SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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FORM 10-K
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the Fiscal Year Ended June 30, 1997 OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
Commission File Number: 0-22240
FIRST SOUTHEAST FINANCIAL CORPORATION
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(Exact name of registrant as specified in its charter)
Delaware 57-0979678
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(State or other jurisdiction of incorporation (I.R.S. Employer
or organization) I.D. Number)
201 North Main Street, Anderson, South Carolina 29622
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(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (864) 224-3401
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Securities registered pursuant to Section 12(b) of the Act: None
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Securities registered pursuant to Section 12(g) of the Act: Common Stock, par
value $.01 per
share
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(Title of Class)
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days. YES X NO .
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Indicate by check mark whether disclosure of delinquent filers pursuant
to Item 405 of Regulation S-K is not contained herein, and will not be
contained, to the best of the Registrant's knowledge, in definitive proxy or
other information statements incorporated by reference in Part III of this
Form 10-K or any amendments to this Form 10-K. YES X NO
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As of September 5, 1997, there were issued and outstanding 4,388,231
shares of the Registrant's Common Stock. The Registrant's voting stock is
traded over-the-counter and is listed on the Nasdaq National Market under the
symbol "FSFC." The aggregate market value of the voting stock held by
nonaffiliates of the Registrant, based on the closing sales price of the
Registrant's common stock as quoted on the Nasdaq National Market on September
5, 1997, was $54 million.
PART I
Item 1. Business
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General
First Southeast Financial Corporation ("First Southeast" or the
"Corporation"), a Delaware corporation, was organized on June 23, 1993 for the
purpose of becoming the holding company for First Federal Savings and Loan
Association of Anderson ("First Federal" or the "Association") upon First
Federal's conversion from a federal mutual to a federal stock savings and loan
association ("Conversion"). The Conversion was completed on October 7, 1993.
At June 30, 1997, the Corporation had total assets of $349 million, total
deposits of $285 million and stockholders' equity of $35 million. First
Southeast has not engaged in any significant activity other than holding the
stock of First Federal. Accordingly, the information set forth in this
report, including financial statements and related data, relates primarily to
First Federal and its subsidiary.
First Federal was organized in 1922 as a South Carolina mutual savings
and loan association under the name "Anderson Building and Loan Association."
In 1936, the Association converted to a federally chartered savings and loan
association and changed its name to "First Federal Savings and Loan
Association of Anderson." The Association is regulated by the Office of
Thrift Supervision ("OTS") and its deposits are insured up to applicable
limits under the Savings Association Insurance Fund ("SAIF") of the Federal
Deposit Insurance Corporation ("FDIC"). First Federal also is a member of
the Federal Home Loan Bank ("FHLB") System.
The Association's principal business consists of accepting deposits from
the general public through a variety of deposit programs and originating loans
secured primarily by owner-occupied residential properties and consumer loans.
Approximately 90% of the Association's first mortgage loans are secured by
properties located within South Carolina. The Association's residential real
estate and consumer loans amounted to $237 million and $22 million, or 84% and
8%, respectively, of the Association's total loan portfolio at June 30, 1997.
To a significantly lesser extent, the Association also originates residential
construction and commercial real estate and business loans.
Pending Acquisition
On July 1, 1997, the Corporation and the Association entered into a
definitive merger agreement ("Agreement") with Carolina First Corporation, and
Carolina First Bank, pursuant to which the Corporation will be merged into
Carolina First Corporation and, thereafter, First Federal will be merged into
Carolina First Bank. The Agreement provides that each share of the
Corporation's common stock will be exchanged for one share of Carolina First
Corporation common stock subject to adjustment in the event of a 10% movement
in Carolina First Corporation's stock price. The aggregate value of the
consideration is approximately $65 million, subject to certain adjustments.
The Agreement will be voted on by the Corporation's stockholders at a special
meeting to be held in October 1997. Consummation of the acquisition is
subject to several conditions, including receipt of approval by federal
banking regulators.
1
Interest Rate Sensitivity of Net Portfolio Value
The table below measures interest rate risk by estimating the change in
market value of the Association assets, liabilities, and off-balance sheet
contracts in response to an instantaneous change in the general level of
interest rates. The procedure for measuring interest rate risk was developed
by the OTS to replace the "gap" analysis (the difference between
interest-earning assets and interest-bearing liabilities that mature or
reprice within a specific time period). The model first estimates the level
of the Association net portfolio value ("NPV") (market value of assets, less
market value of liabilities, plus or minus the market value of any off-balance
sheet items) under the current rate environment. In general, market values
are estimated by discounting the estimated cash flows of each instrument by
appropriate discount rates. The model then recalculates the Association NPV
under different interest rate scenarios. The change in NPV under the
different interest rate scenarios provides a measure of the Association
exposure to interest rate risk. The data presented below is as of June 30,
1997.
-400 -300 -200 -100 +100 +200 +300 +400
Basis Basis Basis Basis No Basis Basis Basis Basis
Points Points Points Points Change Points Points Points Points
------ ------ ------ ------ ------ ------ ------ ------ ------
(In thousands)
ASSETS
Mortgage loans and
securities . . $287,516 $283,775 $280,397 $275,571 $268,363 $259,749 $250,572 $241,294 $232,207
Non-mortgage loans. 20,306 19,887 19,484 19,098 18,727 18,370 18,028 17,698 17,380
Cash, deposits and
securities . . . . 66,241 63,317 60,610 58,095 55,756 53,603 51,613 49,733 48,009
Repossessed assets. -- -- -- -- -- -- -- -- --
Real estate held
for investment . . 751 751 751 751 751 751 751 751 751
Premises and
equipment. . . . . 4,282 4,282 4,282 4,282 4,282 4,282 4,282 4,282 4,282
Other assets. . . . 3,418 4,050 4,973 6,467 8,178 9,829 11,378 12,824 14,193
-------- -------- -------- -------- -------- -------- -------- -------- --------
TOTAL . . . . . . .$382,514 $376,062 $370,497 $364,264 $356,057 $346,584 $336,624 $326,582 $316,822
======== ======== ======== ======== ======== ======== ======== ======== ========
LIABILITIES
Deposits. . . . . .$291,178 $289,752 $288,346 $286,973 $285,614 $284,283 $282,967 $281,677 $280,400
Borrowings. . . . . 27,071 26,404 25,764 25,150 24,560 23,994 23,450 22,928 22,425
Other liabilities . 3,767 3,767 3,767 3,767 3,767 3,767 3,767 3,767 3,767
-------- -------- -------- -------- -------- -------- -------- -------- --------
TOTAL . . . . . . .$322,016 $319,923 $317,877 $315,890 $313,941 $312,044 $310,184 $308,372 $306,592
======== ======== ======== ======== ======== ======== ======== ======== ========
OFF BALANCE SHEET
POSITIONS. . . . .$ 274 $ 217 $ 174 $ 122 $ 14 $ (119) $ (255) $ (388) $ (515)
======== ======== ======== ======== ======== ======== ======== ======== ========
NET PORTFOLIO
VALUE . . . . . . $ 60,772 $ 56,356 $ 52,794 $ 48,496 $ 42,130 $ 34,421 $ 26,185 $ 17,822 $ 9,715
======== ======== ======== ======== ======== ======== ======== ======== ========
2
Lending Activities
General. First Federal originates loans through its 11 offices located
in Anderson, Abbeville and Greenwood counties of South Carolina. The
Association also originates loans in Oconee, Pickens, Greenville and Laurens
counties of South Carolina. In addition, the Association has agreements with
correspondents to originate loans on its behalf primarily in Greenville,
Columbia and Charleston, South Carolina and Charlotte, North Carolina.
The principal lending activity of the Association is the origination of
conventional mortgage loans (which are not insured or guaranteed by federal
agencies) for the purpose of purchasing, constructing or refinancing owner-
occupied, one- to four- family residential property in its primary market
areas. The Association also originates consumer and commercial loans in
amounts generally less than $500,000.
Since 1982, the Association has placed a growing emphasis on the
origination of adjustable-rate mortgage ("ARM") loan products in order to
increase the interest rate sensitivity of its loan portfolio. At June 30,
1997, ARM loans accounted for 53% of the total loan portfolio compared to 48%
at June 30, 1996. During fiscal 1997, the production of ARM loans surpassed
that of fixed-rate loans.
It is management's intention, subject to market conditions, that First
Federal will remain a retail financial institution originating long-term
mortgage loans for the purchase, construction or refinance of one- to four-
family residential real estate, small commercial and consumer loans.
3
Loan Portfolio Analysis. The following table sets forth the composition of the Association's loan portfolio
at the dates indicated.
At June 30,
---------------------------------------------------------------------------------------
1993 1994 1995 1996 1997
--------------- --------------- --------------- --------------- ---------------
Amount Percent Amount Percent Amount Percent Amount Percent Amount Percent
------ ------- ------ ------- ------ ------- ------ ------- ------ -------
(Dollars in thousands)
Mortgage Loans:
One- to four-
family
dwellings . . $177,019 84% $156,141 82% $181,119 83% $209,810 84% $237,124 84%
Construction . 2,457 1 3,444 2 10,600 5 14,220 6 12,350 5
Commercial
real estate . 8,178 4 5,262 3 4,070 2 2,022 1 2,843 1
Other real
estate. . . . 561 -- 494 -- 456 -- 686 -- 904 --
-------- --- -------- --- -------- --- -------- --- -------- ---
Total mortgage
loans. . . . .188,215 89 165,341 87 196,245 90 226,738 91 253,221 90
-------- --- -------- --- -------- --- -------- --- -------- ---
Other Loans:
Home equity. . . 8,516 4 14,023 8 15,492 7 15,092 6 16,543 6
Automobile loans 7,477 4 4,463 2 2,966 1 2,669 1 2,771 1
Savings accounts 1,760 1 1,408 1 1,193 1 1,202 -- 1,476 1
Other consumer
loans . . . . . 2,771 1 2,372 1 1,722 1 1,354 1 1,460 --
-------- --- -------- --- -------- --- -------- --- -------- ---
Total consumer
loans . . . . 20,524 10 22,266 12 21,373 10 20,317 8 22,250 8
-------- --- -------- --- -------- --- -------- --- -------- ---
Commercial
loans . . . . . 2,327 1 1,410 1 1,506 -- 3,496 1 6,603 2
-------- --- -------- --- -------- --- -------- --- -------- ---
Total loans 211,066 100% 189,017 100% 219,124 100% 250,551 100% 282,074 100%
-------- === -------- === -------- === -------- === -------- ===
Less:
Undisbursed loans
in process . . 1,187 2,600 6,492 9,059 6,862
Unearned
discounts on
consumer and
commercial
loans 1,293 623 291 141 117
Unearned
discounts
on loans
purchased. . . 3,350 2,735 2,123 1,348 948
Unamortized
loan origination
fees, net of
direct costs . 522 657 508 433 376
Allowance for
loan losses. . 843 914 1,062 1,233 1,370
-------- -------- -------- -------- --------
Total loans
receivable,
net. . . . .$203,871 $181,488 $208,648 $238,337 $272,401
======== ======== ======== ======== ========
4
The following table sets forth the amount of fixed-rate and adjustable-rate loans included in the
Association's total loan portfolio (net of undisbursed loans in process and unearned discounts on consumer
and commercial loans) at the dates indicated.
At June 30,
-----------------------------------------------------------------------------------------
1993 1994 1995 1996 1997
--------------- --------------- ---------------- ---------------- ----------------
Amount Percent Amount Percent Amount Percent Amount Percent Amount Percent
------ ------- ------ ------- ------ ------- ------ ------- ------ -------
(Dollars in thousands)
Fixed rate. . . $145,146 70% $131,664 71% $128,649 61% $126,088 52% $129,103 47%
Adjustable
rate . . . . . 63,440 30 54,130 29 83,692 39 115,263 48 145,992 53
-------- --- -------- --- -------- --- -------- --- -------- ---
Total. . . . . $208,586 100% $185,794 100% $212,341 100% $241,351 100% $275,095 100%
======== === ======= === ======== === ======== === ======== ===
5
One- to Four- Family Residential Loans. The primary lending activity of
the Association is the origination of mortgage loans to enable borrowers to
purchase or construct one- to four- family homes. Management believes that
this policy of focusing on one- to four- family residential mortgage loans
located in its primary market area has been successful in contributing to
interest income while keeping delinquencies and losses to a minimum. At June
30, 1997, approximately $237 million, or 84%, of the Association's total loan
portfolio consisted of loans secured by one- to four- family residential real
estate.
The Association presently originates both fixed-rate mortgage loans and
ARM loans secured by single-family properties with terms of 15 to 30 years.
Borrower demand for ARM loans versus fixed-rate mortgage loans is a function
of the level of interest rates, the expectations of changes in the level of
interest rates and the difference between the initial interest rates and fees
charged for each type of loan. The relative amount of fixed-rate mortgage
loans and ARM loans that can be originated at any time is largely determined
by the demand for each in a competitive environment. Loans to purchase one-
to four- family residences accounted for $29 million, or 50% of total mortgage
loan originations for the year ended June 30, 1997.
The Association qualifies the borrower based on the borrower's ability to
repay the loan using the first year adjusted rate on a one-year ARM loan and
the initial rate on a three-, five- or ten-year ARM loan. As a result, the
potential for delinquencies and defaults on ARM loans is lessened.
The loan fees charged, interest rates and other provisions of the
Association's ARM loans are determined by the Association on the basis of its
own pricing criteria and competitive market conditions. Interest rates and
payments on the Association's ARM loans generally are adjusted annually or
tri-annually after the initial period to a rate typically equal to 275 to 325
basis points above the one-year constant maturity U.S. Treasury index.
The Association began offering ARM loans in the early 1980's and
currently offers ARM loans with initial rates below those which would prevail
under the foregoing computations, determined by the Association based on
market factors and competitive rates for loans having similar features offered
by other lenders for such initial periods. The Association has offered one and
three year ARM loans for several years. In July 1994, the Association began
offering 5/1 and 10/1 ARM loans (i.e., loans with initial rates fixed for five
or 10 years before adjusting on an annual basis thereafter). At June 30,
1997, the initial interest rates on the Association's ARM loans ranged from
5.875% to 7.500% per annum. The periodic interest rate caps (the maximum
amount by which the interest rate may be increased or decreased in a given
period) on the Association's ARM loans is generally 100 to 200 basis points
per adjustment period and the lifetime interest rate cap is generally 450 to
600 basis points over the initial interest rate of the loan. The Association
does not originate negative amortization loans. The terms and conditions of
the ARM loans offered by the Association, including the index for interest
rates, may vary from time to time. However, the Association intends, subject
to market conditions, to emphasize the origination of ARM loans. The
Association believes that such loans provide protection to the Association
against increases in interest rates. The adjustment feature of such loans
also provides greater flexibility to meet competitive conditions as to initial
rate concessions while preserving the Association's return on equity
objectives by limiting the duration of the initial rate concession.
While single-family residential real estate loans are normally originated
with 15- and 30-year terms and the Association permits its ARM loans to be
assumed by qualified borrowers, such loans typically remain outstanding for
substantially shorter periods. This is because borrowers often prepay their
loans in full upon sale of the property pledged as security or upon
refinancing the original loan. In addition, substantially all mortgage loans
in the Association's loan portfolio contain due-on-sale clauses providing that
the Association may declare the unpaid amount due and payable upon the sale of
the property securing the loan. The Association enforces these due-on-sale
clauses to the extent permitted by law and as business judgement dictates.
Thus, average loan maturity is a function of, among other factors, the level
of purchase and sale activity in the real estate market, prevailing interest
rates and the interest rates payable on outstanding loans.
First Federal originated $46 million of one- to four- family ARM loans
during the fiscal year ended June 30, 1997. The retention of ARM loans in the
Association's loan portfolio helps reduce the Association's exposure
6
to changes in the interest rates. There are, however, unquantifiable credit
risks resulting from the potential of increased costs due to changing rates to
be paid by the customer. It is possible that, during periods of rising
interest rates, the risk of default on ARM loans may increase as a result of
repricing and the increased costs to the borrower. Furthermore, as a
marketing incentive, the ARM loans originated by First Federal generally
provide for initial rates of interest below the rates which would apply were
the adjustment index used for pricing initially (discounting). Because of
this, these loans are subject to increased risks of default or delinquency.
Another consideration is that although ARM loans allow the Association to
increase the sensitivity of its asset base to changes in the interest rates,
the extent of this interest sensitivity is limited by the periodic and
lifetime interest rate adjustment limits. Because of these considerations,
the Association has no assurance that yields on ARM loans will be sufficient
to offset increases in the Association's cost of funds.
First Federal also originates conventional fixed-rate mortgage loans on
one- to four- family residential properties. Most fixed-rate products are
underwritten according to the Federal Home Loan Mortgage Corporation's
("FHLMC") guidelines, utilizing their approved documents, so that the loans
qualify for sale in the secondary mortgage market. The Association originates
and holds its fixed-rate mortgage loans as long-term investments, but has the
capacity to sell these loans as deemed necessary by management. First Federal
originated $13 million of fixed-rate mortgage loans during the fiscal year
ending June 30, 1997. Of these, 84% had initial maturities of 15 years or
less.
The Association requires either title insurance or an attorney's title
opinion assuring the status of its lien on all real estate secured loans and
also requires that the fire and extended coverage insurance (and, if
appropriate, flood insurance) be maintained in an amount at least equal to the
outstanding loan balance.
The Association's lending policies generally limit the maximum
loan-to-value ratio on mortgage loans secured by owner-occupied properties to
95% of the lesser of the appraisal value or the purchase price, with the
condition that private mortgage insurance is required on loans with
loan-to-value ratios of greater than 80%. The maximum financing on refinance
loans is limited to either 90% of the appraised value and such loans require
private mortgage insurance above 80% loan to value.
Construction Loans. The Association originates construction mortgage
loans to residential owner-occupants (custom construction loans) and, on a
limited basis, commercial and multi-family properties primarily in the
Association's market area. Approximately $19 million, or 31% of the loans
originated by the Association for the year ended June 30, 1997 were
construction loans. At June 30, 1997, there were $300,000 of commitments to
provide additional construction loans. At June 30, 1997, $12 million, or 5%,
of total loans were construction loans, all of which were
construction/permanent loans (i.e., structured to become permanent loans upon
the completion of the construction). The Association has a program to provide
financing for speculative housing construction to selected contractors on a
limited basis. All construction loans are secured by a first lien on the
property under construction.
Construction lending is generally considered to involve a higher degree
of credit risk than other long-term financing of residential properties. The
Association's risk of loss on a construction loan is dependent largely upon
the accuracy of the initial estimate of the property's value at completion of
construction and the estimated cost (including interest) of construction. The
Association has sought to minimize the risks associated with construction
lending by limiting construction loans to qualified owner-occupied borrowers
with construction performed by qualified state licensed builders located
primarily in the Association's market area.
The Association's underwriting criteria are designed to evaluate and
minimize the risks of each construction loan. Interim construction loans are
qualified at permanent rates in order to ensure the capability of the borrower
to repay the loan.
Loan proceeds are disbursed only as construction progresses and
inspections warrant. These loans are either fixed-rate or ARM loans,
underwritten to the same standards and to the same terms and requirements
except the loans
7
provide for disbursement of funds during a construction period of up to one
year. During this period, the borrower is required to make monthly payments
of accrued interest on the outstanding loan balance. Disbursements during the
construction period are limited to no more than 80%. Up to 95% loan to value
upon completion of construction, may be disbursed if private mortgage
insurance above 80% loan to value is in place.
Commercial Real Estate Loans. First Federal has historically engaged in
a limited amount of commercial real estate lending. At June 30, 1997,
commercial real estate loans in First Federal's portfolio totalled $3 million
with most of the properties securing these loans located in South Carolina.
This lending has involved loans secured principally by churches, apartment
buildings, and owner occupied/rental commercial buildings. Generally, these
loans are made for a period of 20 years or less, with a loan-to-value ratio of
80% or less, with a fixed- or adjustable-rate indexed to the One or Three Year
Treasury Index.
At June 30, 1997, the largest commercial real estate loan was a $1
million loan to purchase two newly constructed auto parts stores. The second
largest commercial real estate loan was a $840,000 loan to refinance a
shopping center property. The borrowers on these two loans are comprised of
common principals, but are separate legal entities. The two loans are
cross-collateralized and have cross-default provisions. At June 30, 1997, the
outstanding balances on these two loans are $1 million and $815,000,
respectively.
Loans secured by commercial real estate generally are larger and involve
greater risks than one- to four-family residential mortgage loans. Payments
on loans secured by such properties are often dependent on successful
operation or management of the properties. Repayment of such loans may be
subject to a greater extent to adverse conditions in the real estate market or
the economy. The Association seeks to minimize these risks in a variety of
ways, including limiting the size of such loans and strictly scrutinizing the
financial condition of the borrower, the quality of the collateral and the
management of the property securing the loan. The Association also obtains
loan guarantees from financially capable parties. Substantially all of the
properties securing the Association's commercial and multi-family real estate
loans are inspected by the Association's lending personnel before the loan is
made. The Association also obtains appraisals on each property in accordance
with applicable regulations.
Consumer Loans. Consumer lending has been an important part of First
Federal's business. Consumer loans generally have shorter terms to maturity
or repricing and higher interest rates than the long-term, fixed-rate mortgage
loans. The Association's consumer loans consist of automobile loans, loans
secured by mortgages on residences, savings account loans, and unsecured loans
for any personal or household purposes. At June 30, 1997, the Association's
consumer loans totaled approximately $22 million, or 8%, of the Association's
loans receivable. Subject to market conditions, management expects to
continue to market and originate consumer loans as part of its strategy to
provide a wide range of personal financial services to its depository customer
base and as a means to enhance the interest rate sensitivity of the
Association's interest-earning assets and its interest rate spread.
Automobile loans are secured by both new and used cars and light trucks
and are generally limited to 80% of the "sticker price" or dealer invoice, or
the loan value as published by National Automobile Dealers Association or
National Auto Research "Black Book." Automobile loans are only made to the
borrower-owners on a direct basis or indirectly through designated automobile
dealerships using the Association's underwriting standards. New cars are
financed for a period of up to 60 months while used cars are financed for 54
months or less depending on the year and model. Collision and comprehensive
insurance and vendor single interest coverage is required on all automobile
loans. Loans acquired through indirect lending have declined with
management's decision to discontinue indirect lending at this time.
The Association offers closed-end, fixed-rate and open-end, variable rate
home equity loans that are made on the security of residences. Loans normally
do not exceed 80% of the appraised value of the residence, less the
outstanding principal of the first mortgage and have terms of up to 15 years
requiring monthly payments of principal and interest. At June 30, 1997, total
outstanding consumer home equity loans amounted to $17 million, or 6%, of
total loans of the Association.
8
The Association makes savings account loans for up to 90% of the
depositor's savings account balance. The interest rate is normally 2% above
the rate paid on the savings account but not less than prime, and the account
must be pledged as collateral to secure the loan. Savings account loans are
payable in monthly payments of principal and interest or in a single payment.
At June 30, 1997, total loans on savings accounts amounted to $1 million, or
1%, of the Association's total loans.
The Association offers "First Ready Reserve," an unsecured line of credit
to guard against checking customer overdrafts. At June 30, 1997, outstanding
balances totaled $112,000.
Consumer loans entail greater risk than do residential mortgage loans,
particularly in the case of consumer loans which are unsecured or secured by
rapidly depreciating assets such as automobiles. In such cases, any
repossessed collateral for a defaulted consumer loan may not provide an
adequate source of repayment of the outstanding loan balance as a result of
the greater likelihood of damage, loss or depreciation. The remaining
deficiency often does not warrant further substantial collection efforts
against the borrower beyond obtaining a deficiency judgment. In addition,
consumer loan collections are dependent on the borrower's continuing financial
stability, and thus are more likely to be adversely affected by job loss,
divorce, illness or personal bankruptcy. Furthermore, the application of
various federal and state laws, including federal and state bankruptcy and
insolvency laws, may limit the amount which can be recovered on such loans.
Such loans may also give rise to claims and defenses by a consumer loan
borrower against an assignee of such loans such as the Association, and a
borrower may be able to assert against such assignee claims and defenses that
it has against the seller of the underlying collateral. At June 30, 1997,
none of the Association's consumer loans were 90 days or more past due.
Commercial Loans. As a federally chartered savings institution, the
Association is authorized to invest up to 10% of its assets in commercial
loans not secured by real property. First Federal offers a variety of
business loans, including farm loans, equipment loans, inventory loans and
occasionally letters of credit. Commercial loans are primarily offered as an
accommodation to existing customers and are offered on a secured and unsecured
bases. At June 30, 1997, the total commercial loan portfolio was $7 million,
or 2%, of total loans. The largest commercial non-real estate loan was a $1.8
million non-purpose loan secured by stocks listed on the New York Stock
Exchange and bonds. The outstanding balance at June 30, 1997 was $1.3
million.
9
Loan Maturity and Repricing
The following table sets forth certain information at June 30, 1997 regarding the dollar amount of
loans maturing in the Association's portfolio based on their contractual terms to maturity, but does not
include scheduled payments or potential prepayments. Demand loans and loans having no stated schedule of
repayments and no stated maturity are reported as due in one year or less. Construction loans are presented
net of undisbursed proceeds. Consumer loans are presented net of unearned discounts.
After After After After
One Year 3 Years 5 Years 10 Years
Within Through Through Through Through Beyond
One Year 3 Years 5 Years 10 Years 20 Years 20 Years Total
-------- ------- ------- -------- -------- -------- -----
(Dollars in thousands)
Real
estate mortgage. $ 253 $ 529 $4,619 $22,343 $45,774 $164,510 $238,028
Commercial real
estate. . . . . . 163 347 531 1,749 53 -- 2,843
Construction. . . . 5,488 -- -- -- -- -- 5,488
Consumer. . . . . . 7,324 2,753 2,859 4,781 4,416 -- 22,133
Commercial. . . . . 4,149 653 1,067 734 -- -- 6,603
------- ------ ------ ------- ------- -------- --------
Total loans . . . .$17,377 $4,282 $9,076 $29,607 $50,243 $164,510 $275,095
======= ====== ====== ======= ======= ======== ========
The amount of loans as of June 30, 1997 due after June 30, 1998, which have fixed interest rates and
have floating or adjustable interest rates were $112 million and $146 million, respectively.
10
Loan Solicitation and Processing. Loan applicants come through direct
solicitation by Association personnel, referrals by realtors, builders,
previous and present customers and various media advertising promotions. All
types of loans may be originated in any of the Association's 11 offices.
Processing of mortgage loans are performed in the Greenwood office or in the
main office in Anderson, while consumer loans can be processed by each loan
officer in all 11 offices. All loans are serviced from the main office in
Anderson. Applications for fixed-rate and ARM loans on one- to four- family
properties are primarily underwritten and closed based on FHLMC standards, and
other loan applications are underwritten and closed based on the Association's
own guidelines.
The Association underwrites each individual loan file and performs
ride-by site inspections on 10% to 25% of the loans in each package of loans
that it purchases. Loans selected for site inspections are generally loans
with large principal balances or loan-to-value ratios exceeding 80%.
Upon receipt of a loan application from a prospective borrower, a credit
report and other data are obtained to verify specific information relating to
the loan applicant's employment, income and credit standing. An appraisal of
the real estate offered as collateral is undertaken by a fee appraiser
approved by First Federal and licensed or certified by the State of South
Carolina.
Residential loans up to $150,000 may be approved by any member of the
Loan Committee. Residential loans between $150,000 and $300,000 must be
approved by one member of the Board of Directors and one member of the loan
committee. Residential loans in excess of $300,000 must be approved by the
full Board of Directors or the Executive Committee acting on behalf of the
Board.
Consumer and commercial loans not exceeding $150,000 are approved by loan
officers based on their pre-approved lending limits. Loans over $150,000
through $300,000 require the approval of two members of the Board of
Directors. Loans in excess of $300,000 require the approval of the Board of
Directors or its appointees.
Loan applicants are promptly notified of the decision of the Association.
Interest rates are subject to change if the approved loan is not closed within
the time of the commitment.
Loan Originations, Sales and Purchases. The Association originates fixed
and adjustable rate residential mortgage loans that meet or exceed the
applicable underwriting requirements of the FHLMC. During the year ended June
30, 1997 the Association did not sell any loans. The total of loans serviced
for others as of June 30, 1997 was approximately $3 million.
During the year ended June 30, 1997, the Association's total mortgage
loan originations were $61 million, of which 79% were subject to periodic
interest rate adjustments and 21% were fixed rate loans.
Beginning in the late 1970s, the Association began purchasing loan
participations because the Association's traditional deposit sources of funds
began to outpace the demand for loans in its primary market area. As interest
rates increased during the 1980s, the Association experienced higher deposit
inflows and reduced loan demand. As a result, the Association purchased a
number of packages of deeply discounted whole loans. During 1985 through
1986, the Association focused on improving the interest rate sensitivity of
its assets and purchased packages of ARM loans. Subsequent to this period,
the Association has established a small network for purchasing ARM loans which
involved institutions located in selected Southeastern states.
In addition to selling loans, First Federal has purchased in the
secondary market ARM loans secured by single-family residential properties
located outside of its primary market area. The Association's purchases in
the secondary market are dependent upon the demand for mortgage credit in the
local market area and the availability of suitable loan product being offered
for sale.
11
The Association purchases primarily single-family owner-occupied ARM
loans on primary residences. These loans typically have adjustment periods of
from one to three years. The Association seeks loans primarily in the
Southeast (excluding Florida), but has also purchased selected loans in areas
from Pennsylvania to New England.
During the year ended June 30, 1997, the Association purchased loans
totaling $2 million. At June 30, 1997, 76% of purchased loans were ARM loans.
During the year ended June 30, 1997, the Association's loan portfolio
increased by $34 million, or 14% as a result of loan originations. Mortgage
loan originations decreased by $3 million compared to 1996. Principal
repayments also decreased by $3 million compared to 1996. Higher mortgage
rates and decreased refinancing during the year contributed to the decreases
in both originations and repayments.
To supplement the local production, the Association has established a
network of correspondents to originate ARM loans. While the marketplace
favors fixed-rate mortgage products, management seeks the interest rate
sensitivity of the ARM loans to reduce market rate risk. Additionally, to
attempt to increase originations further, the Association offers 3/1, 5/1 and
10/1 ARM loans and open-end home equity loans. These loans have helped
management meet community needs, broaden the Association's customer base and
add additional lines of business. In addition, management is also reviewing
its options for increased production of existing products.
12
The following table shows the location of the real estate securing purchased participation and whole
loans and the delinquency experienced on these loans at the dates indicated.
At June 30,
-------------------------------------------------------------------
1995 1996 1997
------------------- ------------------ ------------------
% of % of % of
Total Total Total
Real Real Real
Estate Estate Estate
Amount Loans Amount Loans Amount Loans
------ ------ ------ ------ ------ ------
(Dollars in thousands)
Purchased
Participation
Loans South-
east(1). . . . . . $ 402 --% $ 322 --% $ 240 --%
South Carolina. . . .2,927 2 1,372 1 869 1
------- --- ------- --- ------ ---
Total . . . . . $3,329 2% $1,694 1% $ 1,109 1%
======= === ======= === ======= ===
Purchased
Whole Loans
New England(2). . . $5,203 3% $2,206 1% $ 21 --%
Midwest(3). . . . . 406 -- 300 -- 215 --
Mid Atlantic(4) . . 4,292 2 3,425 2 2,908 1
Southeast(1). . . . 10,821 5 7,298 3 5,318 2
South Carolina. . . 11,313 6 13,889 6 15,374 6
------- --- ------- --- ------- ---
Total . . . . .$32,035 16% $27,118 12% $23,836 9%
======= === ======= === ======= ===
Total purchased
participation
and whole loans . $35,364 18% $28,812 13% $24,945 10%
======= === ======= === ======= ===
Percent of total
loans . . . . . . 16% 11% 9%
Purchased partici-
pation loans 90
days or more
delinquent. . . . $ -- $ -- $ --
Purchase whole loans
90 days or more
delinquent. . . . 646 38 --
------- ------- ------
Total purchased partici-
pation and whole loans
90 days or more
delinquent . . . . $ 646 $ 38 $ --
======= ======= ======
Percent of total
loans . . . . . . .29% .02% --%
======= ======= ======
- --------------
(1) Primarily includes loans secured by properties in Alabama, Florida, Georgia, North Carolina and
Virginia.
(2) Primarily includes loans secured by properties in Connecticut, Maine, Massachusetts, New Hampshire and
Rhode Island.
(3) Primarily includes loans secured by properties in Indiana and North Dakota.
(4) Primarily includes loans secured by properties in Maryland, New Jersey, Pennsylvania, West Virginia and
the District of Columbia.
13
The following table shows total mortgage loans originated, purchased,
sold and repaid during the periods indicated.
Years Ended June 30,
--------------------------------
1995 1996 1997
(In thousands)
Total mortgage loans at beginning
of period . . . . . . . . . . . . $165,341 $196,245 $226,738
Loans originated:
Single-family residential. . . . . 36,334 44,828 41,976
Multi-family residential and
commercial real estate. . . . . . -- -- --
Construction loans . . . . . . . . 16,813 19,304 18,817
Other loans. . . . . . . . . . . . 135 198 272
Total loans originated . . . . . 53,282 64,330 61,065
Single-family residential loans
purchased . . . . . . . . . . . . 3,250 5,428 2,412
Total whole loans sold. . . . . . . -- -- --
Mortgage loan principal repayments. (25,720) (39,466) (36,527)
Other . . . . . . . . . . . . . . . 92 201 (467)
Net loan activity . . . . . . . . . 30,904 30,493 26,483
-------- -------- --------
Total mortgage loans at end of
period . . . . . . . . . . . . . $196,245 $226,738 $253,221
======== ======== ========
Loan Commitments. The Association issues commitments for fixed- and
adjustable-rate single-family residential mortgage loans conditioned upon the
occurrence of certain events. Such commitments are made in writing on
specified terms and conditions and are honored for up to 60 days from
application. The Association had outstanding loan commitments of
approximately $4 million at June 30, 1997. Also, the Association had
undisbursed advances on consumer lines of credit of $6 million at June 30,
1997. See Notes 21 and 22 of the Notes to Consolidated Financial Statements
contained in Item 8 hereof.
Loan Origination and Other Fees. The Association, in some instances,
receives loan origination fees and discount "points." Loan fees and points
are a percentage of the principal amount of the mortgage loan which are
charged to the borrower for funding the loan. The amount of points charged by
the Association varies, though the range generally is between 0 and 2 1/2
points. Current accounting standards require fees received (net of certain
loan origination costs) for originating loans to be deferred and amortized
into interest income over the contractual life of the loan. Net deferred fees
associated with loans that are prepaid are recognized as income at the time of
prepayment. The Association had $514,000 of net deferred mortgage loan fees
and $138,000 of deferred consumer loan expense at June 30, 1997.
The Association also receives loan servicing fees on the loans it sells
by retaining servicing responsibilities.
Nonperforming Assets and Delinquencies. When a mortgage loan borrower
fails to make a required payment when due, the Association institutes
collection procedures. The first notice is mailed to the borrower 16 days
after the payment due date and, if necessary, a second written notice follows
by the 10th day of the following month. Attempts to contact the borrower by
telephone generally begin approximately 15 days after the 10th day notice is
mailed to the borrower. If a satisfactory response is not obtained,
continuous follow-up contacts are
14
attempted until the loan has been brought current or an agreement is made.
Before the 90th day of delinquency, attempts to interview the borrower,
preferably in person, are made to establish (i) the cause of the delinquency,
(ii) whether the cause is temporary, (iii) the attitude of the borrower toward
the debt, and (iv) a mutually satisfactory arrangement for curing the default.
Also, in the case of second mortgage loans, before the 90th day of
delinquency, all superior lienholders are contacted to determine (a) the
status and unpaid principal balance of each superior lien, (b) whether any
mortgage constituting a superior lien has been sold to any investor, and (c)
whether the borrower is also delinquent under a superior lien and what the
affected lienholder intends to do to resolve the delinquency.
If the borrower cannot be reached and does not respond to collection
efforts, a personal collection visit or property inspection is made. The
physical condition and occupancy status of the property is determined before
recommending further servicing action. Such inspection normally takes place
before the 90th day of delinquency. By the 30th day of delinquency, the
Association notifies the borrower that home ownership counseling is available
for eligible homeowners.
In most cases, delinquencies are cured promptly; however, if by the 90th
day of delinquency, or sooner if the borrower is chronically delinquent and
all reasonable means of obtaining payment on time have been exhausted,
foreclosure, according to the terms of the security instrument and applicable
law, is initiated. Interest income on loans is reduced by the full amount of
accrued and uncollected interest.
When a consumer loan borrower fails to make a required payment on a
consumer loan by the payment due date, the Association institutes collection
procedures. The first notice is mailed to the borrower 11 days following the
payment due date. The borrower is also contacted by the use of collection
letters, phone calls or personal visits to determine the nature of delinquency
and to agree on a method to cure the default.
In most cases, delinquencies are cured promptly; however, if, by the 15th
day following the grace period of delinquency no progress has been made, a
written notice is mailed informing the borrowers of their right to cure the
delinquency within 20 days and of the Association's intent to begin legal
action if the delinquency is not corrected. Depending on the type of property
held as collateral, the Association either obtains a judgment in small claims
court, takes action to repossess the collateral, or initiates a foreclosure
action.
The Association's Board of Directors is informed on a monthly basis as to
the status of all mortgage and consumer loans that are delinquent 30 days or
more, the status on all loans currently in foreclosure, and the status of all
foreclosed and repossessed property owned by the Association.
15
The following table sets forth information with respect to the
Association's nonperforming assets at the dates indicated. At the dates
shown, the Association had no restructured loans within the meaning of SFAS
15.
At June 30,
-------------------------------------------
1993 1994 1995 1996 1997
---- ---- ---- ---- ----
(Dollars in thousands)
Loans accounted for on
a nonaccrual basis:
Real estate -
Residential. . . . . . $471 $179 $704 $584 $209(1)
Commercial . . . . . . -- -- -- -- --
Commercial business . . -- -- -- -- --
Consumer. . . . . . . . -- -- -- -- --
---- ---- ---- ---- ----
Total . . . . . . . $471 $179 $704 $584 $209
---- ---- ---- ---- ----
Accruing loans which
are contractually past
due 90 days or more:
Real estate -
Residential. . . . . . $ -- $ -- $ -- $ -- $ --
Commercial . . . . . . -- -- -- -- --
Commercial business . . -- -- -- -- --
Consumer. . . . . . . . 21 17 58 15 --
---- ---- ---- ---- ----
Total. . . . . . . $ 21 $ 17 $ 58 $ 15 $ --
---- ---- ---- ---- ----
Total of nonaccrual
and 90 days past
due loans . . . . . . $492 $196 $762 $599 $209
Real estate owned . . . . 323 229 27 25 --
Other nonperforming
assets. . . . . . . . . 48 5 -- -- --
---- ---- ---- ---- ----
Total nonperforming
assets . . . . . . . $863 $430 $789 $624 $209
==== ==== ==== ==== ====
Total loans delinquent
90 days or more to
total loans . . . . . . 0.23% 0.10% 0.35% 0.24% 0.07%
Total loans delinquent
90 days or more to
total assets. . . . . . 0.16% 0.06% 0.22% 0.18% 0.06%
Total nonperforming assets
to total assets . . . . 0.27% 0.13% 0.22% 0.19% 0.06%
- -------------
(1) $17,000 of interest income would have been recorded during the year ended
June 30, 1997 if these loans had been current, while only $10,000 was recorded
in net income for the period.
Real Estate Owned. Real estate acquired by the Association as a result
of foreclosure or by deed in lieu of foreclosure is classified as real estate
owned until it is sold. When property is acquired it is recorded at fair
value. Subsequent to foreclosure, the property is carried at the lower of
initial fair value or existing fair value less cost to sell (net realizable
value). Upon receipt of a new appraisal and market analysis, the carrying
value is written down through the establishment of a specific reserve to the
anticipated sales price less selling and holding costs. At June 30, 1997, the
Association had no real estate acquired through foreclosure.
16
Asset Classification. The OTS has adopted various regulations regarding
problem assets of savings institutions. The regulations require that each
insured institution review and classify its assets on a regular basis. In
addition, in connection with examinations of insured institutions, OTS
examiners have authority to identify problem assets and, if appropriate,
require them to be classified. There are three classifications for problem
assets: substandard, doubtful and loss. Substandard assets must have one or
more defined weaknesses and are characterized by the distinct possibility that
the insured institution will sustain some loss if the deficiencies are not
corrected. Doubtful assets have the weaknesses of substandard assets with the
additional characteristic that the weaknesses make collection or liquidation
in full on the basis of currently existing facts, conditions and values
questionable, and there is a high possibility of loss. An asset classified
loss is considered uncollectible and of such little value that continuance as
an asset of the institution is not warranted. The regulations have also
created a special mention category, described as assets which do not currently
expose an insured institution to a sufficient degree of risk to warrant
classification but do possess credit deficiencies or potential weaknesses
deserving management's close attention. If an asset or portion thereof is
classified loss, the insured institution establishes specific allowances for
loan losses for the full amount of the portion of the asset classified loss.
A portion of general loan loss allowances established to cover possible losses
related to assets classified substandard or doubtful may be included in
determining an institution's regulatory capital, while specific valuation
allowances for loan losses generally do not qualify as regulatory capital.
The Association's senior officers meet monthly to review all classified
assets, to approve action plans developed to resolve the problems associated
with the assets and to review recommendations for new classifications, any
changes in classifications and recommendations for reserves.
At June 30, 1997, the Association's classified assets totaled
approximately $523,000 consisting of classified loans for which specific loss
allowances of $1,000 has been provided.
At June 30, 1996 and 1997, the aggregate amounts of the Association's
classified assets were as follows:
At June 30,
--------------------
1996 1997
---- ----
(In thousands)
Loss. . . . . . . . . . . . . . $ 16 $ --
Doubtful. . . . . . . . . . . . -- --
Substandard assets. . . . . . . 800 387
Special mention . . . . . . . . -- 136
Loans classified above do not (i) represent or result from trends or
uncertainties which management reasonably expects will materially impact
future operating results, liquidity or capital resources, or (ii) represent
material credits about which management is aware of any information which
causes management to have serious doubts as to the ability of such borrowers
to comply with the loan repayment terms.
Allowance for Loan Losses. The Association has established a systematic
methodology for the determination of provisions for loan losses. The
methodology is set forth in a formal policy and takes into consideration the
need for an overall general valuation allowance as well as specific allowances
that are tied to individual loans.
In originating loans, the Association recognizes that losses will be
experienced and that the risk of loss will vary with among other things, the
type of loan being made, the creditworthiness of the borrower over the term of
the loan, general economic conditions and, in the case of a secured loan, the
quality of the security for the loan. The Association increases its allowance
for loan losses by charging provisions for possible loan losses against the
Association's income.
17
At June 30, 1997, the Association's loan portfolio consisted of several
loans that were determined by management to have a certain element of risk
that may require the Association to establish additional allowances. These
loans included $24 million, or 10%, of the Association's loan portfolio that
were secured by properties located outside of the State of South Carolina.
The general valuation allowance is maintained to cover possible but
unidentified losses in the portfolio of performing loans. Management reviews
the adequacy of the allowance at least quarterly based on its knowledge of the
portfolio including current asset classifications, the Association's write-off
history, economic conditions affecting the real estate markets and industry
standards.
Specific valuation allowances are established to absorb losses on loans
for which full collectibility may not be reasonably assured. The amount of
the allowance is based on the estimated value of the collateral securing the
loan and other analyses pertinent to each situation.
A provision for losses is charged against income on a monthly basis to
maintain the allowances. The provisions for losses charged against income for
the years ended June 30, 1995, 1996 and 1997 were $180,000, $180,000 and
$180,000, respectively. At June 30, 1997, the Association had allowances for
loan losses of $1.4 million, which represented .49% of total loans.
Management believes that the amount maintained in the allowances will be
adequate to absorb possible losses in the portfolio.
Although management believes that it uses the best information available
to make such determinations, future adjustments to the allowance for loan
losses may be necessary and results of operations could be significantly and
adversely affected if circumstances differ substantially from the assumptions
used in making the determinations.
At June 30, 1997, based on the information available to the Association
at that time, the Association anticipates that it will have the following
approximate amounts of charge-offs against the Association's income during the
next full year of operations. The numbers in the table set forth below
represent projections based on management's best estimate of anticipated
charge-offs during the next year. No assurance can be given, however, that
the Association's future charge-off experience will match these projections.
Type of Loan Amount
------------ ------
(In thousands)
Mortgage Loans:
One- to four- family . . . . . . $ 20
Construction . . . . . . . . . . 20
Commercial real estate . . . . . 20
Other real estate. . . . . . . . --
Consumer Loans:
Real estate. . . . . . . . . . . 20
Automobile . . . . . . . . . . . 30
Other. . . . . . . . . . . . . . 50
Commercial . . . . . . . . . . . . 20
----
Total . . . . . . . . . . . . . $180
====
Charge-offs occur when loans with specific reserves are foreclosed. The
specific reserve, along with any additional amounts necessary to reduce the
carrying value to fair market value, is charged-off. The book value of the
foreclosed asset is thereafter carried at the lower of the asset's book value
or its net realizable value. When the asset is sold, any excess/(deficiency)
over the book value is reflected on the books as a gain/(loss) on the sale of
real estate owned.
The Association's market area is heavily concentrated in manufacturing,
although there are more than 200 different manufacturing firms that employ
over 20,000 people in Anderson County alone. The BMW automotive plant in
nearby Spartanburg County, approximately 45 miles from Anderson, is expected
to attract additional support manufacturers to the upstate area of South
Carolina, including Anderson County which is in the Interstate-85 corridor
18
halfway between Atlanta, Georgia and Charlotte, North Carolina. Real estate
values have been stable to slightly increasing over the past three years.
There can be no assurance as to the future performance of real estate
markets, including those in which the Association primarily operates. A
downturn in the South Carolina real estate markets could have a material
adverse effect on the Association's operations. For example, depressed real
estate values may result in increases in nonperforming assets, hamper
disposition of such nonperforming assets and result in losses upon such
disposition.
While the Association believes it has established its existing allowance
for loan losses in accordance with GAAP, there can be no assurance that
regulators, in reviewing the Association's loan portfolio, will not request
the Association to increase significantly its allowance for loan losses. In
addition, because future events affecting borrowers and collateral cannot be
predicted with certainty, there can be no assurance that the existing
allowance for loan losses is adequate or that substantial increases will not
be necessary should the quality of any loans deteriorate as a result of the
factors discussed above. Any material increase in the allowance for loan
losses may adversely affect the Association's financial condition and results
of operations.
The following table sets forth an analysis of the Association's gross
allowance for possible loan losses for the periods indicated. Where specific
loan loss reserves have been established, any difference between the loss
reserve and the amount of loss realized has been charged or credited to
current income.
Years Ended June 30,
------------------------------------------
1993 1994 1995 1996 1997
---- ---- ---- ---- ----
(Dollars in thousands)
Allowance at beginning
of period . . . . . . $270 $843 $ 914 $1,062 $1,233
Provision for loan
losses. . . . . . . . 805 225 180 180 180
Recoveries . . . . . . 4 30 52 35 14
Charge-offs:
Mortgage. . . . . . . -- -- -- 12 36
Commercial. . . . . . -- -- 25 -- --
Consumer. . . . . . . 236 184 59 32 21
---- ---- ------ ------ ------
Total charge-offs . 236 184 84 44 57
---- ---- ------ ------ ------
Net charge-offs . . 232 154 32 9 43
---- ---- ------ ------ ------
Balance at end of
period . . . . . . . $843 $914 $1,062 $1,233 $1,370
==== ==== ====== ====== ======
Ratio of allowance to
total loans out-
standing at the end
of the period . . . . .40% .48% .48% .49% .49%
Ratio of net charge-
offs to average net
loans outstanding
during the period . . .11% .08% .02% -- .02%
Mortgage-Backed Securities. To supplement lending activities in periods
of deposit growth and/or declining loan demand, the Corporation has invested
in residential mortgage-backed securities. Although such securities are held
for investment, they can serve as collateral for borrowings and, through
repayments, as a source of liquidity. For information regarding the carrying
and market values of the Corporation's mortgage-backed securities portfolio,
see Note 4 of the Notes to Consolidated Financial Statements contained in Item
8 hereof. The Corporation invests in mortgaged-backed securities guaranteed
by FHLMC and the Federal National Mortgage Association ("FNMA").
Mortgage-backed securities are generally fixed- or adjustable-rate
instruments with terms up to 30 years. The value of fixed-rate securities
fluctuates with changes in market interest rates. Also, prepayments of the
19
mortgages which collateralize adjustable-rate securities typically increase
during periods of lower interest rates. Increased prepayments affect the
carrying values and yields on these securities.
As of June 30, 1997, the Association's portfolio included $14 million of
mortgage-backed securities purchased as investments to supplement the
Association's mortgage lending activities. These mortgage-backed securities
were comprised of 17% adjustable-rate and 83% fixed-rate securities.
Investment Activities
Federal savings and loan associations have authority to invest in various
types of liquid assets, including United States Treasury obligations,
securities of various federal agencies and of state and municipal governments,
deposits at the FHLB-Atlanta, certificates of deposit of federally insured
institutions, certain bankers' acceptances and federal funds. Subject to
various restrictions, such savings institutions may also invest a portion of
their assets in commercial paper, corporate debt securities and mutual funds,
the assets of which conform to the investments that federally chartered
savings institutions are otherwise authorized to make directly. Savings
institutions are also required to maintain minimum levels of liquid assets
which vary from time to time. See "REGULATION -- Federal Regulation of
Savings Associations -- Federal Home Loan Bank System." The Association may
decide to increase its liquidity above the required levels depending upon the
availability of funds and comparative yields on investments in relation to
return on loans.
The Association is required under federal regulations to maintain a
minimum amount of liquid assets and is also permitted to make certain other
securities investments. See "REGULATION." The balance of the Association's
investments in short-term securities in excess of regulatory requirements
reflects management's response to the significantly increasing percentage of
deposits with short maturities. At June 30, 1997, the Association's
regulatory liquidity was 8%, which exceeds the 5% required by OTS regulations.
It is the intention of management to hold securities with short-term
maturities in the Association's investment portfolio in order to enable the
Association to provide liquidity and to match more closely the interest-rate
sensitivities of its assets and liabilities.
The Asset Liability Committee ("ALCO"), comprised of the Association's
President, Executive Vice President and other Vice Presidents, determines
appropriate investments in accordance with the Board of Directors' approved
investment policies and procedures.
Investments are made following certain considerations, which include the
Association's liquidity position and anticipated cash needs and sources (which
in turn include outstanding commitments, upcoming maturities, estimated
deposits, anticipated loan amortization and repayments, and amortization of
mortgage-backed securities). Further, the effect that the proposed investment
would have on the Association's "gap" position, credit and interest rate risk,
and risk-based capital is given consideration during the evaluation. The
interest rate, yield, settlement date and maturity are also reviewed.
All book entry securities purchases are settled delivery versus payment
and placed in safekeeping at the Federal Reserve Bank of Richmond
("FRB-Richmond"). Securities not eligible for safekeeping at the FRB-Richmond
are held at a commercial bank. At June 30, 1997, the Association's securities
portfolio totaled approximately $37 million and consisted principally of
Treasury securities and, U.S. Government agency securities.
20
The following table sets forth the Corporation's investment securities
portfolio at carrying value at the dates indicated.
At June 30,
----------------------------------------------------------------
1995 1996 1997
-------------------- -------------------- --------------------
Book Percent of Book Percent of Book Percent of
Value(1) Portfolio Value(1) Portfolio Value(1) Portfolio
-------- ---------- -------- ---------- -------- ----------
(Dollars in thousands)
Investment
securities:
Insured
certificates
of deposit . $ 6,127 7% $ 5,679 11% $ 100 --%
U.S.
government
treasury and
obligations
of U.S.
government
agencies . 54,933 61 17,995 35 15,992 43
Municipal
bonds . . . 489 1 -- -- -- --
------- ---- ------- --- ------- ---
Subtotal. . . 61,549 69 23,674 46 16,092 43
Securities
available
for sale:
U.S.
government
treasury
and
obligations
of U.S.
government
agencies . . -- -- 27,316 54 21,268 57
Mutual funds. 28,285 31 -- -- -- --
------- --- ------- --- ------- ---
Subtotal. . . 28,285 31 27,316 54 21,268 57
------- --- ------- --- ------- ---
Total. . . . $89,834 100% $50,990 100% $37,360 100%
======= === ======= === ======= ===
________________
(1) The market value of the Corporation's investment securities portfolio
amounted to $61 million, $23 million and $16 million, at June 30,
1995, 1996 and 1997, respectively.
The following table sets forth the maturities and weighted average yields
of the securities in the Corporation's investment securities portfolio at June
30, 1997.
Less Than One to Five to Greater than
One Year Five Years Ten Years Ten Years
------------- ------------- ------------- -------------
Amount Yield Amount Yield Amount Yield Amount Yield
------ ----- ------ ----- ------ ----- ------ -----
(Dollars in thousands)
Investment
securities:
Insured
certificates
of deposit . . . . $ 100 6.10% $ -- --% $ -- --% $ -- --%
U.S. government
treasury and
obligations of
U.S. government
agencies . . . . . -- -- 1,996 6.35 7,996 6.69 6,000 7.09
----- ------ ------ ------
Subtotal . . . . . 100 1,996 7,996 6,000
Securities available
for sale:
U.S. government
treasury and
obligations of
U.S. government
agencies . . . . . 4,516 6.92 1,636 7.04 15,116 7.85 -- --
------ ------ ------- ------
Total. . . . . . $4,616 $3,632 $23,112 $6,000
====== ====== ======= ======
There was no security held by the Association as of June 30, 1997, other
than U.S. Government and agency securities, which had an aggregate book value
in excess of 10% of the Association's retained earnings.
21
Subsidiary Activities
General. Federal associations generally may invest up to 3% of their
assets in service corporations, provided that at least one-half of any amount
in excess of 1% is used primarily for community, inner-city and community
development projects. The Association's investment in its service corporation
at June 30, 1997 did not exceed the limits applicable to federal savings and
loan associations.
First Federal is the 100% owner of First Master Service Corporation
("First Master"), a South Carolina corporation, which was incorporated in
1984. At June 30, 1997, the Association had $1,000 invested in First Master's
common stock and $188,000 of equity interest in First Master's accumulated
losses. First Master is principally engaged in real estate development and
leasing activities. The Association has advanced funds to First Master for
acquisition of properties and operations. These funds were advanced on an
unsecured basis at a rate of interest indexed to the Association's costs of
funds. The amount of advances outstanding at June 30, 1997 is $942,000. From
November 1984 to November 1987, First Master acquired 45.6 acres of
undeveloped real estate. The property, consisting of 11.6 acres of prime
commercial land and 34 acres of residential or other purpose land, is located
near Anderson, South Carolina. The total amount invested in the property is
$588,000. As a result of failed negotiations with a joint venture partner,
the plans to construct a retirement facility were discontinued in 1987. First
Master is currently considering other options for the property. On December
23, 1985, First Master entered into an agreement to lease other land and
building to an investor for a national restaurant franchise. The lease term
is 20 years. The net amount invested in the property as of June 30, 1997 is
$164,000. During the last quarter of fiscal 1996, First Master began the
operation of the Investment Center at First Federal. The Center, which sells
uninsured investment products, reached profitable levels in its fourth month
of operations. During the year ended June 30, 1997, First Master recognized
net income of $83,000. The operations of First Master are included in the
Corporation's consolidated financial statements contained in Item 8 hereof.
Deposit Activities and Other Sources of Funds
General. Deposits and loan and investment repayments are the major
sources of the Association's funds for lending and other investment purposes.
Scheduled loan repayments and investment maturities are relatively stable
sources of funds, while deposit inflows and outflows and loan prepayments are
influenced significantly by general interest rates and money market
conditions. Borrowings may be used on a short-term basis to compensate for
reductions in the availability of funds from other sources. They may also be
used on a longer-term basis for general business purposes.
Deposit Accounts. Deposits are attracted from within the Association's
primary market area through the offering of a broad selection of deposit
instruments, including NOW accounts, money market deposit accounts, regular
savings accounts, certificates of deposit and retirement savings plans.
Deposit account terms vary, according to the minimum balance required, the
time periods the funds must remain on deposit and the interest rate, among
other factors. In determining the terms of its deposit accounts, the
Association considers current market interest rates, alternative sources of
funds, matching deposit and loan products and its customer preferences and
concerns. The Association generally reviews its deposit mix and pricing
weekly.
22
The following table sets forth information concerning the Association's deposits at June 30, 1997.
Percentage
Interest Minimum of Total
Rates Offered Term Category Amount Balance Deposits
- ------------- ---- -------- ------- ------- ----------
(In thousands)
1.25 - 1.35% Daily NOW accounts $500/2,500 $ 20,033 7%
None Daily Non-interest checking none 2,782 1
2.50 - 3.75 Daily Money market accounts 500/10,000 13,108 5
2.25 - 2.50 Daily Passbook savings account 50/2,500 26,633 9
Certificates of Deposit(1)
-----------------------
4.80 91 days Fixed term, fixed rate 500 2,486 1
5.25 6 months Fixed term, fixed rate 500 38,095 13
5.30 12 months Fixed term, fixed rate 100 112,075 39
5.35 18 months Fixed term, fixed rate 100 4,065 2
5.35 24 months Fixed term, fixed rate 100 15,389 6
6.20 30 months Fixed term, fixed rate 10,000 3,900 1
5.35 36 months Fixed term, fixed rate 100 28,609 10
5.40 60 months Fixed term, fixed rate 100 5,909 2
5.40 84 months Fixed term, fixed rate 100 11,247 4
Various Various Jumbo certificates 100,000 460 --
-- -- Less premium on deposits acquired (8) --
------- ---
Total $284,783 100%
======== ===
- -------------
(1) Includes accounts with balances of $100,000 or more with remaining maturities of three months or
less, three to six months, six to 12 months and over 12 months of $8 million, $4 million, $8 million
and $10 million, respectively.
23
Deposit Flow
The following table sets forth the balances of savings deposits in the various types of savings
accounts offered by the Association at the dates indicated.
At June 30,
-------------------------------------------------------------------------------------
1995 1996 1997
----------------- ------------------------------- -----------------------------
Percent Percent Percent
of of Increase of Increase
Amount Total Amount Total (Decrease) Amount Total (Decrease)
------ ------- ------ ------- ---------- ------ ------- ----------
(Dollars in thousands)
Non-interest
bearing . . . . . $ 1,222 --% $ 1,577 1% $ 355 $ 2,782 1% $ 1,205
NOW checking . . . 19,020 7 19,852 7 832 20,033 7 181
Passbook savings
accounts. . . . . . 27,634 10 27,470 10 (164) 26,633 9 (837)
Money market
deposit . . . . . . 14,700 5 15,574 5 874 13,108 5 (2,466)
Jumbo certificates . 2,654 1 4,200 1 1,546 460 -- (3,740)
Other fixed-rate
certificates which
mature:
Within one year. . 60,744 58 160,531 56 (213) 191,476 67 30,945
Within three
years . . . . . . 43,119 16 54,810 19 11,691 28,113 10 (26,697)
After three years. 9,169 3 4,221 1 (4,948) 2,186 1 (2,035)
Less: Premium on
deposits acquired. (31) -- (18) -- 13 (8) -- 10
-------- --- -------- --- ------ -------- --- -------
Total . . . . $278,231 100% $288,217 100% $9,986 $284,783 100% $(3,434)
======== === ======== === ====== ======== === =======
24
Time Deposits by Rates
The following table sets forth the time deposits in the Association classified by rates as of the dates
indicated.
At June 30,
----------------------------------------------------------
1995 1996 1997
---- ---- ----
(In thousands)
4.00% and below . . . . . . . $ 4,364 $ -- $ --
4.01 - 5.00%. . . . . . . . . 44,310 12,887 2,606
5.01 - 6.00%. . . . . . . . . 85,323 163,669 183,680
6.01 - 7.00%. . . . . . . . . 68,534 37,664 27,828
7.01 - 9.00%. . . . . . . . . 12,028 9,542 8,121
9.01 - 11.00% . . . . . . . . 1,127 -- --
-------- -------- --------
Total . . . . . . . . . . $215,686 $223,762 $222,235
======== ======== ========
The following table sets forth the amount and maturities of time deposits at June 30, 1997.
Amount Due
Percent
of Total
Less Than 1-2 2-3 3-4 After Certificate
One Year Years Years Years 4 Years Total Accounts
--------- ----- ----- ----- ------- ----- -----------
(Dollars in thousands)
4.01 - 5.00%. . $ 2,606 $ -- $ -- $ -- $ -- $ 2,606 1%
5.01 - 6.00%. . 165,368 13,105 3,831 840 536 183,680 83
6.01 - 7.00%. . 19,869 4,447 2,731 506 275 27,828 12
7.01 - 9.00%. . 4,093 3,999 -- -- 29 8,121 4
-------- ------- ------ ------ ---- -------- ---
Total . . . . . $191,936 $21,551 $6,562 $1,346 $840 $222,235 100%
======== ======= ====== ====== ==== ======== ===
25
The following table sets forth the savings activities of the Association
for the periods indicated.
Years Ended June 30,
---------------------------------------
1995 1996 1997
------ ------ ------
(In thousands)
Beginning balance . . . $271,734 $278,231 $288,217
Net increase (decrease)
before interest
credited . . . . . . . (5,102) (4,297) (17,231)
Interest credited . . . 11,581 14,270 13,787
Net increase (decrease)
in savings deposits . . 6,479 9,973 (3,444)
Deposit premium
amortization. . . . . . 18 13 10
-------- -------- --------
Ending balance. . . . . $278,231 $288,217 $284,783
======== ======== ========
In the unlikely event the Association is liquidated, depositors will be
entitled to full payment of their deposit accounts prior to any payment being
made to the Corporation, as stockholder of the Association. Substantially all
of the Association's depositors are residents of South Carolina or Northern
Georgia.
Borrowings. Savings deposits are the primary source of funds for the
Association's lending and investment activities and for its general business
purposes. The Corporation has executed agreements with a broker-dealer to
sell agency securities and to repurchase those securities at the maturity of
the agreements. Under these agreements, $15 million was borrowed for two year
terms at an average rate of 6.27%. Additionally, the Association may rely
upon advances from the FHLB-Atlanta to supplement its supply of lendable funds
and to meet deposit withdrawal requirements. The FHLB-Atlanta has, from time
to time, served as one of the Association's primary borrowing sources.
Advances from the FHLB-Atlanta are typically secured by the Association's
first mortgage loans. At June 30, 1997, the Association had a $10 million
borrowing from the FHLB-Atlanta with a term of five years at 5.87%.
The FHLB-Atlanta functions as a central reserve bank providing credit for
savings and loan associations and certain other member financial institutions.
As a member, the Association is required to own capital stock in the
FHLB-Atlanta and is authorized to apply for advances on the security of such
stock and certain of its mortgage loans and other assets (principally
securities which are obligations of, or guaranteed by, the United States
government) provided certain creditworthiness standards have been met.
Advances are made pursuant to several different credit programs. Each credit
program has its own interest rate and range of maturities. Depending on the
program, limitations on the amount of advances are based on the financial
condition of the member institution and the adequacy of collateral pledged to
secure the credit.
Competition
The Association faces strong competition in the attraction of savings
deposits (its primary source of lendable funds) and in the origination of
loans. Its most direct competition for savings deposits has historically come
from other thrift institutions, credit unions and from commercial banks
located in its primary market area. Particularly in times of high interest
rates, the Association has faced additional significant competition for
investors' funds from short-term money market securities and other corporate
and government securities. The Association's competition for loans comes
principally from other thrift institutions, commercial banks, mortgage banking
companies and mortgage brokers.
26
According to the most current information available, based on total
deposits as of June 30, 1996, the Association had the second largest deposit
share of the 23 savings and loan associations, commercial banks and credit
unions located in Anderson County.
Personnel
As of June 30, 1997, the Association had 118 full-time and seven
part-time employees. The employees are not represented by a collective
bargaining unit. The Association believes its relationship with its employees
to be good.
REGULATION
General
The Association is subject to extensive regulation, examination and
supervision by the OTS as its chartering agency, and the FDIC, as the insurer
of its deposits. The activities of federal savings institutions are governed
by the Home Owners' Loan Act, as amended (the "HOLA") and, in certain
respects, the Federal Deposit Insurance Act ("FDIA") and the regulations
issued by the OTS and the FDIC to implement these statutes. These laws and
regulations delineate the nature and extent of the activities in which federal
savings associations may engage. Lending activities and other investments
must comply with various statutory and regulatory capital requirements. In
addition, the Association's relationship with its depositors and borrowers is
also regulated to a great extent, especially in such matters as the ownership
of deposit accounts and the form and content of the Association's mortgage
documents. The Association must file reports with the OTS and the FDIC
concerning its activities and financial condition in addition to obtaining
regulatory approvals prior to entering into certain transactions such as
mergers with, or acquisitions of, other financial institutions. There are
periodic examinations by the OTS and the FDIC to review the Association's
compliance with various regulatory requirements. The regulatory structure
also gives the regulatory authorities extensive discretion in connection with
their supervisory and enforcement activities and examination policies,
including policies with respect to the classification of assets and the
establishment of adequate loan loss reserves for regulatory purposes. Any
change in such policies, whether by the OTS, the FDIC or Congress, could have
a material adverse impact on the Corporation, the Association and their
operations. The Corporation, as a savings and loan holding company, is also
required to file certain reports with, and otherwise comply with the rules and
regulations of, the OTS.
Federal Regulation of Savings Associations
Office of Thrift Supervision. The OTS is an office in the Department of
the Treasury subject to the general oversight of the Secretary of the
Treasury. The OTS generally possesses the supervisory and regulatory duties
and responsibilities formerly vested in the Federal Home Loan Bank Board.
Among other functions, the OTS issues and enforces regulations affecting
federally insured savings associations and regularly examines these
institutions.
Federal Home Loan Bank System. The FHLB System, consisting of 12 FHLBs,
is under the jurisdiction of the Federal Housing Finance Board ("FHFB"). The
designated duties of the FHFB are to supervise the FHLBs, to ensure that the
FHLBs carry out their housing finance mission, to ensure that the FHLBs remain
adequately capitalized and able to raise funds in the capital markets, and to
ensure that the FHLBs operate in a safe and sound manner.
The Association, as a member of the FHLB-Atlanta, is required to acquire
and hold shares of capital stock in the FHLB-Atlanta in an amount equal to the
greater of (i) 1.0% of the aggregate outstanding principal amount of
residential mortgage loans, home purchase contracts and similar obligations at
the beginning of each year, or (ii) 1/20 of its advances (borrowings) from the
FHLB-Atlanta. The Association is in compliance with this requirement with an
investment in FHLB-Atlanta stock of $2.7 million at June 30, 1997.
27
Among other benefits, the FHLB provides a central credit facility
primarily for member institutions. It is funded primarily from proceeds
derived from the sale of consolidated obligations of the FHLB System. It
makes advances to members in accordance with policies and procedures
established by the FHFB and the Board of Directors of the FHLB-Atlanta.
Federal Deposit Insurance Corporation. The FDIC is an independent
federal agency established originally to insure the deposits, up to prescribed
statutory limits, of federally insured banks and to preserve the safety and
soundness of the banking industry. In 1989 the FDIC also became the insurer,
up to the prescribed limits, of the deposit accounts held at federally insured
savings associations and established two separate insurance funds: the BIF and
the SAIF. As insurer of deposits, the FDIC has examination, supervisory and
enforcement authority over all savings associations.
The Association's accounts are insured by the SAIF. The FDIC insures
deposits at the Association to the maximum extent permitted by law. The
Association currently pays deposit insurance premiums to the FDIC based on a
risk-based assessment system established by the FDIC for all SAIF-member
institutions. Under applicable regulations, institutions are assigned to one
of three capital groups that are based solely on the level of an institution's
capital -- "well capitalized," "adequately capitalized," and
"undercapitalized" -- which are defined in the same manner as the regulations
establishing the prompt corrective action system, as discussed below. These
three groups are then divided into three subgroups which reflect varying
levels of supervisory concern, from those which are considered to be healthy
to those which are considered to be of substantial supervisory concern. The
matrix so created results in nine assessment risk classifications, with rates
currently ranging from 0% for well capitalized, financially sound institutions
with only a few minor weaknesses to .27% for undercapitalized institutions
that pose a substantial risk of loss to the SAIF unless effective corrective
action is taken. The FDIC is authorized to raise assessment rates in certain
circumstances. The Association's assessments expensed for the year ended June
30, 1997, totalled $2.2 million (including the FDIC SAIF special assessment of
$1.8 million).
Pursuant to the Deposit Insurance Fund ("DIF") Act, which was enacted on
September 30, 1996, the FDIC imposed a special assessment on each depository
institution with SAIF-assessable deposits which resulted in the SAIF achieving
its designated reserve ratio. In connection therewith, the FDIC reduced the
assessment schedule for SAIF members, effective January 1, 1997, to a range of
0% to 0.27%, with most institutions, including the Association, paying 0%.
This assessment schedule is the same as that for the BIF, which reached its
designated reserve ratio in 1995. In addition, since January 1, 1997, SAIF
members are charged an assessment of 0.065% of SAIF-assessable deposits for
the purpose of paying interest on the obligations issued by the Financing
Corporation ("FICO") in the 1980s to help fund the thrift industry cleanup.
BIF-assessable deposits will be charged an assessment to help pay interest on
the FICO bonds at a rate of approximately .013% until the earlier of December
31, 1999 or the date upon which the last savings association ceases to exist,
after which time the assessment will be the same for all insured deposits.
The DIF Act provides for the merger of the BIF and the SAIF into the
Deposit Insurance Fund on January 1, 1999, but only if no insured depository
institution is a savings association on that date. The DIF Act contemplates
the development of a common charter for all federally chartered depository
institutions and the abolition of separate charters for national banks and
federal savings associations. It is not known what form the common charter
may take and what effect, if any, the adoption of a new charter would have on
the operation of the Association.
The FDIC may terminate the deposit insurance of any insured depository
institution if it determines after a hearing that the institution has engaged
or is engaging in unsafe or unsound practices, is in an unsafe or unsound
condition to continue operations, or has violated any applicable law,
regulation, order or any condition imposed by an agreement with the FDIC. It
also may suspend deposit insurance temporarily during the hearing process for
the permanent termination of insurance, if the institution has no tangible
capital. If insurance of accounts is terminated, the accounts at the
institution at the time of termination, less subsequent withdrawals, shall
continue to be insured for a period of six months to two years, as determined
by the FDIC. Management is aware of no existing circumstances that could
result in termination of the deposit insurance of the Association.
28
Liquidity Requirements. Under OTS regulations, each savings institution
is required to maintain an average daily balance of liquid assets (cash,
certain time deposits and savings accounts, bankers' acceptances, and
specified U.S. Government, state or federal agency obligations and certain
other investments) equal to a monthly average of not less than a specified
percentage (currently 5%) of its net withdrawable accounts plus short-term
borrowings. OTS regulations also require each savings institution to maintain
an average daily balance of short-term liquid assets at a specified percentage
(currently 1%) of the total of its net withdrawable savings accounts and
borrowings payable in one year or less. Monetary penalties may be imposed for
failure to meet liquidity requirements.
Prompt Corrective Action. Under the FDIA, each federal banking agency is
required to implement a system of prompt corrective action for institutions
that it regulates. The federal banking agencies have promulgated
substantially similar regulations to implement this system of prompt
corrective action. Under the regulations, an institution shall be deemed to
be (i) "well capitalized" if it has a total risk-based capital ratio of 10% or
more, has a Tier I risk-based capital ratio of 6% or more, has a leverage
ratio of 5% or more and is not subject to specified requirements to meet and
maintain a specific capital level for any capital measure; (ii) "adequately
capitalized" if it has a total risk-based capital ratio of 8% or more, a Tier
I risk-based capital ratio of 4% or more and a leverage ratio of 4% or more
(3% under certain circumstances) and does not meet the definition of "well
capitalized;" (iii) "undercapitalized" if it has a total risk-based capital
ratio that is less than 8%, a Tier I risk-based capital ratio that is less
than 4% or a leverage ratio that is less than 4% (3% under certain
circumstances); (iv) "significantly undercapitalized" if it has a total
risk-based capital ratio that is less than 6%, a Tier I risk-based capital
ratio that is less than 3% or a leverage ratio that is less than 3%; and (v)
"critically undercapitalized" if it has a ratio of tangible equity to total
assets that is equal to or less than 2%.
A federal banking agency may, after notice and an opportunity for a
hearing, reclassify a well capitalized institution as adequately capitalized
and may require an adequately capitalized institution or an undercapitalized
institution to comply with supervisory actions as if it were in the next lower
category if the institution is in an unsafe or unsound condition or has
received in its most recent examination, and has not corrected, a less than
satisfactory rating for asset quality, management, earnings or liquidity.
(The OTS may not, however, reclassify a significantly undercapitalized
institution as critically undercapitalized.)
An institution generally must file a written capital restoration plan
that meets specified requirements, as well as a performance guaranty by each
company that controls the institution, with the appropriate federal banking
agency within 45 days of the date that the institution receives notice or is
deemed to have notice that it is undercapitalized, significantly
undercapitalized or critically undercapitalized. Immediately upon becoming
undercapitalized, an institution shall become subject to various mandatory and
discretionary restrictions on its operations.
At June 30, 1997, the Association was categorized as "well capitalized"
under the prompt corrective action regulations of the OTS.
Standards for Safety and Soundness. The FDIA requires the federal
banking regulatory agencies to prescribe, by regulation, standards for all
insured depository institutions relating to: (i) internal controls,
information systems and internal audit systems; (ii) loan documentation; (iii)
credit underwriting; (iv) interest rate risk exposure; (v) asset growth; and
(vi) compensation, fees and benefits. The federal banking agencies adopted
regulations and Interagency Guidelines Prescribing Standards for Safety and
Soundness ("Guidelines") to implement safety and soundness standards required
by the FDIA. The Guidelines set forth the safety and soundness standards that
the federal banking agencies use to identify and address problems at insured
depository institutions before capital becomes impaired. The agencies also
proposed asset quality and earnings standards which, if adopted in final,
would be added to the Guidelines. If the OTS determines that the Association
fails to meet any standard prescribed by the Guidelines, the agency may
require the Association to submit to the agency an acceptable plan to achieve
compliance with the standard, as required by the FDIA. OTS regulations
establish deadlines for the submission and review of such safety and soundness
compliance plans.
29
Qualified Thrift Lender Test. All savings associations are required to
meet a qualified thrift lender ("QTL") test to avoid certain restrictions on
their operations. A savings institution that fails to become or remain a QTL
shall either become a national bank or be subject to the following
restrictions on its operations: (i) the association may not make any new
investment or engage in activities that would not be permissible for national
banks; (ii) the association may not establish any new branch office where a
national bank located in the savings institution's home state would not be
able to establish a branch office; (iii) the association shall be ineligible
to obtain new advances from any FHLB; and (iv) the payment of dividends by the
association shall be subject to the rules regarding the statutory and
regulatory dividend restrictions applicable to national banks. Also,
beginning three years after the date on which the savings institution ceases
to be a QTL, the savings institution would be prohibited from retaining any
investment or engaging in any activity not permissible for a national bank and
would be required to repay any outstanding advances to any FHLB. In addition,
within one year of the date on which a savings association controlled by a
company ceases to be a QTL, the company must register as a bank holding
company and become subject to the rules applicable to such companies. A
savings institution may requalify as a QTL if it thereafter complies with the
QTL test.
Currently, the QTL test requires that 65% of an institution's "portfolio
assets" (as defined) consist of certain housing and consumer-related assets on
a monthly average basis in nine out of every 12 months. Assets that qualify
without limit for inclusion as part of the 65% requirement are loans made to
purchase, refinance, construct, improve or repair domestic residential housing
and manufactured housing; home equity loans; mortgage-backed securities (where
the mortgages are secured by domestic residential housing or manufactured
housing); FHLB stock; and direct or indirect obligations of the FDIC. In
addition, the following assets, among others, may be included in meeting the
test subject to an overall limit of 20% of the savings institution's portfolio
assets: 50% of residential mortgage loans originated and sold within 90 days
of origination; 100% of consumer and educational loans (limited to 10% of
total portfolio assets); and stock issued by the FHLMC or Fannie Mae.
Portfolio assets consist of total assets minus the sum of (i) goodwill and
other intangible assets, (ii) property used by the savings institution to
conduct its business, and (iii) liquid assets up to 20% of the institution's
total assets. At June 30, 1997, the qualified thrift investments of the
Association were approximately 89% of its portfolio assets.
Capital Requirements. Under OTS regulations a savings association must
satisfy three minimum capital requirements: core capital, tangible capital and
risk-based capital. Savings associations must meet all of the standards in
order to comply with the capital requirements. The Corporation is not subject
to any minimum capital requirements.
OTS capital regulations establish a 3% core capital or leverage ratio
(defined as the ratio of core capital to adjusted total assets). Core capital
is defined to include common stockholders' equity, noncumulative perpetual
preferred stock and any related surplus, and minority interests in equity
accounts of consolidated subsidiaries, less (i) any intangible assets, except
for certain qualifying intangible assets; (ii) certain mortgage servicing
rights; and (iii) equity and debt investments in subsidiaries that are not
"includable subsidiaries," which is defined as subsidiaries engaged solely in
activities not impermissible for a national bank, engaged in activities
impermissible for a national bank but only as an agent for its customers, or
engaged solely in mortgage-banking activities. In calculating adjusted total
assets, adjustments are made to total assets to give effect to the exclusion
of certain assets from capital and to account appropriately for the
investments in and assets of both includable and nonincludable subsidiaries.
Institutions that fail to meet the core capital requirement would be required
to file with the OTS a capital plan that details the steps they will take to
reach compliance. In addition, the OTS's prompt corrective action regulation
provides that a savings institution that has a leverage ratio of less than 4%
(3% for institutions receiving the highest CAMEL examination rating) will be
deemed to be "undercapitalized" and may be subject to certain restrictions.
See "-- Federal Regulation of Savings Associations -- Prompt Corrective
Action."
As required by federal law, the OTS has proposed a rule revising its
minimum core capital requirement to be no less stringent than that imposed on
national banks. The OTS has proposed that only those savings associations
rated a composite one (the highest rating) under the CAMEL rating system for
savings associations will be permitted to operate at or near the regulatory
minimum leverage ratio of 3%. All other savings associations will be required
30
to maintain a minimum leverage ratio of 4% to 5%. The OTS will assess each
individual savings association through the supervisory process on a
case-by-case basis to determine the applicable requirement. No assurance can
be given as to the final form of any such regulation, the date of its
effectiveness or the requirement applicable to the Association.
Savings associations also must maintain "tangible capital" not less than
1.5% of the Association's adjusted total assets. "Tangible capital" is
defined, generally, as core capital minus any "intangible assets" other than
purchased mortgage servicing rights.
Each savings institution must maintain total risk-based capital equal to
at least 8% of risk-weighted assets. Total risk-based capital consists of the
sum of core and supplementary capital, provided that supplementary capital
cannot exceed core capital, as previously defined. Supplementary capital
includes (i) permanent capital instruments such as cumulative perpetual
preferred stock, perpetual subordinated debt and mandatory convertible
subordinated debt, (ii) maturing capital instruments such as subordinated
debt, intermediate-term preferred stock and mandatory convertible subordinated
debt, subject to an amortization schedule, and (iii) general valuation loan
and lease loss allowances up to 1.25% of risk-weighted assets.
The risk-based capital regulation assigns each balance sheet asset held
by a savings institution to one of four risk categories based on the amount of
credit risk associated with that particular class of assets. Assets not
included for purposes of calculating capital are not included in calculating
risk-weighted assets. The categories range from 0% for cash and securities
that are backed by the full faith and credit of the U.S. Government to 100%
for repossessed assets or assets more than 90 days past due. Qualifying
residential mortgage loans (including multi- family mortgage loans) are
assigned a 50% risk weight. Consumer, commercial, home equity and residential
construction loans are assigned a 100% risk weight, as are nonqualifying
residential mortgage loans and that portion of land loans and nonresidential
construction loans that do not exceed an 80% loan-to-value ratio. The book
value of assets in each category is multiplied by the weighing factor (from 0%
to 100%) assigned to that category. These products are then totalled to
arrive at total risk-weighted assets. Off-balance sheet items are included in
risk- weighted assets by converting them to an approximate balance sheet
"credit equivalent amount" based on a conversion schedule. These credit
equivalent amounts are then assigned to risk categories in the same manner as
balance sheet assets and included risk-weighted assets.
The OTS has incorporated an interest rate risk component into its
regulatory capital rule. Under the rule, savings associations with "above
normal" interest rate risk exposure would be subject to a deduction from total
capital for purposes of calculating their risk-based capital requirements. A
savings association's interest rate risk is measured by the decline in the net
portfolio value of its assets (i.e., the difference between incoming and
outgoing discounted cash flows from assets, liabilities and off-balance sheet
contracts) that would result from a hypothetical 200 basis point increase or
decrease in market interest rates divided by the estimated economic value of
the association's assets, as calculated in accordance with guidelines set
forth by the OTS. A savings association whose measured interest rate risk
exposure exceeds 2% must deduct an interest rate risk component in calculating
its total capital under the risk-based capital rule. The interest rate risk
component is an amount equal to one-half of the difference between the
institution's measured interest rate risk and 2%, multiplied by the estimated
economic value of the association's assets. That dollar amount is deducted
from an association's total capital in calculating compliance with its risk-
based capital requirement. Under the rule, there is a two quarter lag between
the reporting date of an institution's financial data and the effective date
for the new capital requirement based on that data. A savings association
with assets of less than $300 million and risk-based capital ratios in excess
of 12% is not subject to the interest rate risk component, unless the OTS
determines otherwise. The rule also provides that the Director of the OTS may
waive or defer an association's interest rate risk component on a case-by-case
basis. Under certain circumstances, a savings association may request an
adjustment to its interest rate risk component if it believes that the
OTS-calculated interest rate risk component overstates its interest rate risk
exposure. In addition, certain "well-capitalized" institutions may obtain
authorization to use their own interest rate risk model to calculate their
interest rate risk component in lieu of the OTS-calculated amount. The OTS
has postponed the date that the component will first be deducted from an
institution's total capital.
31
At June 30, 1997, First Federal's core capital of approximately $34
million, or 9.7% of adjusted total assets, was $23 million in excess of the
OTS requirement of $11 million, or 3% of adjusted total assets. As of such
date, the Association's tangible capital of approximately $34 million, or 9.7%
of adjusted total assets, was $29 million in excess of the OTS requirement of
$5 million, or 1.5% of adjusted total assets. Finally, at June 30, 1997, the
Association had risk-based capital of approximately $35 million or 20.3% of
total risk-weighted assets, which was $21 million in excess of the OTS
risk-based capital requirement of $14 million or 8% of risk-weighted assets.
Limitations on Capital Distributions. OTS regulations impose uniform
limitations on the ability of all savings associations to engage in various
distributions of capital such as dividends, stock repurchases and cash-out
mergers. In addition, OTS regulations require the Association to give the OTS
30 days' advance notice of any proposed declaration of dividends, and the OTS
has the authority under its supervisory powers to prohibit the payment of
dividends. The regulation utilizes a three-tiered approach which permits
various levels of distributions based primarily upon a savings association's
capital level.
A Tier 1 savings association has capital in excess of its fully phased-in
capital requirement (both before and after the proposed capital distribution).
Tier 1 savings association may make (without application but upon prior notice
to, and no objection made by, the OTS) capital distributions during a calendar
year up to 100% of its net income to date during the calendar year plus
one-half its surplus capital ratio (i.e., the amount of capital in excess of
its fully phased-in requirement) at the beginning of the calendar year or the
amount authorized for a Tier 2 association. Capital distributions in excess
of such amount require advance notice to the OTS. A Tier 2 savings
association has capital equal to or in excess of its minimum capital
requirement but below its fully phased-in capital requirement (both before and
after the proposed capital distribution). Such an association may make
(without application) capital distributions up to an amount equal to 75% of
its net income during the previous four quarters depending on how close the
association is to meeting its fully phased-in capital requirement. Capital
distributions exceeding this amount require prior OTS approval. Tier 3
associations are savings associations with capital below the minimum capital
requirement (either before or after the proposed capital distribution). Tier
3 associations may not make any capital distributions without prior approval
from the OTS.
The Association is currently meeting the criteria to be designated a Tier
1 association and, consequently, could at its option (after prior notice to,
and no objection made by, the OTS) distribute up to 100% of its net income
during the calendar year plus 50% of its surplus capital ratio at the
beginning of the calendar year less any distributions previously paid during
the year.
Loans to One Borrower. Under the HOLA, savings institutions are
generally subject to the national bank limit on loans to one borrower.
Generally, this limit is 15% of the Association's unimpaired capital and
surplus, plus an additional 10% of unimpaired capital and surplus, if such
loan is secured by readily-marketable collateral, which is defined to include
certain financial instruments and bullion. The OTS by regulation has amended
the loans to one borrower rule to permit savings associations meeting certain
requirements, including capital requirements, to extend loans to one borrower
in additional amounts under circumstances limited essentially to loans to
develop or complete residential housing units. At June 30, 1997, the
Association's limits on loans to one borrower were $5 million, or $9 million,
based on the type of collateral obtained. At June 30, 1997, the Association's
largest aggregate amount of loans to one borrower was $2 million.
Activities of Associations and Their Subsidiaries. When a savings
association establishes or acquires a subsidiary or elects to conduct any new
activity through a subsidiary that the association controls, the savings
association must notify the FDIC and the OTS 30 days in advance and provide
the information each agency may, by regulation, require. Savings associations
also must conduct the activities of subsidiaries in accordance with existing
regulations and orders.
The OTS may determine that the continuation by a savings association of
its ownership control of, or its relationship to, the subsidiary constitutes a
serious risk to the safety, soundness or stability of the association or is
inconsistent with sound banking practices or with the purposes of the FDIA.
Based upon that determination, the
32
FDIC or the OTS has the authority to order the savings association to divest
itself of control of the subsidiary. The FDIC also may determine by
regulation or order that any specific activity poses a serious threat to the
SAIF. If so, it may require that no SAIF member engage in that activity
directly.
Transactions with Affiliates. Savings associations must comply with
Sections 23A and 23B of the Federal Reserve Act ("Sections 23A and 23B")
relative to transactions with affiliates in the same manner and to the same
extent as if the savings association were a Federal Reserve member bank. A
savings and loan holding company, its subsidiaries and any other company under
common control are considered affiliates of the subsidiary savings association
under the HOLA. Generally, Sections 23A and 23B: (i) limit the extent to
which the insured association or its subsidiaries may engage in certain
covered transactions with an affiliate to an amount equal to 10% of such
institution's capital and surplus and place an aggregate limit on all such
transactions with affiliates to an amount equal to 20% of such capital and
surplus, and (ii) require that all such transactions be on terms substantially
the same, or at least as favorable to the institution or subsidiary, as those
provided to a non-affiliate. The term "covered transaction" includes the
making of loans, the purchase of assets, the issuance of a guarantee and
similar types of transactions.
Three additional rules apply to savings associations: (i) a savings
association may not make any loan or other extension of credit to an affiliate
unless that affiliate is engaged only in activities permissible for bank
holding companies; (ii) a savings association may not purchase or invest in
securities issued by an affiliate (other than securities of a subsidiary); and
(iii) the OTS may, for reasons of safety and soundness, impose more stringent
restrictions on savings associations but may not exempt transactions from or
otherwise abridge Section 23A or 23B. Exemptions from Section 23A or 23B may
be granted only by the Federal Reserve Board, as is currently the case with
respect to all FDIC-insured banks. The Association has not been significantly
affected by the rules regarding transactions with affiliates.
The Association's authority to extend credit to executive officers,
directors and 10% shareholders, as well as entities controlled by such
persons, is currently governed by Sections 22(g) and 22(h) of the Federal
Reserve Act, and Regulation O thereunder. Among other things, these
regulations require that such loans be made on terms and conditions
substantially the same as those offered to unaffiliated individuals and not
involve more than the normal risk of repayment. Regulation O also places
individual and aggregate limits on the amount of loans the Association may
make to such persons based, in part, on the Association's capital position,
and requires certain board approval procedures to be followed. The OTS
regulations, with certain minor variances, apply Regulation O to savings
institutions.
Savings and Loan Holding Company Regulations
Holding Company Acquisitions. The HOLA and OTS regulations issued
thereunder generally prohibit a savings and loan holding company, without
prior OTS approval, from acquiring more than 5% of the voting stock of any
other savings association or savings and loan holding company or controlling
the assets thereof. They also prohibit, among other things, any director or
officer of a savings and loan holding company, or any individual who owns or
controls more than 25% of the voting shares of such holding company, from
acquiring control of any savings association not a subsidiary of such savings
and loan holding company, unless the acquisition is approved by the OTS.
Holding Company Activities. As a unitary savings and loan holding
company, the Corporation generally is not subject to activity restrictions.
If the Corporation acquires control of another savings association as a
separate subsidiary other than in a supervisory acquisition, it would become a
multiple savings and loan holding company. There generally are more
restrictions on the activities of a multiple savings and loan holding company
than on those of a unitary savings and loan holding company. The HOLA
provides that, among other things, no multiple savings and loan holding
company or subsidiary thereof which is not an insured association shall
commence or continue for more than two years after becoming a multiple savings
and loan association holding company or subsidiary thereof, any business
activity other than: (i) furnishing or performing management services for a
subsidiary insured
33
institution, (ii) conducting an insurance agency or escrow business, (iii)
holding, managing, or liquidating assets owned by or acquired from a
subsidiary insured institution, (iv) holding or managing properties used or
occupied by a subsidiary insured institution, (v) acting as trustee under
deeds of trust, (vi) those activities previously directly authorized by
regulation as of March 5, 1987 to be engaged in by multiple holding companies
or (vii) those activities authorized by the Federal Reserve Board as
permissible for bank holding companies, unless the OTS by regulation,
prohibits or limits such activities for savings and loan holding companies.
Those activities described in (vii) above also must be approved by the OTS
prior to being engaged in by a multiple holding company.
Qualified Thrift Lender Test. The HOLA requires any savings and loan
holding company that controls a savings association that fails the QTL test,
as explained under "-- Federal Regulation of Savings Associations -- Qualified
Thrift Lender Test," must, within one year after the date on which the
association ceases to be a QTL, register as and be deemed a bank holding
company subject to all applicable laws and regulations.
TAXATION
Federal Taxation
General. The Corporation and the Association report their income on a
fiscal year basis using the accrual method of accounting and will be subject
to federal income taxation in the same manner as other corporations with some
exceptions, including particularly the Association's reserve for bad debts
discussed below. The following discussion of tax matters is intended only as
a summary and does not purport to be a comprehensive description of the tax
rules applicable to the Association or the Corporation.
Tax Bad Debt Reserves. Historically, savings institutions such as the
Association which met certain definitional tests primarily related to their
assets and the nature of their business ("qualifying thrift") were permitted
to establish a reserve for bad debts and to make annual additions thereto,
which may have been deducted in arriving at their taxable income. The
Association's deductions with respect to "qualifying real property loans,"
which are generally loans secured by certain interest in real property, were
computed using an amount based on the Association's actual loss experience, or
a percentage equal to 8% of the Association's taxable income, computed with
certain modifications and reduced by the amount of any permitted additions to
the non-qualifying reserve. Due to the Association's loss experience, the
Association generally recognized a bad debt deduction equal to 8% of taxable
income.
In August 1996, the provisions repealing these thrift bad debt rules were
passed by Congress as part of "The Small Business Job Protection Act of 1996."
The new rules eliminate the 8% of taxable income method for deducting
additions to the tax bad debt reserves for all thrifts for tax years beginning
after December 31, 1995. These rules also require that all institutions
recapture all or a portion of their bad debt reserves added since the base
year (last taxable year beginning before January 1, 1988). The Association
had previously recorded a deferred tax liability equal to the bad debt
recapture and as such the new rules have had no effect on the net income or
federal income tax expense. For taxable years beginning after December 31,
1995, the Association's bad debt deduction has been determined under the
experience method using a formula based on actual bad debt experience over a
period of years or, if the Association is a "large" association (assets in
excess of $500 million) on the basis of net charge- offs during the taxable
year. The new rules allow an institution to suspend bad debt reserve
recapture for the 1996 and 1997 tax years if the institution's lending
activity for those years is equal to or greater than the institutions average
mortgage lending activity for the six taxable years preceding 1996 adjusted
for inflation. For this purpose, only home purchase or home improvement loans
are included and the institution can elect to have the tax years with the
highest and lowest lending activity removed from the average calculation. If
an institution is permitted to postpone the reserve recapture, it must begin
its six year recapture no later than the 1998 tax year. The unrecaptured base
year reserves will not be subject to recapture as long as the institution
continues to carry on the business of banking. In addition, the balance of
the pre-1988 bad debt reserves continue to be subject to provisions of present
law referred to below that require recapture in the case of certain excess
distributions to stockholders.
34
Distributions. To the extent that the Association makes "nondividend
distributions" to the Corporation that are considered as made: (i) from the
reserve for losses on qualifying real property loans, to the extent the
reserve for such losses exceeds the amount that would have been allowed under
the experience method; or (ii) from the supplemental reserve for losses on
loans ("Excess Distributions"), then an amount based on the amount distributed
will be included in the Association's taxable income. Nondividend
distributions include distributions in excess of the Association's current and
accumulated earnings and profits, distributions in redemption of stock, and
distributions in partial or complete liquidation. However, dividends paid out
of the Association's current or accumulated earnings and profits, as
calculated for federal income tax purposes, will not be considered to result
in a distribution from the Association's bad debt reserve. Thus, any
dividends to the Corporation that would reduce amounts appropriated to the
Association's bad debt reserve and deducted for federal income tax purposes
would create a tax liability for the Association. The amount of additional
taxable income attributable to an Excess Distribution is an amount that, when
reduced by the tax attributable to the income, is equal to the amount of the
distribution. Thus, if, the Association makes a "nondividend distribution,"
then approximately one and one-half times the amount so used would be
includable in gross income for federal income tax purposes, assuming a 35%
corporate income tax rate (exclusive of state and local taxes). See
"REGULATION" for limits on the payment of dividends by the Association. The
Association does not intend to pay dividends that would result in a recapture
of any portion of its tax bad debt reserve.
Corporate Alternative Minimum Tax. The Code imposes a tax on alternative
minimum taxable income ("AMTI") at a rate of 20%. The excess of the tax bad
debt reserve deduction using the percentage of taxable income method over the
deduction that would have been allowable under the experience method is
treated as a preference item for purposes of computing the AMTI. In addition,
only 90% of AMTI can be offset by net operating loss carryovers. AMTI is
increased by an amount equal to 75% of the amount by which the Association's
adjusted current earnings exceeds its AMTI (determined without regard to this
preference and prior to reduction for net operating losses). For taxable
years beginning after December 31, 1986, and before January 1, 1996, an
environmental tax of .12% of the excess of AMTI (with certain modification)
over $2.0 million is imposed on corporations, including the Association,
whether or not an Alternative Minimum Tax ("AMT") is paid.
Dividends-Received Deduction and Other Matters. The Corporation may
exclude from its income 100% of dividends received from the Association as a
member of the same affiliated group of corporations. The corporate
dividends-received deduction is generally 70% in the case of dividends
received from unaffiliated corporations with which the Corporation and the
Association will not file a consolidated tax return, except that if the
Corporation or the Association owns more than 20% of the stock of a
corporation distributing a dividend, then 80% of any dividends received may be
deducted.
Other Federal Tax Matters. Other recent changes in the federal tax
system could also affect the business of the Association. These changes
include limitations on the deduction of personal interest paid or accrued by
individual taxpayers, limitations on the deductibility of losses attributable
to investment in certain passive activities and limitations on the
deductibility of contributions to individual retirement accounts. The
Association does not believe these changes will have a material effect on its
operations.
There have not been any IRS audits of the Association's Federal income
tax returns or audits of the Association's state income tax returns during the
past five years.
South Carolina Taxation
Under the laws of South Carolina, the Association is required to pay an
income tax at the rate of 6% of net income as defined in the statute. This
rate of tax is imposed on financial institutions, such as savings and loan
associations, in lieu of the general state business corporation income tax.
35
Item 2. Properties
- -------------------
The following table sets forth the location of First Federal's offices
and other facilities used in operations as well as certain additional
information relating to these offices and facilities as of June 30, 1997.
Building Land
Year Building Owned/ Owned/
Location Opened Cost Net Book Value Leased Leased
- -------- ------ ---- -------------- ------- ------
(Dollars in thousands)
Main Office 1962 $2,846 $1,319 Owned Owned
- -----------
201 North Main
Street
Anderson, South
Carolina
Branch Offices
- --------------
2918 North Main 1976 426 253 Owned Owned
Street
Anderson, South
Carolina
2808 South Main 1977 373 213 Owned Owned
Street
Anderson, South
Carolina
Powdersville Centre 1979 172 -- Owned Leased
Intersection of Hwy.
81 and 153
Greenville, South
Carolina
509 East Greer 1979 317 155 Owned Owned
Street
Honea Path, South
Carolina
306 Hwy. 28 By-Pass 1979 406 268 Owned Owned
Anderson, South Carolina
205 Savannah Street 1981 278 140 Owned Owned
Calhoun Falls, South
Carolina
100 West Greenwood 1981 551 229 Owned Owned
Street
Abbeville, South
Carolina
302 Hampton Street 1981 1,109 926 Owned Owned
(2)
Greenwood, South
Carolina
241 O'Neal Street 1986 364 36 Owned Owned
Belton, South
Carolina
1001 South Mechanic 1986 491 250 Owned Owned
Street
Pendleton, South
Carolina
The net book value of the Association's investment in office, properties
and equipment totaled $4 million at June 30, 1997. See Note 6 of the Notes to
the Consolidated Financial Statements in Item 8 hereof.
Item 3. Legal Proceedings
- --------------------------
Periodically, there have been various claims and lawsuits involving the
Association, mainly as a defendant, such as claims to enforce liens,
condemnation proceedings on properties in which the Association holds security
36
interests, claims involving the making and servicing of real property loans
and other issues incident to the Association's business. The Association is
not a party to any pending legal proceedings that it believes would have a
material adverse effect on the financial condition or operations of the
Association.
Item 4. Submission of Matters to a Vote of Security Holders
- ------------------------------------------------------------
No matters were submitted to a vote of security holders during the fourth
quarter of the fiscal year ended June 30, 1997.
PART II
Item 5. Market for the Registrant's Common Equity and Related
Stockholder Matters
- --------------------------------------------------------------
The common stock of the Corporation is traded in the over-the counter
market as reported on the Nasdaq National Market under the symbol "FSFC." As
of September 5, 1997, there were approximately 900 stockholders of record.
The Corporation estimates that, as of September 5, 1997, there were
approximately 1,200 beneficial owners holding stock in nominee or "street"
name.
The Corporation presently pays quarterly cash dividends on the common
stock, subject to the discretion of the Board of Directors. Dividend payments
by the Corporation depend primarily on the ability of the Association to pay
dividends to the Corporation. Under Federal regulations, the dollar amount of
dividends a federal savings association may pay depends upon the association's
capital surplus position and recent net income. Generally, if an association
satisfies its regulatory capital requirements, it may make dividend payments
up to the limits prescribed in the OTS regulations. However, institutions
that have converted to the stock form of ownership may not declare or pay a
dividend on, or repurchase any of, its common stock if the effect thereof
would cause the regulatory capital of the institution to be reduced below the
amount required for the liquidation account which was established in
accordance with OTS regulations and the Association's Plan of Conversion. In
addition, earnings of the Association appropriated to bad debt reserves and
deducted for federal income tax purposes are not available for payment of cash
dividends without payment of taxes at the then current tax rate by the
Association on the amount removed from the reserves for such distributions.
The Association does not contemplate any distribution that would limit the
Association's bad debt deduction or create federal tax liabilities.
The stock prices shown below reflect the high and low prices by quarter
for the fiscal years ended June 30, 1995, 1996 and 1997, respectively.
37
Market Price Cash
------------------- Dividends Paid
High Low Per Share
---- ------ ---------------
September 30, 1994. $ 16.25 $ 14.00 $0.0625
December 31, 1994 . 15.25 11.75 0.0625
March 31, 1995. . . 15.75 12.75 0.07
June 30, 1995 . . . 19.25 14.25 0.07
September 30, 1995. 20.25 17.50 0.12
December 31, 1995 . 20.75 17.25 0.12
March 31, 1996. . . 20.25 17.25 0.12
June 30, 1996 . . . 20.25 9.25 10.12
September 30, 1996. 10.00 9.13 0.04
December 31, 1996 . 10.75 9.13 0.05
March 31, 1997. . . 11.50 9.38 0.05
June 30, 1997 . . . 11.00 9.75 0.06
Item 6. Selected Financial Data
- --------------------------------
Since the Corporation had not commenced operations prior to the mutual to
stock conversion of the Association on October 7, 1993, the financial
information for periods and dates as of and before June 30, 1993 presented
herein is that of the Association and its subsidiary. This information is
qualified in its entirety by reference to the detailed information and
Consolidated Financial Statements and notes thereto appearing elsewhere in
this Report.
At June 30,
--------------------------------------------
1993 1994 1995 1996 1997
---- ---- ---- ---- ----
(In thousands)
Total assets . . . . . . $317,168 $341,853 $352,288 $331,852 $348,530
Loans receivable, net . . 203,871 181,488 208,648 238,337 272,401
Mortgage-backed
securities . . . . . . . 12,707 24,631 20,432 17,598 14,352
Cash and due from banks,
interest-bearing
deposits and securities. 89,760 124,691 112,169 64,313 51,011
Deposits. . . . . . . . . 284,704 271,734 278,231 288,217 284,783
Borrowings. . . . . . . . 2,239 1,915 1,597 5,000 25,000
Total equity. . . . . . . 27,559 66,133 68,924 33,503 35,046
(table continued on following page)
38
Years Ended June 30,
--------------------------------------------
1993 1994 1995 1996 1997
---- ---- ---- ---- ----
OPERATING DATA: (In thousands)
Interest income . . . . $24,356 $22,804 $23,950 $25,777 $24,938
Interest expense. . . . 13,605 11,357 11,965 14,357 14,417
------- ------- ------ ------- -------
Net interest income . . 10,751 11,447 11,985 11,420 10,521
Provision for loan
losses . . . . . . . . 805 225 180 180 180
------- ------- ------ ------- -------
Net interest income
after provision
for loan losses. . . . 9,946 11,222 11,805 11,240 10,341
Non-interest income . . 1,145 1,018 1,056 110 1,181
Non-interest expenses . 6,136 7,756 7,376 9,390 7,873
------- ------- ------ ------- -------
Income before income
taxes, extraordinary
item and cumulative
effect adjustment. . . 4,955 4,484 5,485 1,960 3,649
Income tax expense. . . 2,092 1,622 1,908 1,021 1,324
------- ------- ------ ------- -------
Income before
extraordinary item
and cumulative effect
adjustment . . . . . . 2,863 2,862 3,577 939 2,325
Extraordinary item. . . -- -- -- -- --
------- ------- ------ ------- -------
Income before
cumulative effect
adjustment . . . . . . 2,863 2,862 3,577 939 2,325
Cumulative effect on
prior years
for accounting change. -- 39 -- -- --
------- ------- ------ ------- -------
Net income. . . . . . . $ 2,863 $ 2,901 $3,577 $ 939 $ 2,325
======= ======= ====== ======= =======
Per share data:
Net income . . . . . . N/A N/A $ .91 $ .23 $ .53
Cash dividends paid. . N/A $ .06 $ .27 $ 10.48 $ .20
Book value . . . . . . N/A $15.83 $16.82 $ 7.63 $ 7.99
Shares outstanding
(year end) . . . . . . N/A 4,177 4,097 4,388 4,388
Weighted average
shares . . . . . . . N/A N/A 3,946 4,061 4,388
At June 30,
--------------------------------------------
1993 1994 1995 1996 1997
---- ---- ---- ---- ----
OTHER DATA:
Number of:
Real estate loans
serviced . . . . . . 3,446 3,073 3,259 3,516 3,629
Deposit accounts . . 28,771 27,295 27,091 26,700 27,620
Total offices (all
of which are
full service) . . . 11 11 11 11 11
39
At or for the Years Ended June 30,
--------------------------------------------
1993 1994 1995 1996 1997
---- ---- ---- ---- ----
KEY OPERATING RATIOS:
Return on average
assets (net income
divided by average
assets) . . . . . . . 90% .85% 1.04% .26% .70%
Return on average
equity (net income
divided by
average equity) . . . 10.85% 5.27% 5.31% 1.37% 6.85%
Average equity to
average assets. . . . 8.27% 16.13% 19.56% 19.29% 10.21%
Average interest-earning
assets to average
interest-bearing
liabilities . . . . . 106% 116% 121% 121% 109%
Interest rate spread
(difference between
average yield on
interest-earning
assets and average
cost of interest-
bearing
liabilities) . . . . 3.24% 2.93% 2.84% 2.43% 2.90%
Net interest margin
(net interest income
as a percentage of
average interest-
earning assets). . . 3.51% 3.48% 3.61% 3.33% 3.29%
At or for the Years Ended June 30,
--------------------------------------------
1993 1994 1995 1996 1997
---- ---- ---- ---- ----
Non-interest expense
to average assets . . 1.92% 2.27% 2.14% 2.64% 2.37%
Net charge-offs to
average outstanding
loans during the
period. . . . . . . . .11% .08% .02% --% .02%
Allowance for loan
losses to total loans
at end of period. . . .40% .48% .48% .49% .49%
Allowance for loan
losses to nonperforming
loans . . . . . . . . 171% 466% 139% 206% 656%
Allowance for loan
losses to
nonperforming
assets(1) . . . . . . 98% 213% 135% 197% 656%
Nonperforming loans
to total loans. . . . .23% .10% .35% .24% .07%
Ratio of nonperforming
assets to total
assets(1) . . . . . . .27% .13% .22% .19% .06%
_______________
(1) Nonperforming assets include nonaccrual loans and net other repossessed
assets.
40
Item 7. Management's Discussion and Analysis of Financial
Condition and Results of Operations
- ----------------------------------------------------------
The following discussion and analysis is intended to assist in
understanding the financial condition and the results of operations of the
Corporation. Since the operations of the Association significantly impact
those of the Corporation, the following discussion will include references to
both the Corporation and the Association.
The Corporation's total assets increased by $17 million from $332 million
at June 30, 1996 to $349 million at June 30, 1997. The $34 million increase
in loans receivable was funded from maturities in the investment portfolio and
from short term borrowings.
Operating Strategy
The primary goal of management is to increase the Corporation's
profitability and enhance its return on equity while minimizing risk. The
Corporation's results of operations are dependent primarily on the
Association's continued profitability. The Association's results of
operations are significantly affected by general economic and competitive
conditions, particularly changes in market interest rates, government
legislation and policies concerning monetary and fiscal affairs, housing and
financial institutions and the attendant actions of the regulatory
authorities.
The Association has historically operated as a traditional thrift
institution, accepting deposits and making home and consumer loans. As the
funds provided through the growth in deposits have historically exceeded the
demand for loans, the Association has purchased one- to four- family loans
from other lenders and brokers. The majority of purchased loans have been
secured by properties located outside of the Association's primary lending
area. Since 1986, the Association has only purchased adjustable rate mortgage
("ARM") loans. To a lesser extent, the Association has also engaged in
commercial and consumer lending. In addition, First Federal has maintained a
conservative investment portfolio, investing primarily in interest-bearing
deposits and U.S. Government and agency securities.
In guiding the operations of First Federal, the Association's management
has implemented various strategies designed to continue its profitability
while maintaining the safety and soundness of the Association. These
strategies include: (i) emphasizing one- to four- family lending; (ii)
maintaining asset quality; (iii) managing growth; (iv) controlling operating
expenses; and (v) managing interest-rate risk.
Emphasizing One- to Four- Family Lending. Historically, First Federal
has been predominately a one- to four- family lender. As such, it has
developed expertise in mortgage loan underwriting and origination. First
Federal has established methods to expand its loan originations through
contacts with realtors, homebuilders and past and present customers. The
Association also uses advertising and community involvement to gain exposure
within its market area. First Federal emphasizes the origination and purchase
of ARM loans when available. Loan purchases are made through the secondary
market and through correspondent lending programs.
Maintaining Asset Quality. At June 30, 1997, First Federal's ratio of
non-performing assets to total assets was .06%. Since June 30, 1993,
non-performing assets have not exceeded .30% of total assets. First Federal
has focused on maintaining good asset quality through sound underwriting and
effective collection procedures.
Managing Growth. Historically, First Federal has managed its growth to
maintain a strong capital level. On June 23, 1996, in conjunction with First
Southeast's capital restructuring and payment of a special cash dividend,
First Federal paid a $19.5 million cash dividend to First Southeast. As a
result, First Federal's assets decreased a net of $3 million from June 30,
1995 and the Association's capital-to-assets ratio decreased from 14.6% at
June 30, 1995 to 10.4% at June 30, 1996. As of June 30, 1997, First Federal's
assets had increased by $17 million, or 5%, while it's capital-to-assets ratio
decreased to 9.9%.
41
Controlling Operating Expenses. The Association closely monitors its
operating expenses and seeks to control them while maintaining the necessary
personnel to serve its customers properly through its 11-branch network.
Historically, operating expenses have been kept below 2% of average assets.
Since the Corporation's public offering in fiscal 1994, costs related to the
Corporation's public operations and its stock-based employee benefits plans
caused its operating expense ratio to increase to 2.64% in 1996. In 1997, the
Corporation's expense ratio before and after the FDIC special assessment were
1.83% and 2.37%.
Managing Interest-Rate Risk. In order to reduce the impact on the
Association's net interest income due to changes in interest rates, First
Federal's management has implemented several techniques. These include (i)
emphasizing the origination and purchase of ARM loans; (ii) maintaining a
short-term investment portfolio; (iii) originating loans with the ability to
be sold in the secondary mortgage market; and (iv) attempting to lengthen
deposit maturities.
Results of Operations
The operating results of the Corporation depend primarily on its net
interest income, which is the difference between interest income on
interest-earning assets, primarily loans and investment securities, and
interest expense on interest-bearing liabilities, primarily deposits. The
Corporation's net income also is affected by the establishment of provisions
for loan losses and the level of its other income, including deposit service
charges, as well as its other expenses and income tax provisions.
The Association is a member of the Savings Association Insurance Fund
("SAIF") of the Federal Deposit Insurance Corporation ("FDIC"). On September
30, 1996, President Clinton signed into law the Deposit Insurance Funds Act of
1996 directing the FDIC to impose a special assessment on SAIF assessable
deposits to recapitalize the SAIF. Included in the results of operations for
the year ended June 30, 1997, was a charge of $1.8 million ($1.1 million net
of taxes) for the Corporation's portion of the special assessment. In
addition, this Act established a new SAIF premium schedule, which provided for
a substantial reduction in the Corporation's deposit insurance premium expense
beginning in the quarter ended December 31, 1996.
Comparison of Operating Results for the Year Ended June 30, 1996 and 1997
General. Net income increased $1.4 million from $922,000 for the year
ended June 30, 1996 to $2.3 million for the same period in 1997. The results
from both years included large non-recurring charges having material impacts
on net income. In 1996, the Corporation recognized a net loss of $891,000
from the sale of securities and accelerated the recognition of $1.9 million of
ESOP compensation expense in conjunction with the payment of the special
dividend. In 1997, the Corporation recognized a $1.8 million charge to
earnings for FDIC special assessment as previously discussed under "Results of
Operations."
Net income excluding the effect of these non-recurring items increased
primarily due to decreases in compensation costs and deposit insurance premium
expense which were partially offset by a decrease in net interest income.
Net Interest Income. Net interest income decreased by $898,000 from
$11.4 million during the year ended June 30, 1996 to $10.5 million for the
same period in 1997 as a result of decreased interest income.
Interest Income. Interest income decreased by $838,000 from $25.8
million during the year ended June 30, 1996 to $24.9 million for the same
period in 1997. This decrease was the net effect of decreased interest on
investments and interest-earning deposits which was partially offset by
increased interest earned on mortgage loans.
42
Interest on mortgage loans increased by $1.9 million primarily as a
result of increased outstanding loan balances. The average net mortgage loans
receivable increased by $31 million from $196 million during the year
ended June 30, 1996 to $227 million for the same period in 1997. However, the
average yield on mortgage loans decreased by 29 basis points from 8.28% for
the year ended June 30, 1996 to 7.99% for the same period in 1997.
Interest on investments and interest-earning deposits decreased by $2.7
million primarily as a result of the loss of earnings in 1997 from the
interest-earning assets used to pay the Corporation's special $10 per share
cash dividend in June 1996. In addition, funds from maturing investment
securities were used to fund the increase in mortgage loans outstanding.
Interest Expense. Interest expense increased a net of $60,000 for the
year ended June 30, 1997 when compared to the same period in 1996. Interest
on deposits decreased by $630,000 as the average rate paid on deposits
decreased by 23 basis points from 5.06% to 4.83%. This decrease was partially
offset by $690,000 of additional interest cost due to an increased average
balance of borrowed funds from $1.5 million during the year ended June 30,
1996 to $12.8 million for the same period in 1997. The additional borrowings
were used to fund the acquisition of investment securities and loan
originations.
Non-interest Income. Non-interest income for the year ended June 30,
1996 was $110,000 which includes a net loss of $891,000 on the sale of
securities for the purpose of funding the $10 per share special dividend. In
addition, in 1997, the Corporation commenced sales of non-FDIC insured
investment products which netted commissions of $117,000 for the year.
Non-interest Expenses. Non-interest expenses (excluding the effect of
the non-recurring charges of $1.9 million in 1996 and $1.8 million in 1997 as
discussed above) decreased by $1.4 million. This decrease is due to reduced
compensation and deposit insurance costs in 1997 when compared to 1996.
Compensation costs decreased by $1.1 million from 1996 due to the cost of the
Corporation's stock based compensation plans which were fully recognized by
June 30, 1997. Charges to income (excluding the $1.9 million of accelerated
ESOP charges described above) during the year ended June 30, 1996 were
$837,000 for the ESOP and $257,000 for the management recognition plans.
Expenses for the Corporation's deposit insurance premiums (excluding the
$1.8 million special assessment) decreased by $268,000 from $640,000 for the
year ended June 30, 1996 to $372,000 for the same period in 1997 due to the
revised SAIF premium schedule.
Comparison of Operating Results for the Fiscal Years Ended June 30, 1995 and
1996
General. Net income for the year ended June 30, 1996 was $939,000
compared to $3.6 million in 1995. Net interest income decreased $565,000 from
1995. In addition, charges were recognized in conjunction with the payment of
a special cash dividend as described below.
On June 27, 1996 the Corporation paid a special cash dividend of $10 per
share in an effort to reduce the Corporation's excess capital and to
reposition the Corporation's balance sheet to enhance future performance. To
fund the payment of this dividend, the Corporation liquidated securities and
recognized a loss of $891,000. Additionally, the receipt of the dividend
payment on the unallocated shares in the Employee Stock Ownership Plan
("ESOP") accelerated the recognition of $1.9 million of compensation expense.
Net Interest Income. Net interest income decreased by $565,000 from $12
million for the year ended June 30, 1995 to $11.4 million in 1996. This
decrease in net interest income was the net result of an increase in interest
income and an increase in interest expense as described below.
43
Interest Income. Interest income increased by $1.8 million from $24
million for the year ended June 30, 1995 to $25.8 million in 1996. This
increase was primarily attributable to increased interest earned on mortgage
loans.
Interest on mortgage loans increased by $1.8 million primarily as a
result of increased outstanding balances. The average net mortgage loans
receivable increased by $22 million from $174 million during the year ended
June 30, 1995 to $196 million in 1996. The average yield on mortgage loans
decreased by 4 basis points from 8.32% for the year ended June 30, 1995 to
8.28% in 1996.
Interest Expense. Interest expense increased by $2.4 million from $12
million for the year ended June 30, 1995 to $14.4 million in 1996 primarily as
a result of increased rates paid on savings deposits. The average rate paid
on deposits increased by 72 basis points from 4.34% to 5.06% and the average
deposit balance grew by $10 million.
Non-interest Expenses. Non-interest expenses increased by $2 million
primarily as a result of increases in the compensation expense related to the
Corporation's ESOP. The number of shares to be released in the regular annual
allocation for the year increased from 1995 by 8,700 shares and the average
stock price increased by approximately $4 per share attributing to a $300,000
increase in compensation expense. Additionally, as noted above, $1.9 million
of compensation expense was accelerated into 1996 in conjunction with the
payment of the special dividend. See "General." These increases were
partially off-set by a $318,000 decrease in compensation expense associated
with the Corporation's Management Development and Recognition Plans. See Note
19 of the Notes to Consolidated Financial Statements.
Yields Earned and Rates Paid
The earnings of the Corporation depend largely on the spread between the
yield on interest-earning assets (primarily loans and investments) and the
cost of interest-bearing liabilities (primarily deposit accounts), as well as
the relative size of the Corporation's interest-earning assets and
interest-bearing liability portfolios.
44
The following table sets forth, for the periods indicated, information regarding average balances of
assets and liabilities as well as the total dollar amounts of interest income from average interest-earning
assets and interest expense on average interest-bearing liabilities, resultant yields, interest rate spread,
net interest margin, and ratio of average interest-earning assets to average interest-bearing liabilities.
Average balances for a period have been calculated using the average of month-end balances during such
period.
Years Ended June 30,
----------------------------------------------------------------------------- At
1995 1996 1997 June 30,
------------------------- ------------------------- -----------------------
Interest Interest Interest 1997
--------
Average and Yield/ Average and Yield/ Average and Yield/ Yield/
Balance Dividends Cost Balance Dividends Cost Balance Dividends Cost Cost
------- --------- ----- ------- --------- ------ ------- --------- ----- --------
(Dollars in thousands)
Interest-
earning
assets(1):
Mortgage
loans
originated.$138,559 $10,872 7.85% $165,779 $12,993 7.84% $203,672 $15,745 7.73% 7.64%
Purchased
mortgage
loans . . . 35,688 3,620 10.14 30,678 3,271 10.66 23,588 2,406 10.20 9.09
Other loans. 23,196 2,037 8.78 24,268 2,122 8.74 27,442 2,378 8.67 9.11
-------- ------- -------- ------- -------- -------
Total net
loans. . 197,443 16,529 8.37 220,725 18,386 8.33 254,702 20,529 8.06 7.93
Mortgage-
backed
securities . 22,386 1,306 5.84 23,010 1,351 5.87 15,996 1,082 6.76 7.89
Investment
securities.100,485 5,450 5.42 82,210 4,929 6.00 36,799 2,886 7.84 7.22
Daily
interest-
earning
deposits. . 11,798 665 5.63 17,432 1,110 6.37 12,279 441 3.59 6.23
-------- ------- -------- ------- -------- -------
Total
interest-
earning
assets . 332,112 23,950 7.21 343,377 25,776 7.51 319,776 24,938 7.80 7.79
------- ------- -------
Non-interest
earning
assets:
Office
properties
and
equipment,
net . . . . 5,080 4,562 4,252
Real estate,
net . . . . 947 968 801
Other non-
interest-
earning
assets. . . 6,159 6,393 7,271
-------- -------- --------
Total
assets .$344,298 $355,300 $332,100
======== ======== ========
Interest
-earning
liabilities:
Other
deposits . $ 38,206 817 2.14 $ 38,656 849 2.20 $ 40,947 $ 664 1.62 1.87
Passbook
savings . 29,559 744 2.52 26,650 671 2.52 26,349 688 2.61 2.47
Certificates
of deposit. 203,885 10,240 5.02 215,950 12,705 5.88 214,010 12,244 5.72 5.65
-------- -------- --------
Total
deposits 271,650 11,801 4.34 281,256 14,225 5.06 281,306 13,596 4.83 4.88
Other
interest-
bearing
liabilities 1,887 164 8.69 1,462 131 8.96 12,781 821 6.42 6.24
-------- -------- --------
Total
interest-
bearing
liabili-
ties . . 273,537 11,965 4.37 282,718 14,356 5.08 294,087 14,417 4.90 5.00
Non-interest-
bearing
liabilities:
Non-interest-
bearing
deposits. 1,405 1,590 1,287
Other
liabilities 2,015 2,447 2,807
-------- -------- --------
Total
liabili-
ties. . 276,957 286,755 298,181
Retained
earnings . 67,341 68,545 33,919
-------- -------- --------
Total
liabilities
and retained
earnings. .$344,298 $355,300 $332,100
======== ======== ========
Net interest
income . . $11,985 $11,420 $10,521
Interest rate
spread. . . 2.84% 2.43% 2.90%
Net interest
margin . . 3.61% 3.33% 3.29%
Ratio of
average
interest-
earning
assets to
average
interest-
bearing
liabilities. 121% 121% 109%
(1) Does not include interest on nonaccrual loans or loans 90 days or more past due. Nonaccrual loans are
included in the average balance until such loans are transferred to foreclosed real estate.
45
The following table sets forth the effects of changing rates and volumes
on net interest income of the Corporation. Information is provided with
respect to (i) effects on interest income attributable to changes in volume
(changes in volume multiplied by prior rate); (ii) effects on interest income
attributable to changes in rate (changes in rate multiplied by prior volume);
and (iii) changes in rate/volume (change in rate multiplied by change in
volume).
1996 Compared to 1995 1997 Compared to 1996
Increase (Decrease) Increase (Decrease)
Due to Due to
---------------------------- -----------------------------
Rate/ Rate/
Rate Volume Volume Net Rate Volume Volume Net
----- ------ ------ --- ----- ------ ------ ---
(Dollars in thousands)
Interest-earning
assets:
Mortgage
loans(1). . . $174 $1,627 $(29) $1,772 $(318) $2,214 $(10) $1,886
Other
loans(1). . (9) 94 -- 85 (19) 278 (3) 256
------- ----- ----- ----- ------ ------- ----- ------
Total net
loans . . . 165 1,721 (29) 1,857 (337) 2,492 (13) 2,142
Mortgage-backed
securities . 7 38 -- 45 205 (412) (62) (269)
Investment
securities . 575 (991) (105) (521) 1,518 (2,723) (838) (2,043)
Daily interest
-earning
deposits . . 87 316 42 445 (484) (328) 143 (669)
------- ----- ----- ----- ------ ------- ----- ------
Total net change
in income on
interest-earning
assets. . . . 834 1,084 (92) 1,826 902 (971) (770) (839)
------- ----- ----- ----- ------ ------- ----- ------
Interest-bearing
liabilities:
Interest-
bearing
deposits . . 1,938 417 69 2,424 (632) 3 (1) (630)
FHLB
advances . . 5 (37) (1) (33) (37) 1,014 (287) 690
------- ----- ----- ----- ------ ------- ----- ------
Total net change
in expense on
interest-
bearing
liabilities . 1,943 380 68 2,391 (669) 1,017 (288) 60
------- ----- ----- ----- ------ ------- ----- ------
Net change in
net interest
income . . . $(1,109) $ 704 $(160) $(565)$1,571 $(1,988)$(482) $ (899)
======= ===== ===== ===== ====== ======= ===== ======
- -----------
(1) Does not include interest on loans 90 days or more past due.
Liquidity and Capital Resources
The Corporation's primary sources of funds are deposits, borrowings and
proceeds from principal and interest payments on loans, mortgage-backed and
investment securities. While maturities and scheduled amortization of loans
and mortgage-backed securities are a predictable source of funds, deposit
flows and mortgage prepayments are greatly influenced by general interest
rates, economic conditions and competition.
The primary investing activity of the Corporation is the origination and
purchase of mortgage loans. During the three years ended June 30, 1997, the
Corporation originated loans in the amounts of $53 million, $64 million and
$61 million, respectively. Other investing activities include the purchase of
securities, which totaled $19 million, $20 million and $11 million during the
three years ended June 30, 1997, respectively. These activities were funded
primarily by principal repayments on loans, mortgage-backed securities and
other securities and by short-term borrowings.
The Corporation must maintain an adequate level of liquidity to ensure
the availability of sufficient funds to support loan growth and deposit
withdrawals, to satisfy financial commitments and to take advantage of
investment
46
opportunities. The Corporation's sources of funds include deposits and
principal and interest payments from loans, mortgage-backed securities and
investments. During fiscal years 1995, 1996 and 1997, the Corporation used
its sources of funds primarily to fund loan commitments and to pay maturing
savings certificates and deposit withdrawals. At June 30, 1997, the
Corporation had approved loan commitments totaling $4 million and undisbursed
loans in process totaling $7 million.
At June 30, 1997, savings certificates amounted to $222 million, or 78%,
of the Corporation's total deposits, including $192 million which were
scheduled to mature by June 30, 1998. During the year ended June 30, 1997,
84% of the total amount of maturing certificates were retained by the
Association. Management of the Corporation believes it has adequate resources
to fund all loan commitments by savings deposits and borrowed funds and that
it can adjust the offering rates of savings certificates to retain deposits in
changing interest rate environments.
The OTS requires a savings institution to maintain an average daily
balance of liquid assets (cash and eligible investments) equal to at least 5%
of the average daily balance of its net withdrawable deposits and short-term
borrowings. In addition, short-term liquid assets currently must constitute
1% of the sum of net withdrawable deposit accounts plus short-term borrowings.
The Corporation's average liquidity ratios were 35%, 28% and 9% during the
years ended June 30, 1995, 1996 and 1997, respectively. The Corporation's
average short-term liquidity ratios for the same periods were 19%, 20% and 7%,
respectively. The Corporation's actual long- and short-term liquidity ratios
at June 30, 1997 were 8% and 6%, respectively. The Corporation consistently
maintains liquidity levels in excess of regulatory requirements, and believes
this is an appropriate strategy for proper asset and liability management.
Effect of Inflation and Changing Prices
The Consolidated Financial Statements and related financial data
presented herein have been prepared in accordance with GAAP, which require the
measurement of financial position and operating results in terms of historical
dollars, without considering the changes in relative purchasing power of money
over time due to inflation. The primary impact of inflation on operations of
the Corporation is reflected in increased operating costs. Unlike most
industrial companies, virtually all the assets and liabilities of a financial
institution are monetary in nature. As a result, interest rates generally
have a more significant impact on a financial institution's performance than
do general levels of inflation. Interest rates do not necessarily move in the
same direction or to the same extent as the prices of goods and services.
During the current interest rate environment, management believes that the
liquidity and the maturity structure of the Corporation's assets and
liabilities are critical to the maintenance of acceptable profitability.
Item 8. Financial Statements and Supplementary Data
- ----------------------------------------------------
Index to Consolidated Financial Statements
Independent Auditors' Report
Consolidated Financial Statements:
Consolidated Balance Sheets, June 30, 1996 and 1997
Consolidated Statements of Income For the Years Ended June 30, 1995,
1996 and 1997
Consolidated Statements of Stockholders' Equity For the Years Ended
June 30, 1995, 1996 and 1997
Consolidated Statements of Cash Flows For the Years Ended June 30,
1995, 1996 and 1997
Notes to Consolidated Financial Statements
Schedules to the consolidated financial statements have been omitted
as the required information is inapplicable.
47
CRISP
CH
HUGHES
---- & CO., L.L.P. ----
CERTIFIED PUBLIC ACCOUNTANTS AND CONSULTANTS
Independent Auditors' Report
----------------------------
To the Board of Directors
First Southeast Financial Corporation
We have audited the accompanying consolidated balance sheets of First
Southeast Financial Corporation and Subsidiary (the "Company") as of June 30,
1996 and 1997, and the related consolidated statements of income,
stockholders' equity, and cash flows for each of the three years in the period
ended June 30, 1997. These financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
consolidated financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of the
Company as of June 30, 1996 and 1997, and the results of their operations and
their cash flows for each of the three years in the period ended June 30,
1997, in conformity with generally accepted accounting principles.
/s/ Crisp Hughes & Co. L.L.P.
Asheville, North Carolina
July 31, 1997
32 Orange Street - P.O. Box 3049 - Asheville, North Carolina 28802 -
(704) 254-2254 - FAX (704) 254-6859
Other Offices: Boone, Burnsville, Sylvia, NC and Greenville, SC
Member of The American Institute of Certified Public Accountants, The
Continental Association of CPA Firms, Inc. The Intercontinental Accounting
Associates and The North Carolina and South Carolina Associates of CPAs
48
FIRST SOUTHEAST FINANCIAL CORPORATION
AND SUBSIDIARY
Consolidated Balance Sheets
(in thousands, except share data)
June 30,
------------------------
Assets 1996 1997
------ ---- ----
Cash and due from banks $ 3,865 $ 3,274
Interest-earning deposits 9,458 10,377
Investment securities:
Held to maturity (market value of in $22,917 in
1996 and $15,730 in 1997) 23,674 16,092
Available for sale (amortized cost of $27,218 in
1996 and $21,089 in 1997) 27,316 21,268
Loans receivable, net 238,337 272,401
Mortgage-backed securities:
Held to maturity (market value of in $11,217 1996
and $9,338 in 1997) 11,508 9,392
Available for sale (amortized cost of $6,155 in
1996 and $4,960 in 1997) 6,090 4,960
Office properties and equipment, net 4,381 4,282
Real estate 791 751
Federal Home Loan Bank stock 2,691 2,691
Interest receivable 2,294 2,342
Other 1,447 700
---------- ----------
Total assets $ 331,852 $ 348,530
========== ==========
Liabilities and Stockholders' Equity
------------------------------------
Deposits $ 288,217 $ 284,783
Securities sold under agreement to repurchase 5,000 15,000
Federal Home Loan Bank advances - 10,000
Advance payments by borrowers for taxes and insurance 1,436 1,387
Accrued expenses and other liabilities 3,331 1,488
Income taxes payable 365 826
---------- ----------
Total liabilities 298,349 313,484
---------- ----------
Stockholders' equity:
Preferred stock ($.01 par value, 2,000,000 shares
authorized; none outstanding) - -
Common stock ($.01 par value, 8,000,000 shares
authorized; 4,388,231 shares issued and
outstanding at June 30, 1996 and June 30, 1997) 44 44
Paid-in capital 19,137 19,137
Retained income, substantially restricted 14,300 15,747
Unrealized gains on securities, net 22 118
---------- ----------
Total stockholders' equity 33,503 35,046
---------- ----------
Total liabilities and stockholders' equity $ 331,852 $ 348,530
========== ==========
The accompanying notes are an integral part of these consolidated financial
statements.
49
FIRST SOUTHEAST FINANCIAL CORPORATION
AND SUBSIDIARY
Consolidated Statements of Income
(in thousands, except per share data)
Years Ended June 30,
------------------------------------
1995 1996 1997
---- ---- ----
Interest income:
Mortgage loans $ 14,492 $ 16,265 $ 18,151
Mortgage-backed securities 1,306 1,351 1,082
Other loans 2,037 2,122 2,378
Investments 5,450 4,929 2,886
Deposits with other banks 665 1,110 441
---------- ---------- ----------
Total interest income 23,950 25,777 24,938
---------- ---------- ----------
Interest expense:
Deposits 11,801 14,226 13,596
Borrowings 164 131 821
---------- ---------- ----------
Total interest expense 11,965 14,357 14,417
---------- ---------- ----------
Net interest income 11,985 11,420 10,521
Provision for loan losses 180 180 180
---------- ---------- ----------
Net interest income after provision
for loan losses 11,805 11,240 10,341
---------- ---------- ----------
Noninterest income:
Loan fees and service charges 622 585 794
Securities losses (46) (891) -
Income from rental of real estate
acquired for development or rental 88 86 86
Other 392 330 301
---------- ---------- ----------
Total other income 1,056 110 1,181
---------- ---------- ----------
Noninterest expenses:
Compensation and employee benefits 4,607 6,643 3,598
Net occupancy expense 979 954 919
Deposit insurance premiums 625 640 2,172
Provision for real estate losses 21 - -
Other 1,144 1,153 1,184
---------- ---------- ----------
Total other expenses 7,376 9,390 7,873
---------- ---------- ----------
Income before income taxes 5,485 1,960 3,649
Income tax expense 1,908 1,021 1,324
---------- ---------- ----------
Net income $ 3,577 $ 939 $ 2,325
========== ========== ==========
Weighted average common equivalent shares
outstanding 3,946 4,061 4,388
Net income per share $.91 $.23 $.53
The accompanying notes are an integral part of these consolidated financial
statements.
50
FIRST SOUTHEAST FINANCIAL CORPORATION
AND SUBSIDIARY
Consolidated Statements of Stockholders' Equity
(in thousands, except share data)
Unrealized Unearned Compensation
Common Paid-In Retained Gains Treasury ---------------------
Stock Capital Income (Losses) Stock For ESOP For MRPs Total
----- ------- ------ -------- ----- -------- -------- -----
Balance at June 30, 1994 $ 43 $41,949 $30,213 $(399) $(1,846) $(2,995) $(832) $66,133
Net income - - 3,577 - - - - 3,577
Cash dividends ($.265 per share) - - (1,018) - - - - (1,018)
Unrealized gains on securities,
net of taxes of $150 - - - 241 - - - 241
Purchase of treasury stock - - - - (1,074) - - (1,074)
(80,285 shares)
ESOP and MRPs compensation - 157 - - - 333 575 1,065
earned ---- ------- ------- ----- ------- ------- ----- -------
Balance at June 30, 1995 43 42,106 32,772 (158) (2,920) (2,662) (257) 68,924
Net income - - 939 - - - - 939
Cash dividends ($10.48 per - (23,738) (19,411) - - 185 - (42,964)
share)
Unrealized gains on securities,
net of taxes of $106 - - - 180 - - - 180
Issuance of common stock 1 617 - - - - - 618
(61,831 shares)
Issuance of treasury stock - (622) - - 2,920 - - 2,298
(229,785 shares)
Tax benefit of stock options - 505 - - - - - 505
exercised
ESOP and MRPs compensation - 269 - - - 2,477 257 3,003
earned ---- ------- ------- ----- ------- ------- ----- -------
Balance at June 30, 1996 44 19,137 14,300 22 - - - 33,503
Net income - - 2,325 - - - - 2,325
Cash dividends ($.20 per share) - - (878) - - - - (878)
Unrealized gains on securities,
net of taxes of $50 - - - 96 - - - 96
---- ------- ------- ----- ------- ------- ----- -------
Balance at June 30, 1997 $ 44 $19,137 $15,747 $ 118 $ - $ - $ - $35,046
==== ======= ======= ===== ======= ======= ===== =======
The accompanying notes are an integral part of these consolidated financial statements.
51
FIRST SOUTHEAST FINANCIAL CORPORATION
AND SUBSIDIARY
Consolidated Statements of Cash Flows
(in thousands)
Years Ended June 30,
------------------------------------
1995 1996 1997
---- ---- ----
Operating activities:
Net income $ 3,577 $ 939 $ 2,325
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation 454 418 375
Provision for loan losses 180 180 180
Provision for losses on real estate 21 - -
Deferred income taxes (benefit) (11) (250) 134
Gain on sale of equipment (25) - -
Amortization of premium on savings 18 13 10
deposits
Amortization of fees and discounts on (1,093) (1,000) (424)
loans
Loss on sale of securities 46 891 -
Gain on sale of mortgage loans - (4) -
Net realized gain on real estate (62) (15) (10)
Amortization of premium on mortgage-
backed securities 108 180 131
Amortization of premiums (discounts)
on investments (215) 26 (4)
Amortization of unearned ESOP and MRP
compensation 1,065 3,003 -
Increase in accrued interest receivable (293) (97) (48)
Decrease (increase) in other assets (416) (1,033) 1,072
Increase (decrease) in accrued expenses
and other liabilities 1,301 2,401 (1,472)
---------- ---------- ----------
Net cash provided by operating
activities 4,655 5,652 2,269
---------- ---------- ----------
Investing activities:
Net decrease in insured certificates of
deposit 3,479 448 5,579
Purchase of investment securities held
to maturity (17,930) (15,000) (996)
Maturities of investment securities held
to maturity 23,063 12,625 3,000
Purchase of investment securities available
for sale (1,358) (5,000) (9,981)
Maturities of investment securities
available for sale - 10,550 16,113
Proceeds from sale of investment securities
available for sale 1,250 34,964 -
Proceeds from sale of real estate 237 289 67
Capitalized costs on real estate (7) (2) (10)
Purchase of stock subscription rights - - (325)
Net loan originations (22,974) (24,722) (31,430)
Purchase of loans (3,250) (5,000) (2,412)
Proceeds from sale of loans - 775 -
Principal payments on mortgage-backed
securities held to maturity 4,091 3,036 2,035
Purchase of mortgage-backed securities
held to maturity - (7,041) -
Purchase of mortgage-backed securities
available for sale - (5,192) -
Principal payments on mortgage-backed
securities available for sale - 1,771 1,145
(continued)
52
FIRST SOUTHEAST FINANCIAL CORPORATION
AND SUBSIDIARY
Consolidated Statements of Cash Flows
(in thousands)
Years Ended June 30,
------------------------------------
1995 1996 1997
---- ---- ----
Investing activities, continued:
Proceeds from sale of mortgage-backed
securities available for sale $ - $ 9,706 $ -
Purchase of office properties and
equipment (100) (43) (261)
Proceeds from sale of equipment 25 - -
Net cash provided (used) by ---------- ---------- ----------
investing activities (13,474) 12,164 (17,476)
---------- ---------- ----------
Financing activities:
Net increase (decrease) in deposits 6,479 9,973 (3,444)
Increase in repurchase agreements - 5,000 10,000
Increase (decrease) in advance payments
by borrowers for taxes and insurance 299 (200) (49)
Increase (decrease) in mortgage
servicing payments (127) 44 (94)
Proceeds from FHLB advances - - 10,000
Repayment of FHLB advances (318) (1,597) -
Proceeds from borrowings - - 2,040
Repayment of borrowings - - (2,040)
Proceeds from issuance of common stock
and treasury stock - 2,916 -
Purchase of treasury stock (1,074) - -
Dividends paid (1,018) (42,964) (878)
---------- ---------- ----------
Net cash provided (used) by
financing activities 4,241 (26,828) 15,535
---------- ---------- ----------
Decrease in cash and cash
equivalents (4,578) (9,012) 328
Cash and cash equivalents at beginning of
year 26,913 22,335 13,323
---------- ---------- ----------
Cash and cash equivalents at end of year $ 22,335 $ 13,323 $ 13,651
========== ========== ==========
Supplemental disclosures of cash flow information:
Cash paid during the period for:
Interest on deposits and other
borrowings $ 11,872 $ 14,350 $ 14,348
Income taxes net of refunds 1,353 1,869 121
========== ========== ==========
Noncash investing and financing activities:
Real estate acquired in satisfaction
of mortgage loans $ 27 $ 118 $ 149
Loan loss reserve charge-offs 84 44 57
Unrealized gains on securities, net
of taxes 241 180 96
Reclassification of mortgage-backed
securities to mortgage-backed
securities available for sale - 12,749 -
Reclassification of investment securities
to securities available for sale - 39,801 -
Loans originated for real estate
owned disposition 60 36 127
Transfer from office properties to
real estate held for sale 210 - -
Tax benefit of stock options exercised - 505 -
========== ========== ==========
The accompanying notes are an integral part of these consolidated financial
statements.
53
FIRST SOUTHEAST FINANCIAL CORPORATION
AND SUBSIDIARY
Notes to Consolidated Financial Statements
June 30, 1995, 1996 and 1997
(Tabular amounts in thousands)
1. Summary of Significant Accounting Policies
------------------------------------------
The accounting and reporting policies of First Southeast Financial
Corporation (the "Holding Company") and First Federal Savings and Loan
Association of Anderson (the "Association") and Subsidiary (collectively
referred to as the "Company") conform, in all material respects, to
generally accepted accounting principles and to general practices within
the savings and loan industry. The following summarize the more
significant of these policies and practices.
Nature of Operations - The Holding Company's only endeavor is its
investment in the Association, a federally chartered stock savings and
loan association. The Association's principal line of business is
originating residential and nonresidential first mortgage loans. The loans
are primarily with individuals.
Estimates - The preparation of consolidated financial statements in
conformity with generally accepted accounting principles requires
management to make estimates and assumptions that affect the reported
amounts of assets and liabilities and disclosure of contingent assets and
liabilities at the date of the consolidated financial statements and the
reported amounts of revenues and expenses during the reporting period.
Actual results could differ from those estimates.
Principles of Consolidation - The consolidated financial statements
include the accounts of the Holding Company and its subsidiary, the
Association, and the Association's wholly-owned subsidiary, First Master
Service Corporation. Intercompany balances and transactions have been
eliminated.
Loans Receivable - Loans receivable are carried at their unpaid principal
balance less, where applicable, unearned income, net deferred loan fees,
and allowances for losses. Unearned discounts on mortgage loans purchased
are amortized to interest income using the level yield interest method
over the lives of the underlying loans adjusted for anticipated prepayment
rates. Additions to the allowances for losses are based on management's
evaluation of the loan portfolio under current economic conditions and
such other factors which, in management's judgment, deserve recognition in
estimating losses. Interest accrual is discontinued when a loan becomes
90 days delinquent unless, in management's opinion, the loan is well
secured and in process of collection. Interest income on impaired loans
is recognized on a cash basis.
Loan Fees - Loan fees result from the origination of mortgage loans. Such
fees and certain direct incremental costs related to origination of such
loans are deferred ("net deferred loan fees") and reflected as a reduction
of the carrying value of mortgage loans. The net deferred loan fees (or
costs) are amortized using the interest method over the contractual lives
of the loans. Unamortized net deferred loan fees on loans sold prior to
maturity are credited to income at the time of sale.
Investment Securities and Mortgage-Backed Securities - Investment
securities and mortgage-backed securities held to maturity are stated at
amortized cost since the Company has both the ability and intent to hold
such securities to maturity. Premiums and discounts on the investment and
mortgage-backed securities are amortized or accreted into income over the
contractual terms of the securities using a level yield interest method.
Gains and losses on the sale of these securities are calculated based on
the specific identification method.
54
Investment securities and mortgage-backed securities available for sale
are carried at fair value. The Company has identified their holdings in
certain debt securities and mortgage-backed securities as securities
available for sale. The unrealized holding gains or losses on securities
available for sale are excluded from income and reported, net of related
income tax effects, as a separate component of stockholders' equity until
realized. Gains or losses on sales of securities available for sale are
based on average cost method for the mutual funds and specific
identification method for all other securities.
Real Estate - Real estate properties acquired through, or in lieu of, loan
foreclosure are initially recorded at fair value at the date of
foreclosure. Subsequent to foreclosure, real estate is recorded at the
lower of initial fair value or existing fair value less estimated cost to
sell (net realizable value). Real estate properties held for development
and resale are carried at the lower of cost, including cost of
improvements incurred subsequent to acquisition, or net realizable value.
Costs relating to development and improvement of properties are
capitalized, whereas costs relating to the holding of property are
expensed.
Valuations are periodically performed by management, and an allowance for
losses is established by a charge to income if the carrying value of a
property exceeds its estimated net realizable value.
Office Properties and Equipment - Office properties and equipment are
carried at cost less accumulated depreciation. Depreciation is computed
on the straight-line method over the estimated useful lives of the assets
ranging up to 40 years. The cost of maintenance and repairs is charged to
expense as incurred while expenditures which materially increase property
lives are capitalized.
Federal Home Loan Bank Stock - Investment in stock of a Federal Home Loan
Bank is required by law of every federally insured savings and loan or
savings bank. The investment is carried at cost. No ready market exists
for the stock, and it has no quoted market value.
Income Taxes - The Holding Company and the Association and its subsidiary
follow the practice of filing consolidated federal income tax returns.
Income taxes are allocated to the Association and subsidiary as though
separate returns are being filed. Individual state income tax returns are
filed for each company.
The Company utilizes the liability method of computing income taxes in
accordance with Statement of Financial Accounting Standard No. 109,
"Accounting for Income Taxes" (SFAS 109). Under the liability method,
deferred tax liabilities and assets are established for future tax return
effects of temporary differences between the stated value of assets and
liabilities for financial reporting purposes and their tax basis adjusted
for tax rate changes. The focus is on accruing the appropriate balance
sheet deferred tax amount, with the statement of income effect being the
result of changes in balance sheet amounts from period to period. Current
income tax expense is provided based upon the actual tax liability
incurred for tax return purposes.
Premium on Deposit Acquisitions - The premium on deposit acquisitions is
being amortized over the estimated life of the deposits (primarily
thirteen years) using an interest method. The amount is included in
interest expense on deposits.
Income Per Share - Income per share is computed by dividing net income by
the weighted average number of shares and share equivalents outstanding
during the year. Share equivalents include, if applicable, dilutive stock
option share equivalents determined using the treasury stock method, ESOP
shares, and MRP shares. For the year ended June 30, 1997, no common stock
equivalents existed.
Cash Flow Information - As presented in the consolidated statements of
cash flows, cash and cash equivalents include cash on hand and
interest-earning deposits in other banks. The Company considers all
highly liquid instruments with original maturities of three months or less
to be cash equivalents.
55
2. Investment Securities
---------------------
The carrying values and estimated market values of investment securities
are summarized as follows:
Gross Gross Estimated
Amortized Unrealized Unrealized Market
Cost Gains Losses Value
---- ----- ------ -----
Held to Maturity:
June 30, 1996:
U.S. government and
agency securities $ 17,995 $ 3 $ (760) $ 17,238
Insured certificates
of deposit 5,679 - - 5,679
-------- -------- -------- --------
$ 23,674 $ 3 $ (760) $ 22,917
======== ======== ======== ========
June 30, 1997:
U.S. government and
agency securities $ 15,992 $ - $ (362) $ 15,630
Insured certificates
of deposit 100 - - 100
-------- -------- -------- --------
$ 16,092 $ - $ (362) $ 15,730
======== ======== ======== ========
Available for Sale:
June 30, 1996:
U.S. government and
agency securities $ 27,218 $ 110 $ (12) $ 27,316
======== ======== ======== ========
June 30, 1997:
U.S. government
and agency $ 21,089 $ 179 $ - $ 21,268
======== ======== ======== ========
The amortized cost and estimated market values of debt securities by
contractual maturity are as follows:
Amortized Cost Estimated Market Value
----------------- ----------------------
1996 1997 1996 1997
---- ---- ---- ----
Held to Maturity:
Due in one year $ 5,579 $ 100 $ 5,579 $ 100
Due after one year
through five years 1,100 1,996 1,079 1,987
Due after five years
through ten years 7,995 7,996 7,663 7,830
Due after ten years 9,000 6,000 8,596 5,813
-------- -------- -------- --------
$ 23,674 $ 16,092 $ 22,917 $ 15,730
======== ======== ======== ========
Available for Sale:
Due in one year $ 16,114 $ 4,499 $ 16,127 $ 4,516
Due after one year
through five years 6,104 1,608 6,189 1,636
Due after five years
through ten years 5,000 14,982 5,000 15,116
-------- -------- -------- --------
$ 27,218 $ 21,089 $ 27,316 $ 21,268
======== ======== ======== ========
56
The Company had approximately $9,000,000 and $17,279,000 of investment
securities pledged against deposits and other borrowings at June 30, 1996
and 1997, respectively. There were no investment securities held to
maturity sold during the fiscal years 1995, 1996 and 1997.
For the years ended June 30, 1995 and 1996, proceeds on sales of
securities available for sale were approximately $1,250,000 and
$34,964,000, with realized losses of approximately $38,000 and $582,000,
respectively. There were no investment securities available for sale sold
for the year ended June 30, 1997. The net unrealized gains at June 30,
1996 and 1997, of approximately $64,000 and $118,000 are reported as a
separate component of stockholders' equity.
In December 1995, the Company transferred investment securities held to
maturity with an amortized cost of approximately $39,801,000 and market
value of approximately $40,036,000 to the available for sale category.
The transfer was a result of the FASB (Financial Accounting Standards
Board) allowing a one-time reallocation of an entity's investment
portfolio without penalty.
The Company had no commitments to purchase investment securities at June
30, 1996 and 1997.
3. Loans Receivable
----------------
Loans receivable are summarized as follows:
June 30,
-----------------------
1996 1997
---- ----
Real estate first mortgage loans:
One-to-four-family dwellings $ 209,810 $ 237,124
Construction 14,220 12,350
Commercial real estate 2,022 2,843
Other real estate 686 904
--------- ---------
Total real estate loans 226,738 253,221
--------- ---------
Other loans:
Consumer installment loans 20,317 22,250
Commercial loans 3,496 6,603
--------- ---------
Total other loans 23,813 28,853
--------- ---------
Total loans 250,551 282,074
--------- ---------
Less:
Undisbursed portion of loans in process 9,059 6,862
Unearned discounts on consumer loans 141 117
Unearned discounts on loans purchased 1,348 948
Net deferred loan fees 433 376
Allowance for loan losses 1,233 1,370
--------- ---------
12,214 9,673
--------- ---------
$ 238,337 $ 272,401
========= =========
57
The Company's primary lending area for the origination of mortgage loans
includes parts of six counties in northwestern South Carolina. The
Company is also involved with correspondent lenders that broker loans
throughout South and North Carolina. The Company limits uninsured loans
to 80% of the appraised value of the property securing the loan.
Generally, the Company allows loans covered by private mortgage insurance
up to 95% of the appraised value of the property securing the loan.
The general policy is to limit loans on commercial real estate to 75% of
the lesser of appraised value or construction cost of the property
securing the loan.
The Company's policy requires that consumer and other installment loans be
supported primarily by the borrower's ability to repay the loan and
secondarily by the value of the collateral securing the loan, if any.
Management of the Company believes that its allowances for losses on its
loan portfolio are adequate. However, the estimates used by management in
determining the adequacy of such allowances are susceptible to significant
changes due primarily to changes in economic and market conditions. In
addition, various regulatory agencies periodically review the Company's
allowance for losses as an integral part of their examination processes.
Such agencies may require the Company to recognize additions to the
allowances based on their judgments of information available to them at
the time of their examinations.
In accordance with SFAS No. 114, "Accounting by Creditors for Impairment
of a Loan", no loans in non-homogenous groups were determined to be
impaired for the years ended or as of June 30, 1996 and 1997,
respectively. Commercial real estate and other loans are included in the
non-homogenous group.
For the loans in homogeneous groups, loans which are contractually past
due ninety days or more total approximately $791,000 at June 30, 1996 and
$523,000 at June 30, 1997. The amount the Company will ultimately realize
from these loans could differ materially from their carrying value because
of unanticipated future developments affecting the underlying collateral
or the borrower's ability to repay the loans. If collection efforts are
unsuccessful, these loans will be subject to foreclosure proceedings in
the ordinary course of business. Management believes that the Company has
adequate collateral on these loans and that the Company will not incur
material losses in the event of foreclosure.
The changes in the allowance for loan losses are summarized as follows:
June 30,
----------------------------------
1995 1996 1997
---- ---- ----
Beginning balance $ 914 $ 1,062 $ 1,233
Provision charged to income 180 180 180
Recoveries 52 35 14
Charge-offs (84) (44) (57)
--------- --------- ---------
Ending balance $ 1,062 $ 1,233 $ 1,370
========= ========= =========
Mortgage loans serviced for others are not included in the accompanying
consolidated balance sheets. The unpaid principal balances of these loans
are approximately $4,286,000, $3,646,000 and $3,238,000 at June 30, 1995,
1996 and 1997, respectively.
Custodial escrow balances maintained in connection with the foregoing loan
servicing were approximately $45,000, $28,000 and $26,000 at June 30,
1995, 1996 and 1997, respectively.
58
4. Mortgage-Backed Securities
--------------------------
Mortgage-backed securities are summarized as follows:
Gross Gross Estimated
Amortized Unrealized Unrealized Market
Cost Gains Losses Value
---- ----- ------ -----
Held to maturity:
June 30, 1996:
FHLMC Certificates $ 2,839 $ 1 $ (14) $ 2,826
FNMA Certificates 4,368 - (240) 4,128
GNMA Certificates 4,301 - (38) 4,263
---------- ---------- ---------- ----------
$ 11,508 $ 1 $ (292) $ 11,217
========== ========== ========== ==========
June 30, 1997:
FHLMC Certificates $ 2,386 $ 37 $ - $ 2,423
FNMA Certificates 3,454 - (117) 3,337
GNMA Certificates 3,552 26 - 3,578
---------- ---------- ---------- ----------
$ 9,392 $ 63 $ (117) $ 9,338
========== ========== ========== ==========
Available for sale:
June 30, 1996:
FHLMC Certificates $ 910 $ 21 $ - $ 931
FNMA Certificates 582 14 - 596
GNMA Certificates 4,663 - (100) 4,563
---------- ---------- ---------- ----------
$ 6,155 $ 35 $ (100) $ 6,090
========== ========== ========== ==========
June 30, 1997:
FHLMC Certificates $ 689 $ 11 $ - $ 700
FNMA Certificates 420 6 - 426
GNMA Certificates 3,851 - (17) 3,834
---------- ---------- ---------- ----------
$ 4,960 $ 17 $ (17) $ 4,960
========== ========== ========== ==========
Although mortgage-backed securities are initially issued with a stated
maturity date, the underlying mortgage collateral may be prepaid by the
mortgagee and, therefore, such securities may not reach their maturity
date.
The Company had no sales of mortgage-backed securities held to maturity
during the years ended June 30, 1995, 1996 and 1997. Mortgage-backed
securities pledged were approximately $4 million and $.5 million at June
30, 1996 and 1997, respectively.
There were no mortgage-backed securities available for sale sold for the
years ended June 30, 1995 and 1997. For the year ended June 30, 1996,
proceeds on sales of mortgage-backed securities available for sale were
approximately $9,706,000, with realized losses of approximately $309,000.
The net unrealized loss at June 30, 1996, of approximately $42,000 is
reported as a separate component of stockholders' equity.
In December 1995, the Company transferred mortgage-backed securities held
to maturity with an amortized cost of approximately $12,749,000 and market
value of approximately $12,610,000 to the available for sale category.
The transfer was a result of the FASB allowing a one-time reallocation of
an entity's investment portfolio without penalty.
59
5. Real Estate
-----------
Real estate is summarized as follows:
June 30,
-----------------------
1996 1997
---- ----
Real estate acquired on settlement of loans $ 25 $ -
Real estate acquired for development, rental
and sale 984 984
--------- ---------
1,009 984
Less:
Accumulated depreciation 218 233
--------- ---------
$ 791 $ 751
========= =========
Real estate acquired for development, rental and sale consists of:
June 30,
-----------------------
1996 1997
---- ----
Commercial buildings $ 350 $ 350
Improved land 46 46
Unimproved land 588 588
--------- ---------
$ 984 $ 984
========= =========
Real estate acquired for development, rental and sale includes the
Association's subsidiary's investment in commercial rental property
located in Anderson, South Carolina. The subsidiary recognized income
from this property of approximately $88,000, $86,000 and $86,000 during
the years ended June 30, 1995, 1996 and 1997, respectively.
In 1995, the Company reclassified improved land and a building of
approximately $210,000 from office properties and equipment to real
estate. This property consisted of a former branch office which was no
longer used in operations. The property was sold in 1996, with proceeds
on sale of approximately $164,000, resulting in a realized loss of
approximately $23,000.
The changes in the allowance for losses on real estate acquired in
settlement of loans is summarized as follows:
1995 1996 1997
---- ---- ----
Beginning balance $ 12 $ 21 $ -
Provision charged to income 21 - -
Charge-offs (12) (21) -
--------- --------- -------
Ending balance $ 21 $ - $ -
========= ========= =======
60
6. Office Properties and Equipment
-------------------------------
Office properties and equipment are summarized as follows:
June 30,
-----------------------
1996 1997
---- ----
Land and improvements $ 1,591 $ 1,591
Buildings 5,660 5,742
Furniture, fixtures and equipment 3,348 3,374
Construction in progress - 152
--------- ---------
10,599 10,859
Less accumulated depreciation 6,218 6,577
--------- ---------
$ 4,381 $ 4,282
========= =========
7. Interest Receivable
-------------------
Interest receivable is summarized as follows:
June 30,
-----------------------
1996 1997
---- ----
Investments $ 835 $ 750
Loans receivable 1,330 1,485
Mortgage-backed securities 129 107
--------- ---------
$ 2,294 $ 2,342
========= =========
8. Deposits
--------
Deposit account balances are summarized as follows:
June 30,
-----------------------
1996 1997
---- ----
NOW deposits at 1.87% and 1.19% at June 30, 1996
and 1997 (including non-interest bearing accounts
of $1,577 and $2,782, respectively) $ 21,424 $ 22,815
Money Market deposits with weighted average
rates of 3.23% and 3.05% at June 30, 1996 and
1997, respectively 15,574 13,108
Passbook deposits at 2.47% at June 30, 1996 and
1997 27,470 26,633
Fixed rate certificates with weighted average
rates of 5.62% and 5.65% at June 30, 1996 and
1997, respectively 223,767 222,235
Less premium on deposits acquired (18) (8)
--------- ---------
Total deposits $ 288,217 $ 284,783
========= =========
Weighted average cost of deposits 4.91% 4.88%
==== ====
61
Contractual maturities of certificate accounts are summarized as follows:
June 30,
-----------------------
1996 1997
---- ----
12 months or less $ 164,736 $ 191,934
Over 12 months 59,031 30,301
--------- ---------
$ 223,767 $ 222,235
========= =========
The Company had deposit accounts in amounts of $100,000 or more of
approximately $38 million and $33 million at June 30, 1996 and 1997,
respectively.
9. Securities Sold Under Agreement to Repurchase
---------------------------------------------
The securities sold under reverse repurchase agreements were delivered to
safekeeping with an independent third-party on the Company's behalf. The
underlying collateral consists of various government and agency
securities. The broker-dealers have agreed to resell to the Company the
identical securities at the maturity of the agreements. The agreements
contain provisions for maturity every 90 days, with final maturities
through January 1999.
Information concerning the securities sold under agreement to repurchase
is summarized as follows:
June 30,
------------------------
1996 1997
---- ----
Average balance during the year (monthly basis) $ 417 $ 12,083
Average interest rate 6.41% 6.27%
Maximum month-end balance during the year $ 5,000 $ 15,000
Investment securities underlying the agreements
at year-end:
Carrying value (including accrued interest) $ 5,000 $ 15,298
Estimated fair value $ 5,000 $ 15,432
========= =========
10. Advances from the Federal Home Loan Bank
----------------------------------------
Advances from the Federal Home Loan Bank are summarized as follows:
June 30,
-----------------------
Interest Rate Maturity 1996 1997
------------- Date ---- ----
----
5.87 June 2002 $ - $ 10,000
======== ==========
The Federal Home Loan Bank stock and mortgage loans receivable were
pledged as collateral for these advances.
11. Compensation Benefit Agreements
-------------------------------
Effective January 9, 1996, the Association established unfunded
nonqualified compensation agreements with its directors providing for
fixed benefits for life. The benefits are payable to those directors
beginning the month following retirement from the Board or, in the event
of their death prior to retirement, to their designated beneficiary for a
five year period. The liability for the benefits has been accrued at the
balance sheet date at the net present value of the expected future
benefits. Annual expense is based on the increase in the net present
value of expected future benefits. The expense before income tax effect
associated with these agreements was approximately $46,000 for the year
ending June 30, 1996. No additional expense was recognized for the year
ended June 30, 1997.
62
12. Income Taxes
------------
Income tax expense (benefit) is summarized as follows:
Years Ended June 30,
-----------------------------------
1995 1996 1997
---- ---- ----
Current $ 1,919 $ 1,271 $ 1,190
Deferred (11) (250) 134
--------- --------- ---------
Total $ 1,908 $ 1,021 $ 1,324
========= ========= =========
The differences between actual income tax expense and the amount computed
by applying the federal statutory income tax rate of 34% to income before
income taxes and cumulative effect adjustment are reconciled as follows:
Years Ended June 30,
----------------------------------
1995 1996 1997
---- ---- ----
Computed income tax expense $ 1,865 $ 666 $ 1,241
Increase (decrease) resulting from:
State income tax, net of federal
benefit 49 - 57
Nondeductible ESOP compensation
expense - 341 -
Other (6) 14 26
--------- --------- ---------
Actual income tax expense $ 1,908 $ 1,021 $ 1,324
========= ========= =========
Net deferred tax assets (liabilities) are included in other assets or
income taxes payable in the accompanying consolidated balance sheets. The
components of net deferred tax assets (liabilities) are as follows:
June 30,
----------------------
1996 1997
---- ----
Deferred tax assets:
Bad debt reserves $ - $ 476
Loan origination fees 67 -
Deferred compensation and benefit deductions 272 243
Carryforward of capital losses 234 234
State net operating loss 56 56
Tax credits 124 -
Other 31 47
Valuation allowance - -
--------- ---------
784 1,056
Deferred tax liabilities:
Bad debt reserves 277 -
Bad debt recapture adjustment - 784
Excess tax depreciation 112 100
FHLB stock dividends 315 315
Unrealized gains on securities available
for sale 11 61
Loan origination fees - 6
--------- ---------
715 1,266
--------- ---------
Net deferred tax asset (liability) $ 69 $ (210)
========= =========
63
The Association's annual addition to its reserve for bad debts allowed
under the Internal Revenue Code may differ significantly from the bad debt
experience used for financial statement purposes. Such bad debt
deductions for income tax purposes are included in taxable income of later
years only if the bad debt reserves are used for purposes other than to
absorb bad debt losses. Since the Association does not intend to use the
reserve for purposes other than to absorb losses, no deferred income taxes
have been provided on the amount of bad debt reserves for tax purposes
that arose in tax years beginning before December 31, 1987, in accordance
with SFAS No. 109. Therefore, retained income at June 30, 1996 and 1997,
includes approximately $7.8 million, representing such bad debt deductions
for which no deferred income taxes have been provided.
With the repeal of the reserve method of accounting for thrift bad debt
reserves for tax year beginning after December 31, 1995, the Association
will have to recapture into taxable income its post-1987 excess reserves
over a six-year period. The Association currently meets a recapture
provision which allows it to delay the start of the recapture period due
to loan origination volume. The amount of the post-1987 excess is
approximately $2,066,000. Since the tax effect of this excess had been
previously recorded as deferred income taxes, the Association will have no
material impact on its results of operations when it begins recapture of
the excess reserves.
13. Stockholders' Equity
--------------------
At the time of its conversion to a stock association, the Association
established a liquidation account in an amount equal to its total retained
income as of June 30, 1993. The liquidation account will be maintained
for the benefit of eligible account holders who continue to maintain their
accounts at the Association after the conversion. The liquidation account
will be reduced annually to the extent that eligible account holders
reduce their qualifying deposits. Subsequent increases will not restore
an eligible account holder's interest in the liquidation account. In the
event of a complete liquidation, each eligible account holder will be
entitled to receive a distribution from the liquidation account in an
amount proportionate to the current adjusted qualified balances for
accounts then held.
Subsequent to the conversion, the Association may not declare or pay cash
dividends on or repurchase any of its shares of common stock, if the
effect would cause stockholders' equity to be reduced below the amount
required for the liquidation account, applicable regulatory capital
maintenance requirements, or if such declaration and payment would
otherwise violate regulatory requirements.
Unlike the Association, the Company is not subject to these regulatory
restrictions on payment of dividends to its stockholders. However, the
source of future dividends may be dependent upon dividends from the
Association. On June 17, 1996, the Board of Directors of the Holding
Company authorized a one-time special cash dividend of $10 per share to be
paid on June 27, 1996, to stockholders of record on June 21, 1996. The
Company's earnings for the fourth quarter were substantially reduced due
to losses that were recognized upon the liquidation of securities to fund
the cash dividend as well as the recognition of the remaining unearned
ESOP compensation. The ESOP expense recognition was accelerated because
the special dividend payment on unallocated shares provided sufficient
funds for the ESOP to repay its outstanding debt obligation and release
the remaining unallocated shares. The Association received Office of
Thrift Supervision approval to provide $19.5 million of dividends to the
Holding Company to partially fund the one-time special dividend.
14. Regulatory Matters
------------------
The Association is subject to various regulatory capital requirements
administered by the Office of Thrift Supervision (OTS). Failure to meet
minimum capital requirements can initiate certain mandatory, and possibly
additional discretionary, actions by regulators that, if undertaken, could
have a direct material effect on the Association's financial statements.
Under capital adequacy guidelines and the regulatory framework for prompt
corrective action, the Association must meet specific capital guidelines
that involve quantitative measures of the Association's assets,
liabilities, and certain off-balance sheet items as calculated under
regulatory accounting practices. The Association's capital amounts and
classification are also subject to qualitative judgments by the regulators
about components, risk weightings, and other factors.
64
Quantitative measures established by regulation to ensure capital adequacy
require the Association to maintain minimum amounts and ratios (set forth
in the table below) of tangible and core capital (as defined in the
regulations) to adjusted total assets (as defined), and of risk-based
capital (as defined) to risk-weighted assets (as defined). Management
believes, as of June 30, 1997, that the Association meets all capital
adequacy requirements to which it is subject.
As of June 30, 1997, the most recent notification from the OTS categorized
the Association as well capitalized under the regulatory framework for
prompt corrective action. To be categorized as well capitalized the
Association must maintain minimum total tangible, core, and risk-based
ratios as set forth in the table. There are no conditions or events since
that notification that management believes have changed the institution's
category.
The Association's actual capital amounts and ratios are also presented in
the table (in thousands) and assumed no additional deductions from capital
for interest-rate risk.
To Be Well
For Capital Capitalized Under
Adequacy Prompt Corrective
Actual Purposes Action Provisions
------------------ --------------- -----------------
Amount Ratio Amount Ratio Amount Ratio
------ ----- ------ ----- ------ -----
As of June 30, 1997:
Tangible Capital
(to adjusted
total assets) $33,801 9.7% $ 5,227 >1.5% $ 17,422 >5%
- -
Core Capital (to
adjusted total
assets) $33,801 9.7% $10,454 >3.0% $ 17,422 >5%
- -
Risk-Based (to
risk-weighted
assets $35,171 20.3% $13,857 >8.0% $ 17,321 >10%
- -
As of June 30, 1996:
Tangible Capital (to
adjusted total
assets) $33,470 10.5% $ 4,794 >1.5% $ 15,980 >5%
- -
Core Capital (to
adjusted total
assets) $33,470 10.5% $ 9,588 >3.0% $ 15,980 >5%
- -
Risk-Based (to
risk-weighted
assets) $34,686 22.7% $12,203 >8.0% $ 15,254 >10%
- -
15. Stock Option Plans
------------------
The Holding Company's 1993 stock option plan provides for the benefit of
directors, officers, and other key employees. The number of shares of
common stock reserved for issuance under the stock option plan was equal
to approximately 10% of the total number of common shares issued pursuant
to the Company's offering. The plan provides for incentive options for
officers and employees and non-incentive options for directors. The plan
is administered by a committee of three directors appointed by the board
of directors. The option exercise price cannot be less than the fair
value of the underlying common stock as the date of the option grant, and
the maximum option term cannot exceed ten years. The number of shares of
common stock authorized under the stock option and incentive plan is
416,000, and 291,616 were granted in October 1993 at an exercise price of
$10. No options were granted in 1995, 1996, or 1997 and granted options
were exercised in the 1996 fiscal year. The non-incentive options
exercised in 1996 provided the Holding Company with a tax deduction of
approximately $1.3 million, which consisted of the excess of the fair
market value over the exercise price. The tax benefit of that deduction
of approximately $505,000 was credited to stockholders' equity in 1996.
There were 124,384 options available for granting at June 30, 1996 and
1997.
Upon adoption of Statement of Accounting Standards No. 123 (SFAS No.
123), "Accounting for Stock-Based Compensation", the Association elected
to measure compensation cost using APB Opinion No. 25, "Accounting for
Stock Issued to Employees". The Association made no grants of stock
options during the years ended June 30, 1995, 1996, and 1997, and
therefore no proforma disclosures are required as prescribed by SFAS No.
123.
65
16. Pension Plan
------------
The Association maintains a Defined Contribution Money Purchase Pension
Plan to supplement its Profit Sharing and Employee Savings Plans. Under
this plan, the Board authorized an annual contribution of 3.5% of eligible
salaries. Eligible employees are the same as those defined in the Profit
Sharing and Employee Savings Plan. The expense for this plan was
approximately $79,000, $76,000 and $84,000 for the years ending June 30,
1995, 1996 and 1997, respectively.
17. Profit Sharing and Employee Savings Plans
-----------------------------------------
The Association established a qualifying noncontributory profit sharing
plan covering substantially all employees who have completed one year of
service and have attained the age of twenty-one. All employer
contributions, as determined by the Board of Directors, are irrevocable
and the Association has reserved the right of amendment and termination of
the plan. No contributions were made to the plan for the years ended June
30, 1995, 1996 and 1997, respectively. Certain officers and other
eligible employees are covered by a non-qualified plan. The expense
recognized under this plan was $58,000 for the years ended June 30, 1995
and 1996, respectively. No expense was recognized for the year ended June
30, 1997.
The Association also sponsors an employee savings plan under Section
401(k) of the Internal Revenue Code. This plan covers substantially all
full-time employees who have completed one year of service and have
attained the age of twenty-one. Employees may contribute a percentage of
their annual gross salary as limited by the federal tax laws. The
Association matches employee contributions based on the plan guidelines.
The amount charged against income was $68,000 $84,000 and $124,000 for the
years ended June 30, 1995, 1996 and 1997, respectively.
18. Employee Stock Ownership Plan (ESOP)
------------------------------------
For the year ending June 30, 1995, the total contribution to the ESOP used
to fund principal and interest payments on the ESOP debt totaled
approximately $505,000. For the years ending June 30, 1996 and 1997, the
Association was not required to make any contributions to the ESOP Plan
for debt service due to the debt being repaid in June 1996 as a result of
the special dividend as discussed in Note 13.
For the years ending June 30, 1995 and 1996, compensation from the ESOP of
approximately $490,000 and $2,745,000 was expensed, respectively. No
compensation expense was recognized in 1997 since all ESOP shares had been
allocated. Compensation was recognized at the average fair value of the
ratably released shares during the accounting period as the employees
performed services. The ESOP used dividends on allocated and unallocated
shares, as determined by plan administrators, to pay off debt and accrued
interest. Additional compensation expense of approximately $1,967,000 was
recognized in 1996 because of the accelerated debt repayment by the ESOP
Plan as disclosed in Note 13.
For the purpose of computing earnings per share, all ESOP shares committed
to be released have been considered outstanding. All shares were released
by June 30, 1996.
19. Management Development and Recognition Plans
--------------------------------------------
The Association has established four management development and
recognition plans ("MRPs") which purchased 166,400 shares of common stock.
The Association contributed $1.7 million to fund the purchase of the MRP
shares. The shares were awarded to certain officers and directors of the
Association who began vesting on January 1, 1994, and were fully vested on
January 1, 1996. Compensation expense in the amount of the fair value of
the common stock at the date of grant to the officer or director was
recognized during the periods the participants become vested. For the
years ending June 30, 1995 and 1996, approximately $575,000 and $257,000
of compensation expense has been recognized, respectively. All of the
shares were vested as of June 30, 1996, and therefore no expense was
recognized in 1997.
66
20. Employment and Change of Control Agreements
-------------------------------------------
The Association and the Holding Company entered into employment agreements
with certain key officers. The employment agreements provide for
three-year terms. Commencing on the first anniversary date and continuing
each anniversary date thereafter, the respective boards of directors may
extend the agreements for an additional year so that the remaining terms
shall be three years, unless written notice of termination of the
agreement is given by the executive officer. The agreements provide for
severance payments and other benefits in the event of involuntary
termination of employment in connection with any change in control of the
employers. Severance payments also will be provided on a similar basis in
connection with voluntary termination of employment where, subsequent to a
change in control, officers are assigned duties inconsistent with their
positions, duties, responsibilities and status immediately prior to such
change in control. The severance payments will equal 2.99 times the
executive officer's average annual compensation during the preceding five
years. The employment agreements provide for termination by the
Association or the Holding Company for just cause at any time. The
Company has not accrued any benefits under these postemployment
agreements.
21. Commitments
-----------
The Company had outstanding commitments to originate mortgage loans of
approximately $3,600,000 and $4,250,000 at June 30, 1996 and 1997,
respectively. The commitments to originate mortgage loans at June 30,
1996, were composed of variable-rate loans of $3,240,000 and fixed-rate
loans of $360,000. The fixed-rate loans had interest rates ranging from
7.75% to 7.875% and terms ranging from 10 to 15 years. The commitments to
originate mortgage loans at June 30, 1997, were composed of variable-rate
loans of $3,870,000 and fixed-rate loans of $380,000. The fixed-rate
loans had interest rates ranging from 7.50% to 8.25% and terms ranging
from 15 to 30 years.
The Company has executed construction contracts and committed to spend
approximately $720,000 on building branches in leased space. The Company
executed related long-term lease agreements with commencement dates
beginning after June 30, 1997. The leases require one-time advance
payments of approximately $165,000, exclusive of annual rental payments of
$75,000.
22. Financial Instruments with Off-Balance-Sheet Risk
-------------------------------------------------
The Company is a party to financial instruments with off-balance-sheet
risk in the normal course of business to meet the financing needs of its
customers. These financial instruments include commitments to extend
credit and lines of credit. Those instruments involve, to varying
degrees, elements of credit and interest-rate risk in excess of the amount
recognized in the balance sheet. The contract or notional amounts of
those instruments reflect the extent of the Company's involvement in
particular classes of financial instruments.
The Company's exposure to credit loss in the event of nonperformance by
the other party to the financial instrument for commitments to extend
credit and lines of credit is represented by the contractual notional
amount of those instruments. The Company uses the same credit policies in
making commitments and conditional obligations as it does for on-balance-
sheet instruments.
Financial instruments, the contract amounts of which represent credit risk
for lines of credit, totaled approximately $14.1 million at June 30, 1997.
67
Commitments to extend credit are agreements to lend to a customer as long
as there is no violation of any condition established in the contract.
Commitments generally have fixed expiration dates or other termination
clauses and may require payment of a fee. Since many of the commitments
are expected to expire without being drawn upon, the total commitment
amounts do not necessarily represent future cash requirements. The
Company evaluates each customer's creditworthiness. The amount of
collateral obtained, if it is deemed necessary by the Company upon
extension of credit, is based on management's credit evaluation of the
counterparty. Collateral may include accounts receivable, inventory,
stocks, property, plant, and equipment, income-producing commercial
properties, and first and second mortgages on single family residences.
The undisbursed advances on customer lines of credit were approximately
$7.8 million at June 30, 1997. The Company does not anticipate any losses
as a result of these transactions.
23. Deposit Insurance Premiums
--------------------------
The Association recorded an expense in 1997 for the one-time special
assessment levied by the omnibus appropriation bill to recapitalize the
Savings Association Insurance Fund (SAIF). The special assessment for
deposit insurance premiums of approximately $1,792,000 has been reflected
in income for the year ending June 30, 1997, with an after tax impact on
net income of approximately $1,183,000. Effective January 1, 1997, the
Association began paying reduced premium assessments in accordance with
the new SAIF assessment schedule.
24. Financial Instruments
---------------------
The approximate stated and estimated fair value of financial instruments
are summarized below (in thousands of dollars):
June 30,
--------------------------------------------
1996 1997
--------------------- -------------------
Stated Estimated Stated Estimated
Amount Fair Value Amount Fair Value
------ ---------- ------ ----------
Financial assets:
Cash $ 13,323 $ 13,323 $ 13,651 $ 13,651
Investment securities 50,990 50,233 37,360 36,998
Loans receivable, net 238,337 239,147 272,401 270,794
Mortgage-backed securities 17,598 17,307 14,352 14,298
Federal Home Loan Bank
stock 2,691 2,691 2,691 2,691
Other assets 2,294 2,294 2,342 2,342
--------- --------- --------- ---------
$ 325,233 $ 324,995 $ 342,797 $ 340,774
========= ========= ========= =========
Financial liabilities:
Deposits:
Demand accounts $ 64,468 $ 64,468 $ 62,556 $ 62,556
Certificate accounts 223,749 224,774 222,227 222,077
Reverse repurchase
agreement 5,000 5,000 15,000 14,916
Advances from Federal
Home Loan Bank - - 10,000 10,000
Other liabilities 1,764 1,764 1,784 1,784
--------- --------- --------- ---------
$ 294,981 $ 296,006 $ 311,567 $ 311,333
========= ========= ========= =========
68
The Company had off-balance sheet financial commitments, which include
approximately $12.1 million of commitments to originate and fund loans and
unused consumer lines and letters of credit. Since these commitments are
based on current market rates, the commitment amount is considered to be a
reasonable estimate of fair market value.
Statement of Financial Accounting Standards No. 107, "Disclosures about
Fair Value of Financial Instruments" (SFAS 107), requires disclosure of
fair value information about financial instruments, whether or not
recognized in the balance sheet, for which it is practicable to estimate
that value. The following methods and assumptions were used by the
Company in estimating its fair value disclosures for financial
instruments:
Cash - The carrying amount of such instruments is deemed to be a
reasonable estimate of fair value.
Investments - Fair values for investment securities are based on quoted
market prices.
Loans - Fair values for loans held for investment are estimated by
segregating the portfolio by type of loan and discounting scheduled cash
flows using interest rates currently being offered for loans with similar
terms, reduced by an estimate of credit losses inherent in the portfolio.
A prepayment assumption is used as an estimate of the portion of loans
that will be repaid prior to their scheduled maturity.
Federal Home Loan Bank Stock - No ready market exists for this stock and
it has no quoted market value. However, redemption of this stock has
historically been at par value. Accordingly, the carrying amount is
deemed to be a reasonable estimate of fair value.
Deposits - The fair values disclosed for demand deposits are, as required
by SFAS 107, equal to the amounts payable on demand at the reporting date
(i.e., their stated amounts). The fair value of certificates of deposit
are estimated by discounting the amounts payable at the certificate rates
using the rates currently offered for deposits of similar remaining
maturities.
Securities Sold with Agreement to Repurchase - The estimated fair value of
this short-term debt is based on discounting amounts payable at the
contractual rates using current market rates for debt with a similar
maturity.
Advances from the FHLB - The estimated fair value of advances from the
FHLB is based on discounting amounts payable at contractual rates using
current market rates for advances with similar maturities.
Other Assets and Other Liabilities - Other assets represent accrued
interest receivable; other liabilities represent advances from borrowers
for taxes and insurance and accrued interest payable. Since these
financial instruments will typically be received or paid within three
months, the carrying amounts of such instruments are deemed to be a
reasonable estimate of fair value.
Fair value estimates are made at a specific point of time, based on
relevant market information and information about the financial
instrument. These estimates do not reflect any premium or discount that
could result from offering for sale the Company's entire holdings of a
particular financial instrument. Because no active market exists for a
significant portion of the Company's financial instruments, fair value
estimates are based on judgments regarding future expected loss
experience, current economic conditions, current interest rates and
prepayment trends, risk characteristics of various financial instruments,
and other factors. These estimates are subjective in nature and involve
uncertainties and matters of significant judgment and therefore cannot be
determined with precision. Changes in any of these assumptions used in
calculating fair value also would affect significantly the estimates.
Further, the fair value estimates were calculated as of June 30, 1996 and
1997. Changes in market interest rates and prepayment assumptions could
change significantly the estimated fair value.
69
Fair value estimates are based on existing on and off-balance sheet
financial instruments without attempting to estimate the value of
anticipated future business and the value of assets and liabilities that
are not considered financial instruments. For example, the Company has
significant assets and liabilities that are not considered financial
assets or liabilities including deposit franchise value, loan servicing
portfolio, real estate, deferred tax liabilities, and office properties
and equipment. In addition, the tax ramifications related to the
realization of the unrealized gains and losses can have a significant
effect on fair value estimates and have not been considered in any of
these estimates.
25. Condensed Parent Company Only Financial Statements
--------------------------------------------------
The following condensed balance sheets as of June 30, 1996 and 1997, and
condensed statements of income and cash flows for the years ended June 30,
1995, 1996, and 1997 for First Southeast Financial Corporation should be
read in conjunction with the consolidated financial statements and the
notes thereto.
Parent Company Only June 30,
-----------------------
Balance Sheets (in thousands) 1996 1997
---- ----
Assets:
Cash and due from banks $ 5 $ 30
Equity in net assets of Association 34,274 34,678
Other 785 424
--------- ---------
Total assets $ 35,064 $ 35,132
========= =========
Liabilities:
Accrued liabilities $ 1,561 $ 86
--------- ---------
Stockholders' equity:
Common stockholders' equity 33,503 35,046
--------- ---------
Total liabilities and stockholders' equity $ 35,064 $ 35,132
========= =========
Parent Company Only Year Ending June 30,
----------------------------------
Statements of Income (in thousands) 1995 1996 1997
---- ---- ----
Equity in earnings of Association $ 2,971 $ 901 $ 2,583
Interest income 1,145 906 -
Loss on sale of investment securities (11) (593) -
Other expense (183) (259) (391)
Income tax (expense) benefit (345) (16) 133
--------- --------- ---------
Net income $ 3,577 $ 939 $ 2,325
========= ========= =========
The Association subsidiary paid the parent company cash dividends of
$1,100,000, $21,470,000 and $2,275,000 during the years ending June 30,
1995, 1996 and 1997, respectively.
70
Parent Company Only Year Ending June 30,
----------------------------------
Statements of Cash Flows (in 1995 1996 1997
thousands) ---- ---- ----
Operating activities:
Net income $ 3,577 $ 939 $ 2,325
Adjustments to reconcile net
income to net cash provided
by operating activities:
Undistributed equity earnings of
Association (2,971) (901) (2,583)
Distribution of equity earnings
of Association 1,100 5,140 2,275
Realized losses on securities 11 593 -
Amortization of premiums on
mortgage-backed securities 49 38 -
Deferred income tax benefit (11) (219) -
(Increase) decrease in interest
receivable (12) 65 -
Decrease in other assets - 54 361
Increase (decrease) in accrued
liabilities (177) 1,549 (1,475)
Net cash provided by operating
activities 1,566 7,258 903
-------- -------- --------
Investing activities:
Principal repayment by ESOP 333 2,662 -
Purchase of investment securities (1,621) - -
Proceeds from sale of investment
securities 250 8,498 -
Principal payments on mortgage-
backed securities 1,597 1,606 -
Proceeds from sale of mortgage-
backed securities - 6,430 -
Return of capital from Association - 16,330 -
-------- -------- --------
Net cash provided by investing
activities 559 35,526 -
-------- -------- --------
Financing activities:
Proceeds from issuance of common
stock and treasury stock - 2,916 -
Purchase of treasury stock (1,074) - -
Dividends paid (1,018) (45,729) (878)
Net cash used by financing -------- -------- --------
activities (2,092) (42,813) (878)
-------- -------- --------
Net increase (decrease) in cash 33 (29) 25
Cash at beginning of year 1 34 5
-------- -------- --------
Cash at end of year $ 34 $ 5 $ 30
======== ======== ========
Supplemental disclosures:
------------------------
Cash paid during the period for
income taxes $ 532 $ 306 $ -
======== ======== ========
Non-cash investing and financing activities:
Transfer of investment securities
from held to maturity to available
for sale $ - $ 1,000 $ -
Transfer of mortgage-backed
securities from held to maturity
to available for sale - 6,681 -
Tax benefit from stock options
exercised - 505 -
Unrealized gains on securities,
net of taxes 241 180 96
71
26. First Southeast Financial Corporation and Subsidiary Quarterly Results of
Operations (unaudited)
--------------------------------------------------------------------------
(In thousands)
Year Ended June 30, 1996 Year Ended June 30, 1997
------------------------------- -------------------------------
1st 2nd 3rd 4th 1st 2nd 3rd 4th
Quarter Quarter Quarter Quarter Quarter Quarter Quarter Quarter
------- ------- ------- ------- ------- ------- ------- -------
Interest
income $6,419 $6,454 $6,442 $ 6,462 $6,209 $6,122 $6,232 $6,375
Interest
expense 3,622 3,641 3,573 3,521 3,652 3,560 3,572 3,633
------ ------ ------ ------- ------ ------ ------ ------
Net interest
income 2,797 2,813 2,869 2,941 2,557 2,562 2,660 2,742
Provision
for loan
losses 45 45 45 45 45 45 45 45
------ ------ ------ ------- ------ ------ ------ ------
Net interest
income after
provision for
loan losses 2,752 2,768 2,824 2,896 2,512 2,517 2,615 2,697
Noninterest
income 244 244 251 (629) 310 294 297 280
Noninterest
expense 1,835 1,941 1,809 3,805 3,346 1,537 1,474 1,516
------ ------ ------ ------- ------ ------ ------ ------
Income (loss)
before income
tax expense 1,161 1,071 1,266 (1,538) (524) 1,274 1,438 1,461
Income tax
expense
(benefit) 405 344 446 (174) (230) 476 539 539
------ ------ ------ ------- ------ ------ ------ ------
Net income
(loss) $ 756 $ 727 $ 820 $(1,364) $ (294) $ 798 $ 899 $ 922
====== ====== ====== ======= ====== ====== ====== ======
Fourth quarter 1996 results include additional expense of approximately
$1,967,000 related to ESOP compensation that was recognized upon the
release of the remaining unallocated shares due to ESOP debt repayment.
Realized losses on securities of $891,000 were recognized upon the
liquidation of investments to fund the Holding Company's special dividend
of $10 per share. First quarter 1997 results reflect the special SAIF
assessment, net of tax, of approximately $1,183,000.
27. Subsequent Event
----------------
The Company announced on July 1, 1997, its signing of a definitive
agreement by which the Company will merge with a commercial bank. Under
the agreement, the Company's shareholders will receive one share of the
commercial bank's common stock subject to an exchange ratio as defined in
the merger agreement. The completion of the transaction is subject to
regulatory and shareholder approval of the reorganization agreement.
The pending change in control, when approved and consummated, would result
in the payment of certain employee severance benefits, the payment of
employment contract settlements, and the acceleration of certain benefit
payments from nonqualified retirement plans. At June 30, 1997, the
Company has not accrued any liabilities with regard to these potential
benefit payments that would only result upon approval and completion of
the merger.
72
Item 9. Changes in and Disagreements with Accountants on
Accounting and Financial Disclosure
- ---------------------------------------------------------
None.
PART III
Item 10. Directors and Executive Officers of the Registrant
- ------------------------------------------------------------
Section 16(a) of the Exchange Act requires the officers of the
Corporation and its directors, and persons who beneficially own more than 10%
of any registered class of the Corporation's Common Stock, to file reports of
ownership and changes in ownership with the Securities and Exchange Commission
and the Corporation.
Based solely on a review of the reports and written representations
provided to the Corporation by the above referenced persons, the Corporation
believes that during fiscal 1997 all filing requirements applicable to its
reporting officers, directors and greater than 10% beneficial owners were
complied with properly and in a timely manner.
The following table sets forth as to each director, his name, age, and
the year he first became a director. Unless otherwise indicated, the
principal occupation listed for each person below has been his occupation for
the past five years.
Principal Occupation
During Past Five Years
Name Age(1) and Other Information Director(2) Expires
---- ------ ---------------------- ----------- -------
James H. Barton 75 Mr. Barton, a retired 1997 1997
colonel in the U.S.
Marine Corps Reserve,
is a past member of the
National Executive
Committee, Reserve
Officers Association of
the United States, is a
member of the Tri-County
Technical College
Foundation Board, Chairman
of the Support (Finance)
Committee of the Holy
Trinity Lutheran Church,
and is the retired
president of Barton
Grocery Co., Inc. and Acme
Distributing Company of
Greenville.
Josiah Crudup, Jr. 72 Retired President and Chief 1979 1997
Executive Officer of Crudup
Oil Co., Inc. Mr. Crudup is
a past member of the Kiwanis
Club, the South Carolina
Petroleum Marketers Association
and the Board of Directors of
the Salvation Army Boys Club.
Vernon E. Merchant, Jr. 66 Retired physician and 1983 1997
surgeon for over 37 years.
Dr. Merchant formerly served
as a past Director of the
State Free Cancer Clinic and
is a State Cancer Liaison-
Fellow to the American College
of Surgeons. He has also
served as an assistant
clinical professor at the
Medical University of South
Carolina and he serves on its
Medical Foundation Board.
(table continued on following page)
73
Principal Occupation
During Past Five Years
Name Age(1) and Other Information Director(2) Expires
---- ------ ---------------------- ----------- -------
Charles L. Stuart 71 Chairman of the Board 1965 1998
of the Association.
Mr. Stuart has been
affiliated with the
Association for over 42
years and has served in
various capacities,
including holding the
offices of President
and Chief Executive
Officer. He is a past
Director of the Community
Financial Institutions of
South Carolina, the Anderson
Board of Realtors, is a
past Director of the
Anderson County Historical
Society, is a past Director
of the South Carolina
Chamber of Commerce, and is
a past member of the Anderson
Civitan Club.
William R. Phillips 78 Retired stockbroker from 1977 1998
J.C. Bradford & Co. Mr.
Phillips is a retired
colonel of the South
Carolina National Guard,
is a past President of the
Anderson County Foundation,
is a past President and
Chairman of the Board of
United Way, is a Past
Treasurer of the Chamber of
Commerce and was a charter
member of Appalachian
Regional Council of
Governors.
A.C. Terry 71 Forty-four years in retail 1983 1998
furniture. Twenty-eight
years as salesman, store
manager, and vice president
for multi-state retail
furniture chain, with over
100 stores, and sixteen
years as owner, operator of
Terry Furniture Company, a
retail furniture store
located in Anderson, SC. He
is now retired.
David C. Wakefield, III 53 President and Chief Executive 1991 1999
Officer of First Federal since
1991. Prior thereto, Mr.
Wakefield served as Chief
Operating Officer of First
Federal from 1990 to 1991 and
in various capacities since
1976. He also is a past
director of the Community
Financial Institutions of
South Carolina and served as
Chairman of the Board of
Visitors of Anderson College
in 1996-97.
Aubrey T. Scales 74 Retired Senior Vice President 1982 1999
of First Federal. Mr. Scales
has been affiliated with the
Association for 45 years in
various capacities. He is a
current member and a past
president of the Anderson
Lions Club. He is a life
member and Executive
Committee member of the
American Legion. Mr. Scales
is also a past Director of
the Anderson YMCA.
- -------------
(1) At September 5, 1997.
(2) Includes prior service on the Board of Directors of First Federal.
74
The executive officers of the Corporation and Association are as
follows:
Age at
September 5, Position
-------------------------------------
Name 1997 Corporation Association
---- ----
David C. Wakefield, III 53 Director, President and Director,
Chief Executive Officer President and
Chief Executive
Officer
John L. Biediger 40 Executive Vice President Executive Vice
and Treasurer President and
Treasurer
Douglas T. Locke 53 Senior Vice President Senior Vice
President
Carole K. Bain 58 Vice President and Vice President and
Corporate Secretary Corporate
Secretary
Henry D. Bone 63 N/A Vice President
Dennis B. Fowler 51 N/A Vice President
David C. Wakefield, III joined First Federal in 1976 and has served as
President and Chief Executive Officer since 1991. Prior to being appointed
President and Chief Executive Officer, Mr. Wakefield has served as Chief
Operating Officer, Executive Vice President and Vice President of the
Association. Mr. Wakefield is a member and current director of the Anderson
Rotary Club, served as Chairman of the Board of Visitors for Anderson College
in 1996-97, and is a board member and treasurer of the Anderson County
Development Partnership.
John L. Biediger has been with the Association since 1983 and has served
as Executive Vice President and Treasurer since 1991. Prior to being
appointed Executive Vice President and Treasurer, Mr. Biediger served as a
Vice President of the Association. Mr. Biediger is a certified public
accountant and member of both the South Carolina Association and American
Institute of Certified Public Accountants. He is also a past chairman and a
board member of Christmas in April of Anderson, Inc.
Douglas T. Locke joined First Federal in 1965 and currently is Senior
Vice President in charge of the Association's operations. Mr. Locke serves as
a Director of the Broadway Water and Sewer District and is a former director
of the Bank Administration Institute.
Carole K. Bain has been employed by First Federal since 1958 and
currently is Vice President/Savings Division and Corporate Secretary of the
Association. Ms. Bain serves as Treasurer of the Foothills Sertoma Club and
is active in the Anderson YMCA and the Headstart Programs.
Henry D. Bone joined First Federal in 1984 and currently is Vice
President and Manager of the Commercial Banking Division. Mr. Bone is a past
President of the Lakeside Sertoma Club and served as a member of the Anderson
Vision 2002 Committee.
Dennis B. Fowler has been with First Federal since 1976 and currently is
Vice President of Mortgage Lending. Mr. Fowler is Vice President and Director
of the Electric City Lions Club, a Director of the Habitat for Humanity, a
member of the Anderson Board of Realtors and a member of the Homebuilders
Association of Anderson.
75
Item 11. Executive Compensation
- --------------------------------
Summary Compensation Table. The following information is furnished for
the Chief Executive Officer of the Corporation for the year ended June 30,
1997. No executive officers of the Corporation received salary and bonus in
excess of $100,000 during the year ended June 30, 1997.
Annual Compensation
------------------------------
(1)
Other Annual All Other
Name and Salary Bonus Compensation Compensation
Principal Position Year ($) ($) ($) ($)(2)
- ------------------ ---- ------ ----- ------------ ------------
David C. Wakefield, III 1997 117,402 -- -- 28,116
President and Chief
Executive 1996 113,735 -- -- 23,443
Officer of the
Corporation 1995 107,370 -- -- 48,453
and the Association
_______________
(1) Does not include perquisites which did not exceed the lesser of
$50,000 or 10% of salary and bonus.
(2) All Other Compensation for Mr. Wakefield in fiscal year 1997 includes
the following: 401(k) Profit Sharing Plan: $7,020; Executive Deferred
Compensation Plan: $17,132; Pension Plan: $3,964. Does not include
amounts payable pursuant to employment agreements with Mr. Wakefield
in the event of a "change of control" of the Corporation. For a
discussion of the employment agreements including the amounts payable
in the event of a "change of control" of the Corporation, see "--
Employment Agreements."
Employment Agreements
Effective October 1, 1993, the Corporation and the Association
(collectively the "Employers") entered into a three-year employment agreement
with David C. Wakefield, III. The salary level for Mr. Wakefield under the
agreement is $90,500, which amount is paid by the Association and which may be
increased at the discretion of the Board of Directors of the Association or an
authorized committee of the Board. On each anniversary of the commencement
date of the agreement, the term of the agreement may be extended by action of
the Board of Directors of the Association or the Corporation, as the case may
be, for an additional year. The current term of the agreement runs through
September 30, 1999. The agreement is terminable by the Employers for cause at
any time or upon the occurrence of certain events specified by Office of
Thrift Supervision ("OTS") regulations. The agreement also provides for
severance payments if Mr. Wakefield's employment is terminated following a
"change of control" of the Corporation or the Association (as defined in the
Agreement). These payments, which will be made promptly after any such
"change in control," equal 2.99 times the average annual compensation paid to
Mr. Wakefield during the five years immediately preceding the change in
control. Based upon Mr. Wakefield's recent compensation history, the
aggregate payments that would be payable under the terms of the agreements if
a change of control occurred in 1997 would be approximately $538,000.
Notwithstanding anything to the contrary set forth in any of the
Corporation's previous filings under the Securities Act of 1933, as amended,
or the Exchange Act that might incorporate future filings, including this
Proxy Statement, in whole or in part, the following report and Performance
Graph shall not be incorporated by reference into any such filings.
Report of the Compensation Committee
Under rules established by the SEC, the Corporation is required to
provide certain data and information in regard to the compensation and
benefits provided to the Corporation's Chief Executive Officer and other
executive officers of the Corporation and the Association. The disclosure
requirements for the Chief Executive Officer and other executive officers
include the use of tables and a report explaining the rationale and
considerations that led to
76
the fundamental executive compensation decisions affecting those individuals.
Insofar as no separate compensation is currently payable by the Corporation,
the Compensation Committee of the Association (the "Committee"), at the
direction of the Board of Directors of the Corporation, has prepared the
following report for inclusion in this proxy statement.
General. The Committee's duties are to recommend and administer policies
that govern executive compensation for the Association. The Committee
evaluates individual executive performance, compensation policies and
salaries. The Chief Executive Officer of the Association evaluates the
performance of the other senior officers of the Association and makes
recommendations to the Committee regarding individual compensation levels.
The Committee reviews the Chief Executive Officer's recommendations on such
officers' salaries and recommends salaries to be paid to each executive
officer. The entire Board of Directors reviews the Compensation Committee's
recommendations as to executive compensation, including the Chief Executive
Officer, and sets these salaries.
Compensation Policies. The executive compensation policies of the
Association are designed to establish an appropriate relationship between
executive pay and the Corporation's and the Association's annual performance,
to reflect the attainment of short and long-term financial performance goals
and to enhance the ability of the Corporation and the Association to attract
and retain qualified executive officers. The principles underlying the
executive compensation policies include the following:
. To attract and retain key executives who are vital to the long-term
success of the Corporation and the Association and are of the
highest caliber;
. To provide levels of compensation competitive with those offered
throughout the financial industry and consistent with the
Corporation's and the Association's level of performance; and
. To motivate executives to enhance long-term stockholder value by
building their equity interest in the Corporation.
The Committee considers a variety of subjective and objective factors in
determining the compensation package for individual executives including: (1)
the performance of the Corporation and the Association as a whole with
emphasis on annual performance factors and long-term objectives; (2) the
responsibilities assigned to each executive; and (3) the performance of each
executive of assigned responsibilities as measured by the progress of the
Corporation and the Association during the year.
In reviewing and recommending executive salary levels, the Compensation
Committee surveys similar institutions in South Carolina, the Southeast, and
the United States. Peer group analysis focuses on asset size, nature of
ownership, type of operation, and other common factors. In setting salaries
for fiscal year 1997, the Compensation Committee also reviewed executive
compensation data compiled by Americas Community Bankers and SNL Securities
Thrift Executive Compensation Review. In fiscal 1997, executive compensation
structure included salaries and an annual cash bonus incentive.
Although the Compensation Committee did not establish executive
compensation levels on the basis of whether specific financial goals had been
achieved by the Corporation and the Association, the Compensation Committee
(and the Board of Directors) considered the overall profitability of the
Corporation and the Association when making their decisions. The Compensation
Committee believes that management compensation levels, as a whole,
appropriately reflect the application of the Corporation's and Association's
executive compensation policy and the progress of a the Corporation and the
Association.The cash bonus incentive set by the Board of Directors for
executive officers was based on achieving a targeted increase in earnings per
share ("EPS"). The EPS target was not met during fiscal 1997 and no cash
bonus awards were paid to executive officers.
77
Long Term Incentive Compensation. Under the Association's 1993
Management Development and Recognition Plans ("MDRPs") and the Corporation's
1993 Stock Option and Incentive Plan, executive officers of the Association
and the Corporation received grants and awards in connection with the
Association's mutual to stock conversion. The Committee believes that stock
ownership by the Corporation's and the Association's executives is a
significant factor in aligning the interests of the executives with those of
stockholders. Stock options and stock awards under such plans were allocated
based upon regulatory practices and policies, the practices of other recently
converted financial institutions as verified by external surveys and based
upon the executive officers' level of responsibility and contributions to the
Corporation and the Association. All shares have been awarded under the
MDRPs. However, options covering 124,384 shares remain available for grant
under the 1993 Stock Option and Incentive Plan. The Board may authorize the
award of additional stock options in the future although no specific awards
are under consideration at this time.
Compensation of the Chief Executive Officer. During fiscal year 1997,
the base salary of David C. Wakefield, III, President and Chief Executive
Officer of the Corporation and the Association, is $117,000. Mr. Wakefield's
base salary includes compensation paid in lieu of directors fees. The fiscal
1998 base salary is 3% above the 1997 base salary. The Committee believes
that Mr. Wakefield's compensation is appropriate based on the Association's
overall compensation policy and on the basis of the Committee's consideration
of peer group data. Mr. Wakefield did not participate in the Committee's
consideration of his compensation level for the fiscal year.
Compensation Committee
Vernon E. Merchant, Jr. (Chairman)
Aubrey T. Scales
A. C. Terry
Compensation Committee Interlocks and Insider Participation
The Compensation Committee was composed of Messrs. Merchant, Scales and
Terry during the year ended June 30, 1997. No executive officer of the
Association has served as a member of the compensation committee of another
entity, one of whose executive officers served on the Compensation Committee
of the Association. No executive officer of the Association has served as a
director of another entity, one of whose executive officers served on the
Compensation Committee. No executive officer of the Association has served as
a member of the compensation committee of another entity, one of whose
executive officers served as a director of the Association.
78
Performance Graph
The following graph compares the Corporation's cumulative stockholder
return on its Common Stock with the return on the National Association of
Securities Dealers Automated Quotation ("Nasdaq") (U.S. companies) Index and a
peer group of the Nasdaq's Financial Index. Total return assumes the
reinvestment of all dividends.
COMPARISON OF FIVE YEAR CUMULATIVE TOTAL RETURN AMONG
CORPORATION, NASDAQ (U.S. COMPANIES) AND NASDAQ FINANCIAL STOCKS
[graph appears here]
Period Ending
10/07/93 10/07/94 09/30/95 09/30/96 07/31/97
------------------------------------------------
Corporation $100.00 $156.47 $185.62 $207.80 $320.78
Nasdaq (Fin.) Index 100.00 105.39 133.36 165.09 238.76
Nasdaq (U.S.) Index 100.00 100.82 139.26 165.25 214.51
The graph assumes $100 was invested on October 7, 1993 when the
Corporation first issued stock to the public. Trading of the stock began
October 8, 1993.
79
Item 12. Security Ownership of Certain Beneficial Owners and
Management
- -------------------------------------------------------------
Persons and groups who beneficially own in excess of 5% of the
Corporation's Common Stock are required to file certain reports disclosing
such ownership pursuant to the Securities Exchange Act of 1934, as amended
("Exchange Act"). Based upon such reports, the following table sets forth, as
of September 5, 1997, certain information as to those persons who were
beneficial owners of more than 5% of the outstanding shares of Common Stock.
Management knows of no persons other than those set forth below who
beneficially owned more than 5% of the outstanding shares of Common Stock at
September 5, 1997. The following table also sets forth, as of September 5,
1997, information as to the shares of Common Stock beneficially owned by each
director, by the Chief Executive Officer of the Corporation, and by all
executive officers and directors of the Corporation as a group.
Amount and Nature Percent of
of Beneficial Common Stock
Beneficial Owner Ownership (1) Outstanding
---------------- ------------- -----------
First Federal Savings
and $336,896 7.7%
Loan Association of
Anderson Employee
Stock Ownership Plan
Directors and Named
Executive Officers
David C. Wakefield,
III (2) 101,532 2.3
Charles L. Stuart 69,773 1.6
James H. Barton 53,047 1.2
Josiah Crudup, Jr. 45,423 1.0
Vernon E. Merchant, Jr. 37,173 0.8
William R. Phillips 32,523 0.7
Aubrey T. Scales 34,973 0.8
A.C. Terry 53,823 1.2
All executive officers and 592,791 13.5
directors as a
group (11 persons)
_______________
(1) In accordance with Rule 13d-3 under the Exchange Act, a person is
deemed to be the beneficial owner, for purposes of this table, of any
shares of Common Stock if he has shared voting and/or investment power
with respect to such security. The table includes shares owned by
spouses, other immediate family members in trust, shares held in
retirement accounts or funds for the benefit of the named individuals,
and other forms of indirect ownership, over which shares the persons
named in the table possess voting and investment power. Shares
considered indirectly owned included in the table are Mr. Barton,
12,400; Mr. Crudup, 5,300; Mr. Scales, 1,500; Mr. Terry, 7,930; and
all executive officers and directors as a group, 35,798.
(2) President and Chief Executive Officer of the Corporation and the
Association.
The Corporation is not aware of any arrangements, including any pledge by
any person of securities of the Corporation, the operation of which may at a
subsequent date result in a change in control of the Corporation.
80
Item 13. Certain Relationships and Related Transactions
- --------------------------------------------------------
The Association, like many financial institutions, has followed the
policy of granting loans to its officers, directors and employees on the
security of their primary residences and also makes consumer loans to such
persons. In accordance with the requirements of applicable law, loans to
executive officers and directors of the Association are made on substantially
the same terms, including interest rates, fees and collateral, as those
prevailing at the time for comparable transactions with other persons, and in
the opinion of management do not involve more than the normal risk of
collectability or present other unfavorable features. At June 30, 1997,
outstanding balances on loans to directors and executive officers totalled
$520,000.
PART IV
Item 14. Exhibits, Financial Statement Schedules, and Reports
on Form 8-K
- --------------------------------------------------------------
(a) (1) Independent Auditors' Report is contained in Item 8 of this
Form 10-K.
(2) Consolidated Financial Statements are contained in Item 8 of
this Form 10-K.
(3) Exhibits
2 Reorganization and Plan of Mergers dated as of July 1, 1997
by and among First Southeast Financial Corporation, First
Federal Savings and Loan Association of Anderson, Carolina
First Corporation and Carolina First Bank.****
3.1 Certificate of Incorporation of First Southeast Financial
Corporation*
3.2 Bylaws of First Southeast Financial Corporation*
10.1 Employment Agreement with David C. Wakefield, III**
10.2 Employment Agreement with John L. Biediger**
10.2 First Federal Savings and Loan Association of Anderson 1994
Employee Stock Ownership Plan*
10.3 First Southeast Financial Corporation 1993 Stock Option and
Incentive Plan***
10.4 First Federal Savings and Loan Association of Anderson
Management Development and Recognition Plans***
21. Subsidiaries of Registrant
23. Consent of Independent Auditors
27. Financial Data Schedule
(b) The Corporation did not file any Current Reports on Form 8-K during
the quarter ended June 30, 1997.
_________________
* Incorporated by reference to the Corporation's Registration Statement
on Form S-1 File No. 33-65102.
** Incorporated by reference to the Corporation's 1995 Annual Report on
Form 10-K for the year ended June 30, 1995.
*** Incorporated by reference to the Corporation's 1993 Annual Meeting
Proxy Statement dated December 29, 1993.
**** Incorporated herein by reference to the Corporation's Current Report
on Form 8-K dated July 10, 1997.
81
SIGNATURES
Pursuant to the requirements of section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed
on its behalf by the undersigned, thereunto duly authorized.
FIRST SOUTHEAST FINANCIAL CORPORATION
Date: September 25, 1997 By:/s/David C. Wakefield, III
--------------------------------
David C. Wakefield, III
President and Chief
Executive Officer
Pursuant to the Securities Exchange Act of 1934, this report has been
signed below by the following persons on behalf of the registrant and in the
capacities and on the dates indicated.
SIGNATURES TITLE DATE
/s/David C. Wakefield, III President, Chief September 25, 1997
- -------------------------- Executive Officer and
David C. Wakefield, III Director (Principal
Executive Officer)
/s/John L. Biediger Executive Vice President September 25, 1997
- ------------------------- and Treasurer (Principal
John L. Biediger Financial and Accounting
Officer)
/s/Charles L. Stuart Chairman of the Board September 25, 1997
- ------------------------- of Directors
Charles L. Stuart
/s/James H. Barton Director September 25, 1997
- -------------------------
James H. Barton
/s/Josiah Crudup, Jr. Director September 25, 1997
- -------------------------
Josiah Crudup, Jr.
/s/Vernon E. Merchant, Jr. Director September 25, 1997
- -------------------------
Vernon E. Merchant, Jr.
82
/s/William R. Phillips Director September 25, 1997
- -------------------------
William R. Phillips
/s/Aubrey T. Scales Director September 25, 1997
- -------------------------
Aubrey T. Scales
/s/A. C. Terry Director September 25, 1997
- -------------------------
A. C. Terry
83
EXHIBIT 21
Subsidiaries of the Registrant
Parent
First Southeast Financial Corporation
Percentage Jurisdiction or
Subsidiaries (1) Owned State of Incorporation
- ---------------- ---------- ----------------------
First Federal Savings
and Loan Association of Anderson 100% Federally chartered
First Master Service Corporation 100% South Carolina
- --------------
(1) The operations of the Corporation's subsidiaries are included in the
Corporation's consolidated financial statements.
Exhibit 23
Consent of Auditors
CRISP
CH
HUGHES
---- & CO., L.L.P. ----
CERTIFIED PUBLIC ACCOUNTANTS AND CONSULTANTS
CONSENT OF INDEPENDENT AUDITORS
-------------------------------
We have issued our report dated July 31, 1997, accompanying the
consolidated financial statements included in the Annual Report of First
Southeast Financial Corporation on Form 10-K for the year ending June 30,
1997. We hereby consent to the incorporation by reference of said reports in
the Registration Statement of First Southeast Financial Corporation on Form S-
8 (File No. 33-65102, effective March 31, 1994).
/s/Crisp Hughes & Co., L.L.P.
CRISP HUGHES & CO., L.L.P.
Asheville, North Carolina
September 19, 1997
32 Orange Street - P.O. Box 3049 - Asheville, North Carolina 28802 -
(704) 254-2254 - FAX (704) 254-6859
Other Offices: Boone, Burnsville, Sylvia, NC and Greenville, SC
Member of The American Institute of Certified Public Accountants, The
Continental Association of CPA Firms, Inc. The Intercontinental Accounting
Associates and The North Carolina and South Carolina Associates of CPAs