1
EXHIBIT 13.2
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
--------------------
FORM 10-K/A-1
(Mark One)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 [FEE REQUIRED]
For the fiscal year ended June 30, 1995
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934 [NO FEE REQUIRED]
For the transition period from to
-------------- ---------------
Commission File No. 0-20000
-------
HERITAGE FEDERAL BANCSHARES, INC.
---------------------------------
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
TENNESSEE 62-1485034
- --------------------------------- ---------------------
(STATE OR OTHER JURISDICTION (I.R.S. EMPLOYER
OF INCORPORATION OR ORGANIZATION) IDENTIFICATION NUMBER)
110 EAST CENTER STREET, KINGSPORT, TENNESSEE 37660
- --------------------------------------------- ---------------------
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) (ZIP CODE)
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (615) 378-8000
--------------
Securities registered pursuant to Section 12(b) of the Act:
None
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, par value $1.00 per share
---------------------------------------
(Title of Class)
Indicate by check mark whether the registrant (1) has filed all reports
required by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or 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
--- ---
Indicate by check mark if 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 registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to
this Form 10-K. [X]
As of August 11, 1995, the aggregate market value of the 3,189,506 shares of
Common Stock of the registrant issued and outstanding held by non-affiliates on
such date was approximately $82.9 million based on the closing sales price of
$26.00 per share of the registrant's Common Stock on August 9, 1995. For
purposes of this calculation, it is assumed that directors, officers and
beneficial owners of more than 5% of the registrant's outstanding voting stock
are not affiliates.
DOCUMENTS INCORPORATED BY REFERENCE
None.
Page 1 of sequentially numbered pages
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Exhibit Index at Sequentially Numbered Page
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2
This Form 10-K/A-1 is being filed to amend Item 8, "Financial
Statements and Supplementary Data."
2
3
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
56
4
INDEPENDENT ACCOUNTANTS' REPORT
The Board of Directors
Heritage Federal Bancshares, Inc.
We have audited the accompanying consolidated statements of financial condition
of Heritage Federal Bancshares, Inc. and Subsidiary as of June 30, 1995 and
1994, and the related consolidated statements of income, stockholders' equity,
and cash flows for each of the three years in the period ended June 30, 1995.
These financial statements are the responsibility of the Company's management.
Our responsibility is to express an opinion of these financial statements based
on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the consolidated financial position of Heritage Federal
Bancshares, Inc. and Subsidiary at June 30, 1995 and 1994, and the consolidated
results of their operations and their cash flows for each of the three years in
the period ended June 30, 1995, in conformity with generally accepted
accounting principles.
As discussed in Note 1 to the consolidated financial statements, the Company
changed its methods of accounting for securities and income taxes in 1995 and
1994, respectively.
COOPERS & LYBRAND L.L.P.
Knoxville, Tennessee
August 1, 1995
57
5
HERITAGE FEDERAL BANCSHARES, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
June 30, 1995 and 1994
______________________________________
1995 1994
---- ----
ASSETS
Cash and due from banks $ 9,285,434 $ 9,610,848
Interest-earning deposits in financial institutions 5,592,680 2,295,206
Federal funds sold 7,000,000 3,000,000
------------ ------------
Total cash and cash equivalents 21,878,114 14,906,054
Securities available-for-sale 20,213,195 -
Securities held-to-maturity:
U.S. government and agencies and collateralized mortgage
obligations - approximate market value of $86,258,000 86,627,642 -
Mortgage-backed securities - approximate market value of
$83,012,000 83,994,659 -
Investment securities - approximate market value of
$78,754,000 - 80,796,409
Mortgage-backed securities - approximate market
value of $88,397,000 - 92,557,813
Loans receivable, net 297,533,313 308,699,625
Interest receivable 3,666,307 3,446,516
Real estate owned, net of allowance for losses of $211,771
and $262,322 at June 30, 1995 and 1994, respectively - 531,275
Premises and equipment, net 6,785,895 6,676,464
Investment in Federal Home Loan Bank stock, at cost 4,057,300 3,807,700
Excess of cost over fair value of net assets acquired and
other intangibles, net 780,132 1,270,127
Deferred income taxes 897,514 1,457,138
Other assets 1,735,008 1,738,951
------------ ------------
$528,169,079 $515,888,072
============ ============
The accompanying notes are an integral part of these
consolidated financial statements.
Facing Page 58
6
1995 1994
---- ----
LIABILITIES AND STOCKHOLDERS' EQUITY
Deposits $449,317,977 $450,818,608
Advances from Federal Home Loan Bank 18,121,921 9,587,083
Advances from borrowers for taxes and insurance 4,027,987 3,990,598
Accrued expenses and other liabilities 2,927,221 2,107,869
Employee Stock Ownership Plan obligation - 880,885
------------ ------------
474,395,106 467,385,043
Commitments and contingencies (Notes 2, 3, 5, 12, 15, 16, 18 and 21)
Stockholders' equity:
Preferred stock of $1.00 par value, authorized 2,000,000
shares; none issued or outstanding - -
Common stock of $1.00 par value, 8,000,000 shares
authorized; issued and outstanding - 3,186,158 at June 30,
1995 and 3,172,826 at June 30, 1994 (Note 19) 3,186,158 3,172,826
Additional paid-in capital 16,509,491 16,108,095
Retained earnings-substantially restricted 35,070,071 30,813,111
Unrealized appreciation on available-for-sale securities,
net of tax of $51,530 in 1995 84,079 -
Employee Stock Ownership Plan obligation (720,765) (880,885)
Unearned compensation of Management Recognition Plan (355,061) (710,118)
------------ ------------
53,773,973 48,503,029
------------ ------------
$528,169,079 $515,888,072
============ ============
58
7
HERITAGE FEDERAL BANCSHARES, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF INCOME
Years ended June 30, 1995, 1994 and 1993
_____________________________________________
1995 1994 1993
---- ---- ----
Interest income:
Loans $24,770,777 $25,448,506 $30,220,709
Securities available-for-sale 1,361,695 - -
Securities held-to-maturity:
U.S. government and agencies and collateralized
mortgage obligations 4,199,355 - -
Mortgage backed securities 5,034,437 - -
Investments - 5,041,697 5,151,660
Mortgage-backed securities - 4,539,140 3,074,851
Other interest-earning assets 612,630 521,327 619,111
----------- ----------- -----------
Total interest income 35,978,894 35,550,670 39,066,331
----------- ----------- -----------
Interest expense:
Deposits 16,829,466 15,846,768 18,873,962
Other borrowed money 968,030 640,513 431,042
----------- ----------- -----------
Total interest expense 17,797,496 16,487,281 19,305,004
----------- ----------- -----------
Net interest income 18,181,398 19,063,389 19,761,327
Provision for loan losses 82,247 487,346 595,140
----------- ----------- -----------
Net interest income after provision
for loan losses 18,099,151 18,576,043 19,166,187
----------- ----------- -----------
Noninterest income:
Loan fees and service charges 1,826,140 1,574,221 1,426,069
Other operating income 928,831 909,600 684,393
Gain on sale of branches - - 1,000,000
----------- ----------- -----------
Total noninterest income 2,754,971 2,483,821 3,110,462
----------- ----------- -----------
Noninterest expense:
Compensation and benefits 6,198,938 5,306,228 5,713,579
Occupancy and equipment 1,124,528 1,089,392 1,130,840
Communications and other office expenses 1,510,758 1,371,648 1,543,704
Regulatory and other insurance premiums 1,180,955 1,196,911 1,090,247
Computer processing 636,232 597,360 570,524
Real estate owned expenses, including provision
for loss (87,398) 55,744 270,340
Other operating costs 1,254,716 1,211,057 1,191,916
Amortization of excess of cost over fair value of
net assets acquired 422,873 525,336 1,301,646
----------- ----------- -----------
Total noninterest expense $12,241,602 $11,353,676 $12,812,796
----------- ----------- -----------
(continued)
59
8
HERITAGE FEDERAL BANCSHARES, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF INCOME, CONTINUED
Years ended June 30, 1995, 1994 and 1993
_____________________________________________
1995 1994 1993
---- ---- ----
Income before income tax expense and
change in method of accounting for
income taxes $8,612,520 $9,706,188 $9,463,853
Income tax expense 3,145,666 3,501,963 3,951,634
---------- ---------- ----------
Net income before change in method
of accounting for income taxes 5,466,854 6,204,225 5,512,219
Cumulative effect of change in method
of accounting for income taxes - 764,255 -
---------- ---------- ----------
Net income $5,466,854 $6,968,480 $5,512,219
========== ========== ==========
Earnings per share:
Net income before change in method of
accounting for income taxes $ 1.58 $ 1.85 $ 1.67
Cumulative effect of change in method of
accounting for income taxes - .22 -
---------- ---------- ----------
Earnings per share (Note 19) $ 1.58 $ 2.07 $ 1.67
========== ========== ==========
The accompanying notes are an integral part of these
consolidated financial statements.
60
9
HERITAGE FEDERAL BANCSHARES, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
Years ended June 30, 1995, 1994 and 1993
________________________________________
Net
unrealized
depreciation
Retained on certain
Additional earnings- marketable
Common stock paid-in substantially equity
Shares Amount capital restricted securities
------ ------ ------- ---------- ----------
Balances at June 30, 1992 1,495,000 $1,495,000 $14,553,290 $20,703,246 -
Net income - - - 5,512,219 -
Proceeds from issuance of common
stock 42,468 42,468 445,915 - -
Implementation of Management
Recognition Plan, including
issuance of common stock 44,850 44,850 880,181 - -
Three for two stock split 791,159 791,159 - (791,159) -
Increases in fair value of shares held by
Management Recognition Plan
through award date - - 140,156 - -
Amortization of unearned compensation
of Management Recognition Plan - - - - -
Reduction of Employee Stock
Ownership Plan obligation - - - - -
--------- ---------- ----------- ----------- ----
Balances at June 30, 1993 2,373,477 $2,373,477 $16,019,542 $25,424,306 -
========= ========== =========== =========== ====
Employee Unearned
Stock compensation of
Ownership Management
Plan Recognition
obligation Plan Total
---------- ---- -----
Balances at June 30, 1992 $(1,173,388) - $35,578,148
Net income - - 5,512,219
Proceeds from issuance of common
stock - - 488,383
Implementation of Management
Recognition Plan, including
issuance of common stock - (925,031) -
Three for two stock split - - -
Increases in fair value of shares held by
Management Recognition Plan
through award date - (140,156) -
Amortization of unearned compensation
of Management Recognition Plan - 154,009 154,009
Reduction of Employee Stock
Ownership Plan obligation 120,348 - 120,348
----------- --------- -----------
Balances at June 30, 1993 $(1,053,040) $(911,178) $41,853,107
=========== ========= ===========
(continued)
61
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HERITAGE FEDERAL BANCSHARES, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
Years ended June 30, 1995, 1994 and 1993
________________________________________
Retained
Additional earnings-
Common stock paid-in substantially
Shares Amount capital restricted
------- ------ ------- ----------
Balances at June 30, 1993 2,373,477 $2,373,477 $16,019,542 $25,424,306
Net income - - - 6,968,480
Proceeds from issuance of common
stock, including effect of three
for two stock split 6,143 6,143 88,553 (1,419)
Cash dividend paid on common
stock at $.25 per share - - - (785,050)
Four for three stock split 793,206 793,206 - (793,206)
Amortization of unearned compensation
of Management Recognition Plan - - - -
Reduction of Employee Stock
Ownership Plan obligation - - - -
--------- --------- ---------- ----------
Balances at June 30, 1994 3,172,826 $3,172,826 $16,108,095 $30,813,111
========= ========= ========== ==========
Net
unrealized
depreciation Employee Unearned
on certain Stock ompensation of
marketable Ownership Management
equity Plan Recognition
securities obligation Plan Total
---------- ---------- ---- -----
Balances at June 30, 1993 - $(1,053,040) $(911,178) $41,853,107
Net income - - - 6,968,480
Proceeds from issuance of common
stock, including effect of three
for two stock split - - - 93,277
Cash dividend paid on common
stock at $.25 per share - - - (785,050)
Four for three stock split - - - -
Amortization of unearned compensation
of Management Recognition Plan - - 201,060 201,060
Reduction of Employee Stock
Ownership Plan obligation - 172,155 - 172,155
--- --------- -------- ----------
Balances at June 30, 1994 $ - $ (880,885) $(710,118) $48,503,029
=== ========= ======== ==========
(continued)
62
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HERITAGE FEDERAL BANCSHARES, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
Years ended June 30, 1995, 1994 and 1993
________________________________________
Retained
Common Stock Additional earnings-
------------ paid-in substantially
Shares Amount capital restricted
------ ------ ------- ----------
Balances at June 30, 1994 3,172,826 $3,172,826 $16,108,095 $30,813,111
Net income - - - 5,466,854
Adoption of change in accounting
for securities, net of tax - - - -
Proceeds from issuance of common
stock, including effect of four
for three stock split 13,332 13,332 122,226 (1,269)
Cash dividend paid on common
stock at $.38 per share - - - (1,208,625)
Tax benefit from exercise of stock
options - - 67,800 -
Tax benefit from Management
Recognition Plan - - 211,370 -
Change in unrealized appreciation,
net of tax - - - -
Amortization of unearned compensation
of Management Recognition Plan - - - -
Reduction of Employee Stock
Ownership Plan obligation - - - -
--------- --------- ---------- ----------
Balances at June 30, 1995 3,186,158 $3,186,158 $16,509,491 $35,070,071
========= ========= ========== ==========
Net Employee Unearned
unrealized Stock compensation of
appreciation Ownership Management
on available- Plan Recognition
for-sale obligation Plan Total
---------- ---------- ---- -----
Balances at June 30, 1994 $ - $(880,885) $(710,118) $48,503,029
Net income - - - 5,466,854
Adoption of change in accounting
for securities, net of tax (44,843) - - (44,843)
Proceeds from issuance of common
stock, including effect of four
for three stock split - - - 134,289
Cash dividend paid on common
stock at $.38 per share - - - (1,208,625)
Tax benefit from exercise of stock
options - - - 67,800
Tax benefit from Management
Recognition Plan - - - 211,370
Change in unrealized appreciation,
net of tax 128,922 - - 128,922
Amortization of unearned compensation
of Management Recognition Plan - - 355,057 355,057
Reduction of Employee Stock
Ownership Plan obligation - 160,120 - 160,120
---------- --------- --------- -----------
Balances at June 30, 1995 $ 84,079 $(720,765) $(355,061) $53,773,973
========== ========= ========= ===========
The accompanying notes are an integral part of these
consolidated financial statements.
63
12
HERITAGE FEDERAL BANCSHARES, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
Years ended June 30, 1995, 1994 and 1993
________________________________________
1995 1994 1993
---- ---- ----
Cash flows from operating activities:
Net income $ 5,466,854 $ 6,968,480 $ 5,512,219
Adjustments to reconcile net income to net cash
provided by operating activities:
Cumulative effect of change in method of
accounting for income taxes - (764,255) -
Amortization of:
Excess of cost over fair value of net assets acquired 422,873 525,336 1,301,646
Discounts and premiums on securities 536,232 952,346 534,952
Deferred loan origination fees (505,384) (381,771) (60,562)
Loan discounts (753,527) (900,468) (1,056,576)
Provision for loan losses and losses on real estate 83,298 560,337 846,965
Gain on sale of branches - - (1,000,000)
Recognition of Management Recognition Plan expense 355,057 201,060 154,009
Recognition of ESOP expense 160,120 172,155 120,348
Dividends received in stock of Federal Home Loan Bank (249,600) (179,900) (156,100)
Deferred income taxes and charge in-lieu of taxes 787,264 16,554 260,000
Depreciation and amortization of premises and equipment 534,605 505,748 558,126
Increase in unearned compensation of Management
Recognition Plan - - (925,031)
Decrease (increase) in:
Other assets 71,065 28,116 4,851
Accrued interest receivable (219,791) 329,588 265,059
Increase (decrease) in:
Accrued expenses and other liabilities 820,568 (496,008) 650,624
----------- ----------- ------------
Total adjustments 2,042,780 568,838 1,498,311
----------- ----------- ------------
Net cash provided by operating activities 7,509,634 7,537,318 7,010,530
----------- ----------- ------------
Cash flows from investing activities:
Net repayments of loans 12,298,111 19,119,421 30,619,553
Principal receipts on mortgage-backed securities 8,289,568 15,847,363 9,069,390
Purchases of available-for-sale securities (3,984,063) - -
Proceeds from maturities of available-for-sale securities 6,035,681 - -
Purchases of securities held-to-maturity (64,990,375) - -
Proceeds from maturities of securities held-to-maturity 36,767,292 - -
Purchases of mortgage-backed securities - (48,754,748) (28,186,079)
Purchases of investment securities, certificates of deposit
and term federal funds sold - (49,295,935) (65,860,242)
Proceeds from maturities of investment securities and
certificates of deposit - 57,157,839 44,279,779
Proceeds from sales of foreclosed real estate 575,089 91,281 795,102
Purchases of Federal Home Loan Bank stock - - (3,400)
Cash and cash equivalents transferred in sale of branches - - (51,318,038)
Purchases of premises and equipment, net (644,036) (458,083) (501,176)
----------- ---------- ------------
Net cash used by investing activities $(5,652,733) $(6,292,862) $(61,105,111)
----------- ----------- ------------
(continued)
64
13
HERITAGE FEDERAL BANCSHARES, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS, Continued
Years ended June 30, 1995, 1994 and 1993
________________________________________
1995 1994 1993
---- ---- ----
Cash flows from financing activities:
Net increase (decrease) in deposits $(1,500,631) $(9,174,309) $17,878,579
Net increase (decrease) in mortgage escrow funds 37,389 (30,602) (358,953)
Lease payments for obligations under capital leases (1,216) (101,100) (100,996)
Repayment of ESOP obligation (880,885) (172,155) (120,348)
Advances (repayments) from the Federal Home Loan Bank 8,534,838 (246,605) 9,748,028
Net proceeds from issuance of common stock 134,289 93,277 1,413,414
Dividends paid (1,208,625) (785,050) -
----------- ----------- -----------
Net cash provided (used) by financing activities 5,115,159 (10,416,544) 28,459,724
----------- ----------- -----------
Net increase (decrease) in cash and cash equivalents 6,972,060 (9,172,088) (25,634,857)
Cash and cash equivalents at beginning of year 14,906,054 24,078,142 49,712,999
----------- ----------- -----------
Cash and cash equivalents at end of year $21,878,114 $14,906,054 $24,078,142
=========== =========== ===========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Payments made during the period for:
Interest $17,666,029 $16,503,090 $19,262,868
Income taxes $ 2,389,500 $ 3,289,871 $ 3,967,122
=========== =========== ===========
SUPPLEMENTAL DISCLOSURE OF NONCASH INVESTING ACTIVITIES:
Real estate foreclosures and related transfers $44,865 $70,627 $172,183
======= ======= ========
The Company sold certain branches during 1993. In conjunction with that
transaction, assets sold, liabilities transferred and gain recognized were
as follows:
Deposits transferred $54,814,922
Premises and equipment sold, net (2,122,622)
Share loans sold (550,468)
Accrued interest and other liabilities transferred 176,206
Gain on sale (1,000,000)
-----------
Cash and cash equivalents transferred $51,318,038
===========
The accompanying notes are an integral part of these
consolidated financial statements.
65
14
HERITAGE FEDERAL BANCSHARES, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
__________________________________________
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
PRINCIPLES OF CONSOLIDATION - The consolidated financial statements
include the accounts of Heritage Federal Bancshares, Inc. (the Company)
and its wholly-owned subsidiary, Heritage Federal Bank for Savings (the
Bank) and the Bank's wholly-owned subsidiary, Citizens Financial
Corporation. All significant intercompany balances and transactions are
eliminated in consolidation.
CASH AND CASH EQUIVALENTS - For purposes of reporting cash flows, cash
and cash equivalents consist of federal funds sold, cash on hand, and due
from banks. Cash and due from banks includes interest-bearing deposits of
$5,592,680 and $2,295,206 at June 30, 1995 and 1994, respectively.
Federal funds sold included in cash equivalents have maturities ranging
from one to 14 days. The Bank maintained cash reserves required by the
Federal Reserve Bank amounting to $3,168,000 and $4,720,000 as of June
30, 1995 and 1994, respectively.
INVESTMENT SECURITIES - Effective July 1, 1994, the Company adopted the
provisions of Financial Accounting Standards Board ("FASB") Statement of
Financial Accounting Standards No. 115 (SFAS 115), Accounting for
Certain Investments in Debt and Equity Securities. Investments in
certain debt and equity securities are classified as either
Held-to-Maturity (reported at amortized cost), Trading (reported at fair
value with unrealized gains and losses included in earnings), or
Available-for-Sale (reported at fair value with unrealized gains and
losses excluded from earnings and reported as a separate component of
shareholders' equity).
Premiums and discounts on debt securities are recognized in interest
income on the level interest yield method over the period to maturity.
Prior to the adoption of SFAS 115, investment securities were those
securities held for investment purposes which management determined they
had the ability and intent to hold to maturity. Investment securities
were stated at cost adjusted for amortization of premiums and accretion
of discounts.
Mortgage-backed securities represent participating interests in pools of
long-term first mortgage loans originated and serviced by the issuers of
the securities. These securities, which have been classified as
held-to-maturity in 1995, are carried at unpaid principal balances,
adjusted for unamortized premiums and unearned discounts. Premiums and
discounts are amortized using the interest method over the remaining
period to contractual maturity, adjusted for anticipated prepayments.
Gains and losses on the sale of securities are determined using the
specific identification method.
66
15
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
_____________________________________________________
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, continued
LOANS RECEIVABLE - Loans receivable are stated at unpaid principal
balances, net of discounts, deferred loan origination fees, and the
allowance for loan losses.
Unearned discounts on mortgage loans purchased are amortized to interest
income using the interest method over the estimated average lives of the
loans.
The Company adopted Statement of Financial Accounting Standards (SFAS)
No. 114, Accounting by Creditors for Impairment of a Loan, as amended by
SFAS No. 118, Accounting by Creditors for Impairment of a Loan-Income
Recognition and Disclosure, on July 1, 1994. Under the new standards, a
loan is considered impaired, based on current information and events, if
it is probable that the Company will be unable to collect the scheduled
payments of principal or interest when due according to the contractual
terms of the loan agreement. Uncollateralized loans are measured for
impairment based on the present value of expected future cash flows
discounted at the historical effective interest rate, while all
collateral-dependent loans are measured for impairment based on the fair
value of the collateral. The adoption of SFAS 114 and 118 resulted in no
additional provision for credit losses, at July 1, 1994.
At June 30, 1995, the recorded investment in loans for which impairment
has been recognized in accordance with SFAS 114 totaled $2,111,000, and
these loans had a corresponding valuation allowance of $70,000. The
impaired loans at June 30, 1995, were measured for impairment using the
fair value of the collateral as all of these loans were collateral
dependent. For the year ended June 30, 1995, the average recorded
investment in impairment loans was approximately $1,943,000. The Company
recognized approximately $128,000 of interest on impaired loans during
the portion of the year that they were impaired.
The Company uses several factors in determining if a loan is impaired
under SFAS No. 114. The internal asset classification procedures include
a thorough review of significant loans and lending relationships and
include the accumulation of related data. This data includes loan
payment status, borrowers' financial data and borrowers' operating
factors such as cash flows, operating income or loss, etc.
The allowance for loan losses is increased by charges against income and
decreased by chargeoffs (net of recoveries). Management's periodic
evaluation of the adequacy of the allowance is based on the Bank's past
loan loss experience, known and inherent risks in the portfolio, adverse
situations that may affect the borrowers' ability to repay, estimated
value of any underlying collateral, and current economic conditions.
While management believes that it has established the allowance in
accordance with generally accepted accounting principles and has taken
into account the views of its regulators and the current economic
environment, there can be no assurance that in the future the Bank's
regulators or its economic environment will not require further increases
in the allowance.
The allowance for credit losses is established through charges to
earnings in the form of a provision for credit losses. Increases and
decreases in the allowance due to changes in the measurement of the
impaired loans are included in the provision for credit losses. Loans
continue to be classified as impaired unless they are brought fully
current and the collection of scheduled interest and principal is
considered probable.
67
16
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
_____________________________________________________
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, continued
When a loan or portion of a loan is determined to be uncollectible, the
portion deemed uncollectible is charged against the allowance and
subsequent recoveries, if any, are credited to the allowance.
INCOME RECOGNITION ON IMPAIRED AND NONACCRUAL LOANS - Loans, including
impaired loans, are generally classified as nonaccrual if they are past
due as to maturity or payment of principal or interest for a period of
more than 90 days, unless such loans are well-secured and in the process
of collection. If a loan or a portion of a loan is classified as
doubtful or is partially charged off, the loan is generally classified as
nonaccrual. Loans that are on a current payment status or past due less
than 90 days may also be classified as nonaccrual if repayment in full of
principal and/or interest is in doubt.
Loans may be returned to accrual status when all principal and interest
amounts contractually due (including arrearages) are reasonably assured
of repayment within an acceptable period of time, and there is a
sustained period of repayment performance (generally a minimum of six
months) by the borrower, in accordance with the contractual terms of
interest and principal.
While a loan is classified as nonaccrual and the future collectibility of
the recorded loan balance is doubtful, collections of interest and
principal are generally applied as a reduction to principal outstanding,
except in the case of loans with scheduled amortizations where the
payment is generally applied to the oldest payment due. When the future
collectibility of the recorded loan balance is expected, interest income
may be recognized on a cash basis. In the case where a nonaccrual loan
had been partially charged off, recognition of interest on a cash basis
is limited to that which would have been recognized on the recorded loan
balance at the contractual interest rate. Receipts in excess of that
amount are recorded as recoveries to the allowance for loan losses until
prior charge-offs have been fully recovered.
DISCOUNTS ON LOANS ACQUIRED THROUGH MERGERS - Discounts on loans acquired
through mergers are accreted into income principally on the interest
method over the remaining contractual terms of the respective loans,
adjusted for expected prepayments.
68
17
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
_____________________________________________________
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, continued
LOAN ORIGINATION AND COMMITMENT FEES AND RELATED COSTS - Loan fees are
accounted for in accordance with Statement of Financial Accounting
Standards (SFAS) No. 91. Loan fees and certain direct loan origination
costs are deferred, and the net fee or cost is recognized in the
statement of income using the interest method over the contractual life
of the loans, adjusted for estimated prepayments based on the Bank's
historical prepayment experience. Commitment fees and costs relating to
commitments whose likelihood of exercise is remote are recognized over
the commitment period on a straight-line basis. If the commitment is
subsequently exercised during the commitment period, the remaining
unamortized commitment fee at the time of exercise is recognized over the
life of the loan as an adjustment of yield. The Bank ceases amortization
of net deferred fees on loans which are contractually 90 days or more
past due or where management has determined that such amounts may be
uncollectible.
REAL ESTATE OWNED - Real estate properties acquired through loan
foreclosure or deed in lieu of foreclosure and properties classified as
in substance foreclosures are initially recorded at the lower of the
related loan balance, less any specific allowance for loss, or fair value
at the date of foreclosure. Costs subsequently incurred relating to
development and improvement of property are capitalized, whereas costs
relating to holding property are expensed. In substance foreclosed
properties are those properties where the borrower retains title but has
little or no remaining equity in the property considering its fair value;
where repayment can only be expected to come from the operation or sale
of the property; and where the borrower has effectively abandoned control
of the property or it is doubtful that the borrower will be able to
rebuild equity in the property. Property acquired by deed in lieu of
foreclosure results when a borrower voluntarily transfers title to the
Bank in full settlement of the related debt in an attempt to avoid
foreclosure.
Valuations are periodically performed by management and an allowance for
losses is established by a charge to operations if the carrying value of
a property exceeds its estimated fair value.
PREMISES AND EQUIPMENT - Premises and equipment are stated at cost less
accumulated depreciation and amortization. Depreciation is computed
using the straight-line method over the estimated useful lives of the
related assets. Amortization is computed on the straight-line method
over the term of the lease or the life of the assets, whichever is
shorter.
EXCESS OF COST OVER FAIR VALUE OF NET ASSETS ACQUIRED AND OTHER
INTANGIBLES - The Bank is amortizing the excess of cost over fair value
of net assets acquired (goodwill) through business combinations at a
constant rate when applied to the interest-earning assets, through June
1996, which is the estimated remaining life of the long-term
interest-earning assets. During 1993, $637,000 of goodwill relating to
the branches sold was written-off. Other intangibles amounting to
$447,482 and $514,604 at June 30, 1995 and 1994, respectively, consist of
value related to a branch network acquired in 1981, which is being
amortized straight line through 2001; value assigned to the management in
place in the 1981 acquisition, which is being amortized straight line
over the remaining service life of the managers through 2001; and value
assigned to core deposits acquired in 1986, which is being amortized
straight line through 1996.
TRUST ASSETS - Assets held by the Bank in trust capacities are not
included in the accompanying consolidated statements of financial
condition, because such items are not assets of the Bank.
69
18
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
_____________________________________________________
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, continued
INCOME TAXES - Effective July 1, 1993, the Company adopted the provisions
of the Financial Accounting Standards Board Statement No. 109 (Statement
109), Accounting for Income Taxes, on a prospective basis for the fiscal
year ending June 30, 1994. The adoption of Statement 109 resulted in an
increase of the Company's deferred income tax asset of $764,255. Prior
to that date, the Company followed Statement of Financial Accounting
Standards No. 96, Accounting for Income Taxes (Statement 96). Statements
109 and 96 require the asset and liability method of accounting for
income taxes. Under the asset and liability method, deferred income
taxes are recognized for the tax consequences of "temporary differences"
by applying enacted statutory tax rates applicable to future years to
differences between the financial carrying amounts and the tax bases of
existing assets and liabilities. The effect on deferred taxes of a
change in tax rates is recognized in income in the period that includes
the enactment date.
2. CONVERSION TO STOCK SAVINGS BANK, FORMATION OF HOLDING COMPANY, SALE OF
COMMON STOCK AND MERGER
On March 30, 1992, the Bank converted from a mutual savings bank to a
capital stock savings bank. The Bank issued all of its outstanding
capital stock to Heritage Federal Bancshares, Inc., a holding company for
Heritage Federal Bank for Savings. Heritage Federal Bancshares, Inc.
consummated a public offering of 2,990,000 shares of common stock (after
giving effect to stock splits) which generated net proceeds of
$16,048,290 after conversion costs totaling $1,144,210. The Bank
received 99% of the net proceeds in exchange for the stock it issued to
the holding company.
At the time of conversion, the Bank established a liquidation account in
an amount equal to the Bank's net worth for the benefit of eligible
account holders at the time of conversion. The liquidation account will
be reduced annually to the extent that eligible account holders have
reduced their eligible deposits, and shall cease upon the closing of the
accounts, and shall never be increased. In the event of liquidation of
the Bank, such person shall be entitled, after all payments to creditors,
to a distribution from the liquidation account before any distribution to
stockholders.
Federal regulations adopted by the Office of Thrift Supervision (OTS)
impose certain limitations on the payment of dividends and other capital
distributions, including stock repurchases, by the Bank. Based upon
current OTS regulations and its capital structure at June 30, 1995, the
Bank may make capital distributions during a year up to the greater of
(i) 100% of its net earnings to date during the calendar year plus an
amount equal to one-half of the amount by which its total
capital-to-assets ratio exceeded its fully phased-in capital-to-assets
ratio at the beginning of the calendar year or (ii) 75% of its net income
during the most recent four-quarter period. At June 30, 1995,
approximately $19,850,000 was available for payment of dividends from the
Bank to the Company under the above mentioned OTS restrictions. Capital
distributions by the Bank are further subject to 30-day advance written
notice to the OTS.
The Company's charter authorizes 2,000,000 shares of preferred stock of
the Company, of $1.00 par value. The Company's charter expressly vests
in the Board of Directors of the Company the authority to issue the
preferred stock in one or more series and to determine, to the extent
permitted by law prior to the issuance of the preferred stock (or any
series of the preferred stock), the relative rights, limitations, and
preferences of the preferred stock or any such series.
70
19
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
_____________________________________________________
2. CONVERSION TO STOCK SAVINGS BANK, FORMATION OF HOLDING COMPANY, SALE OF
COMMON STOCK AND MERGER, continued
In February 1995, the Company entered into a merger agreement with First
American Corporation (FAC). All of the outstanding shares of the Company
stock will be exchanged for common shares of FAC in a transaction that
will be accounted for as a pooling of interest. The transaction is
expected to be consummated during the Company's second fiscal quarter.
3. SECURITIES
At June 30, 1995, securities have been classified in the consolidated
financial statements according to management's intent. The carrying
amount of securities and their approximate market values at June 30, 1995
were as follows:
Gross Gross Approximate
Amortized Unrealized Unrealized Market
Cost Gains Losses Value
---- ----- ------ -----
Available-for-sale:
U.S. government obligations $ 20,077,586 $ 139,223 $ 3,614 $ 20,213,195
============= =========== =========== =============
Held-to-maturity:
U.S. government and agencies $ 71,685,619 $ 307,843 $ 1,068,462 $ 70,925,000
Collateralized mortgage
obligations 14,942,023 484,692 93,715 15,333,000
------------- ----------- ----------- -------------
86,627,642 792,535 1,162,177 86,258,000
------------- ----------- ----------- -------------
Mortgage-backed securities:
GNMA Certificates 49,076,676 189,729 623,405 48,643,000
FNMA Certificates 12,826,298 14,157 205,455 12,635,000
FHLMC Certificates 22,091,685 71,897 429,582 21,734,000
------------- ----------- ----------- -------------
83,994,659 275,783 1,258,442 83,012,000
------------- ----------- ----------- -------------
$ 170,622,301 $ 1,068,318 $ 2,420,619 $ 169,270,000
============= =========== =========== =============
71
20
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
_____________________________________________________
3. SECURITIES, continued
Investment securities and mortgage-backed securities at June 30, 1994
were summarized as follows:
Gross Gross Approximate
Book Unrealized Unrealized Market
Value Gains Losses Value
----- ----- ------ -----
U.S. government and agencies $ 75,181,904 $270,072 $2,102,976 $ 73,349,000
Collateralized mortgage
obligations 5,614,505 7,370 216,875 5,405,000
------------ -------- ---------- ------------
80,796,409 277,442 2,319,851 78,754,000
------------ -------- ---------- ------------
Mortgage-backed securities:
GNMA Certificates 52,390,756 10,508 2,866,264 49,535,000
FHLMC Certificates 25,810,401 58,079 823,480 25,045,000
FNMA Certificates 14,356,656 4,520 544,176 13,817,000
------------ -------- ---------- ------------
92,557,813 73,107 4,233,920 88,397,000
------------ -------- ---------- ------------
$173,354,222 $350,549 $6,553,771 $167,151,000
============ ======== ========== ============
Debt securities at June 30, 1995 will mature on the following schedule:
Available-for-sale Held-to-maturity
------------------------ ----------------------
Approximate Approximate
Amortized Market Amortized Market
Cost Value Cost Value
---- ----- ---- -----
Due in one year or less $ 7,048,291 $ 7,072,000 $ 5,966,753 $ 6,017,000
Due after one year through
five years 13,029,295 13,141,195 56,275,626 55,467,000
Due after five years through
ten years - - 31,994,678 31,742,000
Due after ten years - - 76,385,244 76,044,000
----------- ----------- ------------ ------------
$20,077,586 $20,213,195 $170,622,301 $169,270,000
=========== =========== ============ ============
The amortized cost and approximate market value of mortgage-backed
securities at June 30, 1995, by contractual maturities are shown in the
above table. Expected maturities will differ from contractual maturities
because borrowers may have the right to call or prepay obligations with
or without call or prepayment penalties.
The weighted average interest yield for all securities was approximately
6.35% at June 30, 1995 and 5.69% at June 30, 1994.
Investment securities carried in the consolidated statements of financial
condition at $23,850,000 and $19,760,000 as of June 30, 1995 and 1994,
respectively, were pledged to secure public deposits.
72
21
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
_____________________________________________________
4. LOANS RECEIVABLE
Loans receivable are summarized as follows:
1995 1994
---- ----
Loans secured by first mortgages on real estate:
Principal balances:
One to four single family residential $239,624,145 $251,144,767
Construction loans, gross commitment 7,044,838 11,219,927
Partially guaranteed by VA or insured by FHA 804,254 998,812
Other conventional 32,549,777 32,177,760
Other 1,431,052 1,746,064
------------ ------------
281,454,066 297,287,330
Less:
Discounts on loans acquired through mergers 1,013,821 1,767,348
Allowance for loan losses 1,222,676 1,222,676
Undisbursed portion of construction loans 2,436,442 3,732,820
Net deferred loan origination fees 871,853 1,192,445
------------ ------------
Total first mortgage loans 275,909,274 289,372,041
------------ ------------
Consumer and other loans:
Principal balances:
Secured by deposits 2,224,023 2,429,921
Education 6,216 10,213
Home equity and second mortgage 13,050,389 10,600,812
Credit card 535,134 595,452
Other consumer and commercial 7,666,405 6,823,118
------------ ------------
23,482,167 20,459,516
Less:
Net deferred loan origination fees (costs) 21,894 (39,945)
Allowance for loan losses 1,103,992 1,055,962
Loans-in-process 732,242 115,915
------------ ------------
Total consumer and other loans 21,624,039 19,327,584
------------ ------------
Loans receivable, net $297,533,313 $308,699,625
============ ============
Weighted average contractual yield 8.18% 7.38%
============ ============
73
22
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
_____________________________________________________
4. LOANS RECEIVABLE, continued
Activity in the allowance for loan losses is summarized as follows:
1995 1994 1993
---- ---- ----
Balance at beginning of year $2,278,638 $2,387,673 $2,338,314
Provisions charged against income 82,247 487,346 595,140
Chargeoffs, net of recoveries (34,217) (596,381) (545,781)
---------- ---------- ----------
Balance at end of year $2,326,668 $2,278,638 $2,387,673
========== ========== ==========
The following is a summary of the principal balances of loans on
nonaccrual status and loans past due ninety days or more:
1995 1994
---- ----
Loans contractually past due 90 days or more
and/or on nonaccrual status:
Residential $178,000 $271,000
Consumer and commercial 47,000 194,000
-------- --------
$225,000 $465,000
======== ========
During the years ended June 30, 1995, 1994, and 1993, interest income of
approximately $17,000, $22,000, and $106,000, respectively, was not
recorded related to loans accounted for on a nonaccrual basis.
In the ordinary course of business, the Bank makes loans to directors and
officers and their related interests. Loans to directors and officers
and their related interests are as follows:
Balance at June 30, 1993 $1,640,199
Advances 702,860
Repayments (346,402)
Separation of officer with loans (43,363)
----------
Balance at June 30, 1994 1,953,294
Advances 381,926
Repayments (545,673)
----------
Balance at June 30, 1995 $1,789,547
==========
74
23
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
_____________________________________________________
4. LOANS RECEIVABLE, continued
The Bank offers an unsecured $100,000 line of credit to each of its seven
non-employee directors. Amounts outstanding against line of credit
agreements with the two directors who have accepted the credit line were
$99,878 and $99,971 at June 30, 1995 and 1994, respectively. The
directors may retain their lines of credit after they leave the board, so
long as they continue to meet the normal credit requirements of the Bank.
5. LOAN SERVICING
Mortgage loans serviced for others are not included in the accompanying
consolidated statements of financial condition. The approximate unpaid
principal balances of these loans were $7,821,000 and $9,905,000 at June
30, 1995 and 1994, respectively.
6. INTEREST RECEIVABLE
Interest receivable is summarized as follows:
1995 1994
---- ----
Securities available-for-sale $ 352,072 $ -
Securities held-to-maturity 1,533,030 -
Investment securities - 1,255,288
Mortgage-backed securities - 488,815
Loans receivable 1,781,205 1,702,413
---------- ----------
$3,666,307 $3,446,516
========== ==========
7. REAL ESTATE OWNED
Activity in the allowance for losses on real estate owned is summarized as
follows:
1995 1994 1993
---- ---- ----
Balance at beginning of year $262,322 $284,947 $201,330
Provision charged against income 1,051 72,991 251,825
Chargeoffs (51,602) (95,616) (168,208)
-------- -------- --------
Balance at end of year $211,771 $262,322 $284,947
======== ======== ========
75
24
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
_____________________________________________________
8. PREMISES AND EQUIPMENT
Premises and equipment are summarized as follows:
1995 1994
---- ----
Land $ 1,587,801 $ 1,540,381
Office buildings and leasehold improvements 8,935,532 8,831,100
Furniture, fixtures, and equipment 4,363,695 5,526,720
Automobiles 105,765 93,017
----------- -----------
14,992,793 15,991,218
Less accumulated depreciation and amortization 8,206,898 9,314,754
----------- -----------
Premises and equipment, net $ 6,785,895 $ 6,676,464
=========== ===========
9. DEPOSITS
Deposits are summarized as follows:
1995 1994
---- ----
Amount % Amount %
------ - ------ -
Noninterest-bearing demand deposits $ 10,574,976 2.4% $ 8,395,930 1.9%
Demand and NOW accounts at 2.25% 56,407,635 12.5 64,671,094 14.3
SuperNow at 2.50% 7,514,508 1.7 10,916,498 2.4
Money market at 3.31% 17,844,834 4.0 24,135,360 5.4
Passbook savings at 2.75% 68,433,425 15.2 91,440,876 20.3
------------ ----- ------------- -----
160,775,378 35.8 199,559,758 44.3
------------ ----- ------------- -----
Certificates of deposit:
2.00 to 2.50% $ 1,016,523 .2 $ 1,466,043 .3
2.51 to 3.00% 701,623 .2 2,367,612 .5
3.01 to 3.50% 2,850 .0 85,027,440 18.9
3.51 to 4.00% 13,693,624 3.0 56,385,354 12.5
4.01 to 4.50% 53,029,316 11.8 38,661,139 8.6
4.51 to 5.00% 56,907,063 12.7 27,079,048 6.0
5.01 to 5.50% 33,348,110 7.4 18,379,993 4.1
5.51 to 6.00% 34,780,123 7.8 15,273,215 3.4
6.01 to 6.50% 52,314,919 11.6 1,246,910 .3
6.51 to 7.00% 39,678,704 8.8 2,320,911 .5
7.01 to 7.50% 2,376,130 .5 1,123,279 .2
7.51 to 8.00% 222,920 .1 1,480,020 .3
8.01 to 8.50% 296,088 .1 286,531 .1
8.51 to 9.00% 99,110 .0 92,491 .0
9.01 to 9.50% 75,496 .0 68,864 .0
------------ ----- ------------- -----
288,542,599 64.2 251,258,850 55.7
------------ ----- ------------- -----
$449,317,977 100.0% $450,818,608 100.0%
============ ===== ============ =====
76
25
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
_____________________________________________________
9. DEPOSITS, continued
The aggregate amount of jumbo certificates of deposit with a minimum
denomination greater than $100,000 was $17,250,670 and $9,264,566 at June
30, 1995 and 1994, respectively.
At June 30, 1995, scheduled maturities of certificates of deposit are as
follows:
Year ending June 30
-------------------
1996 $221,752,925
1997 41,336,160
1998 16,498,383
Later 8,955,131
------------
$288,542,599
============
Interest expense on deposits for the years ended June 30, 1995, 1994 and
1993 is summarized as follows:
1995 1994 1993
---- ---- ----
Demand, Money Market, NOW, and SuperNOW $ 2,338,807 $ 2,361,347 $ 2,517,330
Passbook savings 2,175,733 2,550,798 2,746,998
Time deposits 12,314,926 10,934,623 13,609,634
----------- ----------- -----------
$16,829,466 $15,846,768 $18,873,962
=========== =========== ===========
77
26
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
_____________________________________________________
10. ADVANCES FROM FEDERAL HOME LOAN BANK
Federal Home Loan Bank advances consist of the following:
1995 1994
---- ----
Variable rate advance which reprices monthly based on the one month
London Interbank Offering Rate (LIBOR) plus 5 basis points (6.1203%
at June 30, 1995), with interest only due monthly, and principal
due on October 14, 2004 $10,000,000 $ -
8.1% fixed rate advance payable in monthly principal and interest
payments of $865 through February, 2006 74,005 78,207
6.0% fixed rate advance payable in monthly principal and interest
payments of $45,830, due through November 1, 2002 3,256,279 4,265,337
Variable rate advance which reprices monthly based on the one
month London Interbank Offering Rate (LIBOR) (6.0625% at June 30,
1995), with interest only due monthly, and principal due on
November 14, 1997 492,000 536,000
5.15% fixed rate advance payable in monthly principal and interest
payments of $53,400, due through October 1, 2003 4,299,637 4,707,539
----------- ----------
$18,121,921 $9,587,083
=========== ==========
These advances are collateralized by a blanket pledge of qualifying
mortgage loans totaling $27,279,181 at June 30, 1995.
11. INCOME TAXES
Income tax expense (benefit) is summarized as follows:
1995 1994 1993
---- ---- ----
Current $2,358,402 $3,485,409 $3,691,634
Deferred 654,476 (47,280) (268,381)
Charge-in-lieu of taxes 262,227 248,529 528,381
Change in effective tax rate on
temporary differences (129,439) (184,695) -
---------- ---------- ----------
$3,145,666 $3,501,963 $3,951,634
========== ========== ==========
Included in the above are state income taxes of $393,037, $457,561, and
$473,310 in 1995, 1994, and 1993, respectively.
78
27
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
_____________________________________________________
11. INCOME TAXES, continued
The differences between income tax expense and the expected amounts
computed by applying the federal income tax rate to income before income
tax expense are as follows:
1995 1994 1993
Amount % Amount % Amount %
------ - ------ - ------ -
Income tax expense
at statutory rate $2,928,257 34.0% $3,300,104 34.0% $3,217,710 34.0%
Increases (decreases) in
tax resulting from:
Interest on tax-free
investments (25,442) (.3) (23,708) (.2) (34,565) (.4)
Purchase method of
accounting in
conjunction with
mergers 143,777 1.7 178,614 1.8 435,221 4.6
Change in effective rate on
temporary differences (129,439) (1.5) (184,695) (1.9) - -
Other, net (30,891) .1 (44,053) (.5) 20,883 .2
State income taxes, net
of Federal benefit 259,404 2.5 275,701 2.9 312,385 3.4
---------- ---- ---------- ---- ---------- ----
Actual income tax expense $3,145,666 36.5% $3,501,963 36.1% $3,951,634 41.8%
========== ==== ========== ==== ========== ====
Deferred income taxes reflect the impact of temporary differences between
the amount of assets and liabilities for financial reporting purposes and
as measured by tax laws and regulations. The sources of these temporary
differences are as follows:
1995 1994
---- ----
Excess of book over tax basis of equipment $(288,614) $ (221,276)
Discounts on loans acquired through mergers 385,252 616,765
Allowance for loan losses 450,075 783,880
Federal Home Loan Bank stock (288,221) (177,595)
Deferred loan fees (125,159) 187,354
Deferred compensation 833,322 290,202
Unrealized appreciation on available-for-sale securities (51,530) -
Other (17,611) (22,192)
--------- ----------
$ 897,514 $1,457,138
========= ==========
79
28
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
_____________________________________________________
11. INCOME TAXES, continued
The Bank qualifies under provisions of the Internal Revenue Code which
permit it to deduct from income an allowance for bad debts based on
approximately 8% of taxable income before such deduction, or actual
chargeoffs. As of June 30, 1995, the Company has taken aggregate bad
debt deductions of approximately $4,647,000 for income tax purposes under
the percentage of taxable income method for which no provisions for
federal income tax have been made in the financial statements. This
amount may be used only for absorbing losses for tax purposes. It is not
related to amounts of losses actually anticipated and the additions
thereto have not been charged against income.
12. COMPENSATION AND BENEFITS
PENSION PLAN
Substantially all employees of the Bank and its subsidiary are covered by
a noncontributory defined benefit pension plan. The plan calls for
benefits to be paid to all eligible employees at retirement based
primarily upon years of service with the Bank and compensation paid in
the five consecutive years when earnings were the greatest within the ten
year period preceding retirement. Plan assets consist primarily of fixed
income and equity securities and money market instruments.
The following sets forth the funded status of the plan as of June 30,
1995 and 1994:
1995 1994
---- ----
Actuarial present value of benefit obligations:
Vested benefits $2,112,692 $1,981,368
Nonvested benefits 57,092 60,645
---------- ----------
Accumulated benefit obligations $2,169,784 $2,042,013
========== ==========
Projected benefit obligations $3,167,095 $3,110,004
Fair value of assets held in the plan 2,697,472 2,631,386
---------- ----------
Fair value of plan assets under projected
benefit obligations (469,623) (478,618)
Net unrecognized loss from past experience
different than assumed 817,537 960,278
Unrecognized prior service cost (119,620) 43,730
Unrecognized net asset as of July 1, 1987 (253,209) (274,309)
---------- ----------
Prepaid (accrued) pension cost $ (24,915) $ 251,081
========== ==========
The change in projected benefit obligations resulted from additions for
such factors as interest on the beginning balance and current year
service cost, less distributions to participants.
80
29
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
_____________________________________________________
12. COMPENSATION AND BENEFITS, continued
Pension expense for the years ended June 30, 1995, 1994, and 1993,
includes the following components:
1995 1994 1993
---- ---- ----
Service cost of the current period $128,817 $ 110,807 $ 116,232
Interest cost on the projected benefit obligations 230,242 202,372 179,720
Actual return on assets held in the plan (192,957) 36,410 (34,726)
Net amortization and deferral (48,877) (307,182) (251,987)
-------- --------- ---------
$117,225 $ 42,407 $ 9,239
======== ========= =========
The weighted average discount rate used to measure the projected benefit
obligations is 8.0%, the assumed rate of increase in future compensation
levels is 5.0%, and the expected long-term rate of return on assets is
9.5%. The Bank uses the straight-line method of amortization of
unrecognized gains and losses.
THRIFT AND PROFIT SHARING PLAN
The Bank has a thrift and profit sharing plan for substantially all
employees who have completed at least one year of service. The plan has
been amended to comply with the regulations of the Tax Equity and Fiscal
Responsibility Act, Code Section 401(k), the Retirement Equity Act of
1984, the Deficit Reduction Act of 1984, the Tax Reform Act of 1986, and
the Revenue Reconciliation Act of 1993.
Under these regulations, the Bank agrees to match an employee's
contribution equal to 5% of the employee's salary, although the employee
may contribute up to 10%. The expense for this plan for the years ended
June 30, 1995, 1994, and 1993 was approximately $154,000, $128,000 and
$116,000, respectively.
81
30
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
_____________________________________________________
13. PARENT COMPANY FINANCIAL INFORMATION
Condensed financial information for Heritage Federal Bancshares, Inc.
(parent company only) as of June 30, 1995 and 1994, was as follows:
1995 1994
---- ----
Condensed Balance Sheets
------------------------
Assets
------
Cash $ 724,287 $ 1,044,132
Investment in subsidiary 33,841,080 29,147,192
Other assets 56,321 7,796
----------- -----------
Total assets $34,621,688 $30,199,120
=========== ===========
Liabilities
-----------
Accounts payable $ 105,591 $ 73,082
Employee Stock Ownership Plan obligation - 880,885
----------- -----------
Total liabilities 105,591 953,967
----------- -----------
Stockholders' Equity
--------------------
Common stock 3,186,158 3,172,826
Additional paid-in capital 16,509,491 16,108,095
Retained earnings 15,812,195 11,555,235
Net unrealized appreciation on available-for-sale securities 84,079 -
Employee Stock Ownership Plan obligation (720,765) (880,885)
Unearned compensation of Management Recognition Plan (355,061) (710,118)
----------- -----------
Total stockholders' equity 34,516,097 29,245,153
----------- -----------
Total liabilities and stockholders' equity $34,621,688 $30,199,120
=========== ===========
82
31
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
_____________________________________________________
13. PARENT COMPANY FINANCIAL INFORMATION, continued
Condensed Statements of Income
------------------------------
1995 1994
---- ----
Revenue:
Equity in earnings of subsidiary $ 6,043,382 $ 7,484,815
Loan interest income 30,837 -
----------- -----------
Total revenue 6,074,219 7,484,815
----------- -----------
Expenses
Management fees 572,340 636,442
Legal fees 237,039 143,167
Other 154,339 80,949
----------- -----------
Total expenses 963,718 860,558
----------- -----------
Income before income taxes 5,110,501 6,624,257
Income tax benefit (356,353) (344,223)
----------- -----------
Net income $ 5,466,854 $ 6,968,480
=========== ===========
Condensed Statements of Cash Flows
----------------------------------
Cash flows from operating activities:
Net income $ 5,466,854 $ 6,968,480
Adjustments to reconcile net income to net cash provided
by operating activities:
Equity in earnings of subsidiary (6,043,382) (7,484,815)
Increase (decrease) in other liabilities 32,507 (77,337)
----------- -----------
Net cash used by operating activities (544,021) (593,672)
----------- -----------
Cash flows from investing activities:
Dividends from subsidiary 2,000,000 2,000,000
Advances to ESOP (720,765) -
Decrease in other assets 19,277 43,246
----------- -----------
Net cash provided by investing activities 1,298,512 2,043,246
----------- -----------
Cash flows from financing activities:
Proceeds from issuance of common stock 134,289 93,277
Dividend payments (1,208,625) (785,050)
----------- -----------
Net cash used by financing activities (1,074,336) (691,773)
----------- -----------
Net increase (decrease) in cash (319,845) 757,801
Cash at beginning of year 1,044,132 286,331
----------- -----------
Cash at end of year $ 724,287 $ 1,044,132
=========== ===========
83
32
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
_____________________________________________________
14. CITIZENS FINANCIAL CORPORATION
Summarized financial information of the Bank's wholly-owned service
corporation, Citizens Financial Corporation, is as follows:
June 30,
--------
1995 1994
---- ----
Balance Sheets
--------------
Assets $1,842,612 $1,758,357
========== ==========
Accrued expenses and other liabilities $ 54,175 $ 117,204
Capital stock, paid-in capital and retained earnings 1,788,437 1,641,153
---------- ----------
$1,842,612 $1,758,357
========== ==========
Statements of Earnings
----------------------
Years ended June 30,
--------------------
1995 1994 1993
---- ---- ----
Income $301,775 $310,776 $181,202
Expenses 154,491 155,956 100,573
-------- -------- --------
Net earnings $147,284 $154,820 $ 80,629
======== ======== ========
15. FINANCIAL INSTRUMENTS WITH OFF-BALANCE-SHEET RISK AND SIGNIFICANT GROUP
CONCENTRATION OF CREDIT RISK
The Bank is a party to financial instruments with off-balance-sheet risk
in the normal course of business to meet the financing needs of its
customers and to reduce its own exposure to fluctuations in interest
rates. These financial instruments include commitments to extend credit
and standby letters of credit. These instruments involve, to varying
degrees, elements of credit and interest rate risk in excess of the
amounts recognized in the statements of financial condition. The
contract or notional amounts of these instruments reflect the extent of
involvement the Bank has in particular classes of financial instruments.
The Bank's exposure to credit loss in the event of nonperformance by the
other party to the financial instrument for commitments to extend credit
and standby letters of credit is represented by the contractual notional
amount of those instruments. The Bank uses the same credit policies in
making these commitments and conditional obligations as it does for
on-balance-sheet instruments.
84
33
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
_____________________________________________________
15. FINANCIAL INSTRUMENTS WITH OFF-BALANCE-SHEET RISK AND SIGNIFICANT GROUP
CONCENTRATION OF CREDIT RISK, continued
Outstanding lines of credit balances were $1,682,944 and $1,685,212 at
June 30, 1995 and 1994, respectively. Commitments to originate or
purchase loans were approximately $1,733,000 and $5,195,000 at June 30,
1995 and 1994, respectively. The commitments exclude approved, but
unused, home equity lines of credit of $3,492,558 and $3,523,810 in 1995
and 1994, respectively. The commitments to originate or purchase loans
at June 30, 1995, were composed of variable rate loans of $1,204,000 and
fixed rate loans of $529,000. The fixed rate loans had interest rates
ranging from 6.5% to 9.25%.
Commitments to extend credit are agreements to lend to a customer as long
as there is no violation of any condition established in the contract.
Commitments generally have fixed expiration dates or other termination
clauses and may require payment of a fee. Since many of the commitments
are expected to expire without being drawn upon, the total commitment
amounts do not necessarily represent future cash requirements. The Bank
evaluates each customer's credit worthiness on a case-by-case basis. The
amount of collateral obtained if deemed necessary by the Bank upon
extension of credit is based on management's credit evaluation of the
borrower. Collateral held varies but may include trade accounts
receivable; property, plant, and equipment; and income-producing
commercial properties.
Standby letters of credit are conditional commitments issued by the Bank
to guarantee the performance of a customer to a third party. The credit
risk involved in issuing letters of credit is essentially the same as
that involved in extending loan facilities to customers. At June 30,
1995, the unused amount of letters of credit issued totaled $212,602.
Most of the Bank's business activity is with customers located within the
state of Tennessee. A majority of the loans are collateralized by
residential or commercial real estate or other personal property. The
loans are expected to be repaid from cash flow or proceeds from the sale
of selected assets of the borrowers. The Bank grants residential,
consumer, and commercial loans to customers throughout the eastern
portion of the state of Tennessee.
85
34
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
_____________________________________________________
16. EMPLOYEE STOCK OWNERSHIP PLAN OBLIGATION
In conjunction with converting to a stock ownership form, the Company and
the Bank established an Employee Stock Ownership Plan (ESOP), under which
the Bank makes annual contributions to a trust for the benefit of
eligible employees. To be eligible, an employee must be 21 years of age
and have completed at least one year of service. The contributions may
be in the form of cash, other property, or common shares of the Company.
The amount of the annual contribution is at the discretion of the Board
of Directors of the Bank. Initially, the ESOP acquired 209,300 shares of
the Company's common stock financed by $1,203,475 in borrowings by the
ESOP. The Board of Directors intends to contribute to the Plan an amount
equal to the required principal and interest payments related to the ESOP
loan.
During 1995, the ESOP refinanced its notes payable with borrowings from
the Company. The new loan, which has essentially the same terms as the
prior borrowing, is payable in quarterly principal payments of $30,087
plus interest at the lender's base rate through March 30, 2002. At June
30, 1995, the loan bore interest at 9.00%. The plan is noncontributory
and there is no past service liability. The principal balance of the
ESOP loan was $720,765 at June 30, 1995 and $880,885 at June 30, 1994.
The Company is using the dividends paid on unallocated shares held by the
ESOP to reduce the outstanding debt. The financial statements for the
years ended June 30, 1995, 1994 and 1993 include compensation expense of
$91,241, $120,348 and $120,348 and interest expense of $37,592, $63,613
and $74,407, respectively, related to the ESOP.
The ESOP debt agreement contains certain affirmative financial covenants
related to the Bank's operations and financial position. The Bank is in
compliance with all such covenants.
In prior years, the Company had guaranteed the repayment of the ESOP debt
to the outside lender and, accordingly, recorded the debt on its balance
sheet with a corresponding contra-equity account.
Future minimum principal payments due to the Company related to the
Employee Stock Ownership Plan obligation are as follows:
Year ended June 30,
-------------------
1996 $120,348
1997 120,348
1998 120,348
1999 120,348
2000 120,348
Thereafter 119,025
--------
$720,765
========
86
35
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
_____________________________________________________
17. QUARTERLY RESULTS OF OPERATIONS (UNAUDITED)
The following is a summary of quarterly results of operations for the
years ended June 30, 1995 and 1994:
First Second Third Fourth
----- ------ ----- ------
1995:
Interest income $8,640,565 $8,959,429 $9,074,420 $9,304,480
Interest expense 4,049,674 4,338,990 4,468,926 4,939,906
---------- ---------- ---------- ----------
Net interest income 4,590,891 4,620,439 4,605,494 4,364,574
Provision for loan losses 20,591 2,501 30,920 28,235
---------- ---------- ---------- ----------
Net interest income after
provision for loan losses 4,570,300 4,617,938 4,574,574 4,336,339
---------- ---------- ---------- ----------
Other income 719,009 682,585 701,777 651,600
General and administrative expenses 3,112,009 3,143,617 3,104,945 2,881,031
---------- ---------- ---------- ----------
Income before income taxes 2,177,300 2,156,906 2,171,406 2,106,908
Income tax expense 769,853 689,759 798,920 887,134
---------- ---------- ---------- ----------
Net income $1,407,447 $1,467,147 $1,372,486 $1,219,774
========== ========== ========== ==========
Net income per share $ 0.41 $ 0.43 $ 0.39 $ 0.35
========== ========== ========== ==========
1994:
Interest income $9,181,104 $8,986,173 $8,679,829 $8,703,564
Interest expense 4,309,713 4,198,871 3,997,124 3,981,573
---------- ---------- ---------- ----------
Net interest income 4,871,391 4,787,302 4,682,705 4,721,991
Provision for loan losses 216,652 212,519 45,295 12,880
---------- ---------- ---------- ----------
Net interest income after
provision for loan losses 4,654,739 4,574,783 4,637,410 4,709,111
---------- ---------- ---------- ----------
Other income 556,673 586,449 702,434 638,265
General and administrative expenses 3,049,639 3,021,942 2,415,619 2,866,476
---------- ---------- ---------- ----------
Income before income taxes 2,161,773 2,139,290 2,924,225 2,480,900
Income tax expense 863,870 828,453 969,150 840,490
---------- ---------- ---------- ----------
Net income before accounting change 1,297,903 1,310,837 1,955,075 1,640,410
Accounting change 764,255 - - -
---------- ---------- ---------- ----------
Net income after accounting change $2,062,158 $1,310,837 $1,955,075 $1,640,410
========== ========== ========== ==========
Net income per share $ .61 $ .39 $ .58 $ .49
========== ========== ========== ==========
87
36
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
_____________________________________________________
18. STOCK OPTION AND AWARD PLANS
1992 STOCK OPTION PLAN
The Company has adopted a stock option plan for the benefit of employees
of the Bank and nonemployee directors of the Company. The number of
shares of common stock authorized and awarded under the 1992 stock option
plan was 299,000, equal to 10% of the total number of shares issued in the
Company's public offering. The option exercise price of $5.75 per share
is equal to 100% of the fair market value of the common stock on the date
of grant. The option term is ten years. Options issued to employees of
the Bank in connection with the conversion became exercisable over a three
year period ending in March 1995. Options issued to nonemployee directors
of the Company are immediately exercisable. During 1993, a former
director exercised options for 14,950 shares at an exercise price of $5.75
per share. During 1994, 2,728 options were exercised at an exercise price
of $5.75 per share. During 1995, 8,377 options were exercised at an
exercise price of $5.75 per share.
MANAGEMENT RECOGNITION PLAN (MRP)
The Bank issued 89,700 shares of common stock to a MRP Trust created
during 1993. All of these shares, with a market value of $1,065,187 on
the date of award, have been awarded to certain executive officers as
restricted stock which will vest over the three year period ending March
1996. Compensation expense in the amount of $355,057, $201,060 and
$154,009 was recognized during 1995, 1994 and 1993, respectively, related
to these awards. The plan contains provisions providing for forfeiture of
unvested shares in the event of termination, and vesting in the event of
death, disability, retirement or a change in control.
The shares issued to the MRP Trust have been recorded as outstanding
shares, and the unvested portion has been recorded as unearned
compensation through a contra-equity account.
INCENTIVE COMPENSATION PLANS
The Company has established an incentive compensation plan for certain
officers. The plan provides for annual cash bonuses, restricted stock
awards and stock options based upon base annual compensation and certain
operating results. For the year ended June 30, 1995, compensation in the
aggregate amount of $510,228 was recorded, including awards of 3,348
shares of common stock which will vest over three years and options on
14,350 shares of common stock exercisable at $13.00 related to discounted
option plans. In 1994, the compensation recorded under these plans
aggregated $442,464, including awards of 5,073 shares of common stock
which will vest over three years and 30,735 options on shares of common
stock exercisable at $8.72 related to discounted option plans. In 1993,
the compensation recorded under these plans aggregated $404,463 including
awards of 5,672 shares of common stock. In addition, in 1995, 1994 and
1993 participants were granted stock options for 6,696 shares exercisable
at $26.00 per share, 10,149 shares exercisable at $17.44 per share, and
11,352 shares exercisable at $14.25 per share, respectively.
88
37
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
_____________________________________________________
18. STOCK OPTION AND AWARD PLANS, continued
The Company has established an incentive compensation plan for nonemployee
directors. This unfunded plan provides benefits in the form of
performance stock options for shares of common stock. The number of
shares received, exercisable at 50% of the fair market value on the date
of the grant, is determined based on the amount of director fees deferred
during the year by each director. Director compensation recorded for 1995
related to this plan amounted to $177,250, representing 13,635 shares at
an exercise price of $13.00 per share. Director compensation recorded for
1994 related to this plan amounted to $134,650, representing 15,446 shares
at an exercise price of $8.72 per share.
In 1994, the Company adopted a new Director Option Plan that was approved
by the shareholders at the Annual Meeting in October. The plan provides
for automatic grants to each director of options to purchase 4,000 shares
of common stock annually at the fair market value on the date of the
grant. At June 30, 1995, no options had been exercised and 28,000 options
are exercisable at $20.25 per share and 28,000 options are exercisable at
$15.19 per share.
19. EARNINGS PER SHARE
On July 20, 1994, Heritage Federal Bancshares, Inc. declared a four for
three stock split for all shares outstanding as of August 5, 1994, to be
paid on August 26, 1994, to be effected as a stock dividend. On August
18, 1993, Heritage Federal Bancshares, Inc. declared a three for two stock
split for all shares outstanding as of September 8, 1993 to be effected as
a stock dividend. This stock split was paid September 30, 1993. All
references to the outstanding number of shares and earnings per share
amounts have been restated to reflect the splits.
Stock options are regarded as common stock equivalents. Common stock
equivalents are computed using the treasury stock method.
Following are weighted average shares outstanding for computation of
earnings per share for 1995, 1994, and 1993 after adjusting for stock
splits:
1995 1994 1993
---- ---- ----
Shares issued and outstanding 3,179,737 3,171,216 3,099,422
Common stock equivalents computed by
the treasury stock method-options 284,079 200,856 209,633
--------- --------- ---------
3,463,816 3,372,072 3,309,055
========= ========= =========
89
38
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
_____________________________________________________
20. FAIR VALUES OF FINANCIAL INSTRUMENTS
Financial Accounting Standards Board Statement No. 107 (Statement 107)
requires disclosures of the estimated fair value of an entity's financial
instrument assets and liabilities. For the Company, as for most
financial institutions, the great bulk of its assets and liabilities are
considered financial instruments as defined in Statement 107. However,
many of such instruments lack an available trading market, as
characterized by a willing buyer and seller engaging in an exchange
transaction. Also, it is the Company's general practice and intent to
hold its financial instruments to maturity and not to engage in trading
or sales activities. Therefore, the Company used estimations and present
value calculations to prepare this disclosure.
Changes in the assumptions or methodologies used to estimate fair values
may materially affect the estimated amounts. Also, management is
concerned that there may not be reasonable comparability between
institutions due to the wide range of permitted assumptions and
methodologies in the absence of active markets. This lack of uniformity
gives rise to a high degree of subjectivity in estimating financial
instrument fair values.
Fair values have been estimated using data which management considered
the best available, and estimation methodologies deemed suitable for the
pertinent category of financial instrument. The estimation methodologies
and resulting fair values, and recorded carrying amounts at June 30, 1995
and 1994, were as follows:
Cash and cash equivalents are by definition short-term and do not
present any unanticipated credit issues. Therefore, the carrying
amount is a reasonable estimate of fair value. The estimated fair
values of securities are provided in Note 3 to the financial
statements. These are based on quoted market prices, when available.
If a quoted market price is not available, fair value is estimated
using quoted market prices for similar securities.
The fair value of the net loan portfolio has been estimated using
present value cash flow discounted at an interest rate adjusted for
servicing costs and giving consideration to estimated prepayment risk
and credit loss factors.
1995 1994
------------------------------- -------------------------------
Estimated Fair Carrying Estimated Fair Carrying
Value Amount Value Amount
----- ------ ----- ------
1 - 4 family mortgages $247,984,000 $247,238,858 $259,692,000 $261,813,285
Consumer 23,226,000 23,482,167 20,214,000 20,459,516
Non-Residential 33,969,000 34,215,208 33,906,000 35,474,045
------------ ------------ ------------ ------------
$305,179,000 $304,936,233 $313,812,000 $317,746,846
============ ============ ============ ============
90
39
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
_____________________________________________________
20. FAIR VALUES OF FINANCIAL INSTRUMENTS, continued
Fair value of deposit liabilities with no stated maturities has been
estimated to equal the carrying amount (the amount payable on
demand), totaling $160,775,378 and $199,559,758 in 1995 and 1994,
respectively. Under Statement 107, the fair value of deposits with
no stated maturity is equal to the amount payable on demand.
Therefore, the fair value estimates for these products do not reflect
the benefits that the Bank receives from the low-cost, long-term
funding they provide. These benefits are significant. There is no
material difference between the carrying amount of deposit
liabilities with stated maturities and their estimated fair value
since the majority of the liabilities mature within one year.
The fair value of certificates of deposits and advances from the
Federal Home Loan Bank is estimated by discounting the future cash
flows using the current rates offered for similar deposits and
advances with the same remaining maturities. The carrying value and
estimated fair values of certificates of deposit and Federal Home
Loan Bank advances at June 30, 1995 and 1994 are as follows:
1995 1994
---- ----
Certificates of deposits:
Carrying amount $288,542,599 $251,258,850
Estimated fair value $290,144,000 $252,205,000
Advances from Federal Home Loan Bank:
Carrying amount $ 18,121,921 $ 9,587,083
Estimated fair value $ 17,852,000 $ 8,992,000
In 1994, there was no material difference between the carrying amount and
estimated fair value of the obligation to the Employee Stock Ownership
Plan because it bore interest at a variable rate equivalent to a current
market rate.
There is no material difference between the carrying amount and estimated
fair value of off-balance sheet items totaling $3,415,944 in 1995 and
$6,880,212 in 1994, which are primarily comprised of unfunded loan
commitments which are generally priced at market at the time of funding.
The Company's remaining assets and liabilities are not considered
financial instruments.
21. FINANCIAL INSTITUTIONS REFORM, RECOVERY, AND ENFORCEMENT ACT
The Financial Institutions Reform, Recovery, and Enforcement Act
(FIRREA), which was signed into law in 1989, imposed stringent capital
requirements upon savings institutions. In addition, FIRREA included
provisions for changes in the federal regulatory structure for savings
institutions including a new deposit insurance system, increased deposit
premiums and restricted investment activities with respect to
noninvestment grade corporate debt and certain other investments. FIRREA
also increased the required ratio of housing-related assets in order to
qualify as a qualified thrift lender under federal regulations.
91
40
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
_____________________________________________________
21. FINANCIAL INSTITUTIONS REFORM, RECOVERY, AND ENFORCEMENT ACT, continued
The Bank must satisfy three capital standards, as set by the Office of
Thrift Supervision ("the OTS"). These standards include a ratio of core
capital to adjusted total assets of 3.0%, a tangible capital standard
expressed as 1.5% of total adjusted assets, and a combination of core and
"supplementary" capital equal to 8.0% of risk-weighted assets. The OTS
recently finalized regulations that add an interest rate risk component
to capital requirements under certain circumstances. The Bank does not
expect that this regulation will require it to reduce its capital
materially for purposes of determining compliance with its risk-based
capital requirement. In addition, the OTS has recently adopted
regulations that impose certain restrictions on savings associations that
have a total risk-based capital ratio that is less than 8.0%, a ratio of
Tier 1 capital (or core capital) to risk-weighted assets of less than
4.0%, or a ratio of Tier 1 capital to adjusted total assets of less than
4.0% (or 3.0% if the institution receives the highest rating under the
OTS examination rating system).
The following is a reconciliation of the Bank's net worth at June 30,
1995, under generally accepted accounting principles (GAAP) to regulatory
capital requirements:
Regulatory - Unaudited (Rounded)
--------------------------------------------------------
Tangible Tier 1/Core Risk-based
capital capital capital
------- ------- -------
GAAP Capital $52,378,000 9.93% $52,378,000 9.92% $52,378,000 24.16%
Add:
General valuation
allowances - - 2,247,000 1.03
Deduct:
Goodwill 780,000 (.15) 333,000 (.06) 333,000 (.15)
Unrealized gains on
available-for-sale
securities 84,000 (.01) 84,000 (.01) 84,000 (.04)
----------- ---- ----------- ---- ----------- -----
Regulatory capital -
computed 51,514,000 9.77 51,961,000 9.85 54,208,000 25.00
Minimum capital
requirements 7,909,000 1.50 15,832,000 3.00 17,345,000 8.00
----------- ---- ----------- ---- ----------- -----
Regulatory capital -
excess $43,605,000 8.27% $36,129,000 6.85% $36,863,000 17.00%
=========== ==== =========== ==== =========== =====
92
41
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.
HERITAGE FEDERAL BANCSHARES, INC.
September 21, 1995 By: /s/ William E. Kreis
----------------------------------------
William E. Kreis
President and Chief Executive Officer
(Duly Authorized Representative)
Pursuant to the requirements of 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.
/s/ William E. Kreis September 21, 1995
- ---------------------------------------------------
William E. Kreis
President, Chief Executive Officer and Director
(Principal Executive Officer)
/s/ William F. Richmond September 21, 1995
- ---------------------------------------------------
William F. Richmond
Senior Vice President, Chief Financial
Officer and Treasurer
(Principal Financial and Accounting Officer)
/s/ Sam H. Anderson September 21, 1995
- ---------------------------------------------------
Sam H. Anderson
Chairman of the Board
(Director)
/s/ John C. Bracy September 21, 1995
- ---------------------------------------------------
John C. Bracy
(Director)
/s/ Clyde W. Craven September 21, 1995
- ---------------------------------------------------
Clyde W. Craven
(Director)
/s/ Robert C. Fox September 21, 1995
- ---------------------------------------------------
Robert C. Fox
(Director)
/s/ Thomas E. LaGuardia, Jr. September 21, 1995
- ---------------------------------------------------
Thomas E. LaGuardia, Jr.
(Director)
/s/ Richard A. Manahan September 21, 1995
- ---------------------------------------------------
Richard A. Manahan
(Director)
/s/ C. Mack Patton September 21, 1995
- ---------------------------------------------------
C. Mack Patton
(Director)