UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON D.C. 20549
FORM 10-K/A
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15 (d)
OF THE SECURITIES EXCHANGE ACT OF 1934 (FEE REQUIRED)
FOR THE FISCAL YEAR ENDED SEPTEMBER 30, 1998
Commission File Number: 1-13964
COMMUNITY FEDERAL BANCORP, INC.
(Exact name of small business issuer
as specified in its charter)
Delaware 63-086536
(State or other jurisdiction (I.R.S. Employer
of incorporation or Identification No.)
organization)
333 Court Street, Tupelo, Mississippi 38802
(Address of principal executive offices) (Zip Code)
The registrants's telephone number,
including area code: (601)842-3981
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, par value $0.01 per share
The registrant (1) filed all reports required to be filed by
Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the past 12 months and (2) has been subject to such filing
requirements for the past 90 days.
Disclosure of delinquent filers pursuant to Item 405 of Regulation
S-B is not contained in this form, and disclosure will not be
contained, to the best of the registrant's knowledge, in the
definitive proxy statement incorporated by reference in
Part III of this Form 10-K.
The registrant's revenues for its most recent fiscal year were
$3,050,813.
The aggregate market value of the registrant's outstanding common
stock held by non-affiliates of the registrant at December 10, 1998
was approximately $52,240,247(based on 3,425,590 shares at the most
recent trading price of which management was aware ($15.250 on
December 10, 1998) (for this purpose, the registrant's directors
and executive officers and stock benefit plans and trusts have not
been deemed to be non-affiliates).
The total number of outstanding shares of the registrant's common
stock at September 30, 1998 was 4,318,250.
Transitional small business disclosure format: No.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Proxy Statement for the Registrant's 1998 Annual
Meeting of Stockholders (the "Proxy Statement") are incorporated
by reference in Part III of this form.
ITEM 1.--DESCRIPTION OF BUSINESS
General
Community Federal Bancorp, Inc. (the "Company") was incorporated
under the laws of the State of Delaware in November 1995 at the
direction of management of Community Federal Savings Bank (the
"Savings Bank") for the purpose of serving as a savings
institution holding company of the Savings Bank upon the
acquisition of all of the capital stock issued by the Savings
Bank upon the Conversion. Before the Conversion, the Company did
not engage in any material operations. After the Conversion, the
Company's principal assets have been the outstanding capital
stock of the Savings Bank, a portion of the net proceeds of the
Conversion and a note receivable from the Company's Employee
Stock Ownership Plan ("ESOP"), and the Company's principal
business has been the business of the Savings Bank.
The holding company structure permits the Company to expand the
financial services offered through the Savings Bank. As a
holding company, the Company has greater flexibility than the
Savings Bank to diversify its business activities through
existing or newly formed subsidiaries or through acquisition or
merger with other financial institutions. The Company is
classified as a unitary savings institution holding company and
is subject to regulation by the Office of Thrift Supervision
("OTS"). As long as the Company remains a unitary savings
institution holding company, under current law the Company could
diversify its activities in such a manner as to include any
activities allowed by law or regulation to a unitary savings
institution holding company.
The Company's executive offices are located at 333 Court Street,
Tupelo, Mississippi 38802, and its telephone number is (601)
842-3981.
The Savings Bank is a federally chartered savings bank that was
organized on August 25, 1994 as a subsidiary of the Mutual
Holding Company. The Savings Bank and its predecessors have
conducted business in Tupelo, Mississippi and surrounding
communities through an office in downtown Tupelo since 1933 and a
new branch office located on West Main Street in Tupelo, since
September 1997. At September 30, 1998, the Company had $275.3
million of total assets, $217.8 million of total liabilities,
including $144.8 million of deposits, and $57.6 million of
equity.
The Savings Bank is primarily engaged in attracting deposits from
the general public and using that and other available sources of
funds to originate loans secured by one- to four-family
residences (one-to-four family units) primarily located in its
Primary Market Area. Such loans amounted to $116.7 million or
83% of the Savings Bank's total net loan portfolio, at
September 30, 1998. To a lesser extent, the Savings Bank
originates other mortgage loans secured by multi-family and
non-residential real estate, which amounted to $5.8 million or
4.1% of the total net loan portfolio, at September 30, 1998 and
construction loans for one-to-four family and multi-family
residences which amounted to $4.6 million or 3.2% of the Savings
Bank's total net loan portfolio as of that same date. In
addition, the Savings Bank also originates loans to local
businesses and consumer loans to individuals. As of
September 30, 1998, the commercial loans amounted to $12 million
or 8.5% of the Savings Bank's total net loan portfolio.
Automobile loans together with loans secured by savings accounts
and other consumer loans had a total balance of $5.2 million or
3.7% of the Savings Bank's total net loan portfolio as of
September 30, 1998. The Savings Bank also has an investment
portfolio consisting of mortgage-backed securities which are
insured by federal agencies, and collateralized mortgage
obligations, U.S. government and agency obligations, obligations
of the State of Mississippi and its political subdivisions,
mutual funds and FHLB, FNMA, and FHLMC stock. As of
September 30, 1998, the carrying value of investments that
management has the intent and ability to hold until maturity was
$2.7 million and the carrying value of investments that were
available for sale was $119.8 million. In addition, as of that
same date, the Savings Bank's aggregate cash and interest-bearing
deposits in other banks totaled $3.7 million.
Market Area
The Savings Bank generally conducts business through its main
office located in Tupelo, Mississippi, the county seat of Lee
County, Mississippi. Tupelo is located in northeastern
Mississippi, approximately 90 miles southeast of Memphis,
Tennessee. Tupelo's population was 30,685 in 1990, an increase
from 23,905 in 1980. Between 1980 and 1990, Lee County grew from
57,061 to 65,581 people. This section of the state has grown 13%
faster in population than the remainder of Mississippi due to its
diverse economic base. A diversified manufacturing base of over
200 companies is represented in Lee County alone, which is
considered part of the Mid-South region that includes southern
Tennessee and northeastern Alabama. Manufacturing, product
marketing and convention business, health care, agriculture,
retail, entertainment, and recreation are significant sectors of
economic activity.
Lee County is one of three counties in Mississippi that have
shown consistent growth in the manufacturing sector from 1960 to
1997. During that period manufacturing jobs increased from 5,087
to 16,650. Non-manufacturing jobs increased from 4,062 in 1960 to
34,360 in 1997. Major employers in Lee County include Tecumseh,
a Fortune 500 company, which operates two plants in the county
producing air conditioning and refrigerator compressors, Action
Industries, a furniture manufacturer, and Cooper Tire & Rubber
Company and North Mississippi Medical Center, the largest rural
hospital in the United States. The medical center is the largest
employer in the county. Retail sales also provide a strong
component in the economy, totaling $1,280,100,000 in 1997. A
large shopping mall, the Mall at Barnes Crossing, had 10 million
visitors in 1997.
Lee County is the leading upholstered furniture manufacturing
region in the nation and Tupelo acts as host to the annual
Furniture Market, the second largest furniture exposition in the
United States. A 1.2 million square foot Market Exhibition
Space, a 9,200 seat Coliseum, and the Livestock Arena help
accommodate those attending furniture, entertainment and
agricultural activities. Moreover, Tupelo has a modern airport
capable of receiving air carrier service from Atlanta and
Memphis.
The North Mississippi Medical Center, with more than 200 doctors
representing more than 40 medical and surgical specialties, is
located in Tupelo. The medical center is the State's largest
hospital and is one of only two hospitals in the South affiliated
with the National Cancer Institute.
In agriculture, Lee County economic activity is diversified among
forestry products (chip mills, saw mills, and plywood products),
cattle, cotton, soybean, poultry and egg production, and milk
production. Forestry represents the largest segment of
agricultural activity and represented $60.3 million in production
in 1991.
In education, the Tupelo School District was the tenth largest in
the State in 1997. By comparison, in 1985, the district was the
18th largest in the State. More than half of the certified
school system staff hold masters degrees or better. A branch of
the University of Mississippi is located in Tupelo providing
accredited business and educational degree programs on the
graduate and undergraduate level. Neighboring Itawamba Community
College provides vocational programs. It is one of ten charter
members of the National Coalition of Advanced Technology Centers
in the nation. The Tupelo-Lee County Vocational Technical Center
features modern vocational training in electronics, business
computer applications and computer-assisted drafting. Tupelo is
the home to the Technology Center.
Lending Activities
General. As a federally chartered savings association, the
Savings Bank has general authority to originate and purchase
loans secured by real estate located throughout the United
States. Notwithstanding this nationwide lending authority,
substantially all of the mortgage loans in the Savings Bank's
portfolio are secured by properties located in its Primary Market
Area.
Since the enactment of FIRREA in 1989, a savings association
generally may not make loans to one borrower and related entities
in an amount which exceeds 15% of its unimpaired capital and
surplus, although loans in an amount equal to an additional 10%
of unimpaired capital and surplus may be made to a borrower if
the loans are fully secured by readily marketable securities. At
September 30, 1998, the Savings Bank's loans-to-one borrower
limit was $7.6 million and its five largest loans or groups of
loans-to-one borrower, including related entities, were $1.9
million, $1.7 million, $1.6 million, $1.5 million, and $1.5
million. Each of these loans is secured by real estate, a
substantial portion of which is rental property. All of these
loans or groups of loans were performing in accordance with their
terms at September 30, 1998.
Loan Portfolio Composition. The following table sets forth the
composition of the Savings Bank's loan portfolio by type of loan
at the dates indicated:
September 30,
1998 1997 1996
Amount % Amount % Amount %
Mortgage Loans:
One-to-four family res. 116,674 82.50 108,628 85.31 102,021 86.73
Multi-family and non-res. 5,822 4.12 6,082 4.77 7,165 6.09
Construction loans 4,587 3.24 3,148 2.47 3,337 2.84
Total mortgage loans 127,083 89.87 117,858 92.55 112,523 95.66
Commercial Loans:
Real Estate 10,840 7.67 4,495 3.53 966 .82
Other 1,209 .85 2,837 2.23 2,287 1.95
Total commercial loans 12,049 8.52 7,332 5.76 3,253 2.77
Consumer Loans:
Real Estate 306 .22 0 0.00 0 0.00
Other 4,984 3.52 4,561 3.58 4,211 3.57
Total consumer loans 5,290 3.74 4,561 3.58 4,211 3.57
Total loans 144,422 102.13 129,751 101.89 119,987 102.00
Less:
Loans in process 1,799 1.27 1,388 1.09 1,356 1.15
Unearned discounts
and net deferred
loan origination fees 453 .32 438 .34 428 0.36
Allowance for loan losses 756 .53 590 .46 572 0.49
Loans receivable, net 141,414 100.00 127,335 100.00 117,631 100.00
September 30,
1995 1994
Amount % Amount %
Mortgage Loans:
One-to-four family res. 86,716 88.50 75,811 89.97
Multi-family and non-res. 5,946 6.07 6,728 7.98
Construction loans 3,310 3.38 1,120 1.33
Total mortgage loans 95,972 97.94 83,659 99.28
Commercial Loans:
Real Estate 0 0.00 0 0.00
Other 1,537 1.57 0 0.00
Total commercial loans 1,537 1.57 0 0.00
Consumer Loans:
Real Estate 0 0.00 0 0.00
Other 2,653 2.71 1,828 2.17
Total consumer loans 2,653 2.71 1,828 2.17
Total loans 100,162 102.22 85,487 101.45
Less:
Loans in process 1,279 1.31 429 0.51
Unearned discounts and
net deferred loan
origination fees 343 .35 267 0.32
Allowance for loan losses 552 .56 522 0.62
Loans receivable, net 97,988 100.00 84,269 100.00
Contractual Principal Repayments and Interest Rates. The
following table sets forth certain information at September 30,
1998 regarding the dollar amount of loans maturing in the Savings
Bank's portfolio, based on the contractual terms to maturity,
before giving effect to net items. Demand loans, loans having no
stated schedule of repayments and no stated maturity and
overdrafts are reported as due in one year.
Over Over Over Over
3 Months 6 Months 1 Year 3 Years
3 Months Through Through Over
or Less 6 Months 1 Year 3 Years 5 Years 5 Years Total
(In thousands)
Mortgage Loans
Adjustable 1 0 1 51 399 58,422 58,874
Fixed 4,510 824 451 1,673 4,066 56,685 68,209
Consumer 986 831 880 1,212 1,056 325 5,290
Commercial 693 1,314 1,113 120 1,903 6,906 12,049
Total 6,190 2,969 2,445 3,056 7,424 122,338 144,422
The following table sets forth the dollar amount of all loans,
before net items, due after one year from September 30, 1998
which have fixed interest rates or which have adjustable interest
rates.
Fixed Adjustable
Rates Rates Total
(In thousands)
One-to-four family residential 52,296 56,901 109,197
Multi-family and non-residential 10,127 1,971 12,098
Consumer 2,593 0 2,593
Commercial 8,930 0 8,930
Total 73,946 58,872 132,818
Scheduled contractual amortization of loans does not reflect the
actual term of the Savings Bank's loan portfolio. The average
life of loans is substantially less than their contractual terms
because of prepayments and due-on-sale clauses, which give the
Savings Bank the right to declare a conventional loan immediately
due and payable in the event, among other things, that the
borrower sells the real property subject to the mortgage.
Originations, Purchases, Servicing, and Sales of Loans. The
lending activities of the Savings Bank are subject to written,
non-discriminatory underwriting standards and loan origination
procedures established by the Savings Bank's Board of Directors
and management. Loan originations are obtained by a variety of
sources, including referrals from real estate brokers,
developers, builders, existing customers, newspaper, radio,
periodical advertising, and walk-in customers. Loan applications
are taken by lending personnel, and the loan processing
department supervises the acquisition of credit reports,
appraisals, and other documentation involved with a loan.
Property valuations are generally prepared for the Savings Bank
by a qualified independent appraiser selected from a list
approved by the Savings Bank's Board of Directors. The Savings
Bank generally relies on an attorney's opinion of title that each
loan collateralized by real property has been properly secured.
Hazard insurance is also required on all secured property and
flood insurance is required if the property is within a
designated flood plain. In addition, the Savings Bank requires
credit life insurance if a borrower has no or inadequate life
insurance, except in cases where such insurance is generally
unavailable because of a borrower's age.
The Savings Bank's loan approval process is intended to assess
the borrower's ability to repay the loan, the viability of the
loan and the adequacy of the value of the property that will
secure the loan. A loan application file is first reviewed by a
loan officer of the Savings Bank and then, in most cases, is
submitted for approval to the Loan Committee. In addition, the
Savings Bank's President and Chief Executive Officer have been
delegated authority to approve any loan authorized under the
Savings Bank's real estate lending policy.
The Savings Bank originates substantially all of the mortgage
loans in its portfolio and holds them until maturity. In fiscal
1994 the Savings Bank purchased $900,000 of automobile loans to
diversify its loan portfolio and to shorten the term of its
average contractual maturity. It had no purchases of consumer or
other loans in fiscal 1998, 1997, 1996 nor 1995 but has instead
established a consumer lending department which originated $6.2
million,$5.6 million and $5.3 million of consumer loans in fiscal
1998, 1997,and 1996, respectively. It also began offering
commercial loans during fiscal 1996 and originated $11.5 million,
$6.0 million and $2.1 million of commercial loans during 1998,
1997 and 1996, respectively. During this three-year period, the
Savings Bank had loan sales of $2.8 million and $1.1 million in
fiscal 1998 and 1997, respectively, consisting of first mortgage
loans with terms of 30 years and secured by one-to-four family
residences.
During the 1980s, the Savings Bank sold a small percentage of the
mortgage loans it originated to FNMA but retained the servicing
on such loans. The Savings Bank no longer actively sells loans
with servicing rights retained. As a result, the servicing
portfolio has decreased from $5.7 million at September 30, 1993
to $963 thousand at September 30, 1998 due to principal
repayments. See Note 5 of the Notes to Financial Statements.
The following table shows total loans originated, loan
reductions, and the net increase in Community's loan portfolio
during the periods indicated:
Year Ended September 30,
1998 1997 1996
(In thousands)
Loan Originations:
One-to-four family residential $42,938 $27,320 $34,978
Multi-family and nonresidential 3,350 49 263
Construction 6,713 4,554 8,199
Commercial 11,512 5,968 2,149
Consumer 6,259 5,642 5,345
Total loans originated 70,772 43,533 50,934
Purchases 0 0 372
Total loans originated and purchased 70,772 43,533 51,306
Sales and Loan Principal Repayments:
Loans sold proceeds 2,895 1,060 0
Loan repayments 53,617 32,580 31,629
Total loans sold proceeds and loan
principal repayments 56,512 33,640 31,629
Loan originations (repayments), net 14,260 9,893 0
Increase (decrease) due to other items, net (181) (189) (34)
Net increase (decrease) in net loan portfolio $14,079 $9,704 $19,643
Year Ended September 30,
1995 1994
(In thousands)
Loan Originations:
One-to-four family residential $19,673 $20,821
Multi-family and nonresidential 0 2,062
Construction 5,478 1,346
Commercial 1,608 0
Consumer 3,425 905
Total loans originated 30,184 25,134
Purchases 0 900
Total loans originated and purchased 30,184 26,034
Sales and Loan Principal Repayments:
Loans sold proceeds 220 130
Loan repayments 17,201 26,243
Total loans sold proceeds and loan
principal repayments 17,421 26,373
Loan originations (repayments), net 12,763 (339)
Increase (decrease) due to other items, net 956 179
Net increase (decrease) in net loan portfolio $ 13,719 (160)
One-to-Four Family Residential Loans. The primary lending
activity of the Savings Bank is the origination of loans secured
by first mortgage liens on one-to-four family residences. At
September 30, 1998, $114.3 million or 81% of the Savings Bank's
total net loan portfolio consisted of one-to-four family first
mortgage residential loans. As of such date the average balance
of the Savings Bank's one-to-four family mortgage loans was
$41,600.
The loan-to-value ratio, maturity, and other provisions of the
loans made by the Savings Bank generally have reflected the
policy of making less than the maximum loan permissible under
applicable regulations, in accordance with sound lending
practices, market conditions, and underwriting standards
established by the Savings Bank. While it has been the Savings
Bank's practice in most cases to require a loan-to-value ratio of
80%, the Savings Bank's lending policy on one-to-four family
residential mortgage loans generally limits the maximum
loan-to-value ratio to 85% of the lesser of the appraised value
or purchase price of the property. In cases where loan-to-value
ratios exceed 85%, the Savings Bank requires private mortgage
insurance.
The Savings Bank offers fixed-rate one-to-four family residential
loans with terms up to 15 years. Such loans are amortized on a
monthly basis with principal and interest due each month and
customarily include "due-on-sale" clauses. While the Savings
Bank reserves the right to enforce such a clause in any case, it
has been its practice to waive the clause in most cases. As of
September 30, 1998, approximately 99.8% of all of the Savings
Bank's mortgage loan portfolio consisted of conventional loans;
the remainder is loans insured by the Federal Housing
Administration or partially guaranteed by the Department of
Veterans Affairs.
The Savings Bank is aware that there are inherent risks in
originating fixed-rate one-to-four family residential loans for
its portfolio, especially during periods of historically low
interest rates, but recognized the need to respond to market
demand for fixed-rate loans. To respond to these market demands,
the Savings Bank has emphasized 15-year fixed-rate loans with an
origination fee but no points and only minimal closing costs.
The Savings Bank also generally confines its one-to-four family
residential lending to its Primary Market Area where it is more
familiar with the details of the real estate market and its
knowledge of the local economy allows it to better assess a
borrower's ability to repay a loan.
Since 1982, the Savings Bank has been offering adjustable-rate
loans in order to decrease the vulnerability of its operations to
changes in interest rates. All of the adjustable-rate mortgage
loans in its portfolio have interest rates that adjust on an
annual basis. The demand for adjustable-rate loans in the
Savings Bank's primary market area has been a function of several
factors, including the level of interest rates, the expectations
of changes in the level of interest rates and the difference
between the interest rates offered for fixed-rate loans and
adjustable-rate loans. The relative amount of fixed rate and
adjustable-rate residential loans that can be originated at any
time is largely determined by the demand for each in a
competitive environment. As interest rates fluctuated since
1982, the demand for fixed- and adjustable-rate loans has changed
as the Savings Bank's customers have preferred adjustable rates
in a high interest-rate environment and fixed-rate loans as
interest rates decreased. In order to continue to increase and
then to maintain a high percentage of adjustable-rate one-to-four
family residential loans, the Savings Bank has offered various
forms of adjustable-rate loans and in some cases has purchased
mortgage-backed securities and CMOs collateralized by
adjustable-rate mortgage loans. As a result, at September 30,
1998, $56.5 million, or 48%, of the one-to-four family
residential loans in the Savings Bank's loan portfolio (before
net items) consisted of adjustable-rate loans.
The Savings Bank's one-to-four family residential adjustable-rate
loans are fully amortizing loans with contractual maturities of
up to 30 years. These loans have a fixed-rate of interest for up
to three years and for the remainder of the loan's term adjust
annually in accordance with a designated index. The Savings Bank
currently offers an adjustable-rate mortgage with a 2% limit on
the rate adjustment per period and a 6% limit on the rate
adjustment over the life of the loan. The Savings Bank's
underwriting standards for adjustable-rate mortgage loans require
that it assess a potential borrower's ability to make principal
and interest payments assuming a 2% increase in the interest rate
from the rate at the time of origination. The Savings Bank's
adjustable-rate loans are not convertible by their terms into
fixed rate loans, are assumable with the Savings Bank's approval,
do not contain prepayment penalties and do not produce negative
amortization.
Due to the generally lower rates of interest prevailing in recent
periods, the Savings Bank's ability to originate adjustable-rate
loans has decreased as consumer preference for fixed-rate loans
has increased. However, the Savings Bank has continued to
originate adjustable-rate one-to-four family residential loans
during this period by offering an adjustable-rate loan with an
origination fee but no points and only minimal closing costs. As
a result, even as consumer preference for such loans decreased,
adjustable-rate mortgage loans represented $11 million or 25.8%
of the Savings Bank's total originations of one-to-four family
residential loans during the year ended September 30, 1998 as
compared to 44% and 41% of such originations for the years ended
September 30, 1997 and 1996, respectively.
Adjustable-rate loans decrease the risks associated with changes
in interest rates but involve other risks, primarily because as
interest rates rise, the payment by the borrower rises to the
extent permitted by the terms of the loan, thereby increasing the
potential for default. At the same time, the marketable of the
underlying property may be adversely affected by higher interest
rates. The Savings Bank believes that these risks, which have
not had a material adverse effect on the Savings Bank to date,
generally are less than the risks associated with holding
fixed-rate loans in an increasing interest rate environment.
Non-Residential Real Estate and Multi-Family Residential Loans.
At September 30, 1998, $5.8 million or 4.12% of the Savings
Bank's total net loan portfolio, consisted of loans secured by
existing non-residential and multi-family residential real
estate. The Savings Bank's non-residential and multi-family real
estate loans include primarily loans secured by small office
buildings, family-type business establishments and apartment
buildings. All of the Savings Bank's non-residential and
multi-family real estate loans are secured by properties located
in the Savings Bank's Primary Market Area. The average amount of
the Savings Bank's non-residential and multi-family real estate
loans was $111,950 at September 30, 1998 and the largest was $1.7
million. Originations of non-residential real estate and
multi-family residential real estate amounted to 4.7%, .11%, and
.52% of the Savings Bank's total loan originations in fiscal
1998, 1997, and 1996, respectively.
The Savings Bank's non-residential and multi-family loans have
terms which range up to 25 years and loan-to-value ratios of up
to 80%. The Savings Bank originates both fixed- and
adjustable-rate non-residential and multi-family real estate
loans. As of September 30, 1998, $2 million, or 34% of the
Savings Bank's non-residential and multi-family residential real
estate loans had adjustable rates of interest. A potential
borrower must demonstrate that he or she has the ability to make
principal and interest payments assuming a 2% increase in the
interest rate from the rate at the time of origination.
The Savings Bank requires appraisals of all properties securing
non-residential and multi-family residential real estate loans.
Appraisals are performed by an independent appraiser designated
by the Savings Bank and are reviewed by management. In
originating multi-family residential and non-residential real
estate loans, the Savings Bank considers the quality and location
of the real estate, the credit of the borrower, cash flow of the
project and the quality of management involved with the property.
Corporate loans require the personal guaranty of the entity's
controlling shareholders. Hazard insurance is required as well
as flood insurance if the property is located in a designated
floor zone.
Multi-family residential and non-residential real estate lending
is generally considered to involve a higher degree of risk than
one-to-four family residential lending. Such lending typically
involves large loan balances concentrated in a single borrower or
groups of related borrowers. In addition, the payment experience
on loans secured by income-producing properties is typically
dependent on the successful operation of the related real estate
project and thus may be subject to a greater extent to adverse
conditions in the real estate market or in the economy generally.
The Savings Bank generally attempts to mitigate the risks
associated with multi-family residential and non-residential real
estate lending by, among other things, lending only in its
Primary Market Area and lending only to individuals who have an
established relationship with the Savings Bank and/or who have
substantial ties to the community.
Construction Loans. The Savings Bank makes construction loans to
individuals for the construction of their residences and to
developers for the construction of one-to-four family and
multi-family residences. Construction lending is generally
limited to the Savings Bank's Primary Market Area. At
September 30, 1998, construction loans amounted to $4.6 million
or 3.24% of the Savings Bank's total net loan portfolio.
Construction financing is generally considered to involve a
higher degree of risk of loss than long-term financing on
improved, owner-occupied real estate because of the uncertainties
of construction, including possible delays in completing the
structure, the possibility of costs exceeding the initial
estimates and the need to obtain a tenant or purchaser if the
property will not be owner occupied. In the event of a delay in
the completion of the construction, the Savings Bank may grant an
extension, but such extensions are generally conditioned upon the
payment of interest in full for the initial term.
Construction loans to individuals are separate from the permanent
financing on the structure. However, a borrower only qualifies
for a construction loan if he or she has obtained a commitment
for a permanent loan from the Savings Bank at the end of the
construction phase. The term of a construction loan to an
individual generally does not exceed the greater of 180 days or
the term of the permanent loan commitment. Loan payouts occur
only after an inspection by the Savings Bank's appraiser of the
site has been made and documented by the Savings Bank. Payouts
are based on the percentage of the construction completed as of
the inspection date. Interest rates on construction loans to
individuals are based on current local economic conditions. The
loan-to-value ratio on such loans must be 80% or less of the
appraised value of the completed structure.
The majority of construction loans to builders or developers are
to selected local developers with whom the Bank is familiar and
are for the construction of single-family dwellings on a pre-sold
or on a speculative basis. The Bank generally limits to two the
number of unsold houses which a builder may have under
construction in a project. Construction loans to developers are
generally made for a one- to two-year term depending on the size
and scope of the project. Payment of accrued interest generally
is required on at least a semiannual basis and the amount of a
loan is generally based on the owner's equity in the property but
may not exceed 80% of appraised value or contract price. Loan
proceeds are disbursed in stages after inspection of the project
indicates that such disbursements are for expenses which have
already been incurred and which have added to the value of the
project.
Consumer Loans. Subject to the restrictions contained in federal
laws and regulations, the Savings Bank also is authorized to make
loans for a wide variety of personal or consumer purposes. In
order to broaden the mix of the retail financial services the
Savings Bank offers to its customers, in fiscal 1995 the Savings
Bank established a new department that, among other things,
originates consumer loans. The Savings Bank's consumer loans
consist primarily of automobile loans originated by the Savings
Bank and loans secured by savings accounts. Consumer loans at
September 30, 1998 were $5.3 million, or 3.74%, of the Savings
Bank's total net loan portfolio consisted of consumer loans.
As of September 30, 1998, the Savings Bank's consumer loans also
consisted of loans secured by accounts at the Savings Bank which
amounted to $571,000 or .40% of its total net loan portfolio.
Such a loan is structured to have a term that ends on the same
date as the maturity date of the certificate securing it or if
secured by a passbook account has a six-month term with a hold on
withdrawals that would result in the balance being lower than the
loan balance. Typically these loans require semi-annual payments
of interest only.
Consumer loans generally involve more credit risk than mortgage
loans because of the type and nature of the collateral. In
addition, consumer lending collections are dependent on the
borrower's continuing financial stability, and thus are more
likely to be adversely affected by job loss, divorce, illness,
and personal bankruptcy. In many cases, because of the mobile
nature of the collateral, it may not be readily available in the
event of a default. In other cases, repossessed collateral for a
defaulted consumer loan will not provide an adequate source of
repayment of the outstanding loan balance because of improper
repair and maintenance or depreciation of the underlying
security. The remaining deficiency often does not warrant
further substantial collection efforts against the borrower.
Commercial Loans. Subject to the restrictions contained in
federal laws and regulations, the Savings Bank is authorized to
make secured and unsecured commercial business loans for
corporate and agricultural purposes, including issuing letters of
credit. At September 30, 1998, $12 million, or 8.52%, of the
Savings Bank's total net loan portfolio consisted of commercial
business loans, all of which were secured. The Savings Bank
began originating commercial business loans in fiscal 1995 and
they accounted for 16% of the total loan originations during the
year ended September 30, 1998.
Commercial business loans generally are deemed to entail
significantly greater risk than that which is involved with more
traditional real estate lending. The repayment of commercial
business loans typically are dependent on the successful
operations and income stream of the borrower. Such risks can be
significantly affected by economic conditions. In addition,
commercial lending generally requires substantially greater
oversight efforts compared to residential real estate lending.
Loan Origination and Other Fees. In addition to interest earned
on loans, the Savings Bank receives loan origination fees or
"points" for originating loans. Loan points are a percentage of
the principal amount of the mortgage loan and are charged to the
borrower in connection with the origination of the loan.
In accordance with SFAS No. 91, which deals with the accounting
for non-refundable fees and costs associated with originating or
acquiring loans, the Savings Bank's loan origination fees and
certain related direct loan origination costs are offset, and the
resulting net amount is deferred and amortized as interest income
over the contractual life of the related loans as an adjustment
to the yield of such loans. At September 30, 1998, the Savings
Bank had $453,000 of net loan fees which had been deferred and
are being recognized as income over the estimated maturities of
the related loans. See Notes 1 and 5 of the Notes to the
Consolidated Financial Statements.
Non-Performing Assets. Beginning as of September 30, 1993, the
Savings Bank adopted a policy under which all loans are reviewed
on a regular basis and are placed on a non-accrual status when,
in the opinion of management, the collection of additional
interest is deemed insufficient to warrant further accrual.
Generally, the Savings Bank places all loans more than 90 days
past due on non-accrual status. When a loan is placed on
non-accruing status, total interest accrued to date is reversed.
Subsequent payments are either applied to the outstanding
principal balance or recorded as interest income, depending on
the assessment of the ultimate collectibility of the loan. A
loan is returned to accrual status when, in management's
judgment, the borrower's ability to make periodic interest and
principal payments is in accordance with the terms of the loan
agreement.
Real estate acquired by the Savings Bank for foreclosure is
classified as real estate owned until such time as it is sold.
When such property is acquired it is recorded at the lower of the
recorded investment in the loan or fair value, less estimated
selling costs of disposition. The recorded investment is the sum
of the outstanding principal loan balance plus any accrued
interest which has not been received and acquisition costs
associated with the property. Any excess of the recorded
investment in the loan over the fair value of the underlying
property is charged to the allowance for loan losses at the time
of the loan foreclosure. Costs relating to improvement of
property incurred subsequent to the acquisition are capitalized,
whereas costs relating to holding the property are expensed.
Valuations are periodically performed by management and a
provision for estimated losses on real estate owned is charged to
earnings when losses are anticipated.
As of September 30, 1998, the Savings Bank's total non-performing
loans amounted to $831,000, or .59% of total net loans, compared
to $969,000, or .76% of total net loans, at September 30, 1997.
The following table sets forth the amounts and categories of
Community's non-performing assets at the dates indicated.
Community had no troubled debt restructuring during the periods
shown on the table below:
September 30,
1998 1997 1996 1995 1994
Non-Accruing Loans:
One-to-four family res. $666 969 $717 $715 $560
Multi-family and non-res. 162 0 0 0 0
Construction 2 0 0 0 0
Commercial 0 0 0 0 0
Accruing Loans Greater
Than 90 Days Delinquent:
One-to-four family res. 0 0 0 116 203
Multi-family and non-res. 0 0 0 0 0
Construction 0 0 0 0 0
Commercial 0 0 0 0 0
Consumer 1 0 0 0 0
Total non-performing loans $831 969 $717 838 763
Real estate owned (1) 110 117 0 139 141
Total non-performing assets $941 $1,086 $717 $977 $904
Total non-performing loans
as a percentage of
total net loans .59% .76% .61% .86% .91%
Total non-performing assets
as a percentage of
total assets .34 .50% .35% .60% .58%
(1) Consists of real estate acquired by foreclosures.
Interest income foregone on non-accrual loans was not significant
for any period shown.
Classified Assets. Federal regulations require that each insured
savings association classify its assets on a regular basis. In
addition, in connection with examinations of insured
institutions, federal examiners have authority to identify
problem assets: "substandard," "doubtful", and "loss."
Substandard assets have one or more defined weaknesses and are
characterized by the distinct possibility that the insured
institution will sustain some loss if the deficiencies are not
corrected. Doubtful assets have the weaknesses of substandard
assets with the additional characteristic that the weaknesses
make collection or liquidation in full on the basis of currently
existing facts, conditions and values questionable, and there is
a high possibility of loss. A loss classified asset is
considered uncollectible and of such little value that
continuance as an asset of the institution is not warranted.
Another category designated "special mention" also must be
established and maintained for assets which do not currently
expose an insured institution to a sufficient degree of risk to
warrant classification as substandard, doubtful or loss. Assets
classified as substandard or doubtful require the institution to
establish general allowances for loan losses. If an asset or
portion thereof is classified 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. General loss allowances established to
cover possible losses related to assets classified substandard or
doubtful may be included in determining an institution's
regulatory capital, while specific valuation allowances for loan
losses do not qualify as regulatory capital. Federal examiners
may disagree with an insured institution's classifications and
amounts reserved.
The Savings Bank's classified assets at September 30, 1998
consisted of $455,000 of loans classified as special mention,
$656,000 of loans classified as substandard, $175,000 of loans
classified as doubtful and no loans classified as loss. As of
September 30, 1998, total classified assets amounted to .47% of
total assets.
The following table sets forth the Savings Bank's classified
assets at the dates indicated:
September 30,
1998 1995 1994
Classification:
Special mention $ 455 $ 167 $ 754
Substandard 656 806 736
Doubtful 175 162 0
Loss 0 0 0
Total classified assets $1,286 $1,135 $1,490
Allowance for Loan Losses. It is management's policy to maintain
an allowance for estimated loan losses at a level which
management considers adequate to absorb losses inherent in the
loan portfolio at each reporting date. Management's estimation
of this amount includes a review of all loans for which full
collectibility is not reasonably assured and considers, among
other factors, prior years' loss experience, economic conditions,
distribution of portfolio loans by risk class and the estimated
value of underlying collateral. Although management believes the
current allowance for loan losses to be adequate, ultimate losses
may vary from their estimates; however, estimates are reviewed
periodically and, as adjustments become necessary, they are
reported in earnings in periods in which they become known.
At September 30, 1998, the Savings Bank's allowance for loan
losses was $756,000 compared to $590,000 at September 30, 1997.
As of September 30, 1998 and 1997, all of the Savings Bank's
allowance for loan losses was a general valuation allowance.
The following table sets forth the activity in Community's
allowance for loan losses during the periods indicated.
1998 1997 1996 1995 1994
Allowance at beginning
of period $590 $572 $552 $522 $500
Provisions 235 20 20 30 25
Charge-offs:
Mortgage loans:
One-to-four family res. 10 0 0 0 12
Multi-family and nonres. 0 0 0 0
Construction 0 0 0 0
Total mortgage loans 10 0 0 0 12
Commercial loans:
Real Estate 53 0 0 0 0
Other 0 0 0 0 0
Total commercial loans 53 0 0 0 0
Consumer loans:
Real Estate 0 0 0 0 0
Other 6 2 0 0 0
Total consumer loans 6 2 0 0 0
Total charge-offs 69 2 0 0 12
Recoveries 0 0 0 0 0
Net charge-offs 69 2 0 0 3
Allowance at end of period $756 $590 $572 $552 $522
Allowance for loan losses
to total non-performing
loans at end of period 90.97% 60.89% 79.78% 65.87 68.41%
Allowance for loan losses
to total net loans at
end of period .53% .46% .49% .56% .62%
The following table presents the allocation of the allowance for
loan losses to the total amount of net loans in each category
listed at the dates indicated.
September 30,
1998 1997
% of Loans % of Loans
in Each in Each
Category to Category to
Amount Total Loans Amount Total Loans
Mortgage loans $630 89.87% $501 92.55%
Commercial 88 8.52 54 5.76
Consumer loans 38 3.74 35 3.58
Total allowance
for loan losses $756 102.13% $590 101.89%
September 30,
1996 1995
% of Loans % of Loans
in Each in Each
Category to Category to
Amount Total Loans Amount Total Loans
Mortgage loans $511 95.66% $509 97.94%
Commercial 31 2.77 15 1.57
Consumer loans 30 3.57 28 2.71
Total allowance
for loan losses $572 102.00% $552 102.22%
September 30,
1994
% of Loans
in Each
Category to
Amount Total Loans
Morgage loans $497 99.28%
Commercial 0 0.00
Consumer loans 25 2.17
Total allowance
for loan losses %522 101.45%
Securities
The Company adopted the SFAS No. 115, Accounting for Certain
Investments of Debt and Equity Securities on September 30, 1994.
In accordance with SFAS No. 115, management determines the
appropriate classification of debt securities at the time of
purchase. Debt securities are classified as held to maturity
when the Savings Bank has the positive intent and ability to hold
the securities to maturity. Held to maturity securities are
stated at amortized cost. Debt securities not classified as held
to maturity and equity securities are classified as available for
sale. Available for sale securities are stated at fair value.
See Notes 1 through 4 of the Notes to Consolidated Financial
Statements.
The Company's securities portfolio includes mortgage-backed
securities which are insured or guaranteed by the FHLMC, GNMA, or
the FNMA and CMOs, all of which are backed by FHLMC, GNMA, and
FNMA securities. Mortgage-backed securities and CMOs increase
the quality of the Company's assets by virtue of the guarantees
that back them, are more liquid than individual mortgage loans
and may be used to collateralize borrowings or other obligations
of the Company. In addition, at September 30, 1998, $38 million
or 39.3% of the mortgage-backed securities in the Company's
mortgage-backed securities and CMOs portfolio were secured by
pools of adjustable-rate mortgages. Mortgage-backed securities
and CMOs of this type serve to reduce the interest rate risk
associated with changes in interest rates. Investments in
mortgage-backed securities and CMOs as well as investments in
other investment securities are managed by the Company's
Investment Committee in accordance with the Company's Portfolio
and Investment Policy.
The following table sets forth the carrying value of the
Company's investment portfolio at the dates indicated:
September 30,
1998 1997 1996
Securities available for sale:(1)
U.S. government and federal
agencies bonds and notes $ 5,023 $ 7,978 $14,870
State and local bonds and notes 176 609 964
Mortgage-backed securities 59,017 23,643 23,687
Collateralized mortgage obligations 34,962 26,225 22,531
Equity securities 17,149 12,685 10,244
Mutual funds 3,472 2,836 2,816
Total securities available for sale $119,799 $73,976 $75,112
Securities held to maturity: (2)
U.S. government and federal
agencies bonds and notes $ 0 $ 0 $ 0
State and local bonds and notes 0 0 0
Corporate bonds and notes 0 0 0
Mortgage-backed securities 0 0 0
Collateralized mortgage obligations 2,742 4,157 4,756
Total securities available for sale $ 2,742 $ 4,157 $ 4,756
Total securities $122,541 $78,133 $79,868
The following tables set forth information regarding the
scheduled maturities, amortized costs, fair value and weighted
average yields for the Company's securities at September 30,1998:
One Year or Less One to Five Years
Carrying Average Carrying Average
Value Yield Value Yield
Securities available for sale:(1)
U.S. treasury and government
obligations $ 0 0.00% $ 0 0.00%
Mortgage-backed securities 3,171 7.21 7,360 6.92
Collateralized mortgage
obligations 0 0.00 250 5.25
Equity securities and mutual
funds 20,620 5.38% 0 0.00
Total securities available
for sale $ 23,791 5.62% $ 7,610 6.87%
Securities held to maturity:(2)
Collateralized mortgage
obligations $ 0 0.00% $ 1,001 6.00%
Total securities held to maturity
Total securities $ 23,791 5.62% $ 8,611 6.77%
Five to Ten Years Other
Carrying Average Carrying Average
Value Yield Value Yield
Securities available for sale:(1)
U.S. treasury and government
obligations $ 5,199 6.58% $ 0 0.00%
Mortgage-backed securities 4,201 6.41 44,285 6.97
Collateralized mortgage
obligations 6,113 6.05 28,599 6.53
Equity securities and mutual
funds 0 0 0 0.00
Total securities available for sale $15,513 6.33% $72,884 6.80%
Securities held to maturity:(2)
Collateralized mortgage
obligations $ 1,249 5.81% $ 492 6.53%
Total securities held to maturity 1,249 5.81 492 6.53
Total securities $16,762 6.29% $73,386 6.80%
(1) The carrying value is the approximate fair value of the
security at each reporting date.
(2) The carrying value is the amortized cost of the security at
each reporting date.
Cash and Interest-Bearing Deposits in Other Banks
The Savings Bank also had cash on hand and cash due from and on
deposit with other banks amounting to $3.8 million, $5.4 million,
and $4.2 million at September 30, 1998, 1997, and 1996,
respectively.
Sources of Funds
General. Deposits are the primary source of the Company's funds
for lending and other investment purposes. In addition to
deposits, the Company derives funds from loan principal
repayments. Loan repayments are a relatively stable source of
funds, while deposit inflows and outflows are significantly
influenced by general interest rates and money market conditions.
Borrowings may be used on a short-term basis to compensate for
reductions in the availability of funds from other sources. They
may also be used on a longer term basis for general business
purposes.
Deposits. The Company's deposits are attracted principally from
within the Company's primary market area through the offering of
a wide selection of deposit instruments, including checking
accounts, NOW accounts, money market accounts, regular savings
accounts, and term certificate accounts. Included among these
deposit products are individual retirement accounts of
approximately $12 million at September 30, 1998. Deposit account
terms vary, with the principal differences being the minimum
balance required, the time periods the funds must remain on
deposit and the interest rate. As of September 30, 1998, the
certificates of deposit with principal amounts of $100,000 or
more totaled to $36.4 million, as compared to $37.4 million at
September 30, 1997.
Interest rates paid, maturity terms, service fees and withdrawal
penalties are established by the Savings Bank on a periodic
basis. Determination of rates and terms are predicated on funds
acquisition and liquidity requirements, rates paid by
competitors, growth goals and federal regulations. Rates on
deposits of $100,000 or more are usually negotiated with the
depositor.
The following table sets forth the dollar amount of deposits in
the various types of deposit programs offered at the dates
indicated:
September 30,
1998 1997 1996
Amount % Amount % Amount %
Certificates
of deposit 123,955 85.60 112,585 84.83 112,347 85.28
Transaction accounts:
Saving accounts 6,754 4.67 6,741 10.09 6,873 5.22
Checking and
NOW accounts 14,093 9.73 13,392 5.08 12,520 9.50
Total transaction
accounts 20,847 14.40 20,133 15.17 19,393 14.72
Total deposits 144,802 100.00 132,718 100.00 131,740 100.00
The following table sets forth the savings activities of the
Savings Bank during the periods indicated:
Year Ended September 30,
1998 1997 1996
Net increase (decrease)
before interest credited $12,084 $(5,819) $(7,893)
Interest credited 7,336 6,797 5,079
Net increase (decrease)
in deposits $ 4,748 $ 978 $(2,814)
The following table sets forth the change in dollar and amount of
deposits in the various types of accounts offered by the savings
Bank between the dates indicated:
Increase
(Decrease)
Balance at from Balance at
Sep 30, % of Sep 30, Sep 30, % of
1998 Deposits 1997 1997 Deposits
Interest-bearing and
noninterest bearing
demand deposits 14,092,613 9.73 701,049 13,391,564 10.09
Passbook savings 6,754,054 4.67 12,598 6,741,456 5.08
Certificates of
deposit 123,954,946 85.60 11,369,576 112,585,370 84.83
Total 144,801,613 100.00 12,083,223 132,718,390 100.00
Increase
(Decrease)
from Balance at
Sep 30, Sep 30, % of
1996 1996 Deposits
Interest-bearing and
noninterest bearing
demand deposits 871,766 12,519,798 9.05
Passbook savings (131,582) 6,873,038 5.22
Certificates of deposit 237,773 112,347,597 85.28
Total 977,957 131,740,433 100.00
The following table sets forth the maturities of Community's
certificates of deposit having principal amounts of $100,000 or
more at September 30, 1998:
Certificate of Deposit Maturing
in Quarter Ending: Amount
December 31, 1998 $12,953,263
March 31, 1999 10,316,996
June 30, 1999 5,978,664
September 30, 1999 4,920,622
After September 30, 1999 2,240,781
Total certificates of deposit
balances of more than $100,000 $36,410,326
The following table sets forth the certificates of deposit in the
Savings Bank classified by rates at the dates indicated:
At September 30,
1998 1997
4.00%--4.99% $ 14,418 $ 15,966
5.00%--5.99% 63,793 61,190
6.00%--6.99% 45,629 35,322
7.00%--7.99% 115 107
$123,955 $112,585
The following table sets forth the amount and maturities of the
Savings Bank's certificates of deposit at September 30, 1998.
Over One Over Two Over Three
One Year Year Through Years Through Years Through
or Less Two Years Three Years Four Years
4.00% to 4.99% $ 14,418 $ 0 $ 0 $ 0
5.00% to 5.99% 50,432 8,555 3,424 1,382
6.00% to 6.99% 40,000 3,048 2,429 53
7.00% to 7.99% 115
Over
Four Years Totals
4.00% to 4.99% $ $ 14,418
5.00% to 5.99% 63,793
6.00% to 6.99% 45,530
7.00% to 7.99% 99 214
$123,955
Deposits in the Savings Bank as of September 30, 1998 were
represented by the various programs described below.
% of
Interest Minimum Minimum Total
Rate Term Category Amount Balances Deposits
2.75 None Passbook Savings 50 6,754,054 4.67
2.50 None Golden Now 500 1,442,872 1.00
0.00 None Non-interest Checking 100 121,446 .08
2.50 None Silver Now 300 356,339 .25
3.25 None Daily Money Market 2,500 5,914,460 4.08
0.00 None Student Checking 50 5,171 .00
2.50 None Courtesy Now 100 474,831 .33
0.00 None Community First Checking 50 1,087,190 .75
2.75 None Super Now 1,500 1,805,360 1.25
5.00 None Community First Advantage 25,000 2,684,537 1.85
0.00 None Commercial Checking 100 97,870 .07
0.00 None Small Business Checking 100 102,537 .07
% of
Interest Minimum Minimum Total
Rate Term Certificates Amount Balances Deposits
Fixed Term, Fixed Rate,
5.10 12 month Renewable 1,000 21,787,885 15.05
Fixed Term, Negotiated
5.25 6 month Jumbo Rate, Non-renew. 100,000 4,160,669 2.87
Fixed Term, Fixed Rate,
5.25 30 month Renewable 1,000 3,050,508 2.11
Fixed Term, Fixed Rate,
5.20 24 month Renewable 1,000 10,119,088 6.99
Fixed Term, Fixe Rate,
4.85 182 day Renewable 1,000 13,589,188 9.38
Fixed Term, Negotiated
5.50 12 month Jumbo Rate, Non-renew. 100,000 31,343,035 21.64
Fixed Term, Fixed Rate,
4.10 91 day Renewable 1,000 935,333 .65
Fixed Term, Fixed Rate,
5.15 18 month Renewable 1,000 1,336,055 .92
Fixed Term, Fixed Rate,
5.30 36 month Renewable 1,000 5,982,851 4.13
Fixed Term, Fixed Rate,
5.40 48 month Renewable 1,000 11,408,961 7.88
Negotiated Term, Negotiated
Rate, Non-renew. 1,000 20,241,373 13.98
Total 144,801,613 100.00
Borrowings. The Company may obtain advances from the FHLB of
Dallas upon the security of its FHLB of Dallas stock and certain
of the Savings Bank's residential mortgage loans, provided
certain standards related to creditworthiness have been met.
Such advances are made pursuant to several credit programs, each
of which has its own interest rate and range of maturities. Such
advances are generally available to meet seasonal and other
withdrawals of deposit accounts and to permit increased lending.
The Company had $65.5 million in FHLB advances outstanding at
September 30, 1998.
The following table sets forth the maximum month-end balance and
average balance of Community's FHLB advances during the periods
indicated. See also, Note 12 to the Consolidated Financial
Statements.
Year Ended September 30,
1998 1997 1996
Maximum balance $65,451 $18,282 $1,000
Average balance 41,178 6,944 250
Weighted average interest
rate of FHLB advances 5.30% 5.93% 5.98%
The following table sets forth certain information as to
Community's long-term (terms to maturity in excess of 90 days)
and short-term (terms to maturity of 90 days or less) FHLB
advances at the dates indicated:
1998 1997 1996
FHLB long-term advances 26,451 $14,000 $0
Weighted average interest rate 5.18% 6.05% 0.00%
FHLB short-term advances 39,000 4,282 0
Weighted average interest rate 5.38% 5.54% 0.00%
Competition
The Savings Bank faces strong competition both in attracting
deposits and making real estate loans. Its most direct
competition for deposits has historically come from other savings
associations, credit unions, and commercial banks located in
Northeast Mississippi, including many large financial
institutions which have greater financial and marketing resources
available to them. In addition, the Savings Bank has faced
additional significant competition for investors' funds from
short-term money market securities and other corporate and
government securities. The ability of the Savings Bank to
attract and retain savings deposits depends on its ability to
generally provide a rate of return, liquidity, and risk
comparable to that offered by competing investment opportunities.
The Savings Bank experiences strong competition for real estate
loans primarily from commercial banks, and mortgage banking
companies. The Savings Bank competes for loans principally
through the interest rates and loan fees it charges and the
efficiency and quality of services it provides borrowers.
Asset/Liability Management
The ability to maximize net interest income is largely dependent
upon the achievement of a positive interest rate spread that can
be sustained during fluctuations in prevailing interest rates.
Interest rate sensitivity is a measure of the difference between
amounts of interest-earning assets and interest-bearing
liabilities which either reprice or mature within a given period
of time. The difference, or the interest rate repricing "gap",
provides an indication of the extent to which an institution's
interest rate spread will be affected by changes in interest
rates. A gap is considered positive when the amount of interest-rate
sensitive assets exceeds the amount of interest-rate sensitive
liabilities, and is considered negative when the amount
of interest-rate sensitive liabilities exceeds the amount of
interest-rate sensitive assets maturing or repricing within a
given period. Generally, during a period of rising interest
rates, a negative gap within shorter maturities would adversely
affect net interest income, while a positive gap within shorter
maturities would result in an increase in net interest income,
and during a period of falling interest rates, a negative gap
within shorter maturities would result in an increase in net
interest income while a positive gap within shorter maturities
would have the opposite effect.
The lending activities of savings associations have historically
emphasized long-term, fixed-rate loans secured by one-to-four
family residences, and the primary source of funds of such
institutions has been deposits. The deposit accounts of savings
associations generally bear interest rates that reflect market
rates and largely mature or are subject to repricing within a
short period of time. This factor, in combination with
substantial investments in long-term, fixed-rate loans, has
historically caused the income earned by savings associations on
their loan portfolios to adjust more slowly to changes in
interest rates than their cost of funds. In addition, during the
1980s, the Savings Bank sold a small percentage of the mortgage
loans it originated to FNMA but retained the servicing on such
loans. The Savings Bank no longer actively sells loans with
servicing rights retained. As a result, the servicing portfolio
has decrease from $5.7 million at September 30, 1993 to $963
thousand at September 30, 1998 due to principal repayments. See
Note 5 of the Notes to Financial Statements.
The Savings Bank originates both fixed-and adjustable-rate
residential real estate loans as market conditions dictate. In
the current interest rate environment, it generally offers
fixed-rate loans up to a 15-year term and adjustable-rate loans
with a maximum term of 30 years. Prior to fiscal 1998 all of the
adjustable-rate loans in the Savings Bank's loan portfolio were
indexed to the National Average Mortgage Rate Index, published by
the FHLB System monthly. During fiscal 1998 the Bank began using
the One Year Treasury Index. All the adjustable-rate loans are
adjusted on an annual basis after an initial fixed-rate period of
up to three years. While the Savings Bank does not currently
sell any of its adjustable-rate one-to-four family residential
loans, a substantial portion of such loans in the Savings Bank's
portfolio would qualify for sale and securitization under FHLMC,
FNMA, and Government National Mortgage Association ("GNMA")
guidelines. At September 30, 1998, $57.8 million or 40% of the
Savings Bank's loans, before net items, were fixed-rate one-to-four
family residential mortgages, and $56.4 million or 39% were
adjustable-rate one-to-four family residential first mortgage
loans. All of these adjustable loans have interest rates that
adjust annually after an initial fixed-rate period of up to three
years with a substantial majority adjusting one year after
origination.
As market demand for adjustable-rate mortgage loans has
decreased, the Savings Bank has combined origination of shorter-term
fixed-rate loans and one-year adjustable loans with the
purchase of low-risk collateralized mortgage obligations ("CMOs")
and government-related securities with a maturity or average life
of five years or less or with adjustable rates and investment in
mutual funds. All of the Savings Bank's CMOs are backed by U.S.
government securities and are first-tranche CMO investments to
minimize risk. The Savings Bank's mutual funds portfolio
consists of funds backed by short-term U.S. government securities
and adjustable-rate loans secured by one-to-four family
residences. During fiscal 1995, the Savings Bank also began to
originate consumer and commercial loans. Emphasis on shorter
term and adjustable-rate loans and securities helps the Savings
Bank limit its exposure to rising interest rates.
The Savings Bank anticipates continuing to follow this policy of
investing in shorter-term securities and loans for as long as
long-term interest rates remain at their current level or lower
and will reevaluate it if there is a material and prolonged rise
in interest rates. Notwithstanding the foregoing, however,
because the Savings Bank's interest-bearing liabilities which
mature or reprice within short periods exceed its earning assets
with similar characteristics, material and prolonged increases in
interest rates generally would adversely affect net interest
income, while material and prolonged decreases in interest rates
generally, but to a lesser extent because of their historically
low levels, would have a positive effect on net interest income.
At September 30, 1998, based on the most recent available
information provided by the Office of Thrift Supervision ("OTS"),
it was estimated, on an unaudited basis, that the Bank's net
portfolio value ("NPV") (the net present value of the Bank's cash
flows from assets, liabilities, and off-balance sheet items)
would decrease 6%, 12%, 19%, and 25% in the event of 1%, 2%, 3%,
and 4%, respectively, increase in market interest rates, and
decrease 3%, 2%, 1% and 0% in the event of a 1%, 2%, 3% and 4%,
respectively, decrease in market interest rates. These
calculations indicate that the Bank's NPV could be adversely
affected by increases or decreases in interest rates.
Computations of prospective effects of hypothetical interest rate
changes are based on numerous assumptions, including relative
levels of market interest rates, prepayments, and deposit
run-offs and should not be relied upon as indicative of actual
results. Certain shortcomings are inherent in such computations.
In order to mitigate its interest rate risk, the Bank maintains
substantial capital levels that management believes are
sufficient to sustain unfavorable movements in market interest
rates.
The OTS uses NPV calculation to monitor institutions' Interest
Rate Risk ("IRR"). The application of the OTS' methodology
quantifies IRR as the change in the NPV which results from a
theoretical 200 basis point increase or decrease in market
interest rates. If the NPV from either calculation would
decrease by more than 2% of the present value of the
institution's assets, the institution must deduct 50% of the
amount of the decrease in excess of such 2% in the calculation of
risk-based capital. The IRR regulations were originally
effective as of January 1, 1994, subject to a two quarter "lag"
time between the reporting date of the data used to calculate an
institution's interest rate risk and the effective date of each
quarter's interest rate risk component. However, the Director of
the OTS indicated that it would waive the capital deductions for
institutions with a greater than "normal" risk until the OTS
publishes an appeals process, which the OTS expects will occur
shortly. If implemented, the Savings Bank would still have
exceeded the regulatory requirement.
REGULATION
The Company
General. The Company, as a savings and loan holding company
within the meaning of the Home Owners' Loan Act, as amended,
("HOLA"), is required to register with the OTS and is subject to
OTS regulations, examinations, supervision, and reporting
requirements. As a subsidiary of a savings and loan holding
company, the Savings Bank is subject to certain restrictions in
its dealings with the Company and affiliates thereof.
Activities Restrictions. There are generally no restrictions on
the activities of a savings and loan holding company which holds
only one subsidiary savings institution. However, if the
Director of the OTS determines that there is reasonable cause to
believe that the continuation by a savings and loan holding
company of an activity constitutes a serious risk to the
financial safety, soundness or stability of its subsidiary
savings institution, the Director may impose such restrictions as
deemed necessary to address such risk, including limiting (i)
payment of dividends by the savings institution; (ii)
transactions between the savings institution and its affiliates;
and (iii) any activities of the savings institution that might
create a serious risk that the liabilities of the holding company
and its affiliates may be imposed on the savings institution.
Notwithstanding the above rules as to permissible business
activities of unitary savings and loan holding companies, if the
savings institution subsidiary of such a holding company fails to
meet a Qualified Thrift Lender ("QTL") test, then such unitary
holding company also shall become subject to the activities
restrictions applicable to multiple savings and loan holding
companies and, unless the savings institution requalifies as a
QTL within one year thereafter, shall register as, and become
subject to the restrictions applicable to, a bank holding
company.
If the Company were to acquire control of another savings
institution, other than through merger or other business
combination with the Savings Bank, the Company would thereupon
become a multiple savings and loan holding company. Except where
such acquisition is pursuant to the authority to approve
emergency thrift acquisitions and where each subsidiary savings
institution meets the QTL test, as set forth below, the
activities of the Company and any of its subsidiaries (other than
the Savings Bank or other subsidiary savings institutions) would
thereafter be subject to further restrictions. Among other
things, no multiple savings and loan holding company or
subsidiary thereof which is not a savings institution shall
commence or continue for a limited period of time after becoming
a multiple savings and loan holding company or subsidiary thereof
which is not a savings institution shall commence or continue for
a limited period of time after becoming a multiple savings and
loan holding company or subsidiary thereof any business activity,
upon prior notice to, and no objection by the OTS, other than:
(i) furnishing or performing management services for a subsidiary
savings institution; (ii) conducting an insurance agency or
escrow business; (iii) holding, managing, or liquidating assets
owned by or acquired from a subsidiary savings institution; (iv)
holding or managing properties used or occupied by a subsidiary
savings institution; (v) acting as trustee under deeds of trust;
(vi) those activities authorized by regulation as of March 5,
1987 to be engaged in by multiple savings and loan holding
companies; or (vii) unless the Director of the OTS by regulation
prohibits or limits such activities for savings and loan holding
companies, those activities authorized by the Federal Reserve
Board as permissible for bank holding companies. Those
activities described in (vii) above also must be approved by the
Director of the OTS prior to being engaged in by a multiple
savings and loan holding company.
Limitations on Transactions with Affiliates. Transactions
between savings institutions and any affiliate are governed by
Sections 23A and 23B of the Federal Reserve Act. An affiliate of
a savings institution is any company or entity which controls, is
controlled by or is under common control with the savings
institution. In a holding company context, the parent holding
company of a savings institution (such as the Company) and any
companies which are controlled by such parent holding company are
affiliates of the savings institution. Generally, Sections 23A
and 23B (i) limit the extent to which the savings 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 institution or subsidiary as those provided to
a non-affiliate. The term "covered transaction" includes the
making of loans, purchase of assets, issuance of a guarantee and
similar other types of transactions. In addition to the
restrictions imposed by Sections 23A and 23B, no savings
institution may (i) loan or otherwise extend credit to an
affiliate, except for any affiliate which engages only in
activities which 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
which are subsidiaries of the savings institution.
In addition, Sections 22(h) and (g) of the Federal Reserve Act
place restrictions on loans to executive officers, directors and
principal stockholders. Under Section 22(h), loans to a
director, an executive officer and to a greater than 10%
stockholder of a savings institution, and certain affiliated
interests of either, may not exceed, together with all other
outstanding loans to such person and affiliated interests, the
institution's loan to one borrower limit (generally equal to 15%
of the institution's unimpaired capital and surplus). Section
22(h) also requires that loans to directors, executive officers
and principal stockholders be make on terms substantially the
same as offered in comparable transactions to other persons and
also requires prior board approval for certain loans. In
addition, the aggregate amount of extensions of credit by a
savings institution to all insiders cannot exceed the
institution's unimpaired capital and surplus. Furthermore,
Section 22(g) places additional restrictions on loans to
executive officers. At September 30, 1998, the Savings Bank was
in compliance with the above restrictions.
Restrictions on Acquisitions. Except under limited
circumstances, savings and loan holding companies are prohibited
from acquiring, without prior approval of the Director of the
OTS, (i) control of any other savings institution or savings and
loan holding company or substantially all the assets thereof or
(ii) more than 5% of the voting shares of a savings institution
or holding company thereof which is not a subsidiary. Except
with the prior approval of the Director of the OTS, no director
or officer of a savings and loan holding company or person owning
or controlling by proxy or otherwise more than 25% of such
company's stock, may acquire control of any savings institution,
other than a subsidiary savings institution, or of any other
savings and loan holding company.
The Director of the OTS may only approve acquisitions resulting
in the formation of a multiple savings and loan holding company
which controls savings institutions in more than one state if (i)
the multiple savings and loan holding company involved controls a
savings institution which operated a home or branch office
located in the state of the institution to be acquired as of
March 5, 1987; (ii) the acquirer is authorized to acquire control
of the savings institution pursuant to the emergency acquisition
provisions of the Federal Deposit Insurance Act ("FDIA"); or
(iii) the statutes of the state in which the institution to be
acquired is located specifically permit institutions to be
acquired by the state-chartered institutions or savings and loan
holding companies located in the state where the acquiring entity
is located (or by a holding company that controls such
state-chartered savings institutions).
The FIRREA amended provisions of the Bank Holding Company Act of
1956 to specifically authorize the Federal Reserve Board to
approve an application by a bank holding company to acquire
control of a savings institution. FIRREA also authorized a bank
holding company that controls a savings institution to merge or
consolidate the assets and liabilities to, any subsidiary bank
which is a member of the BIF with the approval of the appropriate
federal banking agency and the Federal Reserve Board. As a
result of these provisions, there have been a number of
acquisitions of savings institutions by bank holding companies in
recent years.
Federal Securities Laws. The Company is registered with the
Securities and Exchange Commission ("SEC") under the Securities
Exchange Act of 1934, as amended (the "Securities Exchange Act"),
and under OTS regulations. Generally, the Common Stock may not
be deregistered for at least three years after the Conversion.
The Company is subject to the information, proxy solicitation,
insider trading restrictions and other requirements of the
Securities Exchange Act.
The Savings Bank
General. The OTS has extensive authority over the operations of
federally chartered savings institutions. As part of this
authority savings institutions are required to file periodic
reports with the OTS and are subject to periodic examinations by
the OTS and the FDIC. The investment and lending authority of
savings institutions are prescribed by federal laws and
regulations, and such institutions are prohibited from engaging
in any activities not permitted by such laws and regulations.
Those laws and regulations generally are applicable to all
federally chartered savings institutions and may also apply to
state-chartered savings institutions. Such regulation and
supervision is primarily intended for the protection of
depositors.
The OTS' enforcement authority over all savings institutions was
substantially enhanced by FIRREA. This enforcement authority
includes, among other things, the ability to assess civil money
penalties, to issue cease and desist or removal orders and to
initiate injunctive actions. In general, these enforcement
actions may be initiated for violations of laws and regulations
and unsafe or unsound practices. Other actions or inactions may
provide the basis for enforcement action, including misleading or
untimely reports filed with the OTS. FIRREA significantly
increased the amount of the ground for civil money penalties.
On December 19, 1991, the Federal Deposit Insurance Corporation
Improvement Act of 1991 ("FDICIA") was enacted into law. The
FDICIA provides for, among other things, the recaptilization of
the Bank Insurance Fund ("BIF"); the authorization of the FDIC to
make emergency special assessments under certain circumstances
against BIF members and members of the Savings Association
Insurance Fund ("SAIF"); the establishment of risk-based deposit
insurance premiums; and improved examinations and reporting
requirements. The FDICIA also provides for enhanced federal
supervision of depository institutions based on, among other
things, an institution's capital level.
Deposit Insurance
The deposits of the Bank are currently insured by the SAIF. Both
the SAIF and the BIF, the federal deposit insurance fund that
covers the deposits of state and national banks and certain state
savings Banks, are required by law to attain and thereafter
maintain a reserve ration of 1.25% of insured deposits. The BIF
has achieved the required reserve rate, and, as discussed below,
during the past year the FDIC reduced the average deposit
insurance premium paid by BIF-insured banks to a level
substantially below the average premium paid by savings
institutions.
On November 4, 1995, the FDIC approved a final rule regarding
deposit insurance premiums, that will reduce deposit insurance
premiums for BIF member institutions to zero basis points
(subject to a $2,000 minimum) for institutions in the lowest risk
category, while holding deposit insurance premiums for SAIF
members at their current levels (23 basis points for institutions
in the lowest risk category). The reduction was effective with
respect to the semiannual premium assessment beginning January 1,
1996.
Banking legislation was enacted September 30, 1996 to eliminate
the premium differential between SAIF-insured institutions and
BIF-insured institutions. The FDIC Board of Directors met
October 8, 1996 and approved a rule that states that except for
the possible impact of certain exemptions for de novo and "weak"
institutions, established the special assessment necessary to
recapitalize the SAIF at 65.7 basis points of SAIF assessable
deposits held by effected institutions as of March 31, 1995. The
legislation provides that all SAIF member institutions pay a
special one-time assessment to recapitalize the SAIF assessable
deposits held by effected institutions as of March 31, 1995. The
legislation provides that all SAIF member institutions pay a
special one-time assessment to recapitalize the SAIF, which in
the aggregate is sufficient to bring the reserve ratio in the
SAIF to 1.25% of insured institutions. The legislation also
provides for the merger of the BIF and the SAIF, with such merger
being conditioned upon the prior elimination of the thrift
charter.
Based upon its level of SAIF deposits as of March 31, 1995, the
Savings Bank paid approximately $864,000. The assessment was
accrued in the quarter ended September 30, 1996.
Regulatory Capital Requirements. Federal insured savings
institutions are required to maintain minimum levels of
regulatory capital. Pursuant to FIRREA, the OTS has established
capital standards applicable to all savings institutions. These
standards generally must be as stringent as the comparable
capital requirements imposed on national banks. The OTS also is
authorized to impose capital requirements in excess of these
standards on individual institutions on a case-by-case basis.
Current OTS capital standards require savings institutions to
satisfy three different capital requirements. Under these
standards, savings institutions must maintain "tangible" capital
equal to at least 1.5% of adjusted total assets, "core" capital
equal to at least 3% of adjusted total assets and "total" capital
(a combination of core and "supplementary" capital) equal to at
least 8.0% of "risk-weighted" assets. For purposes of the
regulation, core capital generally consists of common equity
(including retained earnings), noncumulative perpetual preferred
stock and related surplus, minority interests in the equity
accounts of fully consolidated subsidiaries, certain
nonwithdrawable accounts and pledged deposits and "qualifying
supervisory goodwill." Tangible capital is given the same
definition as core capital but does not include qualifying
supervisory goodwill and is reduced by the amount of all the
savings institution's intangible assets, with only a limited
exception for purchased mortgage servicing rights. The Savings
Bank had no goodwill or other intangible assets at September 30,
1998. Both core and tangible capital are further reduced by an
amount equal to a savings institution's debt and equity
investments in subsidiaries engaged in activities not permissible
to national banks (other than subsidiaries engaged in activities
undertaken as agent for customers or in mortgage banking
activities and subsidiary depository institutions or their
holding companies). These adjustments do not affect the Savings
Bank's regulatory capital. Supplementary capital generally
consists of hybrid capital instruments; perpetual preferred stock
which is not eligible to be included as core capital;
subordinated debt and intermediate-term preferred stock; and
general allowances for loan losses up to a maximum of 1.25% of
risk-weighted assets.
In determining compliance with the risk-based capital
requirement, a savings institution is allowed to include both
core capital and supplementary capital in its total capital,
provided that the amount of supplementary capital included does
not exceed the savings institution's core capital. In
determining the required amount of risk-based capital, total
assets, including certain off-balance sheet items, are multiplied
by a risk weight based on the risks inherent in the type of
assets. The risk weight assigned by the OTS for principal
categories of assets are (i) 0% for cash and securities issued by
the U. S. Government or unconditionally backed by the full faith
and credit of the U. S. Government; (ii) 20% for securities
(other than equity securities) issued by U. S.
Government-sponsored agencies and mortgage-backed securities
issued by, or fully guaranteed as to principal and interest by,
the FNMA or the FHLMC, except for those classes with residual
characteristics or stripped mortgage-related securities; (iii)
50% for prudently underwritten permanent one-to-four family first
lien mortgage loans not more than 90 days delinquent and having a
loan-to-value ratio of not more than 80% at origination unless
insured to such ratio by an insurer approved by the FNMA or the
FHLMC, qualifying residential bridge loans made directly for the
construction of one-to-four family residences and qualifying
multi-family residential loans; and (iv) 100% for all other loans
and investments, including consumer loans, commercial loans, and
single-family residential real estate loans more than 90 days
delinquent, and for repossessed assets.
At September 30, 1998 and 1997, the Savings Bank exceeded all of
its regulatory capital requirements. The following table sets
forth the Savings Bank's compliance with applicable regulatory
capital requirements at September 30, 1998 and 1997:
For Capital
Actual Adequacy Purposes
Amount Ratio Amount Ratio
September 30, 1998:
Total capital (to risk
weighted assets) $44,003 40.6% $8,672 8.0%
Tier 1 (core) capital
(to risk weighted assets) 43,247 39.9 N/A N/A
Tier 1 (core) capital
(to adjusted total assets) 43,247 16.5 7,840 3.0
Tangible capital (to
adjusted total assets) 43,247 16.5 3,920 1.5
September 30, 1997:
Total capital (to risk
weighted assets 43,555 47.5 7,335 8.0
Tier 1 (core) capital
(to risk weighted assets) 42,965 46.9 N/A N/A
Tier 1 (core) capital
(to adjusted total assets) 42,965 21.5 5,938 3.0
Tangible capital (to
adjusted total assets) 42,965 21.5 2,969 1.5
To Be Well
Capitalized Under
Prompt Corrective
Action Provisions
Amount Ratio
September 30, 1998:
Total capital (to risk
weighted assets) $10,840 10.0%
Tier 1 (core) capital
(to risk weighted assets) 6,504 6.0
Tier 1 (core) capital
(to adjusted total assets) 13,066 5.0
Tangible capital (to
adjusted total assets) N/A N/A
September 30, 1997:
Total capital (to risk
weighted assets $9,169 10.0%
Tier 1 (core) capital
(to risk weighted assets) 5,502 6.0
Tier 1 (core) capital
(to adjusted total assets) 9,896 5.0
Tangible capital (to
adjusted total assets) N/A N/A
The following table is a reconciliation of the Bank's
stockholder's equity to tangible, Tier 1, and risk-based capital
as required by the OTS:
1998 1997
Stockholders' equity $ 50,876 $ 48,604
Unrealized gain on securities
available for sale (7,629) (5,639)
Tangible and Tier 1 capital 43,247 42,965
Allowance for loan losses 756 590
Total risk based capital $ 44,003 $43,555
Total assets $273,631 $205,627
Adjusted total assets 261,327 199,988
Total risk weighted assets 108,401 91,693
In August 1993, the OTS adopted a final rule incorporating an
interest-rate risk component into the risk-based capital
regulation. Under the rule, an institution with a greater than
"normal" level of interest rate risk is subject to a deduction of
its interest rate risk component from total capital for purposes
of calculating its risk-based capital. As a result, such an
institution is required to maintain additional capital in order
to comply with the risk-based capital requirement. An
institution with a greater than "normal" interest rate risk is
defined as an institution that would suffer a loss of net
portfolio value exceeding 2.0% of the estimated economic value of
its assets in the event of a 200 basis point increase or decrease
(with certain minor exceptions) in interest rates. The interest
rate risk component is calculated, on a quarterly basis, as
one-half of the difference between an institution's measured
interest rate risk and 2.0% multiplied by the economic value of
its assets. The rule also authorizes the Director of the OTS, or
his designee, to waive or defer an institution's interest rate
risk component on a case-by-case basis. The final rule was
effective as of January 1, 1994, subject however to a three
quarter "lag" time between the reporting date of the data used to
calculate an institution's interest rate risk and the effective
date of each quarter's interest rate risk component. Recently
the OTS postponed the interest rate risk capital deduction in
order to provide sufficient time to implement and evaluate the
OTS appeals process as well as get a better sense of the
direction that the other federal banking agencies may take in
their implementation of Section 305 of FDICIA.
Prompt Corrective Action. Under Section 39 of the FDIA, as added
by the FDICIA, each federal banking agency was required to
implement a system of prompt corrective action for institutions
which it regulates. The federal banking agencies, including the
OTS, adopted substantially similar regulations to implement
Section 38 of the FDIA, effective as of December 19, 1992. Under
the regulations, an institution is deemed to be (i) "well
capitalized" if it has total risk-based capital of 10.0% or more,
than a Tier 1 risk-based capital ratio of 6.0% or more, has a
Tier 1 leverage capital ratio of 5.0% or more and is not subject
to any order or final capital directive to meet and maintain a
specific capital level for any capital measure, (ii) "adequately
capitalized" if it has a total risk-based capital ratio of 8.0%
or more, a Tier 1 risk-based capital ratio of 4.0% or more and a
Tier 1 leverage capital ratio of 4.0% or more (3.0% under certain
circumstances) and does not meet the definition of "well
capitalized," (iii) "undercapitalized" if it has a total
risk-based capital ratio that is less than 8.0%, a Tier 1
risk-based capital ratio that is less than 4.0% or a Tier 1
leverage capital ratio that is less than 4.0% (3.0% under certain
circumstances), (iv) "significantly undercapitalized" if it has a
total risk-based capital ratio that is less than 6.0%, a Tier 1
risk-based capital ratio that is less than 3.0% or a Tier 1
leverage capital ratio that is less than 3.0%, and (v)
"critically undercapitalized" if it has a ratio of tangible
equity to total assets that is equal to or less than 2.0%.
Section 38 of the FDIA and the regulations promulgated thereunder
also specify circumstances under which a federal banking agency
may reclassify a well capitalized institution as adequately
capitalized and may require an adequately capitalized institution
or an undercapitalized institution to comply with supervisory
actions as if it were in the next lower category (except that the
FDIC may not reclassify a significantly undercapitalized
institution as critically undercapitalized).
An institution generally must file a written capital restoration
plan which meets specified requirements with an appropriate
federal banking agency with 45 days of the date that the
institution receives notice or is deemed to have notice that it
is undercapitalized, significantly undercapitalized or critically
undercapitalized. A federal banking agency must provide the
institution with written notice of approval or disapproval within
60 days after receiving a capital restoration plan, subject to
extensions by the agency.
An institution which is required to submit a capital restoration
plan must concurrently submit a performance guaranty by each
company that controls the institution. Such guaranty shall be
limited to the lesser of (i) an amount equal to 5.0% of the
institution's total assets at the time the institution was
notified or deemed to have notice that it was undercapitalized or
(ii) the amount necessary to restore the relevant capital
measures of the institution to the levels required for the
institution to be classified as adequately capitalized. Such a
guarantee shall expire after the federal banking agency notifies
the institution that it has remained adequately capitalized for
each of four consecutive calendar quarters. An institution which
fails to submit a written capital restoration plan with the
requisite period, including any required performance
guarantee(s), or fails in any material respect to implement a
capital restoration plan, shall be subject to the restrictions in
Section 38 of the FDIA which are applicable to significantly
undercapitalized institutions.
Immediately upon becoming undercapitalized, an institution shall
become subject to the provisions of Section 38 of the FDIA (i)
restricting payment of capital distributions and management fees,
(ii) requiring that the appropriate federal banking agency
monitor the condition of the institution and its efforts to
restore its capital, (iii) requiring submission of a capital
restoration plan, (iv) restricting the growth of the
institution's assets and (v) requiring prior approval of certain
expansion proposals. The appropriate federal banking agency for
an undercapitalized institution also may take any number of
discretionary supervisory actions if the agency determines that
any of these actions is necessary to resolve the problem of the
institution at the least possible long-term cost to the deposit
insurance fund, subject in certain cases to specified procedures.
These discretionary supervisory actions include requiring the
institution to raise additional capital; restricting transactions
with affiliates; restricting interest rates paid by the
institution on deposits; requiring replacement of senior
executive officers and directors; restricting the activities of
the institution and its affiliates; requiring divestiture of the
institution or the sale of the institution to a willing
purchaser; and any other supervisory action that the agency deems
appropriate. These and additional mandatory and permissive
supervisory actions may be taken with respect to significantly
undercapitalized and critically undercapitalized institutions.
At September 30, 1998, the Savings Bank was deemed a "well
capitalized" institution for purpose of the above regulations and
as such was not subject to the above mentioned restrictions.
Safety and Soundness. On November 18, 1993, a joint notice of
proposed rule making was issued by the OTS, the Office of the
Comptroller of the Currency and the Federal Reserve Board
(collectively, the "agencies") concerning standards for safety
and soundness required to be prescribed by regulation pursuant to
Section 39 of the FDIA. In general, the standards relate to (1)
operational and managerial matters; (2) asset quality and
earnings; and (3) compensation. The operational and managerial
standards cover (a) internal controls and information systems,
(b) internal audit system, (c) loan documentation, (d) credit
underwriting, (e) interest rate risk exposure, (f) asset growth,
and (g) compensation, fees and benefits. Under the proposed
asset quality and earnings standards, the Savings Bank would be
required to maintain (1) a maximum ratio of classified assets
(assets classified substandard, doubtful and to the extent that
related losses have not been recognized, assets classified loss)
to total capital of 1.0%, and (2) minimum earnings sufficient to
absorb losses without impairing capital. The last ratio
concerning market value to book value was determined by the
agencies not to be feasible. Finally, the proposed compensation
standard states that compensation will be considered excessive if
it is unreasonable or disproportionate to the services actually
performed by the individual being compensated. If an insured
depository institution or its holding company fail to meet any of
the standards promulgated by regulation, then such institution or
company will be required to submit a plan within 30 days to the
FDIC specifying the steps it will take to correct the deficiency.
In the event that an institution or company fails to submit or
fails in any material respect to implement a compliance plan
within the time allowed by the agency, Section 39 of the FDIA
provides that the FDIC must order the institution or company to
correct the deficiency and may (1) restrict asset growth; (2)
require the institution or company to increase its ratio of
tangible equity to assets; (3) restrict the rates of interest
that the institution or company may pay; or (4) take any other
action that would better carry out the purpose of prompt
corrective action. The Savings Bank believes that it will be in
compliance with each of the standards if they are adopted as
proposed.
Liquidity Requirements. Each savings institution is required to
maintain an average daily balance of liquid assets equal to a
certain percentage of the sum of its average daily balance of net
withdrawable deposit accounts and borrowing payable in one year
or less. The liquidity requirement may vary from time to time
(between 4% and 10%) depending upon economic conditions and
savings flows of all savings institutions. At the present time,
the required minimum liquid asset ratio is 4%. At September 30,
1998, the Savings Bank's liquidity ratio was in excess of the
required minimum.
Capital Distributions. OTS regulations govern capital
distributions by savings institutions, which include cash
dividends, stock redemptions or repurchases, cash-out mergers,
interest payments on certain convertible debt and other
transactions charged to the capital account of a savings
institution to make capital distributions. Generally, the
regulation creates a safe harbor for specified levels of capital
distributions from institutions meeting at least their minimum
capital requirements, so long as such institutions notify the OTS
and receive no objection to the distribution from the OTS.
Savings institutions and distributions that do not qualify for
the safe harbor are required to obtain prior OTS approval before
making any capital distributions.
Generally, a savings institution that before and after the
proposed distribution meets or exceeds its fully phased-in
capital requirements (Tier 1 institutions) may make capital
distributions during any calendar year equal to the higher of (i)
100% of net income for the calendar year-to-date plus 50% of its
"surplus capital ratio" at the beginning of the calendar year or
(ii) 75% of net income over the most recent four-quarter period.
The "surplus capital ratio" is defined to mean the percentage by
which the institution's ratio of total capital to assets exceeds
the ratio of its fully phased-in capital requirement: is defined
to mean an institution's capital requirements under the statutory
and regulatory standards applicable on December 31, 1994, as
modified to reflect any applicable individual minimum capital
requirement imposed upon the institution. Failure to meet fully
phased-in or minimum capital requirements will result in further
restrictions on capital distributions, including possible
prohibition without explicit OTS approval.
Tier 2 institutions, which are institutions that before and after
the proposed distribution meet or exceed their minimum capital
requirements, may make capital distributions up to 75% of their
net income over the most recent four quarter period.
In order to make distributions under these safe harbors, Tier 1
and Tier 2 institutions must submit 30 days written notice to the
OTS prior to making the distribution. The OTS may object to the
distribution during that 30-day period based on safety and
soundness concerns. In addition, a Tier 1 institution deemed to
be in need of more than normal supervision by the OTS may be
downgraded to a Tier 2 or Tier 3 institution as a result of such
a determination.
Tier 3 institutions, which are institutions that do not meet
current minimum capital requirements, or that have capital in
excess of either their fully phased-in capital requirement or
minimum capital requirement but which have been notified by the
OTS that it will be treated as a Tier 3 institution because they
are in need of more than normal supervision, cannot make any
capital distribution without obtaining OTS approval prior to
making such distributions.
At September 30, 1998, the Savings Bank was a Tier 1 institution
for purposes of this regulation.
Loans to One Borrower. FIRREA imposed limitations on the
aggregate amount of loans that a savings institution could make
to any one borrower, including related entities. Under FIRREA,
the permissible amount of loans-to-one borrower now follows the
national bank standard for all loans made by savings
institutions, as compared to the pre-FIRREA rule that applied
that standard only to commercial loans made by federally
chartered savings institutions. The regulations promulgated
pursuant to FIRREA generally do not permit loans-to-one borrower
to exceed the greater of $500,000 or 15% of unimpaired capital
and surplus. Loans in an amount equal to an additional 10% of
unimpaired capital and surplus also may be made to a borrower if
the loans are fully secured by readily marketable securities.
For information about the largest borrowers from the Savings
Bank, see "Description of Business - Lending Activities -
General."
Branching by Federal Savings Institutions. Effective May 11,
1992, the OTS amended its Policy Statement on Branching by
Federal Savings Institutions to permit interstate branching to
the full extent permitted by statute (which is essentially
unlimited). Prior policy permitted interstate branching for
federal savings institutions only to the extent allowed for
state-chartered institutions in the states where the
institution's home office is located and where the branch is
sought. Prior policy also permitted healthy out-of-state federal
institutions to branch into another state, regardless of the law
in that state, provided the branch office was the result of a
purchase of an institution that was in danger of default.
Generally, federal law prohibits federal savings institutions
from establishing, retaining or operating a branch outside the
state in which the federal institution has its home office unless
the institution meets the IRS's domestic building and loan test
(generally, 60% of a thrift's assets must be housing-related)
("IRS Test"). The IRS Test requirement does not apply if: (i)
the branch(es) result(s) from an emergency acquisition of a
troubled savings institution (however, if the troubled savings
institution is acquired by a bank holding company, does not have
its home office in the state of the bank holding company bank
subsidiary and does not qualify under the IRS Test, its branching
is limited to the branching laws for state-chartered banks in the
state where the savings institution is located); (ii) the law of
the state where the branch would be located would permit the
branch to be established if the federal savings institution were
chartered by the state in which its home office is located; or
(iii) the branch was operated lawfully as a branch under state
law prior to the savings institution's conversion to a federal
charter.
Furthermore, the OTS will evaluate a branching applicant's record
of compliance with the Community Reinvestment Act of 1977
("CRA"). An unsatisfactory CRA record may be the basis for
denial of a branching application.
Qualified Thrift Lender Test. All savings institutions are
required to meet a QTL test set forth in Section 10(m) of the
HOLA and regulations of the OTS thereunder to avoid certain
restrictions on their operations. A saving institution that does
not meet the QTL test set forth in the HOLA and implementing
regulations must either convert to a bank charter or comply with
the following restrictions on its operations: (i) the institution
may not engage in any new activity or make any new investment,
directly or indirectly, unless such activity or investment is
permissible for a national bank; (ii) the branching powers of the
institution shall be restricted to those of a national bank;
(iii) the institution shall not be eligible to obtain any
advances from its FHLB; and (iv) payment of dividends by the
institution shall be subject to the rules regarding payment of
dividends by a national bank. Upon the expiration of three years
from the date the savings institution ceases to be a QTL, it must
cease any activity and not retain any investment not permissible
for a national bank and immediately repay any outstanding FHLB
advances (subject to safety and soundness considerations).
Currently, the QTL test requires that 65% of an institution's
"portfolio assets" (as defined) consist of certain housing and
consumer-related assets on a monthly average basis in nine out of
every 12 months. Assets that qualify without limit for inclusion
as part of the 65% requirement are loans made to purchase,
refinance, construct, improve or repair domestic residential
housing and manufactured housing; home equity loans;
mortgage-backed securities (where the mortgages are secured by
domestic residential housing or manufactured housing); stock
issued by the FHLB of Dallas; and direct or indirect obligations
of the FDIC. In addition, the following assets, among others,
may be included in meeting the test subject to an overall limit
of 20% of the savings institution's portfolio assets: 50% of
residential mortgage loans originated and sold within 90 days of
origination; 100% of consumer and educational loans (limited to
10% of total portfolio assets); and stock issued by the FHLMC or
the FNMA. Portfolio assets consist of total assets minus the sum
of (i) goodwill and other intangible assets, (ii) property used
by the savings institution to conduct its business, and (iii)
liquid assets up to 20% of the institution's total assets.
Legislation enacted in 1996 expands the QTL test to provide
savings associations with greater authority to lend and diversify
their portfolios. In particular, credit card and educational
loans may now be made by savings associations without regard to
any percentage-of-assets limit, and commercial loans may be made
in an amount up to 10 percent of total assets, plus an additional
10 percent for small business loans. Loans for personal, family
and household purposes (other than credit card, small business
and educational loans) are now included without limit with other
assets that, in the aggregate, may account for up to 20% of total
assets. At September 30, 1998, the qualified thrift investments
of the Savings Bank were substantially in excess of 65%.
Accounting Requirements. FIRREA requires the OTS to establish
accounting standards to be applicable to all savings institutions
for purposes of complying with regulations, except to the extent
otherwise specified in the capital standards. Such standards
must incorporate GAAP to the same degree as is prescribed by the
federal banking agencies for banks or may be more stringent than
such requirements.
Effective October 2, 1992, the OTS amended a number of its
accounting regulations and reporting requirements to adopt the
following standards: (i) regulatory reports will incorporate GAAP
when GAAP is used by federal banking agencies; (ii) savings
institution transactions, financial condition and regulatory
capital must be reported and disclosed in accordance with OTS
regulatory reporting requirements that will be at least as
stringent as for national banks; and (iii) the Director of the
OTS may prescribe regulatory reporting requirements more
stringent than GAAP wherever the Director determines that such
requirements are necessary to ensure the safe and sound reporting
and operation of savings institutions.
Effective February 10, 1992, the OTS adopted a statement of
policy ("Statement") set forth in Thrift Bulletin 52 concerning
(i) procedures to be used in the selection of a securities
dealer, (ii) the need to document and implement prudent policies
and strategies for securities, whether held for investment,
trading or for sale, and to establish systems and internal
controls to ensure that securities activities are consistent with
the financial institution's policies and strategies, (iii)
securities trading and sales practices that may be unsuitable in
connection with securities held in an investment portfolio, (iv)
high-risk mortgage securities that are not suitable for
investment portfolio holdings for financial institutions, and (v)
disproportionately large holdings of long-term, zero-coupon bonds
that may constitute an imprudent investment practice. The
Statement applies to investment securities, high-yield, corporate
debt securities, loans, mortgage-backed securities and derivative
securities, and provides guidance concerning the proper
classification of and accounting for securities held for
investment, sale and trading. Securities held for investment,
sale or trading may be differentiated based upon an institution's
desire to earn an interest yield (held for investment), to
realize a holding gain from assets held for indefinite periods of
time (held for sale), or to earn a dealer's spread between the
bid and asked prices (held for trading). Depository institution
investment portfolios are maintained to provide earnings
consistent with the safety factors of quality, maturity,
marketability and risk diversification. Securities that are
purchased to accomplish these objectives may be reported at their
amortized cost only when the depository institution has both the
intent and ability to hold the assets for long-term investment
purposes. Securities held for investment purposes may be
accounted for at amortized cost, securities held for sale are to
be accounted for at the lower of cost or market, and securities
held for trading are to be accounted for at market. The Savings
bank believes that its investment activities have been and will
continue to be conducted in accordance with the requirements of
OTS policies and GAAP.
Federal Home Loan Bank System. The Savings Bank is a member of
the FHLB of Dallas, which is one of 12 regional FHLBs that
administers the home financing credit function of savings
institutions. Each FHLB serves as a reserve or central bank for
its members within its assigned region. It is funded primarily
from proceeds derived from the sale of consolidated obligations
of the FHLB System. It makes loans to members (i.e., advances)
in accordance with policies and procedures established by the
Board of Directors of the FHLB.
As a member, the Savings Bank is required to purchase and
maintain stock in the FHLB of Dallas in an amount equal to at
least 1% of its aggregate unpaid residential mortgage loans, home
purchase contracts or similar obligations at the beginning of
each year. At September 30, 1998, the Savings Bank had $___
million in FHLB stock, which was in compliance with this
requirement.
As a result of FIRREA, the FHLBs are required to provide funds
for the resolution of troubled savings institutions and to
contribute to affordable housing programs through direct loans or
interest subsidies on advances targeted for community investment
and low- and moderate-income housing projects. These
contributions have adversely affected the level of FHLB dividends
paid and could continue to do so in the future. These
contributions also could have an adverse effect on the value of
FHLB stock in the future.
Federal Reserve System. The Federal Reserve Board requires all
depository institutions to maintain average daily reserves equal
to various percentages against their accounts. The
percentages are subject to adjustment by the Federal Reserve
Board. At September 30, 1998, the Savings Bank met its reserve
requirement. Because required reserves must be maintained in the
form of vault cash or a non-interest-bearing account at a Federal
Reserve Bank, the effect of this reserve requirement is to reduce
an institution's earning assets.
Taxation
General. The Company and the Savings Bank are subject to the
generally applicable corporate tax provisions of the Code, and
the Savings Bank is subject to certain additional provisions of
the Code which apply to thrift and other types of financial
institutions. The following discussion of federal taxation is
intended only to summarize certain pertinent federal income tax
matters and is not a comprehensive discussion of the tax rules
applicable to the Savings Bank.
Fiscal Year. The Company and the Savings Bank file a
consolidated federal income tax return on the basis of a fiscal
year ending on September 30. Consolidated returns have the
effect of eliminating intercompany distributions, including
dividends, from the computation of consolidated taxable income
for the taxable year in which such distributions occur.
Thrift institutions, such as the Savings Bank, generally are
subject to the provisions of the Internal Revenue Code of 1986,
as amended, in the same manner as other corporations.
Earnings appropriated to the Savings Bank's tax bad debt reserves
and claimed as tax deductions will not be available for the
payment of cash dividends or other distributions to the Company
(including distributions made upon dissolution or liquidation),
unless the Savings Bank includes the amounts distributed in
taxable income, along with the amounts deemed necessary to pay
the resulting federal income tax. At September 30, 1998, the
Savings Bank includes the amounts distributed in taxable income,
along with the amounts deemed necessary to pay the resulting
federal income tax.
For taxable years beginning after June 30, 1986, the Internal
Revenue Code imposes an alternative minimum tax at a rate of 20%.
The alternative minimum tax generally applies to a base of
regular taxable income plus certain tax preferences ("alternative
minimum taxable income" or "AMTI") and is payable to the extent
such AMTI exceeds an exemption amount. The Internal Revenue Code
provides that an item of tax preference is the excess of the bad
debt deduction allowable for a taxable year pursuant to the
percentage of taxable income method over the amount allowable
under the experience method. The other items of tax preference
that constitute AMTI include (a) tax-exempt interest on
newly-issued (generally qualified bonds and (b) for taxable years
including 1987 through 1989, 50% of the excess of (i) the
taxpayer's pre-tax adjusted net book income over (ii) AMTI
(determined without regard to this latter preference and prior to
reduction by net operating losses). For taxable years beginning
after 1989, this latter preference has been replaced by 75% of
the excess (if any) of (i) adjusted current earnings as defined
in the Internal Revenue Code, over (ii) AMTI (determined without
regard to this preference and prior to reduction by net operating
losses). For any taxable year beginning after 1986, net
operating losses can offset no more than 90% of AMTI. Certain
payments of alternative minimum taxes may be used as credits
against regular tax liabilities in future years. In addition,
for taxable years after 1986 and before 1992, corporations,
including savings institutions, are also subject to an
environmental tax equal to 0.12% of the excess of AMTI for the
taxable year (determined without regard to net operating losses
and the deduction for the environmental tax) over $2.0 million.
The Savings Bank is not currently paying any amount of
alternative minimum tax but may, depending on future results of
operations, be subject to this tax.
The Savings Bank's federal income tax returns have not been
examined by the regulatory authorities within the past five
years. For additional information, see Note 12 of Notes to
Consolidated Financial Statements contained elsewhere herein.
Mississippi and Delaware Taxation
The Company and the Savings Bank are both subject to Mississippi
corporate income tax and franchise tax to the extent they are
engaged in business in the State of Mississippi or have income
that is generated in the State of Mississippi.
A franchise tax is imposed and the tax rate of $2.50 per $1,000,
or fraction thereof, of the value of capital used, invested or
employed in the State of Mississippi. The franchise tax base
consists of capital stock issued and outstanding, paid in
capital, surplus, and retained earnings; however, in no case
shall the tax base be less than the assessed value of real and
tangible personal property in the State of Mississippi. If the
Company is classified as a "holding company" then it may exclude
from its franchise tax base the stock it owns in the Savings
Bank. Mississippi law provides that the value of capital used,
invested, or employed in Mississippi by a "holding corporation"
excludes that portion of the book value of the holding
corporation's investment in stock or securities of its subsidiary
corporation determined by a formula. The formula states that
first, the ratio of (1) the holding corporation's investment in
stock or securities of its subsidiary corporation, computed using
the cost method of accounting, and (2) the holding corporation's
total assets, is computed. Second, the ratio is then applied to
the total capital stock, surplus, paid in capital and retained
earnings of the holding corporation in order to arrive at the
amount of the exclusion. For purposes of Mississippi franchise
taxes, a "holding corporation" is defined as a corporation, (i)
owning at least eighty percent (80%) of the value and voting
power of all classes of issued and outstanding stock of a
corporation, excluding non-voting stock which is limited and
preferred as to dividends, and (ii) deriving ninety-five (95%) of
its gross receipts from dividends, interest, royalties, rents,
certain services provided to members of an affiliated group and
other passive sources of income.
An income tax is imposed in Mississippi at a rate of 3% on the
first $5,000 of taxable income, 4% on the next $5,000 of taxable
income and 5% on taxable income in excess of $10,000. For these
purposes, "taxable income" generally means federal taxable
income, subject to certain adjustments (exclusion of interest
income on U.S. Treasury obligations). The exclusion of income on
U.S. Treasury obligations has the effect of reducing the
Mississippi taxable income of savings institutions.
Two or more members of an affiliated group of corporations may
elect to file a consolidated Mississippi income tax return when
all the business activities of the group of affiliated
corporations included in the consolidated return are conducted
in, and are taxable solely in Mississippi. In addition, the
Commissioner of the Mississippi Tax Commission may require any
and all members of a group of affiliated corporations to file a
combined or consolidated Mississippi income tax return if he
believes such a return is necessary to clearly and equitably
reflect the Mississippi taxable income of the affiliated group.
The term "affiliated group" for Mississippi consolidated income
tax returns means one or more corporations connected through
stock ownership with a common parent corporation where at least
80% of the voting power of all classes of stock and at least 80%
of each class of the non-voting stock of each of the member
corporations, except the common parent corporation, is directly
owned by one or more of the other members corporations, and the
common parent directly owns stock possessing at least 80% of the
voting power of all classes of stock and at least 80% of each
class of non-voting stock of at least one of the other member
corporations.
The Company was organized in the State of Delaware, and therefore
it will be required to file a franchise tax return with the State
of Delaware. The Company will also be required to file an income
tax return in the State of Delaware if it derives income from
business activities carried on in the State of Delaware.
Currently, the Company does not have any business activities in
the State of Delaware.
Delaware law provides two methods to calculate the Delaware
Franchise Tax. One method is based on the Company's authorized
number of shares and the second method is based on the Company's
"assumed no-par capital" with respect to no par shares and on the
Company's "assumed par value capital" with respect to par value
shares. The lesser result under both methods is then used to
determine the franchise tax liability in the State of Delaware.
Under the first method the franchise tax is calculated at a base
rate of $90 on the first 10,000 shares, plus $50 per each
additional 10,000 shares or part thereof.
The second method is based on "assumed no-par capital" with
respect to no-par shares and an "assumed par-value capital" with
respect to par value shares as follows:
1. The "assumed no-par capital" is the authorized number of
shares without par value multiplied by $100. The tax on
the "assumed no-par capital" is $30 for each $300,000 or
less and is graduated as follows: (i) $50 for over
$300,000 but not over $500,000; (ii) $90 for over $500,000
but not over $1,000,000; and (iii) $90 for over $1,000,000,
plus $50 per each additional $1,000,000 or part thereof.
2. The tax on par value is $200 for each $1,000,000, or
fraction thereof of an "assumed par-value capital." The
"assumed par-value capital" is found as follows: (i)
ascertain average asset value per share by dividing total
gross assets by the total number of issued shares,
including shares without par value; (ii) if average asset
value is more than par value; it is multiplied by the total
number of authorized par value shares; if average assets
value is less than par value of any class of authorized
shares, such shares must be taken at their par value.
Where it is necessary to use average asset value for one
class of shares and par value of any other class or
classes, the "assumed par-value capital" is the sum of the
products of the multiplications.
If a corporation has both no-par shares and par-value shares, the
no-par shares are taxed as calculated above upon a share basis
which is added to the tax calculated above on the par value
shares.
Executive Officers Who Are Not Directors
The following individuals are executive officers of the Company
who do not serve on the Board of Directors.
Age at
September 30,
Name 1998 Position(s) With the Company
Gill Simmons 64 Vice President--Mortgage Loans
Jack Johnson 59 Vice President--Operations and
Compliance
Mark Burleson 32 Vice President-Consumer/Commercial Lending
Sherry McCarty 49 Chief Financial Officer
_________________________________________________________________________
Set forth below is a brief description of the background of each
person who serves as an executive officer of the Company and the
Savings Bank and who is not a director.
Gill Simmons is Vice President for Mortgage Loans. Mr. Simmons
joined the Savings Bank in 1955 and during his tenure also has
served as Secretary/Treasurer.
Jack Johnson is Vice President for Operations and Compliance.
Mr. Johnson joined the Savings Bank in 1958 and during his tenure
also has served as cashier.
Mark Burleson is Vice President--Consumer/Commercial Lending.
Mr. Burleson joined the Savings Bank in 1994 after being employed
at a Tupelo-area commercial bank for five years where he served,
among other positions, as an assistant vice president and a
branch manager.
Sherry McCarty is Chief Financial Officer. Ms. McCarty joined
the Savings Bank in 1967 and during her tenure has also served as
Controller.
Employees
The Savings Bank had 33 full time employees at September 30,
1998. None of the employees is represented by a collective
bargaining agreement.
ITEM 2.--DESCRIPTION OF PROPERTY
The following table sets forth information regarding the
Association's offices at September 30, 1998:
Net Book
Value at Approximate Owned
Year Sep 30, Square or
Opened 1998 Footage Leased
Main Office:
333 Court Street
Tupelo, Mississippi 1969 $152 10,000 Owned
West Main Street Branch:
3425 West Main Street
Tupelo, Mississippi 1997 $1,326 3,500 Owned
The net book value of the Company's investment in furnishings and
equipment totaled $518 at September 30, 1998.
ITEM 3.--LEGAL PROCEEDINGS
From time to time, the Company is a party to various legal
proceedings incident to its business. At September 30, 1998,
there were no legal proceedings to which the Company or its
subsidiary was a party, or to which any of their property was
subject, which were expected by management to result in a
material loss.
ITEM 4.--SUBMISSION OF MATTERS TO A VOTE OF SECURITIES HOLDERS
No matters were submitted to a vote of securities holders during
the fourth quarter of fiscal 1998.
ITEM 5.--MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS
The information contained in the 1998 Annual report under the
caption "Market for Common Stock and Related Stockholder matters"
is incorporated herein by reference.
ITEM 6.--SELECTED FINANCIAL DATA
The information required herein is incorporated by reference from
page 2 of the Annual Report.
ITEM 7.--MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
The information required herein by this item is incorporated by
reference from pages 35 to 41 of the annual report.
ITEM 8--FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
SELECTED QUARTERLY FINANCIAL DATA (UNAUDITED)
(Dollars in thousands except per share amounts)
1998
First Second Third Fourth Total
Interest revenue $3,800 $3,988 $4,296 $4,415 $16,499
Interest expense 2,051 2,255 2,535 2,732 9,573
Net interest revenue 1,749 1,733 1,761 1,683 6,926
Provision for loan
losses 10 15 30 180 235
Non-interest revenue 102 332 480 1,290 2,204
Non-interest expense 840 902 851 1,434 4,027
Income before income
taxes 1,001 1,148 1,360 1,359 4,868
Income tax expense 341 414 474 588 1,817
Net income $ 660 $ 734 $ 886 $ 771 $3,051
Net income per share $.16 $.17 $.21 $.18 $.72
(Dollars in thousands except per share amounts)
1997
First Second Third Fourth Total
Interest revenue $3,600 $3,606 $3,626 $3,676 $14,508
Interest expense 1,677 1,648 1,762 1,937 7,024
Net interest revenue 1,923 1,958 1,864 1,739 7,484
Provision for loan
losses 5 5 0 10 20
Non-interest revenue 66 100 85 (24) 227
Non-interest expense 571 633 921 801 2,926
Income before income
taxes 1,413 1,420 1,028 904 4,765
Income tax expense 528 532 378 290 1,728
Net income $ 885 $ 888 $ 650 $ 614 $ 3,037
Net income per share $ .21 $ .21 $ .15 $ .13 $ .70
Other information required by Item 8 is set forth in the
Company's annual report for the year ended September 30, 1998,
which appears in Exhibit 13, and is incorporated herein by
reference.
The following financial statements and financial statement
schedules are submitted herewith:
Financial Statements
Report of Independent Public Accountants
Consolidated Statements of Financial Condition
Consolidated Statements of Income
Consolidated Statements of Stockholders' Equity
Consolidated Statements of Cash Flows
Notes to Consolidated Financial Statements
ITEM 9.--CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
ACCOUNTING AND FINANCIAL DISCLOSURE
Not applicable.
PART III
ITEM 10.--DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS, AND CONTROL
PERSONS; COMPLIANCE WITH SECTION 16(A) OF THE EXCHANGE
ACT
Information concerning the directors and executive officers of
the Company and Transactions with Management is incorporated
herein by reference to the sections captioned "Executive Officers
Who Are Not Directors" in Item 1. of this report and
"Proposal I--Election of Directors" in the Proxy Statement.
ITEM 11.--EXECUTIVE COMPENSATION
The information required by this item is incorporated herein by
reference to the section captioned "Executive Compensation" in
the Proxy Statement.
ITEM 12.--SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT
The information required by this item is incorporated herein by
reference to the sections captioned "Voting Securities and
Security Ownership" and "Proposal I--Election of Directors" in
the Proxy Statement.
ITEM 13.--CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information required by this item is incorporated herein by
reference to the section captioned "Transactions with Management"
in the Proxy Statement.
PART IV
ITEM 14.--EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON
FORM 8-K
Financial Statement Schedules. The Financial Statement Schedules
listed below appear in Exhibit 13.
1. Financial Statements:
Report of Independent Accountants
Consolidated Statements of Financial Condition
Consolidated Statements of Income
Consolidated Statements of Stockholders' Equity
Consolidated Statements of Cash Flows
Notes to Consolidated Financial Statements
2. All Schedules for which provision is made in the
applicable accounting regulations of the Securities
and Exchange Commission are omitted because of the
absence of conditions under which they are required
or because the required information is included in the
financial statements and related notes thereto.
3. The following exhibits are filed as part of this Form
10-K and this list includes the Exhibit Index.
No. Exhibits
3.1* Certificate of Incorporation
3.2* Bylaws
4.1* Specimen Common Stock Certificate
10.1(a)* Employee Stock Ownership Plan
13 Annual Report to Stockholders
21 List of Subsidiaries
*Incorporated herein by reference to the
Registration Statement file number 33-99962
on Form S-1.
(b) Reports on Form 8-K during the year ended
September 30, 1998.
1. On June 10, the Company filed a current
report on Form 8-K
(c) See (a) (3) above for all exhibits filed herewith
and the Exhibit Index.
(d) There are no other financial statements and
financial statement schedules which were
excluded from Item 8 which are required to be
included herein.
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, as of the date indicated below:
Pursuant to the requirements of the Securities Exchange Act of
1934, this report has been signed below by the following persons
on behalf of the registrant in the capacities indicated below as
of the date indicated above.
COMMUNITY FEDERAL BANCORP, INC.
Date: December 29, 1998 By: (Signature)
Jim Ingram
Chief Executive Officer
(Duly Authorized Representative)
By: (Signature)
H. Lewis Whitfield
President
(Duly Authorized Representative)
By: (Signature)
Sherry McCarty
Chief Financial Officer
(Duly Authorized Representative)
Pursuant to the requirements of the Securities Exchange Act of
1934, this report has been signed below by the following persons
on behalf of the capacities indicated below as of the date
indicated above.
Date: December 29, 1998
(Signature) (Signature)
Medford M. Leake J. Leighton Pettis
Director Director
(Signature) (Signature)
Charles V. Imbler L. F. Sams, Jr.
Director Director
(Signature) (Signature)
Robert R. Black, Sr. Michael R. Thomas
Director Director
(Signature)
Robert Reed, III
Director
Exhibit 21
LIST OF SUBSIDIARIES
Name of Business State of Incorporation
Community Federal Savings Bank Mississippi