SELECTED FINANCIAL DATA
DECEMBER 31,
BALANCE SHEET DATA 1994 1993 1992 1991 1990
(DOLLARS IN THOUSANDS)
Cash, non-interest bearing $ 24,374 28,102 19,242 21,305 16,748
Investment securities (1) 412,254 368,353 338,604 287,731 246,212
Loans, net (2) 641,611 484,384 505,784 549,651 580,834
All other assets 87,375 48,096 50,081 56,085 63,466
Total assets $1,165,614 928,935 913,711 914,772 907,260
Deposit accounts 1,012,145 784,456 773,635 775,140 767,929
FHLB advances 18,576 8,000 12,500 19,500 24,800
All other liabilities 15,133 12,259 10,648 9,987 13,195
Stockholders' equity 119,760 124,220 116,928 110,145 101,336
Total liabilities and stockholders' equity $1,165,614 928,935 913,711 914,772 907,260
YEARS ENDED DECEMBER 31,
OPERATIONS DATA 1994 1993 1992 1991 1990
(DOLLARS IN THOUSANDS)
Interest income $67,536 64,223 71,853 83,061 85,457
Interest expense 29,323 28,135 35,129 47,950 51,320
Net interest income 38,213 36,088 36,724 35,111 34,137
Provision for loan losses 359 653 1,848 1,924 1,620
Net interest income after provision for loan losses 37,854 35,435 34,876 33,187 32,517
Other income 8,356 10,519 8,948 9,213 7,469
Other expense 27,700 23,842 27,540 25,481 22,755
Income taxes 11,876 7,273 6,323 5,642 5,938
Net income $ 6,634 14,839 9,961 11,277 11,293
AT OR FOR THE YEARS ENDED DECEMBER 31,
OTHER DATA 1994 1993 1992 1991 1990
Return on average assets .67 % 1.62 1.09 1.22 1.28
Return on average equity 5.32 12.26 8.81 10.77 11.67
Average equity to average assets
ratio 12.68 13.18 12.37 11.36 10.94
Interest rate spread (3) 3.54 3.49 3.42 3.15 3.08
Net yield on average interest-
earning assets 4.10 4.15 4.21 4.02 4.08
Average interest-earning assets
to
average interest-bearing
liabilities 117.76 % 120.48 119.56 115.81 116.20
Total shares outstanding 11,775,867 11,682,837 11,811,122 11,822,226 11,811,279
Net income per share $ .57 1.26 .84 .95 .95
Book value per share 10.17 10.63 9.90 9.32 8.58
Dividends per share (4) $ .44 .39 .31 .23 .19
(1) INCLUDES INVESTMENT SECURITIES AVAILABLE FOR SALE.
(2) INCLUDES LOANS HELD FOR SALE.
(3) DIFFERENCE BETWEEN WEIGHTED AVERAGE RATE ON ALL INTEREST-EARNING ASSETS AND
ALL INTEREST-BEARING LIABILITIES.
(4) DUE TO THE RESTATEMENT OF FINANCIAL INFORMATION, AS DISCUSSED IN NOTE 2 OF
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, DIVIDENDS PER SHARE FOR ALL
PERIODS PRESENTED EXCEPT FOR THE YEARS ENDED DECEMBER 31, 1994 AND 1993,
HAVE BEEN COMPUTED BY DIVIDING CASH DIVIDENDS PAID BY WEIGHTED AVERAGE
NUMBER OF SHARES OUTSTANDING, AS ADJUSTED RETROACTIVELY FOR STOCK SPLITS AND
DIVIDENDS.
1
GENERAL BUSINESS DISCUSSION
BUSINESS OF SECURITY CAPITAL BANCORP
Security Capital Bancorp ("Security Capital") is a North Carolina
Corporation organized as a multi-bank holding company. Security Capital, which
operates primarily through its four banking subsidiaries which have 49 offices
in 13 counties, serves an area in the south central and western Piedmont regions
of North Carolina. Its general and administrative offices are located in
Salisbury, North Carolina.
The principal business of its banking subsidiaries, Security Capital Bank,
OMNIBANK, SSB, Citizens Savings, SSB, and Home Savings Bank, SSB, is offering
numerous banking services consistent with the needs and conveniences of the
areas that it serves. These services include accepting time and demand deposits,
making secured and unsecured loans, renting safe deposit boxes, sending and
receiving wire transfers, performing trust functions for corporations, pension
trusts, and individuals, and providing certain insurance and securities
brokerage services. In addition, it provides assistance and counseling to
individuals, institutions, and corporations regarding financial matters.
Security Capital has one other wholly owned subsidiary, Estates Development
Corporation, which formerly engaged in real estate activities and is now in the
process of winding down and terminating those operations.
CAPITAL STOCK
The no par value common stock of Security Capital is traded on the NASDAQ
National Market System under the symbol "SCBC". As of March 3, 1995, Security
Capital had 11,780,086 shares of common stock outstanding and approximately
3,100 stockholders of record.
The following table presents for the periods indicated the high and low
sales prices, as reported by NASDAQ, of the common stock of Security Capital.
1994 1993
HIGH LOW High Low
First Quarter $14.25 $13.00 $14.75 $11.00
Second Quarter 15.25 13.00 13.75 12.50
Third Quarter 16.25 13.25 14.75 13.00
Fourth Quarter 18.25 15.00 14.75 13.25
The Board of Directors of Security Capital declared and paid a quarterly
cash dividend on each share of common stock amounting to $.44 and $.39 per share
for the years ended December 31, 1994 and 1993, respectively. The ability of
Security Capital to pay dividends is subject to certain regulatory restrictions.
2
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
RESULTS OF OPERATIONS
COMPARISON OF THE YEARS ENDED DECEMBER 31, 1994 AND 1993
NET INCOME
Security Capital and its subsidiaries (collectively herein, "Security
Capital") earned $6,634,000, or $.57 per share, compared with net income of
$14,839,000, or $1.26 per share, for the year ended December 31, 1993. This
decrease is primarily attributable to the recognition of a one-time charge of
approximately $5,600,000 as a result of Security Capital's savings bank
subsidiaries change in tax accounting method to the specific charge-off method
for bad debts during 1994. This decrease in net income was also impacted by the
recognition of significant non-recurring charges by Security Capital during the
third quarter of 1994 in connection with its acquisition of First Federal
Savings and Loan Association of Charlotte ("First Federal"). Security Capital's
return on average assets decreased to .67% in 1994 from 1.62% in 1993. Return on
average equity decreased to 5.32% in 1994 from 12.26% in 1993.
NET INTEREST INCOME
Net interest income increased $2,125,000, or 5.9%, to $38,213,000. Total
interest income increased $3,313,000, or 5.2%, in 1994. The average yield on
interest-earning assets decreased 14 basis points to 7.25%, while the average
volume increased by $62,821,000. Total interest expense increased $1,188,000, or
4.2%, in 1994. The average rate on interest-bearing liabilities fell 19 basis
points to 3.71%, while the average volume increased by $70,005,000.
The increase in interest income and interest expense is primarily
attributable to the acquisition of First Federal on September 23, 1994, which
was accounted for under the purchase method of accounting. Also, during 1994 the
Federal Reserve changed its monetary policy and began raising interest rates in
an effort to control inflation and slow the national economy. This overall rise
in interest rates impacted interest income and interest expense at Security
Capital. This rise in interest rates had a positive impact by increasing
interest income for the repricing of adjustable rate interest-earning assets
along with increased yields on new loans and investments. While rates in general
increased, the impact on Security Capital was reduced due to the investment of
funds in 1993 and early 1994 at yields significantly less than the yields on
maturing investments and existing portfolio loans refinanced at lower fixed
rates. Likewise, the rise in interest rates had a negative impact due to
increased yields being offered on deposit products to remain competitive. These
higher costs on deposits were effective primarily toward the end of 1994 and
therefore did not fully impact the 1994 results. Accordingly, the net interest
rate spread as of December 31, 1994 was 3.32% compared to a net interest rate
spread of 3.54% for the year ended December 31, 1994. In future periods,
Security Capital could experience a reduction in interest income should
prepayments occur and/or mortgage loans price downward.
LOAN ORIGINATION AND SALE ACTIVITY
Proceeds from the sales of loans were approximately $21,375,000 in 1994
compared to approximately $85,700,000 in 1993, resulting in gains of $190,000
and $1,384,000, respectively. The reductions in loan sales and related gains
reflect the higher interest rate environment previously discussed. Security
Capital has continued to sell the majority of its current production of fixed
rate mortgage loans through its secondary marketing program. Security Capital
retained the servicing rights on all fixed rate mortgage loans sold during 1994.
These servicing rights represent a continuing source of future fee income. Fixed
rate mortgage loans held for sale at December 31, 1994, amounted to $2,697,000.
Proceeds from the sales of loans, along with loan repayments, were used to fund
loan originations, which decreased $57,081,000 (22.0%) to approximately
$202,119,000 in 1994, and to increase the investment portfolio, which increased
a total of $43,901,000 (11.9%) in 1994.
PROVISION FOR LOAN LOSSES
The provision for loan losses was $359,000 for 1994 compared to $653,000
for 1993. Charge-offs decreased 20.6% to $581,000 while recoveries decreased
35.0% to $258,000. This resulted in the allowance for loan losses increasing
$36,000, excluding the $2,054,000 increase from the acquisition of First
Federal. In total, the allowance for loan losses increased $2,090,000 (28.9%) to
$9,317,000 at December 31, 1994. The allowance for loan losses at December 31,
1994, represents 1.44% of period-end loans and 1.55 times non-performing assets.
Management believes that the allowance for loan losses is adequate. In addition,
in the opinion of management, asset quality remains high, with total non-
performing assets totaling $6,009,000, one-half of one percent (0.52%) of total
assets at December 31, 1994. Security Capital does not have any material loans
outstanding classified as "doubtful" or "loss." Additionally, its loan portfolio
does not contain any highly leveraged transactions or foreign loans.
3
OTHER INCOME
Other income decreased $2,163,000 (20.6%) to $8,356,000 in 1994. As noted
above, net gain on sales of loans decreased $1,194,000 (86.3%) to $190,000 in
1994 from $1,384,000 in 1993, primarily due to the increase in interest rates
during 1994. Deposit and other service charge income decreased $545,000 (11.0%)
to $4,431,000. This decrease was partially due to a decline in deposit accounts,
excluding the effects of the First Federal Acquisition. In 1994, there was a
($70,000) loss on sales of investment securities compared to a $310,000 gain in
1993. The 1994 loss was primarily due to the repositioning of several available
for sale investment securities into higher yielding instruments. The gain in
1993 was due to the sale and merger of Atlantic States Bankcard Association,
Inc., and the exercise of call provisions by the issuers of several municipal
securities. Other decreased $382,000 (36.4%) to $667,000 in 1994 primarily due
to losses on sales of several real estate owned properties at amounts less than
anticipated and the write-down of other properties to net realizable value. Loan
servicing and other loans fees increased $89,000 (6.4%) due to an increase in
loans fees, charge card fees, and late charges. Brokerage commissions increased
$249,000 (17.7%) due to an increase in volume, which can be attributed to the
expansion of the operations along with depositors continuing to seek higher
yields through alternative investments throughout most of 1994.
OTHER EXPENSE
Other expense increased $3,858,000 (16.2%) to $27,700,000 in 1994. This
increase was primarily attributable to the non-recurring charges recognized in
connection with the First Federal Acquisition and related to severance,
professional fees, marketing, and discontinued contracts, along with the
increased expenses associated with operating the branch network acquired as part
of the First Federal acquisition.
INCOME TAXES
Income taxes increased $4,603,000 (63.3%) to $11,876,000 in 1994, while
income before income taxes decreased $3,602,000 (16.3%) to $18,510,000 in 1994
from $22,112,000 in 1993. This increase in income taxes was primarily due to the
recognition of a one-time charge of approximately $5,600,000 to record deferred
tax liabilities discussed above. In accordance with accounting requirements,
Security Capital adopted Statement of Financial Accounting Standards No. 109,
"Accounting for Income Taxes" ("Statement 109") effective January 1, 1993.
Adoption of Statement 109 resulted in a net benefit to Security Capital of
approximately $388,000 in 1993. Excluding the impact of adoption of Statement
109, income taxes for 1993 would have been $7,661,000, or 34.6% of income before
income taxes, compared to $6,276,000, or 33.9% of income before income taxes in
1994, excluding the one-time charge of $5,600,000.
COMPARISON OF THE YEARS ENDED DECEMBER 31, 1993 AND 1992
NET INCOME
Security Capital earned $14,839,000, or $1.26 per share, for the year ended
December 31, 1993, an increase of 49.0% from 1992 net income of $9,961,000, or
$.84 per share. On June 30, 1992, Omni Capital Group, Inc. ("Omni"), a
multi-thrift holding company, merged with and into First Security Capital
Corporation ("FSFC"), a bank holding company (the "Merger"). Upon completion of
the merger, FSFC's name was changed to Security Capital Bancorp. This increase
in 1993 net income was primarily a result of the one-time merger-related
expenses and restructuring charges recognized by FSFC and Omni in connection
with the 1992 merger. These charges amounted to $4,100,000 consisting of
approximately $600,000 of merger-related expenses and $3,500,000 of nonrecurring
restructuring charges. As noted above, adoption of Statement 109 resulted in a
net benefit to Security Capital of approximately $388,000 in 1993. Security
Capital's return on average assets increased to 1.62% in 1993 from 1.09% in
1992. Return on average equity increased to 12.26% in 1993 from 8.81% in 1992.
NET INTEREST INCOME
Net interest income decreased $636,000 (1.7%) to $36,088,000 in 1993. Total
interest income decreased $7,630,000, or 10.6%, and total interest expense
decreased $6,994,000, or 19.9%, in 1993. The average yield on interest-earning
assets and the average rate on interest-bearing liabilities both decreased in
1993 along with the average volume for these areas. Also impacting the decrease
in interest income was a decrease in loans receivable. Total loans decreased
$37,227,000 (7.3%) to $473,202,000 at December 31, 1993. This decrease was
primarily the result of the continuation of the selling of current production of
fixed rate mortgage loans through Security Capital's secondary marketing
program. While investment securities increased $29,749,000 (8.8%) to
$368,353,000 at December 31, 1993, the yields on new investments were
significantly less than the yields on maturing investments and existing
portfolio mortgage loans refinanced at lower rates in 1993, thus also negatively
impacting interest income.
4
LOAN ORIGINATION AND SALE ACTIVITY
Proceeds from the sales of loans were approximately $85,700,000 in 1993
compared to approximately $85,100,000 in 1992, resulting in gains of $1,384,000
and $738,000, respectively. As noted above, Security Capital continued to sell
its current production of fixed rate mortgage loans during 1993. Security
Capital retained the servicing rights on all fixed rate mortgage loans sold
during 1993. Proceeds from the sales of loans, along with other funds, were used
to fund loan originations and to increase the investment portfolio.
PROVISION FOR LOAN LOSSES
The provision for loan losses was $653,000 for 1993 compared to $1,848,000
for 1992. In 1992, the provision included $1,500,000 recognized in connection
with the Merger. Charge-offs decreased 28.5% in 1993 to $732,000 while
recoveries decreased 39.5% to $397,000. This resulted in the allowance for loan
losses increasing $318,000 (4.6%) to $7,227,000 at December 31, 1993, from
$6,909,000 at December 31, 1992.
OTHER INCOME
Other income increased $1,571,000 (17.6%) to $10,519,000 in 1993. As noted
above, net gain on sales of loans increased $646,000 (87.5%) to $1,384,000 in
1993 from $738,000 in 1992. Brokerage commissions increased $411,000 (41.4%) to
$1,404,000 in 1993. This increase was due to an increase in volume, which was
attributed to an expansion of the operation in 1993, along with depositors
seeking higher yields through alternative investments. Net securities gains
increased to $310,000 in 1993 from $8,000 in 1992. These gains were the result
of the sale of Security Capital's investment in Atlantic States Bankcard
Association, Inc., and the exercise of call provisions by the issuers of several
municipal securities. Other increased $446,000 (74.0%) due to several smaller
increases within this category.
OTHER EXPENSE
Other expense decreased $3,698,000 (13.4%) to $23,842,000 in 1993. For the
year ended December 31, 1992, Security Capital had approximately $2,600,000 of
merger-related expenses. These merger-related expenses were reflected in the
personnel, net occupancy, professional and other services, and other categories
for 1992. Federal and other insurance premiums decreased $194,000 (9.6%) during
1993 due to a decline in the average deposit accounts and the consolidation of
other insurance coverage. During 1993, Security Capital experienced additional
increases in efficiencies of operations due to the Merger which were reflected
in various categories.
INCOME TAXES
Income taxes increased $950,000 (15.0%) for the year ended December 31,
1993, while income before income taxes increased $5,828,000 (35.8%) to
$22,112,000 in 1993. Excluding the impact of adoption of Statement 109, income
taxes would have been $7,661,000, or 34.6% of income before income taxes,
compared to 38.8% in 1992. This decrease was largely due to a portion of the
1992 provision for thrift loan losses for which a benefit could not be
recognized. In 1993, as allowed by Statement 109, an income tax benefit was
recognized for the provision for loan losses. Income taxes for the year ended
December 31, 1993, included the effect of the Omnibus Budget Reconciliation Act
of 1993 (the "Act"). The overall effect of the Act was an increase in income
taxes of approximately $200,000, primarily due to the increased corporate tax
rate.
FINANCIAL CONDITION
Total assets of Security Capital at December 31, 1994, were $1,165,614,000,
an increase from December 31, 1993, of $236,679,000 (25.5%). This increase,
along with the other balance sheet increases noted below, is primarily due to
the acquisition of First Federal on September 23, 1994, which was accounted for
under the purchase method of accounting. Total assets of $302,163,000, net loans
of $135,819,000, and deposits of $250,929,000, were purchased in connection with
the First Federal acquisition. Cash and cash equivalents increased $11,946,000
at December 31, 1994 primarily due to cash and cash equivalents acquired in the
First Federal acquisition. Excluding the effects of the First Federal
acquisition, net loans receivable, including loans held for sale, were
$505,792,000 an increase of $21,408,000, or 4.4%, over the December 31, 1993
amount. This increase is the result of increases in various types of loans.
Security Capital recorded intangible assets, with a balance of $16,634,000 at
December 31, 1994, in connection with the acquisition of First Federal. Deposit
accounts decreased $23,240,000, or 3.0%, from the comparable December 31, 1993
amount, excluding the effects of the First Federal acquisition. This decrease is
primarily attributable to depositors continuing to seek higher yields through
alternative investments. Total stockholders' equity was $119,760,000, or 10.3%
of total assets, at December 31, 1994. Total stockholders' equity included an
unrealized loss on investment securities available for sale of
5
($6,372,000) at December 31, 1994 in connection with Security Capital's adoption
of Statement of Financial Accounting Standards No. 115, "Accounting for Certain
Investments in Debt and Equity Securities," on January 1, 1994.
LIQUIDITY AND CAPITAL RESOURCES
The principal sources of liquidity for Security Capital's banking
subsidiaries are deposit accounts, Federal Home Loan Bank ("FHLB") advances,
principal and interest payments on loans, interest received on investment
securities, and fees. Deposit accounts are considered a primary source of funds
supporting the banking subsidiaries' lending and investment activities. At
December 31, 1994, the Security Capital banking subsidiaries were in compliance
with all regulatory liquidity requirements. Management believes that Security
Capital had adequate sources of liquidity as of December 31, 1994.
At December 31, 1994, Security Capital and its banking subsidiaries were in
compliance with all applicable regulatory capital requirements. The following
table compares Security Capital's regulatory capital as of December 31, 1994,
with the minimum capital standards established by the Board of Governors of the
Federal Reserve System (the "FRB").
[CAPTION]
Leverage Capital Risk-Based Capital
Amount % of Assets Amount % of Assets
(Dollars in Thousands)
Actual $110,494 9.46% $118,136 19.37%
Minimum Capital Standard 35,041 3.00(1) 48,783 8.00
Excess of Actual Regulatory
Capital Over Minimum Regulatory
Capital Standards $ 75,453 6.46% $ 69,353 11.37%
(1) THE FRB MINIMUM LEVERAGE RATIO REQUIREMENT IS 3% TO 5%, DEPENDING ON THE
INSTITUTION'S COMPOSITE RATING AS DETERMINED BY ITS REGULATORS. THE FRB HAS
NOT ADVISED SECURITY CAPITAL OF ANY SPECIFIC REQUIREMENT APPLICABLE TO IT.
Management is not aware of any current recommendations by regulatory
authorities which, if implemented, would have a material effect on liquidity,
capital resources or operations.
On November 4, 1994, Security Capital and CCB Financial Corporation,
Durham, North Carolina ("CCB"), entered into a definitive agreement of
combination pursuant to which Security Capital will merge with and into CCB,
with CCB as the surviving corporation and continuing to operate under its
present name (the "Combination"). For further discussion of the combination, see
note 2 to the consolidated financial statements.
6
CONSOLIDATED BALANCE SHEETS
DECEMBER 31,
[CAPTION]
ASSETS 1994 1993
(DOLLARS IN
THOUSANDS)
Cash and due from banks $ 24,374 28,102
Interest-bearing balances in other banks 17,321 5,145
Federal funds sold 6,948 3,450
Investment securities available for sale (amortized cost of $266,299 at December
31, 1994) (note 3) 256,657 --
Investment securities held to maturity (market value of $149,790 and $375,046
at December 31, 1994 and 1993, respectively) (note 4) 155,597 368,353
Loans, net of unearned income ($2,691 in 1994 and $2,698 in 1993) (note 5) 648,231 473,202
Less allowance for loan losses (note 6) 9,317 7,227
Loans, net 638,914 465,975
Loans held for sale 2,697 18,409
Premises and equipment, net (note 7) 21,713 18,360
Intangible assets 16,634 --
Other assets (note 5) 24,759 21,141
Total assets $1,165,614 928,935
LIABILITIES AND STOCKHOLDERS' EQUITY
Deposit accounts:
Demand, noninterest-bearing 67,203 67,830
Interest-bearing 856,530 653,614
Time deposits of $100 or more 88,412 63,012
Total deposit accounts 1,012,145 784,456
Advances from the Federal Home Loan Bank (note 8) 18,576 8,000
Other borrowed money 3,276 1,764
Other liabilities 11,857 10,495
Total liabilities 1,045,854 804,715
Stockholders' equity (notes 10, 12, and 13):
Preferred stock, no par value, 5,000,000 shares authorized;
none issued and outstanding -- --
Common stock, no par value, 25,000,000 shares authorized; 11,775,867 and
11,682,837 shares issued and outstanding at December 31, 1994 and 1993,
respectively 51,610 51,167
Retained earnings, substantially restricted 74,522 73,053
Unrealized loss on investment securities available for sale (note 3) (6,372) --
Total stockholders' equity 119,760 124,220
Commitments and contingencies (notes 11 and 14)
Total liabilities and stockholders' equity $1,165,614 928,935
SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
7
CONSOLIDATED STATEMENTS OF INCOME
YEARS ENDED DECEMBER 31,
[CAPTION]
1994 1993 1992
(DOLLARS IN THOUSANDS, EXCEPT SHARE DATA)
Interest income:
Loans $43,951 41,195 48,277
Investment securities
Taxable 21,280 21,299 21,165
Nontaxable 858 955 1,137
Other 1,447 774 1,274
Total interest income 67,536 64,223 71,853
Interest expense:
Deposit accounts 28,363 27,255 33,695
Borrowings 960 880 1,434
Total interest expense 29,323 28,135 35,129
Net interest income 38,213 36,088 36,724
Provision for loan losses (note 6) 359 653 1,848
Net interest income after provision for loan losses 37,854 35,435 34,876
Other income:
Loan servicing and other loan fees 1,485 1,396 1,351
Deposit and other service charge income 4,431 4,976 5,255
Brokerage commissions 1,653 1,404 993
Gain on sales of loans 190 1,384 738
Investment securities available for sale losses, net (note 3) (70) -- --
Investment securities held to maturity gains, net (note 4) -- 310 8
Other 667 1,049 603
Total other income 8,356 10,519 8,948
Other expense:
Personnel (notes 11 and 13) 14,768 13,314 14,536
Net occupancy 3,942 3,390 3,488
Telephone, postage, and supplies 1,820 1,564 1,579
Federal and other insurance premiums 2,230 1,832 2,026
Data processing fees 913 746 801
Professional and other services 1,029 793 1,683
Other 2,998 2,203 3,427
Total other expense 27,700 23,842 27,540
Income before income taxes 18,510 22,112 16,284
Income taxes (note 9) 11,876 7,273 6,323
Net income $ 6,634 14,839 9,961
Net income per share $ .57 1.26 .84
Weighted average shares outstanding 11,738,083 11,771,739 11,832,570
SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
8
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
YEARS ENDED DECEMBER 31, 1994, 1993, AND 1992
Unrealized
Gain
(Loss) on
Investment
Securities Total
Common Retained Obligations Available Stockholders'
Stock Earnings of ESOP for Sale Equity
(DOLLARS IN THOUSANDS)
Balance at December 31, 1991 $54,471 56,559 (885) -- 110,145
Proceeds from stock options exercised
(note 12) 158 -- -- -- 158
Repayment of ESOP debt (note 13) -- -- 376 -- 376
Retirement of unallocated ESOP shares
(note 13) (509) -- 509 -- --
Dividends paid to stockholders
($.31 per share) -- (3,712) -- -- (3,712)
Net income -- 9,961 -- -- 9,961
Balance at December 31, 1992 54,120 62,808 -- -- 116,928
Proceeds from stock options exercised
(note 12) 606 -- -- -- 606
Retirement of common stock (3,559) -- -- -- (3,559)
Dividends paid to stockholders
($.39 per share) -- (4,594) -- -- (4,594)
Net income -- 14,839 -- -- 14,839
Balance at December 31, 1993 51,167 73,053 -- -- 124,220
EFFECT OF CHANGE IN ACCOUNTING PRINCIPLE -- -- -- 4,036 4,036
PROCEEDS FROM OPTIONS EXERCISED (NOTE 12) 443 -- -- -- 443
DIVIDENDS PAID TO STOCKHOLDERS
($.44 PER SHARE) -- (5,165) -- -- (5,165)
CHANGE IN UNREALIZED GAIN (LOSS) ON
INVESTMENT SECURITIES AVAILABLE FOR
SALE -- -- -- (10,408) (10,408)
NET INCOME -- 6,634 -- -- 6,634
BALANCE AT DECEMBER 31, 1994 $51,610 74,522 -- (6,372) 119,760
SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
9
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31,
[CAPTION]
1994 1993 1992
(DOLLARS IN THOUSANDS)
Cash flows from operating activities:
Net income $ 6,634 14,839 9,961
Adjustments to reconcile net income to net cash
provided by operating activities:
Provision for loan losses 359 653 1,848
Depreciation 1,991 1,456 1,422
Securities (gains) losses, net 70 (310) (8)
Amortization of securities, premiums and discounts, net 2,367 2,325 1,151
Amortization of intangible assets 227 -- --
Change in loans held for sale, net 15,712 (16,145) 1,478
Decrease (increase) in other assets 10,661 (270) 1,718
(Decrease) increase in other liabilities (3,964) 553 593
Net cash provided by operating activities 34,057 3,101 18,163
Cash flows from investing activities:
Proceeds from maturities of investment securities available for sale 91,623 -- --
Proceeds from sale of investment securities available for sale 71,430 -- 1,991
Purchases of investment securities available for sale (41,410) -- --
Proceeds from maturities and issuer calls of investment securities
held to maturity 4,061 90,299 71,874
Proceeds from sales of investment securities held to maturity -- -- 11
Purchases of investment securities held to maturity (111,811) (122,063) (125,892)
(Increase) decrease in loans (42,349) 34,910 39,532
Capital expenditures for premises and equipment (2,131) (2,713) (1,313)
Proceeds from sale of Federal Home Loan Bank Stock 5,735 -- --
Purchase of First Federal, net of cash acquired 31,182 -- --
Net cash provided by (used in) investing activities 6,330 433 (13,797)
Cash flows from financing activities:
(Decrease) increase in deposits (23,383) 10,821 (1,505)
Proceeds from FHLB advances 12,451 14,740 8,000
Repayment of FHLB advances (14,299) (19,240) (15,000)
Increase in other borrowed money, net 1,512 1,058 68
Purchase and retirement of common stock, net -- (3,559) (509)
Dividends paid to stockholders (5,165) (4,594) (3,712)
Proceeds from stock options exercised 443 606 158
Purchase of ESOP stock -- -- 885
Net cash used in financing activities (28,441) (168) (11,615)
Net increase (decrease) in cash and cash equivalents 11,946 3,366 (7,249)
Cash and cash equivalents at beginning of year 36,697 33,331 40,580
Cash and cash equivalents at end of year $ 48,643 36,697 33,331
Supplemental disclosures of cash flow information:
Cash paid during the year for:
Interest $ 28,941 27,962 35,812
Income taxes 6,959 7,286 7,064
Supplemental schedule of noncash investing activities:
Loans receivable transferred to real estate owned $ 1,123 1,982 1,009
Investment securities held to maturity transferred to investment
securities available for sale 329,799 -- --
Effect of change in accounting principle (net of tax effect of
$2,039) 4,036 -- --
Decrease in unrealized gain on investment securities available for
sale (net of tax effect of $5,309) (10,408) -- --
SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
10
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1994, 1993 AND 1992
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The following is a description of the more significant accounting and
reporting policies which Security Capital Bancorp and subsidiaries
("Security Capital") follow in preparing and presenting their consolidated
financial statements:
(a) PRINCIPLES OF CONSOLIDATION AND REPORTING
The accompanying consolidated financial statements include the accounts of
Security Capital Bancorp, a North Carolina corporation organized as a
multi-bank holding company and its wholly owned subsidiaries, Security
Capital Bank, formerly Security Bank and Trust Company, Salisbury, North
Carolina ("Security Bank"), OMNIBANK, Inc., A State Savings Bank,
Salisbury, North Carolina ("OMNIBANK"), Citizens Savings, Inc., SSB,
Concord, North Carolina ("Citizens"), Home Savings Bank, Inc., SSB, Kings
Mountain, North Carolina ("Home Savings"), and Estates Development
Corporation, Salisbury, North Carolina ("EDC"). All significant
intercompany balances have been eliminated.
Certain amounts have been reclassified to conform with the statement
presentation for 1994. The reclassifications have no effect on
stockholders' equity or net income as previously reported.
All dollar amounts except share and per share amounts in the notes to the
consolidated financial statements are in thousands.
(b) SECURITIES
As more fully described in note 3 to the consolidated financial statements,
Security Capital adopted the provisions of Statement of Financial
Accounting Standards No. 115, "Accounting for Certain Investments in Debt
and Equity Securities," on January 1, 1994.
The classification of securities is determined at the date of purchase.
Investment securities available for sale are recorded at market value with
a corresponding adjustment net of tax recorded as a component of
stockholders' equity. Security Capital intends to hold these securities for
an indefinite period of time but may sell them prior to maturity.
Investment securities held to maturity are stated at cost, adjusted for
amortization of premiums and accretion of discounts. Security Capital
intends and has the ability to hold such securities until maturity.
Gains and losses on sales of securities are recognized when realized, with
cost being determined by the specific identification method. Premiums and
discounts are amortized into interest income using a level yield method.
Regulations require the savings bank subsidiaries (i.e. OMNIBANK, Citizens,
and Home Savings) to maintain cash and approved securities in an amount
equal to a prescribed percentage (10% at December 31, 1994) of total
assets.
(c) LOANS HELD FOR SALE
Loans held for sale are carried at the lower of aggregate cost or market as
determined by the outstanding commitments from investors or current
investor yield requirements calculated on the aggregate loan basis. Gains
or losses resulting from sales of loans are recognized when the proceeds
are received from the investors.
(d) LOAN INTEREST INCOME
Loan interest income is recognized on the accrual basis.
The accrual of interest is generally discontinued on all loans that become
90 days past due as to principal or interest unless collection of both
principal and interest is assured by way of both collateralization,
guarantees, or other security, and the loan is in the process of
collection. Security Capital provides an allowance for uncollected accrued
interest income if, in the opinion of management, collectibility of that
accrued interest income is doubtful. This allowance is netted against
accrued interest income, which is included in other assets in the
accompanying consolidated financial statements. Interest income foregone on
nonaccrual and restructured loans for each of the years in the three-year
period ended December 31, 1994 was not significant.
11
(e) ALLOWANCE FOR LOAN LOSSES
Security Capital provides for loan losses on the allowance method.
Accordingly, all loan losses are charged to the related allowance and all
recoveries are credited to it. Additions to the allowance for loan losses
are provided by charges to operations based on various factors that, in
management's judgment, deserve current recognition in estimating losses
inherent in the portfolio. Such factors considered by management include
the market value of the underlying collateral, growth and composition of
the loan portfolio, the relationship of the allowance for loan losses to
outstanding loans, delinquency trends and economic conditions. Management
evaluates the carrying value of loans periodically and the allowance is
adjusted accordingly. While management uses the best information available
to make evaluations, future adjustments may be necessary if economic and
other conditions differ substantially from the assumptions used.
In addition, various regulatory agencies, as an integral part of their
examination process, periodically review the allowance for loan losses.
Such regulatory agencies may require the financial institution subsidiaries
to recognize additions to the allowance for loan losses based on their
judgments about information available to them at the time of their
examination.
(f) REAL ESTATE OWNED
Real estate owned is included in other assets and represent other real
estate that has been acquired through loan foreclosures or deed received in
lieu of foreclosure. Such properties are generally appraised annually and
are recorded at the lower of cost or fair value, less applicable selling
costs. Costs relating to the development and improvement of property are
capitalized, whereas those relating to holding the property are charged to
expense.
(g) PREMISES AND EQUIPMENT
Premises and equipment are recorded at cost, and depreciation is provided
over the estimated useful lives of the related assets principally on a
straight-line basis. Estimated lives are ten to fifty years for buildings,
building components and improvements; five to ten years for furniture,
fixtures, and equipment; and three years for automobiles. Leasehold
improvements are amortized on a straight-line basis over the lesser of
their estimated life or the remaining lease term.
Maintenance and repairs are charged to expense as incurred and improvements
are capitalized. The costs and accumulated depreciation relating to
premises and equipment retired or otherwise disposed of are eliminated from
the accounts and any resulting gains or losses are credited or charged to
income.
(h) INTANGIBLE ASSETS
Goodwill is being amortized on a straight-line basis over a 20-year period.
Deposit base premiums and mortgage servicing rights are being amortized
over 10 years using the sum-of-the-years digits method.
(i) LOAN ORIGINATION FEES AND COSTS
Loan origination fees and certain direct loan origination costs are
deferred and amortized over the contractual life of the related loan as an
adjustment of the loan yield using a level yield method. Direct costs of
unsuccessful loans and indirect costs are expensed as incurred.
(j) INCOME TAXES
Security Capital adopted the provisions of Statement of Financial
Accounting Standards No. 109, "Accounting for Income Taxes" ("Standard No.
109") during 1993 and has applied the provisions of the statement without
restating prior years' financial statements. Prior to the adoption of
Standard No. 109, Security Capital accounted for income taxes using the
deferred method required by APB Opinion 11. Standard No. 109 has changed
Security Capital's method of accounting for income taxes from the
deferred method to the asset and liability method. The objective of the
asset and liability method is to establish deferred tax assets and
liabilities for the temporary differences between the financial reporting
basis and the tax basis of Security Capital's assets and liabilities at
enacted rates expected to be in effect when such amounts are realized or
settled. Deferred tax assets are reduced, if necessary, by the amount of
such benefits that are not expected to be realized based upon available
evidence.
The cumulative effect of adopting Standard No. 109 as of January 1, 1993
was not material, and therefore no cumulative effect was presented in the
consolidated statement of income for the year ended December 31, 1993.
12
Pursuant to the deferred method under APB Opinion 11, which applied in 1992
and prior years, deferred income taxes are recognized for income and
expense items that are reported in different years for financial reporting
purposes and income tax purposes using the tax rate applicable for the year
of the calculation. Under the deferred method, deferred taxes are not
adjusted for subsequent changes in tax rates.
(k) NET INCOME AND DIVIDENDS PER SHARE
Net income per share has been computed by dividing net income by the
weighted average number of shares outstanding, as adjusted retroactively
for stock splits and stock dividends. Due to the pooling-of-interests
merger in 1992, as discussed in note 2, dividends per share for 1992 was
computed by dividing dividends paid by the weighted average number of
shares outstanding, as adjusted retroactively for stock splits and stock
dividends.
(l) CASH AND CASH EQUIVALENTS
Cash and cash equivalents include cash and due from banks, interest-bearing
balances in other banks, and federal funds sold. Generally, cash and cash
equivalents are considered to have maturities of three months or less.
(m) FAIR VALUE OF FINANCIAL INSTRUMENTS
In December 1991 the FASB issued Statement of Financial Accounting
Standards No. 107, "Disclosures About Fair Value of Financial Instruments"
("Statement No. 107"). Statement No. 107 requires disclosures about the
fair value of all financial instruments. Fair value estimates, methods, and
assumptions are set forth in note 17.
(n) POSTRETIREMENT BENEFITS
The FASB issued Statement of Financial Accounting Standards No. 106,
"Employers' Accounting for Postretirement Benefits Other Than Pensions"
(Statement No. 106), which requires during an employee's active years of
service, accrual of expected costs of providing postretirement benefits,
principally health care and life insurance, to employees and their
beneficiaries and dependents. Statement No. 106 was effective for 1993, but
there was no material impact on Security Capital's consolidated financial
statements since Security Capital generally does not provide such benefits.
(2) ACQUISITIONS AND PENDING MERGER
Effective September 23, 1994, Security Capital purchased the outstanding
stock of First Federal Savings & Loan Association of Charlotte ("First
Federal") from Fairfield Communities, Inc. for approximately $41,000,000 in
cash. The acquisition is being accounted for by the purchase method.
Concurrent with the purchase, First Federal was merged into Security Bank.
Immediately prior to the acquisition, First Federal had assets of
$302,163,000, net loans of $135,819,000, deposits of $250,929,000,
stockholders' equity of $29,434,000, and net income for the period from
January 1, 1994, through September 23, 1994, of $855,000. As a result of
the acquisition, goodwill, deposit base premium, and mortgage servicing
rights were increased by $12,597,000, $3,222,000, and $1,042,000,
respectively. These amounts are being amortized on a straight-line basis
over 20 years for goodwill and over 10 years using the sum-of-the-years
digits method for deposit base premium and mortgage servicing rights.
The information below indicates, on a pro forma basis, amounts as if First
Federal had been purchased as of the beginning of each period presented.
[CAPTION]
Years Ended December 31,
1994 1993
(DOLLARS IN
THOUSANDS, EXCEPT
PER SHARE DATA)
Net interest income $42,067 $39,447
Net income $ 4,754 $11,776
Net income per share $ 0.40 $ 1.00
During the second quarter of 1994, Security Capital completed the purchase
of First Citizens Bank and Trust Co.'s ("First Citizens") Bessemer City
office and the sale of Home Savings' Gastonia office to First Citizens.
With the transaction, Home Savings assumed approximately $2,700 in deposits
in Bessemer City and First Citizens assumed approximately $6,400 in
deposits in Gastonia.
13
On June 30, 1992, Omni Capital Group, Inc. ("Omni"), a multiple thrift
holding company incorporated under the laws of the State of North Carolina
and the former parent of OMNIBANK, Citizens, Home Savings, and EDC, merged
with and into First Security Financial Corporation ("FSFC"), a bank holding
company incorporated under the laws of the State of North Carolina and the
parent of Security Bank (the "Merger"). Upon the completion of the Merger,
FSFC's name was changed to "Security Capital Bancorp". Pursuant to the
Agreement of Combination and the related Plan of Merger, which were
approved by the stockholders of both FSFC and Omni, 5,681,216 shares of
Security Capital common stock, no par value per share, were issued in
exchange for the surrender of the issued and outstanding shares of common
stock of Omni, par value of $1.00 per share, at an exchange ratio of 2.25
shares of Security Capital common stock for each such share of Omni common
stock. The Merger was accounted for as a pooling-of-interests and,
accordingly, the consolidated financial statements for periods prior to the
Merger were restated to combine the accounts of FSFC and Omni.
On November 4, 1994, Security Capital and CCB Financial Corporation,
Durham, North Carolina ("CCB"), entered into a definitive Agreement of
Combination pursuant to which Security Capital will merge with and into
CCB, with CCB as the surviving corporation and continuing to operate under
its present name (the "Combination"). To effect the Combination, CCB will
issue .50 of a share of its common stock, par value $5.00 per share, in
exchange for each outstanding share of Security Capital's common stock, no
par value. In connection with the Combination, Security Capital's banking
subsidiaries will merge into Central Carolina Bank and Trust Company, a
subsidiary of CCB. The Combination is expected to be completed during the
second quarter of 1995.
(3) INVESTMENT SECURITIES AVAILABLE FOR SALE
A summary of investment securities available for sale follows:
DECEMBER 31, 1994
GROSS GROSS
AMORTIZED UNREALIZED UNREALIZED MARKET
COST GAINS LOSSES VALUE
(Dollars in Thousands)
U.S. Government obligations $ 194,612 134 (6,106) 188,640
U.S. Government agency obligations 70,661 18 (3,688) 66,991
Mortgage-backed Securities 960 10 (43) 927
Other 66 33 -- 99
$ 266,299 195 (9,837) 256,657
Total proceeds from sales or issuer calls of investment securities available
for sale during 1994 were $71,430. There were gross gains of $6 and gross
losses of $76 realized in 1994. Investment securities available for sale
with an aggregate par value of $1,075 were pledged to secure public deposits
and for other purposes as required by various agencies.
The Financial Accounting Standards Board (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.
On January 1, 1994, Security Capital adopted the provisions of Standard No.
115 and classified approximately $329,799 of securities as investment
securities available for sale. Security Capital recorded a fair value
adjustment for this change in accounting principle amounting to $6,075 for
the unrealized gain on investment securities available for sale, an increase
to deferred income taxes of $2,039, and an increase to stockholders' equity
of $4,036.
At December 31, 1994, Security Capital recorded a fair value adjustment
amounting to ($15,717) for the change in unrealized gain (loss) on
investment securities available for sale during the year, a deferred tax
benefit of $5,309, and a decrease to stockholders' equity of $10,408.
14
(4) INVESTMENT SECURITIES HELD TO MATURITY
A comparative summary of investment securities held to maturity follows:
DECEMBER 31, 1994
GROSS GROSS
AMORTIZED UNREALIZED UNREALIZED MARKET
COST GAINS LOSSES VALUE
(DOLLARS IN THOUSANDS)
U.S. Government obligations $ 54,328 -- (1,953) 52,375
U.S. Government agency obligations 76,931 -- (3,412) 73,519
Mortgage-backed securities 8,659 6 (301) 8,364
State and municipal obligations 15,679 180 (327) 15,532
$ 155,597 186 (5,993) 149,790
December 31, 1993
Gross Gross
Amortized Unrealized Unrealized Market
Cost Gains Losses Value
(DOLLARS IN THOUSANDS)
U.S. Government obligations $ 305,180 5,762 183 310,759
US Government agency obligations 40,409 304 345 40,368
Mortgage-backed securities 12,676 459 -- 13,135
State and municipal obligations 10,022 676 -- 10,698
Other 66 20 -- 86
$ 368,353 7,221 528 375,046
There were no sales or issuer calls of investment securities held to
maturity during 1994. Total proceeds from sales or issuer calls of
investment securities held to maturity during 1993 and 1992 were $5,860, and
$11, respectively. There were gross realized gains of $310 and $8,
respectively, and no gross realized losses in 1993 and 1992, respectively.
Investment securities held to maturity with an aggregate par value of
$18,050 were pledged to secure public deposits and for other purposes as
required by various agencies.
(5) LOANS RECEIVABLE
A comparative summary of loans receivable follows:
[CAPTION]
December 31,
1994 1993
(DOLLARS IN THOUSANDS)
Real estate mortgage (principally single family dwellings, 1-4 units) $447,452 338,562
Real estate construction 14,396 10,085
Commercial, financial, and agricultural 126,291 64,739
Installment 62,681 62,341
Unearned income (2,691) (2,698)
Premium on loans sold 102 173
$648,231 473,202
Nonaccrual and restructured loans included above $ 1,903 1,759
Accruing loans past due 90 days were $2,402 and $420 at December 31, 1994
and 1993, respectively.
Accrued interest receivable at December 31, 1994 and 1993, consisted of the
following:
[CAPTION]
December 31,
1994 1993
(DOLLARS IN THOUSANDS)
Loans $ 5,512 3,430
Investment securities 6,879 6,041
Other 94 70
$12,485 9,541
Certain real estate loans are pledged as collateral for advances from the
Federal Home Loan Bank ("FHLB") as set forth in note 8.
15
Loans serviced for others approximated $314,692, $203,403 and $174,884 at
December 31, 1994, 1993, and 1992, respectively.
Included in other assets are foreclosed properties (real estate owned) of
$1,704 and $951 at December 31, 1994 and 1993, respectively.
Security Capital's banking subsidiaries offer mortgage and consumer loans to
their officers, directors, and employees for the financing of their personal
residences and for other personal purposes. These loans are made in the
ordinary course of business and management believes they are made on
substantially the same terms, including interest rates and collateral,
prevailing at the time for comparable transactions with unaffiliated
persons. Management does not believe these loans involve more than the
normal risk of collectibility or present other unfavorable features.
The following is a reconciliation of loans outstanding in excess of $60 to
Security Capital's executive officers, directors, and their immediate
families for the year ended December 31, 1994:
(DOLLARS IN THOUSANDS)
Balance at December 31, 1993 $3,172
New loans 120
Repayments (1,219)
Balance at December 31, 1994 $2,073
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 to be implemented
prospectively for fiscal years beginning after December 15, 1994. The FASB
has also issued Standard No. 118 "Accounting by Creditors for Impairment of
a Loan-Income Recognition and Disclosures", that amends Standard No. 114 to
allow a creditor to use existing methods for recognizing interest income on
an impaired loan and by requiring additional disclosures about how a
creditor recognizes interest income related to impaired loans. This Standard
is to be implemented concurrently with Standard No. 114. At this time,
management does not anticipate a material impact to the consolidated
financial statements of Security Capital upon the adoption of these
Standards.
(6) ALLOWANCE FOR LOAN LOSSES
The following is a reconciliation of the allowance for loan losses for the
years ended December 31, 1994, 1993 and 1992:
[CAPTION]
Years Ended December 31,
1994 1993 1992
(DOLLARS IN THOUSANDS)
Balance at beginning of year $7,227 6,909 5,429
Charge-offs (581) (732) (1,024)
Recoveries 258 397 656
Net charge-offs (323) (335) (368)
Allowance of acquired institution 2,054 -- --
Provision for loan losses 359 653 1,848
Balance at end of year $9,317 7,227 6,909
16
(7) PREMISES AND EQUIPMENT
A comparative summary of premises and equipment follows:
[CAPTION]
December 31,
1994 1993
(DOLLARS IN THOUSANDS)
Land and land improvements $ 4,863 3,917
Office buildings and improvements 16,986 16,175
Furniture, fixtures, and equipment 14,788 11,910
Construction in progress 193 1,120
36,830 33,122
Accumulated depreciation (15,117) (14,762)
Premises and equipment, net $ 21,713 18,360
(8) ADVANCES FROM THE FEDERAL HOME LOAN BANK
A comparative summary of advances from the FHLB follows:
[CAPTION]
December 31,
Date Due Interest Rate 1994 1993
(DOLLARS IN THOUSANDS)
March 10, 1994 9.55% $ -- 1,000
March 31, 1995, variable rate 6.88 2,130 --
December 24, 1995 (Face amount of $1,000) 5.52 989 --
March 10, 1996 9.65 1,000 1,000
April 2, 1996 (Face amount of $2,000) 4.80 1,949 --
April 16, 1996 (Face amount of $1,000) 4.61 971 --
April 23, 1996 8.50 2,000 2,000
May 21, 1996 8.20 1,000 1,000
June 1, 1996 (Face amount of $1,500) 4.93 1,459 --
July 1, 1996 9.25 1,000 1,000
July 2, 1996 9.05 1,000 1,000
December 24, 1996 (Face amount of $1,000) 6.07 981 --
March 10, 1997 8.15 1,000 1,000
April 2, 1997 (Face amount of $3,000) 5.26 2,880 --
June 9, 2012 (Face amount of $330) 5.69 217 --
$18,576 8,000
At December 31, 1994, stock owned by Security Bank and OMNIBANK in the FHLB,
totaling $2,890, certain securities and mortgage loans were pledged to
secure these advances.
17
(9) INCOME TAXES
As discussed in the Summary of Significant Accounting Policies, Security
Capital adopted Standard No. 109 as of January 1, 1993. The cumulative
effect of this change in accounting for income taxes of $388 as of January
1, 1993 is reflected in the 1993 financial statements as a reduction of
income tax expense. Financial statements for the periods prior to 1993 have
not been restated to apply the provisions of Standard No. 109.
Income tax expense (benefit) for the years ended December 31, 1994, 1993,
and 1992, was as follows:
Current Deferred Total
(DOLLARS IN THOUSANDS)
1994:
FEDERAL $6,824 4,010 10,834
STATE 506 536 1,042
$7,330 4,546 11,876
1993:
Federal 7,019 (132) 6,887
State 403 (17) 386
$7,422 (149) 7,273
1992:
Federal 6,745 (839) 5,906
State 417 -- 417
$7,162 (839) 6,323
The income tax expense of Security Capital for the years ended December 31,
1994, 1993, and 1992, was different from the amount computed by applying the
federal income tax rate to income before income taxes because of the
following:
[CAPTION]
1994 1993 1992
Amount Percent Amount Percent Amount Percent
(DOLLARS IN THOUSANDS)
Income tax expense at federal rate $6,479 35.0% $7,739 35.0% $5,537 34.0%
Increase (decrease) in income taxes
resulting from:
Adjustment to deferred tax assets and
liabilities for enacted changes in tax
laws and rates -- -- (48) (.2) -- --
Change in beginning-of-the-year deferred
tax assets valuation allowance (92) (.5) (46) (.2) -- --
Tax-exempt interest (247) (1.3) (301) (1.3) (361) (2.2)
Thrift bad debt provision for financial
reporting purposes in excess of current
year loan losses -- -- -- -- 504 3.1
Thrift bad debt reserve recapture 4,906 26.5 -- -- -- --
State income tax expense, net of federal
income tax benefit 677 3.7 251 1.1 275 1.7
Other, net 153 .8 (322) (1.5) 368 2.2
$11,876 64.2% $7,273 32.9% $6,323 38.8%
For the year ended December 31, 1992, deferred income tax benefits resulted
from timing differences in the period in which revenues and expenses were
recognized for income tax and financial statement purposes. The sources of
these differences and the tax effects of each are presented below:
[CAPTION]
1992
(DOLLARS
IN
THOUSANDS)
Deferred compensation $ (327)
Accrued expenses, not deductible until paid (258)
Other, net (254)
$ (839)
18
The sources and tax effects of temporary differences that give rise to
significant portions of the deferred tax liabilities (assets) at December
31, 1994 and 1993, are presented below:
1994 1993
(Dollars in Thousands)
Deferred tax liabilities:
Depreciation $ 925 987
FHLB Stock -- book basis greater than tax basis 881 869
Prepaid FDIC premium 502 --
Prepaid pension expense 231 232
Bank bad debt recapture 116 204
FHLMC discount accretion 151 207
Thrift bad debt reserve recapture 5,627 --
Other 97 98
Total gross deferred tax liabilities 8,530 2,597
Deferred tax assets:
Unrealized loss on investment securities available for sale (3,886) --
Provision for loan losses, net (2,934) (1,687)
Net deferred loan fees (522) (603)
Accrued expenses, deductible when paid (1,902) (1,711)
Intangible assets tax basis greater than book basis (39) --
Other (197) (298)
Total gross deferred tax assets (9,480) (4,299)
Deferred tax assets valuation allowance 725 201
Net deferred tax asset $ (225) (1,501)
A portion of the change in the net deferred tax asset relates to unrealized
losses on investment securities available for sale. The related current
period deferred tax benefit of $3,270, net of a charge of $616 to the
valuation allowance, has been recorded directly to stockholders' equity. The
balance of the change in the net deferred tax asset results from the current
period deferred tax expense of $4,546.
The realization of net deferred tax assets may be based on utilization of
carrybacks to prior taxable periods, anticipation of future taxable income
in certain periods, and the utilization of tax planning strategies.
Management has determined that it is more likely than not that the net
deferred tax asset can be supported by carrybacks to federal taxable income
and by expected future taxable income which will far exceed amounts
necessary to fully realize remaining deferred tax assets resulting from the
scheduling of temporary differences. The valuation allowance primarily
relates to certain state temporary differences. At January 1, 1993, the
valuation allowance was $247. The change in the valuation allowance during
1994 and 1993 was a net increase (decrease) of $524 and $(46), respectively.
Under the Internal Revenue Code of 1986, Security Capital's savings bank
subsidiaries are allowed a special bad debt deduction related to additions
to tax bad debt reserves established for the purpose of absorbing losses. A
reduction of such reserves for purposes other than bad debt losses will
create income for tax purposes only, which will be subject to the then
current corporate income tax rates. Under the provisions of APB Opinion 23,
a deferred tax liability is not currently recognized for temporary
differences resulting from a savings bank's base year tax bad debt reserve.
At December 31, 1993, the potential deferred tax liability related to the
recapture of this portion of the tax bad debt reserve was approximately
$5,600. As a result of the savings bank subsidiaries change in tax
accounting method to the specific charge-off method for bad debts during
1994, Security Capital has recorded an additional federal and state income
tax expense in 1994 of $5,600 to fully recapture prior amounts. At December
31, 1994, there are no remaining amounts included in retained earnings for
which a provision for federal or state income tax has not been made.
In 1994, the Internal Revenue Service examination of Security Capital's 1992
federal income tax return was settled with no material impact on Security
Capital's financial position or results of operations. Income tax returns
subsequent to 1992 are subject to examination by the taxing authorities.
19
(10) STOCKHOLDERS' EQUITY
At the time of their conversions to stock ownership, liquidation accounts
were established for each of Security Capital's savings bank subsidiaries
in amounts equal to their respective regulatory capital. Each eligible
deposit account holder, as described in the respective plans of
conversion, is entitled to a proportionate share of this account in the
event of a complete liquidation of any of these subsidiaries, and only in
such event. This share will be reduced if the account holder's balance in
the related deposit account falls below the amount in such account on the
date(s) of record, and will cease to exist if the account is closed. The
liquidation accounts will never be increased despite any increase after
the conversions in the related balance of an account holder.
Security Capital and its banking subsidiaries must comply with certain
regulatory capital requirements established by the FRB and the FDIC. At
December 31, 1994, these standards required Security Capital and its
banking subsidiaries to maintain minimum ratios of Tier 1 capital (as
defined) to total risk-weighted assets and total capital (as defined) to
risk-weighted assets of 4.00% and 8.00%, respectively, and a minimum ratio
of Tier 1 capital to total assets (as defined) of 3.00% to 5.00%,
depending upon the specific institution's composite ratings as determined
by its regulators. At December 31, 1994, Security Capital and its banking
subsidiaries were in compliance with all of the aforementioned capital
requirements.
Security Capital also has authorized 5,000,000 shares of no par value
preferred stock, none of which is issued and outstanding at December 31,
1994.
(11) PENSION, PROFIT SHARING, AND INCENTIVE COMPENSATION PLANS
Security Capital had a profit sharing plan (the "Profit Sharing Plan")
covering certain of Security Bank's employees. In 1993 Security Capital
merged the Profit Sharing Plan into an Employees' Incentive Profit Sharing
and Savings (401k) Plan (the "Incentive Plan") for the benefit of the
eligible employees of Security Capital and its subsidiaries. As a result,
Security Capital made contributions to the Incentive Plan in 1993 rather
than to the Profit Sharing Plan. Contributions to the Incentive Plan are
based on a percentage of Security Capital's profits, as computed by a
formula set by the Board of Directors. The maximum allowable contribution
is 15% of the participating employee's compensation. Profit sharing costs
charged to expense approximated $360 in 1994, $694 in 1993, and $329 in
1992.
Security Bank sponsored a noncontributory defined benefit plan which
covered substantially all the employees of Security Bank and Security
Capital sponsored a noncontributory defined benefit plan for the benefit
of the employees of the savings bank subsidiaries (the "Plans"). The
Plans were merged into one defined benefit pension plan covering all
eligible employees of Security Capital and its subsidiaries as of January
1, 1993. Benefits for the Plan are based on years of service and the
employee's annual compensation during his or her term of employment.
Security Capital's funding policy is to contribute annually to the Plan
the maximum amount that can be deducted for federal income tax purposes.
Contributions are intended to provide for benefits attributed to service
to date but also for those expected to be earned in the future.
The following table sets forth the Plans' funded status and amounts
recognized in the consolidated balance sheets at December 31, 1994 and
1993.
[CAPTION]
1994 1993
(DOLLARS IN THOUSANDS)
Plans' assets at fair value, primarily short-term investments and U.S.
Treasury securities $ 7,660 7,028
Actuarial present value of projected benefit obligation for service rendered
to date 7,921 9,503
Plans' assets less than projected benefit obligation (261) (2,475)
Unrecognized net transition asset being recognized over 18 years (443) (487)
Unrecognized net (gain) loss (349) 1,693
Unrecognized prior service cost 1,490 1,628
Prepaid pension cost included in other assets $ 437 359
20
The actuarial present value of the accumulated benefit obligation amounted
to $6,095 in 1994 and $6,341 in 1993, including vested benefits of $5,924 in
1994 and $6,135 in 1993.
Net periodic pension cost for the Plans for the three years ended December
31, 1994 included the following components:
[CAPTION]
1994 1993 1992
(DOLLARS IN THOUSANDS)
Service cost -- benefits earned during the period $ 410 374 403
Interest cost on projected benefit obligation 596 586 367
Return on Plans' assets (334) (467) (390)
Net amortization and deferral (160) 14 --
Net periodic pension cost $ 512 507 380
The weighted average discount rate used in determining the actuarial
present value of the projected benefit obligation was 8.0% in 1994, 7.0%
in 1993 and 7.75% in 1992. The expected rate of increase in future
compensation levels was 5.0% in 1994, 6.0% in 1993 and 6.5% to 8.0% in
1992. The expected long-term rate of return on assets was 8.0% in 1994 and
1993 and 7.0% to 8.0% in 1992.
Prior to the acquisition, First Federal had a defined contribution plan
where eligible employees would receive a contribution on their behalf in an
amount equal to 15% of annual compensation. Security Capital made a
contribution to this plan for remaining eligible employees in the amount of
$66 in 1994. Management plans to terminate this plan in early 1995.
(12) STOCK OPTION PLANS
Security Capital has continued in effect the Omni Capital Group, Inc. 1988
Incentive Stock Option Plan pursuant to which options to purchase Security
Capital common stock may be granted to certain full-time officers and
employees at an exercise price equal to the fair market value of the stock
on the date of grant. Such options are exercisable for a ten year period.
An aggregate of 675,000 shares of common stock is reserved for issuance
under this plan. In the case of an employee who owns more than 10% of
Security Capital's outstanding common stock at the time the option is
granted, the option price may not be less than 110% of the fair market
value of the shares on the date of grant, and shall be exercisable after
the expiration of six months and before the expiration of five years from
the date of grant.
Security Capital has also continued in effect the Omni Capital Group, Inc.
1988 Directors' Non-Qualified Stock Option Plan, pursuant to which certain
non-employee members of the boards of directors of Security Capital and its
subsidiaries have been granted options to purchase Security Capital common
stock at an exercise price equal to the fair market value of the common
stock on the date of grant. Options granted under this plan must be
exercised within five years from the date of grant.
On March 15, 1988, OMNIBANK adopted two stock option plans, the Home
Federal Savings Bank 1988 Amended and Restated Directors' Non-Qualified
Stock Option Plan and the Home Federal Savings Bank 1988 Incentive Stock
Option Plan (the "Home Option Plans"), which plans became effective upon
the completion of its conversion from a mutual savings and loan association
to a capital stock savings bank. Home Federal Savings Bank was subsequently
renamed OMNIBANK. Security Capital has continued the Home Option Plans. An
aggregate number of shares amounting to 337,500 has been reserved by
Security Capital to be issued upon the exercise of stock options which have
been granted to certain directors, officers, and employees of Security
Capital under the Home Option Plans. No more options may be granted under
the Home Option Plans.
All stock options outstanding at the time of the Merger were converted into
options to acquire common stock of Security Capital.
The shareholders of Security Capital approved an Omnibus Stock Ownership
and Long Term Incentive Compensation Plan at the 1994 annual meeting. The
plan added 300,000 shares of common stock available to be granted to key
employees and officers of Security Capital or its subsidiaries. Options are
priced at 100% or more of the fair market value of the stock at the time
the option is granted. These options are first subject to vesting on the
second anniversary of the date of grant and vest over the next five years
in annual increments of 20%.
21
The following table reflects the combined status of all of the above stock
option plans at December 31, 1994:
Available Shares
for Subject to Price
Future Outstanding per
Grants Options Exercisable Share
Directors' Non-Qualified Stock Option Plans:
(1)
Balance outstanding at December 31, 1992 72,947 108,016 -- $ 3.56-7.67
Granted -- -- -- --
Exercised -- (65,834) -- $ 3.56-5.78
Balance outstanding at December 31, 1993 72,947 42,182 42,182 3.56-7.67
GRANTED -- -- -- --
EXERCISED -- (35,095) -- 4.08-5.78
BALANCE OUTSTANDING AT DECEMBER 31, 1994 72,947 7,087 7,087 $ 7.67
Incentive Stock Option Plans: (2)
Balance outstanding at December 31, 1992 247,500 435,936 -- $ 3.56-7.11
Granted -- -- -- --
Exercised -- (71,031) -- 3.56-7.11
Balance outstanding at December 31, 1993 247,500 364,905 364,905 3.56-7.11
GRANTED -- -- -- --
EXERCISED -- (57,935) -- 3.56-7.11
BALANCE OUTSTANDING AT DECEMBER 31, 1994 247,500 306,970 306,970 $ 3.56-7.11
1994 Omnibus Stock Ownership and Long Term
Incentive Plan:
Balance outstanding at December 31, 1993 -- -- -- --
Common stock available to be granted 300,000 -- -- --
GRANTED (71,000 ) 71,000 -- $ 13.625-15.375
EXERCISED -- -- -- --
BALANCE OUTSTANDING AT DECEMBER 31, 1994 229,000 71,000 -- $ 13.625-15.375
(1) INCLUDES THE HOME FEDERAL SAVINGS BANK AMENDED AND RESTATED 1988
DIRECTORS' NON-QUALIFIED STOCK OPTION PLAN AND THE OMNI CAPITAL GROUP,
INC. 1988 DIRECTORS' NON-QUALIFIED STOCK OPTION PLAN.
(2) INCLUDES THE HOME FEDERAL SAVINGS BANK 1988 INCENTIVE STOCK OPTION PLAN
AND THE OMNI CAPITAL GROUP, INC, 1988 INCENTIVE STOCK OPTION PLAN.
(13) EMPLOYEE STOCK OWNERSHIP PLAN
Security Capital continued Omni's Employee Stock Ownership Plan (the
"ESOP") for the benefit of the former employees of Omni and its
subsidiaries. Contributions to the ESOP were made on a discretionary basis
and were allocated to each eligible employee based on his/her salary in
relation to total employee compensation expense. At retirement or
termination of employment, each employee will receive an amount equal to
his/her vested interest in the ESOP in the form of cash or common stock.
In connection with the mutual to stock conversions of the savings bank
subsidiaries, the ESOP borrowed funds to purchase Omni common stock for the
ESOP. Upon the Merger, the shares of Omni common stock held in the ESOP
were exchanged for shares of Security Capital common stock. During 1992,
Security Capital repurchased sufficient remaining unallocated shares of
Security Capital common stock held by the ESOP to eliminate the remaining
balance of the related debt. In 1994 and 1993, Security Capital made
contributions to the Incentive Plan discussed in Note 11 rather than to the
ESOP. Security Capital plans to officially terminate the ESOP in 1995.
ESOP costs charged to expense amounted to $5, $10 and $334 in 1994, 1993
and 1992, respectively.
(14) COMMITMENTS, CONTINGENCIES AND OFF BALANCE SHEET RISK
Security Capital is a defendent in various litigation arising in the normal
course of business. In the opinion of management, resolution of these
matters will not result in a material adverse effect on Security Capital's
financial position.
In the normal course of business, there are outstanding various commitments
to extend credit which are not reflected in the consolidated financial
statements. At December 31, 1994, outstanding loan commitments approximated
$2,591 (Fixed Rate -- $349, Variable Rate -- $2,242), preapproved but
unused lines of credit for loans
22
totalled $95,198 and standby letters of credit aggregated $675. These
amounts represent Security Capital's exposure to credit risk, and in the
opinion of management have no more than the normal lending risk that
Security Capital's banking subsidiaries commit to their borrowers. If these
commitments are drawn, Security Capital's banking subsidiaries will obtain
collateral if it is deemed necessary based on management's credit
evaluation of the borrower. Collateral held varies but may include accounts
receivable, inventory, and commercial or residential real estate.
Management expects that these commitments can be funded through normal
operations. In addition, Security Capital has no off-balance sheet
derivative commitments.
Security Capital's banking subsidiaries make primarily commercial, real
estate and installment loans to customers throughout their market areas,
which consists primarily of the south central and western Piedmont regions
of North Carolina. These 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.
Average daily Federal Reserve balance requirements for Security Bank and
the savings bank subsidiaries for the two week period ended January 4, 1995
amounted to $6,765 and $525, respectively.
(15) SUMMARY OF QUARTERLY INCOME STATEMENT INFORMATION (UNAUDITED)
A summary of quarterly income information for the years ended December 31,
1994 and 1993, follows:
YEAR ENDED DECEMBER 31, 1994
THREE MONTHS ENDED
MARCH 31 JUNE 30 SEPTEMBER 30 DECEMBER 31
(DOLLARS IN THOUSANDS, EXCEPT SHARE DATA)
INTEREST INCOME $ 15,068 15,430 15,988 21,050
INTEREST EXPENSE 6,443 6,342 6,739 9,799
NET INTEREST INCOME 8,625 9,088 9,249 11,251
PROVISION FOR LOAN LOSSES 87 84 97 91
NET INTEREST INCOME AFTER PROVISION FOR
LOAN LOSSES 8,538 9,004 9,152 11,160
OTHER INCOME 2,439 2,140 1,577 2,200
OTHER EXPENSE 5,753 6,100 8,269 7,578
INCOME BEFORE INCOME TAXES 5,224 5,044 2,460 5,782
INCOME TAXES 1,762 1,581 6,500 2,033
NET INCOME $ 3,462 3,463 (4,040) 3,749
NET INCOME PER SHARE $ .30 .30 (.34) .32
Year Ended December 31, 1993
Three Months Ended
March 31 June 30 September 30 December 31
(DOLLARS IN THOUSANDS, EXCEPT SHARE DATA)
Interest income $ 16,498 16,279 15,933 15,513
Interest expense 7,248 7,104 6,986 6,797
Net interest income 9,250 9,175 8,947 8,716
Provision for loan losses 184 153 170 146
Net interest income after provision for loan
losses 9,066 9,022 8,777 8,570
Other income 2,611 2,600 2,785 2,523
Other expense 6,163 6,200 6,037 5,442
Income before income taxes 5,514 5,422 5,525 5,651
Income taxes 1,545 1,770 2,017 1,941
Net income $ 3,969 3,652 3,508 3,710
Net income per share $ .33 .31 .30 .32
23
(16) PARENT COMPANY FINANCIAL DATA
The primary assets of Security Capital (the "Parent Company") are its
investments in subsidiaries and its principal source of income is dividends
from these subsidiaries. Certain regulatory and other requirements restrict
the lending of funds by the subsidiaries to the Parent Company and the
amount of dividends which can be paid to the Parent Company. Subject to
restrictions imposed by state laws and federal regulations, the Boards of
Directors of the Parent Company's subsidiaries may declare dividends from
their retained earnings of up to approximately $36,900 at December 31,
1994. The subsidiaries are prohibited by law from paying dividends from
their capital stock and paid-in capital accounts totaling approximately
$38,100 at December 31, 1994.
The following is a summary of selected financial information for the Parent
Company:
[CAPTION]
Balance Sheets December 31,
1994 1993
(DOLLARS IN THOUSANDS)
Assets:
Cash on deposit with subsidiaries $ 5,767 13,488
Investments in and advances to subsidiaries 113,617 110,762
Investment securities available for sale (amortized cost of $66 at December
31, 1994) 99 --
Investment securities (market value of $86 at December 31, 1993) -- 66
Other assets 417 --
Total assets $119,900 124,316
Liabilities and stockholders' equity:
Other liabilities 140 96
Total liabilities 140 96
Stockholders' equity:
Common stock 51,610 51,167
Retained earnings, substantially restricted 74,522 73,053
Unrealized loss on investment securities available for sale (6,372) --
Total stockholders' equity 119,760 124,220
Total liabilities and stockholders' equity $119,900 124,316
[CAPTION]
Statements of Income Years Ended December 31,
1994 1993 1992
(DOLLARS IN THOUSANDS)
Dividends from subsidiaries $10,111 15,184 5,434
Management income from subsidiaries 1,105 639 1,552
Equity in undistributed net (loss) income of subsidiaries (3,478) (233) 4,393
Other income 19 165 145
Total income 7,757 15,755 11,524
Expenses 1,123 916 1,563
Net income $ 6,634 14,839 9,961
24
[CAPTION]
Statements of Cash Flows Years Ended December 31,
1994 1993 1992
(DOLLARS IN THOUSANDS)
Cash flows from operating activities:
Net income $ 6,634 14,839 9,961
Adjustments to reconcile net income to net cash provided by operating
activities:
Decrease (increase) in other assets (417) 158 1,654
Equity in undistributed net loss (income) of subsidiaries 3,478 233 (4,393)
Increase in other liabilities 44 46 50
Net cash provided by operating activities 9,739 15,276 7,272
Cash flows from investing activities:
Decrease (increase) in advances to subsidiaries (12,738) 2,215 (2,532)
Purchases of investment securities -- (66) --
Net cash provided (used) by investing activities (12,738) 2,149 (2,532)
Cash flows from financing activities:
Purchase and retirement of common stock -- (3,559) (509)
Proceeds from stock options exercised 443 606 158
Dividends paid to stockholders (5,165) (4,594) (3,712)
Net cash used by financing activities (4,722) (7,547) (4,063)
Net increase (decrease) in cash and cash equivalents (7,721) 9,878 677
Cash and cash equivalents at beginning of year 13,488 3,610 2,933
Cash and cash equivalents at end of year $ 5,767 13,488 3,610
Supplemental schedule of noncash investing activities:
Unrealized gain on parent company investment securities available for
sale $ 33 -- --
Unrealized loss on subsidiaries investment securities available for
sale (6,405) -- --
(17) FAIR VALUE OF FINANCIAL INSTRUMENTS
Statement of Financial Accounting Standards No. 107, "Disclosures About
Fair Value of Financial Instruments" ("Statement No. 107") was issued by
the FASB in December 1991. Statement No. 107 requires disclosures about the
fair value of all financial instruments. Fair value estimates, methods, and
assumptions are set forth below for each type of financial instrument.
CASH, FEDERAL FUNDS SOLD AND SHORT-TERM BORROWINGS
The carrying amount of cash, federal funds sold, short-term borrowings, and
accrued interest receivable or payable on all financial instruments
approximate fair value because of the short terms to maturity of these
financial instruments.
INVESTMENT SECURITIES AVAILABLE FOR SALE
The following table presents the carrying value and estimated fair value of
investment securities available for sale at December 31, 1994:
1994
Estimated
Fair Value
Amortized and Carrying
Cost Value
(DOLLARS IN THOUSANDS)
US Government Obligations:
Due in one year or less $ 63,227 62,976
Due after one year through five years 129,315 123,602
Due after five years through ten years 2,070 2,062
US Government agency obligations:
Due in one year or less 1,006 1,004
Due after one year through five years 49,882 46,384
Due after five years through ten years 19,773 19,603
Mortgage-backed securities: 960 927
Other:
Due after ten years 66 99
$266,299 256,657
25
The fair value of debt securities is established based on bid prices
published in financial newspapers or bid quotations received from securities
dealers.
INVESTMENT SECURITIES HELD TO MATURITY
The following table presents the carrying value and estimated fair value of
investment securities held to maturity at December 31, 1994 and 1993:
At December 31,
1994 1993
Amortized Amortized
Cost and Cost and
Carrying Estimated Carrying Estimated
Value Fair Value Value Fair Value
(DOLLARS IN THOUSANDS)
US Government obligations:
Due in one year or less $ 1,000 1,000 94,356 95,719
Due after one year through five years 53,328 51,375 210,824 215,040
US Government agency obligations:
Due in one year or less -- -- 500 505
Due after one year through five years 45,968 43,613 34,947 34,724
Due after five years through ten years 30,963 29,906 4,962 5,139
Mortgage-backed securities: 8,659 8,364 12,676 13,135
State and municipal obligations:
Due in one year or less 6,509 6,612 1,002 1,018
Due after one year through five years 2,484 2,561 9,020 9,680
Due after five years through ten years 1,276 1,243 -- --
Due after ten years 5,410 5,116 -- --
Other:
Due after ten years -- -- 66 86
$155,597 149,790 368,353 375,046
The fair value of debt securities, except certain state and municipal
obligations, is estimated based on bid prices published in financial
newspapers or bid quotations received from securities dealers. The fair
value of certain state and municipal obligations is not readily available
through market sources other than dealer quotations, so fair value estimates
are based on quoted market prices of instruments similar to those being
valued, adjusted for differences between the quoted instruments and the
instruments being valued.
LOANS
For purposes of estimating fair value of loans, the portfolio is segregated
by type based on similar characteristics such as real estate mortgage, real
estate construction and installment and equity lines of credit.
The fair value of loans is calculated by discounting estimated cash flows
using current rates at which similar loans would be made to borrowers with
similar credit risk. Cash flows for fixed rate loans are based on the
weighted average maturity of the specific loan category. Adjustable rate
loans are either prime based and are repriced immediately or monthly as
prime changes, or are based on published indices and have relatively short
terms to their repricing dates.
The following table presents fair value information for loans:
1994 1993
Carrying Estimated Carrying Estimated
Amount Fair Value Amount Fair Value
(DOLLARS IN THOUSANDS)
Loans, net $638,914 615,451 465,975 472,092
Loans held for sale $ 2,697 2,697 18,409 18,411
26
DEPOSIT LIABILITIES
The fair value of demand deposits, savings accounts and money market
deposits is the amount payable on demand. The fair value of certificates of
deposit is based on the discounted value of contractual cash flows. The
discount rate is estimated using the rates currently offered for deposits of
similar remaining maturities.
The following table presents fair value information for deposits:
At December 31,
1994 1993
Carrying Estimated Carrying Estimated
Amount Fair Value Amount Fair Value
(DOLLARS IN THOUSANDS)
Demand deposit- noninterest-bearing $ 67,203 67,203 67,830 67,830
Demand deposit- interest bearing 91,071 91,071 76,130 76,130
Insured money market accounts 94,981 94,981 79,711 79,711
Savings deposits 165,107 165,107 151,360 151,360
Certificates of deposit 593,783 581,144 409,425 411,365
$1,012,145 999,506 784,456 786,396
ADVANCES FROM THE FEDERAL HOME LOAN BANK AND OTHER BORROWED MONEY
The fair value of advances from the FHLB is based on quoted market prices
for the same or similar issues or on the current rates offered to Security
Capital for debt of the same remaining maturities. At December 31, 1994 and
1993, the carrying value of advances from the FHLB was $18,576 and $8,000,
respectively, and the fair value was $18,477 and $8,539, respectively.
The fair value of other borrowed money, consisting of securities sold under
agreements to repurchase, bearing a short term to maturity, is considered to
approximate carrying value.
COMMITMENTS TO EXTEND CREDIT AND STANDBY LETTERS OF CREDIT
The large majority of commitments to extend credit and standby letters of
credit are at variable rates and/or have relatively short terms to maturity
and, therefore, are subject to minimal interest rate risk exposure.
LIMITATIONS
Fair value estimates are made at a specific point in time, based on relevant
market information and information about the financial instrument. These
estimates do not reflect any premium or discount that could result from
offering for sale at one time Security Capital's entire holdings of a
particular financial instrument. Because no market exists for a significant
portion of Security Capital's financial instruments, fair value estimates
are based on judgments regarding future expected loss experience, current
economic conditions, risk characteristics of various financial instruments,
and other factors. These estimates are subjective in nature and involve
uncertainties and matters of significant judgment and therefore cannot be
determined with precision. Changes in assumptions could significantly affect
the estimates.
Fair value estimates are based on existing on-and-off balance sheet
financial instruments without attempting to estimate the value of
anticipated future business and the value of assets and liabilities that are
not considered financial instruments. For example, a significant asset not
considered a financial asset is premises and equipment. In addition, tax
ramifications related to the realization of the unrealized gains and losses
can have a significant effect on fair value estimates and have not been
considered in any of the estimates.
27
INDEPENDENT AUDITORS' REPORT
The Board of Directors
Security Capital Bancorp
Salisbury, North Carolina
We have audited the accompanying consolidated balance sheets of Security Capital
Bancorp and subsidiaries (Security Capital) as of December 31, 1994 and 1993,
and the related consolidated statements of income, stockholders' equity, and
cash flows for each of the years in the three-year period ended December 31,
1994, included on pages 7 through 27 herein. These consolidated financial
statements are the responsibility of Security Capital's management. Our
responsibility is to express an opinion on these consolidated financial
statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Security Capital
Bancorp and subsidiaries at December 31, 1994 and 1993, and the results of their
operations and their cash flows for each of the years in the three-year period
ended December 31, 1994 in conformity with generally accepted accounting
principles.
As discussed in note 3 to the consolidated financial statements, Security
Capital adopted the provisions of the Financial Accounting Standards Board's
Statement of Financial Accounting Standards No. 115, "Accounting for Certain
Investments in Debt and Equity Securities," on January 1, 1994.
KPMG Peat Marwick LLP
Charlotte, North Carolina
January 20, 1995
28