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 For fiscal year ended December 31, 1997
/_/ 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. / /
State issuer's revenues for its most recent fiscal year. $13,476,950
State the aggregate market value of the voting and non-voting common
equity 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.) $14,363,184 as of March 1, 1998
State the number of shares outstanding of each of the issuer's classes
of common equity, as of the latest practicable date. 1,006,116 common shares as
of March 30, 1998.
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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, 1997 are incorporated by reference in
Part II; and
2. Portions of the Proxy Statement to be used in connection with the
1998 Annual Meeting of Shareholders ("1997 Proxy Statement") are
incorporated herein by reference in Part III.
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PART I
This Annual Report on Form 10-KSB contains forward-looking statements
as defined by the Private Securities Litigation Reform Act of 1995.
Forward-looking statements should be read with the cautionary statements and
important factors included in this Form 10-KSB. (See Item 6. - Management's
Discussion and Analysis of Financial Condition and Results of Operations, Safe
Harbor for Forward-Looking Statements.) Forward-looking statements include
statements concerning plans, objectives, goals, strategies, future events or
performance and underlying assumptions and other statements which are other than
statements of historical facts. Such forward-looking statements may be
identified, without limitation, by the use of the words "anticipates,"
"estimates," "expects," "intends," "plans," "predicts," "projects," and similar
expressions. The Company's expectations, beliefs and projections are expressed
in good faith and are believed by the Company to have a reasonable basis,
including without limitation, management's examination of historical operating
trends, data contained in the Company's records and other data available from
third parties, but there can be no assurance that management's expectations,
beliefs or projections will result or be achieved or accomplished.
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 owns 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 principal subsidiary, the Bank accounted for 99.9% of total
consolidated assets as of December 31, 1997, and 87% of total net income for
1997. The Bank conducts its business from its main bank building at 307 N. 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.
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.
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, 1998, the Company and the Bank employed 89 full-time
employees and 12 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 48% of
the Bank's total deposits come from branches in the City of Marion and
approximately 22% of its deposits come from the branch in the City of Mullins.
The greater market area for the Bank includes Marion County, Florence County 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.
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On December 31, 1997, the Bank had total deposits of $130,482,069 and total
assets of $156,270,694. 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, N.A., First Citizens Bank &
Trust Company of South Carolina and Pee Dee Federal Savings Bank. 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 Bank.
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.
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. 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 took 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. South Carolina law was amended, effective
July 1, 1996, to permit such interstate branching, but not de novo branching by
an out-of-state bank.
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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 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. Bank regulators continue to
indicate their desire generally to raise capital requirements applicable to
banking organizations beyond their current levels.
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The Federal Reserve, the FDIC and the Office of the Comptroller of the Currency
(the "OCC") have issued a joint rule amending the capital standards to specify
that the banking agencies will include in their evaluations of a bank's capital
adequacy an assessment of the exposure to declines in the economic value of the
bank's capital due to changes in interest rates. The agencies have also issued a
joint policy statement that provides bankers guidance on sound practices for
managing interest rate risk. The policy statement identifies the key elements of
sound interest rate risk management and describes prudent principles and
practices for each element, emphasizing the importance of adequate oversight by
a bank's board of directors and senior management and of a comprehensive risk
management process. The policy statement also outlines the critical factors that
will affect the agencies' evaluation of a bank's interest rate risk when making
a determination of capital adequacy. In adopting the policy statement, the
agencies have asserted their intention to continue to place significant emphasis
on the level of a bank's interest rate risk exposure and the quality of its risk
management process when evaluating a bank's capital adequacy.
The Federal Reserve, the FDIC, the OCC and the Office of Thrift Supervision (the
"OTS") have also issued joint rules amending the risk-based capital guidelines
to take into account concentration of credit risk and the risk of
non-traditional activities, and to incorporate a measure for exposure to market
risk. The rule relating to concentration of credit risk and risk of
non-traditional activities amends each agency's risk- based capital standards by
explicitly identifying concentration of credit risk and the risk arising from
activities that have not customarily been part of the banking business but have
been conducted as a result of developing technology and changes in financial
markets, as well as an institution's ability to manage these risks, as important
factors to be taken into account by the agency in assessing an institution's
overall capital adequacy. The rule relating to market risk amends each agency's
risk-based- capital standards to incorporate measures for market risk to cover
all positions located in a banking institution's trading account, foreign
exchange and commodity positions. The effect of the market risk rules is that
any bank or bank holding company regulated by the Federal Reserve, the FDIC or
the OCC or the OTS that has significant exposure to market risk must measure
that risk using its own internal value-at-risk model and also hold a
commensurate amount of capital. "Market risk" means the risk of loss resulting
from movements in market prices. "Value-at-risk" is an estimate of potential
changes in portfolio value based on a statistical confidence interval of changes
in market prices that occur during some time intervals. The effective date of
the market risk rules is January 1, 1997, and compliance with the rules was
mandatory January 1, 1998.
The Company is still assessing the impact these rules and proposed policy
statement would have on the capital requirements of the Bank or The Company, but
does not expect the impact to be material.
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. Because the Bank's deposits are insured by the Bank
Insurance Fund of the FDIC (the "BIF"), the Bank is subject to insurance
assessments imposed by the FDIC. Under current law, the insurance assessment to
be paid by BIF-insured institutions is as specified in a schedule issued by the
FDIC that specifies, at semiannual intervals, target reserve ratios designed to
maintain the FDIC insurance funds' reserve ratios at 1.25% of estimated insured
deposits (or such higher ratio as the FDIC may determine in accordance with the
statute). Further, the FDIC is authorized to impose one or more special
assessments in any amount deemed necessary to enable repayment of amounts
borrowed by the FDIC from the United States Department of the Treasury. The FDIC
has implemented a risk-based assessment schedule, imposing assessments ranging
from 0.00% to 0.27% of an institution's average assessment base. The actual
assessment to be paid by each BIF member is based on the institution's
assessment risk classification, which is determined based on whether the
institution is considered "well capitalized," "adequately capitalized" or
"undercapitalized," as such terms have been defined in applicable federal
regulations adopted to implement the prompt corrective action provisions of
FDICIA, and whether such institution is considered by its supervisory agency to
be financially sound or to have supervisory concerns.
The FDIC may increase or decrease the new assessment rates semiannually up to a
maximum increase or decrease of 5 basis points, as deemed necessary to maintain
the BIF reserve ratio at $1.25 per $100 of insured deposits.
The Deposit Insurance Funds Act of 1996 (the "Funds Act") authorized the FICO to
levy assessments on BIF- and SAIF-assessable deposits, and stipulated that the
BIF rate must equal one-fifth the SAIF rate through year-end 1999, or until the
insurance funds are merged, whichever occurs first. Thereafter, BIF and SAIF
payers will be assessed pro rata for FICO. The assessment rates are based on
deposit balances as of specified dates, taken from insured institutions' Call
Reports and Thrift Financial Reports, and are adjusted quarterly to reflect
changes in the assessment bases of the respective funds based on quarterly Call
Report and Thrift Financial Report submissions.
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Other Regulation. The Bank is also subject to various other state and federal
laws and regulations, including state usury laws, laws relating to fiduciaries,
consumer credit and laws relating to branch banking. The Bank's operations also
are subject to certain federal consumer credit laws and regulations promulgated
thereunder, including, but not limited to: the federal Truth-In-Lending Act,
governing disclosures of credit terms to consumer borrowers; the Home Mortgage
Disclosure Act, requiring financial institutions to provide certain information
concerning their mortgage lending; the Equal Credit Opportunity Act and the Fair
Housing Act, prohibiting discrimination on the basis of certain prohibited
factors in extending credit; the Fair Credit Reporting Act, governing the use
and provision of information to credit reporting agencies; the Bank Secrecy Act,
dealing with, among other things, the reporting of certain currency
transactions; and the Fair Debt Collection Act, governing the manner in which
consumer debts may be collected by collection agencies. The deposit operations
of the Bank also are subject to the Truth in Savings Act, requiring certain
disclosures about rates paid on savings accounts; the Expedited Funds
Availability Act, which deals with disclosure of the availability of funds
deposited in accounts and the collection and return of checks by banks; the
Right to Financial Privacy Act, which imposes a duty to maintain certain
confidentiality of consumer financial records and the Electronic Funds Transfer
Act and regulations promulgated thereunder, which govern automatic deposits to
and withdrawals from deposit accounts and customers' rights and liabilities
arising from the use of automated teller machines and other electronic banking
services.
The Bank is also subject to the requirements of the Community Reinvestment Act
(the "CRA"). The CRA imposes on financial institutions an affirmative and
ongoing obligation to meet the credit needs of their local communities,
including low- and moderate-income neighborhoods, consistent with the safe and
sound operation of those institutions. Each financial institution's actual
performance in meeting community credit needs is evaluated as part of the
examination process, and also is considered in evaluating mergers, acquisitions
and applications to open a branch or facility.
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.
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Item 2. Description of Property
The main office of the Bank, which also serves as the principal 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 five other branches, including a branch located at 1207 East
Godbold Street in Marion and branches in Nichols, Myrtle Beach and two in
Florence, South Carolina. Four of these branch buildings are owned by the Bank
and are located in one-story, brick buildings. Currently, one of the Florence
branches is operating in a temporary modular facility. The Bank plans to start
construction of a permanent one-story facility later this year.
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
1997.
PART II
Item 5. Market for Common Equity and Related Stockholder Matters.
As of December 31, 1997, there were 708 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, 1997 until March 1, 1998, the Common Stock of the Company
has traded in a range of $13.33 to $16.00 per share. (Sale prices have been
retroactively adjusted to give effect to the three-for-one stock split effected
in 1997.) However, management has not ascertained that these transactions are
the result of arm's length negotiations between the parties, and because of the
limited number of shares involved, these prices may not be indicative of the
market value of the Common Stock.
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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 $0.37 and $.33 per share
during 1997 and 1996, respectively. These amounts have been retroactively
restated to give effect to the three-for-one stock split effected in 1997. 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 under the caption "Management's Discussion
and Analysis of Financial Condition and Results of Operations" in Exhibit 13 as
excerpts from the Company's 1997 Annual Report to Shareholders is incorporated
herein by reference.
Item 7. Financial Statements.
The Company's Consolidated Financial Statements set forth in Exhibit 13
as excerpts from the Company's 1997 Annual Report to Shareholders are
incorporated herein by reference.
Item 8. Changes in and Disagreements with Accountants on Accounting
and Financial Disclosures.
Not applicable.
PART II
Item 9. Directors, Executive Officers, Promoters and Control Persons;
Compliance with Section 16(a) of the Exchange Act.
The information set forth under the caption "Management" and "Section
16(a) Beneficial Ownership Reporting Compliance" in the Company's definitive
Proxy Statement relating to the 1998 Annual Meeting of Stockholders is
incorporated herein by reference.
9
<PAGE>
Item 10. Executive Compensation
The information set forth under the caption "Management Compensation"
in the Company's definitive Proxy Statement relating to the 1998 Annual Meeting
of Stockholders is incorporated herein by reference.
Item 11. Security Ownership of Certain Beneficial Owners and Management.
The information set forth under the caption "Security Ownership of
Certain Beneficial Owners and Management" in the Company's definitive Proxy
Statement relating to the 1998 Annual Meeting of Stockholders is incorporated
herein by reference.
Item 12. Certain Relationships and Related Transactions.
The information set forth under the caption "Certain Relationships and
Related Transactions" in the Company's definitive Proxy Statement relating to
the 1998 Annual Meeting of Stockholders is incorporated herein by reference.
Item 13. Exhibits and Report on Form 8-K.
(a)
3.1 Articles of Incorporation, as amended
3.2 Bylaws, as amended*
10.1 Marion National Bank 401(k) Plan Summary*
10.2 Executive Employment Agreement with George H. Hardwick*
10.3 Employment Agreement with Chester A. Duke
10.4 M&M Financial Corporation and First National South Incentive
Stock Option Plan of 1997 (incorporated by reference to
Appendix to Registrant's Schedule 14A filed in connection
with Registrant's 1997 Annual Meeting of Shareholders)
10.5 Form of First National South Salary Continuation Agreement
with each of Chester A. Duke, George H. Hardwick and Curtis
A. Tyner
10.6 Form of First National South Phantom Stock Agreement with
each of Chester A. Duke, George H. Hardwick, Richard C.
Mathis, and Curtis A. Tyner
13 Portions of 1997 Annual Report to Stockholders for year
ended December 31, 1997
21 Subsidiaries of the Registrant
27 Financial Data Schedule
(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.
10
<PAGE>
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: 3/30/98 By: /s/Chester A. Duke
Chester A. Duke
Chairman, President and
Chief Executive Officer
Date: 3/30/98 By: /s/Richard C. Mathis
Richard C. Mathis
Executive Vice President
and 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
Chester A. Duke Chairman, President, Director 3/30/98
(Chief Executive Officer)
/s/Charles B. McElveen
Charles B. McElveen Director 3/30/98
/s/J.M. McLendon
J.M. McLendon Director 3/30/98
Bruce Seigal Director 3/__/98
Nancy B. Williams Director 3/__/98
</TABLE>
11
<PAGE>
EXHIBIT INDEX
Exhibit Exhibit Title
3.1 Articles of Incorporation, as amended
3.2 Bylaws, as amended*
10.1 Marion National Bank 401(k) Plan Summary*
10.2 Executive Employment Agreement with George H. Hardwick*
10.3 Employment Agreement with Chester A. Duke
10.4 M&M Financial Corporation and First National South Incentive
Stock Option Plan of 1997 (incorporated by reference to
Appendix to Registrant's Schedule 14A filed in connection
with Registrant's 1997 Annual Meeting of Shareholders)
10.5 Form of First National South Salary Continuation Agreement
with each of Chester A. Duke, George H. Hardwick and Curtis
A. Tyner
10.6 Form of First National South Phantom Stock Agreement with
each of Chester A. Duke, George H. Hardwick, Richard C.
Mathis, and Curtis A. Tyner
13 Portions of 1997 Annual Report to Stockholders for year
ended December 31, 1997
21 Subsidiaries of the Registrant
27 Financial Data Schedule
- --------------
* Incorporated herein by reference to exhibits filed with Form S-4 Registration
Statement under the Securities Act of 1933, Registration No. 33-75344.
<PAGE>
12
STATE OF SOUTH CAROLINA John C. Campbell
SECRETARY OF STATE Secretary of State
FILED
ARTICLES OF INCORPORATION Feb. 24, 1984
OF
MARION NATIONAL CORPORATION
1. The name of the proposed corporation is Marion National Corporation.
2. The initial registered office of the corporation is 301 North Main St.
located in the city of Marion, county of Marion and the State of South
Carolina and the initial registered agent at such address is Chester A.
Duke.
3. The period of duration shall be perpetual.
4. The corporation is authorized to issue shares of stock as follows:
Class of Shares Authorized No. of Each Class Par Value
--------------- ---------------------------- ---------
Common stock 120,000 $5.00 per share
If shares are divided into two or more classes or if any class of
shares is divided into series within a class, the relative rights,
preferences, and limitations of the shares of each class, and of each
series within a class, are as follows:
5. Total authorized capital stock $600,000.00. Please see instructions on
Page 4.
6. It is represented that the corporation will not begin business until
there has been paid into the corporation the minimum consideration for
the issue of shares, which is $1,000 of which at least $500.00 is in
cash.
7. The number of directors constituting the initial board of directors of
the corporation is 10, and the names and addresses of the persons who
are to serve as directors until the first annual meeting of
shareholders or until their successors be elected and qualify are:
Name Address
T.C. Atkinson, Jr. 912 N. Main St., Marion, SC 29571
Chester A. Duke 402 S. Main St., Marion, SC 29571
Reaves H. Gasque 1202 Bryant St., Marion, SC 29571
D.C. McIntyre 901 Willcox Ave., Marion, SC 29571
J.M. McLendon 401 S. Main St., Marion, SC 29571
Robert A. Scott 316 Lipscomb St., Marion, SC 29571
Mrs. Lurine B. Stedman 901 N. Main St., Marion, SC 29571
William F. Thompson 1002 N. Main St., Marion, SC 29571
M.C. Woods, Jr. 201 E. Godbold St., Marion, SC 29571
F.T. Zeman 322 Elizabeth St., Marion, SC 29571
8. The general nature of the business for which the corporation is
organized is (it is not necessary to set forth in the purposes powers
enumerated in Section (33-3-10) of 1976 Code).
To engage directly or indirectly in banking and financial activities,
and activities closely related to banking or managing or controlling banks to
the full extent that may from time to time be deemed permissible by law; and
also to engage in all incidental activities necessary to conduct the aforesaid
activities.
9. Provisions which the incorporators elect to include in the articles of
incorporation are as follows:
(a) When any proposed merger or purchase or sale of assets not in the
ordinary course of business is on the agenda for a shareholder's meeting and the
said proposal is not recommended by the Board of Directors, 80% of the shares
issued shall constitute a quorum for the said shareholder's meeting;
<PAGE>
(b) A vote of 80% of the shares issued shall be required to approve any
proposed merger or purchase or sale of assets not in the ordinary course of
business which is not recommended by the Board of Directors;
(c) In addition to all requirements of law, all directors must have
been residents of the corporate market area for at least six (6) months prior to
their election, unless the said requirement is waived by the Board of Directors
then sitting by a 82% vote.
10. The name and address of each incorporator is.
Name Street & Box No. City County State
T.C. Atkinson, Jr. 912 N. Main St. Marion Marion S.C.
Chester A. Duke 402 S. Main St. Marion Marion S.C.
J.M. McLendon 401 S. Main St. Marion Marion S.C.
M.C. Woods, Jr. 201 E. Godbold St. Marion Marion S.C.
S/ T.C. Atkinson, Jr.
(Signature of Incorporator)
T.C. Atkinson, Jr.
(Type or Print Name)
S/ Chester A. Duke
(Signature of Incorporator)
Chester A. Duke
(Type or Print Name)
S/ J.M. McLendon
(Signature of Incorporator)
J.M. McLendon
(Type or Print Name)
Date: January 20, 1984 S/ M.C. Woods, Jr.
---------------- ------------------
(Signature of Incorporator)
M.C. Woods, Jr.
(Type or Print Name)
2
<PAGE>
STATE OF SOUTH CAROLINA
COUNTY OF MARION
The undersigned T.C. Atkinson, Jr., Chester A. Duke, J.M. McLendon, and
M.C. Woods, Jr., do hereby certify that they are the incorporators of Marion
National Corporation and are authorized to execute this verification; that each
of the undersigned for himself does hereby further certify that he has read the
foregoing document, understands the meaning and purport of the statements
therein contained and the same are true to the best of his information and
belief.
S/ T.C. Atkinson, Jr. S/ Chester A. Duke
(Signature of Incorporator) (Signature of Incorporator)
S/ J.M. McLendon
(Signature of Incorporator)
S/ M.C. Woods, Jr.
(Signature of Incorporator)
(Each Incorporator Must Sign)
CERTIFICATE OF ATTORNEY
11. I, Samuel B. Woods , an attorney licensed to practice in the State of South
Carolina, certify that the corporation, to whose articles of incorporation this
certificate is attached, has complied with the requirements of chapter 7 of
Title 33 of the South Carolina Code of 1976, relating to the organization of
corporations, and that in my opinion, the corporation is organized for a lawful
purpose.
Date: February 15, 1984 S/ Samuel B. Woods
-------------------------------------- --------------------
SAMUEL B. WOODS
Address 104 W. Dozier St.
Marion, SC 29571
3
<PAGE>
STATE OF SOUTH CAROLINA Jim Miles
Secretary of State
ARTICLES OF AMENDMENT FILED
February 11, 1994
Pursuant to Section 33-10-106 of the 1976 South Carolina Code, as
amended, the undersigned corporation adopts the following Articles of Amendment
to its Articles of Incorporation:
1. The name of the corporation is Marion National Corporation.
2. On March 30, 1988, the corporation adopted the following Amendment(s) of its
Articles of Incorporation.
(Type or attach the complete text of Each Amendment)
On recommendation of the Board of Directors the authorized number of
shares of common stock be increased to 225,000 shares.
3. The manner, if not set forth in the amendment, in which any exchange,
reclassification, or cancellation of issued shares provided for in the
Amendment shall be effected, is as follows: (if not applicable, insert
"not applicable" or "NA"). Not applicable.
4. Complete either a or b, whichever is applicable.
a.
[x] Amendment(s) adopted by shareholder action.
At the date of adoption of the amendment, the number
of outstanding shares of each voting group entitled
to vote separately on the Amendment, and the vote of
such shares was:
<TABLE>
<CAPTION>
Number of
Number of Number of Number of Votes Undisputed*
Voting Outstanding Votes Entitled Represented Shares Voted
Group Shares to be Cast at the meeting For Against
------ -------- ---------- -------------- -------------
<S> <C> <C> <C> <C> <C>
Shareholders 48,160 48,160 37,872 37,872 0
Common Stock
</TABLE>
b. The amendment(s) was duly adopted by the
Incorporators or board of directors without
shareholder approval pursuant to ss.33-6-102(d),
33-10-102 and 33-10-105 of the 1976 South Carolina
Code as amended, and shareholder action was not
required.
5. Unless a delayed date is specified, the effective date of these
Articles of Amendments shall be the date of acceptance for filing by
the Secretary of State (See ss.33-1-230(b)). This amendment effective
March 30, 1988.
DATE: 2-11-94 Marion National Corporation
By: S/ Chester A. Duke
(Signature)
Chester A. Duke, President
*NOTE: Pursuant to Section 33-10-106(6)(i), the corporation can alternatively
state the total number of votes cast for and against the amendment by
each voting group entitled to vote separately on the amendment or the
total number of undisputed votes cast for the amendment by each voting
group together with a statement that the number cast for the amendment
by each voting group was sufficient for approval by that voting group.
4
<PAGE>
STATE OF SOUTH CAROLINA Jim Miles
SECRETARY OF STATE Secretary of State
FILED
ARTICLES OF AMENDMENT April 15, 1994
Pursuant to Section 33-10-106 of the 1976 South Carolina Code, as
amended, the undersigned corporation adopts the following Articles of Amendment
to its Articles of Incorporation:
1. The name of the corporation is Marion National Corporation.
2. On April 6, 1994, the corporation adopted the following Amendment(s) of its
Articles of Incorporation.
(Type or attach the complete text of Each Amendment)
To amend the Charter to increase the authorized shares of
common stock from 225,000 shares to 800,000 shares and to increase the
amount of total authorized capital stock from $1,125,000 to $4,000,000.
3. The manner, if not set forth in the amendment, in which any exchange,
reclassification, or cancellation of issued shares provided for in the
Amendment shall be effected, is as follows: (if not applicable, insert
"not applicable" or "NA").
4. Complete either a or b, whichever is applicable.
a.
[x] Amendment(s) adopted by shareholder action.
At the date of adoption of the amendment, the number
of outstanding shares of each voting group entitled
to vote separately on the Amendment, and the vote of
such shares was:
<TABLE>
<CAPTION>
Number of
Number of Number of Number of Votes Undisputed*
Voting Outstanding Votes Entitled Represented Shares Voted
Group Shares to be Cast at the meeting For Against
------ -------- ---------- -------------- -------------
<S> <C> <C> <C> <C> <C>
Shareholders 191,140 191,140 135,634 135,634 0
Common Stock
</TABLE>
b. The amendment(s) was duly adopted by the
Incorporators or board of directors without
shareholder approval pursuant to ss.33-6-102(d),
33-10-102 and 33-10-105 of the 1976 South Carolina
Code as amended, and shareholder action was not
required.
5. Unless a delayed date is specified, the effective date of these
Articles of Amendments shall be the date of acceptance for filing by
the Secretary of State (See ss.33-1-230(b)). This amendment effective
4-6-94.
DATE: 4-6-94 Marion National Corporation
By: S/ Chester A. Duke
(Signature)
Chester A. Duke, President
*NOTE: Pursuant to Section 33-10-106(6)(i), the corporation can alternatively
state the total number of votes cast for and against the amendment by
each voting group entitled to vote separately on the amendment or the
total number of undisputed votes cast for the amendment by each voting
group together with a statement that the number cast for the amendment
by each voting group was sufficient for approval by that voting group.
5
<PAGE>
STATE OF SOUTH CAROLINA Jim Miles
SECRETARY OF STATE Secretary of State
FILED
ARTICLES OF AMENDMENT August 12, 1994
Pursuant to Section 33-10-106 of the 1976 South Carolina Code, as
amended, the undersigned corporation adopts the following Articles of Amendment
to its Articles of Incorporation:
1. The name of the corporation is Marion National Corporation.
2. On April 6, 1994, the corporation adopted the following Amendment(s) of its
Articles of Incorporation.
(Type or attach the complete text of Each Amendment)
Motion was made and adopted to change the name of the Corporation to M
& M Financial Corporation subject to the consummation of the merger with
Davis National Bank. (The merger has now been consummated.)
3. The manner, if not set forth in the amendment, in which any exchange,
reclassification, or cancellation of issued shares provided for in the
Amendment shall be effected, is as follows: (if not applicable, insert "not
applicable" or "NA"). N/A
4. Complete either a or b, whichever is applicable.
a.
[x] Amendment(s) adopted by shareholder action.
At the date of adoption of the amendment, the number
of outstanding shares of each voting group entitled
to vote separately on the Amendment, and the vote of
such shares was:
<TABLE>
<CAPTION>
Number of
Number of Number of Number of Votes Undisputed*
Voting Outstanding Votes Entitled Represented Shares Voted
Group Shares to be Cast at the meeting For Against
------ -------- ---------- -------------- -------------
<S> <C> <C> <C> <C> <C>
Common Stock 191,140 191,140 135,634 135,634 0
</TABLE>
b. The amendment(s) was duly adopted by the
Incorporators or board of directors without
shareholder approval pursuant to ss.33-6-102(d),
33-10-102 and 33-10-105 of the 1976 South Carolina
Code as amended, and shareholder action was not
required.
5. Unless a delayed date is specified, the effective date of these
Articles of Amendments shall be the date of acceptance for filing by
the Secretary of State (See ss.33-1-230(b)). This amendment effective
April 6, 1994.
DATE: August 10, 1994 Marion National Corporation
By: S/ Chester A. Duke
(Signature)
Chester A. Duke, President
*NOTE: Pursuant to Section 33-10-106(6)(i), the corporation can alternatively
state the total number of votes cast for and against the amendment by
each voting group entitled to vote separately on the amendment or the
total number of undisputed votes cast for the amendment by each voting
group
6
<PAGE>
together with a statement that the number cast for the amendment by
each voting group was sufficient for approval by that voting group.
7
<PAGE>
STATE OF SOUTH CAROLINA Jim Miles
SECRETARY OF STATE Secretary of State
FILED
ARTICLES OF AMENDMENT May 7, 1997
Pursuant to Section 33-10-106 of the 1976 South Carolina Code, as
amended, the undersigned corporation adopts the following Articles of Amendment
to its Articles of Incorporation:
1. The name of the corporation is M & M Financial Corporation.
2. On April 17, 1997, the corporation adopted the following Amendment(s) of its
Articles of Incorporation.
(Type or attach the complete text of Each Amendment)
To amend the Charter to increase the authorized shares of
common stock from 800,000 shares to 3,000,000 shares and to increase
the amount of total authorized capital stock from $4,000,000 to
$15,000,000.
3. The manner, if not set forth in the amendment, in which any exchange,
reclassification, or cancellation of issued shares provided for in the
Amendment shall be effected, is as follows: (if not applicable, insert
"not applicable" or "NA"). Not applicable
4. Complete either a or b, whichever is applicable.
a.
[x] Amendment adopted by shareholder action.
At the date of adoption of the amendment, the number
of outstanding shares of each voting group entitled
to vote separately on the Amendment, and the vote of
such shares was:
<TABLE>
<CAPTION>
Number of
Number of Number of Number of Votes Undisputed
Voting Outstanding Votes Entitled Represented Shares Voted
Group Shares to be Cast at the meeting For Against
------ -------- ---------- -------------- -------------
<S> <C> <C> <C> <C> <C>
Shareholders 335,372 335,372 284,630 275,708 8,147
of Common
Stock
</TABLE>
b. The amendment(s) was duly adopted by the
Incorporators or board of directors without
shareholder approval pursuant to ss.33-6-102(d),
33-10-102 and 33-10-105 of the 1976 South Carolina
Code as amended, and shareholder action was not
required.
5. Unless a delayed date is specified, the effective date of these
Articles of Amendments shall be the date of acceptance for filing by
the Secretary of State (See ss.33-1-230(b)).
DATE: 5-5-97 M & M Financial Corporation
By: S/ Chester A. Duke
(Signature)
Chester A. Duke, President
8
STATE OF SOUTH CAROLINA )
) EMPLOYMENT AGREEMENT
COUNTY OF MARION )
THIS AGREEMENT is made between Chester A. Duke, residing at 402 S. Main
Street, Marion, South Carolina 29571, herein referred to as Employee or
President, and Marion National Corporation, herein referred to as Employer or
Corporation, whose principal place of business is 301 N. Main Street, Marion,
South Carolina 29571.
WHEREAS, Employer is a National flank Corporation duly organized and
existing under the laws of the United States of America, operating and doing
business in South Carolina; and
WHEREAS, Employer and Employee desire to contract with each other
because of employee's experience in matters of banking and his knowledge of the
people of this community and state;
NOW, THEREFORE, for the reasons set forth above, and in consideration
of the mutual covenants and promises of the parties hereto, employer and
employee agree as follows;
TERM OF CONTRACT:
The term of employment shall be four (4) years and shall commence on
January 1, 1987. Additionally, on each annual anniversary date from the date of
commencement of this agreement the term of employment shall automatically be
extended for an additional one (1) year period beyond the then effective
expiration date. However, upon written notice being given by either party to the
other party the employment may be limited to four (4) years from the date of the
notice. Also, when employee reaches the age of sixty-one (61) years the
automatic extension of one (1) additional year per annum shall cease.
The duties of President shall be performed at offices located in Marion
County, South Carolina, except as the President shall from time Lo time attend
meetings, conferences and attend to other business of the Corporation.
DUTIES:
The duties of The President of The Corporation are as follows:
A. Serve as Chief Executive officer of the Corporation.
B. Direct activities of other officers of Marion National
Corporation in performance of their responsibilities and
functions.
C. Establish Corporation objectives, policies and plans.
D. Administer Board of Directors policies.
1
<PAGE>
E. Promote public relations activities of the Corporation.
F. Maintain proper attitude toward work responsibilities, including
courteous and cooperative relationships with customers and fellow
employees.
G. Perform other duties as applicable or as directed by the Board of
Directors.
H. Carry the title of President and Chief Executive Officer.
I. Report to the Board of Directors.
Employee shall devote his best efforts to Employer and shall conduct
himself in a proper manner. Hours of employment shall be as circumstances shall
reasonably dictate, taking into consideration the various civic, community and
public relations activities of the position.
Employee may serve on such boards and committees as he desires to serve
upon, provided the time required for such service does not have significant
adverse affect upon employee's job performance and provided the Board of
Directors do not object.
OFFICE:
President shall be provided such working as shall be appropriate for a
President of comparable corporations and financial institutions including, but
not limited to, an executive office appropriately located and furnished and a
late model automobile properly equipped and maintained.
Corporation shall provide President qualified administrative assistant
together appropriate supplies and equipment and office.
COMPENSATION:
(a) Corporation shall pay President an annual salary commensurate with
salary for comparable positions within the industry. This salary is to be paid
exclusive of the insurance, retirement, expense allocations and other matters
set forth in this Agreement.
(b) If the President is unable to work due to illness or injury, he
shall be compensated on the basis of his regular salary, less disability income
benefits, for a period not to exceed ninety (90) days. If the incapacity exceeds
ninety (90) days and the President is unable to perform his duties, his salary
shall then be reduced by 50% of his regular monthly salary, less disability
income benefits, for a period not to exceed six (6) months from the beginning of
the illness or injury which caused the President to be unable to work. After the
period of six (6) months if the President is unable to perform his duties this
contract shall terminate and all duties and obligations of each party to the
other as provided for in this agreement shall end and this agreement shall be of
no further force or effect.
2
<PAGE>
In the event employer merges with another entity or is purchased
through voluntary or involuntary takeover, the continuity of salary of President
shall be maintained at equal or greater level than the salary existing at the
time of merger or purchase, regardless of duties performed, if any, for a
minimum period of four (4) years from date of merger or acquisition, except that
should such event occur after employee reaches the age of sixty-one (61) years,
this employer obligation shall terminate at the end of the contract year which
coincides with employee's sixty- fifth birthday. It is further provided that if
after such merger or takeover Employee voluntarily resigns and obtains any other
employment or receives compensation as an advisor or consultant from any other
entity then all further obligations of Corporation to Employee to pay Employee's
salary shall be ended.
Provided, however, that the payments made hereunder shall be reduced in
such amounts as is necessary to ensure that the aggregate present value of all
payments made to the employee which are described in Section 280G(b) (2) of the
Internal Revenue Code of 1954, as amended, as such present value is calculated
under Section 280G(d) (4)' does not exceed 300% of the employee's base amount as
defined in Section 280G(b) (3) (A).
OTHER BENEFITS:
President shall receive fringe benefits during the contract period,
paid for by the Corporation. These benefits may change from time to time
depending upon availability, re-evaluation, group alteration of terms and
similar blanket revisions. However, the unavoidable deletion of any of the
following shall be offset by the addition of a comparable benefit so that the
present level of these benefits will be maintained as a minimum.
Included in this group are the following:
A. Group hospitalization insurance.
B. Major medical coverage.
C. Group life insurance.
D. Group disability insurance.
In addition to the other matters set forth in this agreement, employer
shall pay employee for actual expenses for travel, meals and lodging while
employee is on Corporation business, and where the expenses are known in
advance, payment shall be made in advance, if desired by the President,
otherwise to be paid in the customary manner upon the usual documentation for
the expenses incurred.
RETIREMENT PLAN:
Upon retirement, President shall receive remuneration as outlined in
the present pension plan, or any other plan made in addition, supplementation or
substitution of existing plans.
3
<PAGE>
VACATIONS AND HOLIDAYS:
President shall receive annually three (3) weeks of paid vacation, to
be used jointly or severally at the discretion of employee, notwithstanding the
requirements set forth by Banking Law applicable to this matter.
DURABILITY OF AGREEMENT:
This Agreement, for valuable consideration mutually given and mutually
received, shall transcend any sale, merger, takeover or transformation of Marion
National Corporation, its successors and assigns, whether such transition is
voluntary or involuntary and this Agreement shall be binding upon employer and
employee in all particulars.
AGREEMENT NOT TO COMPETE:
Employee, upon the event of his voluntary retirement during the term of
this agreement, or upon his breach of the agreement, shall not compete with
employer by taking a similar position with another banking institution within
the County of Marion, South Carolina, for a period of two (2) years.
MODIFICATION:
Any alteration of this Agreement shall be in writing duly and
voluntarily executed by the parties hereto.
This document constitutes the complete agreement by and between the
parties hereto.
Any differences, claims, or matters in dispute between the parties
arising out of this agreement or connected therewith, shall be determined by
South Carolina Law.
IN WITNESS WHEREOF and pursuant to action taken by the Board of
Directors of Marion National Corporation the foregoing instrument has been
executed in duplicate this 8th day of July, 1986.
[SIGNATURES OMITTED]
4
FIRST NATIONAL SOUTH
SALARY CONTINUATION AGREEMENT
THIS AGREEMENT is made this ____ day of , 1997, by and between FIRST
NATIONAL SOUTH, a national banking association located at 307 North Main Street,
Marion, South Carolina (the "Bank") and Chester A. Duke (the "Executive").
INTRODUCTION
To encourage the Executive to remain an employee of the Bank, the Bank
is willing to provide salary continuation benefits to the Executive. The Bank
will pay the benefits from its general assets.
AGREEMENT
The Executive and the Bank agree as follows:
Article 1
Definitions
1.1 Definitions. Whenever used in this Agreement, the following words
and phrases shall have the meanings specified:
1.1.1"Change of Control" means the transfer of more than 50% of
the Company's outstanding voting common stock or if the Company is
merged or consolidated with another corporation in an acquisition
transaction or the Company sells substantially all of the assets of
the Company, or the Bank which employs the Executive is merged or
consolidated with another bank which is not owned at least 50% by the
Company or its subsidiary or the Bank has a change of control in which
more than 50% of the stock of the Bank is acquired or the Bank sells
substantially all of its assets.
1.1.2 "Code" means the Internal Revenue Code of 1986, as amended.
1.1.3 "Company" means M&M Financial Corporation, a South Carolina
corporation, which owns 100% of the outstanding capital stock of the
Bank.
1.1.4 "Disability" means the Executive's inability to engage in
any substantial gainful activity by reason of any medically
determinable physical or mental impairment which can be expected to
result in death or which has lasted or can be expected to last for a
continuous period of not less than twelve (12) months.
1
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1.1.5 "Early Termination" means the Termination of Employment
before Normal Retirement Age for reasons other than death, Disability,
Termination for Cause or following a Change of Control.
1.1.6 "Early Termination Date" means the month, day and year in
which Early Termination occurs.
1.1.7 "Normal Retirement Age" means the Executive's 65th
birthday.
1.1.8 "Normal Retirement Date" means the later of the Normal
Retirement Age or Termination of Employment.
1.1.9 "Plan Year" means a 12 month calendar year. The initial
Plan Year shall begin as of August 1, 1997.
1.1.10 "Termination for Cause" See Section 5.1(b).
1.1.11 "Termination of Employment" means that the Executive
ceases to be employed by the Bank for any reason whatsoever other than
by reason of a leave of absence which is approved by the Bank. For
purposes of this Agreement, if there is a dispute over the employment
status of the Executive or the date of the Executive's Termination of
Employment, the Bank shall have the sole and absolute right to decide
the dispute.
Article 2
Lifetime Benefits
2.1 Normal Retirement Benefit. Upon Termination of Employment on or
after the Normal Retirement Age for reasons other than death, the Bank shall pay
to the Executive the benefit described in this Section 2.1 in lieu of any other
benefit under this Agreement.
2.1.1 Amount of Benefit. The annual benefit under this Section
2.1 is $48,785, increased 3% of the amount of such benefit for the
preceding year, each year between the date of this Agreement and the
Executive's Normal Retirement Date.
2.1.2 Payment of Benefit. The Bank shall pay the annual benefit
to the Executive in 12 equal monthly installments payable on the first
day of each month commencing with the month following the Executive's
Normal Retirement Date and continuing for 227 additional months.
2.1.3 Benefit Increases. Commencing on the first anniversary of
the first benefit payment, and continuing on each subsequent
anniversary, the Bank's Board of Directors, in its sole discretion,
may increase the benefit.
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2.2 Early Termination Benefit. Upon Early Termination, the Bank shall
pay to the Executive the benefit described in this Section 2.2 in lieu of any
other benefit under this Agreement.
2.2.1 Amount of Benefit. The annual benefit under this Section
2.2 is the Early Termination Benefit Payable at 65 set forth in
Schedule A, for the Plan Year ending immediately prior to the Early
Termination Date.
2.2.2 Payment of Benefit. The Bank shall pay the annual benefit
to the Executive in 12 equal monthly installments payable on the first
day of each month commencing with the month following the Normal
Retirement Date and continuing for 227 additional months.
2.2.3 Benefit Increases. Benefit payments may be increased as
provided in Section 2.1.3.
2.3 Disability Benefit. If the Executive terminates employment due to
Disability prior to Normal Retirement Age, the Bank shall pay to the Executive
the benefit described in this Section 2.3 in lieu of any other benefit under
this Agreement.
2.3.1 Amount of Benefit. The annual benefit under this Section
2.3 is the Disability Benefit Payable Immediately on Termination of
Employment as set forth in Schedule A, for the Plan Year ending
immediately prior to the date in which Termination of Employment
occurs.
2.3.2 Payment of Benefit. The Bank shall pay the annual benefit
amount to the Executive in 12 equal monthly installments payable on
the first day of each month commencing with the month following the
Termination of Employment and continuing for 227 additional months.
2.3.3 Benefit Increases. Benefit payments may be increased as
provided in Section 2.1.3.
2.4 Change of Control Benefit. If the Executive is in the active
service of the Bank at the time of a Change of Control, the Bank shall pay to
the Executive the benefit described in this Section 2.4 in lieu of any other
benefit under this Agreement.
2.4.1 Amount of Benefit. The benefit is the accrual account
balance at the Normal Retirement Age ($585,131) discounted to the date
of the Change of Control at 8% compounded monthly.
2.4.2 Payment of Benefit. The Bank shall pay the benefit to the
Executive in a lump sum within 60 days alter the date of the Change of
Control.
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Article 3
Death Benefits
3.1 Death During Active Service. If the Executive dies while in the
active service of the Bank, the Bank shall pay to the Executive's beneficiary
the benefit described in this Section 3.1. This benefit shall be paid in lieu of
the Lifetime Benefits of Article 2.
3.1.1 Amount of Benefit. The annual benefit under this Section
3.1 is the Normal Retirement Benefit amount described in Section
2.1.1, calculated as if the date of death was the Normal Retirement
Age.
3.1.2 Payment of Benefit. The Bank shall pay the annual benefit
to the beneficiary in 12 equal monthly installments payable on the
first day of each month commencing with the month following the
Executive's death and continuing for 227 additional months. 3.2 Death
During Benefit Period. If the Executive dies after the benefit
payments have commenced under this Agreement, the Bank shall pay the
benefits to the Executive's beneficiary at the same time and in the
same amounts as they would have been paid to the Executive for the
remainder of the nineteen year period from the commencement of
benefits.
Article 4
Beneficiaries
4.1 Beneficiary Designations. The Executive shall designate a
beneficiary by filing a written designation with the Bank. The Executive may
revoke or modify the designation at any time by filing a new designation.
However, designations will only be effective if signed by the Executive and
accepted by the Bank during the Executive's lifetime. The Executive's
beneficiary designation shall be deemed automatically revoked if the beneficiary
predeceases the Executive, or if the Executive names a spouse as beneficiary and
the marriage is subsequently dissolved. If the Executive dies without a valid
beneficiary designation, all payments shall be made to the Executive's surviving
spouse, if any, and if none, to the Executive's surviving children and the
descendants of any deceased child by right of representation, and if no children
or descendants survive, to the Executive's estate. If a beneficiary dies after
beginning to receive payments hereunder, then such payments shall continue to be
paid to the beneficiary's estate.
4.2 Facility of Payment. If a benefit is payable to a minor, to a
person declared incapacitated, or to a person incapable of handling the
disposition of his or her property, the Bank may pay such benefit to the
guardian, legal representative or person having the care or custody of such
minor, incapacitated person or incapable person. The Bank may require proof of
incapacity, minority or guardianship as it may deem appropriate prior to
distribution of the benefit. Such distribution shall completely discharge the
Bank from all liability with respect to such benefit.
4
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Article 5
General Limitations
5.1 Notwithstanding any provision of this Agreement to the contrary,
the Bank shall not pay any benefit under this Agreement:
(a) To the extent the benefit would be an "excess parachute
payment" as that term is defined under Section 28OG of the Code; or
(b) If the Bank terminates the Executive's employment for
"cause," which shall include:
(i) Gross negligence or gross neglect of duties;
(ii) Commission of felony or of a misdemeanor involving
moral turpitude; or
(iii) Fraud, disloyalty, dishonesty or wilful violation of
any law or significant Bank policy or commission or omission of
any act committed in connection with the Executive's employment
and resulting in an adverse effect on the Bank.
5.2 Competition After Termination of Employment. No benefits shall be
payable if the Executive during a period of three (3) years following the
Executive's termination or retirement, without the prior written consent of the
Bank, engages in, becomes interested in, directly or indirectly, as a sole
proprietor, as a partner in a partnership, or as a substantial shareholder in a
corporation, or becomes associated with, in the capacity of employee, director,
officer, principal, agent, trustee or in any other capacity whatsoever, any
enterprise conducted in the trading area (a fifty (50) mile radius) of the
business of the Bank, which enterprise is, or may deemed to be, competitive with
any business carried on by the Bank as of the date of termination of the
Executive's employment or his retirement. This section shall not apply following
a Change of Control.
5.3 Suicide or Misstatement. No benefits shall be payable if the
Executive commits suicide within two years after the date of this Agreement, or
if the Executive has made any material misstatement of fact on any application
for life insurance purchased by the Bank.
Article 6
Claims and Review Procedures
6.1 Claims Procedure. The Bank shall notify any person or entity that
makes a claim against the Agreement (the "Claimant") in writing, within ninety
(90) days of his or her written application for benefits, of his or her
eligibility or noneligibility for benefits under the Agreement. If the Bank
determines that the Claimant is not eligible for benefits or full benefits, the
notice shall set forth (1) the specific reasons for such denial, (2) a specific
reference to the
5
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provisions of the Agreement on which the denial is based, (3) a description of
any additional information or material necessary for the Claimant to perfect his
or her claim, and a description of why it is needed, and (4) an explanation of
the Agreement's claims review procedure and other appropriate information as to
the steps to be taken if the Claimant wishes to have the claim reviewed. if the
Bank determines that there are special circumstances requiring additional time
to make a decision, the Bank shall notify the Claimant of the special
circumstances and the date by which a decision is expected to be made, and may
extend the time for up to an additional ninety-day period.
6.2 Review Procedure. If the Claimant is determined by the Bank not to
be eligible for benefits, or if the Claimant believes that he or she is entitled
to greater or different benefits, the Claimant shall have the opportunity to
have such claim reviewed by the Bank by filing a petition for review with the
Bank within sixty (60) days after receipt of the notice issued by the Bank. Said
petition shall state the specific reasons which the Claimant believes entitle
him or her to benefits or to greater or different benefits. Within sixty (60)
days alter receipt by the Bank of the petition, the Bank shall afford the
Claimant (and counsel, if any) an opportunity to present his or her position to
the Bank orally or in writing, and the Claimant (or counsel) shall have the
right to review the pertinent documents. The Bank shall notify the Claimant of
its decision in writing within the sixty-day period, stating specifically the
basis of its decision, written in a manner calculated to be understood by the
Claimant and the specific provisions of the Agreement on which the decision is
based. If, because of the need for a hearing, the sixty-day period is not
sufficient, the decision may be deferred for up to another sixty-day period at
the election of the Bank, but notice of this deferral shall be given to the
Claimant.
Article 7
Amendments and Termination
This Agreement may be amended or terminated only by a written agreement
signed by the Bank and the Executive.
Article 8
Miscellaneous
8.1 Binding Effect. This Agreement shall bind the Executive and the
Bank, and their beneficiaries, survivors, executors, successors, administrators
and transferees.
8.2 No Guarantee of Employment. This Agreement is not an employment
policy or contract It does not give the Executive the right to remain an
employee of the Bank, nor does it interfere with the Bank's right to discharge
the Executive. It also does not require the Executive to remain an employee nor
interfere with the Executive's right to terminate employment at any time.
8.3 Non-Transferability. Benefits under this Agreement cannot be sold,
transferred, assigned, pledged, attached or encumbered in any manner.
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8.4 Tax Withholding. The Bank shall withhold any taxes that are
required to be withheld from the benefits provided under this Agreement.
8.5 Applicable Law. The Agreement and all rights hereunder shall be
governed by the laws of the' State of South Carolina, except to the extent
preempted by the laws of the United States of America.
8.6 Unfunded Arrangement. The Executive and beneficiary are general
unsecured creditors of the Bank for the payment of benefits under this
Agreement. The benefits represent the mere promise by the Bank to pay such
benefits. The rights to benefits are not subject in any manner to anticipation,
alienation, sale, transfer, assignment, pledge, encumbrance, attachment, or
garnishment by creditors. Any insurance on the Executive's life is a general
asset of the Bank to which the Executive and beneficiary have no preferred or
secured claim.
8.7 Recovery of Estate Taxes. If the Executive's gross estate for
federal estate tax purposes includes any amount determined by reference to and
on account of this Agreement, and if the beneficiary is other than the
Executive's estate, then the Executive's estate shall be entitled to recover
from the beneficiary receiving such benefit under the terms of the Agreement, an
amount by which the total estate tax due by the Executive's estate, exceeds the
total estate tax which would have been payable if the value of such benefit had
not been included in the Executive's gross estate. If there is more than one
person receiving such benefit, the right of recovery shall be against each such
person. In the event the beneficiary has a liability hereunder, the beneficiary
may petition the Bank for a lump sum payment in an amount not to exceed the
beneficiary's liability hereunder.
8.8 Entire Agreement. This Agreement constitutes the entire agreement
between the Bank and the Executive as to the subject matter hereof. No rights
are granted to the Executive by virtue of this Agreement other than those
specifically set forth herein.
8.9 Administration. The Bank shall have powers which are necessary to
administer this Agreement, including but not limited to:
(a) Interpreting the provisions of the Agreement;
(b) Establishing and revising the method of accounting for the
Agreement;
(c) Maintaining a record of benefit payments; and
(d) Establishing rules and prescribing any forms necessary or
desirable to administer the Agreement.
IN WITNESS WHEREOF, the Executive and a duly authorized Bank officer
have signed this Agreement.
[SIGNATURES OMITTED]
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BENEFICIARY DESIGNATION
FIRST NATIONAL SOUTH
SALARY CONTINUATION AGREEMENT
Chester A. Duke
I designate the following as beneficiary of any death benefits under the Salary
Continuation Agreement:
Primary:------------------------------------------------------------------------
- --------------------------------------------------------------------------------
Contingent:---------------------------------------------------------------------
- --------------------------------------------------------------------------------
Note: To name a trust as beneficiary, please provide the name of the
trustee(s) and the exact name and date of the trust agreement.
I understand that I may change these beneficiary designations by filing a new
written designation with the Bank I further understand that the designations
will be automatically revoked if the beneficiary predeceases me, or, if I have
named my spouse as beneficiary, in the event of the dissolution of our marriage.
Signature-----------------------
Date----------------------------
Accepted by the Bank this ---- day of ------------- 199--
By -------------------------
Title ----------------------
8
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FIRST NATIONAL SOUTH
SALARY CONTINUATION AGREEMENT
SCHEDULE A
Chester A. Duke
Early Termination Disability
Plan Accrual Benefit Benefit
Year Balance Payable at 65 Payable Immediately
1 $44,247 $7,928 $4,537
2 93,751 15,511 9,613
3 149,353 22,816 15,315
4 212,135 29,924 21,752
5 283,574 36,936 29,078
6 365,877 44,003 37,517
7 462,954 51,411 47,471
8 585,131 59,999 59,999
9
FIRST NATIONAL SOUTH
PHANTOM STOCK AGREEMENT
THIS AGREEMENT is made this day of , 1997 by and between FIRST NATIONAL
SOUTH, a national banking association located at 307 North Main Street, Marion,
South Carolina (the "Bank"), M&M FINANCIAL CORPORATION, a South Carolina
corporation (the "Company") of which the Bank is a wholly-owned subsidiary, and
Chester A. Duke (the "Executive").
INTRODUCTION
To encourage the Executive to remain an employee of the Bank, the Bank
is willing to provide to the Executive a phantom stock opportunity. The Bank
will pay the value of the phantom stock account in cash from its general assets.
AGREEMENT
The Executive, the Bank and the Company agree as follows:
Article 1
Definitions
1.1 Definitions. Whenever used in this Agreement, the following words and
phrases shall have the meanings specified:
1.1.1 "Change of Control" means the transfer of more than 50% of
the Company's outstanding voting common stock or if the Company is
merged or consolidated with another corporation in an acquisition
transaction or the Company sells substantially all of the assets of
the Company, or the Bank which employs the Executive is merged or
consolidated with another bank which is not owned at least 50% by the
Company or its subsidiary or the Bank has a change of control in which
more than 50% of the stock of the Bank is acquired or the Bank sells
substantially all of its assets.
1.1.2 "Code" means the "Internal Revenue Code of 1986, as
amended.
1.1.3 "Disability" means the Executive's inability to engage in
any substantial gainful activity by reason of any medically
determinable physical or mental impairment
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which can be expected to result in death or which has lasted or can be
expected to last for a continuous period of not less than twelve (12)
months. As a condition to any benefits, the Bank may require the
Executive to submit to such physical or mental evaluations and tests as
the Bank's Board of Directors deems appropriate.
1.1.4 "Dividend Rate" means the total dividends paid during the
fiscal year divided by flea total stockholders' equity less preferred
stock, measured as of the beginning of the fiscal year.
1.1.5 "Extraordinary Items" means those items recognized by
Generally Accepted Accounting Principles as extraordinary, that
substantially affect shareholder equity and/or the Company's assets.
Examples of such items are stock redemptions, mergers, acquisitions,
stock splits and other items of that nature. The Company's Board of
Directors, in its sole discretion, may designate other items of income
or expense as extraordinary.
1.1.6 "Growth of Stock Rate" means the percentage change in the
Company's fair market value of common stock (the "Stock Price") over a
one year period, measured on December 31 of each year. For example,
awards for the 1997 Plan Year would be credited immediately after the
1998 Plan Year with the Growth of Stock Rate determined on December
31, 1998 by taking the per share Stock Price on December 31, 1998 less
the per share Stock Price on December 31, 1997 divided by the December
31, 1997 per share Stock Price. The fair market value of the Company's
common stock shall be determined as of December 31 of each Plan Year
by computing the average price of all trades reported to the Company
of the Company's common stock during the preceding twelve (12) months.
1.1.7 "Interest" means that when an interest rate accrues or is
provided for with regard to a benefit, interest shall accrue on a 365
day year, compounded quarterly.
1.1.8 "Normal Retirement Age" means the Executive's 65th
birthday.
1.1.9 "Normal Retirement Date" means the later of the Normal
Retirement Age or Termination of Employment.
1.1.10 "Plan Year" means a 12 month calendar year. The initial
Plan Year shall be 1997.
1.1.11 "Termination of Employment" means the Executive ceasing to
be employed by the Bank or the Company for any reason whatsoever,
voluntary or involuntary, other than by reason of an approved leave of
absence.
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Article 2
Phantom Stock Award
2.1 Phantom Stock Award Amount. The Bank's Board of Directors, in its sole
discretion, shall determine the Executive's "Phantom Stock Award Percentage," as
of December 31 of each Plan Year based on performance objectives established and
achieved for the Plan Year.
The Phantom Stock Award Amount shall be calculated annually by taking the
Executive's base salary for the applicable year times the Phantom Stock Award
Percentage.
2.2 Phantom Stock Deferral On December 31 of each Plan Year, the Bank shall
defer the Phantom Stock Award Amount into the Phantom Stock Account as set forth
in Article 3 of this Agreement.
Article 3
Phantom Stock Account
3.1 Establishing and Crediting. The Bank shall establish a Phantom Stock
Account on its books for the Executive, and shall credit to the Phantom Stock
Account the following amounts:
3.1.1 Awards. The Phantom Stock Award Amount as determined under
Article 2.
3.1.2 Interest. On December 31 of each Plan Year and immediately
prior to the payment of any benefits under this Agreement, interest on
the balance in the Phantom Stock Account since the preceding credit to
that account under this Section 3.1.2, if any, at an annual rate,
compounded annually, equal to the Growth of Stock Rate plus the
Dividend Rate determined as of the end of the most recent completed
fiscal year.
3.2 Statement of Accounts. The Bank shall provide to the Executive, within
120 days of the end of each Plan Year this Agreement is in effect, a statement
setting forth the Phantom Stock Account balance.
3.3 Accounting Device Only. The Phantom Stock Account is solely a device
for measuring amounts to be paid under this Agreement. The Phantom Stock Account
is not a trust fund of any kind. The Executive is a general unsecured creditor
of the Bank for the payment of benefits. The benefits represent the mere Bank's
promise to pay such benefits. The Executive's
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rights are not subject in any manner to anticipation, alienation, sale,
transfer, assignment, pledge, encumbrance, attachment, or garnishment by the
Executive's creditors.
Article 4
Lifetime Benefits
4.1 Normal Retirement Benefit. If the Executive terminates employment
on or after the Normal Retirement Age for reasons other than death, the Bank
shall pay to the Executive the benefit described in this Section 4.1 in lieu of
any other benefit under this Agreement.
4.1.1 Amount of Benefit. The benefit under this Section 4.1 is
the Phantom Stock Account balance at the Executive's Normal Retirement
Date.
4.1.2 Payment of Benefit. The Bank shall pay the benefit
amount described in Section 4.1.1 to the Executive in 180 equal monthly
installments commencing on the first day of the month following the
Executive's Normal Retirement Date. The Bank shall annuitize the
benefit amount over 180 months crediting interest on the unpaid balance
of the benefit amount at the annual rate of 8% during the installment
period.
4.2 Early Termination Benefit. If the Executive terminates employment
before the Normal Retirement Age, and for reasons other than death or
Disability, the Bank shall pay to the Executive the benefit described in this
Section 4.2 in lieu of any other benefit under this Agreement.
4.2.1 Amount of Benefit. The benefit amount under this Section
4.2 is the Phantom Stock Account balance at the Executive's Termination
of Employment.
4.2.2 Payment of Benefit. The Bank shall pay the benefit
amount described in Section 4.2.1 to the Executive in 180 equal monthly
installments commencing on the first day of the month following the
Executive's Termination of Employment. The Bank shall annuitize the
benefit amount over 180 months crediting interest on the unpaid balance
of the benefit amount at an annual rate of 8% during the installment
period.
4.3 Disability Benefit. If the Executive terminates employment due to
Disability prior to the Normal Retirement Age, the Bank shall pay to the
Executive the benefit described in this Section 4.3 in lieu of any other benefit
under this Agreement.
4.3.1 Amount of Benefit. The benefit amount under this Section
4.3 is the Phantom Stock Account balance on the date of the Executive's
Termination of Employment due to Disability.
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4.3.2 Payment of Benefit. The Bank shall pay the benefit
amount described in Section 4.3.1 to the Executive in 180 equal monthly
installments commencing on the first day of the month following the
Executive's Termination of Employment due to Disability. The Bank shall
annuitize the benefit amount over 180 months crediting interest on the
unpaid balance of the benefit amount at an annual rate of 8% during the
installment period.
4.4 Change of Control Benefit. Upon a Change of Control while the
Executive is in the active service of the Bank or the Company, the Bank shall
pay to the Executive the benefit described in this Section 4.4 in lieu of any
other benefit under this Agreement.
4.4.1 Amount of Benefit. The benefit amount under this Section
4.4 is the Phantom Stock Account balance at the date of the Executive's
Termination of Employment upon a Change in Control.
4.4.2 Payment of Benefit. The Bank shall pay the benefit to
the Executive in a lump sum within 60 days after a Change in Control.
4.5 Hardship Distribution. Upon the Bank's determination (following
petition by the Executive) that the Executive has suffered an unforeseeable
financial emergency, the Bank shall distribute to the Executive all or a portion
of the Phantom Stock Account balance as determined by the Bank, but in no event
shall the distribution be greater than is necessary to relieve the financial
hardship. An unforeseeable financial emergency means that an event arising from
the death of a family member, divorce, sickness, i'~jury, catastrophe or similar
event outside the control of the Executive occurs and the Bank's Board of
Directors, in its sole discretion, approves of, in writing, of the hardship
distribution.
Article 5
Death Benefits
5.1 Death During Active Service. If the Executive dies while in the
active service of the Bank or the Company, the Bank shall pay to the Executive's
beneficiary the benefit described in this Section 5.1 in lieu of any other
benefit under this Agreement.
5.1.1 Amount of Benefit. The benefit under this Section 5.1 is
the Phantom Stock Account balance at the Executive's death.
5.1.2 Payment of Benefit. The Bank shall pay the benefit
amount described in Section 5.1.1 to the Executive's beneficiary in 180
equal monthly installments payable on the first day of each month
following the Executive's death. The Bank shall annuitize the
5
<PAGE>
benefit amount over 180 months crediting interest on the unpaid balance
of the benefit amount at the annual rate of 8% during the installment
period.
5.2 Death During Benefit Period. If the Executive dies after benefit
payments have commenced under this Agreement but before receiving all such
payments, the Bank shall pay the remaining benefits to the Executive's
beneficiary at the same time and in the same amounts that would have been paid
to the Executive had the Executive survived.
Article 6
Beneficiaries
6.1 Beneficiary Designations. The Executive shall designate a
beneficiary by filing a written designation with the Bank. The Executive may
revoke or modify the designation at any time by filing a new designation.
However, designations will only be effective if signed by the Executive and
accepted by the Bank during the Executive's lifetime. The Executive's
beneficiary designation shall be deemed automatically revoked if the beneficiary
predeceases the Executive, or if the Executive names a spouse as beneficiary and
the marriage is subsequently dissolved. If the Executive dies without a valid
beneficiary designation, all payments shall be made to the Executive's surviving
spouse, if any, and if none, to the Executive's surviving children and the
descendants of any deceased child by right of representation, and if no children
or descendants survive, to the Executive's estate. If a beneficiary dies after
beginning to receive payments hereunder, then such payments shall continue to be
paid to the beneficiary's estate.
6.2 Facility of Payment. If a benefit is payable to a minor, to a
person declared incompetent, or to a person incapable of handling the
disposition of his or her property, the Bank may pay such benefit to the
guardian, legal representative or person having the care or custody of such
minor, incompetent person or incapable person. The Bank may require proof of
incompetence, minority or guardianship as it may deem appropriate prior to
distribution of the benefit. Such distribution shall completely discharge the
Bank from all liability with respect to such benefit.
Article 7
General Limitations
7.1 Notwithstanding any provision of this Agreement to the contrary,
the Bank shall not pay any benefit under this Agreement:
(a) To the extent the benefit would be "an excess parachute
payment" as that term is defined under Section 2800 of the Code; or
6
<PAGE>
(b) If the Bank, the Company or any affiliate of the Bank or
the Company that may employ Executive terminates the Executive's
employment for "cause," which shall include:
(i) Gross negligence or gross neglect of duties;
(ii) Commission of a felony or of a misdemeanor
involving moral turpitude; or
(iii) Fraud, disloyalty, dishonesty or willful
violation of any law or significant Bank or Company policy
or commission or omission of any act committed in connection
with the Executive's employment and resulting in an adverse
effect on the Bank or the Company.
7.2 Suicide or Misstatement. If the Executive commits suicide within
two years after the date of this Agreement, or if the Executive has made any
material misstatement of fact on any application for life insurance purchased by
the Bank.
Article 8
Claims and Review Procedures
8.1 Claims Procedure. The Bank shall notify the Executive, the
Executive's beneficiary or any other person which makes a claim under this
Agreement (the "Claimant") in writing, within ninety (90) days of his or her
written application for benefits, of his or her eligibility or ineligibility for
benefits under the Agreement. If the Bank determines that the Claimant is not
eligible for benefits or full benefits, the notice shall set forth (1) the
specific reasons for such denial, (2) a specific reference to the provisions of
the Agreement on which the denial is based, (3) a description of any additional
information or material necessary for the Claimant to perfect his or her claim,
and a description of why it is needed, and (4) an explanation of the~
Agreement's claims review procedure and other appropriate information as to the
steps to be taken if the Claimant wishes to have the claim reviewed. If the Bank
determines that there are special circumstances requiring additional time to
make a decision, the Bank shall notify the Claimant of the special circumstances
and the date by which a decision is expected to be made, and may extend the time
for up to an additional ninety-day period.
8.2 Review Procedure. If the Claimant is determined by the Bank not to
be eligible for benefits, or if the Claimant believes that he or she is entitled
to greater or different benefits, the Claimant shall have the opportunity to
have such claim reviewed by the Bank by filing a petition for review with the
Bank within sixty (60) days after receipt of the notice issued by the Bank. Said
petition shall state the specific reasons which the Claimant believes entitle
him or her to benefits or to greater or different benefits. Within sixty (60)
days after receipt by the Bank
7
<PAGE>
of the petition, the Bank shall afford the Claimant (and counsel, if any) an
opportunity to present his or her position to the Bank orally or in writing, and
the Claimant (or counsel) shall have the right to review the pertinent
documents. The Bank shall notify the Claimant of its decision in writing within
the sixty day period, stating specifically the basis of its decision, written in
a manner calculated to be understood by the Claimant and the specific provisions
of the Agreement on which the decision is based. If, because of the need for a
hearing, the sixty-day period is not sufficient, the decision may be deferred
for up to another sixty-day period at the election of the Bank, but notice of
this deferral shall be given to the Claimant.
Article 9
Amendments and Termination
This Agreement may be amended or terminated only by a written agreement
signed by the Bank and the Executive.
Article 10
Miscellaneous
10.1 Binding Effect. This Agreement shall bind the Executive, the Bank
and the and their beneficiaries, survivors, executors, administrators and
transferees.
10.2 No Guaranty of Employment. This Agreement is not an employment
policy or contract. It does not give the Executive the right to remain an
employee of the Bank or the Company, nor does it interfere with the Bank's or
the Company's right to discharge the Executive. It also does not require the
Executive to remain an employee nor interfere with the Executive's right to
terminate employment at any time.
10.3 Non-Transferability. Benefits under this Agreement cannot be sold,
transferred, assigned, pledged, attached or encumbered in any manner.
10.4 Tax Withholding. The Bank shall withhold any taxes that are
required to be withheld from the benefits provided under this Agreement.
10.5 Applicable Law. The Agreement and all rights hereunder shall be
governed by the laws of the State of South Carolina, except to the extent
preempted by the laws of the United States of America.
8
<PAGE>
10.6 Unfunded Arrangement. The Executive and beneficiary are general
unsecured creditors of the Bank for the payment of benefits under this
Agreement. The benefits represent the mere promise by the Bank to pay such
benefits. The rights to benefits are not subject in any manner to anticipation,
alienation, sale, transfer, assignment, pledge, encumbrance, attachment, or
garnishment by creditors. Any insurance on the Executive's life is a general
asset of the Bank to which the Executive and beneficiary have no preferred or
secured claim.
10.7 Entire Agreement. This Agreement constitutes the entire agreement
between the Bank, the Company and the Executive as to the subject matter hereof.
No rights are granted to the Executive by virtue of this Agreement other than
those specifically set forth herein.
10.8 Administration. The Bank's Board of Directors shall have powers
which are necessary to administer this Agreement, including but not limited to:
(a) Interpreting the provisions of the Agreement;
(b) Establishing and revising the method of accounting for the
Agreement;
(c) Maintaining a record of benefit payments; and
(d) Establishing rules and prescribing any forms necessary or
desirable to administer the Agreement.
IN WITNESS WHEREOF, the Executive, a duly authorized Bank officer, and
a duly authorized Company officer have signed this Agreement.
[SIGNAUTRES OMITTED]
9
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) 1997 1996 1995 1994 1993
---------- ---------- ----------- ----------- --------
Income Statement Data:
<S> <C> <C> <C> <C> <C>
Interest income $ 11,555 $ 9,420 $ 8,233 $ 7,121 $ 7,585
Interest expense 5,418 4,357 3,839 2,919 3,088
Net interest income 6,137 5,063 4,394 4,202 4,497
Provision for loan losses 800 180 39 274 885
Net interest income after
provision for loan losses 5,337 4,883 4,355 3,928 3,612
Noninterest income 1,921 1,330 1,276 1,270 1,511
Noninterest expense 5,628 5,091 4,851 5,462 4,672
Income tax expense (benefit) 503 263 187 (203) 20
Net income (loss) 1,127 859 593 (61) 431
Basic and diluted earnings (loss) per share(1) 1.12 0.85 0.59 (0.06) 0.43
Cash dividends paid 369 335 302 314 280
Cash dividends per share(1) 0.37 0.33 0.30 0.31 0.28
Balance Sheet Data:
Assets $ 156,271 $ 133,914 $ 117,815 $ 113,616 $ 115,213
Gross loans outstanding 105,427 80,923 61,344 43,607 50,599
Allowance for loan losses 927 1,027 819 726 1,467
Time deposits in other banks 300 800 300 300 1,150
Investment securities 32,875 38,342 40,625 55,544 47,802
Deposits:
Interest-bearing 111,524 89,548 78,714 73,316 77,976
Noninterest-bearing 18,958 17,925 17,370 18,004 17,173
Stockholders' equity 11,688 10,822 10,158 9,327 10,517
Other Data:
Nonperforming loans $ 473 $ 723 $ 855 $ 1,859 $ 2,009
Loan loss reserve to
nonperforming loans 195.86% 142.15% 95.79% 39.05% 73.02%
</TABLE>
(1) - Share data have been restated to reflect the three-for-one stock split on
July 1, 1997.
1
<PAGE>
M & M FINANCIAL CORPORATION
Management's Discussion And Analysis of
Financial Condition And Results of Operation
Safe Harbor for Forward-Looking Statements: Statements included in Management's
Discussion and Analysis of Financial Condition and Results of Operations which
are not historical in nature, are intended to be and are hereby identified as
"forward looking statements" for purposes of the safe harbor provided by Section
21E of the Securities Exchange Act of 1934, as amended. The Company cautions
readers that forward looking statements, including without limitation, those
relating to the Company's future business prospects, revenues, working capital,
liquidity, capital needs, interest costs and income, are subject to certain
risks and uncertainties that could cause actual results to differ materially
from those indicated in the forward looking statements, due to several important
factors herein identified, among others, and other risks and factors identified
from time to time in the Company's reports filed with the Securities and
Exchange Commission.
Basis of Presentation
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.
General
M & M Financial Corporation is a bank holding company headquartered in Marion,
South Carolina 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. The Company pursues a
community banking business which is characterized by personalized service and
local decision-making and emphasizes the banking needs of individuals and small
to medium-sized businesses. During 1997 the Company opened a new branch in
Florence, South Carolina (the "new branch").
Results Of Operations
Year Ended December 31, 1997 Compared With Year Ended December 31, 1996
For the year ended December 31, 1997, net interest income was $6,137,243, an
increase of $1,073,704, or 21.2%, from the prior year. The improvement is
related to an increase in the volume of interest earning assets and an increase
in the yields on interest earning assets due to an increase in the percentage of
loans to total earning assets. For 1997, average loans comprised 70.9% of
average earning assets compared to 61.6% for 1996. The improvement in interest
income was partially offset by the increase in interest expense due to the
increase in both the volume of and rates paid on interest-bearing liability
accounts. Interest expense was $5,418,294, an increase of $1,061,366, or 24.36%,
from the prior year. The increase was due mainly to a $17,263,000 increase in
average interest-bearing deposits during 1997 and the Company's increased use of
borrowings from the Federal Home Loan Bank as a funding source. The increase in
the volume of both assets and liabilities is attributable to management's
ability to strengthen its influence in the Company's market area and the
Company's emphasis on growth.
The influence of the factors above had the effect of increasing the interest
rate spread 23 basis points to 3.97% and increasing the net interest margin 14
basis points to 4.57% for the year ended December 31, 1997.
The provision for loan losses is the charge to operating earnings that
management feels is necessary to maintain the allowance for possible loan losses
at an adequate level. The 1997 provision for loan losses was $800,000, or
$620,000 higher than in 1996. The increase in the loan loss provision was due
mainly to one asset-based loan of approximately $827,000 which eventually
defaulted and to the growth in the loan portfolio-particularly commercial loans.
2
<PAGE>
M & M FINANCIAL CORPORATION
Results Of Operations
Noninterest income increased $591,995 to $1,921,413 in 1997 from $1,329,418 in
1996. Most of the increase was attributable to a gain of $266,232 that the
Company realized on the sale of selected available-for-sale securities. The
Company's purchase of additional Federal Home Loan Bank stock during 1997 in
order to meet the borrowing requirements of the Federal Home Loan Bank resulted
in an increase of $72,931 in dividend income. During the first quarter of 1997,
the Company began charging customers of other banks for use of its ATM's. These
charges generated approximately $52,260 of additional fee income. Due to the
Company's continued emphasis on securities sales through its brokerage
department, fees from these sales were $154,756 in 1997 compared to $101,387 for
1996, an increase of $53,369. Additionally, noninterest income for 1997 was
favorably impacted by the $101,907 increase in service charges on deposit
accounts. The increase in these service charges was attributable to the opening
of the new branch in Florence, the increase in demand deposit accounts, and an
emphasis on charging customers for writing checks on insufficient funds.
For the year ended December 31, 1997, noninterest expense was $5,628,380, an
increase of $537,529, or 10.6%, over the $5,090,851 recorded in 1996. The
increase in noninterest expense was attributable mainly to the continuing growth
of the Company. The largest component of noninterest expense is salaries and
benefits which increased $255,149 to $3,039,928 for the year. Most of the
increase was due to the hiring of employees to staff the new branch and several
experienced loan officers from larger regional banks to increase loan business.
The Company's total income tax expense for 1997 was $502,874, an increase of
$239,531 from the 1996 income tax expense of $263,343. The effective tax rates
for 1997 and 1996 were 30.8% and 23.5%, respectively. The increase was partially
attributable to a decrease in tax-exempt income as a percentage of income before
income taxes.
The combination of the factors above resulted in net income for the year ended
December 31, 1997 of $1,127,402, or $1.12 per share, as compared to $858,763 or
$0.85 per share for the year ended December 31, 1996.
Year Ended December 31, 1996 Compared With Year Ended December 31, 1995
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 were reduced, and more emphasis was 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 attributable to an increase in loan volumes.
The 1996 provision for loan losses was $180,000, or $141,110 higher than in
1995. The increase in the loan loss provision was due mainly to the growth in
the loan portfolio.
3
<PAGE>
M & M FINANCIAL CORPORATION
Results Of Operations
Noninterest income increased $53,125 to $1,329,418 in 1996 from $1,276,293 in
1995. Brokerage department commissions on sales of securities during 1996 were
$101,387, an increase of $72,582 over the amount recorded in 1995. These
increased commissions were the primary source of the overall increase in
noninterest income. 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 by the $139,544 decrease in the gain on
the sale of securities because there were no sales of securities from the
investment portfolio during 1996.
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. 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.
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 resulted
primarily from increased income before taxes. The effective tax rates for 1996
and 1995 were 23.5% and 24.0%, respectively.
The combination of the factors above resulted in net income for the year ended
December 31, 1996 of $858,763 or $0.85 per share as compared to $592,818 or
$0.59 per share for the year ended December 31, 1995.
Net Interest Income
The largest component of the Company's net income is its net interest income,
which is the difference between the income earned on assets and interest paid on
deposits and borrowings used to support such assets. Net interest income is
determined by the yields earned on the Company's interest-earning assets and the
rates paid on its interest-bearing liabilities, the relative amounts of
interest-earning assets and interest-bearing liabilities and the degree of
mismatch and the maturity and repricing characteristics of its interest-earning
assets and interest-bearing liabilities. Net interest income divided by average
interest-earning assets represents the Company's net interest margin.
The following tables set forth, for the periods indicated, certain information
related to the Company's average balance sheet and its average yields on assets
and average costs of liabilities. Such yields are derived by dividing income or
expense by the average balance of the corresponding assets or liabilities.
Average balances have been derived from the daily balances throughout the
periods indicated.
4
<PAGE>
M & M FINANCIAL CORPORATION
Net Interest Income
The following tables, "Comparative Average Balances, Yields and Rates" and
"Rate/Volume Analysis," provide information on specific factors affecting the
Company's net interest income.
Comparative Average Balances, Yields and Rates
<TABLE>
<CAPTION>
1997 1996
--------------------------------- ---------------------------------
Average Yield/ Average Yield/
(Dollars in thousands) Balance Interest Rate Balance Interest Rate
--------- -------- ------- ---------- --------- ------
Assets:
<S> <C> <C> <C> <C> <C> <C>
Interest-earning deposits in other banks $ 1,251 $ 100 7.99% $ 1,448 $ 118 8.15%
Taxable securities (1) 32,324 2,040 6.31 34,390 2,078 6.04
Tax-exempt securities (1) 3,782 224 5.92 4,848 296 6.11
Federal funds sold 1,720 97 5.64 3,146 195 6.20
Loans (2) 95,162 9,094 9.56 70,406 6,733 9.56
--------- -------- ---------- ---------
Total interest-earning assets 134,239 11,555 8.61 114,238 9,420 8.25
--------- -------- ---------- ---------
Cash and due from banks 5,527 5,037
Allowance for loan losses (1,170) (928)
Premises and equipment 4,270 3,823
Other real estate owned - 49
Other assets 4,569 3,494
--------- ----------
Total assets $ 147,435 $ 125,713
========= ==========
Liabilities and Stockholders' Equity:
Interest-bearing deposits $ 101,354 4,574 4.51% $ 84,091 3,717 4.42%
Advances from FHLB 9,397 550 5.85 3,060 181 5.92
Other borrowings 6,036 294 4.87 9,592 459 4.79
--------- -------- ---------- ---------
Total interest-bearing liabilities 116,787 5,418 4.64 96,743 4,357 4.50
--------- -------- ---------- ---------
Noninterest-bearing deposits 18,063 16,937
Accrued interest and other liabilities 1,244 1,430
Stockholders' equity 11,341 10,603
--------- ----------
Total liabilities and stockholders' equity $147,435 $ 125,713
======== ==========
Net interest income/interest rate spread(3) $ 6,137 3.97% $ 5,063 3.74%
======== ======= ========= =======
Net interest margin(4) 4.57% 4.43%
======= =======
</TABLE>
(1) Yields on securities are computed at their nominal rates and have not been
adjusted for tax rate differences.
(2) The effects of loans in non-accrual status and fees collected are not
significant to the computations.
(3) Interest rate spread is the difference between the average yield on
interest-earning assets and the average effective rate paid on
interest-bearing liabilities.
(4) Net interest margin is net interest income divided by average
interest-earning assets.
5
<PAGE>
M & M FINANCIAL CORPORATION
Net Interest Income
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
affected the Company's interest income and interest expense during the periods
indicated. Information is provided on impacts 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).
<TABLE>
<CAPTION>
1997 Compared to 1996
Due to increase (decrease) in
Volume/
(Dollars in thousands) Volume Rate Rate Total
------ ---- ---- -----
Interest income:
<S> <C> <C> <C> <C>
Time deposits in other banks $ (16) $ (2) $ 0 $ (18)
Taxable securities (125) 92 (5) (38)
Tax-exempt securities (65) (9) 2 (72)
Federal funds sold (88) (18) 8 (98)
Loans 2,367 (5) (1) 2,361
-------- --------- --------- ---------
Total interest income 2,073 58 4 2,135
-------- --------- --------- ---------
Interest expense:
Interest bearing deposits 763 78 16 857
Advances from FHLB 375 (2) (4) 369
Other borrowings (170) 8 (3) (165)
-------- --------- --------- ---------
Total interest expense 968 84 9 1,061
-------- --------- --------- ---------
Net interest income $ 1,105 $ (26) $ (5) $ 1,074
======== ========= ========= =========
<CAPTION>
1996 Compared to 1995
Due to increase (decrease) in
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>
6
<PAGE>
M & M FINANCIAL CORPORATION
Net Interest Income
Interest Rate Risk And Sensitivity
Interest rates paid on deposits and borrowed funds and interest rates earned on
loans and investments generally followed the fluctuations in market rates in
1997 and 1996. 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.
Within an acceptable range of the balance 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 is the interest rate risk that is assumed; and the greater is the
positive or negative impact of interest rate fluctuations on liquidity and
earnings.
Interest rate sensitivity management is concerned with 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 associated with
movements in interest rates. The following table, "Interest Rate Sensitivity
Analysis,"displays the Company's static gap, or the difference between the
amount of assets and liabilities which reprice or mature within a specified time
interval. No adjustments have been made to allow for the effects of probable
calls, prepayments on mortgage-backed securities, or any other option or timing
related considerations. The table indicates that, on a cumulative basis through
twelve months, unadjusted rate-sensitive liabilities exceeded unadjusted
rate-sensitive assets, resulting in a liability sensitive position at the end of
1997 of $77,615,000. The table may not be indicative of the Company's position
at other points in time. For a bank with a liability sensitive position, or
negative static 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.
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
---------- ---------- ---------- ----------- ----------- -------
Interest-earning assets:
<S> <C> <C> <C> <C> <C> <C>
Deposits in other banks $ 1,520 $ 100 $ 200 $ - $ - $ 1,820
Investment securities 2,390 496 1,749 13,282 14,958 32,875
Loans, net of unearned
income 12,264 8,872 11,119 53,314 19,858 105,427
---------- ---------- ---------- ----------- ----------- ----------
Total 16,174 9,468 13,068 $ 66,596 $ 34,816 $ 140,122
---------- ---------- ---------- =========== =========== ==========
Interest-bearing liabilities:
Interest-bearing deposits 73,927 13,258 20,679 $ 3,660 $ - $ 111,524
Advances from FHLB 5,000 500 500 4,000 - 10,000
Short-term borrowings 2,461 - - - - 2,461
---------- ---------- ---------- ----------- ----------- ----------
Total 81,388 13,758 21,179 $ 7,660 $ - $ 123,985
---------- ---------- ---------- =========== =========== ==========
Interest sensitivity gap $ (65,214) $ (4,290) $ (8,111)
========== ========== ==========
Cumulative interest
sensitivity gap $ (65,214) $ (69,504) $ (77,615)
========== ========== ==========
Gap ratio 0.20 0.69 0.62
Cumulative gap ratio 0.20 0.27 0.33
</TABLE>
7
<PAGE>
M & M FINANCIAL CORPORATION
Liquidity
Liquidity is the ability to meet cash obligations through the maturity, or
sometimes sale, 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
individual certificates of deposit in excess of $100,000, are a relatively
stable source of liquidity. Certificates of deposit in excess of $100,000 are
considered a less stable source of liquidity because they are on occasion more
sensitive to interest rate changes than are other deposit accounts. As of
December 31, 1997, the Bank also had unused lines of credit to purchase federal
funds from unrelated banks totaling $9,500,000 and an unused commitment from the
Federal Home Loan Bank totaling $10,000,000 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. Most of
the cash dividends have been paid in the past, and most 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 7.7%
during 1997 and 8.4% during 1996. The decrease in this ratio reflects the fact
that average asset growth has outpaced equity growth from earnings. Average
assets grew 17.3% in 1997 while equity increased 6.9%. In 1998 management plans
to formally assess its capital levels to assure continued capital adequacy for
current and projected growth.
The Federal Reserve Board and bank regulatory agencies require bank holding
companies and financial institutions to maintain capital at adequate levels
based on a percentage of assets and off-balance sheet exposures, adjusted for
risk weights ranging from 0% to 100%. Under the risk-based standard, capital is
classified into two tiers. Tier 1 capital of the Company consists of common
stockholders' equity, excluding the unrealized gain(loss) on available-for-sale
securities, minus intangible assets. The Company's Tier 2 capital consists of
the general reserve for loan losses subject to certain limitations. A bank
holding company's qualifying capital base for purposes of its risk-based capital
ratio consists of the sum of its Tier 1 and Tier 2 capital. The regulatory
minimum requirements are 4% for Tier 1 and 8% for total risk-based capital.
The holding company and the Bank are also required to maintain capital at a
minimum level based on average total assets (as defined), which is known as the
leverage ratio. Only the strongest bank holding companies and banks are allowed
to maintain capital at the minimum requirement. All others are subject to
maintaining ratios 100 to 200 basis points above the minimum. The Bank is also
required to meet specific capital guidelines to be well-capitalized under the
regulatory framework for prompt corrective action.
8
<PAGE>
M & M FINANCIAL CORPORATION
Capital Resources
The Federal Reserve guidelines contain an exemption from the capital
requirements for bank holding companies with less than $150 million in
consolidated assets. Accordingly, prior to 1997, the Company was not subject to
the Federal Reserve's minimum requirements.
Both the Company and the Bank exceeded the fully phased-in regulatory ratios at
December 31, 1997 and 1996, as set forth in the following table.
Capital Ratios
<TABLE>
<CAPTION>
To Be Well
Capitalized Under
For Capital Prompt Corrective
Actual Adequacy Purposes Action Provisions
(Dollars in thousands) Amount Ratio Amount Ratio Amount Ratio
---------- ------- ----------- ------- ---------- ------
December 31, 1997
The Company
<S> <C> <C> <C> <C> <C> <C>
Total capital (to risk weighted assets) $12,366 10.81% $ 9,154 8.0% $ N/A -%
Tier 1 capital (to risk weighted assets) 11,440 10.00 4,577 4.0 N/A -
Tier 1 capital (to average assets) 11,440 7.32 6,254 4.0 N/A -
The Bank
Total capital (to risk weighted assets) 12,136 10.60 9,156 8.0 11,445 10.0
Tier 1 capital (to risk weighted assets) 11,209 9.79 4,578 4.0 6,867 6.0
Tier 1 capital (to average assets) 11,209 7.19 6,235 4.0 7,794 5.0
December 31, 1996
The Company
Total capital (to risk weighted assets) $11,708 13.29% $ 7,047 8.0% $ N/A -%
Tier 1 capital (to risk weighted assets) 10,681 12.13 3,524 4.0 N/A -
Tier 1 capital (to average assets) 10,681 8.04 5,315 4.0 N/A -
The Bank
Total capital (to risk weighted assets) 11,403 13.00 7,016 8.0 8,771 10.0
Tier 1 capital (to risk weighted assets) 10,376 11.83 3,508 4.0 5,262 6.0
Tier 1 capital (to average assets) 10,376 7.82 5,307 4.0 6,634 5.0
</TABLE>
At December 31, 1997, the Company's stockholders' equity was $11,688,358, an
increase of $866,646 from December 31, 1996. The increase stems from the net
income for 1997, less cash dividends paid to stockholders, and the positive
effects of the valuation allowance on securities available-for-sale in the
amount of $108,153.
At December 31, 1997, the Company had no significant commitments for capital
expenditures.
9
<PAGE>
M & M FINANCIAL CORPORATION
Investment Securities
Note 4 to the Company's Consolidated Financial Statements presents the book
value of investment securities by category as of December 31, 1997 and 1996. The
following table summarizes the carrying value, maturities and weighted average
yields of the Company's investment securities, excluding equity securities, at
December 31, 1997. Yields on tax-exempt securities have been adjusted to reflect
the pre-tax equivalent yields.
<TABLE>
<CAPTION>
Available-for-Sale Held-to-Maturity
------------------ ----------------
Carrying Carrying
Amount Yield Amount Yield
------ ----- ------ -----
<S> <C> <C> <C> <C>
U.S. Treasury Securities
Due in one year or less $ 1,002,500 7.28%
Due after one year but within five years 6,093,281 5.98
Due after five years but within ten years 1,000,625 6.01
---------------
Total $ 8,096,406 6.14
---------------
Securities of Other U.S. Government
Agencies and Corporations
Due in one year or less $ 2,679,471 5.66
Due after one year but within five years 4,948,052 6.28
Due after ten years 3,793,531 5.92
---------------
Total $ 11,421,054 6.01
---------------
Obligations of States and Local Governments
Due in one year or less $ 297,767 10.66 $ 655,006 9.84%
Due after one year but within five years 267,869 10.74 1,972,309 8.98
Due after five years but within ten years - - 234,924 4.01
Due after ten years - - 111,597 12.55
--------------- ---------------
Total $ 565,636 10.70 $ 2,973,837 8.87
--------------- ---------------
Total Securities
Due in one year or less $ 3,979,738 6.44 $ 655,006 9.84
Due after one year but within five years 11,309,202 6.22 1,972,309 8.98
Due after five years but within ten years 1,000,625 6.01 234,924 4.01
Due after ten years 3,793,531 5.92 111,597 12.55
Mortgage-backed securities 9,628,265 5.93 - -
--------------- ---------------
Total securities $ 29,711,361 6.11 $ 2,973,837 8.87
=============== ===============
</TABLE>
Loan Portfolio
The Company extends credit primarily 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 1998.
10
<PAGE>
M & M FINANCIAL CORPORATION
Loan Portfolio
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 other than in the
hotel/motel industry. Loans to borrowers in this industry are $10,843,010 or
10.3% of the total loan portfolio. There have been no adverse economic
developments that have affected these customers' repayment capability. Loans in
this industry are performing as agreed. Note 5 to the Company's Consolidated
Financial Statements presents separately the amount of loans by category as of
December 31, 1997 and 1996.
Loans, the largest component of earning assets, represented 70.9% of average
earning assets and 64.5% of average total assets during 1997 compared with 61.6%
and 56.0%, respectively, during 1996. The Company has focused on growth in its
market area, loan quality and expansion of existing customer relationships.
These efforts enabled loans to increase to $105,427,377 at December 31, 1997, a
30.3% increase over the $80,922,947 amount reported for year-end 1996.
Maturities and Sensitivity of Loans to Changes in Interest Rates
The following table summarizes the loan maturity distribution, by type, at
December 31, 1997 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 $ 28,010,355 $ 44,369,469 $ 15,739,668 $ 88,119,492
Real estate - construction 2,986,810 38,448 987,549 4,012,807
Consumer and other 1,256,842 8,907,169 3,131,067 13,295,078
-------------- -------------- -------------- ---------------
$ 32,254,007 $ 53,315,086 $ 19,858,284 $ 105,427,377
============== ============== ============== ===============
Loans maturing after one year with:
Fixed interest rates $ 52,494,854
Variable interest rates 20,678,516
---------------
Total $ 73,173,370
===============
</TABLE>
Provision And Allowance 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. Loan losses and recoveries are charged
or credited directly to the allowance. 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.
11
<PAGE>
M & M FINANCIAL CORPORATION
Provision And Allowance For Loan Losses
The following is an analysis of activity in the allowance for loan losses for
the years ended December 31, 1997 and 1996:
Summary of Loan Loss Experience
<TABLE>
<CAPTION>
1997 1996
--------------- --------------
<S> <C> <C>
Net loans outstanding at the end of the year $ 105,427,377 $ 80,922,947
=============== ==============
Average amount of loans outstanding during the year $ 95,162,041 $70,406,181
=============== ==============
Allowance for loan losses, beginning of year $ 1,027,355 $ 818,637
--------------- --------------
Loans charged off:
Commercial 902,003 17,004
Real estate, construction - -
Consumer 57,421 19,481
--------------- --------------
Total loans charged off 959,424 36,485
--------------- --------------
Recoveries of loans previously charged off 58,704 65,203
--------------- --------------
Net charge-offs (recoveries) 900,720 (28,718)
--------------- --------------
Provision charged to operations 800,000 180,000
--------------- --------------
Allowance for loan losses, end of year $ 926,635 $ 1,027,355
=============== ==============
</TABLE>
The following is a summary of nonperforming assets at December 31, 1997 and
1996:
<TABLE>
<CAPTION>
1997 1996
--------------- --------------
<S> <C> <C>
Nonaccrual loans - (all loans are collateralized) $ 473,103 $ 710,834
Accruing loans 90 days or more past due - 11,916
Loans impaired - -
Restructured loans - -
Other real estate owned - -
--------------- --------------
Total nonperforming assets $ 473,103 $ 722,750
=============== ==============
</TABLE>
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, 1997 and 1996, nonperforming
assets to total loans and other real estate owned was 0.45% and 0.89%,
respectively.
<TABLE>
<CAPTION>
Ratios
<S> <C> <C>
Net charge-offs to average loans outstanding 0.95% -0.04%
Net charge-offs to loans at end of year 0.85 -0.04
Allowance for loan losses to average loans outstanding 0.97 1.46
Allowance for loan losses to loans, end of year 0.88 1.27
Net charge-offs to allowance for loan losses 97.20 -2.80
Net charge-offs to provisions for loan losses 112.59 -15.95
Allowance for loan losses to nonperforming loans 195.86 142.15
</TABLE>
12
<PAGE>
M & M FINANCIAL CORPORATION
Provision And Allowance for Loan Losses
In 1997, the Company increased the allowance for loan losses by a charge to
operations of $800,000. 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 1.27% at December 31, 1996 to 0.88% at December 31, 1997.
For 1997 the Company had net charge-offs of $900,720, compared to net recoveries
of $28,718 for 1996. The amount of charge-offs in 1997 was largely attributable
to one Business Manager loan that originated in the first quarter of 1997. In
December 1997, management determined that the loan was not collectible and
charged off the balance of $826,671. Management does not believe that the
increase in loan charge-offs is indicative of any future trend. Although
management cannot determine the exact amount of loans to be charged off in the
future, it knows some loans will continue to be charged off due to the risks
associated with extending credit.
At December 31, 1997 and 1996, the Company's internal review mechanism had
identified $4,904,483 and $4,066,439, respectively, of criticized and classified
loans. These are loans as to which known information about possible credit
problems of the borrowers cause management to have serious doubts as to the
ability of such borrowers to comply with present loan repayment terms, which may
result in such loans becoming non-performing loans. Included in this amount are
$3,425,674 and $1,751,459, 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. This internal review process is the primary
determining factor 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 about 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
borrowers 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 provision for loan losses may not be significant to a particular
accounting period. At December 31, 1997 and 1996, management considered the
allowance for loan losses adequate based on its judgements, evaluations and
analysis of the loan portfolio.
13
<PAGE>
M & M FINANCIAL CORPORATION
Average Daily Deposits
The following table summarizes the Company's average daily deposits for the
years ended December 31, 1997 and 1996. The 1997 totals include certificates of
deposit over $100,000 which at December 31, 1997 totaled approximately
$16,294,857. Of this total, $9,449,021 had scheduled maturities within three
months, $1,746,865 within four to six months, $4,773,971 within seven to twelve
months and $325,000 thereafter.
<TABLE>
<CAPTION>
1997 1996
----------------------------- ----------------------------
Average Average Average Average
Amount Rate Paid Amount Rate Paid
------ --------- ------ ---------
<S> <C> <C> <C> <C>
Noninterest-bearing demand $ 18,062,755 -% $ 16,937,418 -%
Interest-bearing transaction accounts 28,583,650 3.37 21,623,547 3.13
Savings 16,682,701 3.11 15,656,646 3.00
Certificates of deposit 56,087,786 5.50 46,810,808 5.49
--------------- ---------------
Total $ 119,416,892 $ 101,028,419
=============== ===============
</TABLE>
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.
1997 1996
------ -----
Return on average assets 0.76% 0.68%
Return on average equity 9.94 8.10
Dividend payout ratio 32.72 39.05
Equity to assets ratio 7.69 8.43
Short-term Borrowings
At December 31, 1997 and 1996, the Company had borrowings characterized as
securities sold under agreements to repurchase aggregating $1,072,526 and
$8,534,279, respectively. The weighted average interest rate paid was 4.78% and
4.76%, for the years ended December 31, 1997 and 1996, respectively.
Additionally, the Company had $6,000,000 and $5,000,000 in fixed-rate advances
from the Federal Home Loan Bank due to mature within one year at December 31,
1997 and 1996, respectively.
Long-term Debt
The Company had $4,000,000 in fixed-rate advances from the Federal Home Loan
Bank as of December 31, 1997 scheduled to be repaid in more than one year.
Accounting Rule Changes
Earnings Per Share. In February 1997, the Financial Accounting Standards Board
("FASB") issued Statement of Financial Accounting Standards ("SFAS") 128,
"Earnings Per Share," effective for years ending after December 15, 1997. SFAS
128 simplifies the standards for computing earnings per share and makes them
comparable to international earning per share standards. It also requires the
dual presentation of basic and diluted earnings per share on the face of the
income statement for all entities with complex capital structures and requires a
reconciliation of the numerator and denominator of the basic earnings per share
computation to the numerator and denominator of the diluted earnings per share
computation.
14
<PAGE>
M & M FINANCIAL CORPORATION
Accounting Rule Changes
Basic earnings per share is computed by dividing net income by the
weighted-average number of shares outstanding for the period excluding the
effects of any dilutive potential common shares. Diluted earnings per share is
similar to the computation of basic earnings per share except that the
denominator is increased to include the number of additional common shares that
would have been outstanding if the dilutive potential common shares had been
issued. The dilutive effect of options outstanding under the Company's stock
option plan is reflected in diluted earnings per share by the application of the
treasury stock method.
SFAS 128 became effective for the Company as of December 31, 1997. SFAS 128 had
no effect on earnings per share data for prior years because the Company
previously had a simple capital structure.
Comprehensive Income. In June 1997, the FASB released SFAS 130, "Reporting
Comprehensive Income." SFAS 130 requires that all items that are required to be
recognized under accounting standards as components of comprehensive income be
reported in a financial statement that is displayed with the same prominence as
other financial statements. Comprehensive income is the change in equity of a
business during a period from transactions and other events and circumstances
from nonowner sources and excludes investments by owners and distributions to
owners. Comprehensive income consists of two components-net income and other
comprehensive income. Other comprehensive income includes, among other things,
the change in the unrealized gain or loss on securities available for sale.
This statement is effective for fiscal years beginning after December 15, 1997.
Reclassification of financial statements for earlier periods provided for
comparative purposes is required.
Impact Of Inflation
Unlike most industrial companies, the assets and liabilities of financial
institutions such as the Company and its subsidiaries are primarily monetary in
nature. Therefore, interest rates have a more significant effect on the
Company's performance than do the effects of changes in the general rate of
inflation and change in prices. In addition, interest rates do not necessarily
move in the same direction or in the same magnitude as the prices of goods and
services. As discussed previously, management seeks to manage the relationships
between interest sensitive assets and liabilities in order to protect against
wide interest rate fluctuations, including those resulting from inflation.
The Year 2000
During 1997, the Company commenced a year 2000 date conversion project to
address all necessary code changes, testing and implementation. Failure to
address the issue could result in computer applications which fail or create
erroneous results by or at the year 2000. Bank regulators have established
minimum guidelines for banks in addressing the year 2000 issue. The regulators
are monitoring the progress of banks in complying with these guidelines and have
the option of taking regulatory action for banks which have not made
satisfactory progress in addressing the year 2000 issue. The Company is
utilizing both internal and external resources to identify, correct, and test
the systems for the year 2000 compliance. The Company has contacted its primary
processing vendors, and the vendors have developed plans to address processing
of transactions in the year 2000. Additionally, in the normal course of
business, management decided to replace its outdated core banking software
beginning in the fourth quarter of 1998. The vendor for the new core software
has certified that it will be fully capable of correctly processing transactions
in the year 2000. Management has assessed the anticipated year 2000 compliance
expenses and does not expect them to have a material effect on the Company's
earnings. Maintenance or modification costs will be expensed as incurred, while
the costs of new software will be capitalized over the software's useful life.
16
<PAGE>
TOURVILLE, SIMPSON & HENDERSON
CERTIFIED PUBLIC ACCOUNTANTS
POST OFFICE BOX 8567
1615 PICKENS STREET
COLUMBIA, SOUTH CAROLINA 29202
TELEPHONE (803)252-3000
FAX (803)254-0211
WILLIAM E. TOURVILLE, CPA MEMBER AICPA SEC AND
HARRIET S. SIMPSON, CPA, CISA, CFE, CCP PRIVATE COMPANIES
LEWIS M. HENDERSON, CPA PRACTICE SECTIONS
CHRISTOPHER G. SPEAKS, CPA
R. JASON CASKEY, CPA
STARLENE W. WATSON, CPA
FRANK D. THOMAS, CPA
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, 1997 and 1996, 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, 1997. 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, 1997 and 1996, and the consolidated results of
its operations and its cash flows for each of the three years in the period
ended December 31, 1997, in conformity with generally accepted accounting
principles.
Tourville, Simpson & Henderson
Columbia, South Carolina
March 9, 1998
17
<PAGE>
M & M FINANCIAL CORPORATION
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 1997 AND 1996
<TABLE>
<CAPTION>
ASSETS
1997 1996
-------------- ---------------
Cash and cash equivalents:
<S> <C> <C>
Cash and due from banks .............................................................. $ 7,822,361 $ 7,022,370
Interest-bearing demand accounts with other banks .................................... 1,519,920 241,458
Federal funds sold ................................................................... - 700,000
------------- -------------
Total cash and cash equivalents ............................................. 9,342,281 7,963,828
Time deposits with other banks ......................................................... 300,000 800,000
Investment securities:
Securities available-for-sale ........................................................ 29,901,275 34,997,823
Securities held-to-maturity (estimated market value of $3,031,496 and
$3,463,852 at December 31, 1997 and 1996, respectively) ............................ 2,973,837 3,344,422
------------- -------------
Total investment securities ................................................. 32,875,112 38,342,245
Loans receivable ....................................................................... 105,427,377 80,922,947
Less allowance for loan losses ....................................................... (926,635) (1,027,355)
------------- -------------
Loans, net ......................................................................... 104,500,742 79,895,592
Premises and equipment, net ............................................................ 4,355,338 3,708,575
Accrued interest receivable ............................................................ 1,256,335 1,207,411
Other assets ........................................................................... 3,640,886 1,996,546
------------- -------------
Total assets ................................................................ $ 156,270,694 $ 133,914,197
============= =============
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities:
Deposits:
Noninterest-bearing demand deposits .................................................. $ 18,958,066 $ 17,925,223
Interest-bearing demand deposits ..................................................... 32,004,240 23,412,310
Savings deposits ..................................................................... 18,281,077 15,164,905
Time deposits ........................................................................ 61,238,686 50,970,568
------------- -------------
Total deposits .............................................................. 130,482,069 107,473,006
Short-term borrowings .................................................................. 2,461,432 9,083,374
Advances from the Federal Home Loan Bank ............................................... 10,000,000 5,000,000
Accrued interest and other liabilities ................................................. 1,638,835 1,536,105
------------- -------------
Total liabilities ........................................................... 144,582,336 123,092,485
------------- -------------
Stockholders' equity:
Common stock, $5 par value; 3,000,000 shares authorized;
1,006,116 and 335,372 shares issued and outstanding at
December 31, 1997 and 1996, respectively ............................................. 5,030,580 1,676,860
Capital surplus ........................................................................ 2,483,783 2,483,783
Unrealized gain on securities available-for-sale, net .................................. 248,721 140,568
Retained earnings ...................................................................... 3,925,274 6,520,501
------------- -------------
Total stockholders' equity .................................................. 11,688,358 10,821,712
------------- -------------
Total liabilities and stockholders' equity .................................. $ 156,270,694 $ 133,914,197
============= =============
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
18
<PAGE>
M & M FINANCIAL CORPORATION
CONSOLIDATED STATEMENTS OF INCOME
FOR THE YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
<TABLE>
<CAPTION>
1997 1996 1995
----------- ----------- -----------
Interest income:
<S> <C> <C> <C>
Loans, including fees ............................................. $ 9,093,815 $ 6,732,695 $ 5,126,826
Securities, nontaxable ............................................ 224,493 295,842 355,059
Securities, taxable ............................................... 2,039,786 2,078,500 2,548,207
Federal funds sold ................................................ 97,026 195,563 147,178
Time deposits with other banks and other .......................... 100,417 117,867 56,108
----------- ----------- -----------
Total interest income .................................... 11,555,537 9,420,467 8,233,378
----------- ----------- -----------
Interest expense:
Deposits .......................................................... 4,574,507 3,717,409 3,202,304
Advances from the Federal Home Loan Bank .......................... 550,138 181,066 80,306
Federal funds purchased and securities sold
under repurchase agreements and other borrowings ................ 293,649 458,453 556,608
----------- ----------- -----------
Total interest expense ................................... 5,418,294 4,356,928 3,839,218
----------- ----------- -----------
Net interest income ................................................. 6,137,243 5,063,539 4,394,160
Provision for loan losses ........................................... 800,000 180,000 38,890
----------- ----------- -----------
Net interest income after provision for loan losses ................. 5,337,243 4,883,539 4,355,270
----------- ----------- -----------
Other income:
Service charges on deposit accounts ............................... 798,621 735,481 781,076
Commercial analysis charges ....................................... 192,732 153,965 151,536
Gain on sales of securities available-for-sale .................... 266,232 - 139,544
Commissions on sales of mutual funds and annuities ................ 154,756 101,387 28,805
Other income ...................................................... 509,072 338,585 175,332
----------- ----------- -----------
Total other income ....................................... 1,921,413 1,329,418 1,276,293
----------- ----------- -----------
Other expense:
Salaries and employee benefits .................................... 3,039,928 2,784,779 2,649,597
Occupancy expense of premises ..................................... 278,794 279,833 270,831
Furniture and equipment expense ................................... 554,863 564,280 516,303
Other operating expense ........................................... 1,754,795 1,461,959 1,414,664
----------- ----------- -----------
Total other expense ...................................... 5,628,380 5,090,851 4,851,395
----------- ----------- -----------
Income before income taxes .......................................... 1,630,276 1,122,106 780,168
Income tax provision ................................................ 502,874 263,343 187,350
----------- ----------- -----------
Net income .......................................................... $ 1,127,402 $ 858,763 $ 592,818
=========== =========== ===========
Basic earnings per share ............................................ $ 1.12 $ 0.85 $ 0.59
Diluted earnings per share .......................................... 1.12 0.85 0.59
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
19
<PAGE>
M & M FINANCIAL CORPORATION
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
FOR THE YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
<TABLE>
<CAPTION>
Unrealized
Gain on
Securities Total
Common Stock Capita Available- Retained Stockholders'
Shares Amount Surplus for-Sale, net Earnings Equity
------ ------ ------- ------------- -------- ------
<S> <C> <C> <C> <C> <C> <C>
Balance, December 31, 1994 ............. 335,372 $ 1,676,860 $ 2,483,783 $ (539,617) $ 5,706,127 $ 9,327,153
Cash dividends, $0.30 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, $0.33 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
Three-for-one stock split .............. 670,744 3,353,720 - - (3,353,720) -
Cash dividends, $0.37 per share ........ - - - - (368,909) (368,909)
Change in fair value for the period .... - - - 108,153 - 108,153
Net income for 1997 .................... - - - - 1,127,402 1,127,402
--------- ------------ ------------ ------------ ------------- -----------
Balance, December 31, 1997 ............. 1,006,116 $ 5,030,580 $ 2,483,783 $ 248,721 $ 3,925,274 $11,688,358
========= ============ ============ ============ ============= ===========
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
20
<PAGE>
M & M FINANCIAL CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
<TABLE>
<CAPTION>
1997 1996 1995
------------ ------------ ------------
Cash flows from operating activities:
<S> <C> <C> <C>
Net income ........................................................... $ 1,127,402 $ 858,763 $ 592,818
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation and amortization .................................... 440,501 429,692 409,519
Gain on sale of securities ....................................... (266,232) - (139,544)
Provision for loan losses ........................................ 800,000 180,000 38,890
Amortization less accretion on securities ........................ (40,955) 26,993 (69,006)
Deferred income taxes ............................................ 168,584 (35,961) 17,483
Foreclosed asset valuation expense ............................... - - 18,417
Gain on disposition of foreclosed assets ......................... - (25,369) -
(Increase) decrease in interest receivable ....................... (48,924) (218,285) 179,951
Increase in interest payable ..................................... 174,501 293,749 267,081
(Increase) decrease in other assets .............................. (1,167,332) 139,524 (678,495)
Decrease in other liabilities .................................... (71,771) (81,623) (238,673)
------------ ------------ ------------
Net cash provided by operating activities ...................... 1,115,774 1,567,483 398,441
------------ ------------ ------------
Cash flows from investing activities:
Proceeds from sales of securities available-for-sale ................. 5,272,801 - 21,702,952
Proceeds from maturities of securities available-for-sale ............ 9,403,561 10,798,945 7,389,026
Purchases of securities available-for-sale ........................... (9,114,188) (8,954,269) (16,154,008)
Proceeds from maturities of securities held-to-maturity .............. 388,003 702,500 8,976,276
Purchases of securities held-to-maturity ............................. - - (5,908,470)
Net increase in loans made to customers .............................. (25,405,150) (19,550,025) (17,770,768)
Net decrease (increase) in deposits in other banks ................... 500,000 (500,000) -
Purchases of premises and equipment .................................. (1,065,260) (200,564) (240,523)
Proceeds on disposition of foreclosed assets ......................... - 108,588 218,353
Purchase of Federal Home Loan Bank Stock ............................. (735,300) (245,500) (304,500)
------------ ------------ ------------
Net cash used by investing activities .......................... (20,755,533) (17,840,325) (2,091,662)
------------ ------------ ------------
Cash flows from financing activities:
Net increase in deposit accounts ..................................... 23,009,063 11,388,893 4,764,235
Net decrease in short-term borrowings ................................ (6,621,942) (1,165,095) (1,073,534)
Proceeds of advances from the Federal Home Loan Bank ................. 5,000,000 5,000,000 -
Cash dividends paid .................................................. (368,909) (335,372) (301,835)
------------ ------------ ------------
Net cash provided by financing activities ...................... 21,018,212 14,888,426 3,388,866
------------ ------------ ------------
Net increase (decrease) in cash and cash equivalents ................... 1,378,453 (1,384,416) 1,695,645
Cash and cash equivalents, beginning of year ........................... 7,963,828 9,348,244 7,652,599
------------ ------------ ------------
Cash and cash equivalents, end of year ................................. $ 9,342,281 $ 7,963,828 $ 9,348,244
============ ============ ============
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
21
<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.
22
<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 - 15-40 years
Furniture, fixtures and equipment - 5-20 years
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, 1997 and 1996, the investment in Federal Reserve Bank stock was
$113,300. At December 31, 1997 and 1996, the investment in Federal Home Loan
Bank stock was $1,470,600 and $735,300, respectively. Dividends received on
Federal Reserve Bank stock and Federal Home Loan Bank stock are included in
other income.
Stock-Based Compensation - Statement of Financial Accounting Standards ("SFAS")
No. 123, "Accounting for Stock-Based Compensation", issued in October 1995,
allows a company to either adopt the fair value method or continue using the
intrinsic valuation method presented under Accounting Principles Board ("APB")
Opinion 25 to account for stock-based compensation. The fair value method
recommended in SFAS 123 requires compensation cost to be measured at the grant
date based on the value of the award and to be recognized over the service
period. The intrinsic value method measures compensation cost based on the
excess, if any, of the quoted market price of the stock at the grant date over
the amount an employee must pay to acquire the stock. The Company has elected to
use APB Opinion 25 to account for stock options granted under the stock option
plan adopted during 1997 and has disclosed in the footnotes pro forma net income
and earnings per share information as if the fair value method had been used.
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.
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 1997, 1996 and 1995, the Company paid $5,243,793, $4,063,179, and
$3,572,137 respectively, for interest. In 1997, 1996 and 1995, the Company made
tax payments of $369,494, $119,000 and $3,952, respectively.
23
<PAGE>
M & M FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES- continued
Supplemental noncash investing and financing activities are as follows:
During 1997, the Company transferred $3,353,720 from retained earnings to common
stock in order to record the stock split (see Note 15).
During 1996, the Company transferred property with a carrying amount of $46,275
from other real estate owned to premises and equipment. During 1995, the Company
transferred loans totaling $68,219 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 monitoring a concentration of loans in the
hotel/motel industry that would be similarly affected by changes in economic
conditions (See Note 5). Even though 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 - Basic earnings per share is computed by dividing net income
by the weighted-average number of shares outstanding for the period excluding
the effects of any dilutive potential common shares. Diluted earnings per share
is similar to the computation of basic earnings per share except that the
denominator is increased to include the number of additional common shares that
would have been outstanding if the dilutive potential common shares had been
issued. The dilutive effect of options outstanding under the Company's stock
option plan are reflected in diluted earnings per share by the application of
the treasury stock method. See Notes 2 and 18.
Reclassifications - Certain captions and amounts in the 1996 and 1995
consolidated financial statements were reclassified to conform with the 1997
presentation.
All references in the condensed consolidated financial statements referring to
shares, share prices, per-share amounts and stock plans have been adjusted
retroactively for the three-for-one stock split. Additional information is
presented in Note 15.
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. In
1996, the investment was reclassified to securities available-for-sale and is
carried at its fair value as of December 31, 1996 and 1997.
NOTE 2 - CHANGE IN ACCOUNTING PRINCIPLE
In February 1997, the Financial Accounting Standards Board (FASB) issued SFAS
No. 128, "Earnings Per Share", effective for financial statements issued for
periods ending after December 15, 1997. SFAS 128 simplifies the standards for
computing earnings per share (EPS) and makes them comparable to international
EPS standards. It also requires the dual presentation of basic and diluted EPS
on the face of the income statement for all entities with complex capital
structures and requires a reconciliation of the numerator and denominator of the
basic EPS computation to the numerator and denominator of the diluted EPS
computation. The reconciliation of basic and diluted EPS is included in Note 18.
SFAS 128 had no effect on earnings per share computations for prior years
because the Company had a simple capital structure with no dilutive potential
shares prior to 1997.
24
<PAGE>
M & M FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 3 - 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, 1997 and
1996, the required cash reserve was $1,303,000 and $971,000, 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.
NOTE 4 - INVESTMENT SECURITIES
Securities available-for-sale at December 31, 1997 and 1996 consist of the
following:
<TABLE>
<CAPTION>
Gross Gross Estimated
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
------------ ------------- ------------ ------------
December 31, 1997
<S> <C> <C> <C> <C>
Equity securities ............................. $ 27,879 $ 162,035 $ - $ 189,914
U.S. Treasury securities ...................... 8,024,831 71,575 - 8,096,406
Securities of other U.S. Government
agencies and corporations ................... 11,346,175 74,879 - 11,421,054
Obligations of states and local government .... 550,500 15,136 - 565,636
Mortgage-backed securities .................... 9,547,467 80,798 - 9,628,265
------------ ------------- ------------ ------------
Total .................................. $ 29,496,852 $ 404,423 $ - $ 29,901,275
============ ============= ============ ============
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
============ ============= ============ ============
</TABLE>
For the years ended December 31, 1997, 1996, and 1995, aggregate realized gains
on securities available-for-sale were $266,232, $0, and $179,804, respectively.
There were no realized losses in 1997 or 1996. Realized losses were $40,260 in
1995. Proceeds from sales of securities available-for-sale were $5,272,801, $0,
and $21,702,952 in 1997, 1996, and 1995, respectively.
Securities held-to-maturity at December 31, 1997 and 1996 consist of the
following:
<TABLE>
<CAPTION>
Gross Gross Estimated
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
------------ ------------- ----------- ------------
December 31, 1997
<S> <C> <C> <C> <C>
Obligations of states and local government ..... $ 2,973,837 $ 57,659 $ - $ 3,031,496
============ ============= ============ ============
December 31, 1996
Obligations of states and local government ..... $ 3,344,422 $ 119,430 $ - $ 3,463,852
============ ============= ============ ============
</TABLE>
For the years ended December 31, 1997, 1996 and 1995, there were no sales of
securities held-to-maturity.
25
<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, 1997, based on the contractual
maturities. Actual maturities may differ from the contractual maturities because
issuers or 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 ......................... $ 3,975,314 $ 3,979,738 $ 655,006 $ 658,281
Due after one year but within five years ........ 11,221,420 11,309,202 1,972,309 2,024,674
Due after five years but within ten years ....... 987,193 1,000,625 234,924 236,944
Due after ten years ............................. 3,737,579 3,793,531 111,598 111,597
Mortgage-backed securities ...................... 9,547,467 9,628,265 - -
Equity securities ............................... 27,879 189,914 - -
------------ ------------- ------------ ------------
Total ................................ $ 29,496,852 $ 29,901,275 $ 2,973,837 $ 3,031,496
============ ============= ============ ============
</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, 1997 and 1996, investment securities having an amortized cost of
approximately $31,466,463 and $23,350,545, respectively, and an estimated market
value of approximately $31,751,067 and $23,405,919, respectively, were pledged
as collateral for advances from the Federal Home Loan Bank, to secure public
deposits and for other purposes as required and permitted by law.
NOTE 5 - LOANS RECEIVABLE
Loans receivable at December 31, 1997 and 1996, are summarized as follows:
1997 1996
-------------- --------------
Commercial ................................. $ 88,119,492 $ 55,300,370
Real estate - construction ................. 4,012,807 3,296,039
Consumer ................................... 13,295,078 22,326,538
-------------- --------------
Total loans ..................... $ 105,427,377 $ 80,922,947
============== ==============
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 such exceptions. Therefore, the real
estate and commercial loan portfolios are the categories primarily subject to
possible impairment.
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, 1997 and 1996, 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.
26
<PAGE>
M & M FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 5 - LOANS RECEIVABLE - continued
A concentration of loans exists when there are direct or indirect obligations in
a class of borrowers or industries that exceed 10% of total loans. Under this
definition, the Bank has a concentration of credit in the hotel/motel industry.
As of December 31, 1997, loans to the hotel/motel industry are $10,843,010 or
10.3% of gross loans outstanding and approximately 97% of the Bank's capital.
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, 1997 and 1996, management had placed loans totaling $473,103
and $710,834, 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 $0 and $11,916 for December 31, 1997 and 1996, respectively.
An analysis of the allowance for loan losses for the years ended December 31,
1997, 1996 and 1995, is as follows:
<TABLE>
<CAPTION>
1997 1996 1995
-------------- -------------- --------------
<S> <C> <C> <C>
Balance, beginning of year ............................... $ 1,027,355 $ 818,637 $ 726,097
Provision for loan losses ................................ 800,000 180,000 38,890
Recoveries of charged-off loans .......................... 58,704 65,203 314,798
Loans charged off ........................................ (959,424) (36,485) (261,148)
-------------- -------------- --------------
Balance, end of year ..................................... $ 926,635 $ 1,027,355 $ 818,637
============== ============== ==============
</TABLE>
During 1996, the Company implemented a credit program in which it advances money
to small businesses based on the outstanding accounts receivable of the business
("Business Manager"). Payments on the receivables are collected directly by the
Bank. Per the credit agreements, the respective businesses are required to
reduce the outstanding balances based on the aging of the receivables. As of
December 31, 1997, total advances under this program totaled $1,558,519.
During 1997, the Company advanced money under this program to one Business
Manager account that was not financially able to reduce its loan commitment. The
Company restructured the loan but the customer was not able to support the
payments as they became due. In December 1997, management determined that the
loan was not collectible and charged off the remaining balance of $826,670.
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.
27
<PAGE>
M & M FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 5 - LOANS RECEIVABLE - continued
The following table summarizes the Company's off-balance sheet financial
instruments whose contract amounts represent credit risk:
December 31
1997 1996
-------------- --------------
Commitments to extend credit ................. $ 18,033,790 $ 17,668,992
Standby letters of credit .................... 355,000 13,500
At December 31, 1997, the Company was not committed to lend additional funds to
borrowers who have loans in nonaccrual status.
NOTE 6 - PREMISES AND EQUIPMENT
Premises and equipment at December 31, 1997 and 1996, consists of the following:
1997 1996
-------------- --------------
Land ......................................... $ 1,186,115 $ 720,764
Office and buildings ......................... 3,717,196 3,515,952
Furniture and equipment ...................... 3,524,918 3,183,260
Construction in process ...................... 50,579 3,000
-------------- --------------
Total ............................. 8,478,808 7,422,976
Less, accumulated depreciation ............... 4,123,470 3,714,401
-------------- --------------
Premises and equipment, net .................. $ 4,355,338 $ 3,708,575
============== ==============
Depreciation expense for the years ended December 31, 1997, 1996 and 1995 was
$418,497, $422,232 and $408,809, respectively.
NOTE 7 - DEPOSITS
At December 31, 1997 and 1996, time deposits of $100,000 or more totaled
approximately $16,294,857 and $10,106,220, respectively. Interest expense on
these deposits was approximately $750,102, $464,938 and $361,900 in 1997, 1996
and 1995, respectively.
At December 31, 1997, the scheduled maturities of time deposits are as follows:
1998 ........................................ $ 57,578,241
1999 ........................................ 3,253,142
2000 ........................................ 270,799
2001 ........................................ 58,158
2002 and thereafter ......................... 78,346
--------------
Total ............................ $ 61,238,686
==============
28
<PAGE>
M & M FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 8 - SHORT-TERM BORROWINGS
Short-term borrowings at December 31, 1997 and 1996 consists of the following:
<TABLE>
<CAPTION>
1997 1996
-------------- --------------
<S> <C> <C>
Securities sold under agreements to repurchase .............................. $ 1,072,326 $ 8,534,279
Interest-bearing demand notes issued to the U.S. Treasury ................... 1,389,106 549,095
-------------- --------------
Total ............................................................ $ 2,461,432 $ 9,083,374
============== ==============
</TABLE>
Securities sold under agreements to repurchase generally mature within one to
fourteen days from the transaction date. A third party provides safekeeping
services for the Company and maintains possession of the securities. As of
December 31, 1997, the amortized cost and market value of the securities
underlying the agreements were $1,101,274 and $1,107,295, respectively.
At December 31, 1997, the Bank had unused lines of credit to purchase federal
funds from unrelated banks totaling $9,500,000. These lines of credit are
available on a one to seven day basis for general corporate purposes. The Bank
also had available to it an unused commitment from the Federal Home Loan Bank
totaling $10,000,000.
NOTE 9 - ADVANCES FROM THE FEDERAL HOME LOAN BANK
Advances from the Federal Home Loan Bank consisted of the following at December
31, 1997:
Interest
Description Rate Balance
- ----------- --------- --------------
Fixed rate advances maturing:
February 14, 1998 ...................... 5.70% $ 5,000,000
November 24, 2002 ...................... 6.19 5,000,000
--------------
Total ......................... $ 10,000,000
==============
Scheduled principal reductions of Federal Home Loan Bank advances are as
follows:
1998 ........................... $ 6,000,000
1999 ........................... 1,000,000
2000 ........................... 1,000,000
2001 ........................... 1,000,000
2002 ........................... 1,000,000
--------------
$ 10,000,000
==============
As collateral, the Bank has pledged its portfolio of first mortgage loans on
one-to-four family residential properties aggregating approximately $16,197,000
and $1,600,000 of debt securities. In addition, the Company's Federal Home Loan
Bank stock, which is included in other assets, is pledged to secure the
borrowings.
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, 1997 and 1996,
were $878,851 and $1,166,826, respectively. During 1997, $91,896 of new loans
were made to related parties and repayments totaled $379,871.
29
<PAGE>
M & M FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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, 1997, 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 amount of loans or advances from the Bank to the Company are
restricted.
NOTE 13 - INCOME TAXES
Income tax expense included in the income statements for the years ended
December 31, 1997, 1996 and 1995 is summarized as follows:
<TABLE>
<CAPTION>
1997 1996 1995
-------- -------- --------
Currently payable:
<S> <C> <C> <C>
Federal ............................................ $294,269 $255,457 $141,052
State .............................................. 40,021 43,847 28,815
-------- -------- --------
334,290 299,304 169,867
-------- -------- --------
Deferred:
Federal ............................................ 205,603 38,141 317,595
State .............................................. 30,685 13,518 38,076
-------- -------- --------
236,288 51,659 355,671
-------- -------- --------
Income tax expense ........................ $570,578 $350,963 $525,538
======== ======== ========
Income tax expense is allocated as follows:
To continuing operations .......................... $502,874 $263,343 $187,350
To stockholders' equity ........................... 67,704 87,620 338,188
-------- -------- --------
Income tax expense ........................ $570,578 $350,963 $525,538
======== ======== ========
</TABLE>
A summary of the Company's deferred tax accounts as of December 31, 1997 and
1996 follows:
1997 1996
--------- ---------
Deferred tax assets $ 360,196 $ 546,549
Deferred tax liabilities 250,323 200,388
Valuation allowance 193,764 193,764
30
<PAGE>
M & M FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 13 - INCOME TAXES - continued
The principal sources of temporary differences in 1997, 1996, and 1995, and the
related deferred tax effects are as follows:
<TABLE>
<CAPTION>
1997 1996 1995
---------- ---------- ----------
<S> <C> <C> <C>
Provision for bad debts ..................................................... $ 133,294 $ (29,904) $ 9,805
Tax depreciation in excess of book depreciation ............................. (4,172) 32,206 (697)
Valuation allowance on foreclosed property .................................. - 22,083 (13,774)
Alternative minimum tax ..................................................... - 36,940 18,602
Retirement plans ............................................................ 50,010 37,093 10,922
Other net ................................................................... (10,548) (134,379) (7,375)
--------- --------- ---------
Temporary differences attributable to continuing operations ............. 168,584 (35,961) 17,483
Change in valuation allowance ........................................... - - -
--------- --------- ---------
Deferred tax expense (benefit) attributable to continuing operations ........ 168,584 (35,961) 17,483
Deferred tax expense attributable to stockholders' equity ................... 67,704 87,620 338,188
--------- --------- ---------
Change in deferred income taxes ......................................... $ 236,288 $ 51,659 $ 355,671
========= ========= =========
</TABLE>
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>
1997 1996 1995
--------- --------- ---------
<S> <C> <C> <C>
Income tax at the statutory rate ................................. $ 554,294 $ 381,516 $ 265,257
State income tax, net of federal benefit ......................... 49,185 32,859 44,148
Tax exempt interest income ....................................... (99,920) (106,594) (124,745)
Disallowed interest expense ...................................... 35,144 22,038 17,787
Other, net ....................................................... (35,829) (66,476) (15,097)
--------- --------- ---------
Total ................................................. $ 502,874 $ 263,343 $ 187,350
========= ========= =========
</TABLE>
NOTE 14 - OTHER OPERATING EXPENSES
Other operating expenses for the years ended December 31, 1997, 1996 and 1995
are summarized below:
<TABLE>
<CAPTION>
1997 1996 1995
---------- ---------- ----------
<S> <C> <C> <C>
Stationary and banking supplies ............................... $ 216,747 $ 199,714 $ 185,669
Federal deposit insurance assessment .......................... 13,361 2,054 106,783
Directors' fees ............................................... 91,985 97,718 96,450
Professional fees ............................................. 201,201 167,446 111,703
Marketing and advertising ..................................... 178,792 182,774 106,599
Insurance and bonds ........................................... 54,527 68,330 81,484
Other real estate expense ..................................... - - 67,751
Telephone ..................................................... 129,442 103,131 95,141
Other ......................................................... 868,740 640,792 563,084
---------- ---------- ----------
Total .............................................. $1,754,795 $1,461,959 $1,414,664
========== ========== ==========
</TABLE>
31
<PAGE>
M & M FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 15 - STOCKHOLDERS' EQUITY
On April 17, 1997, the stockholders approved an amendment to the Articles of
Incorporation increasing the number of authorized shares outstanding from
800,000 shares to 3,000,000 shares. On May 5, 1997, the Company declared a
three-for-one stock split effected in the form of a 200 percent stock dividend
to stockholders of record on June 2, 1997. On July 1, 1997, the Company
transferred $3,353,720 from retained earnings to common stock, representing the
670,744 additional shares of the Company's $5 par value stock which were issued.
In 1997, the Company approved a dividend reinvestment plan for stockholders of
the Company. The plan offers stockholders the opportunity to reinvest cash
dividends paid on common stock by the purchase of additional shares of common
stock. Dividends are reinvested on a semi-annual basis as paid. The Bank is the
plan administrator.
There were no shares purchased under this plan in 1997.
NOTE 16 - EMPLOYEE BENEFIT PLANS
The Company has a retirement savings and profit sharing plan with 401(k)
provisions covering substantially all full-time employees. Annual expense
provisions are based primarily upon employee participation and earnings of the
Company. The expense recognized under this plan in 1997, 1996, and 1995 totaled
approximately $68,834, $66,704 and $52,521, respectively.
During 1997, the Company terminated its noncontributory defined benefit pension
plan and replaced it with a money purchase pension plan and trust. A gain of
$53,005 was recognized on the termination of the defined benefit plan. Under the
money purchase pension plan and trust, the Company contributes 7% of the
compensation of employees who have completed 1,000 hours of service for the year
and are employed on the last day of the year into a trust account for the future
benefit of the employees. An employee becomes fully vested in this plan after
seven years of service. For 1997, the Company accrued $140,000 in plan expense.
Contributions to the plan in 1997 were $130,000.
The Company approved a Salary Continuation Plan in December 1997 which provides
certain officers with salary continuation benefits after retirement. The plan
also provides for benefits in the event of early termination, disability, death,
or substantial change of control of the Company. For the year ended December 31,
1997, salary continuation expense included in salaries and employee benefits was
$28,260. In connection with the Salary Continuation Plan, single premium life
insurance contracts with total death benefits of $2,900,000 were purchased on
the officers. The Company paid premiums of $1,290,000 which were based on
estimates of the future performance of the policies. The cash surrender value of
$1,312,388 was included in other assets at December 31, 1997.
During 1997, the Company also approved a performance award plan which provides
certain officers with deferred benefits based upon the Company's performance in
relation to performance goals and objectives established annually by the Board
of Directors. Under the plan, the Company may distribute in cash, at the sole
discretion of the Board of Directors, up to 25% of the performance award. The
Company will accrue an interest portion on the deferred benefit for each
participant equal to the participants' cumulative deferred benefit multiplied by
the sum of the percentage change in the Company's stock price during the year
plus the percentage of dividends paid during the year to stockholders' equity at
the beginning of the year. Upon normal retirement, early termination,
disability, or death, the Company will pay the accumulated deferred benefit over
180 months crediting interest on the unpaid balance of the benefit at an annual
rate of 8%. Upon substantial change of control, the Company will pay the
accumulated benefit in a lump-sum payment. No awards were earned under this plan
for the year ended December 31, 1997.
32
<PAGE>
M & M FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 17 - STOCK COMPENSATION PLAN
On April 17, 1997, the stockholders approved an Incentive Stock Option Plan of
1997 (Stock Plan) which provides for the granting of options to purchase up to
78,000 shares of the Company's common stock to officers and employees of the
Company. The per-share exercise price of incentive stock options granted under
the Stock Plan may not be less than the fair market value of a share on the date
of grant. Participants become vested in options granted based on each
participant's years of service to the Company. The expiration date of any option
may not be greater than ten years from the date of grant. Options that expire
unexercised or are canceled become available for issuance.
As discussed in Note 1, the Company will apply APB Opinion No. 25 and related
interpretations in accounting for the Stock Plan. Accordingly, no compensation
cost has been recognized. Had compensation cost for the Company's Stock Plan
been determined based on the fair value at the grant dates for awards under the
plan consistent with the method of SFAS 123, the Company's net income and
earnings per share for the year ended December 31, 1997 would have been reduced
to the pro forma amounts indicated below:
1997
----
Net income:
As reported ...................................... $1,127,402
Pro forma ........................................ 1,093,688
Basic earnings per share:
As reported ...................................... $ 1.12
Pro forma ........................................ 1.09
Diluted earnings per share:
As reported ...................................... $ 1.12
Pro forma ........................................ 1.09
In calculating the pro forma disclosures, the fair value of options granted is
estimated as of the date granted using the Black-Scholes option pricing model
with the following weighted-average assumptions: dividend yield of 2.78 percent;
expected volatility of 0 percent; risk-free interest rate of 6.84 percent; and
an expected life of 10 years.
On May 5, 1997, the Company granted options to purchase up to 54,000 shares of
the Company's common stock for $13.33 per share. As of December 31, 1997, none
of the options had been exercised or canceled, and 6,390 options were
exercisable. At December 31, 1997, the weighted-average remaining contractual
life was 9.3 years. The fair value of options, calculated using the
Black-Scholes option pricing model, granted during 1997 was $3.37 per share.
Subsequent to year end, the Company issued an additional 7,000 options
exercisable at $15 per share.
NOTE 18 - EARNINGS PER SHARE
As discussed in Note 2, the FASB issued SFAS 128, "Earnings Per Share", in
February 1997. SFAS 128 replaces the presentation of primary earnings per share
(EPS) with a presentation of basic EPS. It requires the presentation of basic
and diluted EPS on the face of the income statement for all entities with a
complex capital structure. Basic EPS excludes dilution and is computed by
dividing income available to common stockholders by the weighted-average number
of shares outstanding for the period. Diluted EPS reflects the potential
dilution that could occur if securities or other contracts to issue common stock
were exercised or converted into common stock or resulted in the issuance of
common stock that then shared in the earnings of the entity.
33
<PAGE>
M & M FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 18 - EARNINGS PER SHARE - continued
A reconciliation of the numerators and denominators used to calculate basic and
diluted earnings per share is as follows:
<TABLE>
<CAPTION>
For the Year Ended December 31, 1997
------------------------------------------
Income Shares Per-Share
(Numerator) (Denominator) Amount
----------- ------------- ---------
Basic EPS
<S> <C> <C> <C>
Income available to common stockholders ............................. $1,127,402 1,006,116 $ 1.12
=========
Effect of Dilutive Securities
Stock options ....................................................... - 647
---------- ---------
Diluted EPS
Income available to common stockholders plus assumed conversions .... $ 1,127,402 1,006,763 $ 1.12
=========== ========= =========
<CAPTION>
For the Year Ended December 31, 1996
------------------------------------------
Income Shares Per-Share
(Numerator) (Denominator) Amount
----------- ------------- ---------
Basic EPS
<S> <C> <C> <C>
Income available to common stockholders .............................. $ 858,763 1,006,116 $ 0.85
=========
Effect of Dilutive Securities
Stock options ........................................................ - -
--------- ---------
Diluted EPS
Income available to common stockholders plus assumed conversions ..... $ 858,763 1,006,116 $ 0.85
========== ========= =========
<CAPTION>
For the Year Ended December 31, 1995
------------------------------------------
Income Shares Per-Share
(Numerator) (Denominator) Amount
----------- ------------- ---------
Basic EPS
<S> <C> <C> <C>
Income available to common stockholders .............................. $ 592,818 1,006,116 $ 0.59
=========
Effect of Dilutive Securities
Stock options ........................................................ - -
---------- ---------
Diluted EPS
Income available to common stockholders plus assumed conversions ..... $ 592,818 1,006,116 $ 0.59
========== ========= =========
</TABLE>
NOTE 19 - CAPITAL REQUIREMENTS
The Company and the Bank are subject to various regulatory capital requirements
administered by the federal banking agencies. Failure to meet minimum capital
requirements can initiate certain mandatory and possibly additional
discretionary actions by regulators that, if undertaken, could have a material
effect on the Company's financial statements. Under capital adequacy guidelines
and the regulatory framework for prompt corrective action, the Company and the
Bank must meet specific capital guidelines that involve quantitative measures of
the assets, liabilities, and certain off-balance-sheet items as calculated under
regulatory accounting practices. The capital amounts and classifications are
also subject to qualitative judgements by the regulators about components, risk
weightings, and other factors.
34
<PAGE>
M & M FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 19 - CAPITAL REQUIREMENTS - continued
Quantitative measures established by regulation to ensure capital adequacy
require the Company and 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 Company consists of
common stockholders' equity, excluding the unrealized gain or loss on securities
available-for-sale, minus certain intangible assets. The Company'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 Company and the Bank are 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, 1997, 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 Company and the Bank
and the regulatory minimum requirements at December 31, 1997 and 1996:
<TABLE>
<CAPTION>
To Be Well
Capitalized Under
For Capital Prompt Corrective
Actual Adequacy Purpose Action Provisions
--------------------- -------------------- -----------------
(Dollars in thousands) Amount Ratio Amount Ratio Amount Ratio
---------- ------- ---------- ------- ---------- ------
December 31, 1997
The Company
<S> <C> <C> <C> <C> <C> <C>
Total capital (to risk weighted assets) $ 12,366 10.81% $ 9,154 8.0% $ N/A -%
Tier 1 capital (to risk weighted assets) 11,440 10.00 4,577 4.0 N/A -
Tier 1 capital (to average assets) 11,440 7.32 6,254 4.0 N/A -
The Bank
Total capital (to risk weighted assets) 12,136 10.60 9,156 8.0 11,445 10.0
Tier 1 capital (to risk weighted assets) 11,209 9.79 4,578 4.0 6,867 6.0
Tier 1 capital (to average assets) 11,209 7.19 6,235 4.0 7,794 5.0
December 31, 1996
The Company
Total capital (to risk weighted assets) $ 11,708 13.29% $ 7,047 8.0% $ N/A -%
Tier 1 capital (to risk weighted assets) 10,681 12.13 3,524 4.0 N/A -
Tier 1 capital (to average assets) 10,681 8.04 5,315 4.0 N/A -
The Bank
Total capital (to risk weighted assets) 11,403 13.00 7,016 8.0 8,771 10.0
Tier 1 capital (to risk weighted assets) 10,376 11.82 3,508 4.0 5,262 6.0
Tier 1 capital (to average assets) 10,376 7.76 5,307 4.0 6,634 5.0
</TABLE>
NOTE 20 - ANNUAL FINANCIAL DISCLOSURE STATEMENT BY THE OCC
This statement has not been reviewed or confirmed for accuracy or relevance by
the Office of the Comptroller of the Currency. This disclosure is furnished
pursuant to 12 CFR, part 18 of the OCC's rules and regulations.
35
<PAGE>
M & M FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 21- M & M Financial Corporation (PARENT COMPANY ONLY)
Condensed financial statements for M & M Financial Corporation (Parent Company
Only) as of December 31, 1997 and 1996 and for the years ended December 31,
1997, 1996, and 1995 follow:
BALANCE SHEETS
<TABLE>
<CAPTION>
1997 1996
----------- -----------
Assets
<S> <C> <C>
Cash and cash equivalents ...................................................... $ 164,128 $ 145,015
Investment in subsidiaries ..................................................... 11,422,519 10,419,431
Securities available-for-sale .................................................. 189,914 321,816
Other assets ................................................................... 67,967 33,374
----------- -----------
Total assets .......................................................... $11,844,528 $10,919,636
=========== ===========
Liabilities and Stockholders' Equity
Liabilities .................................................................... $ 156,170 $ 97,924
----------- -----------
Total stockholders' equity ..................................................... 11,688,358 10,821,712
----------- -----------
Total liabilities and stockholders' equity ............................ $11,844,528 $10,919,636
=========== ===========
</TABLE>
STATEMENTS OF INCOME
<TABLE>
<CAPTION>
1997 1996 1995
---------- ---------- ----------
Income:
<S> <C> <C> <C>
Dividends from subsidiaries ................................................ $ 117,380 $ 360,372 $ 359,991
Gain on sale of securities ................................................. 258,343 - -
Other income ............................................................... 4,716 14,835 20,642
---------- ---------- ----------
380,439 375,207 380,633
Expenses ..................................................................... 1,201 995 4,225
---------- ---------- ----------
Income before income taxes and equity in undistributed
earnings of subsidiaries ................................................... 379,238 374,212 376,408
Income tax provision ......................................................... 90,000 - 5,581
---------- ---------- ----------
Income before equity in undistributed earnings of subsidiaries ............... 289,238 374,212 370,827
Equity in undistributed earnings of subsidiaries ............................. 838,164 484,551 221,991
---------- ---------- ----------
Net income ................................................................... $1,127,402 $ 858,763 $ 592,818
========== ========== ==========
</TABLE>
36
<PAGE>
M & M FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 21 - M & M Financial Corporation (PARENT COMPANY ONLY) - continued
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
1997 1996 1995
----------- ----------- -----------
Operating activities:
<S> <C> <C> <C>
Net income ........................................................... $ 1,127,402 $ 858,763 $ 592,818
Adjustments to reconcile net income to net cash
provided by operating activities
Equity in undistributed earnings of subsidiaries ................. (838,164) (484,551) (221,991)
Gain from sale of securities ..................................... (258,343) - -
(Increase) decrease in other assets ............................. (34,593) - 18,546
Increase in liabilities .......................................... 93,788 - -
----------- ----------- -----------
Net cash provided by operating activities ................... 90,090 374,212 389,373
----------- ----------- -----------
Investing activities:
Proceeds from sale of premises ....................................... - - 29,346
Purchase of securities available-for-sale ............................ (4,716) (4,113) (8,074)
Proceeds from sale of securities available-for-sale .................. 302,648 - -
----------- ----------- -----------
Net cash provided (used) by investing activities ............ 297,932 (4,113) 21,272
----------- ----------- -----------
Financing activities:
Cash dividends paid .................................................. (368,909) (335,372) (301,835)
----------- ----------- -----------
Net cash used by financing activities ....................... (368,909) (335,372) (301,835)
----------- ----------- -----------
Net increase in cash and cash equivalents .............................. 19,113 34,727 108,810
Cash and cash equivalents, beginning of year ........................... 145,015 110,288 1,478
----------- ----------- -----------
Cash and cash equivalents, end of year ................................. $ 164,128 $ 145,015 $ 110,288
=========== =========== ===========
</TABLE>
NOTE 22 - FAIR VALUE OF FINANCIAL INSTRUMENTS
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 Cash Equivalents - The carrying amount is a reasonable estimate of 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 certain
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.
37
<PAGE>
M & M FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 22 - FAIR VALUE OF FINANCIAL INSTRUMENTS - continued
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 and other time deposits 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.
Advances from the Federal Home Loan Bank - The fair values are estimated using a
discounting cash flow calculation that applies the Company's current borrowing
rate from the Federal Home Loan Bank.
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.
The carrying values and estimated fair values of the Company's financial
instruments as of December 31, 1997 and December 31, 1996 are as follows:
<TABLE>
<CAPTION>
December 31, 1997 December 31, 1996
------------------------------ --------------------------------
Carrying Estimated Carrying Estimated
Amount Fair Value Amount Fair Value
------------- ------------- ------------- -------------
Financial Assets:
<S> <C> <C> <C> <C>
Cash and cash equivalents ........................... $ 9,342,281 $ 9,342,281 $ 7,963,828 $ 7,963,828
Time deposits with other banks ...................... 300,000 300,000 800,000 800,000
Securities available-for-sale ....................... 29,901,275 29,901,275 34,997,823 34,997,823
Securities held-to-maturity ......................... 2,973,837 3,031,496 3,344,422 3,463,852
Loans ............................................... 105,427,377 105,335,377 80,922,947 80,596,947
Allowance for loan losses ........................... (926,635) (926,635) (1,027,355) (1,027,355)
Accrued interest receivable ......................... 1,256,335 1,256,335 1,207,411 1,207,411
Financial Liabilities:
Demand deposit, interest-bearing transaction,
and savings accounts .............................. $ 69,243,383 $ 69,243,383 $ 56,502,438 $ 56,502,438
Time deposits ....................................... 61,238,686 61,583,686 50,970,568 51,013,568
Short-term borrowings ............................... 2,461,432 2,461,432 9,083,374 9,083,374
Advance from the Federal Home Loan Bank ............. 10,000,000 10,000,000 5,000,000 5,000,000
Accrued interest payable ............................ 1,834,397 1,834,397 933,401 933,401
Off-Balance Sheet Financial Instruments
Commitments to extend credit ........................ $ 18,033,790 $ 18,033,790 $ 17,682,492 $ 17,682,492
</TABLE>
NOTE 23 - RECENTLY ISSUED ACCOUNTING STANDARDS
In June 1997, the FASB released SFAS 130, "Reporting Comprehensive Income." SFAS
130 requires that all items that are required to be recognized under accounting
standards as components of comprehensive income be reported in a financial
statement that is displayed with the same prominence as other financial
statements. Comprehensive income is the change in equity of a business during a
period from transactions and other events and circumstances from nonowner
sources and excludes investments by owners and distributions to owners.
Comprehensive income consists of two components, net income and other
comprehensive income. Other comprehensive income includes, among other things,
the change in the unrealized gain or loss on securities available-for-sale.
This statement is effective for fiscal years beginning after December 15, 1997.
Reclassification of financial statements for earlier periods provided for
comparative purposes is required.
38
Subsidiaries of the Registrant
First National South
Marion National Investment Corporation
<TABLE> <S> <C>
<ARTICLE> 9
<LEGEND>
This schedule contains summary information extracted from the Consolidated
Balance Sheet at December 31, 1997 and the Consolidated Statement of Income for
the year Ended December 31, 1997 and is qualified in its entirety by reference
to such financial statements.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-END> DEC-31-1997
<CASH> 7,822
<INT-BEARING-DEPOSITS> 1,820
<FED-FUNDS-SOLD> 0
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 29,901
<INVESTMENTS-CARRYING> 2,974
<INVESTMENTS-MARKET> 3,031
<LOANS> 105,427
<ALLOWANCE> 927
<TOTAL-ASSETS> 156,271
<DEPOSITS> 130,482
<SHORT-TERM> 8,461
<LIABILITIES-OTHER> 1,639
<LONG-TERM> 4,000
0
0
<COMMON> 5,031
<OTHER-SE> 6,658
<TOTAL-LIABILITIES-AND-EQUITY> 156,271
<INTEREST-LOAN> 9,094
<INTEREST-INVEST> 2,264
<INTEREST-OTHER> 197
<INTEREST-TOTAL> 11,556
<INTEREST-DEPOSIT> 4,575
<INTEREST-EXPENSE> 5,418
<INTEREST-INCOME-NET> 6,137
<LOAN-LOSSES> 800
<SECURITIES-GAINS> 266
<EXPENSE-OTHER> 5,628
<INCOME-PRETAX> 1,630
<INCOME-PRE-EXTRAORDINARY> 1,630
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 1,127
<EPS-PRIMARY> 1.12
<EPS-DILUTED> 1.12
<YIELD-ACTUAL> 4.57
<LOANS-NON> 473
<LOANS-PAST> 0
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 1,006
<ALLOWANCE-OPEN> 1,027
<CHARGE-OFFS> 959
<RECOVERIES> 59
<ALLOWANCE-CLOSE> 927
<ALLOWANCE-DOMESTIC> 927
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 0
</TABLE>
