UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 1993 Commission File Number 0-12359
SECURITY CAPITAL BANCORP
(Exact name of registrant as specified in its charter)
North Carolina 56-1354694
(State or other jurisdiction of (I.R.S. employer
incorporation or organization) identification no.)
507 West Innes Street, Salisbury, North Carolina 28144
(Address of principal executive offices) (Zip code)
Registrant's telephone number, including area code:
(704) 636-3775
SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT:
Title of class
Common Stock, no par value
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 __
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]
State the aggregate market value of the voting stock held by non-affiliates
of the registrant as of March 7, 1994. Common Stock, no par value ---
$142,621,034.
Indicate the number of shares outstanding of each of the registrant's
class of common stock, as of the latest practicable date.
Class Outstanding at March 7, 1994
Common Stock, no par value 11,710,391
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Annual Report to Shareholders for the year ended
December 31, 1993, are incorporated by reference into Part II.
Portions of the Proxy Statement for the Annual Meeting of Shareholders on
April 28, 1994, are incorporated by reference into Part III.
PART I
ITEM 1 - BUSINESS
The Corporation is a bank holding company organized in 1983 and
registered with the Board of Governors of the Federal Reserve System (the
"FRB") under the Bank Holding Company Act of 1956, as amended (the "BHCA"),
and the bank holding company laws of North Carolina. The Corporation's
executive offices are located at 507 West Innes Street, Salisbury, North
Carolina, and substantially all of the operations of the Corporation are
carried on through its subsidiaries: (a) Security Bank and Trust Company, a
North Carolina commercial bank headquartered in Salisbury, North Carolina
("Security Bank"); (b) OMNIBANK, Inc., A State Savings Bank, a North Carolina
savings bank headquartered in Salisbury, North Carolina ("OMNIBANK"); (c)
Citizens Savings, Inc., SSB, a North Carolina savings bank headquartered in
Concord, North Carolina ("Citizens"); (d) Home Savings Bank, Inc., SSB, a
North Carolina savings bank headquartered in Kings Mountain, North Carolina
("Home Savings"); (e) First Cabarrus Corporation, a North Carolina corporation
that provides management information, electronic data processing and other
management services to the financial institution subsidiaries of the
Corporation ("FCC"); and, (f) Estates Development Corporation, a North
Carolina corporation which formerly engaged in real estate activities and is
now in the process of winding down and terminating those operations ("EDC").
Security Bank has one subsidiary, First Security Credit Corporation ("FSCC"),
a North Carolina corporation which operates as a consumer finance company.
Security Bank, OMNIBANK, Citizens, Home Savings, FCC, EDC and FSCC are
hereinafter collectively referred to as the "Subsidiaries." Security Bank,
OMNIBANK, Citizens and Home Savings are hereinafter collectively referred to
as the "Banking Subsidiaries," and OMNIBANK, Citizens and Home Savings are
hereinafter collectively referred to as the "Savings Banks." The Corporation
owns 100% of the outstanding common stock of the Subsidiaries other than FSCC,
and Security Bank owns 100% of the outstanding common stock of FSCC. The
Corporation's principal sources of income are cash dividends from the Banking
Subsidiaries. The major sources of operating income of the Subsidiaries are
set forth in the Consolidated Financial Statements of the Corporation
incorporated elsewhere herein.
The Merger
On June 30 1992, Omni Capital Group, Inc. ("Omni") was merged with and
into the Corporation (the "Merger"). In connection with the Merger, the
Corporation's Restated Articles of Incorporation were amended and restated to
change the Corporation's name from "First Security Financial Corporation" to
"Security Capital Bancorp," to increase the Corporation's authorized shares of
common stock (the "Common Stock") from 10,000,000 to 25,000,000, to establish
that its shares of Common Stock would have no par value, to authorize
5,000,000 shares of preferred stock with no par value per share, to establish
the minimum number of directors as 9 and the maximum number as 30, to stagger
the terms of the Board of Directors, and to make certain revisions to the
Corporation's Restated Articles of Incorporation to reflect the
characteristics of the combined company resulting from the Merger.
Prior to the Merger, Omni was a multiple savings and loan holding
company registered under the Home Owners' Loan Act, as amended, and it and its
subsidiaries (OMNIBANK, Citizens, Home Savings, FCC and EDC) were subject to
regulation by the Office of Thrift Supervision (the "OTS"). As a consequence
of the Merger, the Corporation continued as a bank holding company regulated
by the FRB and became a multiple savings and loan company regulated by the
OTS. In December of 1992, the
2
Savings Banks were converted from federally
chartered savings banks to North Carolina chartered savings banks.
Accordingly, the Corporation is no longer subject to regulation by the OTS.
The Merger was effected as a nontaxable reorganization under Section
368(a)(1)(A) of the Internal Revenue Code of 1986, as amended. It was
accounted for as a pooling-of-interests, with the result that, on the
Corporation's consolidated balance sheet: (a) the historical basis of the
assets and liabilities of the Corporation and Omni were combined as of the
Merger and carried forward at their previously recorded amounts; (b) the
shareholders' equity accounts of the Corporation and Omni were combined as of
the Merger and carried forward at their previously recorded amounts; and (c)
the income and other financial statements of the Corporation issued after the
Merger have been restated retroactively to reflect the
consolidated operations of the Corporation and Omni as if the Merger had taken
place prior to the periods covered by such financial statements.
The Subsidiaries
Security Bank was originally chartered in 1915 as the "Morris Plan
Company." In 1945, it became a North Carolina commercial bank and changed its
name to "Security Bank and Trust Company." At December 31, 1993, it operated
33 branches in 21 communities located in 10 counties in the south central
Piedmont region of North Carolina, and had total assets of approximately $385
million, insured deposit liabilities of approximately $332 million, leverage
capital of approximately $50 million, and total risk-based capital of
approximately $52 million (or 35.23% of risk-weighted assets).
OMNIBANK was originally chartered in 1919 as a North Carolina mutual
savings and loan association under the name "Home Savings and Loan
Association." In 1980 it became a federal mutual savings and loan, and in
March of 1988, it converted to a federal capital stock savings bank. In
December of 1988, it effected a corporate reorganization and became a
subsidiary of Omni (subsequently changing its name to "OMNIBANK, A Federal
Savings Bank"). On December 1, 1992, it converted from a federally-chartered
to a North Carolina chartered savings bank. At December 31, 1993, OMNIBANK
operated 3 branches in Salisbury, North Carolina, and had total assets of
approximately $230 million, insured deposit liabilities of approximately $184
million, leverage capital of approximately $30 million, and total risk-based
capital of approximately $31 million (or 24.33% of risk-weighted assets).
Citizens was originally chartered in 1906 as a North Carolina mutual
savings and loan association. In December of 1988, it converted to a federal
capital stock savings bank through a merger conversion transaction with Omni.
On December 1, 1992, it converted from a federally-chartered to a North
Carolina chartered savings bank. At December 31, 1993, Citizens operated 5
branches in Concord, North Carolina and surrounding areas, and had total
assets of approximately $212 million, insured deposit liabilities of
approximately $189 million, leverage capital of approximately $21 million, and
total risk-based capital of approximately $22 million (or 19.47% of risk-
weighted assets).
Home Savings was originally chartered in 1923 as a North Carolina mutual
savings and loan association, and, in 1981, it became a federal mutual savings
and loan association. In 1989, it converted into a federal capital stock
savings bank through a merger conversion transaction with Omni. On December
1, 1992, it converted from a federally-chartered to a North Carolina chartered
savings bank. At December 31, 1993, Home Savings operated 3 branches in Kings
Mountain, North Carolina and surrounding areas, and had total assets of
approximately $104 million, insured deposit liabilities of approximately $94
million, leverage capital of approximately $8 million, and total risk-based
capital of approximately $9 million (or 17.76% of risk-weighted assets).
3
In May 1993, the Corporation consolidated eight branch locations into
four banking offices. These "superbranches" are a new concept in North
Carolina since the 4 remaining facilities actually provide retail operations
for two separately chartered financial institution subsidiaries in each
location.
FCC is a North Carolina corporation. It provides management, electronic
data processing, and other services to the Corporation and the other
Subsidiaries.
FSCC is a North Carolina corporation. As a consumer finance company, it
provides small consumer loans through its two offices in Kannapolis and
Concord, North Carolina.
EDC is a North Carolina corporation and was formerly in the business of
providing real estate appraisal services and engaging in real estate
development, building and sales. It is in the process of winding down and
terminating these activities in compliance with FRB regulations.
Business Activities
Through one or more of the Banking Subsidiaries and the 40 banking
offices they operate in 28 communities located in eleven counties in the south
central and western Piedmont regions of North Carolina, the Corporation offers
numerous banking services, including accepting time and demand deposits,
making secured and unsecured business and personal loans, making mortgage
loans (secured primarily by one-to-four family residential properties),
renting safe deposit boxes, sending and receiving wire transfers, and
performing trust functions for corporations, pension and other employee
benefit plans, and individuals. Additionally, consumer finance, insurance and
securities brokerage services, and other services relating to financial
management, are offered through one or more of the Subsidiaries. Ranked by
total assets, the Corporation is the 10th largest bank holding company
headquartered in North Carolina.
The economy in the geographic areas served by the Corporation has been
influenced positively by the growth of Charlotte, North Carolina, one of the
fastest growing cities in the Southeast and North Carolina's largest city.
Charlotte is located in Mecklenburg County. A substantial portion of the
Banking Subsidiaries' banking offices are located in Mecklenburg County, in
other counties included in the Charlotte Standard Metropolitan Statistical
Area (the "Charlotte SMSA"), or in counties adjacent to, or within a radius of
30 miles of, the Charlotte SMSA. At December 31, 1993, the economic
conditions in this primary market area were considered to be moderate to good,
with more favorable unemployment rates and other key economic indicators than
national averages.
Vigorous competition exists in all major market areas served by the
Banking Subsidiaries. The Banking Subsidiaries face direct competition for
deposits not only from commercial banks, thrift institutions and credit
unions, but from other businesses such as securities brokerage firms and
mutual funds. Particularly in times of high interest rates, the Banking
Subsidiaries encounter additional significant competition for depositors'
funds from short-term money market securities and other corporate and
government securities. The Banking Subsidiaries' competition for loans and
similar services come from commercial banks, thrift institutions, credit
unions, leasing companies, finance companies, insurance companies, other
institutional lenders, and a variety of financial services and advisory
companies. The Banking Subsidiaries seek to meet the competition of these
other companies, many of which are larger and have greater resources than the
Corporation, through offering competitive interest rates, focusing upon the
efficiency and quality of their services in meeting the banking needs of their
customers, and, where appropriate, expanding their presence in attractive
markets through branching or acquisitions.
4
Lending Activities
General. The principal lending activities of Security Bank have been
the making of installment and other consumer loans, real estate mortgage
loans, and commercial, financial and agricultural loans. The Savings Banks'
principal activity has been the origination of conventional mortgage loans for
the purpose of constructing, financing or refinancing one-to-four family
residential properties. To a lesser extent, the Savings Banks also make
commercial real estate loans (which include loans secured by multi-family and
other commercial real properties), other commercial loans and consumer loans.
As of December 31, 1993, approximately $320 million, or 67.59%, of the Banking
Subsidiaries' total loans consisted of loans secured principally by first
mortgages on one-to-four family residential properties. As of that same date,
approximately $17.5 million, or 3.69%, of the Banking Subsidiaries' total
loans were secured by multi-family properties and approximately $47.3 million,
or 10.00%, were secured by other commercial real property. Approximately $62
million, or 13.17%, of the Banking Subsidiaries' loans were installment and
other consumer loans, and approximately $65 million, or 13.68%, were
commercial, financial and agricultural loans, as of December 31, 1993.
Federal regulations limit the aggregate amount of loans a financial
institution may make to a single borrower. At December 31, 1993, none of the
Banking Subsidiaries had loans to a single borrower that exceeded these
limits. See "Regulation."
Loan Portfolio Analysis. Set forth below is selected data relating to
the composition of the Banking Subsidiaries' loan portfolio, excluding loans
held for sale, by type of loan on the dates indicated:
5
At December 31,
1993 1992 1991 1990 1989
Amount % Amount % Amount % Amount % Amount %
(Dollars in Thousands)
Real estate mortgage $338,562 71.55 $361,935 70.91 $379,574 68.85 $385,753 66.15 $350,531 64.11
Real estate construction 10,085 2.13 11,215 2.20 15,653 2.84 16,996 2.91 13,205 2.41
Commercial, financial and
agricultural 64,739 13.68 68,598 13.44 73,794 13.38 86,134 14.77 89,432 16.35
Installment (consumer) 62,341 13.17 70,909 13.89 84,318 15.29 96,431 16.54 95,012 17.38
Total loans 475,727 512,657 553,339 585,314 548,180
Less: unearned income (2,698) ( .57) (2,545) (.50) (2,419) (.44) (2,697) (.46) (1,976) (.36)
Plus: Premiums 173 .04 317 .06 418 .08 530 .09 584 .11
Loans, net: $473,202 100.00 $510,429 100.00 $551,338 100.00 $583,147 100.00 $546,788 100.00
6
Residential Mortgage Loans. The primary lending activity of the Savings
Banks has been the granting of conventional loans to enable borrowers to
purchase existing homes or refinance existing mortgages. To a lesser extent,
Security Bank also makes residential mortgage loans. Mortgage loans made by
the Banking Subsidiaries are generally long-term loans, amortized on a monthly
basis, with principal and interest due each month. The Banking Subsidiaries'
lending policies limit the maximum loan-to-value ratio on residential mortgage
loans to 95% of the lesser of the appraised value or purchase price, with the
condition that private mortgage insurance generally be required on any home
loans with loan-to-value ratios in excess of 80%. The Banking Subsidiaries
require mortgage title insurance on most mortgage loans and hazard insurance
generally in the amount of the loan. The contractual loan payment period for
residential loans typically ranges from 15 to 30 years. Borrowers may
refinance or prepay loans at their option, typically without penalty. The
Banking Subsidiaries' experience indicates that real estate loans remain
outstanding for significantly shorter periods than their contractual terms.
The thrift and mortgage banking industries have generally used a 7 to 10 year
average loan life as an approximation in calculations calling for prepayment
assumptions. Management believes that the Banking Subsidiaries' loan
prepayment experience has been somewhat shorter than the industry approximated
12-year average loan life assumption, due to the high rate of refinancing and
turnover in the housing markets they serve.
The Banking Subsidiaries currently offer adjustable rate mortgage loans
generally tied to the one year U.S. Treasury security yield or a published
prime lending rate. The interest rates on most of these mortgages are
adjustable once a year with limitations on adjustments of one or two percent
per adjustment period and five to six percent over the life of the loan.
Although adjustable rate mortgage loans allow the Banking Subsidiaries to
increase the sensitivity of their asset bases to changes in interest rates,
the extent of this interest sensitivity is limited by the annual and lifetime
interest rate ceilings contained in adjustable rate mortgage loans. The terms
of such loans may also increase the likelihood of delinquencies during periods
of high interest rates. Adjustable rate residential mortgage loans amounted
to 51.79% of the total loan portfolio of the Banking Subsidiaries at December
31, 1993.
Commercial Real Estate Loans. The Savings Banks provide commercial real
estate loans, including loans secured by multi-family dwellings with more than
four units and other commercial real property. From time to time, Security
Bank also makes these types of loans. These loans constituted approximately
$64.8 million, or 13.69%, of the Banking Subsidiaries' loan portfolio at
December 31, 1993. These loans typically are secured by improved real estate
located in North Carolina. Commercial real estate loans customarily are made
in amounts up to 80% of the appraised value of the property and generally have
terms of up to 15 years. Interest rates are tied generally to the one, two,
three and five-year U.S. Treasury security yield or a published prime lending
rate.
Because of their generally shorter terms and higher interest rates,
commercial real estate loans, such as those made by the Banking Subsidiaries,
are helpful in maintaining a profitable spread between the Banking
Subsidiaries' average loan yields and their cost of funds. Traditionally,
such loans have been regarded as posing significantly greater risk of default
than residential mortgage loans. Such loans generally are substantially
larger than single-family residential mortgage loans, and repayment of the
loan generally depends on cash flow generated by the property. Because the
payment experience on loans secured by such property is often dependent upon
successful operation or management of the property, repayment of the loan may
be subject to a greater extent to adverse conditions in the real estate market
or the economy than generally is the case with one-to-four family residential
mortgage loans. The commercial real estate business is cyclical and subject
to downturns, overbuilding and local economic conditions. The Banking
Subsidiaries seek to limit these risks in a variety of ways, including, among
others, limiting the size of their commercial and multi-family real estate
loans, generally limiting such
7
loans to a maximum loan-to-value ratio of 80%
based on the lesser of the purchase price or the appraised value of the
property and generally lending on property located within their market areas.
Commercial, Financial, and Agricultural Loans. Security Bank and, to a
lesser extent, the Savings Banks also make commercial, financial and
agricultural loans primarily to small and medium-sized companies for expansion
and renovation, working capital needs, equipment purchases and farming
operations. Generally, loans are made at adjustable interest rates with terms
of one to five years. These loans constituted approximately $18.7 million, or
3.95%, of the Banking Subsidiaries' loan portfolio at December 31, 1993.
Interest rates are tied generally to the one, two, three or five-year U.S.
Treasury securities yield or a published prime lending rate. Generally, these
commercial, financial and agricultural loans are made to borrowers located in
North Carolina.
As with commercial real estate loans, commercial, financial and
agricultural loans are helpful in maintaining a profitable spread between the
Banking Subsidiaries' average loan yields and their cost of funds because of
their shorter term and higher interest rates. These loans have a higher
degree of risk than residential mortgage loans because they are typically made
on the basis of the borrower's ability to make repayment from the cash flow of
its business and are either unsecured or secured by business assets, such as
accounts receivable, equipment and inventory. As a result, the availability
of funds for the repayment of commercial, financial and agricultural loans may
be substantially dependent on the success of the business itself. The Banking
Subsidiaries seek to limit these risks by maintaining close contact with the
borrower, obtaining financial statements on a regular basis and determining
that the borrower is in compliance with the terms of the loan agreement.
Installment and Other Consumer Loans. At December 31, 1993, the
Corporation's installment and other consumer loans portfolio aggregated
approximately $62.3 million, or 13.17%, of the Corporation's total loan
portfolio. The consumer loans made by the Banking Subsidiaries include line
of credit loans to individuals, loans on automobiles, boats, recreational
vehicles and other consumer goods and unsecured loans. Generally, consumer
loans have up to five-year terms and may have either adjustable or fixed
interest rates or may be in the form of credit lines with adjustable interest
rates. The Banking Subsidiaries normally limit the loan-to-value ratios on
secured consumer loans to 85%, depending on the type of collateral securing
the loan. Consumer loans typically are either secured by collateral that is
rapidly depreciating or has greater recovery risks, such as automobiles, or
are unsecured. Therefore, these loans generally carry a greater degree of
credit risk than residential mortgage loans. Approximately $13 million, or
20.93%, of the Banking Subsidiaries' consumer loans as of December 31, 1993
were unsecured.
Loan Maturity Schedule. The following table sets forth certain
information at December 31, 1993 regarding the dollar amount of real estate
construction loans and commercial, financial and agricultural loans maturing
in the Banking Subsidiaries' loan portfolio. Demand and line of credit loans
having no stated schedule of repayments and no stated maturity, and
overdrafts, are reported as due in one year or less.
8
Due In 1 Due After 1
Year or Less Through 5 Due After 5
After Years After Years After
December 31, 1993 December 31, 1993 December 31, 1993 Total
(Dollars in Thousands)
Real estate
construction loans $ 8,804 $ 1,281 $ --- $10,085
Commercial, financial
and agricultural
loans 27,847 10,544 26,348 64,739
Total $36,651 $11,825 $26,348 $74,824
Predetermined and Adjustable Interest Rates Schedule. The following
table sets forth the dollar amount of all real estate construction loans and
commercial, financial and agricultural loans of the Banking Subsidiaries due
after one year from December 31, 1993 that have predetermined interest rates
or have floating or adjustable interest rates:
Predetermined Floating
Rates Adjustable Rates
(Dollars in Thousands)
Real estate construction $ --- $ 1,281
Commercial, financial and agricultural 5,915 30,977
Total $5,915 $32,258
Loan Solicitation and Processing. The Banking Subsidiaries derive their
loan originations from a number of sources. Residential loan originations can
be attributed to real estate broker referrals, mortgage banking relationships,
direct solicitation by the loan officers of the Banking Subsidiaries, current
depositors and borrowers, builders, attorneys, walk-in customers,
correspondent loan originators and, in some instances, other lenders.
Commercial real estate loans, consumer loans, and commercial, financial and
agricultural originations result from many of the same sources. Upon receipt
of a loan application from a prospective borrower, a credit report and
verifications are ordered to verify specific information relating to the loan
applicant's employment, income and credit standing. An appraisal of any real
estate intended to secure a proposed loan is undertaken by in-house or
independent appraisers approved by the applicable Banking Subsidiary.
The Corporation and the Banking Subsidiaries have established certain
general policies for loan authorization procedures. Loans up to limits
established by each Banking Subsidiary's Board of Directors may be made by the
applicable loan officers. Such loans are reviewed by the Banking
Subsidiary's management and/or Loan Committee. Loans in excess of these limits
must be approved by Loan Administration and reviewed by the Loan Committee
of the relevant Banking Subsidiary. Loans in excess of a pre-established
level are reviewed or approved by the Loan Committee of the relevant
Banking Subsidiary and/or the General Loan Committee of the Corporation.
9
Loan applicants promptly are notified of the decision by a letter or, in
some instances, orally. If a loan, other than consumer loans or certain loans
of lesser amounts, is approved, a commitment letter will specify the terms and
conditions of the proposed loan, including the amount of the loan, interest
rate, amortization term, a brief description of the required collateral (if a
secured loan is to be made) and required insurance coverage. The borrower
must provide proof of fire and casualty insurance on any real property serving
as collateral, which insurance must be maintained during the full term of the
loan. In addition, the Banking Subsidiaries generally require title insurance
on all loans secured by real property. Loan rates are normally locked in for
a 60-day period.
Loan Commitments. In the normal course of business, the Banking
Subsidiaries have various commitments to extend credit which are not reflected
in the Corporation's consolidated financial statements. At December 31, 1993,
outstanding loan commitments approximated $9 million (of which approximately
$6 million were fixed rate and $3 million were variable rate), preapproved but
unused lines of credit for loans totaled $91 million and standby letters of
credit aggregated $268,000. These amounts represent the Corporation's
exposure to credit risk for these off-balance sheet financial instruments,
and, in the opinion of management, represent no more than the normal lending
risk that the Banking Subsidiaries commit to their borrowers. If these
commitments are drawn, the Banking Subsidiaries will obtain collateral if it
is deemed necessary based on management's credit evaluation of the borrower.
Collateral obtained varies but may include accounts receivable, inventory, and
commercial or residential real estate. Management expects that these
commitments can be funded through normal operations.
Loan Activity. Loan originations of the Banking Subsidiaries are
primarily generated by their own lending functions, as opposed to purchasing
loans from other financial institutions. In this manner, the Banking
Subsidiaries collect for themselves the loan origination fees paid by the
borrowers. The Savings Banks from time to time have purchased adjustable rate
mortgage loans and fixed rate mortgage-backed securities in the secondary
market.
The Banking Subsidiaries typically underwrite fixed rate mortgage loans
according to Federal Home Loan Mortgage Corporation ("FHLMC") or Federal
National Mortgage Association ("FNMA") guidelines, so that the loans qualify
for sale in the secondary mortgage market or exchange for participation
certificates. Such loans may be considered by management to be held for sale
at origination based on their interest rates and terms to maturity, and thus
such loans are carried at the lower of cost or market as determined by
outstanding commitments from investors or current investor yield requirements
calculated on the aggregate loan basis. Gains and losses on loan sales are
recognized if at the time of sale the average interest rate on the loans sold,
adjusted for servicing costs, differs from the agreed yield to the buyer. Any
excess servicing fee is deferred and is amortized using a level yield
method over the contractual life of such loans. Sales of loans in 1993
and 1992 resulted in no such excess servicing fees. During 1993 and 1992,
the Banking Subsidiaries sold, through OMNIBANK, approximately $86 million
and $85 million, respectively, of fixed rate residential mortgage loans
to generate liquidity and to meet loan demand. In connection with such
sales, OMNIBANK generally retains the servicing of the loans (i.e.,
collection of principal and interest payments), for which it generally
receives an average fee payable monthly of .25% to .375% per annum of the
unpaid balance of each loan. As of December 31, 1993, the Banking
Subsidiaries were servicing loans for others aggregating approximately $203
million. The sale and subsequent servicing of residential mortgage
loans have been, and will continue to be, a significant source of
other income for the Corporation. The Corporation's gains on sales of loans,
however, are largely dependent upon prevailing interest rates, which influence
residential loan borrowers to refinance their loans at more favorable interest
rates. As a result, this source of other income could be significantly
affected by such interest rates in future periods. Gains on sales of loans
totaled $1,384,000, $738,000
10
and $927,000 for 1993, 1992, and 1991,
respectively, and loan servicing fees totaled $604,000, $563,000 and $548,000
for 1993, 1992, and 1991, respectively.
Loan Origination and Other Fees. In addition to interest earned on
loans and fees for making loan commitments, the Banking Subsidiaries receive
loan origination fees for originating mortgage loans. These origination fees
generally are calculated as a percentage of the principal amount of the
mortgage loan and are charged to the borrower for creation of the loan. Non-
refundable fees and certain related costs associated with originating or
acquiring loans generally are recognized over the life of the related loans as
an adjustment to interest income. Deferred net fees and discounts associated
with the mortgage loans held by the Banking Subsidiaries are included as
components of the carrying value of the loan and are being amortized into
interest income over the lives of the related loans by a method that
approximates level yield.
The Banking Subsidiaries also receive other fees and charges relating to
existing loans, including late charges, fees collected in connection with a
change in borrower, and insurance commissions. These fees and charges for the
years ended December 31, 1993, 1992, and 1991 totaled approximately $792,000,
$788,000 and $739,000, respectively.
Non-Performing Assets. The Banking Subsidiaries' collection procedures
provide that when a loan is 30 days delinquent, the borrower will be contacted
by mail and payment requested. If the delinquency continues, subsequent
efforts will be made to contact the delinquent borrower. In certain limited
instances, the Banking Subsidiary may modify the loan or grant a limited
moratorium on loan payments to enable the borrower to reorganize his financial
affairs. If the loan continues in a delinquent status for at least 90 days,
the Banking Subsidiary generally will initiate foreclosure or other collection
proceedings. If the loan is unsecured, it is generally charged-off after it
is 120 days delinquent. If a loan is secured, upon a foreclosure or other
action seizing the collateral, or the determination by management that the
collateral has been in substance foreclosed, the collateral property is
appraised, and is then classified as real estate owned and is recorded at the
lower of cost or fair value, less the estimated costs to sell the property.
Generally, such properties are appraised annually to update the fair value
estimates made by management.
The following table presents information on nonperforming assets,
including non-accrual loans, accruing loans that are 90 or more days past due,
real estate owned and restructured loans.
At December 31,
1993 1992 1991 1990 1989
(Dollars in Thousands)
Non-accrual loans $1,573 $2,515 $1,750 $2,438 $ 974
Accruing loans 90 days or more
past due 420 1,380 2,139 2,942 1,784
Real estate owned 951 983 998 1,894 681
Restructured loans 186 479 1,700 - -
Total $3,130 $5,357 $6,587 $7,274 $3,439
Non-performing assets as
a percentage of
total assets .34% .59% .72% .80% .40%
Management of the Banking Subsidiaries periodically evaluates the
collectibility of the principal and interest on these loans. When a loan
becomes delinquent by at least 90 days, management determines whether interest
should continue to accrue by considering various factors, including the
current financial
11
position of the borrower, the value of the underlying
collateral, the existence and amount of coverage of any private mortgage
insurance, and the date that the last payment or partial payment was received.
If collectibility of the outstanding principal balance and the accrued
interest appears certain based on a review of the aforementioned factors, and
the loan is considered by management to be in the process of collection,
management will continue to accrue interest on these loans. Loans are placed
on nonaccrual status when management determines uncertainty of interest
collection exists but payment of principal is not impaired. When uncertainty
of collection of principal exists, the asset is written down to its net
realizable value. Interest income foregone on nonaccrual loans and
restructured loans for each of the years in the three-year period ended
December 31, 1993, was not significant.
Asset Classification. Regulations governing insured financial
institutions require those institutions to classify their assets on a regular
basis. In addition, in connection with examinations of insured institutions,
federal and state examiners have authority to identify problem assets and, if
appropriate, classify them. If an institution does not agree with an
examiner's classification of an asset, it may appeal this determination to the
appropriate regulator. Problem assets may be classified as "substandard,"
"doubtful" or "loss." An asset will be classified as "substandard" if it is
determined to involve a distinct possibility that the insured institution may
sustain some loss if deficiencies associated with the loan, such as inadequate
documentation or credit weakness, are not corrected. An asset will be
classified as "doubtful" if full collection is highly questionable or
improbable. An asset will be classified as "loss" if it is considered as
uncollectible, even if a partial recovery may be expected in the future.
There is also a "special mention" category which includes assets that
currently do not expose an insured institution to a sufficient degree of
risk to warrant classification but that do possess credit deficiencies or
potential weaknesses deserving management's close attention. An institution
must establish general allowances for loan losses for assets classified
as substandard or doubtful. If an asset or portion thereof is
classified as loss, the insured institution must either establish specific
allowances for loan losses in the amount of 100% of the portion of the
asset classified loss, or charge off such amount.
The aggregate amounts of classified assets (which included non-
performing assets) of the Banking Subsidiaries at December 31, 1993 were as
follows:
Security Bank OMNIBANK Citizens Home Savings EDC
(Dollars in Thousands)
Substandard assets $1,904 $1,023 $5,175 $ 2,678 -
Doubtful assets - - - - -
Loss assets - - - - -
Restructured loans - 186 - - -
Real estate owned - 186 - 623 $142
Loans classified for regulatory purposes as loss, doubtful, substandard
or special mention that have not been disclosed in the nonperforming asset
table under the section "Nonperforming Assets" do not represent or result from
trends or uncertainties which management reasonably expects will materially
impact future operating results, liquidity, or capital resources, or 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.
Allowances for Loan Losses. The Corporation recognizes that the Banking
Subsidiaries will experience credit losses in making loans 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 and, in the case of
a secured loan, the quality of the security for the loan.
12
Management's policy to maintain adequate reserves is based on, among
other things, estimates of historical loan loss experience, loan growth, the
composition and quality of each Banking Subsidiary's overall loan portfolio
and off-balance sheet commitments, evaluations of current and anticipated
economic conditions, and collateral values. Management evaluates the carrying
value of loans periodically and specific allowances are made for individual
loans when the ultimate collection is considered questionable by management
after reviewing the current status of loans that are contractually past due
and taking into account the fair value of the collateral of the loan. In
addition, management of the Banking Subsidiaries utilizes the aforementioned
regulatory classification system to evaluate the adequacy of the allowance for
loan losses for the remaining portfolio. A percentage allocation is made to
the allowance for loan losses based on the various loan classifications, so
that loans with higher risk are assigned a larger allocation of allowance for
loan losses. Also taken into consideration are the nature and extent of off-
balance sheet financial instruments, including loan commitments and
preapproved but unused lines of credit. During each of the years in the
three-year period ended December 31, 1993 the Corporation had no realized
credit losses from such off-balance sheet financial instruments.
The Banking Subsidiaries grant primarily commercial, real estate, and
installment loans throughout their market areas, which consists primarily of
the south central and western Piedmont regions of North Carolina. The Banking
Subsidiaries real estate loan portfolios can be affected by the condition of
the local real estate markets and their commercial and installment loan
portfolios can be affected by local economic conditions.
While management uses the best information available to make
evaluations, future adjustments to the allowance may be necessary if
conditions differ substantially from assumptions used in making such
evaluations. In addition, various regulatory agencies, as an integral part of
their examination process, periodically review the Banking Subsidiaries'
allowances for loan losses and losses on real estate owned. Such agencies may
require the Banking Subsidiaries to adjust the allowance based on their
judgments about information available to them at the time of their
examinations.
13
The following is a reconciliation of the allowance for loan losses for
the years shown:
Years Ended December 31,
1993 1992 1991 1990 1989
(Dollars in Thousands)
Balance, at the beginning
of the year $6,909 $5,429 $4,732 $4,620 $4,230
Charge-offs:
Real estate
mortgage loans (283) (118) (167) (398) (397)
Commercial, financial
and agricultural loans ( 33) (492) (821) (749) (374)
Installment (consumer)
loans (416) (414) (700) (1,169) (249)
Recoveries:
Real estate
mortgage loans 165 69 119 56 267
Commercial, financial
and agricultural loans 46 267 154 338 90
Installment (consumer)
loans 186 320 188 414 90
Net charge-offs $(335) (368) (1,227) (1,508) (573)
Provision for loan
losses $ 653 1,848 1,924 1,620 963
Balance, at the end of
the year $7,227 $6,909 $5,429 $4,732 $4,620
Ratio of net
charge-offs
during the year to
average loans
outstanding during
the year .07% .07% .22% .27% .11%
The following table presents an allocation of the allowance for loan
losses by the categories indicated and the percentage that loans in each
category bear to the Banking Subsidiaries' total loans. This allocation is
used by management to assist in its evaluation of the Banking Subsidiaries'
loan portfolio. These allocations are merely estimates and are subject to
revisions as conditions change. Based upon historical loss experience and the
Banking Subsidiaries' assessment of their loan portfolios, the Banking
Subsidiaries' allowances for loan losses have been allocated to the categories
of loans indicated. Specific allocations for these loans are based primarily
on the creditworthiness of each borrower. In addition, general allocations
are also made to each category based upon, among other things, the impact of
current and future economic conditions on the loan portfolio taken as a whole.
Losses on loans made to consumers are reasonably predictable based on prior
loss experience and a review of current economic conditions.
At December 31,
1993 % 1992 % 1991 % 1990 % 1989 %
(Dollars in Thousands)
Real estate
mortgage loans $4,579 71.17 $4,118 70.60 $2,856 68.59 $3,380 65.90 $3,181 63.95
Real estate
construction loans - 2.12 - 2.19 - 2.83 - 2.90 - 2.41
Commercial, financial
and agricultural loans 1,242 13.61 961 13.38 1,090 13.34 631 14.72 679 16.31
Installment
(consumer) loans
1,406 13.10 1,830 13.83 1,483 15.24 721 16.48 760 17.33
$ 7,227 100.00% $6,909 100.00% $5,429 100.00% $4,732 100.00% $4,620 100.00%
14
Non-Banking Subsidiaries
The Corporation has two direct Subsidiaries, and one indirect
Subsidiary, which are not financial institutions. FCC provides management,
electronic data processing and other services to the Corporation and the other
Subsidiaries. At December 31, 1993, FCC had assets of approximately $4.3
million and liabilities of approximately $3.8 million. Prior to the Merger,
EDC engaged in real estate acquisition, development and construction and
provided real estate appraisal services to Omni and its subsidiaries. At
December 31, 1993, EDC had assets of approximately $929,000 and liabilities of
approximately $21,000. FSCC is a subsidiary of Security Bank and operates as
a consumer finance company. At December 31, 1993, FSCC had assets of
approximately $2.2 million, including a consumer loan portfolio of
approximately $2 million, and total liabilities of approximately $2 million.
See "Regulation" below.
Investment Activities
Interest and dividends on investments historically have provided the
Corporation and its Subsidiaries an additional substantial source of income.
At December 31, 1993, the Corporation's investment securities portfolio
aggregated approximately $368.4 million and consisted primarily of United
States Government obligations, with lesser amounts of mortgage-backed
securities, state and municipal obligations and federal agency obligations.
Purchases of securities are funded either through the sale or maturity of
other securities or from the cash flow arising in the ordinary course of
business.
The Banking Subsidiaries have authority to invest in various types of
liquid assets, which include certain time deposits, bank acceptances,
specified U.S. Government securities, government agency securities, and state
and municipal obligations. Subject to various regulatory restrictions, the
Banking Subsidiaries may also invest a portion of their assets in commercial
paper, corporate debt securities and in mutual funds whose assets conform to
the investments that they are otherwise authorized to make directly. The
Banking Subsidiaries are required to maintain liquid assets at minimum levels,
which are adjusted by financial institution regulators from time to time. See
"Regulation." The Banking Subsidiaries traditionally have maintained levels
of liquidity above that required by federal regulations. In addition to
providing for regulatory liquidity, the Banking Subsidiaries maintain
investments to employ funds not currently required for their various lending
activities.
Subject to the investment policy of the Corporation's Board of
Directors, members of senior management normally make investment decisions.
Management determines the maturities and mix of investments in the Banking
Subsidiaries' investment portfolios based on liquidity needs and legal
liquidity restrictions. Maturities are also determined based on general and
anticipated market trends. The Corporation's investment strategy has been,
and remains, to invest principally in U.S. Government securities, government
agency obligations, and certain types of state and municipal obligations with
maturities of seven years or less. These high grade investments generally
pose little or no credit risks and are easily liquidated if necessary.
Investments in these types of securities and obligations amounted to 97% of
the Corporation's investment portfolio at December 31, 1993. Management
generally considers government and agency obligations that carry lower yields
to be preferable to higher yielding corporate and other securities that
carry greater credit risks. Furthermore, management recognizes the
Corporation's limitations in being able to evaluate and monitor many
corporate and other securities on a timely basis. Management believes that
this investment strategy will provide stable earnings and maintain asset
quality, although rates of return will be more moderate than those that
could be obtained with riskier securities. The Corporation does not
engage in hedging or other high risk investment strategies.
15
At December 31, 1993, the Corporation's investment securities portfolio
had gross unrealized gains of $7.2 million and gross unrealized losses of
$528,000, compared to gross unrealized gains of $9.3 million and gross
unrealized losses of $549,000 at December 31, 1992. The net unrealized gain
of $6.7 million at December 31, 1993 reflects the fact that the weighted
average yield of the Corporation's investment securities portfolio exceeds the
current yields being offered in the bond market for securities with similar
features. Such amounts generally do not reflect possible future realized
gains for the investment securities portfolio. At December 31, 1993, the
Corporation had the intent to hold all investment securities in the investment
portfolio as long-term investments and had the ability to hold them to
maturity. The level of unrealized gains will change in future periods as
yields being offered in the bond market for securities with similar features
fluctuate.
During the year ended December 31, 1993, sales or issuer calls
of investment securities totalled $5.86 million. During the year ended
December 31, 1992, sales of investment securities were insignificant.
During the year ended December 31, 1991, sales of investment securities
totaled $56.15 million. These sales occurred in response to an unforeseen
decline in interest rates during 1991.
The following table presents the book value and the estimated fair value
of the various components of the investment securities portfolio, excluding
investment securities available for sale, at December 31, 1993, 1992, and
1991:
At December 31,
1993 1992 1991
(Dollars in Thousands)
Estimated Estimated Estimated
Book Fair Book Fair Book Fair
Value Value Value Value Value Value
U.S. Government
obligations $305,180 $310,759 $292,848 $300,115 $247,062 $256,583
U.S. Government
agency
obligations 40,409 40,368 9,966 9,996 1,998 2,083
Mortgage-backed
securities 12,676 13,135 19,298 19,769 20,162 20,650
State and
municipal
obligations 10,022 10,698 15,592 16,570 15,601 16,788
Other 66 86 900 900 917 917
Total: $368,353 $375,046 $338,604 $347,350 $285,740 $297,021
16
The following table sets forth the maturities of the components of the
aggregate investment securities portfolio of the Corporation at
December 31, 1993, and the weighted average yields of such securities:
After 1 but After 5 but
1 Year or Less Before 5 Years Before 10 Years After 10 Years
Amount Yield Amount Yield Amount Yield Amount Yield
(Dollars in Thousands)
U.S. Government
obligations $94,356 7.36% $210,824 6.59% - - - -
U.S. Government
agency
obligations 500 9.60 34,947 5.00 $4,962 6.25% - -
Mortgage-backed
securities - - - - 3,335 8.12 $9,341 7.66%
State and
municipal
obligations 1,002 8.10 9,020 8.02 - - - -
Other
investments - - - - - - 66 -
Total investment $95,858 7.38% $254,791 6.42% $8,297 7.00% $9,407 7.66%
securities
17
Sources of Funds
General Sources of Funds. Core deposits are the largest and most
important source of the Banking Subsidiaries' funds for lending and other
investment purposes. In addition to deposits, the Banking Subsidiaries
receive funds from interest payments, loan principal repayments, advances
(loans) from the FHLB ("FHLB Advances"), other borrowings and operations.
Loan repayments and interest payments are a relatively stable source of funds,
while deposit inflows and outflows are significantly influenced by general
interest rates and money market conditions. The Savings Banks generally use
borrowings on a short-term basis to compensate for reductions in the
availability of funds from other sources. Borrowings may also be used on a
longer-term basis for general business purposes. Historically, the Banking
Subsidiaries have not relied upon significant amounts of borrowings to fund
loan and asset growth.
Deposits. The Banking Subsidiaries attract consumer and commercial
deposits principally from within their respective primary market areas through
the offering of a broad selection of deposit instruments, including (depending
upon the Banking Subsidiary), demand deposits, NOW accounts, money market
accounts, regular and bonus savings accounts, money market certificates, other
time deposits (including negotiated "jumbo" and "mini jumbo" certificates in
denominations of at least $100,000 and $50,000, respectively), and individual
retirement plans. Deposit account terms vary, with the principal differences
being the minimum balance required, the time period that the funds must remain
on deposit and the interest rate. The Banking Subsidiaries generally do not
obtain funds through brokers, and they do not solicit funds outside of North
Carolina. The Banking Subsidiaries' aggregate deposits increased
approximately $10.82 million in 1993, decreased approximately $1.51 million in
1992, and increased approximately $7.21 million in 1991.
The following table contains information pertaining to the average
amount of and the average rate paid on each of the following deposit
categories for the periods indicated:
Year Ending Year Ending Year Ending
December 31, 1993 December 31, 1992 December 31, 1991
Average Average Average
Average Rate Average Rate Average Rate
Deposit Category Balance Paid Balance Paid Balance Paid
Demand deposits - (Dollars in Thousands)
non-interest bearing $ 68,689 - $ 63,989 - $57,481 -
Demand deposits -
interest bearing 149,668 2.33% 149,244 3.09% 142,770 4.52%
Savings deposits 152,378 3.00 139,356 3.77 117,747 5.48
Time deposits 407,851 4.71 423,029 5.63 461,023 7.16
Total $778,586 3.84% $775,618 4.73% $779,021 6.36%
The following table sets forth the amount and maturities of jumbo
certificates of deposit (certificates of deposit of $100,000 or more) in the
Banking Subsidiaries at December 31, 1993:
(Dollars in Thousands)
Maturing in 3 months or less $17,616
Maturing after 3 but less than 6 months 12,734
Maturing after 6 but less than 12 months 13,222
Maturing after 12 months 19,440
Total $63,012
Borrowings. In addition to the deposits described above, the Savings
Banks rely upon FHLB Advances as their principal borrowing source, to
supplement their supply of lendable funds and to secure
18
funds for other
operational purposes, such as meeting deposit withdrawals and other short-term
liquidity requirements. The FHLB of Atlanta functions in a central reserve
capacity providing credit for thrift and other financial institutions. FHLB
Advances may be on a secured or unsecured basis depending upon a number of
factors, including the purpose for which the funds are being borrowed and
existing advances outstanding. At December 31, 1993, OMNIBANK had FHLB
Advances totaling $8 million, at rates varying from 8.15% to 9.65%, secured by
certain of its real estate loans and all of its FHLB of Atlanta stock. The
Savings Banks have also entered into blanket collateral agreements with the
FHLB of Atlanta whereby they maintain, free of other encumbrances, "qualifying
mortgages" with unpaid principal balances at least equal to, when discounted
at 65% of the unpaid principal balance, 100% of the total FHLB Advances. The
Savings Banks also have unused lines of credit with the FHLB of Atlanta
totaling approximately $60 million at December 31, 1993. If drawn, the
advanced funds would be at market rates of interest and would be
collateralized by the aforementioned blanket collateral agreements, all stock
of the borrowing subsidiary in the FHLB, and any other collateral deemed
necessary by the FHLB. See Note 7 of Notes To Consolidated Financial
Statements for information as to interest rates and maturities for these FHLB
Advances. The other Banking Subsidiaries had no FHLB Advances at December 31,
1993. The Savings Banks also enter into retail repurchase agreements on a
short-term basis, primarily as a service to their customers. These
borrowings are generally secured by investment securities of the
Corporation, and are classified as other borrowings in the table below.
The following tables set forth the borrowings of the Banking
Subsidiaries at the dates and for the periods indicated:
At December 31,
1993 1992 1991
(Dollars in Thousands)
FHLB Advances $8,000 $12,500 $19,500
Other borrowings 1,764 706 638
Total borrowings $9,764 $13,206 $20,138
Year Ended December 31,
1993 1992 1991
(Dollars in Thousands)
Maximum amount of other short-term
borrowings outstanding at any
month end during the year $1,764 $ 773 $ 687
Approximate average amount of
other borrowings outstanding
at any month end during
the year $1,103 $ 403 $ 596
Weighted average interest rate paid
on other borrowings during
the year 3.16% 3.81% 6.61%
Approximate weighted average interest
rate paid on total borrowings
during the year 7.69% 8.38% 6.35%
Net Interest Income Analysis. The following tables set forth for the
periods and at the dates indicated the average interest-earning assets, the
average interest-bearing liabilities, interest income from interest-earning
assets and interest expense related to interest-bearing liabilities, average
yields on interest-earning assets and average rates on interest-bearing
liabilities, the spread between the combined average rates earned on interest-
earning assets and average rates paid on interest-bearing liabilities, and the
net yield on interest-earning assets (net interest margin). Average balances
are determined on a daily basis. For the purposes of this table, the loan
averages include nonaccrual loans and are stated net of unearned income. The
amount of loan fees included in interest income for each of the periods
presented is not material.
19
(Dollars in Thousands)
Year Ended December 31, 1993 Year Ended December 31, 1992 Year Ended December 31, 1991
Weighted
Average
Yield/Rate Income/ Average Average Income/ Average Average Income/ Average Average
As Of Expense Balance Yield/Rate Expense Balance Yield/Rate Expense Balance Yield/Rate
December
31, 1993
Interest-earning assets:
Loans, net of unearned income 7.78% $41,195 $494,943 8.32% $48,277 $528,869 9.13% $59,572 $571,284 10.43%
Investments-taxable 5.85 21,299 338,773 6.29 21,165 293,808 7.20 20,874 249,926 8.35
Investments-nontaxable 7.68 955 13,012 7.34 1,137 15,596 7.29 1,130 15,611 7.24
Federal funds sold 3.00 197 6,847 2.88 443 12,404 3.57 773 13,561 5.70
Other interest-earning assets 3.98 577 15,409 3.74 831 20,683 4.02 712 22,994 3.10
Total interest-earning assets 6.93 $64,223 $868,984 7.39 $71,853 $871,360 8.24% $83,061 $873,376 9.51%
Other non-interest earning assets 49,376 44,540 48,449
Total assets $918,360 $915,900 $921,825
Interest-bearing liabilities:
FHLB advances & other
borrowings1 7.81% $ 880 $ 11,401 7.72% $ 1,434 $ 17,120 8.38% $ 2,071 $ 32,589 6.35%
Deposits 3.63 27,255 709,897 3.84 33,695 711,629 4.73 45,879 721,540 6.36
Total interest-bearing liabilities 3.69% $ 28,135 $721,298 3.90% $35,129 $728,749 4.82% $47,950 $754,129 6.36%
Non-interest bearing liabilities 76,055 74,729 62,963
Total liabilities $797,353 $803,478 $817,092
Stockholders' equity 121,007 112,422 104,733
Total liabilities & stockholders'
equity $918,360 $915,900 $921,825
Net interest rate spread 3.24% $ 36,088 3.49% $36,724 3.42% $35,111 3.15%
Net yield on interest earning
assets 4.15% 4.21% 4.02%
1 Refer to the table on page 19 for information concerning other borrowings.
20
Asset/Liability Management
The Banking Subsidiaries' exposure to interest-rate risk results from
the differences in maturities and pricing of their interest-earning assets
(loans and other investments) and interest-bearing liabilities (deposits and
other borrowings). Historically, financial institutions with substantial
mortgage loan portfolios have operated in a mismatched position, with
interest-sensitive liabilities greatly exceeding interest-sensitive assets.
Because interest rates paid on deposits can adjust more quickly to interest
rate movements than do yields earned on loans, sharp increases in interest
rates can adversely affect the earnings of such financial institutions. The
rapid escalation of interest rates in the early 1980's is directly responsible
for many of the problems of banks and thrift institutions as their cost of
funds exceeded their yield on assets. Such interest-rate risk can be reduced
if the maturities of deposits and loans are reasonably well matched.
The senior management personnel of the Corporation and each Banking
Subsidiary currently maintain responsibility for and discuss and monitor on a
continuing basis the asset/liability management for the Banking Subsidiaries.
In addition, the Board of Directors of the Corporation has adopted an
interest-rate risk management policy providing for a formal asset/liability
committee that meets no less frequently than quarterly to monitor exposure to
interest-rate risk and report findings and accomplishments to the Boards of
Directors of the Corporation and the Banking Subsidiaries.
The Corporation currently measures its exposure to interest rate risks
through the utilization of a computer model that outlines a gap position
for various maturities and market value of portfolio equity, by
Banking Subsidiary. Various interest rate scenarios are used to determine
whether the goals established by the Boards of Directors of the
Corporation and each Banking Subsidiary are being met. All such data
is reviewed with the respective Boards of Directors of the Corporation and
the Banking Subsidiaries on a quarterly basis.
Realizing that various hedging activities are inherently volatile and
that such activities require specific expertise, neither the Corporation nor
any Subsidiary engages in the following investment activities: financial
options transactions, interest rate futures transactions, mortgage or interest
rate swap transactions, transferring securities, trading in mortgage
derivative instruments or products such as collateralized mortgage
obligations, investing in junk bonds, or otherwise engaging in synthetic or
artificial hedging of risk-controlled arbitrage.
In an effort to make the yields on their loan and investment portfolios
more interest-rate sensitive, the Savings Banks have implemented a number of
measures, including: (i) increasing their emphasis on originating adjustable
rate mortgage loans on residential and commercial properties, subject to
market conditions; (ii) originating higher levels of construction, small
commercial real estate and consumer loans, which typically bear higher
interest rates than residential loans and offer greater interest rate
flexibility through shorter maturities; and (iii) using FHLB Advances and
longer- term savings certificates to lengthen maturities of liabilities.
Security Bank historically has had, and continues to have, a large percentage
of commercial, financial and agricultural loans and installment and other
consumer loans in its portfolio and an even higher percentage of its total
assets in its investment portfolio. Consequently, its loan and investment
portfolios tend to be more interest-rate sensitive than those of the Savings
Banks. The risks involved in commercial real estate, consumer and commercial,
financial and agricultural loans are evaluated by management carefully as part
of the underwriting of such loans.
21
Management is continuing to attempt to direct the Savings Banks' loan
portfolios into types of loans other than residential mortgage loans. The
effort, together with the emphasis in Security Bank's portfolio upon
commercial, financial and agricultural loans and installment and other
consumer loans, has resulted in the diversification of the Corporation's
aggregate loan portfolio.
The Banking Subsidiaries also emphasize longer-term deposits when
prudent to do so. It is difficult, however, to attract longer term deposits
in periods of rising interest rates or during extended periods of low interest
rates. Conversely, in a declining rate environment, longer-term deposits are
easier to attract, but could leave the Banking Subsidiaries holding more
costly deposits if interest rates declined significantly or for any extended
period of time.
The following table sets forth the dollar amount of maturing assets and
liabilities of the Banking Subsidiaries
as of December 31, 1993 and the difference between them for the repricing
periods indicated:
22
(Dollars in Thousands)
0 to 90 91 to 180 181 to More More Than More Than Total
Days1 Days1 365 Than 3 years to 5 years1
Days1 1 year to 5 years1
3 years1
Interest-earning assets:
Loans2 $191,410 $58,211 $112,720 $42,840 $25,221 $61,209 $491,611
Investments-taxable 27,514 24,035 43,307 147,353 98,418 17,704 358,331
Investments-non-taxable --- 1,002 --- 9,020 --- --- 10,022
Interest-bearing balances in other banks 5,145 --- --- --- --- --- 5,145
Federal funds sold 3,450 --- --- --- --- --- 3,450
Total interest-earning assets $227,519 $83,248 $156,027 $199,213 $123,639 $78,913 $868,559
Interest-bearing liabilities:
Deposits $286,371 $98,876 $89,825 $170,646 $70,880 $28 $716,626
FHLB advances and other borrowings 2,764 --- --- 6,000 1,000 --- 9,764
Total interest-bearing liabilities $289,135 $98,876 $89,825 $176,646 $71,880 $28 $726,390
Interest sensitivity gap $(61,616) $(15,628) $66,202 $22,567 $51,759 $ 78,885 $142,169
Cumulative interest sensitivity gap $(61,616) $(77,244) $(11,042) $11,525 $63,284 $142,169
Cumulative ratio of interest-earning assets
to interest-bearing liabilities 78.69% 80.09% 97.69% 101.76% 108.71% 119.57%
Ratio of cumulative gap to total assets (6.63%) (8.32%) (1.19%) 1.24% 6.81% 15.30%
1. Gap analysis includes fixed rate loan repayments (contractual and
prepayment) and decay rates of deposit accounts based upon historical
industry experience.
2. Includes loans held for sale.
23
In evaluating the Corporation's exposure to interest-rate risk,
shortcomings inherent in the method of analysis presented in the foregoing
table must be considered. For example, although certain assets and
liabilities may have similar maturities or repricing periods, they may react
in different degrees to changes in market interest rates. The interest rates
in certain types of assets and liabilities may fluctuate in advance of changes
of market interest rates, while interest rates on other types may lag behind
changes in market rates. Certain assets, such as adjustable rate mortgage
loans, have features which restrict changes in interest rates on a short-term
basis and over the life of the asset. In the event of a change in interest
rates, prepayment and early withdrawal levels would likely deviate
significantly from those assumed in calculating the table. The ability of
borrowers to service a debt may decrease in the event of an interest rate
increase. The Banking Subsidiaries consider the anticipated effects of these
various factors in implementing their interest rate risk management
objectives. Management believes that it must continue its efforts to manage
the rates, liquidity and interest-rate sensitivity of the assets and
liabilities of the Banking Subsidiaries to generate an acceptable return.
Rate/Volume Analysis
The following table shows, for the periods indicated, the change in
interest income and interest expense for each major component of interest-
earning assets and interest-bearing liabilities attributable to (1) changes in
volume (changes in volume multiplied by old rate) and (2) changes in rates
(changes in rate multiplied by old volume). The change in interest income or
expense attributable to the combination of rate variance and volume variance
is included in the table, but such amount has been allocated equally between,
and included in the amounts shown as, changes due to rate and changes due to
volume.
24
Year Ended December 31,
1993 vs. 1992 1992 vs. 1991
Increase (Decrease) Increase (Decrease)
Due To Due To
Rate/ Rate/
Volume Rate Volume Total Volume Rate Volume Total
(Dollars in Thousands)
Interest income:
Loans $(2,960) $(4,122) $ 273 $(7,082) $(4,147) $ (7,148) $551 $(11,295)
Investments-taxable 3,033 (2,899) (412) 134 3,413 (3,122) (504) 291
Investments-non-taxable ( 189) 7 ( 1) ( 182) ( 1) 8 - 7
Federal funds sold ( 179) ( 67) 39 ( 246) ( 54) (276) 25 ( 330)
Other interest-
earning assets ( 205) ( 49) 14 ( 254) ( 82) 201 ( 21) 119
Total interest-
earning assets $( 500) $(7,130) $( 87) $(7,630) $( 871) $(10,337) $ 51 $(11,208)
Interest expense:
Deposits $( 74) $(6,366) $ 16 $(6,440) $( 550) $(11,634) $ 161 $(12,184)
FHLB Advances and
other borrowings ( 460) ( 94) 37 ( 554) (1,139) 502 (313) (637)
Total interest-
bearing liabilities $( 534) $(6,460) $ 53 $(6,994) $(1,689) $(11,132) $(152) $(12,821)
Net interest income $ 34 $( 670) $(140) $( 636) $ 818 $ 795 $ 203 $ 1,613
25
Liquidity
The following discussion supplements the discussion in the Annual Report
under the section "Management's Discussion and Analysis of Financial Condition
and Results of Operations - Liquidity and Capital Resources."
As discussed in the section "Sources of Funds" and in other sections
included or incorporated by reference herein, the Banking Subsidiaries'
principal sources of funds, other than cash provided from the net income of
the Banking Subsidiaries, are deposit accounts, FHLB Advances, principal and
interest payments on loans, interest received on investment securities, and
fees. As noted in the consolidated statements of cash flows included in the
Annual Report and incorporated by reference herein, the largest source of cash
during 1993, 1992 and 1991 was the approximately $3 million, $20 million and
$13 million, respectively, in net cash provided by operations. These funds
resulted from net income adjusted primarily for the following noncash items:
the provision for loan losses, depreciation and amortization, net securities
gains, and changes in other assets and liabilities. The most significant
investing activity during 1993 and 1992 was purchases of investment securities
of approximately $122 million and $126 million, respectively, which was
partially funded in 1993 and 1992 by maturities of investment securities
totaling approximately $90 million and $72 million, respectively.
As discussed elsewhere herein, the net decrease in loans in 1993, 1992
and 1991 of approximately $35 million, $40 million and $26 million,
respectively, was largely due to management's policy of selling current
production of fixed rate mortgage loans during these years. In total,
net cash provided by investing activities in 1993 totalled approximately
$433,000, while net cash of approximately $16 million and $16 million was
used in investing activities during 1992 and 1991, respectively. Net cash
used in financing activities amounted to approximately $168,000, $12 million
and $577,000 during 1993, 1992 and 1991, respectively. For additional
information regarding liquidity and capital resources, see "Regulation."
Key Operating Ratios
The table below sets forth certain performance ratios of the Corporation
for the periods indicated:
Year Ended December 31
1993 1992 1991
Return on average assets (net income divided
by average total assets) 1.62% 1.09% 1.22%
Return on average equity (net income divided
by average stockholders' equity) 12.26 8.81 10.77
Dividend payout ratio (1) .31 .37 .24
Equity to assets ratio (average stockholders'
equity divided by average total assets) 13.18 12.37 11.36
Interest rate spread (difference between
weighted average interest rate earned on
all interest-earning assets and weighted
average interest rate paid on all interest-
bearing liabilities) 3.49 3.42 3.15
(1) Due to the restatement of financial information for all periods presented, as discussed in Note 2 of
Notes to Consolidated Financial Statements, dividends per share for all
periods presented except for the year ended December 31, 1993, have been
computed by dividing cash dividends paid by the weighted average
number of shares outstanding as adjusted retroactively for
stock splits and stock dividends.
26
Personnel
As of December 31, 1993, the Corporation and the Subsidiaries employed
392 employees on a full-time basis and approximately 28 employees on a part-
time basis. The Corporation and/or the Subsidiaries currently maintain such
employee benefits as pension and retirement plans, hospitalization and major
medical insurance coverage, long-term disability and group life insurance, and
an employee stock ownership plan. Employee benefits are considered by
management to be competitive with those provided by other major employers in
the Corporation's primary market areas. The employees are not represented by
a collective bargaining unit, and the Corporation believes its relationship
with its employees to be good.
Regulation
Federal and state legislation and regulation have significantly affected
the operations of financial institutions in the past several years and have
increased competition among commercial banks, savings institutions and other
providers of financial services. In addition, federal legislation has imposed
new limitations on the investment authority of, and higher insurance and
examination assessments on, financial institutions and has made other changes
that may adversely affect the future operations and competitiveness of
regulated financial institutions with other financial intermediaries. The
operations of regulated depository institutions and their holding companies,
including the Corporation and its Banking Subsidiaries, will continue to be
subject to changes in applicable statutes and regulations from time to time.
The Corporation. As a bank holding company registered under the BHCA,
the Corporation is subject to the regulations of the FRB. Under the BHCA, the
Corporation's activities and those of the Subsidiaries are limited to banking,
managing or controlling banks, furnishing services to or performing services
for its Subsidiaries or engaging in any other activity which the FRB
determines to be so closely related to banking or managing or controlling
banks as to be a proper incident thereto.
The BHCA prohibits the Corporation from acquiring direct or indirect
control of more than 5% of the outstanding voting stock or substantially all
of the assets of any bank or savings bank or merging or consolidating with
another bank holding company or savings bank holding company without prior
approval of the FRB. The BHCA also prohibits the Corporation from acquiring
control of any bank or savings bank operating outside the State of North
Carolina unless such action is specifically authorized by the statutes of the
state where the bank or savings bank to be acquired is located.
Additionally, the BHCA prohibits the Corporation from engaging in, or
acquiring ownership or control of more than 5% of the outstanding voting stock
of any company engaged in a non-banking business, including thrifts, unless
such business is determined by the FRB to be so closely related to banking as
to be properly incident thereto. The BHCA generally does not place
territorial restrictions on the activities of such non-banking related
activities.
Similarly, FRB approval (or, in certain cases, non-disapproval) must be
obtained prior to any person acquiring control of the Corporation or a Banking
Subsidiary. Control is conclusively presumed to exist if, among other things,
a person acquires more than 25% of any class of voting stock of the
institution or holding company or controls in any manner the election of a
majority of the directors of the institution or the holding company. Control
is presumed to exist if a person acquires more than 10% of any class of voting
stock and the institution or the holding company has registered securities
under Section 12 of the Securities Exchange Act of 1934, as amended, or the
acquiror will be the largest shareholder after the acquisition.
27
There are a number of obligations and restrictions imposed on bank
holding companies and their insured depository institution subsidiaries by law
and regulatory policies that are designed to minimize potential loss to
depositors of such depository institutions and the Federal Deposit Insurance
Corporation ("FDIC") insurance funds in the event the depository institution
becomes in danger of default or in default. For example, under the recently
enacted Federal Deposit Insurance Corporation Improvement Act of 1991 (the
"1991 Banking Law"), to reduce the likelihood of receivership of an insured
depository institution subsidiary, a bank holding company is required to
guarantee the compliance of any insured depository institution subsidiary that
may become "undercapitalized" with the terms of any capital restoration plan
filed by such subsidiary with its appropriate federal banking agency up to the
lesser of (i) an amount equal to 5% of the institution's total assets at the
time the institution became undercapitalized or (ii) the amount which is
necessary (or would have been necessary) to bring the institution into
compliance with all acceptable capital standards as of the time the
institution fails to comply with such capital restoration plan. Under a
policy of the FRB with respect to bank holding company operations, a bank
holding company is required to serve as a source of financial strength to its
subsidiary depository institutions and to commit resources to support such
institutions in circumstances where it might not do so absent such policy.
Under the BHCA, the FRB also has the authority to require a bank holding
company to terminate any activity or to relinquish control of a nonbank
subsidiary (other than a nonbank subsidiary of a bank) upon the FRB's
determination that such activity or control constitutes a serious risk to the
financial soundness and stability of any bank subsidiary of the bank holding
company.
In addition, the "cross-guarantee" provisions of the Federal Deposit
Insurance Act ("FDIA") require insured depository institutions under common
control to reimburse the FDIC for any loss suffered by either the Savings
Association Insurance Fund (the "SAIF") or the Bank Insurance Fund ("BIF") of
the FDIC as a result of the default of a commonly controlled insured
depository institution or for any assistance provided by the FDIC to a
commonly controlled insured depository institution in danger of default. The
FDIC may decline to enforce the cross-guarantee provisions if it determines
that a waiver is in the best interest of the SAIF or the BIF or both. The
FDIC's claim is superior to claims of shareholders of the insured depository
institution or its holding company but subordinate to claims of depositors,
secured creditors and holders of subordinated debt (other than affiliates) of
the commonly controlled insured depository institutions.
The Corporation is subject to the obligations and restrictions described
above, and the Banking Subsidiaries are subject to the cross-guarantee
provisions of the FDIA. However, management of the Corporation currently does
not expect that any of these provisions will have an impact on the operations
of the Corporation or its Subsidiaries.
Bank holding companies are required to comply with the FRB's risk-based
capital guidelines. At the end of 1992, the minimum ratio of total capital to
risk-weighted assets (including certain off-balance sheet activities, such as
standby letters of credit) increased to 8%. Until such time, the required
ratio was 7.25%. At least half of the total capital is required to be "Tier I
capital," principally consisting of common shareholders' equity, noncumulative
perpetual preferred stock, and a limited amount of cumulative perpetual
preferred stock, less certain goodwill items. The remainder ("Tier II
capital") may consist of a limited amount of subordinated debt, certain hybrid
capital instruments and other debt securities, perpetual preferred stock, and
a limited amount of the general loan loss allowance. Until December 31, 1992,
a limited portion of Tier II capital could be counted as Tier I capital. In
addition to the risk-based capital guidelines, the FRB has adopted a minimum
Tier I (leverage) capital ratio, under which a bank holding company must
maintain a minimum level of Tier I capital (as determined under the risk-based
capital rules in effect at year-end 1992) to average total consolidated assets
of at least 3% in the case of a bank holding company which has the highest
regulatory examination rating and is not contemplating significant growth or
28
expansion. All other bank holding companies are expected to maintain a Tier I
(leverage) capital ratio of at least 1% to 2% above the stated minimum.
The following table sets forth the Corporation's regulatory capital
position at December 31, 1993 (for the regulatory capital positions of the
Banking Subsidiaries as of December 31, 1993, see the discussions below).
Leverage Capital Risk-Based Capital
Amount % of Assets Amount % of Assets
(Dollars in Thousands)
Actual $124,220 13.31% $129,821 29.08%
Minimum capital standard 27,992 3.00 35,719 8.00
Excess of actual regulatory
capital over minimum
regulatory capital standard $ 96,228 10.31% $ 94,102 21.08%
The 1991 Banking Law requires each federal banking agency, including the
FRB, to revise its risk-based capital standards within 18 months of enactment
of the statute to ensure that those standards take adequate account of
interest rate risk, concentration of credit risk and the risks of non-
traditional activities, as well as reflect the actual performance and expected
risk of loss on multi-family mortgages. In August 1992, the FRB, the FDIC and
the Office of the Comptroller of the Currency issued a joint advance notice of
proposed rulemaking, soliciting comments on a proposed framework for
implementing these revisions. Under the proposal, an institution's assets,
liabilities, and off-balance sheet positions would be weighed by risk factors
that approximate the instruments' price sensitivity to a 100 basis point
change in interest rates. Institutions with interest rate risk exposure in
excess of a threshold level would be required to hold additional capital
proportional to that risk. The notice also asked for comments on how the
risk-based capital guidelines of each agency may be revised to take account of
concentration and credit risk and the risk of nontraditional activities. The
Corporation is studying the notice. It cannot assess at this point the
impact, if any, the proposal would have on the capital requirements of the
Corporation or its Banking Subsidiaries.
Under current federal law, transactions between depository institutions
and any affiliate are governed by Section 23A and 23B of the Federal Reserve
Act. An affiliate of a depository institution is any company or entity that
controls, is controlled by or is under common control with the institution.
In a holding company context, the parent holding company of a depository
institution and any companies which are controlled by such parent holding
company are affiliates of the depository institution. Generally, Sections 23A
and 23B (i) limit the extent to which the depository institution or its
subsidiaries may engage in "covered transactions" with any one affiliate to an
amount equal to 10% of such institution's capital stock and surplus, and
contain an aggregate limit on all such transactions with all affiliates to an
amount equal to 20% of such capital stock and surplus and (ii) require that
all such transactions be on terms substantially the same, or at least as
favorable, to the savings institution or the subsidiary as those provided to a
nonaffiliate. The term "covered transaction" includes the making of loans or
other extensions of credit to an affiliate, the purchase of assets from an
affiliate, the purchase of, or an investment in, the securities of an
affiliate, the acceptance of securities of an affiliate as collateral for a
loan or extension of credit to any person, or issuance of a guarantee,
acceptance or letter of credit on behalf of an affiliate. In addition to the
restrictions imposed by Sections 23A and 23B, no depository institution may
(i) loan or otherwise
29
extend credit to an affiliate, except for any affiliate
which engages only in activities that are permissible for bank holding
companies, or (ii) purchase or invest in any stocks, bonds, debentures, notes
or similar obligations of any affiliate, except for affiliates that are
subsidiaries of the institution.
Additionally, the FDIC has provided advance notice of a proposed rule-
making which would affect contracts between a bank holding company, such as
the Corporation, or its non-depository subsidiaries or related interests under
common control, and its insured depository institution affiliates, such as the
Banking Subsidiaries. The FDIC proposed establishing a rebuttable regulatory
presumption that certain types of contracts between an insured depository
institution and any company which directly or indirectly controls it (or which
is under common control with it) are unsafe and unsound. The types of
contracts to be covered by such a presumption would include those relating to:
(1) making or purchasing loans, (2) servicing loans, (3) performing trust
functions, (4) providing bookkeeping or data processing services, (5)
furnishing management services, (6) selling or transferring any department or
subsidiary, (7) payments for intangible assets, (8) transferring any asset
for less than fair market value as evidenced by an independent written
appraisal, or (9) prepaying any liability more than 30 days prior to its due
date. The FDIC also has proposed regulations which would prohibit any insured
depository institution from entering into any contract with any person to
provide goods, products or services if such contract is determined to
adversely affect the safety or soundness of the insured institution. The
Corporation cannot determine at this point the impact these proposed rules
would have upon it and the Banking Subsidiaries if they are adopted in their
currently proposed form.
Section 4(i) of the BHCA authorizes the FRB to approve the application
of a bank holding company to acquire any savings institution under Section
4(c)(8) of the BHCA. In approving such an application, the FRB is precluded
from imposing any restrictions on transactions between the bank holding
company and the acquired savings institution, except as required by Section
23A or 23B of the Federal Reserve Act or any other applicable law. Further,
the FDIA, as amended by the 1991 Banking Law, authorizes the merger or
consolidation of any BIF member with any SAIF member, the assumption of any
liability by any BIF member to pay any deposits of any SAIF member or vice
versa, or the transfer of any assets of any BIF member to any SAIF member in
consideration for the assumption of liabilities of such BIF member or vice
versa, provided that certain conditions are met and, in the case of any
acquiring, assuming or resulting depository institution which is a BIF member,
such institution continues to make payment of SAIF assessments on the portion
of liabilities attributable to any acquired, assumed or merged SAIF-insured
institution.
As a result of the Corporation's ownership of Security Bank, in 1983 the
Corporation was registered under the bank holding company laws of North
Carolina. Accordingly, the Corporation and the Subsidiaries are also subject
to regulation by the North Carolina Commissioner of Banks (the "N.C.
Commissioner"). The N.C. Commissioner has asserted authority to examine North
Carolina bank holding companies and their affiliates and is in the process of
formulating regulations in this area. Further, as a result of its ownership
of the Savings Banks, the Corporation is also registered under the savings
bank holding company laws of North Carolina. Thus, it is also subject to
regulation and supervision by the North Carolina Administrator of Savings
Institutions (the "N.C. Administrator").
Security Bank. Security Bank is organized as a North Carolina chartered
commercial bank and is subject to various statutory requirements and to rules
and regulations promulgated and enforced by the N.C. Commissioner and the
FDIC. Its deposits are insured by the BIF.
30
North Carolina commercial banks, such as Security Bank, are subject to
legal limitations on the amounts of dividends they are permitted to pay.
Prior approval of the N.C. Commissioner is required if the total of all
dividends declared by Security Bank in any calendar year exceeds its net
profits (as defined by statute) for that year combined with its retained net
profits (as defined by statute) for the preceding two calendar years, less any
required transfers to surplus. Also, under the 1991 Banking Law an insured
depository institution, such as Security Bank, is prohibited from making
capital distributions, including the payment of dividends, if, after making
such distribution, the institution would become "undercapitalized" (as such
term is defined in the statute). Based on its current financial condition,
the Corporation does not expect that this provision will have any impact on
Security Bank's ability to pay dividends.
As a North Carolina chartered, FDIC-insured commercial bank which is not
a member of the Federal Reserve System, Security Bank is subject to capital
requirements imposed by the FDIC. Under the FDIC's regulations, state
nonmember banks that (a) receive the highest rating during the examination
process and (b) are not anticipating or experiencing any significant growth,
are required to maintain a minimum leverage ratio of 3% of Tier I capital to
average total consolidated assets; all other banks are required to maintain
a minimum ratio of 1% or 2% above the stated minimum, with a minimum
leverage ratio of not less than 4%. As of December 31, 1993, the leverage
ratio of Security Bank was 13.17%.
The following table sets forth Security Bank's regulatory capital
position at December 31, 1993:
Leverage Capital Risk-Based Capital
Amount % of Assets Amount % of Assets
(Dollars in Thousands)
Actual $ 49,901 13.17% $ 51,749 35.23%
Minimum capital standard 11,366 3.00 11,752 8.00
Excess of actual regulatory
capital over minimum
regulatory capital standard $ 38,535 10.17% $ 39,997 27.23%
As a BIF-insured institution, Security Bank is also subject to insurance
assessments imposed by the FDIC. Under current law, as amended by the 1991
Banking Law, the insurance assessment to be paid by BIF-insured institutions
shall be as specified in a schedule required to be issued by the FDIC that
would specify, at semiannual intervals, target reserve ratios designed to
increase the reserve ratio to 1.25% of estimated insured deposits (or such
higher ratio as the FDIC may determine in accordance with the statute) in 15
years. Further, the FDIC is authorized, under the 1991 Banking Law, to impose
one or more special assessments in any amount deemed necessary to enable
repayment of amounts borrowed by the FDIC from the Treasury Department.
Effective January 1, 1993, the FDIC replaced the uniform assessment rate with
a transitional risk-based assessment schedule which became fully effective in
January 1994, having assessments ranging from 0.23% to 0.31% of an
institution's average assessment base. The actual assessment to be paid by
each BIF member is based on an institution's assessment risk classification,
which is determined based on whether the institution is considered "well
capitalized," "adequately capitalized" or "under capitalized," as such terms
have been defined in applicable federal regulations adopted to implement the
prompt corrective action provisions of the 1991 Banking Law, and whether such
institution is considered by its supervisory agency to be financially sound or
to have supervisory concerns. See "Impact of the 1991 Banking Law." As a
result of the provisions of the 1991 Banking Law, the assessment rate on
deposits could increase significantly over the next 15 years. Based on the
current financial condition
31
and capital levels of Security Bank, the
Corporation does not expect that the transitional risk-based assessment
schedule will have a material impact on Security Bank's future earnings.
Further, under current federal law, depository institutions are subject
to the restrictions contained in Section 22(h) of the Federal Reserve Act with
respect to loans to directors, executive officers and principal stockholders.
Under Section 22(h), loans to directors, executive officers and stockholders
who own more than 10% of a depository institution (18% in the case of
institutions located in an area with less than 30,000 in population), and
certain affiliated entities of any of the foregoing, may not exceed, together
with all other outstanding loans to such person and affiliated entities, the
institution's loan-to-one-borrower limit as established by federal law (as
discussed below). Section 22(h) also prohibits loans above amounts prescribed
by the appropriate federal banking agency to directors, executive officers and
shareholders who own more than 10% of an institution, and their respective
affiliates, unless such loans are approved in advance by a majority of the
board of directors of the institution. Any "interested" director may not
participate in the voting. The FRB has prescribed the loan amount (which
includes all other outstanding loans to such person), as to which such prior
board of director approval is required, as being the greater of $25,000 or 5%
of capital and surplus (up to $500,000). Further, pursuant to Section 22(h),
the FRB requires that loans to directors, executive officers, and principal
shareholders be made on terms substantially the same as offered in comparable
transactions to other persons.
Security Bank is subject to FDIC-imposed loan-to-one-borrower limits
which are substantially the same as those applicable to national banks. Under
these limits, no loans and extensions of credit to any borrower outstanding at
one time and not fully secured by readily marketable collateral shall exceed
15% of the unimpaired capital and unimpaired surplus of the bank. Loans and
extensions of credit fully secured by readily marketable collateral may
comprise an additional 10% of unimpaired capital and unimpaired surplus.
These limits also authorize banks to make loans to one borrower, for any
purpose, in an amount not to exceed $500,000. As of December 31, 1993, the
largest aggregate amount of loans which Security Bank had to one borrower was
$1.9 million. Management does not believe that any of Security Bank's
outstanding loans violate the applicable loans-to-one-borrower limits or that
these limits will have a significant impact on Security Bank's business,
operations or earnings.
Regulations promulgated by the FDIC pursuant to the 1991 Banking Law
place limitations on the ability of insured depository institutions to accept,
renew or roll over deposits by offering rates of interest which are
significantly higher than the prevailing rates of interest on deposits offered
by other insured depository institutions having the same type of charter in
such depository institution's normal market area. Under these regulations,
"well capitalized" depository institutions may accept, renew or roll such
deposits over without restriction, "adequately capitalized" depository
institutions may accept, renew or roll such deposits over with a waiver from
the FDIC (subject to certain restrictions on payments of rates) and
"undercapitalized" depository institutions may not accept, renew or roll such
deposits over. The regulations contemplate that the definitions of "well
capitalized," "adequately capitalized" and "undercapitalized" will be the same
as the definition adopted by the agencies to implement the corrective action
provisions of the 1991 Banking Law. See "Impact of the 1991 Banking Law."
Management does not believe that these regulations will have a materially
adverse effect on the current operations of Security Bank.
Security Bank is subject to examination by the FDIC and the N.C.
Commissioner. FSCC, the consumer finance company subsidiary of Security Bank,
is also subject to such examination. In addition, Security Bank is subject to
various other state and federal laws and regulations, including state usury
laws, laws relating to fiduciaries, consumer credit and equal credit, fair
credit reporting laws and laws relating to branch banking. Security Bank, as
an insured North Carolina commercial bank, is prohibited from
32
engaging as a
principal in activities that are not permitted for national banks, unless (i)
the FDIC determines that the activity would pose no significant risk to the
appropriate deposit insurance fund and (ii) Security Bank is, and continues to
be, in compliance with all applicable capital standards.
Under Chapter 53 of the North Carolina General Statutes, if the capital
stock of a North Carolina commercial bank is impaired by losses or otherwise,
the N.C. Commissioner is authorized to require payment of the deficiency by
assessment upon the bank's shareholders, pro rata, and to the extent
necessary, if any such assessment is not paid by any shareholder, upon 30 days
notice, to sell as much as is necessary of the stock of such shareholder to
make good the deficiency. The Corporation is the sole shareholder of Security
Bank.
The Savings Banks. The Savings Banks are North Carolina-chartered
savings banks and members of the FHLB system (the "FHLB System"). Their
deposits are insured by the FDIC through the SAIF. They are subject to
examination and regulation by the FDIC and the N.C. Administrator and to
regulations governing such matters as capital standards, mergers,
establishment of branch offices, subsidiary investments and activities, and
general investment authority.
North Carolina enacted the Savings Bank Act, Ch. 54C of the North
Carolina General Statutes ("Chapter 54C"), effective October 1, 1991. Chapter
54C created a state savings bank ("SSB") charter. An SSB is a North Carolina
chartered financial institution regulated by the FDIC and the N.C.
Administrator, but not by the OTS, with its deposit accounts insured by either
the SAIF or the BIF of the FDIC. Each of the Savings Banks converted to an
SSB charter on December 1, 1992 (the "Conversions") in order to reduce the
regulatory cost and burden imposed by the overlapping regulatory jurisdiction
of the three agencies under whose regulation they operated as federal savings
banks. The Conversions are expected to reduce substantially the amounts that
the Savings Banks would otherwise pay to OTS in assessments, application and
securities filing fees.
The Financial Institutions Reform, Recovery and Enforcement Act of 1989
("FIRREA") effected a major restructuring of the federal regulatory scheme
applicable to financial institutions. Among other things, FIRREA abolished
the Federal Home Loan Bank Board and Federal Savings and Loan Insurance
Corporation, many of the previous regulatory functions of which are now under
the control of the OTS and the FDIC. Regulatory functions relating to deposit
insurance and to conservatorships and receiverships of federally insured
financial institutions, including savings banks, are now exercised by the
FDIC. FIRREA contains provisions affecting numerous aspects of the operations
and regulation of federally insured savings banks and empowers the FDIC to
promulgate regulations implementing the provisions of FIRREA, including
regulations defining certain terms used in the statute as well as regulations
exercising or defining the limits of regulatory discretion conferred by the
statute.
Prior to their Conversions, the Savings Banks were regulated by the OTS
in addition to the FDIC and the N.C. Administrator. Consequently, they were
subject to various operating requirements and restrictions imposed by the OTS.
Additionally, they were regulated by the N.C. Administrator under North
Carolina law as savings and loan associations rather than as savings banks.
The following discussion sets forth the regulatory requirements and
restrictions to which the Savings Banks became subject upon their Conversions.
As SAIF-insured institutions, the Savings Banks are also subject to
insurance assessments imposed by the FDIC. Under current law, as amended by
the 1991 Banking Law, the insurance assessment paid by SAIF-insured
institutions must be the greater of 0.15% of the institution's average
assessment base (as
33
defined) or such rate as the FDIC, in its sole discretion,
determines to be appropriate to be able to increase (or maintain) the reserve
ratio to 1.25% of estimated insured deposits (or such higher ratio as the FDIC
may determine in accordance with the statute) within a reasonable period of
time. Through December 31, 1993, the assessment rate could not be less than
0.23% of the institution's average assessment base, and from January 1, 1994
through December 31, 1997, the assessment rate must not be less than 0.18% of
the institution's average assessment base. In each case the assessment rate
may be higher if the FDIC, in its sole discretion, determines such higher rate
to be appropriate. Effective January 1, 1993, the annual assessment rate is
determined pursuant to the transitional risk-based assessment schedule issued
by the FDIC pursuant to the 1991 Banking Law, which imposes assessments
ranging from 0.23% to 0.31% of an institution's average assessment base. The
actual assessment to be paid by each SAIF member will be based on the
institution's assessment risk classification, which will be determined based
on whether the institution is considered "well capitalized," "adequately
capitalized" or "undercapitalized" (as such terms have been defined in federal
regulations adopted to implement the prompt corrective action provisions of
the 1991 Banking Law), and whether such institution is considered by its
supervisory agency to be financially sound or to have supervisory concerns.
See "Impact of the 1991 Banking Law." The Savings Banks do not anticipate any
material increase in their insurance assessments.
Upon their Conversions, the Savings Banks ceased to be subject to the
capital requirements of the OTS and became subject to the capital requirements
of the FDIC and the N.C. Administrator. The FDIC requires each of the Savings
Banks to have a minimum leverage ratio of Tier I capital to average total
assets of at least 3%; provided, however, that all institutions, other
than those (i) receiving the highest rating during the examination process
and (ii) not anticipating or experiencing any significant growth, are required
to maintain a ratio of 1% or 2% above the stated minimum, with a minimum
leverage ratio of not less than 4%. The FDIC also requires each of the
Savings Banks to have a ratio of total capital to risk-weighted assets
of at least 8%. The FDIC leverage and risk-based capital ratio calculations
and components are very similar to the OTS core capital and risk-based capital
requirements, respectively. The FDIC, however, does not impose a tangible
capital requirement. The N.C. Administrator requires a net worth equal to at
least 5% of total assets. At December 31, 1993, each of the Savings Banks
complied with the net worth requirements of the N.C. Administrator:
OMNIBANK, 12.97%; Citizens, 9.92%; and, Home Savings, 8.05%.
The following table sets forth the consolidated FDIC regulatory capital
positions of OMNIBANK, Citizens and Home Savings as of December 31, 1993:
Leverage Capital Risk-Based Capital
Amount % of Assets Amount % of Assets
(Dollars in Thousands)
Actual $ 59,140 10.93% $ 62,837 21.30%
Minimum capital standard 16,239 3.00 23,599 8.00
Excess of actual regulatory
capital over minimum
regulatory capital standard $ 42,901 7.93% $ 39,238 13.30%
The FHLB System provides a central credit facility for member
institutions. As members of the FHLB of Atlanta, each of the Savings Banks
are required to own capital stock in the FHLB of Atlanta in an amount at least
equal to the greater of 1% of the aggregate principal amount of its unpaid
residential
34
mortgage loans, home purchase contracts and similar obligations at
the end of each calendar year, or 5% of its outstanding advances (borrowings)
from the FHLB of Atlanta. As of December 31, 1993, each of the Savings Banks
was in compliance with this requirement.
FIRREA has had the effect of significantly reducing the dividends that
Savings Banks receive on their stock in the FHLB of Atlanta. FIRREA requires
each FHLB to transfer a certain amount of its reserves and undivided profits
to the Resolution Funding Corporation ("RECORP"), the government entity
established to raise funds to resolve troubled savings association cases, in
order to fund the principal and a portion of the interest on RECORP bonds and
certain other obligations. In addition, FIRREA requires each FHLB to transfer
a percentage of its annual net earnings to the Affordable Housing Program.
That amount will increase from 5% of the annual net income of the FHLB in 1990
to at least 10% of its annual net income in 1995 and subsequent years. As a
result of these FIRREA requirements, it is anticipated that the FHLB of
Atlanta's earnings will be reduced and that each of the Savings Banks will
continue to receive reduced dividends on its FHLB of Atlanta stock in future
periods.
FRB regulations adopted pursuant to the Depository Institutions
Deregulation and Monetary Control Act of 1980 require savings associations and
savings banks to maintain reserves against their transaction accounts
(primarily negotiable order of withdrawal accounts) and certain nonpersonal
time deposits. The reserve requirements are subject to adjustment by the FRB.
As of December 31, 1993, each of the Savings Banks was in compliance with the
applicable reserve requirements of the FRB.
Upon their Conversions, the
Savings Banks ceased to be subject to OTS liquidity requirements and became
subject to the N.C. Administrator's requirement that the ratio of liquid
assets to total assets equal at least 10%. The computation of liquidity under
North Carolina regulation allows the inclusion of mortgage-backed securities
and investments which, in the judgment of the N.C. Administrator, have a
readily marketable value, including investments with maturities in excess of
five years. On December 31, 1993, the liquidity ratios of the Savings Banks
exceeded the requirements of the N.C. Administrator and were as follows:
OMNIBANK, 20.39%; Citizens, 34.94%; and, Home Savings, 31.75%.
The Savings Banks also are subject to loan-to-one-borrower limits which
are substantially the same as those applicable to Security Bank.
Additionally, under these limits, a savings bank is authorized to make loans
to one borrower to develop domestic residential housing units, not to exceed
the lesser of $30 million or 30% of the savings bank's unimpaired capital and
unimpaired surplus, provided that (i) the purchase price of each single-family
dwelling in the development does not exceed $500,000; (ii) the savings bank is
in compliance with its fully phased-in capital requirements; (iii) the loans
comply with the applicable loan-to-value requirements; (iv) the aggregate
amount of loans made under this authority does not exceed 150% of unimpaired
capital and surplus and (v) either the savings bank's regulator issues an
order permitting the savings bank to use the higher limit or the savings bank
meets the requirements for "expedited treatment." A savings bank meets the
requirements of "expedited treatment" if, among other
35
things, it has a
composite MACRO rating of 1 or 2, a Community Reinvestment Act rating of
satisfactory or better, and has not been notified by supervisory personnel
that it is a problem institution or an institution in troubled condition.
These limits also authorize a savings institution to make loans to one
borrower to finance the sale of real property acquired in satisfaction of
debts in an amount up to 50% of unimpaired capital and surplus. As North
Carolina chartered savings banks, the Savings Banks are subject under North
Carolina law to the same loans-to-one-borrower restrictions as are described
above. However, if North Carolina loans-to-one-borrower limitations were to
be made less stringent than the restrictions set forth above, the Savings
Banks would still be subject to the above described restrictions pursuant to
FDIC regulations.
As of December 31, 1993, the largest aggregate amount of loans which the
Savings Banks had to any one borrower was as follows: OMNIBANK, $3.13
million; Citizens, $2.21 million; and, Home Savings, $1.05 million. None of
the Savings Banks had loans outstanding which management believes violate the
applicable loans-to-one-borrower limits. The Corporation does not believe
that the loans-to-one-borrower limits will have a significant impact on the
Savings Banks' business, operations or earnings.
The Savings Banks are subject to the same FDIC regulations as Security
Bank regarding the ability of insured depository institutions to accept,
renew, or roll over deposits offering rates of interest significantly higher
than generally prevailing market rates. Management does not believe these
regulations will have a materially adverse effect on the current operations of
the Savings Banks.
As North Carolina-chartered savings banks,
the Savings Banks are subject to North Carolina law which requires that at
least 60% of their respective assets be investments that qualify under certain
Internal Revenue Service guidelines. As of December 31, 1993, each Savings
Bank was in compliance with the North Carolina law.
Recent FDIC law and regulations generally provide that state-chartered
savings banks may not engage as principal in any type of activity, or in any
activity in an amount, not permitted for national banks, or directly acquire
or retain any equity investment of a type or in an amount not permitted for
national banks. The FDIC has authority to grant exceptions from these
prohibitions (other than with respect to non-service corporation equity
investments) if it determines no significant risk to the SAIF is posed by the
amount of the investment or the activity to be engaged in and if the savings
bank is and continues to be in compliance with fully phased-in capital
standards. National banks are generally not permitted to hold equity
investments other than shares of service corporations and certain federal
agency securities. Moreover, the activities in which service corporations are
permitted to engage are limited to those of service corporations for national
banks.
FIRREA generally prohibits any savings institution (state or federal)
from directly or indirectly acquiring or retaining any corporate debt security
that is not of investment grade (generally referred to as "junk bonds'). Any
savings institution that held corporate debt securities not of investment
grade prior to August 9, 1989 is required to divest those securities as
quickly as can be prudently done, but in no event later than July 1, 1994, and
must file an application setting forth its plans for divestiture with the
FDIC. At December 31, 1993, none of the Savings Banks owned any corporate
debt securities not of investment
36
grade for which such divestiture would be
required. Additionally, FDIC regulations impose restrictions on the lending
limits of state-chartered savings banks, including percentage limitations on
the total investment in various types of loans, including limitations which
(i) limit total non-residential real estate loans to 400% of capital, (ii)
limit total commercial, corporate, business or agricultural loans to 10% of
assets, and (iii) limit total consumer loans, commercial paper and corporate
debt securities to 35% of assets. Each Savings Bank was in compliance with
such requirements as of December 31, 1993.
FIRREA also generally requires any savings institution that proposes to
establish or acquire a new subsidiary, or to conduct new activities through an
existing subsidiary, to notify the FDIC at least 30 days prior to the
establishment or acquisition of any subsidiary, or at least 30 days prior to
conducting any such new activity. Any such activities must be conducted in
accordance with the regulations and orders of the FDIC and the N.C.
Administrator.
As North Carolina chartered savings banks, the Savings Banks derive
their authority from, and are regulated by, the N.C. Administrator. The N.C.
Administrator has the right to promulgate rules and regulations necessary for
the supervision and regulation of state savings banks under his jurisdiction
and for the protection of the public investing in such institutions. The
regulatory authority of the N.C. Administrator includes, but is not limited
to, the establishment of reserve requirements; the regulation of the payment
of dividends; the regulation of incorporators, shareholders, directors,
officers and employees; the establishment of permitted types of withdrawable
accounts and types of contracts for savings programs, loan and investments;
and, the regulation of the conduct and management of savings banks, chartering
and branching of institutions, mergers, conversions and conflicts of interest.
North Carolina law requires that the Savings Bank maintain federal deposit
insurance as a condition of doing business.
The N.C. Administrator conducts regular annual examinations of the
Savings Banks as well as other state-chartered savings institutions in North
Carolina. The purpose of such examinations is to assure that institutions are
being operated in compliance with applicable North Carolina law and
regulations and in a safe and sound manner. These examinations are usually
conducted on a joint basis with the FDIC. In addition, the N.C. Administrator
is required to conduct an examination of any institution when he has good
reason to believe the standing and responsibility of the institution is of
doubtful character or when he otherwise deems it prudent. The N.C.
Administrator is empowered to order the revocation of the license of an
institution if he finds that it has violated or is in violation of any North
Carolina law or regulation and that revocation is necessary in order to
preserve the assets of the institution and protect the interest of its
depositors. The N.C. Administrator has the power to issue cease and desist
orders if any person or institution is engaging in, or has engaged in , any
unsafe or unsound practice or unfair and discriminatory practice in the
conduct of its business or in violation of any other law, rule or regulation.
A North Carolina chartered savings bank must maintain net worth of 5% of
total assets and liquidity of 10% of total assets, as discussed above.
Additionally, a North Carolina chartered savings bank is required to maintain
general valuation allowances and specific loss reserves in the same amounts as
required by the federal regulators.
A North Carolina chartered stock savings bank may not declare or pay a
cash dividend on, or repurchase any of, its capital stock if the effect of
such transaction would be to reduce the net worth of the institution to an
amount which is less than the minimum amount required by applicable federal
and state regulations. Accordingly, each of the Savings Banks is prohibited
from making capital distributions, including the payment of dividends, if,
after making such distribution, it would become "undercapitalized" (as such
term is defined in the 1991 Banking Law).
37
In addition, each of the Savings Banks is also subject to the
restriction that it is not permitted to declare or pay a cash dividend on or
repurchase any of its capital stock if the effect thereof would be to cause
its net worth to be reduced below the amount for the liquidation account
established in connection with its conversion from mutual to stock form.
Subject to limitations established by the N.C. Administrator, North
Carolina-chartered savings banks may make any loan or investment or engage in
any activity which is permitted to federally chartered savings institutions.
In addition to such lending authority, North Carolina-chartered savings banks
are authorized to invest funds, in excess of loan demand, in certain
statutorily permitted investments, including but not limited to (i)
obligations of the United States, or those guaranteed by it; (ii) obligations
of the State of North Carolina; (iii) bank demand or time deposits; (iv) stock
or obligations of the federal deposit insurance fund or FHLB; (v) savings
accounts of any savings and loan association as approved by the board of
directors; and (vi) stock or obligations of any agency of the State of North
Carolina or of the United States or of any corporation doing business in North
Carolina whose principal business is to make education loans.
North Carolina law provides a procedure by which savings institutions
may consolidate or merge, subject to the approval of the N.C. Administrator.
The approval is conditioned upon findings by the N.C. Administrator that,
among other things, such merger or consolidation will promote the best
interests of the members or shareholders of the merging institutions. North
Carolina law also provides for simultaneous mergers and conversions and for
supervisory mergers conducted by the N.C. Administrator.
Impact of the 1991 Banking Law. The 1991 Banking Law was signed into
law on December 19, 1991. Among other things, the 1991 Banking Law provides
increased funding for the BIF and the SAIF, and provides for expanded
regulation of depository institutions and their affiliates, including parent
holding companies.
The 1991 Banking Law provides authority for special assessments against
insured deposits and for the development of a general risk-based deposit
insurance assessment system which the FDIC implemented on a transitional basis
effective January 1, 1993. The BIF and SAIF funding provisions could result
in a significant increase in the assessment rate on deposits of BIF and SAIF
institutions over the next 15 years. No assurance can be given at this time
as to what level of assessments against insured deposits will be during this
15-year period.
Effective one year after its enactment, the 1991 Banking Law provides
the federal banking agencies with broad powers to take corrective action to
resolve the problems of insured depository institutions. The extent of these
powers will depend upon whether the institutions in question are "well
capitalized," "adequately capitalized," "undercapitalized," "significantly
undercapitalized," or "critically undercapitalized." In September 1992, each
of the federal banking agencies issued final uniform regulations to be
effective December 19, 1992, which define such capital levels. Under the
final regulations, an institution is considered "well capitalized" if it has
(i) a total risk-based capital ratio of 10% or greater, (ii) a Tier I risk-
based capital ratio of 6% or greater, (iii) a leverage ratio of 5% or greater
and (iv) is not subject to any order or written directive to meet and maintain
a specific capital level for any capital measure. An "adequately capitalized"
institution is defined as one that has (i) a total risk-based capital ratio of
8% or greater, (ii) a Tier I risk-based capital ratio of 4% or greater and
(iii) a leverage ratio of 4% or greater (or 3% or greater in the case of an
institution with the highest examination rating). An institution is
considered (A) "undercapitalized" if it has (i) a total risk-based capital
ratio of less than 8%, (ii) a Tier I risk-based capital ratio of less than 4%
or (iii) a leverage ratio of less than 4% (or 3% in the case of an institution
38
with the highest examination rating; (B) "significantly undercapitalized" if
the institution has (i) a total risk-based capital ratio of less than 6%, or
(ii) a Tier I risk-based capital ratio of less than 3% or (iii) a leverage
ratio of less than 3% and (C) "critically undercapitalized" if the institution
has a ratio of tangible equity to total assets equal to or less than 2%.
The 1991 Banking Law also amended the prior law with respect to the
acceptance of brokered deposits by insured depository institutions to permit
only a "well capitalized" (as defined in the statute as significantly
exceeding each relevant minimum capital level) depository institution to
accept brokered deposits without prior regulatory approval. In June 1992, the
FDIC issued final regulations implementing these provisions regulating
brokered deposits. Under the regulations, "well-capitalized" banks may accept
brokered deposits without restrictions, "adequately capitalized" banks may
accept brokered deposits with a waiver from the FDIC (subject to certain
restrictions on payment of rates), while "under-capitalized" banks may not
accept brokered deposits. The regulations contemplate that the definitions of
"well capitalized," "adequately capitalized" and "under capitalized" are the
same as the definitions adopted by the agencies to implement the prompt
corrective action provisions of the 1991 Banking Law (as described in the
previous paragraph). The Corporation does not believe that these regulations
have had or will have a material adverse effect on the current operations of
its Banking Subsidiaries.
To facilitate the early identification of problems, the 1991 Banking Law
requires the federal banking agencies to review and, under certain
circumstances, prescribe more stringent accounting and reporting requirements
than those required by generally accepted accounting principles. In September
1992, the FDIC issued a notice of proposed rulemaking implementing those
provisions. The proposed rule, among other things, would require that
management report on the institution's responsibility for preparing financial
statements and establishing and maintaining an internal control structure and
procedures for financial reporting and compliance with laws and regulations
concerning safety and soundness, and that independent auditors attest to and
report separately on assertions in management's reports concerning compliance
with such laws and regulations, using FDIC-approved audit procedures.
The 1991 Banking Law further requires the federal banking agencies to
develop regulations requiring disclosure of contingent assets and liabilities
and, to the extent feasible and practicable, supplemental disclosure of the
estimated fair market value of assets and liabilities. The 1991 Banking Law
also requires annual examinations of all insured depository institutions by
the appropriate federal banking agency, with some exceptions for small, well-
capitalized institutions and state chartered institutions examined by state
regulators. Moreover, the federal banking agencies are required to set
operational and managerial, asset quality, earnings and stock valuation
standards for insured depository institutions and depository institution
holding companies, as well as compensation standards for insured depository
institutions that prohibit excessive compensation, fees or benefits to
officers, directors, employees, and principal shareholders. In July 1992, the
federal banking agencies issued a joint advance notice of proposed rulemaking
soliciting comments on all aspects of the implementation of these standards in
accordance with the 1991 Banking Law, including whether the compensation
standards should apply to depository institution holding companies.
The foregoing necessarily is a general description of certain provisions
of the 1991 Banking Law and does not purport to be complete. Several of the
provisions of the 1991 Banking Law will be implemented through regulations
issued by the various federal banking agencies, only a portion of which have
been adopted in final form. Several of the significant provisions of the
legislation will not become effective until one year or more after enactment.
The effect of the 1991 Banking Law on the Corporation
39
and its Subsidiaries
will not be full ascertainable until after all of the provisions are effective
and after all of the regulations are adopted.
Taxation
Federal Income Taxation. The Corporation files a consolidated federal
income tax return with its Subsidiaries. The Banking Subsidiaries are subject
to the taxing provisions of the Internal Revenue Code of 1986, as amended
("Code"), for corporations, as modified by certain provisions of accounting.
Thrift institutions, which qualify under certain definitional tests and
other conditions of the Code, are permitted certain favorable provisions
regarding their deductions from taxable income for annual additions to their
bad debt reserve. A reserve may be established for bad debts on qualifying
real property loans (generally loans secured by interests in real property
improved or to be improved) under (i) a method based on a percentage of the
institution's taxable income, as adjusted (the "percentage of taxable income
method") or (ii) a method based on actual loss experience (the "experience
method"). Nonqualifying loans are computed on the experience method. The
Savings Banks generally compute their additions to their reserves using the
percentage of taxable income method.
The percentage of taxable income method is limited to 8% of taxable
income. This method may not raise the reserve to exceed 6% of qualifying real
property loans at the end of the year. Moreover, the additions for qualifying
real property loans, when added to nonqualifying loans, cannot exceed 12% of
the amount by which total deposits or withdrawable accounts exceed the sum of
surplus, undivided profits and reserves at the beginning of the year. The
experience method is the amount necessary to increase the balance of the
reserve at the close of the year to the greater of (i) the amount which bears
the same ratio to loans outstanding at the close of the year as the total net
bad debts sustained during the current and five preceding years bear to the
sum of the loans outstanding at the close of such six years or (ii) the
balance in the reserve account at the close of the last taxable year beginning
before 1988 (assuming that the loans outstanding have not declined since such
date).
In order to qualify for the percentage of income method, an institution
must have at least 60% of its assets as "qualifying assets" which generally
include cash, obligations of the U.S. government or an agency or
instrumentality thereof or a state or political subdivision, residential real
estate-related loans, or loans secured by savings accounts and property used
in the conduct of its business. In addition, it must meet certain other
supervisory tests and operate principally for the purpose of acquiring savings
and investing in loans.
Institutions which become ineligible to use the percentage of income
method must change to either the reserve method or the specific charge-off
method that apply to banks. Proposed regulations require ratable inclusion in
income of excess reserves over a six-year period in the event of
ineligibility. Large banks, those generally exceeding $500 million in assets,
must convert to the specific charge-off method.
Bad debt reserve balances in excess of the balance computed under the
experience method or amounts maintained in a supplemental reserve built up
prior to 1962 ("excess bad debt reserve") require inclusion in taxable income
upon certain distributions to its shareholders. Distributions in redemption
or liquidation or stock or distributions with respect to its stock in excess
of earnings and profits accumulated in years beginning after December 31,
1951, are treated as a distribution from the excess bad debt reserve. When
such a distribution takes place and it is treated as from the excess bad debt
reserve, the thrift is
40
required to reduce its reserve by such amount and
simultaneously recognize the amount as an item of taxable income increased by
the amount of income tax imposed on the inclusion. Dividends not in excess of
earnings and profits accumulated since December 31, 1951 will not require
inclusion of part or all of the bad debt reserve in taxable income. Each of
the Savings Banks has accumulated earnings and profits since December 31, 1951
and has an excess in its bad debt reserve. Distributions in excess of current
and accumulated earnings and profits will increase taxable income.
Security Bank traditionally has maintained its reserve using the
experience method described above. As a commercial bank, Security Bank's use
of the experience method is subject to the limitation based upon $500 million
in total assets.
The Corporation's and Omni's income tax returns for tax years subsequent
to 1989 are subject to examination. The Corporation's federal income tax
return for the year ended December 31, 1991 was examined during 1993 and its
federal income tax return for the year ended December 31, 1992 is currently
under examination.
State and Local Taxation. Under North Carolina law, the corporate
income tax is 7.75% of federal taxable income as computed under the Code,
subject to certain prescribed adjustments. In addition, for tax years
beginning in 1992, 1993 and 1994, a corporate taxpayer must pay a surtax equal
to 3%, 2% and 1%, respectively, of the state income tax otherwise payable by
it. An annual state franchise tax is imposed at a rate of 0.15% applied to
the greatest of the institutions' (i) capital stock, surplus and undivided
profits, (ii) investment in tangible property in North Carolina, or (iii)
appraised valuation of property in North Carolina.
Accounting Matters
Postemployment Benefits. In November 1992 the Financial Accounting
Standards Board (FASB) issued Statement of
Financial Accounting Standards No. 112, "Employers' Accounting for
Postemployment Benefits" ("Statement 112"), which is effective for fiscal
years beginning after December 15, 1993. Statement 112 establishes accounting
standards for employers who provide benefits to former or inactive employees
after employment but before retirement (referred to in this statement as
postemployment benefits). Those benefits include, but are not limited to,
salary continuation, supplemental unemployment benefits, severance benefits,
continuation of benefits such as health care benefits and life insurance
coverage, etc. The Corporation has not determined the effect, if any, of
Statement 112 on its consolidated financial statements.
41
Accounting by Creditors for Impairment of a Loan. The FASB has issued
Standard No. 114, "Accounting by Creditors for Impairment of a Loan," which
requires that all creditors value all specifically reviewed loans for which
it is probable that the creditor will be unable to collect all amounts due
according to the terms of the loan agreement at either the present value of
expected cash flows discounted at the loan's effective interest rate, or if
more practical, the market price or value of collateral. This Standard is
required for fiscal years beginning after December 15, 1994. The Corporation
has not determined the impact, if any, of this Standard on its consolidated
financial statements.
Accounting for Certain Investments in Debt and Equity Securities.
The FASB has issued Standard No. 115, "Accounting for Certain Investments in
Debt and Equity Securities," that requires debt and equity securities held:
(i) to maturity be classified as such and reported at amortized cost; (ii)
for current resale be classified as trading securities and reported at fair
value, with unrealized gains and losses included in current earnings; and
(iii) for any other purpose be classified as securities available for sale
and reported at fair value, with unrealized gains and losses excluded from
current earnings and reported as a separate component of stockholders' equity.
It is required for fiscal years beginning after December 15, 1993. The
Corporation will adopt Standard No. 115 as of January 1, 1994. In connection
with this adoption, the Corporation anticipates that approximately $324,500
of investment securities will be classified as securities available for sale.
As of December 31, 1993, these securities had unrealized securities gains
of approximately $6,100, which would result in an unrealized securities
gain, net of income tax effects, of approximately $4,100 being recorded
as an increase to stockholders' equity on the date of adoption.
Stock-based Compensation. The FASB has issued an Exposure Draft for a
proposed SFAS entitled "Accounting for Stock-based Compensation" which
addresses the recognition and measurement of stock-based compensation paid
to employees, including employee stock options, restricted stock, and stock
appreciation rights. Employers would be required to recognize a charge to
earnings for such awards, whereas generally no charge is recognized under
current accounting practices. Compensation expense would be measured as the
fair value of the award at the grant date with subsequent adjustments made
to reflect the outcome of certain service or performance assumptions made at
the date of grant but not for effects of subsequent changes in the price
of the entity's stock. Disclosure provisions of the proposed statement would
be effective for fiscal years beginning after December 31, 1993 with
recognition provisions being effective for awards granted after
December 31, 1996.
ITEM 2 - PROPERTIES
42
The Corporation's principal office is located at 507 West Innes Street,
Salisbury, North Carolina 28144. The main administrative and executive office
of OMNIBANK are also located at the same address. The executive office of
Security Bank is located at 215 South Main Street, Salisbury, North Carolina
28144; the executive office of Citizens is located at 31 Union Street (North),
Concord, North Carolina 28082; and, the executive office of Home Savings is
located at 700 West Kings Street, Kings Mountain, North Carolina 28086.
Of the Corporation's 47 banking, insurance, and consumer finance
locations, 42 are located on real property owned by the related Subsidiary, 5
of the facilities are located on leased land and 5 of the facilities occupy
leased quarters. FCC also owns and maintains a facility for operations, data
processing and related activities. During 1993, the Corporation paid
aggregate rents of approximately $39,000 for utilization of leased premises.
ITEM 3 - LEGAL PROCEEDINGS
In the opinion of management, neither the Corporation nor any Subsidiary
is involved in any pending legal proceedings other than routine, non-material
proceedings occurring in the ordinary course of business.
ITEM 4 - SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matter was submitted to a vote of the Corporation's shareholders
during the quarter ended December 31, 1993.
PART II
ITEM 5 - MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS
The Corporation's outstanding common stock is qualified for quotation on
the National Market System of the National Association of Securities Dealers
Automated Quotation system under the symbol "SCBC." As of March 7, 1994, the
approximate number of shareholders of record of the Corporation was 3,200.
Common stock market prices and cash dividends are set forth on page 4 of the
Annual Report to Shareholders for the year ended December 31, 1993 (the
"Annual Report") and are incorporated herein by reference. See Item 1 above
for potential regulatory restrictions upon the Banking Subsidiaries' payments
of dividends to the Corporation.
ITEM 6 - SELECTED FINANCIAL DATA
The information contained under the heading "Selected Financial Data" on
page 1 of the Annual Report is incorporated herein by reference.
ITEM 7 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
The information contained on pages 5 through 27 and pages 41 and 42 of
Item 1 above and the information contained under the heading "Management's
Discussion and Analysis of Financial Condition and Results of Operations" on
pages 5 through 7 of the Annual Report are incorporated herein by reference.
43
ITEM 8 - CONSOLIDATED FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The following consolidated financial statements of the Corporation
included in the Annual Report are incorporated herein by reference:
Annual Report
Page Number
Independent Auditors' Report 27
Consolidated Balance Sheets - 8
December 31, 1993 and 1992
Consolidated Statements of Income - Years ended 9
December 31, 1993, 1992 and 1991
Consolidated Statements of Stockholders' Equity - 10
Years ended December 31, 1993, 1992 and 1991
Consolidated Statements of Cash Flows - Years ended 11
December 31, 1993, 1992 and 1991
Notes to Consolidated Financial Statements 12-26
ITEM 9 - CHANGE IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
Not applicable.
PART III
ITEM 10 - DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The information set forth on pages 2 through 6 of the Proxy Statement
regarding the Corporation's Annual Meeting of Shareholders on April 28, 1994
(the "Proxy Statement") is incorporated herein by reference.
ITEM 11 - EXECUTIVE COMPENSATION
The information set forth on pages 9 through 15 of the Proxy Statement
is incorporated herein by reference.
ITEM 12 - SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information set forth on pages 7-8 and 10 of the Proxy Statement is
incorporated herein by reference.
44
ITEM 13 - CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information set forth on page 16 of the Proxy Statement is
incorporated herein by reference.
PART IV
ITEM 14 - EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a)(1) Financial Statements
The following consolidated financial statements of the Corporation
are included in the Annual Report and are incorporated herein by
reference:
Independent Auditors' Report Exhibit 13, page 27
Consolidated Balance Sheets -
December 31, 1993 and 1992 Exhibit 13, page 8
Consolidated Statements of Income -
Years ended December 31, 1993, 1992 and 1991 Exhibit 13, page 9
Consolidated Statements of
Stockholders' Equity - Years ended
December 31, 1993, 1992 and 1991 Exhibit 13, page 10
Consolidated Statements of Cash Flows -
Years ended December 31, 1993, 1992 and 1991 Exhibit 13, page 11
Notes to Consolidated Financial
Statements - Exhibit 13, pages 12-26
(2) Financial Statement Schedules
All financial statement schedules are omitted because the required
information is either not applicable, is immaterial, or is
included in the consolidated financial statements of the
Corporation and notes thereto.
(b) Reports on Form 8-K
The Corporation filed reports on Form 8-K on December 17, 1993 and
February 1, 1994 regarding the status of its negotiations with
Fairfield Communities, Inc. to purchase all of the outstanding
stock of First Federal Savings and Loan Association of Charlotte,
North Carolina, a Fairfield subsidiary.
(c) Exhibits
A listing of the exhibits to this Report on Form 10-K is set forth
on the Exhibit Index which immediately precedes such exhibits and
is incorporated herein by reference.
45
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.
SECURITY CAPITAL BANCORP
By:
David B. Jordan
Vice-Chairman and Chief Executive Officer
Pursuant to the requirements of the Securities 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:
Signature Title Date
Vice-Chairman and Chief Executive March 28, 1994
David B. Jordan Officer and Director
Senior Vice President, Treasurer March 28, 1994
Pressley A. Ridgill and Chief Financial Officer
(Principal Financial Officer)
Director March 28, 1994
John M. Barnhardt
Director and Vice-Chairman March 28, 1994
Ralph A. Barnhardt
Director March 28, 1994
Edward A. Brown
Director March 28, 1994
Henry B. Gaye
Director March 28, 1994
Dan L. Gray
Director March 28, 1994
Lloyd G. Gurley
Director March 28, 1994
William C. Kluttz, Jr.
Director March 28, 1994
Ervin E. Lampert, Jr.
Director March 28, 1994
William G. Loeblein
Director March 28, 1994
F. Taft McCoy, Jr.
Director March 28, 1994
Harold Mowery
Director March 28, 1994
J.G. Rutledge, III
Director March 28, 1994
Carl M. Short, Jr.
Director and Chairman March 28, 1994
Miles J. Smith, Jr. of the Board
Director March 28, 1994
W. Erwin Spainhour
Director March 28, 1994
Fred J. Stanback, Jr.
Director March 28, 1994
Jimmy K. Stegall
Director March 28, 1994
Thomas A. Tate, Sr.
Director March 28, 1994
E. William Wagoner
Director March 28, 1994
James L. Williamson
Exhibit Index
Exhibit Table No. Description Location
13 1993 Annual Report to Filed herewith on sequential page
Shareholders no. ___.
22 Information regarding Filed herewith on sequential page
Subsidiaries no. ___.
23 Proxy Statement for 1994 Filed herewith on sequential page
Annual Meeting of Shareholders no. ___.
24 Consent of KPMG Peat Marwick Filed herewith on sequential page
no. ___.
****************************************************************************
APPENDIX
On the Front Cover of Exhibit 13 the Security Capital Bancorp logo appears
where noted.
On Page 3 of Exhibit 13 a photo of Lloyd G. Gurley, David B. Jordan,
Ralph A. Barnhardt and Miles J. Smith, Jr. appears in the upper left
hand corner of the page where indicated.
Also on Page 3 the signatures of David B. Jordan and Lloyd G. Gurley
appear where indicated.
On the Back Cover of Exhibit 13 the Security Capital Bancorp logo appears
where noted.
On the Notice of 1994 Annual Meeting of Shareholders page on Exhibit 23
the Security Capital Bancorp logo appears where noted. Also the signature
of Miles J. Smith, Jr. appears where indicated.
On Page 1 of Exhibit 23 the Security Capital Bancorp logo appears where
noted.
On Page 14 of Exhibit 23 the Comparison of Five Year-Cumulative Total
Returns graph appears where noted. The plot points are as listed below:
12/30/88 12/29/89 12/31/90 12/31/91 12/31/92 12/31/93
SECURITY CAPITAL BANCORP 100.00 130.3 114.0 95.1 113.3 137.3
CRSP Index for Nasdaq
Stock Market (US Companies) 100.00 121.2 103.0 165.2 192.1 219.2
CRSP Index for Nasdaq
Bank Stocks 100.00 111.2 81.4 133.6 194.2 221.3
On Page 22 of Exhibit 23 the signature of Miles J. Smith, Jr. appears where
noted.