Index to Financial Statements
King George State Bank, Inc.
PAGE
AUDITED FINANCIAL STATEMENTS:
Independent Auditor's Report...............................................F-2
Balance Sheets as of December 31, 1995 and 1994............................F-3
Statements of Operations for the Two Years Ended
December 31, 1995 and 1994......................................F-5
Statements of Changes in Stockholders' Equity for the Two
Years Ended December 31, 1995 and 1994..........................F-6
Statements of Cash Flows for the Two Years Ended
December 31, 1995 and 1994......................................F-7
Notes to Financial Statements..............................................F-9
UNAUDITED INTERIM FINANCIAL STATEMENTS:
Balance Sheet as of March 31, 1996.........................................F-19
Statements of Operations for the Three Months Ended
March 31, 1996 and 1995.........................................F-20
Statements of Charges in Stockholders' Equity for the
Three Months Ended March 31, 1996 and 1995......................F-21
Statements of Cash Flows for the Three Months Ended
March 31, 1996 and 1995.........................................F-22
Notes to Interim Financial Statements......................................F-24
F-1
INDEPENDENT AUDITORS' REPORT
Stockholders and Directors
King George State Bank, Inc.
King George, Virginia
We have audited the accompanying balance sheets of King George State Bank,
Inc. as of December 31, 1995 and 1994, and the related statements of income,
changes in stockholders' equity and cash flows for each of the three years in
the three year period ended December 31, 1995. These financial statements are
the responsibility of the Bank's management. Our responsibility is to express an
opinion on these financial statements based on our audit.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audits to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of King George State Bank, Inc.
as of December 31, 1995 and 1994, and the results of its operations and its cash
flows for each of the three years in the three year period ended December 31,
1995 in conformity with generally accepted accounting principles.
SMITH & EGGLESTON, P.C.
February 16, 1996
F-2
KING GEORGE STATE BANK, INC.
BALANCE SHEETS
DECEMBER 31, 1995 AND 1994
A S S E T S
1995 1994
----------- --------
CASH AND DUE FROM BANKS $ 1,805,084 $ 1,214,097
INVESTMENT SECURITIES: (Approximate market
value of $9,497,346 and $12,245,673 for
1995 and 1994, respectively)
(Notes 1, 2 & 16) 9,450,258 12,831,041
FEDERAL FUNDS SOLD (Note 16) 600,000 1,200,000
LOANS: (Net of allowance for loan losses
of $303,160 and $376,219 for 1995 and
1994, respectively) (Notes 1, 3 & 16) 32,696,362 30,589,695
PREMISES AND EQUIPMENT (Notes 1 & 11) 679,571 687,420
OTHER REAL ESTATE OWNED (Note 8) 331,711 416,633
OTHER ASSETS (Note 5) 1,098,033 1,061,804
----------- ----------
Total Assets $46,661,019 $48,000,690
=========== ===========
F-3
L I A B I L I T I E S A N D S T O C K H O L D E R S ' E Q U I T Y
1995 1994
----------- --------
DEPOSITS: (Note 16)
Demand $ 5,629,172 $ 5,791,472
NOW accounts 2,190,244 2,346,526
Money Market accounts 2,961,813 3,646,034
Savings 9,436,386 14,760,000
Time, $100,000 and over 7,463,411 4,907,847
Other time 13,722,267 11,747,806
----------- -----------
Total Deposits $41,403,293 $43,199,685
OTHER LIABILITIES (Note 6) 867,380 808,050
----------- -----------
Total Liabilities $42,270,673 $44,007,735
----------- -----------
COMMITMENTS AND CONTINGENCIES (Note 10)
STOCKHOLDERS' EQUITY:
Capital stock - par value $6 per share:
Authorized - 200,000 shares
Issued and outstanding - 50,000 shares $ 300,000 $ 300,000
Surplus 300,000 300,000
Retained earnings 3,783,594 3,392,955
Unrealized gain on securities available-
for-sale (Note 2) 6,752 -
----------- -----------
Total Stockholders' Equity $ 4,390,346 $ 3,992,955
----------- -----------
Total Liabilities and Stockholders' Equity $46,661,019 $48,000,690
=========== ===========
See Notes To Financial Statements
F-4
KING GEORGE STATE BANK, INC.
STATEMENTS OF INCOME
YEARS ENDED DECEMBER 31, 1995, 1994, AND 1993
1995 1994 1993
---------- ---------- -------
INTEREST INCOME:
Interest and fees on loans $2,977,761 $2,591,485 2,738,209
Interest on investment
securities:
Obligations of the U. S.
government and its
agencies and corporations 265,075 343,557 221,575
Obligations of states and
political subdivisions 168,123 129,228 91,616
Other securities 169,222 197,897 173,100
Interest on federal funds sold 32,435 52,892 178,296
---------- ---------- ----------
Total Interest Income $3,612,616 $3,315,059 $3,402,796
Interest on deposits 1,572,611 1,380,369 1,669,951
---------- ---------- ----------
Net Interest Income $2,040,005 $1,934,690 $1,732,845
PROVISION FOR LOAN LOSSES
(Notes 1 & 3) 403,000 505,000 351,357
---------- ---------- ----------
Net Interest Income After
Provision For Loan Losses $1,637,005 $1,429,690 $1,381,488
NONINTEREST INCOME (Note 12) 176,346 175,862 166,189
---------- ---------- ----------
$1,813,351 $1,605,552 $1,547,677
---------- ---------- ----------
OPERATING EXPENSES:
Salaries and employee benefits $ 550,465 $ 464,415 $ 356,190
Occupancy 107,519 95,496 91,929
Equipment 43,470 29,474 60,738
Other 375,426 346,110 346,536
FDIC insurance 61,418 106,682 103,405
---------- ---------- ----------
$1,138,298 $1,042,177 $ 958,798
---------- ---------- ----------
Income Before Income Tax $ 675,053 $ 563,375 $ 588,879
PROVISION FOR INCOME TAX
(Note 7) 169,414 125,502 227,523
---------- ---------- ----------
Net Income $ 505,639 $ 437,873 $ 361,356
========== ========== ==========
Earnings per share (Note 1) $ 10.11 $ 8.76 $ 7.23
========== ========== ==========
See Notes To Financial Statements
F-5
KING GEORGE STATE BANK, INC.
STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
YEARS ENDED DECEMBER 31, 1995, 1994, AND 1993
Capital Retained
Stock Surplus Earnings Total
BALANCE - JANUARY 1, 1993 $ 300,000 $ 300,000 $2,816,226 $3,416,226
Dividends (Note 4) - - ( 110,000) ( 110,000)
Net income - - 361,356 361,356
--------- --------- ---------- ----------
BALANCE - DECEMBER 31, 1993 $ 300,000 $ 300,000 $3,067,582 $3,667,582
Dividends (Note 4) - - ( 112,500) ( 112,500)
Net Income - - 437,873 437,873
--------- --------- ---------- ----------
BALANCE - DECEMBER 31, 1994 $ 300,000 $ 300,000 $3,392,955 $3,992,955
Dividends (Note 4) - - ( 115,000) ( 115,000)
Net Income - - 505,639 505,639
Unrealized gains on securities
available-for-sale - - 6,752 6,752
--------- --------- ---------- ----------
BALANCE - DECEMBER 31, 1995 $ 300,000 $ 300,000 $3,790,346 $4,390,346
========= ========= ========== ==========
See Notes To Financial Statements
F-6
KING GEORGE STATE BANK, INC.
STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31, 1995, 1994, AND 1993
1995 1994 1993
---------- ---------- -------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 505,639 $ 437,873 $ 361,356
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation and amortization 78,957 74,947 58,093
Provision for loan losses 403,000 505,000 351,357
Amortization of premium on investment
securities 46,106 59,691 56,924
Gain (loss) on sale of investment
securities 7,395 ( 517) ( 746)
Changes in assets and liabilities:
(Increase) in cash value of life
insurance ( 17,451) ( 45,079) ( 31,872)
Decrease in deferred income taxes 29,658 29,565 100,073
(Increase) decrease in interest
receivable ( 42,894) 10,258 ( 67,944)
(Increase) in prepaid expenses ( 9,746) ( 5,437) 12,060
(Increase) decrease in accounts
receivable - other 726 159 ( 40,235)
Increase (decrease) in interest
payable on deposits 29,201 51,054 ( 83,864)
Increase in deferred compensation
liability 23,930 55,597 73,823
Increase in accounts payable 6,199 12,106 1,299
(Decrease) in income tax payable - - ( 19,902)
---------- ---------- ----------
Net Cash Provided by Operating
Activities $1,060,720 $1,185,217 $ 770,422
---------- ---------- ----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Net (increase) in loans ($2,509,667) ($2,056,911) ($2,956,626)
Purchase of held-to-maturity securities ( 950,151) ( 2,266,972) ( 7,697,849)
Proceeds from maturities of held-to-
maturity securities 4,254,026 868,882 1,485,923
Purchase of available-for-sale securities ( 100,000) - -
Proceeds from sale of securities 133,637 - -
Changes in federal funds sold - net 600,000 1,265,000 6,715,000
Purchase of equipment ( 71,108) ( 76,853) ( 141,626)
Purchase of other real estate ( 66,991) ( 297,116) ( 90,971)
Proceeds from sale of foreclosed
real estate 151,913 238,283 404,912
---------- ---------- ----------
Net Cash Provided by (Used in)
Investing Activities $1,441,659 ($2,325,687) ($2,281,237)
---------- ---------- ----------
See Notes To Financial Statements
F-7
KING GEORGE STATE BANK, INC.
STATEMENTS OF CASH FLOWS
(CONTINUED)
YEARS ENDED DECEMBER 31, 1995, 1994, AND 1993
1995 1994 1993
---------- ---------- -------
CASH FLOWS FROM FINANCING ACTIVITIES:
Increase (decrease) in deposits - net ($1,796,392) $ 815,964 $2,169,535
Dividends paid ( 115,000) ( 112,500) ( 110,000)
---------- ---------- ----------
Net Cash Provided by (Used in)
Financing Activities ($1,911,392) $ 703,464 $2,059,535
---------- ---------- ----------
Net Increase (Decrease) in Cash
and Due from Banks $ 590,987 ($ 437,006) $ 548,720
CASH AND DUE FROM BANKS - BEGINNING OF YEAR 1,214,097 1,651,103 1,102,383
---------- ---------- ----------
CASH AND DUE FROM BANKS - END OF YEAR $1,805,084 $1,214,097 $1,651,103
========== ========== ==========
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash paid during the year for:
Interest $1,543,409 $1,329,316 $1,753,815
Income taxes 138,463 123,390 187,569
See Notes To Financial Statements
F-8
KING GEORGE STATE BANK, INC.
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1995
NOTE 1: SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
HISTORY AND ORGANIZATION
King George State Bank, Inc., a Virginia corporation, provides general
commercial banking services to individuals and businesses primarily within King
George County, Virginia and surrounding communities. It is a member of the
Federal Reserve System and the Federal Deposit Insurance Corporation and is also
subject to the regulations of certain Federal and State agencies. It undergoes
periodic examinations by regulatory authorities.
USE OF ESTIMATES
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenues and expenses during the reporting period.
Actual results could differ from those estimates.
INVESTMENT SECURITIES
Debt securities that management has the ability and intent to hold to maturity
are classified as held-to-maturity and carried at cost, adjusted for
amortization of premiums and accretion of discounts, computed by the interest
method. Other marketable securities are classified as available-for-sale and are
carried at fair value. Unrealized gains and losses on securities
available-for-sale are recognized as direct increases or decreases in
stockholders' equity. The cost of securities sold is recognized using the
specific identification method.
MORTGAGE BACKED SECURITIES
Mortgage-backed securities represent participating interests in pools of
long-term first mortgage loans originated and serviced by issuers of the
securities. Mortgage-backed securities are carried at unpaid principal balances,
adjusted for unamortized premiums and unearned discounts. Premiums and discounts
are amortized using methods approximating the interest method over the remaining
period to contractual maturity, adjusted for anticipated prepayments. Mortgage
backed securities that management has the ability and intent to hold to maturity
are classified as held-to-maturity. Other mortgage backed securities are
classified as available-for-sale and are carried at fair value. Should any be
sold, cost of securities sold is determined using the specific identification
method.
LOANS AND ALLOWANCE FOR LOAN LOSSES
Loans are stated at the amount of unpaid principal, reduced by unearned discount
and an allowance for loan losses. Unearned discount on installment loans is
recognized as income over the terms of the loans. Interest on other loans is
calculated by using the simple interest method on daily balances of the
principal amount outstanding. The allowance for loan losses is maintained at a
level which, in management's judgment, is adequate to absorb credit losses
inherent in the loan portfolio. The amount of the allowance is based on
management's evaluation of the
F-9
KING GEORGE STATE BANK, INC.
NOTES TO FINANCIAL STATEMENTS
(CONTINUED)
DECEMBER 31, 1995
NOTE 1: SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES: (Continued)
LOANS AND ALLOWANCE FOR LOAN LOSSES (Continued)
collectibility of the loan portfolio, including the nature of the portfolio,
credit concentrations, trends in historical loss experience, specific impaired
loans, and economic conditions. Allowances for impaired loans are generally
determined based on collateral values or the present value of estimated cash
flows. The allowance is increased by a provision for loan losses, which is
charged to expense and reduced by charge-offs, net of recoveries. Changes in the
allowance relating to impaired loans are charged or credited to the provision
for loan losses. Because of uncertainties inherent in the estimation process,
management's estimate of credit losses inherent in the loan portfolio and the
related allowance may change in the near term. Accrual of interest is
discontinued on a loan when management believes, after considering economic and
business conditions and collection efforts, that the borrower's financial
condition is such that collection of interest is doubtful.
PREMISES AND EQUIPMENT
The premises and equipment is recorded at cost. Depreciation is based on
estimated useful service lives and is computed on the straight-line method.
CASH FLOW INFORMATION
The statement of cash flows reconciles net income with the change in cash and
due from banks. The indirect method has been used. For purposes of reporting
cash flows, cash and due from banks includes cash on hand and amounts due from
banks.
EARNINGS PER SHARE
Earnings per share are calculated on the basis of the weighted average number of
shares outstanding.
LOAN COSTS
Loan fees and certain direct loan origination costs of completed loans are
deferred and recognized as an adjustment of the yields on related loans over the
lives of the loans.
INCOME TAXES
In 1993, the Bank adopted FASB Statement 109, Accounting for Income Taxes, which
requires an assets and liability approach to financial accounting and reporting
for income taxes. Income taxes are provided for the tax effects of transactions
reported in the financial statements and consist of taxes currently due plus
deferred taxes related primarily to differences between the basis of the
allowance for loan losses, premises and equipment, deferred loan costs and
deferred compensation liability for financial and income tax reporting. The
deferred tax assets and liabilities represent the future tax return consequences
of those differences, which will either be taxable or deductible when the assets
and liabilities are recovered or settled. Income tax expense is the tax payable
or refundable for the year plus or minus the change for the year in deferred tax
assets and liabilities.
F-10
KING GEORGE STATE BANK, INC.
NOTES TO FINANCIAL STATEMENTS
(CONTINUED)
DECEMBER 31, 1995
NOTE 1: SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES: (Continued)
FORECLOSED REAL ESTATE
Foreclosed real estate includes both formally foreclosed property and
in-substance foreclosed property. In-substance foreclosed properties are those
properties for which the Bank has taken physical possession, regardless of
whether formal foreclosure proceedings have taken place.
At the time of foreclosure, foreclosed real estate is recorded at the lower of
the Bank's cost or the asset's fair value, less estimated costs to sell, which
becomes the property's new basis. Any write-downs based on the asset's fair
value at date of acquisition are charged to the allowance for loan losses. Costs
incurred in maintaining foreclosed real estate and subsequent write-downs to
reflect declines in the fair value of the property are included in income (loss)
on foreclosed real estate.
RECLASSIFICATIONS
Certain previously reported amounts have been reclassified to conform to current
presentations.
NOTE 2: INVESTMENT SECURITIES:
Securities held-to-maturity at December 31, 1995 consist of the following:
Gross Gross
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
U. S. Government and
federal agencies $ 500,000 $ - $ 30,000 $ 470,000
State and local governments 2,824,417 32,887 10,785 2,846,519
Mortgage-backed securities 8,384 37 220 8,201
Corporate debt securities 2,653,317 58,675 3,506 2,708,486
---------- ---------- ---------- -----------
$5,986,118 $ 91,599 $ 44,511 $ 6,033,206
========== ========== ========== ===========
Securities available-for-sale at December 31, 1995 consist of the following:
Gross Gross
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
U. S. Government and
federal agencies $3,290,964 $ 13,356 $ 8,050 $ 3,296,270
Mortgaged-backed securities 83,987 4,924 - 88,911
---------- ---------- ---------- -----------
$3,374,951 $ 18,280 $ 8,050 $ 3,385,181
Other equity securities 78,959 - - 78,959
---------- ---------- ---------- -----------
$3,453,910 $ 18,280 $ 8,050 $ 3,464,140
========== ========== ========== ===========
F-11
KING GEORGE STATE BANK, INC.
NOTES TO FINANCIAL STATEMENTS
(CONTINUED)
DECEMBER 31, 1995
NOTE 2: INVESTMENT SECURITIES: (Continued)
The total net unrealized gain on available-for-sale securities of $10,230 is
reported as an increase of retained earnings of $6,752 (net of $3,478 deferred
income tax). The carrying amounts of investments at December 31, 1995 are as
follows:
Held-to-maturity $5,986,118
Available-for-sale 3,464,140
$9,450,258
Securities held-to-maturity at December 31, 1994 consist of the following:
Gross Gross
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
U. S. Government and
federal agencies $ 6,764,166 $ - $ 338,481 $ 6,425,685
State and local governments 2,624,532 3,736 143,455 2,484,813
Mortgaged-backed securities 125,779 1,955 1,260 126,474
Corporate debt securities 3,236,464 - 102,763 3,133,701
----------- ---------- ---------- -----------
$12,750,941 $ 5,691 $ 585,959 $12,170,673
=========== ========== ========== ===========
Securities available-for-sale at December 31, 1994 consist of the following:
Gross Gross
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
Other equity securities $ 80,100 $ - $ - $ 80,100
=========== ========== ========== ===========
U. S. Government and government backed obligations with a carrying amount of
$1,679,956 are pledged to secure municipality and treasury tax and loan deposits
as of December 31, 1995.
The schedule below reflects the maturities of investment securities at December
31, 1995. The classification of mortgage-backed securities was based on expected
maturities, while contractual maturities were used for other debt securities.
Expected maturities differ from contractual maturities because borrowers may
have the right to call or prepay obligations with or without call or prepayment
penalties.
F-12
KING GEORGE STATE BANK, INC.
NOTES TO FINANCIAL STATEMENTS
(CONTINUED)
DECEMBER 31, 1995
NOTE 2: INVESTMENT SECURITIES: (Continued)
Securities Securities
Held-to-Maturity Available-for-Sale
Amortized Fair Amortized Fair
Cost Value Cost Value
Due in one year or less $ 900,781 $ 903,438 $ 452,655 $ 452,235
Due after one year through
five years 4,154,539 4,187,864 2,838,309 2,844,035
Due after five years through
ten years 812,459 823,908 - -
Due after ten years 109,955 109,795 - -
Mortgage-backed securities 8,384 8,201 83,987 88,911
Equity securities - - 78,959 78,959
---------- ---------- ---------- -----------
$5,986,118 $6,033,206 $3,453,910 $ 3,464,140
========== ========== ========== ===========
NOTE 3: LOANS AND ALLOWANCE FOR LOAN LOSSES:
Major classifications of loans are as follows:
1995 1994
----------- --------
Monthly real estate $ 6,871,847 $ 6,259,413
Construction 1,151,264 1,411,330
Collateral 19,930,743 16,960,457
Installment 3,348,455 3,108,029
Plain 1,663,911 3,158,683
Demand - 20,000
Capitalized loan costs 47,151 69,239
----------- -----------
$33,013,371 $30,987,151
Unearned income ( 13,849) ( 21,237)
----------- -----------
$32,999,522 $30,965,914
Allowance for loan losses ( 303,160) ( 376,219)
----------- -----------
Loans - net $32,696,362 $30,589,695
=========== ===========
Loans on which the accrual of interest has been discontinued or reduced amounted
to $73,250 and $646,437 at December 31, 1995 and 1994, respectively. Certain
directors and officers were indebted to the Bank in the aggregate amounts of
$520,078 and $604,569 as of December 31, 1995 and 1994, respectively. During the
year ended December 31, 1995, new loans made to related parties totaled $53,000
and repayments totaled $137,491.
F-13
KING GEORGE STATE BANK, INC.
NOTES TO FINANCIAL STATEMENTS
(CONTINUED)
DECEMBER 31, 1995
NOTE 3: LOANS AND ALLOWANCE FOR LOAN LOSSES: (Continued)
An analysis of the changes in the allowance for loan losses follows:
1995 1994
---------- ----------
Balance - beginning of year $ 376,219 $ 405,924
Additions:
Provision charged to operations 403,000 505,000
Recoveries of loans charged off
in prior years 51,631 76,969
---------- ----------
$ 830,850 $ 987,893
Deduction:
Loans charged off 527,690 611,674
---------- ----------
Balance - end of year $ 303,160 $ 376,219
========== ==========
NOTE 4: DIVIDENDS:
Dividends were declared at the rate of $2.30, $2.25 and 2.20 per share in 1995,
1994 and 1993, respectively.
NOTE 5: OTHER ASSETS:
Other assets consist of the following:
1995 1994
---------- ----------
Loan interest receivable $ 481,741 $ 393,776
Deferred income tax 135,322 168,458
Cash value of life insurance 253,235 235,784
Accounts receivable - other 39,350 40,076
Prepaid expenses and other 44,912 35,166
Interest receivable on investments 143,473 188,544
---------- ----------
$1,098,033 $1,061,804
NOTE 6: OTHER LIABILITIES:
Other liabilities consist of the following:
1995 1994
---------- ----------
Interest payable on deposits $ 138,750 $ 109,548
Deferred compensation liability 697,271 673,341
Accounts payable 31,359 25,161
---------- ----------
$ 867,380 $ 808,050
========== ==========
F-14
KING GEORGE STATE BANK, INC.
NOTES TO FINANCIAL STATEMENTS
(CONTINUED)
DECEMBER 31, 1995
NOTE 7: INCOME TAX:
The provision for income tax consists of the following:
1995 1994 1993
---------- ---------- ----------
Current $ 139,756 $ 95,937 $ 127,432
Deferred 29,658 29,565 100,091
---------- ---------- ----------
$ 169,414 $ 125,502 $ 227,523
========== ========== ==========
The following reconciles income taxes reported in the financial statements to
taxes that would be obtained by applying regular tax rates to net income before
income taxes.
1995 1994 1993
---------- ---------- ----------
Income tax at statutory rate $ 229,518 $ 191,548 $ 200,219
(Decrease) resulting from:
Tax exempt income ( 57,162) ( 43,938) ( 29,229)
Other ( 2,942) ( 22,108) 33,909
Effect of change in accounting
principle - - 22,624
---------- ---------- ----------
$ 169,414 $ 125,502 $ 227,523
========== ========== ==========
Deferred tax assets have been provided for deductible temporary differences
related to deferred compensation. Deferred tax liabilities have been provided
for taxable temporary differences related to the allowance for loan losses,
premises and equipment, capitalized loan costs, and available for sale
investments. The net deferred tax assets in the accompanying statements of
financial condition include the following components:
1995 1994
---------- -------
Deferred tax assets $ 237,072 $ 228,936
Deferred tax liabilities ( 101,750) ( 60,478)
---------- ----------
$ 135,322 $ 168,458
========== ==========
NOTE 8: OTHER REAL ESTATE OWNED:
Other real estate owned reflects properties acquired during foreclosure sales in
order to protect the Bank's interests after the secured notes were in default.
The properties are valued at the lower of their fair market value or the
recorded investment in the related loan.
F-15
KING GEORGE STATE BANK, INC.
NOTES TO FINANCIAL STATEMENTS
(CONTINUED)
DECEMBER 31, 1995
NOTE 9: DIRECTORS' BENEFIT PLAN:
The Bank maintains a voluntary deferred compensation program which permits
eligible directors and officers to defer receipt of a portion of their
directors' fees. There are 10 eligible participants and 7 have elected to
participate. The Bank has purchased life insurance on all of the participants in
amounts that, in the aggregate, actuarially fund its future liabilities under
this program, and it is the owner and sole beneficiary of all such insurance.
The program has been designed so that, if assumptions as to mortality
experience, policy dividends, tax effects, and other factors are realized, the
compensation deferred by a participant and the death benefits payable to the
Bank under the insurance policies will cover all premium payments and benefit
payments, plus a factor for the use of funds of the Bank.
While the insurance policies were purchased as a means of funding the deferred
compensation liability created under this plan, there exists no obligation to
use any insurance funds from policy loans or death proceeds to curtail the
deferred compensation liability. Under the terms of the directors' benefit plan,
a participant, or his beneficiary, will receive upon retirement a monthly
retirement payment for life, payable for a minimum of 15 years. The plan also
provides for a reduced payment to a participant's beneficiary in the event that
the participant dies prior to retirement, payable for a period of 15 years from
the date of death. A participant's retirement date is considered to be the later
of the date a participant turns age 65 or completes 10 years of plan
participation.
The deferred compensation liability as of December 31, 1995 and 1994 totaled
$697,271 and $673,341, respectively. The deferred compensation plan expense
totaled $39,643, $55,597, and $73,823 for 1995, 1994, and 1993, respectively.
The Bank began paying benefits during 1995 and $15,713 was paid to eligible
participants.
Anticipated payments for the next five years are as follows:
1996 $ 36,671
1997 39,818
1998 49,258
1999 49,258
2000 49,258
NOTE 10: COMMITMENTS AND CONTINGENT LIABILITIES:
In the normal course of business, there are various outstanding commitments and
contingent liabilities such as guarantees, commitments to extend credit, etc.,
which are not reflected in the accompanying financial statements. The Bank had
outstanding letters of credit totaling $874,044 and $993,313 at December 31,
1995 and 1994, respectively, and it does not anticipate losses as a result of
these transactions. At December 31, 1995, the Bank also had undisbursed funds
under various lines of credit and loan commitments totaling $2,041,292.
F-16
KING GEORGE STATE BANK, INC.
NOTES TO FINANCIAL STATEMENTS
(CONTINUED)
DECEMBER 31, 1995
NOTE 11: PREMISES AND EQUIPMENT:
A summary of premises and equipment at December 31, 1995 and 1994 follows:
1995 1994
---------- ----------
Land $ 206,862 $ 206,862
Building and improvements 389,598 378,123
Furniture and equipment 586,638 527,895
---------- ----------
$1,183,098 $1,112,880
Less: Accumulated depreciation 503,527 425,460
---------- ----------
$ 679,571 $ 687,420
========== ==========
NOTE 12: NONINTEREST INCOME:
Noninterest income was comprised of the following:
1995 1994 1993
---------- ---------- -------
Service charges on deposit accounts $ 136,501 $ 113,393 $ 115,268
Other service charges 33,201 50,649 39,237
Net investment securities gains
(losses) ( 7,395) 517 746
Other 12,959 10,223 9,858
Dividends - Federal Reserve stock 1,080 1,080 1,080
---------- ---------- ----------
$ 176,346 $ 175,862 $ 166,189
========== ========== ==========
NOTE 13: INVESTMENT IN SUBSIDIARY:
During 1994, the Bank formed Porays Services, Inc., a wholly owned subsidiary
organized to conduct any business authorized by a bank subsidiary. The Bank
accounts for its investment under the equity method. It contributed $5,100 to
Porays' initial capital. Net income recorded for 1995 totaled $3,959.
NOTE 14: DISCLAIMER:
This financial information has not been reviewed, or confirmed for accuracy or
relevance, by the Federal Reserve System.
NOTE 15: FINANCIAL INSTRUMENTS WITH OFF-BALANCE-SHEET RISK:
The Bank is a party to financial instruments with off-balance-sheet risk in the
normal course of business to meet the financing needs of its customers. These
financial instruments include commitments to extend credit and standby letters
of credit. These instruments involve, to varying degrees, elements of credit and
interest rate risk in excess of the amounts recognized in the statements of
financial condition.
F-17
KING GEORGE STATE BANK, INC.
NOTES TO FINANCIAL STATEMENTS
(CONTINUED)
DECEMBER 31, 1995
NOTE 15: FINANCIAL INSTRUMENTS WITH OFF-BALANCE-SHEET RISK: (Continued)
The Bank's exposure to credit loss in the event of nonperformance by the other
party to the financial instruments for commitments to extend credit and standby
letters of credit is represented by the contractual notional amount of those
instruments (see Note 10). The Bank uses the same credit policies in making
commitments and conditional obligations as it does for on-balance-sheet
instruments.
Commitments to extend credit are agreements to lend to a customer as long as
there is no violation of any condition established in the contract. Commitments
generally have fixed expiration dates or other termination clauses and may
require payment of a fee. Since many of the commitments are expected to expire
without being drawn upon, the total commitment amounts do not necessarily
represent future cash requirements. The Bank evaluates each customer's
creditworthiness on a case-by-case basis. The amount and type of collateral
obtained, if deemed necessary by the Bank upon extension of credit, varies and
is based on management's credit evaluation of the counterparty.
Standby letters of credit are conditional commitments issued by the Bank to
guarantee the performance of a customer to a third party. Standby letters of
credit generally have fixed expiration dates or other termination clauses and
may require payment of a fee. The credit risk involved in issuing letters of
credit is essentially the same as that involved in extending loan facilities to
customers. The Bank's policy for obtaining collateral, and the nature of such
collateral, is essentially the same as that involved in making commitments to
extend credit.
NOTE 16: FAIR VALUES OF FINANCIAL INSTRUMENTS:
The estimated fair values of the Bank's financial instruments are as follows:
1995 1994
---------------------- ------------------------
Carrying Fair Carrying Fair
Amount Value Amount Value
Financial Assets:
Cash and due from banks $1,805,084 $1,805,084 $1,214,097 $ 214,097
Securities available-for-sale 3,453,910 3,464,140 80,100 80,100
Securities held-to-maturity 5,986,118 6,033,206 12,750,941 12,170,673
Federal funds sold 600,000 600,000 1,200,000 1,200,000
Demand deposits 5,629,172 5,629,172 5,791,472 5,791,472
NOW accounts 2,190,244 2,190,244 2,346,526 2,346,526
Money market accounts 2,961,813 2,961,813 3,646,034 3,646,034
Savings accounts 9,436,386 9,436,386 14,760,000 14,760,000
The fair values of loans and time deposits are not presented herein as it is not
practicable to estimate the fair value without incurring excessive costs.
F-18