 67,751 69,755
Other 742,889 658,225 896,964
-------------- -------------- --------------
Total $ 1,460,925 $ 1,414,664 $ 2,231,841
============== ============== ==============
</TABLE>
NOTE 15 - EMPLOYEE BENEFIT PLANS
The Company has a trusteed defined contribution retirement savings and profit
sharing (401k) plan covering substantially all full-time employees. Annual
expense provisions are based primarily upon employee participation and earnings
of the Company. The Company's policy is to fund retirement plan contributions as
accrued. In 1996, 1995, and 1994, retirement plan expense totaled approximately
$145,469, $154,982 and $89,849, respectively.
The Company has a noncontributory defined benefit pension plan covering
substantially all of its employees. The benefits are based on years of service
and the employee's average compensation for the last five highest consecutive
years out of the last ten years of employment. The Company's funding policy is
to contribute annually the maximum amount that can be deducted for federal
income tax purposes. Contributions are intended to provide not only for benefits
attributed to service to date but also for those expected to be earned in the
future.
F-15
<PAGE>
M & M FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 15 - EMPLOYEE BENEFIT PLANS - CONTINUED
The following table sets forth the plan's funded status and amounts recognized
in the Company's balance sheets at December 31, 1996, 1995 and 1994:
<TABLE>
<CAPTION>
1996 1995 1994
-------------- -------------- --------
<S> <C> <C> <C>
ACTUARIAL PRESENT VALUE OF
BENEFIT OBLIGATIONS:
Actuarial present value of benefit obligation:
Vested benefits $ 792,282 $ 659,234 $ 884,060
Nonvested benefits 100,964 75,959 85,087
-------------- -------------- --------------
$ 893,246 $ 735,193 $ 969,147
============== ============== ==============
Projected benefit obligation $ (1,319,587) $ (1,222,416) $ (1,498,190)
Plan assets at fair value 1,422,261 1,105,263 1,209,349
-------------- -------------- --------------
Plan assets in excess of (less than) projected benefit obligation 102,674 (117,153) (288,841)
Unrecognized net gain from past experience different from
that assumed and effects of change in assumptions 7,226 196,067 438,640
Unrecognized net pension asset being recognized over 15 years (162,905) (186,063) (209,221)
---------- --------- -------------
Accrued pension cost $ (53,005) $ (107,149) $ (59,422)
============== ============== ==============
Funding/expensing differential:
Accrued pension liability, beginning of year $(107,149) $(59,422) $ 93
Contribution 199,613 107,255 23,334
Pension expense (145,469) (154,982) (82,849)
-------------- -------------- --------------
Accrued pension liability, end of year $ (53,005) $ (107,149) $ (59,422)
============== ============== ==============
Net pension expense included in the following components:
Service costs - benefits earned during the period $170,145 $156,537 $ 91,075
Interest cost on projected benefit obligation 79,463 73,618 83,355
Actual return on plan assets (88,528) (69,998) (80,794)
Net amortization of transition asset (23,158) (23,158) (22,352)
Recognition of loss on plan assets - - 5,571
Amortization of prior service cost 17,983 17,983 5,994
Amortization of gain (10,436) - -
-------------- -------------- --------------
$ 145,469 $ 154,982 $ 82,849
============== ============== ==============
Actuarial assumptions:
Weighted average discount rate 7.40% 7.40% 7.00%
Expected long-term rate of return on plan assets 7.40% 7.00% 7.00%
Rate of increase in future compensation levels 5.00% 5.00% 5.00%
</TABLE>
NOTE 16 - CAPITAL REQUIREMENTS
The Bank is subject to various regulatory capital requirements administered by
the federal banking agencies. Failure to meet minimum capital requirements can
initiate certain mandatory and possibly additional discretionary actions by
regulators that, if undertaken, could have a material effect on the Company's
financial statements. Under capital adequacy guidelines and the regulatory
framework for prompt corrective action, the Bank must meet specific capital
guidelines that involve quantitative measures of the Bank's assets, liabilities,
and certain off-balance-sheet items as calculated under regulatory accounting
practices. The Bank's capital amounts and classifications are also subject to
qualitative judgements by the regulators about components, risk weightings, and
other factors.
F-16
<PAGE>
M & M FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 16 - CAPITAL REQUIREMENTS - CONTINUED
Quantitative measures established by regulation to ensure capital adequacy
require the Bank to maintain minimum ratios of Tier 1 and total capital as a
percentage of assets and off-balance-sheet exposures, adjusted for risk weights
ranging from 0% to 100%. Tier 1 capital of the Bank consists of common
stockholders' equity, excluding the unrealized gain or loss on securities
available-for-sale, minus certain intangible assets. The Bank's Tier 2 capital
consists of the allowance for loan losses subject to certain limitations. Total
capital for purposes of computing the capital ratios consists of the sum of Tier
1 and Tier 2 capital. The regulatory minimum requirements are 4% for Tier 1 and
8% for total risk-based capital.
The Bank is also required to maintain capital at a minimum level based on total
assets, which is known as the leverage ratio. Only the strongest banks are
allowed to maintain capital at the minimum requirement of 3%. All others are
subject to maintaining ratios 1% to 2% above the minimum.
As of December 31, 1996, the most recent notification from the Bank's primary
regulator categorized the Bank as well- capitalized under the regulatory
framework for prompt corrective action. There are no conditions or events that
management believes have changed the Bank's category.
The following table summarizes the capital ratios of the Bank and the regulatory
minimum requirements at December 31, 1996.
Tier 1 Total Tier 1
Risk-Based Risk-Based Leverage
Actual ratios: 11.82 % 13.00 % 7.76 %
Regulatory minimum:
For capital adequacy purposes 4.00 8.00 4.00
To be well capitalized under
prompt corrective action provisions 6.00 10.00 5.00
The Federal Reserve Board has similar requirements for bank holding companies.
The Company is currently not subject to these requirements because the Federal
Reserve guidelines contain an exemption for bank holding companies with less
than $150,000,000 in consolidated assets.
F-17
<PAGE>
M & M FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 17- M & M FINANCIAL CORPORATION (PARENT COMPANY ONLY)
Condensed financial statements for M & M Financial Corporation (Parent Company
Only) as of December 31, 1996 and 1995 and for the years ended December 31,
1996, 1995, and 1994 follow:
BALANCE SHEETS
<TABLE>
<CAPTION>
1996 1995
-------------- ----------
<S> <C> <C>
ASSETS
Cash and cash equivalents $ 145,015 $ 110,288
Investment in subsidiaries 10,419,431 9,951,342
Securities available-for-sale 321,816 -
Other assets 33,374 96,729
-------------- --------------
Total assets $ 10,919,636 $ 10,158,359
============== ==============
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities $ 97,924 $ -
-------------- --------------
Common stock 1,676,860 1,676,860
Capital surplus 2,483,783 2,483,783
Unrealized gain on securities available
for sale, net 140,568 606
Retained earnings 6,520,501 5,997,110
-------------- --------------
Total stockholders' equity 10,821,712 10,158,359
-------------- --------------
Total liabilities and stockholders' equity $ 10,919,636 $ 10,158,359
============== ==============
</TABLE>
STATEMENTS OF INCOME
<TABLE>
<CAPTION>
1996 1995 1994
-------------- -------------- ----------
<S> <C> <C> <C>
Income:
Dividend income $ 360,372 $ 359,991 $ 592,806
Other income 14,835 20,642 -
-------------- -------------- --------------
375,207 380,633 592,806
Expenses:
Other expenses 995 4,225 3,110
-------------- -------------- --------------
Income before income taxes and equity in undistributed
earnings and losses of subsidiaries 374,212 376,408 589,696
Income tax (provision) benefit - allocated from
consolidated return - (5,581) 990
-------------- -------------- --------------
Income before equity in undistributed earnings and
losses of subsidiaries 374,212 370,827 590,686
Equity in undistributed earnings and losses of subsidiaries 484,551 221,991 (651,421)
--------------- --------- ---------
Net income (loss) $ 858,763 $ 592,818 $ (60,735)
============== ============== ==============
</TABLE>
F-18
<PAGE>
M & M FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 17 - M & M FINANCIAL CORPORATION (PARENT COMPANY ONLY) - CONTINUED
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
1996 1995 1994
--------------- ----------- -------
<S> <C> <C> <C>
Operating activities:
Net income (loss) $ 858,763 $ 592,818 $ (60,735)
Adjustments to reconcile net income to net cash
provided by operating activities
Equity in undistributed earnings and losses of subsidiaries (484,551) (221,991) 651,421
(Increase) decrease in other assets - 18,546 (546)
-------------- -------------- --------------
Net cash provided by operating activities 374,212 389,373 590,140
-------------- -------------- --------------
Investing activities:
Proceeds from sale of premises - 29,346 -
Purchase of securities available-for-sale (4,113) (8,074) -
-------------- -------------- --------------
Net cash provided (used) by investing activities (4,113) 21,272 -
------------- -------- --------------
Financing activities:
Cash dividends paid (335,372) (301,835) (313,561)
Payments to merger dissenters - - (274,044)
Payments for fractional shares - - (1,474)
-------------- -------------- --------------
Net cash used by financing activities (335,372) (301,835) (589,079)
-------------- -------------- --------------
Net increase in cash and cash equivalents 34,727 108,810 1,061
Cash and cash equivalents, beginning of year 110,288 1,478 417
-------------- -------------- --------------
Cash and cash equivalents, end of year $ 145,015 $ 110,288 $ 1,478
============== ============== ==============
</TABLE>
NOTE 18 - FAIR VALUE OF FINANCIAL INSTRUMENTS
In December 1991, the Financial Accounting Standards Board issued Statement on
Financial Accounting Standards No. 107 (SFAS 107), "Disclosures About Fair Value
of Financial Instruments." SFAS 107 extends the existing fair value disclosure
practices for some instruments by requiring all entities to disclose the fair
value of financial instruments, both assets and liabilities recognized and not
recognized in the balance sheet, for which it is practicable to estimate fair
value.
The fair value of a financial instrument is the amount at which the asset or
obligation could be exchanged in a current transaction between willing parties,
other than in a forced or liquidation sale. Fair value estimates are made at a
specific point in time based on relevant market information and information
about the financial instruments. Because no market value exists for a
significant portion of the financial instruments, fair value estimates are based
on judgments regarding future expected loss experience, current economic
conditions, risk characteristics of various financial instruments, and other
factors.
The following methods and assumptions were used to estimate the fair value of
significant financial instruments:
CASH AND DUE FROM BANKS - The carrying amount is a reasonable estimate of fair
value.
F-19
<PAGE>
M & M FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 18 - FAIR VALUE OF FINANCIAL INSTRUMENTS - CONTINUED
FEDERAL FUNDS SOLD - Federal funds sold are for a term of one day, and the
carrying amount approximates the fair value.
TIME DEPOSITS WITH OTHER BANKS - The carrying value is a reasonable estimate of
fair value.
INVESTMENT SECURITIES - The fair values of securities held-to-maturity are based
on quoted market prices or dealer quotes. For securities available-for-sale,
fair value equals the carrying amount which is the quoted market price. If
quoted market prices are not available, fair values are based on quoted market
prices of comparable securities.
LOANS - For certain categories of loans, such as variable rate loans which are
repriced frequently and have no significant change in credit risk and credit
card receivables, fair values are based on the carrying amounts. The fair value
of other types of loans is estimated by discounting the future cash flows using
the current rates at which similar loans would be made to the borrowers with
similar credit ratings and for the same remaining maturities.
DEPOSITS - The fair value of demand deposits, savings, and money market accounts
is the amount payable on demand at the reporting date. The fair values of
certificates of deposit are estimated using a discounted cash flow calculation
that applies current interest rates to a schedule of aggregated expected
maturities.
SHORT-TERM BORROWINGS - The carrying value is a reasonable estimate of fair
value.
SECURITIES SOLD UNDER AGREEMENTS TO REPURCHASE - Securities sold under
agreements to repurchase generally have an original term to maturity of less
than 30 days, and, therefore their carrying value is a reasonable estimate of
fair value.
ADVANCE FROM THE FEDERAL HOME LOAN BANK - The carrying value is a reasonable
estimate of fair value.
ACCRUED INTEREST RECEIVABLE AND PAYABLE - The carrying value of these
instruments is a reasonable estimate of fair value.
OFF-BALANCE SHEET FINANCIAL INSTRUMENTS - The fair value of commitments to
extend credit is estimated using the fees currently charged to enter into
similar agreements taking into account the remaining terms of the agreements and
the present creditworthiness of the counter parties. The contractual amount is a
reasonable estimate of fair value for the instruments because commitments to
extend credit are issued on a short-term or floating rate basis.
F-20
<PAGE>
M & M FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 18 - FAIR VALUE OF FINANCIAL INSTRUMENTS - CONTINUED
The carrying values and estimated fair values of the Company's financial
instruments as of December 31, 1996 and December 31, 1995 are as follows:
<TABLE>
<CAPTION>
December 31, 1996 December 31, 1995
----------------------------------------------------------------------
Carrying Estimated Carrying Estimated
Amount Fair Value Amount Fair Value
<S> <C> <C> <C> <C> <C> <C>
FINANCIAL ASSETS:
Cash and due from banks $ 7,263,828 $ 7,263,828 $ 6,598,244 $ 6,598,244
Federal funds sold 700,000 700,000 2,750,000 2,750,000
Time deposits with other banks 800,000 800,000 300,000 300,000
Securities available-for-sale 34,997,823 34,997,823 36,564,801 36,564,801
Securities held-to-maturity 3,344,422 3,463,852 4,060,676 4,228,844
Loans 80,922,947 80,596,947 61,344,204 61,624,204
Allowance for loan losses (1,027,355) (1,027,355) (818,637) (818,637)
Accrued interest receivable 1,207,411 1,207,411 989,126 989,126
FINANCIAL LIABILITIES:
Demand deposit, interest-bearing transaction,
and savings accounts $ 56,502,438 $ 56,502,438 $ 51,959,490 $ 51,959,490
Time deposits 50,970,568 51,013,568 44,124,623 44,190,623
Short-term borrowings 549,095 549,095 470,577 470,577
Securities sold under repurchase agreements 8,534,279 8,534,279 9,777,892 9,777,892
Advance from the Federal Home Loan Bank 5,000,000 5,000,000 - -
Accrued interest payable 933,401 933,401 639,652 639,652
OFF-BALANCE SHEET FINANCIAL INSTRUMENTS
Commitments to extend credit $ 17,682,492 $ 17,682,492 $ 14,198,442 $ 14,198,442
</TABLE>
NOTE 19 - SUBSEQUENT EVENT
On February 28, 1997, the Bank purchased a parcel of land in Florence for
$441,000 for the purpose of constructing a branch office. The construction of a
branch in Florence by the Company would be subject to the approval of the OCC.
F-21
<PAGE>
EXHIBIT 21
First National South
Marion National Investment Corporation
<PAGE>
<PAGE>
EXHIBIT 23
CONSENT OF INDEPENDENT ACCOUNTANTS
We hereby consent to the use in the Form 10K-SB of M&M Financial Corporation
of our report dated March 5, 1997 regarding the consolidated financial
statements of M&M Financial Corporation which appears in such filing.
/s/ Tourville, Simpson & Henderson
TOURVILLE, SIMPSON & HENDERSON
Columbia, South Carolina
March 28, 1997
<TABLE> <S> <C>
<ARTICLE> 9
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-END> DEC-31-1996
<CASH> 7,263,828
<INT-BEARING-DEPOSITS> 800,000
<FED-FUNDS-SOLD> 700,000
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 34,997,823
<INVESTMENTS-CARRYING> 38,342,245
<INVESTMENTS-MARKET> 38,461,675
<LOANS> 80,922,947
<ALLOWANCE> 1,027,355
<TOTAL-ASSETS> 133,914,197
<DEPOSITS> 107,473,006
<SHORT-TERM> 14,083,374
<LIABILITIES-OTHER> 1,536,105
<LONG-TERM> 0
0
0
<COMMON> 1,676,860
<OTHER-SE> 9,144,852
<TOTAL-LIABILITIES-AND-EQUITY> 133,914,197
<INTEREST-LOAN> 6,732,695
<INTEREST-INVEST> 2,374,342
<INTEREST-OTHER> 313,430
<INTEREST-TOTAL> 9,420,467
<INTEREST-DEPOSIT> 3,717,409
<INTEREST-EXPENSE> 4,356,928
<INTEREST-INCOME-NET> 5,063,539
<LOAN-LOSSES> 180,000
<SECURITIES-GAINS> 0
<EXPENSE-OTHER> 5,090,851
<INCOME-PRETAX> 1,122,106
<INCOME-PRE-EXTRAORDINARY> 1,122,106
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 1,122,106
<EPS-PRIMARY> 2.56
<EPS-DILUTED> 2.56
<YIELD-ACTUAL> 4.43
<LOANS-NON> 710,834
<LOANS-PAST> 11,916
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 2,314,980
<ALLOWANCE-OPEN> 818,637
<CHARGE-OFFS> 36,485
<RECOVERIES> 65,203
<ALLOWANCE-CLOSE> 1,027,355
<ALLOWANCE-DOMESTIC> 1,027,355
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 0
</TABLE>
