INDEPENDENT AUDITORS' REPORT
The Board of Directors
Bank of North America Bancorp, Inc.
and subsidiaries:
We have audited the accompanying consolidated statements of financial
condition of Bank of North America Bancorp, Inc. and subsidiaries as of December
31, 1995 and 1994, and the related consolidated statements of operations,
stockholders' equity, and cash flows for the years ended December 31, 1995, 1994
and 1993. These consolidated financial statements are the responsibility of the
Bank's management. Our responsibility is to express an opinion on these
consolidated financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of Bank of
North America Bancorp, Inc. and subsidiaries as of December 31, 1995 and 1994,
and the results of their operations and their cash flows for the years ended
December 31, 1995, 1994 and 1993, in conformity with generally accepted
accounting principles.
As discussed in note 1(d), the Bank changed its method of accounting for
investments to adopt the provisions of the Financial Accounting Standards
Board's SFAS No. 115, Accounting for Certain Investments in Debt and Equity
Securities, at December 31, 1993.
KPMG PEAT MARWICK LLP
Miami, Florida
January 11, 1996
BANK OF NORTH AMERICA BANCORP, INC., AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
DECEMBER 31,
---------------------------
1995 1994
------------ ------------
ASSETS
Cash and due from banks........................................... $ 14,605,787 $ 11,859,729
Interest bearing deposits with banks.............................. 36,423,055 7,719,762
Federal funds sold and securities purchased under agreements to
resell.......................................................... 431,000 1,127,000
Securities available for sale..................................... 100,786,529 30,629,965
Securities held to maturity....................................... -- 116,593,447
Federal Home Loan Bank of Atlanta stock........................... 2,775,000 3,225,000
Loans held for sale (approximate market value: $2,732,000 and
$26,403,000).................................................... 2,709,924 26,274,544
Loans receivable, net............................................. 376,781,652 326,222,418
Accrued interest receivable....................................... 4,026,657 3,939,323
Premises and equipment............................................ 8,210,789 8,356,578
Cost of mortgage loan servicing rights acquired................... 2,277,000 2,619,566
Other intangible assets........................................... 204,051 304,251
Foreclosed real estate............................................ 1,025,805 1,345,366
Deferred income taxes............................................. 1,502,866 2,087,828
Other assets...................................................... 2,741,408 2,567,266
------------ ------------
Total assets............................................ $554,501,523 $544,872,043
=========== ===========
LIABILITIES AND STOCKHOLDER'S EQUITY
Liabilities:
Deposits:
Non-interest bearing......................................... $ 53,749,576 $ 47,876,926
Interest bearing............................................. 439,962,733 390,808,368
------------ ------------
Total deposits.......................................... 493,712,309 438,685,294
Securities sold under agreements to repurchase.................. 820,473 5,372,769
Other borrowings................................................ 20,000,000 64,500,000
Accrued interest payable........................................ 662,203 744,901
Other liabilities............................................... 1,365,474 854,135
------------ ------------
Total liabilities....................................... 516,560,459 510,157,099
------------ ------------
Commitments and contingencies
Stockholder's equity:
Common stock, $1.00 par value. Authorized, 5,000,000 shares;
issued and outstanding 100,000 shares........................ 100,000 100,000
Additional paid-in capital...................................... 30,000,000 30,000,000
Retained earnings............................................... 8,300,443 6,122,015
Unrealized loss on securities available for sale, net........... (459,379) (1,507,071)
------------ ------------
Total stockholder's equity.............................. 37,941,064 34,714,944
------------ ------------
Total liabilities and stockholder's equity.............. $554,501,523 $544,872,043
=========== ===========
See accompanying notes to consolidated financial statements.
BANK OF NORTH AMERICA BANCORP, INC., AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE YEARS ENDED DECEMBER 31,
---------------------------------------
1995 1994 1993
----------- ----------- -----------
Interest income and fees
Loans................................................. $30,491,963 $27,035,132 $28,533,636
Short-term investments................................ 1,546,380 514,066 986,796
Securities............................................ 8,514,080 8,093,732 3,188,138
----------- ----------- -----------
Total interest income......................... 40,552,423 35,642,930 32,708,570
----------- ----------- -----------
Interest expense
Transaction accounts.................................. 3,923,685 2,549,174 2,677,321
Time deposits......................................... 16,755,725 14,297,037 14,010,768
Borrowings............................................ 2,336,889 2,245,418 383,535
----------- ----------- -----------
Total interest expense........................ 23,016,299 19,091,629 17,071,624
----------- ----------- -----------
Net interest income........................... 17,536,124 16,551,301 15,636,946
Provision for loan losses............................... 1,150,000 1,105,000 2,050,000
----------- ----------- -----------
Net interest income after provision for loan
losses...................................... 16,386,124 15,446,301 13,586,946
----------- ----------- -----------
Non-interest income
Service charges on deposits........................... 2,234,489 1,409,455 1,074,566
Mortgage servicing income (expense), net.............. 1,368,939 813,682 (5,099,847)
Gains on sales of loans, net.......................... 957,077 142,036 629,360
Securities transactions, net.......................... 136,931 25,006 1,196,882
Other................................................. 506,320 385,191 499,219
----------- ----------- -----------
Total non-interest income (expense)........... 5,203,756 2,775,370 (1,699,820)
----------- ----------- -----------
Operating expenses
Compensation and benefits............................. 8,674,567 8,029,031 7,884,864
Occupancy and equipment............................... 3,274,140 3,042,683 2,799,367
Data processing....................................... 1,022,109 866,850 934,529
Regulatory insurance and assessments.................. 1,128,452 1,084,152 1,119,894
Office expenses....................................... 994,215 812,496 745,173
Professional fees..................................... 781,507 588,150 743,432
Marketing............................................. 524,813 471,515 312,131
Other intangible amortization......................... 100,200 100,200 580,200
Other................................................. 1,798,066 1,377,485 1,272,149
----------- ----------- -----------
Total operating expenses...................... 18,298,069 16,372,562 16,391,739
----------- ----------- -----------
Income (loss) before income taxes....................... 3,291,811 1,849,109 (4,504,613)
Income tax expense (credit)............................. 1,113,383 492,588 (1,697,012)
----------- ----------- -----------
Net income (loss)....................................... $ 2,178,428 $ 1,356,521 $(2,807,601)
========== ========== ==========
See accompanying notes to consolidated financial statements.
BANK OF NORTH AMERICA BANCORP, INC., AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS
FOR THE YEARS ENDED DECEMBER 31,
--------------------------------------------
1995 1994 1993
------------- ------------ -------------
Cash flows from operating activities:
Net income (loss)............................................... $ 2,178,428 $ 1,356,521 $ (2,807,601)
Adjustments to reconcile net income (loss) to net cash provided
(used) by operating activities:
Amortization of mortgage loan servicing rights acquired....... 342,566 1,087,758 7,372,024
Other amortization and depreciation........................... 1,562,129 1,142,154 691,007
Provision for loan losses..................................... 1,150,000 1,105,000 2,050,000
Deferred tax benefit.......................................... (47,147) (68,172) (509,369)
Proceeds from loan sales of loans held for sale............... 46,422,568 7,497,081 17,566,914
Origination and purchase of loans held for sale............... (22,623,506) (12,230,459) (22,373,224)
Net realized gains on available for sale securities........... (136,931) (25,006) (1,196,882)
Net realized gains on sales of loans.......................... (957,077) (142,036) (629,360)
Changes in other assets and other liabilities:
Accrued interest receivable, current income taxes and other
assets...................................................... (261,476) 322,948 (682,535)
Accrued interest payable and other liabilities................ 428,641 67,798 (35,809)
------------ ----------- ------------
Net cash provided (used) by operating activities................ 28,058,195 113,587 (554,835)
------------ ----------- ------------
Cash flow from investing activities:
Purchase of available for sale securities....................... -- (12,192,547) (130,267,067)
Proceeds from sales of available for sale securities............ 36,744,498 6,684,402 95,745,533
Proceeds from maturities of available for sale securities....... 3,160,569 3,181,930 9,482,093
Purchases of held to maturity securities........................ -- (55,326,011) (50,350,418)
Proceeds from maturities of held to maturity securities......... 8,118,723 9,249,653 13,712,885
Net (increase) decrease in Federal Home Loan Bank of Atlanta
stock......................................................... 450,000 75,000 (179,200)
Originations of loans........................................... (124,309,814) (75,372,844) (49,830,223)
Purchase of loans............................................... (238,301) (2,071,600) (71,863,864)
Proceeds from maturities of loans............................... 71,944,569 73,910,084 91,674,222
Proceeds from sales of loans.................................... -- -- 28,034,679
Net purchases of premises and equipment......................... (870,854) (1,443,122) (2,197,221)
Proceeds from sale of foreclosed properties..................... 1,721,047 1,978,422 2,665,961
Purchases of mortgage loan servicing rights..................... -- -- (2,935,746)
------------ ----------- ------------
Net cash used by investing activities........................... (3,279,563) (51,326,633) (66,308,366)
------------ ----------- ------------
Cash flows from financing activities:
Net increase (decrease) in deposits............................. 55,027,015 17,662,165 (45,225,652)
Net increase (decrease) in securities sold under agreements to
repurchase and short term other borrowings.................... (19,052,296) 9,872,769 --
Proceeds from long term other borrowings........................ -- 30,000,000 30,000,000
Repayments of long term other borrowings........................ (30,000,000) -- --
------------ ----------- ------------
Net cash provided (used) by financing activities................ 5,974,719 57,534,934 (15,225,652)
------------ ----------- ------------
Net increase (decrease) in cash and cash equivalents............ 30,753,351 6,321,888 (82,088,853)
Cash and cash equivalents at beginning of year.................... 20,706,491 14,384,603 96,473,456
------------ ----------- ------------
Cash and cash equivalents at end of year.......................... $ 51,459,842 $ 20,706,491 $ 14,384,603
============ =========== ============
Supplemental disclosures of cash flow information:
Cash paid during the year for:
Interest...................................................... $ 23,098,997 $ 18,713,682 $ 17,018,377
============ =========== ============
Income taxes.................................................. $ 1,144,000 $ 550,000 $ --
============ =========== ============
Supplemental non-cash investing and financing information:
Transfers to foreclosed real estate............................. $ 2,420,335 $ 3,100,660 $ 2,126,810
============ =========== ============
Transfers to loans held for sale................................ $ (246,635) $ 21,399,130 $ (10,407,627)
============ =========== ============
Transfers to securities available for sale...................... $ 108,248,811 $ -- $ 4,848,166
============ =========== ============
Reclassification of allowance for purchased loans to discount
and premium (See Note 1(e))................................... $ -- $ 2,400,000 $ --
============ =========== ============
See accompanying notes to consolidated financial statements.
BANK OF NORTH AMERICA BANCORP, INC., AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDER'S EQUITY
FOR THE YEARS ENDED DECEMBER 31, 1995, 1994 AND 1993
UNREALIZED
GAIN (LOSS) ON
ADDITIONAL SECURITIES
COMMON PAID-IN RETAINED AVAILABLE
STOCK CAPITAL EARNINGS FOR SALE, NET TOTAL
-------- ----------- ----------- -------------- -----------
Balance at December 31, 1992..... $100,000 $30,000,000 $ 7,573,095 -- $37,673,095
Unrealized gain on securities
available for sale, net..... -- -- -- 65,598 65,598
Net loss for the year ended
December 31, 1993........... -- -- (2,807,601) -- (2,807,601)
-------- ----------- ----------- -------------- -----------
Balance at December 31, 1993..... 100,000 30,000,000 4,765,494 65,598 34,931,092
Change in unrealized loss on
securities available for
sale, net................... -- -- -- (1,572,669) (1,572,669)
Net income for the year ended
December 31, 1994........... -- -- 1,356,521 -- 1,356,521
-------- ----------- ----------- -------------- -----------
Balance at December 31, 1994..... 100,000 30,000,000 6,122,015 (1,507,071) 34,714,944
Change in unrealized loss on
securities available for
sale, net................... -- -- -- 1,047,692 1,047,692
Net income for the year ended
December 31, 1995........... -- -- 2,178,428 -- 2,178,428
-------- ----------- ----------- -------------- -----------
Balance at December 31, 1995..... $100,000 $30,000,000 $ 8,300,443 $ (459,379) $37,941,064
======== ========== ========== =========== ==========
See accompanying notes to consolidated financial statements.
BANK OF NORTH AMERICA BANCORP, INC., AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1995, 1994 AND 1993
1. BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING AND REPORTING POLICIES
(a) Principles of Consolidation
The consolidated financial statements include the accounts of Bank of North
America Bancorp, Inc. ("Company"), its wholly owned subsidiary Bank of North
America ("the Bank"), and two non-bank subsidiaries. Bank of North America is a
state-chartered commercial bank with offices in Dade, Broward and Palm Beach
Counties, Florida. The two non-bank subsidiaries are inactive. All significant
intercompany transactions and balances have been eliminated in consolidation.
(b) Basis of Financial Statement Presentation
The consolidated financial statements have been prepared in conformity with
generally accepted accounting principles and with general practices within the
banking industry. In preparing the consolidated financial statements, management
is required to make estimates and assumptions that affect the reported amounts
of assets and liabilities as of the date of the consolidated statement of
financial condition and revenues and expenses for the year. Actual results could
differ significantly from those estimates. Material estimates that are
particularly susceptible to significant change in the next year relate to the
determination of the allowance for loan losses, the carrying value of foreclosed
real estate, and the carrying value of mortgage servicing rights.
(c) Cash and Cash Equivalents
Cash and cash equivalents include cash, due from banks, interest-bearing
balances with banks, federal funds sold and securities purchased under
agreements to resell. Cash and cash equivalents have maturities, at acquisition
date, of three months or less.
(d) Securities
The Bank adopted the provisions of Statement of Financial Accounting
Standards No. 115, Accounting for Certain Investments in Debt and Equity (SFAS
No. 115) at December 31, 1993. Upon adoption of SFAS No. 115, all securities
previously classified as held for sale were designated as available for sale.
The adoption of SFAS No. 115 resulted in an increase in the carrying value of
investment securities available for sale of $105,175 and a corresponding
increase in stockholder's equity of $65,598 and in deferred tax liability of
$39,577.
Under SFAS No. 115 the Bank classifies its debt and equity securities in
one of three categories: trading, available-for-sale, or held-to-maturity.
Trading securities are bought and held principally for the purpose of selling
them in the near term. Held-to-maturity securities are those securities in which
the Bank has the ability and intent to hold the security until maturity. All
other securities not included in trading or held-to-maturity are classified as
available-for-sale.
Trading and available-for-sale securities are recorded at fair value.
Held-to-maturity securities are recorded at amortized cost, adjusted for the
amortization or accretion of premiums or discounts. Unrealized holding gains and
losses on trading securities are included in earnings. Unrealized holding gains
and losses, net of the related tax effect, on available-for-sale securities are
excluded from earnings and are reported as a separate component of stockholder's
equity until realized. Realized gains and losses from the sale of available-
for-sale securities are determined on a specific identification basis.
A decline in the market value of any available-for-sale or held-to-maturity
security below cost that is deemed other than temporary results in a reduction
in carrying amount to fair value. The impairment is charged to earnings and a
new cost basis for the security is established. Premiums and discounts are
amortized
BANK OF NORTH AMERICA BANCORP, INC., AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
or accreted over the life of the related security as an adjustment to yield
using the effective interest method. Dividend and interest income are recognized
when earned.
On November 15, 1995, the Financial Accounting Standards Board ("FASB")
issued Special Report No. 155-B, A Guide to Implementation of Statement 115 on
Accounting for Certain Investments in Debt and Equity Securities (the "Special
Report"). Pursuant to the Special Report, the Bank was permitted to conduct a
one-time reassessment of the classifications of all securities held at that
time. Any reclassifications from the held-to-maturity category made in
conjunction with that reassessment would not call into question an enterprises'
intent to hold other debt securities to maturity in the future.
The Bank undertook such a reassessment and, effective November 30, 1995,
all securities then classified as held-to-maturity were reclassified as
available for sale. On the effective date of the reclassification, the
securities transferred had a carrying value of $108,249,000 and an estimated
fair value of $107,211,000, resulting in a net reduction to stockholder's equity
for the net unrealized loss of $647,000, after deducting applicable income taxes
of $391,000.
(e) Loan Purchases, Securitization and Sales
Loans are stated at the unpaid principal balance net of unearned income and
discounts and allowance for loan losses plus prepaid dealer reserves. Loan
packages of primarily one to four family residential loans have been acquired
through Federal Deposit Insurance Corporation ("FDIC") and Resolution Trust
Corporation ("RTC") loan offerings and in private transactions. The purchase
price of these loans is determined based upon factors such as credit quality,
the type of loan product being offered and inherent market conditions at the
time of purchase. Upon the purchase of these loan packages, an allocation of the
purchase price is made among the allowance for loan losses and purchased
discount or premium.
The amount allocated to the allowance for loan losses is based on an
evaluation of the estimated discounted credit losses to be incurred for the
loans purchased. When loans are sold, gains or losses resulting from such sales
are measured by using the cost basis allocated to such loans at the time of
purchase, adjusted for amortization of premiums and accretion of discounts.
Specific allowances for loan losses, which are identified as part of loans being
sold, are included as part of the cost basis of such loans at time of sale. This
cost allocation methodology is also utilized for purchased loans which are
securitized.
Effective December 31, 1994, a comprehensive evaluation was made of the
allowance for loan losses originally established during 1993, 1992 and 1991
related to purchased one to four family residential loans. As a result of this
evaluation, which included a review of historical losses on the purchased loans,
the original estimates were revised. The effect of this change in estimate was
to reduce the allowance for loan losses on purchased loans and to increase net
unearned purchased discounts and premiums by $2,400,000. Beginning in 1995, the
increased net unearned purchased discount was amortized as an adjustment to the
related loans' yield over the estimated remaining lives of those loans.
The Bank classifies loans which it intends to sell or securitize and sell
as loans held for sale. These loans are carried at the aggregate of lower of
cost or market. At December 31, 1995, loans held for sale consisted of
originated residential loans. At December 31, 1994 loans held for sale consisted
of purchased consumer loans with a carrying value of approximately $25.8
million, and originated residential loans.
(f) Allowance for Loan Losses
The allowance for loan losses is increased by charges to income and
decreased by charge-offs (net of recoveries). Management's periodic evaluation
of the adequacy of the allowance is based on the Bank's past loan loss
experience, known and inherent risks in the portfolio, adverse situations that
may affect the borrower's ability to repay, the estimated value of any
underlying collateral, and current economic conditions. Management believes that
the allowance for loan losses is adequate; however, regulatory agencies, as an
BANK OF NORTH AMERICA BANCORP, INC., AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
integral part of their examination process, periodically review the allowance
for losses on loans. Such agencies may require the recognition of additions or
reductions to the allowance based on their judgement of information available at
the time of their examination.
The Bank adopted the provisions of Statement of Financial Accounting
Standard No. 114, Accounting by Creditors for Impairment of a Loan, as amended
by SFAS No. 118, Accounting by Creditors for Impairment of a Loan -- Income
Recognition and Disclosure, ("SFAS No. 114") on January 1, 1995. The provisions
of SFAS No. 114 did not have a significant impact on financial condition or
results of operations upon adoption. Management, considering current information
and events regarding the borrowers ability to repay their obligations, considers
a loan to be impaired when it is probable that the Bank will be unable to
collect all amounts due according to the contractual terms of the loan
agreement. When a loan is considered to be impaired, the amount of the
impairment is measured based on the present value of expected future cash flows
discounted at the loan's effective interest rate or at the fair value of
collateral, if the loan is collateral dependent. Impairment losses and changes
in estimates to the impairment losses are included in the allowance for loan
losses through a provision for loan losses. The Bank recognizes interest income
on impaired loans on a cash basis. Prior periods have not been restated.
(g) Loan Interest Income Recognition
Interest income on commercial and real estate mortgage loans is recognized
as earned based upon the principal amounts outstanding. Interest income on
installment loans is recognized using a method which approximates the interest
method. Loans are placed on non-accrual status when management believes that
interest on such loans may not be collected in the normal course of business or
when the loans become ninety days delinquent, whichever is earlier. Premiums and
discounts on purchased loans are amortized or accreted using the level yield
method.
(h) Loan Fees
Loan origination, prepaid dealer reserves, certain other fees and certain
direct loan origination costs are being deferred and the net amount is being
amortized as an adjustment to the related loan's yield, generally over the
contractual life of the related loans, or if the related loan is held for sale,
until the loan is sold. Fees received in connection with loan commitments are
deferred until the loan is advanced and are then recognized over the term of the
loan as an adjustment of the yield. Fees on commitments that expire unused are
recognized in other non-interest income at expiration.
(i) Mortgage Loan Servicing Rights
The Bank services mortgage loans for investors. These mortgage loans
serviced are not included in the accompanying consolidated statements of
financial condition. Loan servicing fees are based on a stipulated percentage of
the outstanding loan principal balances being serviced and are recognized as
income when related loan payments from mortgagors are collected. Loan servicing
costs are charged to expense using the level yield method over the estimated
life of the loan, and continually adjusted for prepayments. Management evaluates
the carrying value of purchased mortgage servicing rights by estimating the
future net servicing income of the portfolio on a discounted basis, based on
estimates of the remaining loan lives.
In May 1995 the FASB issued Statement of Financial Accounting Standards No.
122, Accounting for Mortgage Servicing Rights, ("SFAS No. 122") which would
eliminate the accounting distinction between rights to service mortgage loans
for others that are acquired through loan origination activities and those
acquired through purchase transactions. SFAS No. 122 requires an entity to
recognize rights to service mortgage loans for others or rights to service
mortgage loans originated as separate assets, however acquired, for transactions
in which the Bank has sold the loan and retained the servicing rights. This
statement is to be
BANK OF NORTH AMERICA BANCORP, INC., AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
applied prospectively effective on January 1, 1996. Retroactive application is
prohibited. Upon adoption, SFAS No. 122 is not expected to have a material
effect on results of operations or financial condition.
(j) Premises and Equipment
Land is carried at cost. Bank premises, furniture and equipment, and
leasehold improvements are carried at cost, less accumulated depreciation and
amortization, computed principally by the straight-line method.
(k) Income Taxes
The operating results of the Company and its subsidiaries are included in
consolidated federal and state income tax returns. Each subsidiary pays its
allocation of income taxes to the Company, or receives payment from the Company
to the extent that tax benefits are realized based on amounts computed as if
each subsidiary was an individual company.
Effective January 1, 1993, Statement of Financial Accounting Standards No.
109, Accounting for Income Taxes, ("SFAS No. 109") was adopted prospectively.
The adoption of SFAS No. 109 changes the method of accounting for income taxes
from the deferred method to an asset and liability approach. Deferred tax assets
and liabilities are recognized for the future tax consequences attributable to
differences between the financial statement carrying amounts of existing assets
and liabilities and their respective tax bases and operating loss and tax credit
carryforwards. Deferred tax assets and liabilities are measured using enacted
tax rates expected to apply to taxable income in the years in which those
temporary differences are expected to be recovered or settled. The effect on
deferred tax assets and liabilities of a change in tax rates is recognized in
income in the period that includes the enactment date. Deferred tax assets are
required to be reduced by a valuation allowance to the extent that, based on the
weight of available evidence, it is more likely than not that the deferred tax
assets will not be realized.
The adoption of SFAS No. 109 on January 1, 1993 did not have a significant
impact on financial condition or results of operations.
(l) Other Intangible Assets
Excess cost over fair value of assets acquired of $82,283 and $123,983 at
December 31, 1995 and 1994, respectively, is amortized on a straight-line basis
over a seven year period . Remaining core deposit premium of $121,768 and
$180,268 at December 31, 1995 and 1994, respectively, is being amortized over
its estimated remaining economic life of approximately 2 years at December 31,
1995.
(m) Foreclosed Real Estate
Real estate properties acquired through, or in lieu of, foreclosure are
initially recorded at fair value at the date of foreclosure establishing a new
cost basis. After foreclosure, valuations are periodically performed by
management and the real estate is carried at the lower of (1) cost or (2) fair
value minus estimated costs to sell. Revenue and expenses from operations and
adjustments of the fair value are included in earnings. Foreclosed real estate
is not depreciated.
(n) Reclassifications
Certain amounts for prior years have been reclassified to conform with
financial statement presentations for 1995.
BANK OF NORTH AMERICA BANCORP, INC., AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
2. SECURITIES
Securities available for sale consist of the following:
DEBT SECURITY MATURITIES
--------------------------------------------------------------
AFTER 1 YEAR AFTER 5 YEARS TOTAL
THROUGH THROUGH AMORTIZED
AT DECEMBER 31, 1995 1 YEAR OR LESS 5 YEARS 10 YEARS AFTER 10 YEARS COST
- ------------------------------ -------------- ------------ ------------- -------------- ------------
Debt securities
U.S. Treasury................ $ 4,999,638 $ -- $ -- $ -- $ 4,999,638
U.S. Government agencies..... -- 2,999,585 -- -- 2,999,585
Municipal bonds.............. 414,810 1,677,890 3,602,944 -- 5,695,644
Corporate bonds.............. -- 17,792,560 3,508,520 -- 21,301,080
Mortgage-backed securities... 9,503,118 25,727,096 27,127,861 4,169,046 66,527,121
------------ ----------- ----------- ---------- ------------
Total.................. $ 14,917,566 $48,197,131 $34,239,325 $4,169,046 $101,523,068
============ =========== =========== ========== ============
CARRYING
GROSS UNREALIZED VALUE
--------------------- (ESTIMATED
AT DECEMBER 31, 1995 GAINS LOSSES FAIR VALUE)
- ------------------------------ ---------- --------- ------------
Debt securities
U.S. Treasury................ $ -- $ (19,169) $ 4,980,469
U.S. Government agencies..... 27,134 -- 3,026,719
Municipal bonds.............. 13,910 (30,919) 5,678,635
Corporate bonds.............. 14,922 (97,505) 21,218,497
Mortgage-backed securities... 92,536 (737,448) 65,882,209
-------- -------- ------------
Total.................. $ 148,502 $(885,041) $100,786,529
======== ======== ============
DEBT SECURITY MATURITIES
-----------------------------------------------------------
AFTER 1 YEAR AFTER 5 YEARS TOTAL
THROUGH THROUGH EQUITY AMORTIZED
AT DECEMBER 31, 1994 1 YEAR OR LESS 5 YEARS 10 YEARS AFTER 10 YEARS SECURITIES COST
- ------------------------------ -------------- ------------ ------------- -------------- ---------- ------------
Debt securities...............
U.S. Government agencies..... $ 2,000,000 $ -- $ 2,000,000 $ -- $ -- $ 4,000,000
Corporate bonds.............. -- -- 2,191,460 -- -- 2,191,460
Mortgage-backed securities... 1,158,302 11,049,631 3,744,088 2,307,433 -- 18,259,454
U.S. Government agency equity
securities................... -- -- -- -- 8,595,391 8,595,391
----------- ----------- ----------- ---------- ---------- ------------
Total.................. $ 3,158,302 $11,049,631 $ 7,935,548 $2,307,433 $8,595,391 $ 33,046,305
=========== =========== =========== ========== ========== ============
CARRYING
GROSS UNREALIZED VALUE
---------------------- (ESTIMATED
AT DECEMBER 31, 1994 GAINS LOSSES FAIR VALUE)
- ------------------------------ ---------- ----------- ------------
Debt securities...............
U.S. Government agencies..... $ -- $ (127,153) $ 3,872,847
Corporate bonds.............. -- (223,332) 1,968,128
Mortgage-backed securities... -- (1,206,713) 17,052,741
U.S. Government agency equity
securities................... -- (859,142) 7,736,249
-------- ------------ ------------
Total.................. $ -- $(2,416,340) $ 30,629,965
======== ============ ============
Securities held to maturity at December 31, 1994 are presented below. All
securities were classified as available for sale at December 31, 1995.
DEBT SECURITY MATURITIES
--------------------------------------------------------------
AFTER 1 YEAR AFTER 5 YEARS TOTAL
THROUGH THROUGH CARRYING VALUE
AT DECEMBER 31, 1994 1 YEAR OR LESS 5 YEARS 10 YEARS AFTER 10 YEARS (AMORTIZED COST)
- ------------------------------ -------------- ------------ ------------- -------------- ----------------
U.S.Treasury.................. $7,001,796 $ 4,998,701 $ -- $ -- $ 12,000,497
U.S. Government agencies...... -- 2,999,398 -- -- 2,999,398
Municipal bonds............... 259,966 1,737,758 2,904,160 1,145,628 6,047,512
Corporate bonds............... -- 9,721,550 9,635,815 -- 19,357,365
Mortgage-backed securities.... 1,041,743 20,152,544 25,642,776 29,351,612 76,188,675
----------- ----------- ----------- ------------ ------------
Total.................. $8,303,505 $39,609,951 $38,182,751 $ 30,497,240 $116,593,447
=========== =========== =========== ============ ============
GROSS UNREALIZED
---------------------------- ESTIMATED
AT DECEMBER 31, 1994 GAINS LOSSES FAIR VALUE
- ------------------------------ -------------- ------------ ------------
U.S.Treasury.................. $ -- $ (278,778) $ 11,721,719
U.S. Government agencies...... -- (186,273) 2,813,125
Municipal bonds............... -- (441,501) 5,606,011
Corporate bonds............... -- (2,018,003) 17,339,362
Mortgage-backed securities.... -- (7,802,067) 68,386,608
------------ ------------ ------------
Total.................. $ -- $(10,726,622) $105,866,825
============ ============ ============
Expected maturities of mortgage-backed securities will differ from
contractual maturities since borrowers generally have the right to prepay
obligations without penalty. The maturity distribution of mortgage-backed
securities is based on their expected maturities based on information available
at December 31, 1995 and 1994.
Gross gains resulting from the disposition of securities available for sale
amounted to $211,036, $25,006, and $1,196,882 during 1995, 1994 and 1993,
respectively. Gross losses amounted to $74,105 during 1995. There were no losses
on securities available for sale during 1994 or 1993.
Investment securities with carrying values of $607,617 and $610,172 were
pledged as required by government regulation as of December 31, 1995 and 1994,
respectively. In addition, at December 31, 1995 and
BANK OF NORTH AMERICA BANCORP, INC., AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
1994, investment securities with carrying values of $830,021 and $30,977,697,
respectively, were pledged to secure securities sold under agreements to
repurchase and other short-term borrowings.
3. LOANS
The composition of loans is summarized as follows:
DECEMBER 31,
---------------------------
1995 1994
------------ ------------
Real estate -- residential................................ $229,005,786 238,150,292
Real estate -- commercial................................. 47,216,816 37,346,130
Commercial................................................ 30,174,139 16,177,208
Consumer.................................................. 74,859,096 42,400,631
Overdrafts................................................ 598,985 102,421
------------ ------------
Subtotal........................................ 381,854,822 334,176,682
Add: prepaid dealer reserve............................... 3,746,096 1,731,182
Less: net deferred loan fees.............................. (452,078) (484,788)
Less: net purchased discounts and premiums (See Note
1(e))................................................... (2,866,041) (3,354,662)
Less: allowance for loan losses........................... (5,501,147) (5,845,996)
------------ ------------
Loans, net...................................... $376,781,652 326,222,418
=========== ===========
At December 31, 1995 and 1994, approximately $3,914,000 and $3,989,000,
respectively, of loans were on non-accrual status. Interest related to
non-accrual loans, determined in accordance with the original contractual terms
for the years ended December 31, 1995, 1994 and 1993, amounted to approximately
$307,000, $343,000 and $531,000, respectively. Interest collected on such loans
and included in the results of operations during 1995, 1994 and 1993 amounted to
approximately $211,000, $133,000 and $314,000, respectively.
The Bank adopted SFAS No. 114 effective January 1, 1995. All loans on
non-accrual status are considered to be impaired loans for purposes of SFAS No.
114. At December 31, 1995, the Bank's recorded investment in impaired loans was
approximately $3.9 million. Of the total impaired loans, approximately $2.0
million in principal balance had related specific allowance for loan losses of
approximately $753,000. Average impaired loans for 1995 were approximately $3.4
million.
4. ALLOWANCE FOR LOAN LOSSES
An analysis of the allowance for loan losses is presented below:
FOR THE YEARS ENDED DECEMBER 31,
---------------------------------------
1995 1994 1993
----------- ----------- -----------
Balance, beginning of year...................... $ 5,845,996 $ 8,434,497 $ 6,214,414
Provision for loan losses....................... 1,150,000 1,105,000 2,050,000
Allowance for loan losses for purchased loans... -- -- 1,252,335
Reclassification of allowance for purchased
loans to discount and premium (See Note
1(e))......................................... -- (2,400,000) --
Loan sales...................................... (476,000) -- (17,358)
Charge-offs..................................... (1,331,811) (1,498,237) (1,465,438)
Recoveries...................................... 312,962 204,736 400,544
----------- ----------- -----------
Balance, end of year.................. $ 5,501,147 $ 5,845,996 $ 8,434,497
========== ========== ==========
BANK OF NORTH AMERICA BANCORP, INC., AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
5. PREMISES AND EQUIPMENT
Premises and equipment are summarized as follows:
DECEMBER 31,
-------------------------
1995 1994
----------- -----------
Land, building and improvements............................. $ 6,603,827 $ 6,408,645
Leasehold improvements...................................... 1,010,319 1,021,195
Furniture, fixtures and equipment........................... 3,805,526 3,336,839
----------- -----------
Subtotal.................................................. 11,419,672 10,766,679
Accumulated depreciation and amortization................... 3,208,883 2,410,101
----------- -----------
Premises and equipment, net................................. $ 8,210,789 $ 8,356,578
========== ==========
The Bank is obligated under operating leases for office premises and
equipment. At December 31, 1995, the total remaining minimum lease commitments
were as follows:
YEAR ENDING DECEMBER 31,
- ------------------------
1996....................................................... $1,406,000
1997....................................................... 622,000
1998....................................................... 292,000
1999....................................................... 209,000
----------
$2,529,000
=========
Rent expense for the years ended December 31, 1995, 1994 and 1993 was
approximately $1,433,000, $1,422,000, and $1,287,000, respectively, and is
included in occupancy and equipment expense.
In connection with a lease for the Bank's corporate offices, a letter of
credit with a redemption value of $97,500 at December 31, 1995 was issued by the
Bank in favor of the owner of such premises.
The Bank is lessor under operating leases for office premises. The building
being leased had cost and carrying a value of approximately $5.5 million and
$5.2 million at December 31, 1995, respectively. Minimum future rentals on
leases as of December 31, 1995 were as follows:
YEAR ENDING DECEMBER 31,
- ------------------------
1996........................................................ $235,000
1997........................................................ 130,000
1998........................................................ 76,000
1999........................................................ 54,000
--------
$495,000
========
BANK OF NORTH AMERICA BANCORP, INC., AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
NOTE 6. DEPOSITS
Deposits are summarized as follows:
DECEMBER 31,
---------------------------
1995 1994
------------ ------------
Non-interest bearing:
Customers............................................... $ 49,786,586 $ 46,764,273
Official checks......................................... 3,962,990 1,112,653
Savings................................................... 66,271,833 28,735,724
NOW....................................................... 41,836,493 32,369,618
Money market.............................................. 40,893,238 53,780,385
Certificates of deposit................................... 290,961,169 275,922,641
------------ ------------
Total deposits.................................. $493,712,309 $438,685,294
=========== ===========
As of December 31, 1995 and 1994, the Bank held certificates of deposit of
$100,000 or more of approximately $48.5 million and $43.4 million, respectively.
The interest expense on certificates of deposit of $100,000 or more amounted to
approximately $2,654,000, $2,230,000 and $1,969,000, during the years ended
December 31, 1995, 1994 and 1993, respectively.
The following table sets forth the amount and maturities of certificates of
deposits as of December 31, 1995:
AMOUNT
AMOUNT DUE DURING DUE AFTER
YEARS ENDING DECEMBER 31, DECEMBER
--------------------------------------- 31,
1996 1997 1998 1998 TOTAL
------------ ----------- ---------- ----------- ------------
2.00% to 3.00.......... $ 285,848 $ -- $ -- $ -- $ 285,848
3.01% to 4.00.......... 7,801,947 869,932 292,158 -- 8,964,037
4.01% to 5.00.......... 35,352,395 1,538,263 859,708 652,254 38,402,620
5.01% to 6.00.......... 66,954,442 12,674,703 4,455,642 890,217 84,975,004
6.01% to 7.00.......... 57,102,695 48,000,993 403,398 9,334,155 114,841,241
7.01% to 8.00.......... 23,761,812 15,310,625 -- 4,419,982 43,492,419
------------ ----------- ---------- ----------- ------------
Total........ $191,259,139 $78,394,516 $6,010,906 $15,296,608 $290,961,169
=========== ========== ========= ========== ===========
NOTE 7. SECURITIES SOLD UNDER AGREEMENTS TO REPURCHASE
Securities sold under agreements to repurchase are summarized as follows:
1995 1994 1993
---------- ----------- -----------
Balance at December 31........................... $ 820,473 $ 5,372,769 $ --
Average balance for the year..................... 2,109,748 3,409,404 --
Maximum amount outstanding at any month end
during the year................................ 2,588,114 15,007,773 --
Average interest rate:
During the year................................ 5.71% 4.35% --
At December 31................................. 5.17 5.70 --
At December 31, 1995 and 1994, the Bank had sold mortgage-backed securities
and United States treasury securities under agreements to repurchase those same
securities, with maturities ranging from one to thirty days. The Bank sells
securities under agreements to repurchase to its customers and to major
securities dealers. Securities sold to customers are maintained under the Bank's
control. Securities sold to dealers are
BANK OF NORTH AMERICA BANCORP, INC., AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
maintained in safekeeping by those dealers for the Bank's benefit. At December
31, 1994, securities sold under agreements to repurchase with the investment
firm of Goldman, Sachs & Co. were $4.0 million.
8. OTHER BORROWINGS
Other borrowings consist of Federal Home Loan Bank of Atlanta ("FHLB")
advances of a short-term nature and advances with original maturities in excess
of one year. Short-term FHLB advances are summarized as follows:
1995 1994 1993
----------- ----------- -----------
Balance at December 31........................ $ -- $14,500,000 $10,000,000
Average balance for the year.................. 6,121,636 10,471,557 3,748,219
Maximum amount outstanding at any month end
during the year............................. 20,000,000 18,000,000 22,500,000
Average interest rate:
During the year............................. 6.30% 4.14% 3.21%
At December 31.............................. -- 6.42 3.50
FHLB advances with original maturities in excess of one year are summarized
as follows:
DECEMBER 31,
-------------------------
1995 1994
----------- -----------
Floating rate advance, based on 3-month LIBOR, due 1995..... $ -- $10,000,000
Floating rate advance, based on 3-month LIBOR, due 1996..... 10,000,000 10,000,000
3.78% advance, due 1995..................................... -- 10,000,000
3.97% advance, due 1995..................................... -- 10,000,000
7.51% advance, due 1996..................................... 5,000,000 5,000,000
7.73% advance, due 1997..................................... 5,000,000 5,000,000
----------- -----------
Total............................................. $20,000,000 $50,000,000
========== ==========
The Bank has been advised by the FHLB that it has a total credit
availability of $100 million with maturities of up to 10 years. The FHLB credit
availability does not represent a firm commitment by the FHLB. Rather, it is the
FHLB's assessment of what the Bank could borrow given the Bank's current
financial condition. The credit availability is subject to change at any time
based upon the Bank's financial condition and that of the FHLB, as well as
changes in FHLB policies or Congressional mandates. At December 31, 1995, the
Bank's available credit from the FHLB was $80 million.
In connection with its borrowings from the FHLB, the Bank is required to
own FHLB stock with a par value equal to at least five percent of total advances
outstanding. At December 31, 1995, the Bank's investment in FHLB stock had a par
and carrying value of $2,775,000, and was automatically pledged against FHLB
advances. Advances from the FHLB are secured by eligible investment securities
or first mortgage loans. Generally, short-term FHLB advances are secured by
pledging and delivering specific investment security collateral under terms and
at rates comparable to those available in the repurchase agreement market. All
other FHLB advances are secured by a blanket floating lien on the Bank's
residential, one-to-four family first mortgage loans. For advances secured by
the blanket floating lien, the Bank is not required to specifically identify,
deliver, or otherwise segregate first mortgage loans pledged as collateral for
advances, but must maintain eligible first mortgage loan collateral equal to
approximately 133% of outstanding advances, or approximately $27 million at
December 31, 1995.
BANK OF NORTH AMERICA BANCORP, INC., AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
NOTE 9. INCOME TAXES
Income tax expense (credit) reflected in the consolidated statements of
operations for 1995, 1994 and 1993 is detailed below:
FOR THE YEARS ENDED DECEMBER 31,
------------------------------------
1995 1994 1993
---------- --------- -----------
Current tax expense (credit):
Federal................................................. $1,053,600 $ 560,760 ($1,187,643)
State................................................... 106,930 -- --
---------- --------- -----------
Total current................................... 1,160,530 560,760 (1,187,643)
---------- --------- -----------
Deferred tax expense (benefit):
Federal................................................. (103,991) (154,531) (274,861)
State................................................... 56,844 86,359 (234,508)
---------- --------- -----------
Total deferred.................................. (47,147) (68,172) (509,369)
---------- --------- -----------
Total income tax expense (credit)............... $1,113,383 $ 492,588 ($1,697,012)
========= ========= ==========
The actual income tax rate differs from the "expected" income tax rate (the
U.S. Federal corporate tax rate of 34%) for 1995, 1994 and 1993 as follows:
FOR THE YEARS ENDED
DECEMBER 31,
-----------------------
1995 1994 1993
---- ---- -----
Tax at federal statutory rate......................................... 34.0% 34.0% (34.0)%
State income tax, net of federal benefit.............................. 3.3 1.7 (3.6)
Amortization of intangibles........................................... 0.7 1.3 2.3
Corporate dividend exclusion.......................................... (2.5) (6.9) (2.3)
Tax-exempt interest................................................... (2.1) (3.6) (0.3)
Other, net............................................................ 0.4 0.1 0.2
---- ---- -----
Total income tax expense (credit)................................... 33.8% 26.6% (37.7)%
==== ==== =====
BANK OF NORTH AMERICA BANCORP, INC., AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Approximate temporary differences between financial statement carrying
amounts and tax basis of assets and liabilities that give rise to significant
portions of the net deferred tax asset at December 31, 1995 and 1994 are as
follows:
DECEMBER 31,
-----------------------
1995 1994
---------- ----------
Deferred tax assets:
Provision for loan losses................................... $1,427,558 $1,262,251
Unrealized loss on securities available for sale............ 277,160 909,269
Intangible asset amortization............................... 223,568 266,052
Depreciation................................................ 117,858 63,075
Loan fees................................................... 108,035 121,573
Delinquent interest reserve................................. 80,351 188,950
State tax net operating loss carry forward.................. -- 74,645
Other....................................................... 68,685 35,255
---------- ----------
Gross deferred tax assets..................................... 2,303,215 2,921,070
Valuation allowance...................................... -- --
---------- ----------
Net deferred tax assets.................................. 2,303,215 2,921,070
---------- ----------
Deferred tax liabilities:
Intangible asset amortization............................... 362,352 351,345
Purchased loans............................................. 291,683 363,002
Stock dividends............................................. 91,223 107,659
Other....................................................... 55,091 11,236
---------- ----------
Total deferred tax liabilities...................... 800,349 833,242
---------- ----------
Deferred tax assets, net............................ $1,502,866 $2,087,828
========= =========
An analysis of the changes in the net deferred tax asset is presented
below:
FOR THE YEAR
ENDED DECEMBER 31,
-----------------------
1995 1994
---------- ----------
Balance, beginning of year.................................... $2,087,828 $1,070,810
Deferred tax benefit.......................................... 47,147 68,172
Change in unrealized loss on securities available for sale.... (632,109) 948,846
---------- ----------
Balance, end of year................................ $1,502,866 $2,087,828
========= =========
10. CREDIT COMMITMENTS
The Bank has outstanding at any time a significant number of commitments to
extend credit. Commitments to extend credit are agreements to lend to a customer
as long as there is no violation of any condition established in the loan
commitment contract. Commitments generally have fixed expiration dates or other
termination clauses and may require payment of a fee. Since some of the
commitments are expected to expire without being drawn upon, the total
commitment amount does not necessarily represent future cash requirements. Each
customer's credit worthiness is evaluated on an individual basis and the amount
of collateral required, if deemed necessary, is based on management's credit
evaluation. As of December 31, 1995 and 1994, there were approximately $39.6
million and $34.4 million, respectively of commitments to extend credit,
generally with terms of up to 90 days. Commitments at December 31, 1995 and 1994
include approximately $5.8 million and $12.4 million in fixed rate commitments,
respectively.
BANK OF NORTH AMERICA BANCORP, INC., AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Loan commitments have off-balance-sheet credit risk because only
origination fees and accruals for probable losses are recognized in the
statement of financial position until the commitments are fulfilled. Credit risk
represents the accounting loss that would be recognized at the reporting date if
counterparties failed completely to perform as contracted. The credit risk
amounts are equal to the contractual amounts, assuming that the amounts are
fully advanced and that the collateral or other security is of no value.
The Bank's policy with regard to collateral-dependent loans is to require
customers to provide collateral prior to the disbursement of approved loans. For
consumer loans, the Bank usually retains a security interest in the property or
products financed, which provides repossession rights in the event of default by
the customer. For commercial loans and financial guarantees, collateral is
usually in the form of inventory or marketable securities (held in trust) or
real estate (notations on title).
Standby letters of credit are conditional commitments issued by the Bank to
guarantee the performance of a customer to a third party. At December 31, 1995
and 1994, there were approximately $2.2 million and $574,000, respectively, of
standby letters of credit outstanding with maturities of up to one year. The
credit risk involved in issuing letters of credit is essentially the same as
that involved in extending loan facilities to customers. The Bank holds
certificates of deposit as collateral supporting those commitments for which
collateral is deemed necessary. The extent of collateral held for those
commitments at December 31, 1995 and 1994 varies from unsecured to 100 percent.
The Bank has not incurred any losses on its commitments in either 1995 or
1994.
11. CONCENTRATIONS OF CREDIT RISK
Concentrations of credit risk (whether on or off balance sheet) arising
from financial instruments exist in relation to certain groups of customers. A
group concentration arises when a number of customers have similar economic
characteristics that would cause their ability to meet contractual obligations
to be similarly affected by changes in economic or other conditions. The Bank
does not have a significant exposure to any individual customer. The major
concentrations of credit risk for the Bank arise by customer type in relation to
loans and credit commitments, as shown in the following table. A geographic
concentration arises because the Bank operates primarily in Florida, where a
majority of loan customers and related collateral are located.
COMMERCIAL
RESIDENTIAL REAL
REAL ESTATE ESTATE COMMERCIAL CONSUMER TOTAL
----------- ---------- ---------- -------- --------
(IN THOUSANDS)
CREDIT RISK:
December 31, 1995
Loans...................................... $ 245,646 $ 38,167 $ 30,174 $70,578 $384,565
Credit commitments......................... 20,327 1,870 19,612 17 41,826
--------- -------- -------- ------- --------
$ 265,973 $ 40,037 $ 49,786 $70,595 $426,391
========= ======== ======== ======= ========
COMMERCIAL
RESIDENTIAL REAL
REAL ESTATE ESTATE COMMERCIAL CONSUMER TOTAL
----------- ---------- ---------- -------- --------
(IN THOUSANDS)
CREDIT RISK:
December 31, 1994
Loans...................................... $ 244,966 $ 34,908 $ 16,177 $64,400 $360,451
Credit commitments......................... 18,849 8,412 7,577 105 34,943
--------- -------- -------- ------- --------
$ 263,815 $ 43,320 $ 23,754 $64,505 $395,394
========= ======== ======== ======= ========
The credit risk amounts represent the maximum accounting loss that would be
recognized at the reporting date if customers failed completely to perform as
contracted and any collateral or security proved to
BANK OF NORTH AMERICA BANCORP, INC., AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
be of no value. The Bank has experienced little difficulty in accessing
collateral when required. The amounts of credit risk shown, therefore, greatly
exceed expected losses, which are included in the allowance for loan losses.
12. COMMITMENTS AND CONTINGENCIES
In the ordinary course of business, the Bank has various outstanding
commitments and contingent liabilities that are not reflected in the
accompanying consolidated financial statements. In addition, the Bank is
involved in various claims and legal actions arising in the ordinary course of
business. The outcome of these claims and actions are not presently
determinable, however, in the opinion of the Bank's management, after consulting
with their legal counsel, the ultimate disposition of these matters will not
have a material adverse effect on the consolidated financial statements.
Because of the legal structure of its acquisitions, the Bank pays deposit
insurance premiums to the FDIC's Savings Association Insurance Fund ("SAIF").
The majority of commercial banks pay such premiums to the FDIC's Bank Insurance
Fund ("BIF"). The SAIF and the BIF previously assessed deposit insurance
premiums at the same rate. However, effective September 30, 1995, the FDIC
reduced the minimum assessment rate applicable to BIF deposits, but not SAIF
deposits, from 23 basis points of covered deposits to four basis points of
covered deposits and will further reduce the BIF rate to zero effective January
1, 1996. This disparity in assessment rates may place the Bank at a competitive
disadvantage to institutions whose deposits are exclusively or primarily
BIF-insured (such as most commercial banks). Congress has proposed legislation
intended to recapitalize the SAIF and substantially bridge the assessment rate
disparity. As currently drafted, the Bank believes that it would be subject to a
one-time assessment estimated to be 80 basis points of covered deposits as of
March 31, 1995 and would subsequently pay a substantially reduced assessment
rate. Further, the Bank believes that the assessment would be reduced by 20%
based on the Bank's status as a "de novo sasser bank", as defined by the
proposed legislation. Should this legislation be enacted in its current form,
the Bank believes that its one-time assessment would result in a pre-tax charge
of $2.8 million and would be payable within 60 days after enactment of the
legislation. There is no assurance, however, that the proposed legislation, or
any other related legislation, will be enacted. Further, the legislation could
be materially modified prior to enactment. Accordingly, no provision has been
made in these financial statements for the proposed one-time assessment.
13. EMPLOYEE BENEFIT PLAN
The Bank sponsors a defined contribution 401(k) retirement savings plan
("Plan"). The Plan provides for certain contributions made by employees to be
matched by the Bank. Substantially all full-time employees with one year of
service can participate in the Plan. During 1995, 1994 and 1993, Bank
contributions to the Plan and Plan administrative expenses paid by the Bank
amounted to approximately $122,000, $109,000, and $123,000 respectively.
14. RELATED PARTY TRANSACTIONS
The Bank is a party to a loan subservicing agreement with a mortgage
servicing company owned by the Company's stockholder ("Loan Servicer"). The
agreement is under market terms and conditions and covers subservicing of one to
four family residential loans which the Bank owns or for which the Bank has
purchased servicing rights. The agreement can be cancelled by either party after
ninety days written notification. During 1995, 1994 and 1993, the Bank paid
approximately $619,000, $741,000 and $907,000, respectively, in servicing fees
to the Loan Servicer. At December 31, 1995 and 1994, approximately $487.9
million and $526.3 million, respectively, in loans were being serviced pursuant
to the loan subservicing agreement.
BANK OF NORTH AMERICA BANCORP, INC., AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The Loan Servicer has advised the Bank that, in the first quarter of 1996,
the Loan Servicer will cease operations. Accordingly, the Bank has entered into
a new subservicing agreement with an unaffiliated mortgage servicer. Conversion
to the new subservicer is scheduled for January 31, 1996.
During 1993 and 1992, the Bank acquired mortgage servicing rights to
approximately $242.2 million and $569.8 million of loans, respectively. These
loans, with an unpaid principal balance of $312.0 million and $359.4 million at
December 31, 1995 and 1994, respectively, are part of the loans being serviced
by the Loan Servicer under the subservicing agreement.
In conjunction with servicing performed by the Loan Servicer for the Bank
and for its own account, escrow funds and other servicing-related non-interest
bearing deposits are maintained at the Bank. Such funds averaged $17.6 million,
$30.2 million and $50.0 million for 1995, 1994 and 1993, respectively. At
December 31, 1995 and 1994, such servicing deposits amounted to $4.8 million and
$13.0 million, respectively.
Through September 30, 1995, the Bank was a party to an interest rate
exchange agreement ("interest rate swap") with the Loan Servicer. The
differential between the rate paid or received was recognized as a yield
adjustment to the Bank's cost of funds. The interest rate swap rates were
generally negotiated every sixty days under normal market terms and conditions.
The nature of the swap was such that the Loan Servicer earns a rate equal to
that available on short-term certificates of deposit on the notional amount.
Accordingly, the interest rate swap agreement did not have the characteristics
of a traditional interest swap in hedging interest rate risk. The notional
amount of the swap was established periodically by reference to the balance of
certain discretionary funds maintained by the Loan Servicer on deposit at the
Bank in non-interest bearing accounts. During 1995, 1994 and 1993, the average
notional amounts outstanding under the interest rate swap were $6.2 million,
$12.1 million, and $20.3 million, respectively. The net interest cost associated
with the interest rate swap during 1995, 1994 and 1993 amounted to approximately
$327,000, $456,000, and $513,000, respectively. At December 31, 1994, the
outstanding notional amount of the interest swap was $4.9 million.
From time to time, the Bank has securitized groups of mortgage loans it has
purchased or originated under programs established by government agencies,
primarily the Federal National Mortgage Association ("FNMA") and the Federal
Home Loan Mortgage Corporation ("FHLMC"), or sells individual loans to those
agencies, while maintaining the right to service the loans. During 1994 and
1993, the Bank sold to the Loan Servicer rights to $3.0 million and $18.3
million of such loans and recognized gains of $28,000 and $172,000,
respectively. There were no such sales during 1995.
During 1995, 1994 and 1993, the Bank purchased single family first mortgage
loans from the Loan Servicer for a total purchase price of approximately
$582,000, $3.4 million and $4.8 million, respectively. The Loan Servicer makes
available to the Bank information on loan applications being processed. The Bank
reviews those loans and, based upon an independent underwriting review, selects
loans for acquisition. Loans are purchased at prices customarily available in
the first mortgage market.
During 1994, the Bank invested in residential first mortgage loans
originated by the Loan Servicer from the date such loans were originated until
their delivery to permanent, non-affiliated investors or to the Bank. Purchases
made by the Bank were made pursuant to an agreement that the Loan Servicer would
repurchase the loans at no gain or loss to the Bank. A total of $88.8 million in
loans were purchased by the Bank under this arrangement and subsequently sold to
the Loan Servicer. No such loans were held by the Bank at December 31, 1995, or
1994, as the Loan Servicer terminated its loan origination capability during
1994.
In conjunction with the above purchases of loans, the Bank provided
underwriting services to the Loan Servicer and charged the Loan Servicer
approximately $104,000 during 1994.
During 1995, 1994 and 1993, the Loan Servicer paid the Bank rent of
approximately $183,000, $195,000 and $78,000 for use of office space in a
building owned by the Bank under the terms of a lease expiring July 1,
BANK OF NORTH AMERICA BANCORP, INC., AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
1996. Because of the Loan Servicer's winding-down of operations, it is
anticipated that this lease agreement will not be renewed.
The Bank provides certain human resource services to the Loan Servicer
primarily with regard to payroll, health insurance processing, and policies and
procedures. During 1995, 1994, and 1993, the Bank charged the Loan Servicer
approximately $21,000, $38,000, and $43,000, respectively for those services.
In the ordinary course of business, the Bank enters into transactions with
Directors of the Bank, with the Company's stockholder and with firms with which
the Directors or stockholder are affiliated. During 1995, 1994 and 1993,
respectively, the Bank paid marketing, advertising, and public relations fees of
approximately $179,000, $181,000, and $138,000 to a company owned by one of the
Bank's Directors. Another of the Bank's Directors is an employee of a law firm
which performs routine legal services for the Bank. During 1995, 1994, and
1993, the Bank paid legal fees of approximately $24,000, $11,000 and $19,000,
respectively, to that law firm. In addition, the Bank rents office space to a
firm managed by one of the Bank's Directors under a three year lease agreement
expiring on June 30, 1997. Rental income earned by the Bank from that lease was
approximately $14,000 and $6,000 in 1995 and 1994, respectively. The aggregate
unpaid principal balance of loans outstanding to the Bank's Directors or their
business interests was approximately $414,000 and $396,000 at December 31, 1995
and 1994, respectively.
The Company's stockholder has an ownership interest in a building which
houses one of the Bank's offices. Rent expense on that office was approximately
$7,000 for each of the years, 1995, 1994, and 1993, respectively. The Bank has
loans outstanding to a firm in which the Company's stockholder has ownership
interests. The principal balance of those loans was approximately $36,000 and
$315,000 as of December 31, 1995 and 1994 respectively. The Company's
stockholder or firms controlled by the stockholder had approximately $4.4
million and $4.6 million, on deposit at the Bank on December 31, 1995 and 1994
respectively, excluding servicing deposits held by the Loan Servicer.
15. RESTRICTIONS ON RETAINED EARNINGS
The Bank is subject to certain restrictions on the amount of dividends that
it may declare without prior regulatory approval. At December 31, 1995,
approximately $727,000 of retained earnings were available for dividend
declaration without prior regulatory approval.
16. REGULATORY CAPITAL REQUIREMENTS
During January 1989, the Federal Reserve Board ("FRB") issued final
guidelines for a risk-based approach in determining the capital requirements of
banking organizations. The guidelines consist of Tier I and total capital, the
difference primarily being that the allowance for loan losses is included in
total capital subject to certain specific limitations. The new guidelines became
fully phased in at December 31, 1992, at which time the total capital ratio
requirement was 8.00%, of which Tier I capital must be at least 4.00%. At
December 31, 1995, the Company's unaudited Tier I and total capital ratios were
11.5% and 12.7%, respectively.
The FRB and the FDIC have adopted minimum Tier I leverage ratio standards.
Tier I capital for purposes of the leverage ratio requirement is the same as
year end 1992 Tier I capital for purposes of the risk-based approach. The
leverage ratio establishes a minimum of Tier I capital to total assets of 3% for
strong banking organizations, generally with a composite CAMEL rating of one,
and 100 to 200 basis points above this minimum level for other institutions. The
Company's unaudited leverage ratio was 6.9% at December 31, 1995.
The Company and the Bank believe that the aforementioned capital amounts
exceed the minimum of risk-based and leverage ratio capital required by the FRB
and the FDIC. There can be no assurance that
BANK OF NORTH AMERICA BANCORP, INC., AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
interpretation of applicable regulations would not result in different capital
requirements for the Company and the Bank.
FDICIA also requires the FDIC to place financial institutions into
risk-based categories for purposes of determining the amount of risk, if any, to
the deposit insurance funds. Institutions are assigned to one of three groups:
well capitalized, adequately capitalized, or undercapitalized, based on their
capital ratios and other available relevant information. As of December 31,
1995, the Bank was included in the well capitalized category pursuant to a
notification received from the FDIC, as its total capital ratio exceeded 10% and
its Tier I capital ratio exceeded 6%. The Bank is also considered by management
to be well capitalized pursuant to the prompt corrective action provisions of
FDICIA.
17. FAIR VALUES OF FINANCIAL INSTRUMENTS
Statement of Financial Accounting Standards No. 107, Disclosures about Fair
Value of Financial Instruments, defines the fair value of a financial instrument
as the amount at which the instrument could be exchanged in a current
transaction between willing parties, other than in a forced or liquidation sale.
The following table presents the carrying amounts and fair values of the Bank's
financial instruments at December 31, 1995 and 1994 (in thousands):
DECEMBER 31, 1995 DECEMBER 31, 1994
---------------------- ----------------------
CARRYING CARRYING
AMOUNT FAIR VALUE AMOUNT FAIR VALUE
--------- ---------- --------- ----------
FINANCIAL ASSETS:
Cash and due from banks and
interest-bearing deposits with banks.... $ 51,029 $ 51,029 $ 19,579 $ 19,579
Federal funds sold and securities
purchased under agreements to resell.... 431 431 1,127 1,127
Securities available for sale............. 100,787 100,787 30,630 30,630
Securities held to maturity............... -- -- 116,593 105,867
FHLB stock................................ 2,775 2,775 3,225 3,225
Loans held for sale....................... 2,710 2,732 26,275 26,403
Loans receivable, net..................... 376,782 383,515 326,222 318,560
FINANCIAL LIABILITIES:
Deposit liabilities....................... $(493,712) (495,749) (438,685) (437,851)
Securities sold under agreements to
repurchase.............................. (820) (820) (5,373) (5,373)
Other borrowings.......................... (20,000) (20,127) (64,500) (64,266)
OFF-BALANCE-SHEET ASSETS (LIABILITIES):
Commitments to extend credit.............. $ -- -- -- --
Standby letters of credit................. -- -- -- --
The fair value estimates do not include the benefit that results from the
low-cost funding provided by the deposit liabilities compared to the cost of
borrowing funds in the market. If that value were considered at December 31,
1995 and 1994, excluding escrow deposits held at the Bank related to mortgage
loan servicing rights purchased independently and relating to owned residential
loans, the fair value of the Bank's net assets would increase by approximately
$17.4 million and $31.9 million, respectively.
The fair value estimates also do not include the value of mortgage loan
servicing rights owned by the Bank. The value of those rights is composed of (1)
the value of low cost deposits maintained at the Bank relating to servicing
escrow and investor custodial funds, and (2) expected net servicing revenue from
purchased mortgage servicing rights. At December 31, 1995 and 1994, the fair
value of servicing rights owned by the Bank was approximately $5.1 million and
$8.1 million and the carrying value was $2.3 million and $2.6 million,
respectively.
BANK OF NORTH AMERICA BANCORP, INC., AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
ESTIMATION OF FAIR VALUES
The following notes summarize the major methods and assumptions used in
estimating the fair values of financial instruments.
Short-term financial instruments are valued at their carrying amounts
included in the consolidated statement of financial condition, which are
reasonable estimates of fair value due to the relative short period to maturity
of the instruments. This approach applies to cash and cash equivalents.
Loans held for sale are valued at quoted market prices or investor
commitments.
Loans are valued on the basis of estimated future receipts of principal and
interest, discounted at various rates. Loan prepayments are assumed to occur at
the same rate as in previous periods when interest rates were at levels similar
to current levels. Future cash flows for homogeneous categories of consumer
loans, such as motor vehicle loans, are estimated on a portfolio basis and
discounted at current rates offered for similar loan terms to new borrowers. The
fair value of nonaccrual loans is estimated based on the fair value of related
collateral for collateral-dependent loans or on a present value basis, using
higher discount rates appropriate to the higher risk involved.
Securities are valued at quoted market prices.
FHLB stock is valued at the redemption value.
Fair value of demand deposits and deposits with no defined maturity is
taken to be the amount payable on demand at the reporting date. The fair value
of fixed-maturity deposits is estimated using rates currently offered for
deposits of similar remaining maturities. The intangible value of long-term
relationships with depositors is not taken into account in estimating the fair
values shown in the previous table.
Rates currently available to the Bank for term borrowings with similar
terms and remaining maturities are used to estimate the fair value of existing
borrowings as the present value of expected cash flows.
Commitments to extend credit and standby letters of credit are valued on
the basis of fees currently charged for commitments for similar loan terms to
new borrowers with similar credit profiles.