COMMUNITY FEDERAL BANCORP, INC.
Consolidated Financial Statements
as of September 30, 1998 and 1997
Together With
Auditors' Report
To Our Stockholders:
We are pleased to report record net income of $3,050,813 or $.72
per share, fully diluted, for the fiscal year ended September 30,
1998.
Community Federal also experienced another year of outstanding
growth in loans and deposits. Net loans increased to
$141,414,264, a gain of $14,079,306 or 11.1%. Total deposits
rose to $144,801,613, an increase of $12,083,223 or 9.1%. We
believe this growth affirms our philosophy of offering
traditional banking services to our customers in a warm, friendly
environment.
Total assets showed dramatic growth from $215,937,823 on
September 30, 1997 to $275,320,442 on September 30, 1998. This
extraordinary increase of 27.5% is partially as a result of our
growth in core customer business. However, there is a special
reason for the bulk of the increase, which is explained below.
You are aware that we have been aggressively managing our capital
to maximize the return to you. In May of 1997, we paid a special
dividend of $2.50 per share. During the fiscal year ended
September 30, 1998, we embarked on a stock repurchase program
through which 310,500 shares were repurchased.
Beyond the special dividend and stock repurchase program, we
implemented a growth program designed to leverage the Company's
strong capital base. Essentially, we will be using deposit
growth and advances from the Federal Home Loan Bank to fund the
purchase of securities. This program should result in more net
income and should improve return on stockholders' equity over
time. We intend to implement this program with great care. Our
new growth program helps explain our dramatic increase in total
assets.
We are fortunate to operate in the dynamic Northeast Mississippi
area. Our customer base is strong and growing, and it is served
by a dedicated, friendly, professional staff. By providing high
quality, personal service, our staff is building great
relationships with our customers, which is translating into
excellent growth and profitability for our company.
As stockholders, your support is critically important to our
success. Please consider us for your banking needs. We are
committed to building outstanding shareholder value, and we need
your full support to accomplish this goal.
On behalf of our board and staff, I want to thank you for your
continuing support of and investment in Community Federal.
Sincerely,
Jim Ingram
Chief Executive Officer
SELECTED CONSOLIDATED FINANCIAL AND OTHER DATA
Year Ended September 30,
1998 1997 1996 1995 1994
INCOME STATEMENT DATA:
Total interest income 16,607 14,508 13,150 11,016 10,011
Total interest expense 9,573 7,024 6,950 6,267 6,438
Net interest income 7,034 7,484 6,200 4,749 3,573
Provision for loan losses 235 20 20 30 25
Net interest income
after provision for
loan losses 6,799 7,464 6,180 4,719 3,548
Noninterest income 1,929 227 188 132 752
Noninterest expense 3,860 2,926 3,036 1,672 1,840
Income before income taxes 4,868 4,765 3,332 3,179 2,460
Provision for income taxes 1,817 1,728 1,184 1,144 1,012
Cumulative effect of change
in accounting principle 0 0 0 0 131
Net income 3,051 3,037 2,148 2,035 1,317
Earnings per share (1)
Basic $.76 $.70 $.27 N/A N/A
Diluted $.72 $.70 $.27 N/A N/A
At September 30,
1998 1997 1996 1995 1994
BALANCE SHEET DATA:
Total assets 275,320 215,938 204,017 162,042 154,600
Loans receivable, net 141,414 127,335 117,631 97,988 84,269
Securities:(2)
Available for sale 119,799 73,976 75,112 25,125 N/A
Held to maturity 2,742 4,157 4,756 33,837 N/A
Mortgage-backed and
related securities(2) N/A N/A N/A N/A 33,755
Securities(2) N/A N/A N/A N/A 30,146
Deposits 144,802 132,718 131,740 134,555 131,989
Stockholders' equity 57,565 58,563 67,139 23,427 20,394
Year Ended September 30,
1998 1997 1996 1995 1994
KEY OPERATING DATA:
Return on average assets 1.2% 1.5% 1.1% 1.3% 0.9%
Return on average equity 5.2 4.7 4.4 9.4 7.0
Average equity to average assets 23.6 30.9 26.2 13.6 12.4
Dividend payout ratio (1) 40.2 389.7 57.9 N/A N/A
Number of offices 2 2 1 1 1
(1) Earnings per share and dividend payout ratios are presented
from the conversion date.
(2) Securities are presented in connection with the Company's
adoption of Statement of Accounting Standards No. 115 as of
October 1, 1994.
MARKET FOR COMMON STOCK
AND RELATED STOCKHOLDER MATTERS
The Company's common stock began trading on the NASDAQ on
March 26, 1996, under the symbol "CFTP." At September 30, 1998,
there were 4,318,250 shares of the common stock outstanding and
approximately 2,400 stockholders of record.
The payment of dividends on the Common Stock is subject to
determination and declaration by the Board of Directors of the
Company. The Board of Directors has adopted a policy of paying
quarterly cash dividends on the Common Stock. In addition, from
time to time, the Board of Directors may determine to pay special
cash dividends in addition to, or in lieu of, regular cash
dividends. The payment of future dividends will be subject to
the requirements of applicable law and the determination by the
Board of Directors of the Company based on the net income,
capital, and financial condition of the Company and the
Association, thrift industry trends, and general economic
conditions justifying the payment of dividends, however there can
be no assurance that dividends will be paid or, if paid, will
continue to be paid in the future.
The following table sets forth information as to high and low
sales prices of the Company's common stock and cash dividends per
share of common stock for the calendar quarters indicated.
Price Per Share Dividends Per Share
High Low Regular Special
Fiscal 1998:
Fourth quarter $17.7500 $14.000 $.080 $ .00
Third quarter 18.8750 17.250 .080 .00
Second quarter 20.8125 18.125 .080 .00
First quarter 22.0000 16.375 .075 .00
Fiscal 1997:
Fourth quarter $18.7500 $17.250 $.075 $ .00
Third quarter 20.7500 16.875 .075 2.50
Second quarter 20.0000 16.750 .075 .00
First quarter 17.3750 13.375 .075 .00
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To Community Federal Bancorp, Inc.:
We have audited the accompanying consolidated statements of
financial condition of Community Federal Bancorp, Inc. (a
Delaware corporation) AND SUBSIDIARY as of September 30, 1998 and
1997, and the related consolidated statements of income,
stockholders' equity, and cash flows for each of the three years
in the period ended September 30, 1998. These financial
statements are the responsibility of the Company's management.
Our responsibility is to express an opinion on these financial
statements based on our audits.
We conducted our audits in accordance with generally accepted
auditing standards. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether
the financial statements are free of material misstatement. An
audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An
audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating
the overall financial statement presentation. We believe that
our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to
above present fairly, in all material respects, the consolidated
financial position of Community Federal Bancorp, Inc. and
Subsidiary as of September 30, 1998 and 1997, and the results of
their operations and their cash flows for each of the three years
in the period ended September 30, 1998, in conformity with
generally accepted accounting principles.
ARTHUR ANDERSEN LLP
Birmingham, Alabama
October 8, 1998
COMMUNITY FEDERAL BANCORP, INC.
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
AS OF SEPTEMBER 30, 1998 AND 1997
ASSETS
1998 1997
CASH AND DUE FROM BANKS $ 2,978,714 $ 3,886,874
FEDERAL FUNDS SOLD 300,000 0
Total cash and cash equivalents 3,278,714 3,886,874
INTEREST-BEARING DEPOSITS IN BANKS 792,000 1,550,129
SECURITIES AVAILABLE FOR SALE,
at fair value 119,799,017 73,976,278
SECURITIES HELD TO MATURITY, at
amortized cost (estimated fair
value of $2,760,651 and
$4,122,225 respectively) 2,742,209 4,156,732
LOANS RECEIVABLE, net 141,414,264 127,334,958
ACCRUED INTEREST AND DIVIDENDS
RECEIVABLE 1,523,400 1,239,777
PREMISES AND EQUIPMENT, net 2,944,000 3,318,561
OTHER ASSETS 2,826,838 474,514
Total assets $275,320,442 $215,937,823
LIABILITIES AND STOCKHOLDERS' EQUITY
DEPOSITS 144,801,613 $132,718,390
FEDERAL HOME LOAN BANK ADVANCES 65,451,449 18,282,186
OTHER LIABILITIES:
Accrued interest payable 682,350 731,619
Advances from borrowers for taxes
and insurance 427,879 424,356
Deferred income taxes payable 4,996,792 3,410,146
Accrued expenses and other liabilities 1,395,733 1,808,125
Total liabilities 217,755,816 157,374,822
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' EQUITY:
Preferred stock, no par value;
2,000,000 shares authorized;
shares issued and outstanding--none 0 0
Common stock, par value $.01 per
share; 10,000,000 shares authorized,
4,628,750 shares issued 46,288 46,288
Additional paid-in capital 45,210,144 45,113,004
Retained earnings 15,487,717 13,714,336
Treasury stock, at cost, 310,500
shares in 1998 (5,545,540) 0
Unearned compensation (5,277,786) (5,998,323)
Unrealized gain on securities
available for sale, net 7,643,803 5,687,696
Total stockholders' equity 57,564,626 58,563,001
Total liabilities and
stockholders' equity $275,320,442 $215,937,823
The accompanying notes are an integral part of these statements.
COMMUNITY FEDERAL BANCORP, INC.
CONSOLIDATED STATEMENTS OF INCOME
FOR THE YEARS ENDED SEPTEMBER 30, 1998, 1997, AND 1996
1998 1997 1996
INTEREST INCOME:
Interest and fees on loans:
Mortgage loans $ 8,864,345 $ 9,010,094 $ 8,217,595
Consumer loans 1,014,303 325,172 262,356
Commercial loans 916,603 462,641 130,510
Interest and dividends
on securities held to
maturity 196,129 265,859 824,987
Interest and dividends
on securities available
for sale 5,279,983 4,163,866 3,249,772
Other interest income 335,920 280,980 464,598
Total interest income 16,607,283 14,508,612 13,149,818
INTEREST EXPENSE:
Deposits 7,176,109 6,649,961 6,930,124
Other borrowings 2,397,313 374,366 19,410
Total interest expense 9,573,422 7,024,327 6,949,534
Net interest income 7,033,861 7,484,285 6,200,284
PROVISION FOR LOAN LOSSES 235,000 20,000 20,000
Net interest income
after provision for
loan losses 6,798,861 7,464,285 6,180,284
NONINTEREST INCOME:
Gain on sale of securities
available for sale, net 1,650,548 1,967 54,838
Loan servicing fees 129,698 92,686 67,254
Other income 149,127 132,348 65,656
Total noninterest income 1,929,373 227,001 187,748
NONINTEREST EXPENSES:
Compensation and benefits 2,293,192 1,963,349 1,153,133
Special SAIF assessment 0 0 863,835
Deposit insurance premium 87,400 123,616 317,896
Occupancy and equipment 251,693 144,382 134,745
(Gain) loss on real estate
owned, net 30,177 3,279 (15,119)
Loss on sale of loans, net 17,269 9,616 0
Other expenses 1,180,145 682,401 580,990
Total noninterest expenses 3,859,876 2,926,643 3,035,480
Income before income taxes 4,868,358 4,764,643 3,332,552
PROVISION FOR INCOME TAXES 1,817,545 1,728,120 1,184,294
NET INCOME $ 3,050,813 $3,036,523 $2,148,258
EARNINGS PER SHARE
Basic $.76 $.70 $.27
Diluted $.72 $.70 $.27
The accompanying notes are an integral part of these statements.
COMMUNITY FEDERAL BANCORP, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
FOR THE YEARS ENDED SEPTEMBER 30, 1998, 1997, AND 1996
Additional
Common Paid-In Retained Unearned
Stock Capital Earnings Compensation
BALANCE,
Sep 30, 1995 $ 0 $ 0 $21,030,744 $ 0
Net income 0 0 2,148,258 0
Change in
unrealized
gain (loss)
on securities,
due to the
reclassification
of securities
from held to
maturity to
available for
sale, net 0 0 0 0
Issuance of
common stock 46,288 44,954,433 0 (3,632,000)
Change in
unrealized gain
on securities
available
for sale, net 0 0 0 0
Amortization
of unearned
compensation 0 51,878 0 167,890
Dividends declared
($.15 per share) 0 0 (667,072) 0
BALANCE,
Sep 30, 1996 46,288 45,006,311 22,511,930 (3,464,110)
Net income 0 0 3,036,523 0
Contributions to
stock plan trusts 0 (16,922) 0 (3,065,278)
Change in unrealized
gain on securities
available for
sale, net 0 0 0 0
Amortization of
unearned
compensation 0 123,615 0 531,065
Dividends declared
($2.80 per share) 0 0 (11,834,117) 0
BALANCE,
September 30,
1997 46,288 45,113,004 13,714,336 (5,998,323)
Net income 0 0 3,050,813 0
Contributions to
stock plan
trusts 0 (27,150) 0 (156,798)
Change in
unrealized gain
on securities
available for
sale, net 0 0 0 0
Amortization
of unearned
compensation 0 124,290 0 877,335
Purchase of
treasury stock,
at cost 0 0 0 0
Dividends declared
($.32 per share) 0 0 (1,277,432) 0
BALANCE,
September 30,
1998 $46,288 $45,210,144 $15,487,717 $(5,277,786)
Unrealized
Gain on
Securities
Treasury Available
Stock for Sale, Net Total
BALANCE, Sep 30, 1995 $ 0 $2,396,156 $23,426,900
Net income 0 0 2,148,258
Change in unrealized
gain (loss) on
securities, due to the
reclassification
of securities from held
to maturity to
available for sale, net 0 (28,115) (28,115)
Issuance of common stock 0 0 41,368,721
Change in unrealized gain on
securities available for
sale, net 0 670,436 670,436
Amortization of unearned
compensation 0 0 219,768
Dividends declared ($.15
per share) 0 0 (667,072)
BALANCE, Sep 30, 1996 0 3,038,477 67,138,896
Net income 0 0 3,036,523
Contributions to stock
plan trusts 0 0 (3,082,200)
Change in unrealized gain
on securities available
for sale, net 0 2,649,219 2,649,219
Amortization of unearned
compensation 0 0 654,680
Dividends declared
($2.80 per share) 0 0 (11,834,117)
BALANCE, September 30, 1997 0 5,687,696 58,563,001
Net income 0 0 3,050,813
Contributions to stock
plan trusts 0 0 (183,948)
Change in unrealized gain on
securities available for
sale, net 0 1,956,107 1,956,107
Amortization of unearned
compensation 0 0 1,001,625
Purchase of treasury
stock, at cost (5,545,540) 0 (5,545,540)
Dividends declared
($.32 per share) 0 0 (1,277,432)
BALANCE, September 30,
1998 $(5,545,540) $7,643,803 $57,564,626
The accompanying notes are an integral part of these statements.
COMMUNITY FEDERAL BANCORP, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED SEPTEMBER 30, 1998, 1997, AND 1996
1998 1997 1996
CASH FLOWS FROM OPERATING
ACTIVITIES:
Net income $ 3,050,813 $3,036,523 $2,148,258
Adjustments to reconcile net
income to net cash provided
by operating activities:
Depreciation 109,126 81,139 63,832
Deferred income tax provision
(benefit) 28,874 71,401 (281,057)
Amortization of deferred loan
fees and costs, net 82,261 32,371 47,949
Amortization of discounts and
premiums of accretion,net 195,962 (48,587) (84,616)
Amortization of unearned
compensation 1,001,625 654,680 219,768
Provision for losses on loans 235,000 20,000 20,000
FHLB stock dividends (136,000) (75,000) (72,589)
Loss on sale of loans, net 17,269 9,616 0
Gain on sale of securities
available for sale, net (1,650,548) (1,967) (54,838)
(Gain) loss on sale of
repossessed assets, net 30,177 3,279 (15,119)
Changes in assets and liabilities:
Decrease (increase)in other
assets (2,214,544) 4,525 (171,199)
Decrease (increase)in
interest and dividends
receivable (283,623) 104,170 (184,782)
Increase in income taxes
payable 604,725 71,652 53,588
Increase (decrease)in
accrued interest payable (49,269) 115,197 (47,050)
Increase (decrease)in
accrued expenses and
other liabilities (658,248) (446,868) 1,728,892
Total adjustments (2,687,213) 595,608 1,222,779
Net cash provided by
operating activities 363,600 3,632,131 3,371,037
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from sale of
repossessed assets 453,502 13,000 190,000
Proceeds from maturities and
principal collections of
securities held to maturity 1,404,319 590,329 1,921,600
Proceeds from maturities,
principal collections, and
calls on securities available
for sale 43,180,945 12,998,115 13,165,134
Proceeds from sales of
securities available for sale 1,864,490 5,498,843 2,621,913
(Purchase of) proceeds from
maturities of interest-bearing
deposits in banks, net 758,129 891,195 (692,324)
Purchase of securities available
for sale (86,112,374) (13,132,359) (36,586,411)
Purchase of securities held to
maturity 0 0 (559,141)
(Purchase of) proceeds from
sale of property and
equipment, net (109,565) (2,417,433) (6,351)
Investment in real estate owned (41,535) (7,064) (2,031)
Loan (originations) and principal
repayments, net (14,993,760) (9,892,636) (19,744,689)
Net cash used in
investing
activities (53,595,849) (5,458,010) (39,692,300)
CASH FLOWS FROM FINANCING
ACTIVITIES:
(Decrease) increase in customer
deposits, net 12,083,223 977,957 (2,814,071)
Proceeds from (repayments of)
FHLB advances, net 47,169,263 18,282,186 (1,000,000)
(Decrease) increase in advances
from borrowers for taxes and
insurance 3,523 (20,428) 51,940
Proceeds from stock offering 0 0 41,368,721
Contributions to stock plan
trusts (183,948) (3,082,200) 0
Purchase of treasry stock,
at cost (5,545,540) 0 0
Dividends paid (1,277,432) (11,834,117) (667,072)
Net cash provided
by financing
activities 52,249,089 4,323,398 36,939,518
Net increase
(decrease) in cash
and cash equivalents (983,160) 2,497,519 618,255
CASH AND CASH EQUIVALENTS,
beginning of year 4,261,874 1,764,355 1,146,100
CASH AND CASH EQUIVALENTS,
end of year $ 3,278,714 $4,261,874 $1,764,355
SUPPLEMENTAL CASH FLOW
INFORMATION:
Cash paid for:
Interest on deposits and
other borrowings $ 9,622,691 $6,909,130 $7,049,843
Income taxes $ 1,247,500 $1,668,000 $1,185,000
SUPPLEMENTAL NONCASH INVESTING
AND FINANCING ACTIVITIES:
Transfer of loans to
repossessed assets $ 579,924 $ 126,576 $ 33,878
Change in unrealized net gain
on securities available
for sale, net of deferred
taxes $ 1,956,107 $2,649,219 $ 642,321
Transfer of securities from
held to maturity to available
for sale at fair value $ 0 $ 0 $27,758,607
The accompanying notes are an integral part of these statements.
COMMUNITY FEDERAL BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 1998 AND 1997
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Organization, Nature of Operations, and Principles of
Consolidation
Community Federal Bancorp, Inc. (the "Company") was incorporated
in the State of Delaware in November 1995, for the purpose of
becoming a holding company to own all of the outstanding capital
stock of Community Federal Savings Bank (the "Bank") upon the
Bank's conversion from a federally chartered mutual savings
association to a federally chartered stock savings association
(the "Conversion"). The Bank was converted to a federally
chartered stock organization in November 1995, through the sale
of all of its common stock to the Company. The accounting for
the conversion is in a manner similar to that utilized in a
pooling of interests (see Note 19).
The accompanying consolidated financial statements include the
accounts of the Company and the Bank. All significant
intercompany balances and transactions have been eliminated in
consolidation.
The Bank is primarily engaged in the business of obtaining funds
in the form of various savings deposits products and investing
those funds in mortgage loans or single family real estate and,
to a lesser extent, in consumer and commercial loans. The Bank
operates from two offices in Tupelo, Mississippi, and originates
the majority of its loans in its market area.
Use of Estimates
The preparation of financial statements in conformity with
generally accepted accounting principles requires management to
make estimates and assumptions that affect the reported amounts
of assets and liabilities and disclosure of contingent assets and
liabilities at the date of the financial statements and the
reported amounts of revenues and expenses during the reporting
period. Actual results could differ from those estimates.
Cash and Cash Equivalents
Cash and cash equivalents of $3,278,714 and $4,261,874 at
September 30, 1998 and 1997, respectively, consist of cash on
hand of $736,807 and $797,092 at September 30, 1998 and 1997,
respectively; cash due from and on deposit with other banks of
$2,241,907 and $3,464,782 at September 30, 1998 and 1997,
respectively; and federal funds sold of $300,000 at September 30,
1998. The cash due from and on deposit with other financial
institutions primarily consisted of an interest-bearing account
with a correspondent bank.
For purposes of reporting cash flows, cash and cash equivalents
include cash on hand; amounts due from and on deposit with other
banks, and federal funds. Federal funds are generally sold for
one-day periods overnight.
Securities
Securities classified as securities held to maturity are carried
at amortized cost, adjusted for amortization of premiums and
accretion of discounts, using the level yield method over the
estimated remaining life. The Company has the ability and
management has the positive intent to hold these securities to
maturity.
All securities not considered held to maturity have been
designated as available for sale and are carried at fair value.
The unrealized difference between amortized cost and fair value
on securities available for sale is excluded from earnings and is
reported, net of deferred taxes, as a component of equity.
Securities available for sale includes securities that Management
intends to use as part of its asset/liability management strategy
or that may be sold in response to changes in interest rates,
changes in prepayment risk, liquidity needs, or for other
purposes.
The Company's available for sale portfolio consists of U.S.
Government and federal agencies, mortgage-backed and related
securities, and equity securities. Also included in securities
available for sale is FHLB common stock, which is carried at cost
and evaluated for impairment, as it is considered a restricted
investment security.
The adjusted cost of the specific security sold is used to
compute gain or loss on the sale of securities.
Loans Receivable
Loans receivable are stated at their unpaid principal balances,
less the allowance for loan losses and net deferred loan
origination fees and discounts.
The Bank ceases accrual of interest on substantially all loans
when payment on a loan is in excess of 90 days past due. An
allowance is established by a charge to interest income equal to
all interest previously accrued but unpaid. Interest income is
subsequently recognized only to the extent that cash payments are
received until, 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; in which case the loan is
returned to accrual status.
The allowance for loan losses is increased by charges to income
and decreased by loan charge-offs, net of recoveries. The
allowance for loan losses is maintained 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 the underlying collateral. Though management believes
the 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.
The Bank's loan portfolio consists primarily of one-to-four
family residential mortgages and consumer installment loans that
are evaluated collectively for impairment. The Bank had no loans
designated as impaired under the provisions of Statement of
Financial Accounting Standards ("SFAS") No. 114 at September 30,
1998 and 1997.
Loan Origination Fees and Related Costs
Loan fees and certain direct costs of loan origination are
deferred, and the net fee or cost is recognized as an adjustment
to interest income using the level yield method over the
contractual life of the loan.
Real Estate Owned
Real estate owned includes properties sold under mortgage loans
to facilitate sales of foreclosed properties. The recognition of
gains and losses on the sale of real estate owned is dependent
upon whether the nature and terms of the sale and future
involvement of the Bank in the property meet certain
requirements. If the transaction does not meet these
requirements, income recognition is deferred and recognized under
an alternative method in accordance with SFAS No. 66, Accounting
for Sales of Real Estate.
Real estate owned is carried at the lower of the recorded
investment in the property or the fair value of the property,
less estimated costs of disposition. 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 foreclosure. Subsequent to foreclosure, real estate owned is
evaluated on an individual basis for changes in fair value.
Declines in the fair value of the asset, less costs of
disposition below its carrying amount, result in a loss provision
to increase the valuation allowance account. Increases in the
fair value of the asset, less costs of disposition above its
carrying amount, reduce the valuation allowance account, but not
below zero. Increases or decreases in the valuation allowance
account are charged or credited to income. Costs relating to
improvement of the property incurred subsequent to acquisition
are capitalized, whereas costs relating to the holding of
property are expensed. The amounts expensed in fiscal years
1998, 1997, and 1996 were $6,366, $521, and $8,929,
respectively. The amounts capitalized in 1998, 1997, and, 1996
were $41,535, $7,064, and $2,031, respectively.
Premises and Equipment
Land is carried at cost. Buildings, furniture, fixtures, and
equipment are carried at cost, less accumulated depreciation.
Buildings, furniture, fixtures, and equipment are depreciated
using the straight-line or accelerated methods over the estimated
useful lives of the assets. The estimated useful lives for
furniture, fixtures, and equipment range from 3 to 20 years and
for buildings and improvements range from 10 to 40 years.
Income Taxes
Provisions for income taxes are based on taxes payable or
refundable for the current year (after exclusion of nontaxable
income) and deferred income taxes on temporary differences
between the tax bases of assets and liabilities and their
reported amounts in the financial statements. Deferred tax
assets and liabilities are included in the financial statements
at currently enacted income tax rates applicable to the period in
which the deferred tax assets are enacted, deferred tax assets
and liabilities are adjusted through the provision for income
taxes in the period of enactment.
Pending Accounting Pronouncements
In June 1997, the Financial Accounting Standards Board ("FASB")
issued SFAS No. 130, Reporting of Comprehensive Income. This
Statement established standards for reporting and display of
comprehensive income and its components (revenues, expenses,
gains, and losses) in a full set of financial statements. This
Statement also requires that all items that are required to be
recognized under accounting standards as components of
comprehensive income, be reported in financial statements and are
displayed with the same prominence as other financial statements.
This Statement is effective for fiscal years beginning after
December 15, 1997. Earlier application is permitted.
Reclassification of financial statements for earlier periods
provided for comparative purposes is required.
In June 1997, FASB issued SFAS No. 131, Disclosures About
Segments of an Enterprise and Related Information. This
Statement establishes standards for the way that public business
enterprises report information about operating segments in annual
financial statements and also establishes standards for related
disclosures about products and services, geographic areas, and
major customers. This Statement is effective for financial
statements for periods beginning after December 15, 1997. In the
initial year of application comparative information for earlier
years is to be restated.
In February 1998, the FASB issued SFAS No. 132, Employers'
Disclosures About Pensions and Other Postretirement Benefits.
This Statement revises employers' disclosures about pension and
other postretirement benefit plans. It does not change the
measurement or recognition of those plans. It standardizes the
disclosure requirements for pensions and other postretirement
benefits to the extent practicable, requires additional
information on changes in the benefit obligations and fair values
of plan assets that will facilitate financial analysis, and
eliminates certain disclosures that are no longer as useful and
suggests combined formats for presentation of pension and other
postretirement benefit disclosures. This Statement is effective
for fiscal years beginning after December 15, 1997. Earlier
application is encouraged. Restatement of disclosures for
earlier periods provided for comparative purposes is required
unless the information is not readily available, in which case
the notes to the financial statements should include all
available information and a description of the information not
available.
In June 1998, the FASB issued SFAS No. 133, Accounting for
Derivative Instruments and Hedging Activities. This Statement
requires derivatives to be recorded in the balance sheet as
either an asset or liability measured at its fair value. This
Statement also requires that changes in derivatives' fair value
be recognized currently in earnings unless specific hedge
criteria are met. This Statement is effective for all fiscal
quarters of fiscal years beginning after June 15, 1999.
Management believes there will be no material effect on the
consolidated financial statements from the adoption of these
pronouncements.
Financial Statement Reclassification
The financial statements for prior years have been reclassified
in order to conform with the 1998 financial statement
presentation. The reclassification did not change total assets
or net income in the prior year.
2. SECURITIES AVAILABLE FOR SALE
The amortized cost, gross unrealized gains and losses, and
estimated fair value of securities available for sale at
September 30, 1998 and 1997 are summarized as follows:
1998
Gross Gross
Amortized Unrealized Unrealized Estimated
Cost Gains Losses Fair Value
U.S. government and
federal agencies
bonds and notes $ 98,509,041 $ 687,462 $(193,273) $ 99,003,230
State and local
bonds and notes 161,241 14,295 0 175,536
Total bonds and
notes 98,670,282 701,757 (193,273) 99,178,766
Equity securities:
FNMA preferred 1,010,000 45,000 0 1,055,000
FHLMC common 420,482 8,053,846 0 8,474,328
FNMA common 572,331 3,728,172 0 4,300,503
FHLB common 3,318,800 0 0 3,318,800
Total equity
securities 5,321,613 11,827,014 0 17,148,627
Mutual funds 3,478,377 0 (6,757) 3,471,620
Total $107,470,272 $12,528,775 $(200,030) $119,799,017
1997
Gross Gross
Amortized Unrealized Unrealized Estimated
Cost Gains Losses Fair Value
U.S. government and
federal agencies
bonds and notes $57,768,977 $ 244,065 $(166,253) $57,846,789
State and local
bonds and notes 682,787 0 (73,962) 608,825
Total bonds and
notes 58,682,787 244,065 (240,215) 58,455,614
Equity securities:
FNMA preferred 1,010,000 32,400 0 1,042,400
FHLMC common 457,926 5,935,838 0 6,393,765
FNMA common 734,975 3,194,225 0 3,929,200
FHLB common 1,319,500 0 0 1,319,500
Total equity
securities 3,522,402 9,162,463 0 12,684,865
Mutual funds 2,828,377 7,422 0 2,835,799
Total $64,802,543 $9,413,950 $(240,215) $73,976,278
The amortized cost and fair value of debt securities available
for sale by contractual maturity are shown below. Expected
maturities may differ from contractual maturities because issuers
may have the right to call or prepay obligations with or without
call or prepayment penalties.
September 30, 1998
Amortized Estimated
Cost Fair Value
Due in one year or less $ 3,159,182 $ 3,171,452
Due from one to five years 7,637,028 7,609,734
Due from five to ten years 16,541,501 16,705,481
Due after ten years 71,332,600 71,692,103
98,670,311 99,178,770
Equity securities 5,321,613 17,148,627
Mutual funds 3,478,377 3,471,620
Total $107,470,301 $119,799,017
Gross realized gains on the sale of securities available for sale
totaled $1,665,533 and $43,468, and gross realized losses totaled
$14,985 and $41,501 at September 30, 1998 and 1997, respectively.
3. SECURITIES HELD TO MATURITY
The amortized cost, gross unrealized gains and losses, and
estimated fair values of securities designated as held to
maturity at September 30, 1998 and 1997 are summarized as
follows.
Gross Gross
Amortized Unrealized Unrealized Estimated
1998: Cost Gains Losses Fair Value
U.S. government and
federal agencies
bonds and notes $2,742,209 $19,924 $(1,482) $2,760,651
Total $2,742,209 $19,924 $(1,482) $2,760,651
1997:
U.S. government and
federal agencies
bonds and notes $4,156,732 0 $ (34,507) $4,122,225
Total $4,156,732 0 $ (34,507) $4,122,225
U.S. government and federal agencies bonds and notes designated
as held to maturity at September 30, 1998 bear interest at fixed
and adjustable rates ranging from 5.5% to 7.0%. These bonds and
notes contractually mature at various dates ranging from April
2001 to July 2023.
The carrying value and fair value of debt securities held to
maturity by contractual maturity are shown below. Expected
maturities may differ from contractual maturities because issuers
may have the right to call or prepay obligations with or without
call or prepayment penalties.
September 30, 1998
Carrying Estimated
Value Fair Value
Due from one to five years $1,001,276 $1,004,290
Due from five to ten years 1,249,043 1,265,954
Due after ten years 491,890 490,407
$2,742,209 $2,760,651
4. LOANS RECEIVABLE, NET
Loans receivable at September 30, 1998 and 1997 are summarized as
follows:
1998 1997
Mortgage loans:
Principal balances:
Secured by 1-4 family residences $116,674,242 $108,628,196
Secured by multifamily and
nonresidential properties 5,821,402 6,081,926
Construction loans 4,587,375 3,147,984
127,083,019 117,858,106
Less:
Undisbursed portion of
mortgage loans 1,799,338 1,388,223
Total mortgage loans 125,283,681 116,031,946
Commercial loans:
Principal balances:
Other 1,208,796 2,837,058
Real Estate 10,840,608 4,495,165
Consumer loans:
Principal balances:
Other 4,984,542 4,560,789
Real Estate 305,660 0
Total loans 142,623,287 128,362,895
Less allowance for loan losses 756,285 590,000
Unearned discounts and net
deferred loan origination fees 452,738 437,937
Loans receivable, net $141,414,264 $127,334,958
As a savings bank, the Bank has a credit concentration in 1-4
family residential real estate mortgage loans. Substantially all
of the Bank's 1-4 family residential mortgage loan customers are
located in its trade area of Lee, Itawamba, Prentiss, and
Pontotoc Counties, Mississippi, which have a local unemployment
rate at or slightly below the average for the state. Although
the Bank has generally conservative underwriting standards,
including a collateral policy calling for low loan to collateral
values, the ability of its borrowers to meet their residential
mortgage obligations is dependent upon local economic conditions.
In the normal course of business, loans are made to officers,
directors, and employees of the Company and subsidiary. These
loans are made on substantially the same terms, including
interest rates and collateral, as those prevailing for comparable
transactions with others. Such loans do not involve more than
the normal risk of collectibility, nor do they present other
unfavorable features. As of September 30, 1998 and 1997,
$3,083,622 and $2,081,135, respectively, of these loans were
outstanding. During fiscal year 1998, $1,837,445 of new loans and
advances were made, principal repayments totalled $834,958.
During fiscal year 1997, $1,078,541 of new loans
and advances were made, principal repayments totaled $664,250.
Activity in the allowance for loan losses is summarized as
follows:
1998 1997 1996
Balance at beginning of year $590,000 $572,000 $552,000
Provision charged to income 235,000 20,000 20,000
Charge-offs 68,715 2,000 0
Recoveries 0 0 0
Balance at end of year $756,285 $590,000 $572,000
The Bank had loans on nonaccrual status at September 30, 1998 and
1997 in the amounts of approximately $831,000 and $969,000,
respectively. Interest income forgone on nonaccrual loans was
approximately $17,000 and $50,000 for fiscal years 1998 and 1997,
respectively.
5. LOAN SERVICING
In 1984, the Bank sold first mortgage single-family residential
loans to the Federal National Mortgage Association ("FNMA") with
full recourse which are not included in the accompanying
statements of financial condition. The total principal balances
outstanding under these mortgages were $963,367, $1,518,887, and
$2,212,865, at September 30, 1998, 1997, and 1996,respectively.
Custodial escrow balances maintained in connection with the
foregoing loan servicing were $29,041, $37,115, and $45,805,
at September 30, 1998, 1997, and 1996, respectively. In the event
of default, the Bank must pay the principal and interest under
default to FNMA. The Bank would bear the burden of foreclosure
losses in the event of default. Because of the Bank's credit
policies, foreclosure losses in the event of default have not
been significant and losses under this recourse obligation
are not expected to be significant. At September 30, 1997,
none of these loans were past due 90 days or more. Accordingly,
no provision has been made in the financial statements for
any future losses that may result from this recourse arrangement.
6. ACCRUED INTEREST AND DIVIDENDS RECEIVABLE
Accrued interest and dividends receivable at September 30, 1998
and 1997 are as follows:
1998 1997
Securities available for sale $ 649,800 $ 472,199
Securities held to maturity 13,736 21,504
Loans receivable 855,809 729,505
Other 4,055 16,569
Total $1,523,400 $1,239,777
7. PREMISES AND EQUIPMENT, NET
Premises and equipment at September 30, 1998 and 1997 are
summarized as follows:
1998 1997
Land $ 947,917 $1,322,912
Building and improvements 1,898,417 1,847,918
Furniture, fixtures, and equipment 757,581 715,273
Total 3,603,915 3,886,103
Less accumulated depreciation 659,915 567,542
Premises and equipment, net $2,944,000 $3,318,561
8. DEPOSITS
Deposits at September 30, 1998 and 1997, and the related ranges
of interest rates payable for deposits at September 30, 1998, are
summarized as follows:
1998 1997
Amount Percent Amount Percent
NOW accounts, 0% to
5.00% $ 14,092,613 9.73% 13,391,564 10.09%
Savings accounts,
2.75% 6,754,054 4.67 6,741,456 5.08
20,846,667 14.40 20,133,020 15.17
Certificates of deposit:
4% to 4.99% 14,418,107 9.96 15,965,857 12.03
5% to 5.99% 63,792,916 44.05 61,189,886 46.11
6% to 6.99% 45,629,034 31.51 35,322,441 26.61
7% to 7.99% 114,889 .08 107,186 .08
123,954,946 85.60 112,585,370 84.83
Total $144,801,613 100.00% 132,718,390 100.00%
The aggregate amounts of jumbo certificates of deposit with a
minimum balance of $100,000 were approximately $36,396,989 and
$37,353,716 at September 30, 1998 and 1997, respectively.
Deposits in excess of $100,000 are not federally insured.
Scheduled maturities of certificates of deposit at September 30,
1998 are as follows:
Years ending September 30:
1999 $105,205,697
2000 11,419,550
2001 5,795,318
2002 1,434,891
2003 99,489
Total $123,954,945
Interest expense on deposits for the years ended September 30,
1998, 1997, and 1996 is summarized as follows:
1998 1997 1996
Savings accounts $ 185,456 $ 187,628 $ 260,564
NOW accounts 422,613 402,199 360,598
Certificates of deposit 6,568,040 6,060,134 6,308,962
Total $7,176,109 $6,649,961 $6,930,124
9. EARNINGS PER SHARE
In 1998, the Company adopted SFAS No. 128, Earnings Per Share.
effective December 15, 1997. Basic earnings per share were
computed by dividing net income by the weighted average number of
shares of common stock outstanding during the years ended
September 30, 1998, 1997, and 1996. Diluted earnings per share
for the years ended September 30, 1998, 1997, and 1996, were
computed by dividing net income by the weighted average number of
shares of common stock outstanding and the dilutive effects of
the shares awarded under the Management Recognition Plan ("MRP")
and the Stock Option Plan, based on the treasury stock method
using an average fair market value of the stock during the
respective periods. As a result, the Company's reported earnings
per share for 1997 and 1996 were restated. Earnings per share
for the period from March 25, 1996, the date of Conversion, to
September 30, 1996, have been computed based on the earnings
during that period and on the weighted average number of shares
of common stock and common stock equivalents outstanding during
that period. The weighted average number of shares used for the
period from March 25, 1996 through September 30, 1996, was
4,265,638.
The following table represents the earnings per share
calculations for the years ended September 30, 1998, 1997, and
1996 accompanied by the effect of this accounting change on
previously reported earnings per share:
Per Share
Income Shares Amount
1998:
Net income $3,050,813
Basic earnings per share:
Income available to common
shareholders 3,050,813 4,013,858 $.76
Dilutive securities:
Management recognition
plan shares 0 140,915
Incentive stock option
plan shares 0 57,220
Diluted earnings per share:
Income available to common
shareholders plus assumed
conversions $3,050,813 4,211,992 $.72
1997:
Net income $3,036,253
Basic earnings per share:
Income available to common
shareholders $3,036,253 4,215,679 $.72
Dilutive securities:
Management recognition
plan shares 0 86,555
Incentive stock option
plan shares 0 51,151
Diluted earnings per share:
Income available to common
shareholders plus
assumed conversions $3,036,253 4,353,385 $.70
1996:
Net income from March 25, 1996 $1,152,177
Basic and diluted earnings
per share:
Income available to common
shareholders 1,152,177 4,265,638 $.27
Changes in previously reported earnings per share were as follows
for the years ended September 30, 1997 and 1996:
1997 1996
Earnings per share, as reported $.70 $.27
Earnings per share, as amended:
Basic .72 .27
Diluted .70 .27
10. COMPENSATION AND EMPLOYEE BENEFITS
Employee Stock Ownership Plan
In connection with the Conversion, the Bank established an ESOP
for eligible employees. The ESOP purchased 363,200 shares of the
Company's common stock with the proceeds of a $3,632,000 note
payable from the Bank to the Company and secured by the Common
Stock owned by the ESOP. Interest and principal under the note
are due in quarterly installments through June 2013; interest is
payable quarterly based on the average daily outstanding balance
of principal at the rate of 8.25% per annum. Impact of this
financing is eliminated in the consolidated financial statement
presentation.
Expense related to the ESOP for the years ended September 30,
1998, 1997, and 1996 was approximately $432,000, $348,000, and
$220,000, respectively. Unearned compensation related to the ESOP was
approximately $2,996,000 and $3,240,000 at September 30, 1998 and
1997, respectively, and is shown as a reduction of stockholders'
equity in the accompanying consolidated statements of financial
condition. Unearned compensation is amortized into compensation
expense based on employee services rendered in relation to shares
which are committed to be released.
Unearned compensation is amortized into compensation expense based on
employee services rendered in relation to shares which are committed to
be released based on the fair value of shares. The difference between
the fair value of shares committed to be released and the cost of those
shares to the ESOP is credited to additional paid-in capital in
accordance with Statement of Position 93-6 Employers' Accounting for
Employee Stock Ownership Plans.
Contributions to the ESOP which will be used to repay the loan the
Company made to the ESOP Trust to form the ESOP are debited to other
assets. At September 30, 1998, approximately $2.4 million which will
be used to repay the ESOP loan was included in other assets.
Management Recognition Plan
During fiscal 1997, the Bank established a MRP which purchased
174,450 shares of the Company's common stock on the open market
subsequent to the Conversion. The MRP provides for awards of
common stock to directors and officers of the Bank. The
aggregate fair market value of the shares purchased by the MRP is
considered unearned compensation at the time of purchase and
compensation is earned ratably over the stipulated vesting
period. The expense related to the MRP was approximately
$633,000 and $307,000 for 1998 and 1997, respectively. Unearned
compensation related to the MRP was approximately $2,758,000 and
is shown as a reduction to stockholders' equity in the accompanying
consolidated statements of financial condition.
Contributions to the MRP plan during 1998 and 1997 were for the
purchase of shares for grants during the year. The amount of the
contributions which equalled the share price on the date of grant
was debited to unearned compensation. The difference between the share
repurchase price and the price on the date of grant was debited to
addition paid-in capital.
Contributions to the MRP, usually in the form of dividend equivalents,
which will result in future compensation to the employees are debited to
unearned compensation.
Stock Option Plan
During fiscal 1997, the Company established a stock option plan
to provide incentive stock options to employees and non-incentive
stock options to non- employee directors. The Company accounts
for the Plan under the provisions of Accounting Principles Board
Opinion ("APB") No. 25, Accounting for Stock Issued to Employees
(see Note 10).
Defined Benefit Pension Plan
The Bank has a qualified, noncontributory defined benefit pension
plan covering substantially all its employees. Benefits are
based on each employee's years of service up to a maximum of 40
years and the average of that employee's compensation for the
highest five consecutive calendar years out of the last ten years
prior to retirement. An employee becomes fully vested upon
completion of five years of qualifying service. The Bank's
funding policy is to make annual contributions equal to or
greater than the required minimum under ERISA. The funds are
primarily invested in short-term certificates of deposit with the
Bank.
The following sets forth the plan's funded status and amounts
recognized in the Bank's statement of financial condition at
September 30, 1998 and 1997:
1998 1997
Actuarial present value of
benefit obligations:
Accumulated benefit
obligation:
Vested $2,346,986 $2,011,979
Nonvested 59,397 55,209
Total 2,406,383 2,067,188
Additional benefit based on
estimated future salary levels 516,496 567,359
Projected benefit obligation for
service rendered to date 2,922,879 2,643,547
Plan assets at fair market value 2,372,912 2,254,819
Unfunded projected benefit obligation (549,967) (388,728)
Unrecognized net loss from past
experience different from that
assumed and effects of changes in
assumptions 525,550 364,104
Unrecognized net transition obligation
(asset from adoption of SFAS No. 87)
being amortized over 20 years (100,083) (109,181)
Unfunded pension cost liability
(included in other liabilities) $ 124,500 $ 133,805
The components of net periodic pension expense for the years
ended September 30, 1998, 1997, and 1996 are as follows:
1998 1997 1996
Service cost--benefits earned
during the period $ 72,863 $ 63,033 $ 57,591
Interest cost on the projected
benefit obligation 172,438 156,320 147,926
Actual return on plan assets (93,825) (200,378) (120,002)
Net asset gain (loss) during
the period deferred for
later recognition (62,839) 9,779 13,507
Amortization of unrecognized
net obligation (9,098) (9,098) (9,098)
Net periodic pension cost $ 79,539 $ 19,656 $ 89,924
Assumptions used to develop
the net periodic pension
cost were:
Weighted average discount
rate 6.50% 6.50% 6.50%
Weighted average rate of
compensation increase 5.00 5.00 5.00
Weighted average expected
long-term rate of return
on plan assets 4.00 4.00 4.00
Directors' Retirement Plan
During fiscal 1993, the Bank established the Directors'
Retirement Plan ("DRP") whereby directors or their beneficiaries
will be provided specific amounts of quarterly retirement
benefits for a period of ten years following retirement.
Directors are eligible under the plan upon the completion of ten
years of service. The related compensation expense for the DRP
was $37,171, $33,199, and $52,791, for fiscal years 1998, 1997,
and 1996, respectively. The related accrued compensation is
included in "accrued expenses and other liabilities" in the
accompanying consolidated statements of financial condition.
For fiscal year 1997 and 1996, the projected benefit obligations
related to the DRP were approximately $496,000 and $483,000; the
accumulated benefit obligations, which were accrued for and
included in "accrued expenses and other liabilities," were
approximately $325,000 and $309,000; and the service costs were
approximately $33,000 and $53,000, respectively. The weighted
average discount rate used was 6.5% for 1998 and 1997.
Employment Agreement
The Company has 36-month employment agreements with its Chief
Executive Officer and its President. These agreements provide
that if their employment under the agreements is terminated by
the Company without cause or if they terminate their employment
for good reason, they shall be paid approximately three times
their salary.
11. STOCK-BASED COMPENSATION PLANS
Effective July 1, 1996, the Company adopted SFAS No. 123,
Accounting for Stock-Based Compensation. This Statement
establishes financial accounting and reporting standards for
stock-based employee compensation plans. Those plans include all
arrangements by which employees receive shares of stock or other
equity instruments of the employer or the employer incurs
liabilities to employees in amounts based on the price of the
employer's stock. Examples are stock purchase plans, stock
options, restricted stock and stock appreciation rights. The
accounting requirements of this Statement are effective for
transactions entered into in fiscal years that begin after
December 15, 1995.
The Company has a stockholder approved Option Plan. The Option
Plan provides for the grant of incentive stock options ("ISO") to
employees and nonincentive stock options ("non-ISO") to
non-employee directors. The Company accounts for this plan under
APB No. 25, under which no compensation cost has been recognized.
The Company may grant options up to 462,875 shares under the
Option Plan and has granted options outstanding of 440,859 shares
through September 30, 1997. Under the Option Plan, the option
exercise price equals the stock's market price at the date of
grant. The options vest 20% per year and become exercisable upon
the participant's completion of each of five years of service.
Had compensation costs for these plans been determined consistent
with SFAS No. 123, the Company's net income and earnings per
share would have been reduced to the following pro forma amounts
for the year ended September 30:
1998 1997
Net income:
As reported $3,050,813 $3,036,523
Pro forma 2,436,936 2,745,844
Earnings per share:
As reported:
Basic $.76 $.70
Diluted .72 .70
Pro forma:
Basic .61 .63
Diluted .57 .63
Because the SFAS No. 123 method of accounting has not been
applied to options granted prior to March 25, 1996, the resulting
pro forma compensation costs may not be representative of that to
be expected in future years.
At September 30, 1998, unearned compensation related to the
Option Plan has not been recorded, as the Company has not
purchased shares of the Company's common stock to fund the Option
Plan Trust. A summary of the status of the Company's stock
option plan at September 30, 1998 and 1997 and the changes during
the year then ended is as follows:
1998 1997
Weighted Weighted
Average Average
Exercise Exercise
Shares Price Shares Price
Outstanding at beginning
of year 440,859 $15.42 0 $ 0.00
Granted
Forfeitures 22,016 15.10 440,859 15.42
Exercised 0 0.00 0 0.00
Outstanding at end
of year 462,875 $15.41 440,859 $15.42
Exercisable at end
of year 92,875 $15.41 0 $ 0.00
Weighted average fair
value of the options
granted $6.80 $6.92
At September 30, 1998, 440,859 of the 462,875 options outstanding
have exercise prices between $15.19 and $15.94 with a weighted
average exercise price of $15.42 and an average remaining
contractual life of 8.5 years. The remaining 22,016 options
outstanding at September 30, 1998, consist of options granted
during fiscal 1998 and have exercise prices between $14.50 and
$16.38, with a weighted average exercise price of $15.10 and an
average remaining contractual life of 9.5 years. Of the options
granted in fiscal 1998 and 1997, 4,703 and 88,172 options,
respectively, are exercisable as of September 30, 1998.
The fair value of each option grant is estimated on the date of
grant using the Black-Scholes option pricing model with the
following weighted-average assumptions used for grants in 1998
and 1997, respectively: risk-free interest rates of 6.07% and
5.12% for 1998 and 6.76% and 6.70% for 1997; expected life of the
options is 20% per year over the next five years and expected
volatility of 24% in 1998 and 21% in 1997; and dividend yields of
2% in 1998 and 30% in 1997.
12. INCOME TAXES
The provisions (benefit) for income taxes for the years ended
September 30, 1998, 1997, and 1996, were as follows:
1998 1997 1996
Current:
Federal $1,623,894 $1,500,326 $1,324,389
State 164,777 156,393 140,962
1,788,671 1,656,719 1,465,351
Deferred 28,874 71,401 (281,057)
Total $1,817,545 $1,728,120 $1,184,294
The differences between the provisions for income taxes and the
amounts computed by applying the statutory federal income tax
rate of 34% to income before income taxes at September 30, 1998,
1997, and 1996 were as follows:
1998 1997 1996
Expected income tax expense
at federal tax rate $1,655,242 $1,619,979 $1,133,068
Increase (decrease) resulting
from:
State income tax, net 110,519 107,588 75,840
Dividend received deduction (52,377) (55,452) (47,997)
Tax-exempt interest income 0 0 (5,798)
Other 104,161 56,005 29,181
$1,817,545 $1,728,120 $1,184,294
Effective income tax rate 37% 36% 35%
Temporary differences between the financial statement carrying
amounts and tax bases of assets and liabilities that give rise to
significant portions of the net deferred tax liability as of
September 30, 1998 and 1997 relate to the following:
1998 1997
Book allowance for loan loss $ 288,148 $ 224,200
Retirement plan 131,093 123,580
Accrued bonuses 27,031 54,792
Employee benefit plans 185,035 201,805
Other 44,298 50,902
Deferred tax asset 675,605 655,279
Unrealized gain on securities
available for sale (4,684,912) (3,486,038)
Tax bad debt reserve in excess
of base year (255,993) (324,778)
FHLB dividends (181,446) (129,766)
Accretion of bond discount (40,938) (37,667)
Deferred loan fees and costs, net (97,474) (49,857)
Depreciation (40,343) (23,502)
Other (12,393) (13,817)
Deferred tax liability (5,313,499) (4,065,425)
Net deferred tax liability $(4,637,894) $(3,410,146)
Thrift institutions, in determining taxable income, had
historically been allowed special bad debt deductions based on
specified experience formulae or on a percentage of taxable
income before such deductions. On August 2, 1996, Congress
passed the Small Business Job Protection Act that, among other
things, repealed the tax bad debt reserve method for thrifts
effective for taxable years beginning after December 31, 1995.
As a result, thrifts must recapture into taxable income the
amount of their post-1987 tax bad debt reserves over a six-year
period beginning after 1995. At September 30, 1997, the Bank's
post-1987 tax bad debt reserve, subject to recapture, was
approximately $855,000. The Bank recaptured approximately
$171,000 of this reserve into taxable income in the current year.
The recapture did not have any effect on the Bank's net income
because the related tax expense has already been accrued.
Because of such repeal, thrifts such as the Bank may only use the
same tax bad debt reserve that is allowed for commercial banks.
Accordingly, a thrift with assets of $500 million or less may
only add to its tax bad debt reserves based upon its moving
six-year average experience of actual loan losses (i.e., the
experience method).
The portion of a thrift's tax bad debt reserve that is not
recaptured under this new law is only subject to recapture at a
later date under certain circumstances. These include stock
repurchases, redemptions by the thrift or if the thrift converts
to a type of institution (such as a credit union) that is not
considered a commercial bank for tax purposes. However, no
further recapture would be required if the thrift converted to a
commercial bank charter or was acquired by a commercial bank.
The Bank does not anticipate engaging in any transactions at this
time that would require the recapture of its pre-1988 tax bad
debt reserves of approximately $4,650,000.
13. FEDERAL HOME LOAN BANK ADVANCES
The Company uses Federal Home Loan Bank ("FHLB") advances as an
alternative to funding sources with similar maturities such as
certificates of deposit or other deposit programs. The Company
is required by its blanket floating lien agreement with the FHLB
to pledge its portfolio of first mortgage collateral, demand
deposit accounts, capital stock, and certain other assets. These
advances generally offer more attractive rates when compared to
other traditional financing options and are flexible, allowing
the Company to quickly obtain the necessary maturities and rates
that best suit the Company's overall asset/liability policy.
The following table summarizes information concerning FHLB
advances at September 30:
1998 1997
(In thousands)
Ending balance $65,451 $18,282
Average balance 41,178 6,944
Maximum month-end balance during year 65,451 18,282
Average rate paid 5.30% 5.93%
Scheduled maturities of FHLB advances as of September 30, 1998
were as follows (in thousands):
Due in less than one year $39,000
Due from one to five years 5,000
Due from five to ten years 15,750
Due after ten years 5,701
$65,451
14. REGULATORY MATTERS
The Bank is subject to various regulatory capital requirements
administered by the federal banking agencies. Failure to meet
minimum capital requirements can initiate certain mandatory and
possibly additional discretionary actions by regulators that, if
undertaken, could have a direct material effect on the Bank's
financial statements. Under capital adequacy guidelines and the
regulatory framework for prompt corrective action, the Bank must
meet specific capital guidelines that involve quantitative
measures of the Bank's assets, liabilities, and certain
off-balance sheet items as calculated under regulatory accounting
practices. The Bank's capital amounts and classifications are
also subject to qualitative judgments by the regulators about
components, risk weightings, and other factors.
Quantitative measures established by regulation to ensure capital
adequacy require the Bank to maintain minimum amounts and ratios
(set forth in the table which follows) of total and Tier 1
capital (as defined in the regulations) to risk-weighted assets
(as defined), and of Tier 1 capital (as defined) to average
assets (as defined). Management believes, as of September 30,
1998, and 1997 that the Bank meets all capital adequacy
requirements to which it is subject.
As of September 30, 1998 and 1997, the most recent notification
from the regulatory authorities categorized the Bank as well
capitalized under the regulatory framework for prompt corrective
action. To be categorized as well capitalized, the Bank must
maintain minimum total risk-based, Tier 1 risk-based, Tier 1
leverage ratios as set forth in the table which follows.
Actual capital amounts and ratios are presented in the table
below for the Bank:
To Be Well
Capitalized Under
For Capital Prompt corrective
Actual Adequacy Purpose Action Provision
Amount Ratio Amount Ratio Amount Ratio
($) (%) ($) (%) ($) (%)
September 30,1998
Total Capital
(To risk weighted
Assets) 44,003 40.6 8,672 8.0 10,840 10.00
Tier 1 (core)
capital (to risk
weighted assets) 43,247 39.9 N/A N/A 6,504 6.0
Tier 1 (core)
capital (to
adjusted total
assets) 43,247 16.5 7,840 3.0 13,066 5.0
Tangible Capital
(to adjusted
total assets) 43,247 16.5 3,920 1.5 N/A N/A
September 30, 1997
Total capital
(to risk weighted
assets) 43,555 47.5 7,335 8.0 9,169 10.0
Tier 1 (core)
capital (to risk
weighted assets) 42,965 46.9 N/A N/A 5,502 6.0
Tier 1 (core)
capital (to
adjusted total
assets) 42,965 21.5 6,000 3.0 9,999 5.0
Tangible Capital
(to adjusted
total assets) 42,965 21.5 3,000 1.5 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
(In thousands)
Stockholder's 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
The Company's principal source of funds for dividend payments is
dividends from the Bank. Pursuant to OTS regulations, an
institution that exceeds all fully phased-in capital requirements
before and after a proposed capital distribution and has not been
advised by the OTS that it is in need of more than the normal
supervision can, after prior notice but without the approval of
the OTS, make capital distributions during a calendar year equal
to the greater of (i) 100% of its net income to date during the
calendar year plus the amount that would reduce by one-half its
"surplus capital ratio" (the excess capital over its fully
phased-in capital requirements) at the beginning of the calendar
year, or (ii) 75% of its net income over the most recent
four-quarter period. Any additional capital distributions
require prior regulatory approval.
14. COMMITMENTS AND CONTINGENCIES
Loan Commitments
At September 30, 1997, the Bank had outstanding commitments to
originate loans in the amount of $2,955,025. Of these
outstanding amounts, commitments of $1,106,600 were at fixed
rates ranging between 7.25% and 8.25%; terms for these
outstanding commitments are up to 360 days. Commitments to
extend credit include exposure to some credit loss in the event
of nonperformance of the customer. The Bank's credit policies
and procedures for credit commitments are the same as those for
extensions of credit that are recorded on the statement of
financial condition.
Litigation
The Company is a defendant in certain claims and legal actions
arising in the ordinary course of business. In the opinion of
management, after consultation with legal counsel, the ultimate
disposition of these matters is not expected to have a material
adverse effect on the consolidated financial position of the
Company.
15. COMMITMENTS AND CONTINGENCIES
Loan Commitments
At September 30, 1998, the Bank had outstanding commitments to
originate loans in the amount of $4,523,134. Of these
outstanding amounts, commitments of $2,239,584 were at fixed
rates ranging between 7% and 9.25%; terms for these outstanding
commitments are up to 360 days. Commitments to extend credit
include exposure to some credit loss in the event of
nonperformance of the customer. The Bank's credit policies and
procedures for credit commitments are the same as those for
extensions of credit that are recorded on the statement of
financial condition.
Litigation
The Company is a defendant in certain claims and legal actions
arising in the ordinary course of business. In the opinion of
management, after consultation with legal counsel, the ultimate
disposition of these matters is not expected to have a material
adverse effect on the consolidated financial position of the
Company.
16. INTEREST RATE SENSITIVITY
A portion of the Bank's interest-earning assets are long-term
fixed rate mortgage loans and mortgage-backed and related
securities (approximately 54%), while its principal source of
funds is savings deposits with maturities of three years or less
(approximately 91%). Because of the short-term nature of the
savings deposits, their cost generally reflects returns currently
available in the market. Accordingly, the savings deposits have
a high degree of interest rate sensitivity, while the mortgage
loan portfolio, to the extent of fixed rate loans, is relatively
fixed and has much less sensitivity to changes in current market
rates. Although these conditions are somewhat mitigated by the
Bank's risk management strategies of selling certain long-term
fixed rate loans and plans to increase amounts of short-term
consumer loans originated, changes in market interest rates tend
to directly affect the level of net interest income.
At June 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%, 13%, 20%, and 27% and increase 5%, 6%, 7%, and 11%
in the event of 1%, 2%, 3%, and 4% increases and decreases in
market interest rates, respectively. These calculations indicate
that the Bank's NPV could be adversely affected by increases in
interest rates but could be favorably affected by 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.
17. FAIR VALUE OF FINANCIAL INSTRUMENTS
SFAS No. 107, Disclosures About Fair Value of Financial
Instruments, requires disclosure of fair value information about
financial instruments, whether or not recognized in the statement
of condition, for which it is practicable to estimate that value.
In cases where quoted market prices are not available, fair
values are based on estimates using present value or other
valuation techniques. Those techniques are significantly
affected by the assumptions used, including the discount rate and
estimates of future cash flows. In that regard, the derived fair
value estimates cannot be substantiated by comparison to
independent markets and, in many cases, could not be realized in
immediate settlement of the instrument. The use of different
market assumptions and/or estimation methodologies may have a
material effect on the estimated fair value amounts. Also, the
fair value estimates presented herein are based on pertinent
information available to Management as of September 30, 1998.
Such amounts have not been comprehensively revalued for purposes
of these financial statements since those dates and, therefore,
current estimates of fair value may differ significantly from the
amounts presented herein.
The following methods and assumptions were used by the Company in
estimating its fair values disclosures for financial instruments:
Investment Securities
Fair values for investment securities are primarily based on
quoted market prices. If a quoted market price is not available,
fair value is estimated using market prices for similar
securities.
Loans
For equity lines and other loans with short-term or variable rate
characteristics, the carrying value reduced by an estimate for
credit losses inherent in the portfolio is a reasonable estimate
of fair value. The fair value of all other loans is estimated by
discounting their future cash flows using interest rates
currently being offered for loans with similar terms, reduced by
an estimate of credit losses inherent in the portfolio. The
discount rates used are commensurate with the interest rate and
prepayment risks involved for the various types of loans.
Deposits
The fair value disclosed for demand deposits (e.g., interest and
non-interest bearing demand, savings and money market savings),
are, as required by SFAS No. 107, equal to the amounts payable on
demand at the reporting date (i.e., their carrying amounts).
Fair values for certificates of deposits are estimated using a
discounted cash flow calculation that applies interest rates
currently being offered on certificates to a schedule of
aggregated monthly maturities.
Federal Home Loan Bank Advances
The fair values of the Company's FHLB advances are based on
quoted market prices of similar instruments or estimates using
the Company's incremental borrowing rates for similar types of
instruments.
Commitments to Extend Credit
The value of these unrecognized financial instruments is
estimated based on the fee income associated with the commitments
which, in the absence of credit exposure, is considered to
approximate their settlement value. As no significant credit
exposure exists and because such fee income is not material to
the Company's financial statements at September 30, 1998 and
1997, the fair value of these commitments is not material.
Many of the Company's assets and liabilities are short-term
financial instruments whose carrying amounts reported in the
statement of condition approximate their fair values. These
items include cash and due from banks, interest-bearing bank
balances, interest receivable and payable, and similar assets.
The estimated fair values of the Company's remaining on-balance
sheet financial instruments as of September 30, 1998 and 1997,
are summarized below:
1998 1997
Carrying Estimated Carrying Estimated
Value Fair Value Value Fair Value
Financial Assets:
Securities available
for sale 107,470 119,799 73,976 73,976
Securities held to
maturity 2,742 2,761 4,157 4,122
Loans, net 141,414 142,461 127,335 127,123
Financial Liabilities:
Deposits 144,802 144,237 132,718 132,599
FHLB advances 65,451 64,398 18,282 18,213
SFAS No. 107 excludes certain financial instruments and all
nonfinancial instruments from its disclosure requirements. The
disclosures also do not include certain intangible assets, such
as customer relationships, deposit base intangibles and goodwill.
Accordingly, the aggregate fair value amounts presented do not
represent the underlying value of the Company.
18. FDIC ASSESSMENT
The deposits of the Bank are currently insured by the Savings
Association Insurance Fund ("SAIF"). Both the SAIF and the Bank
Insurance Fund ("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 ratio of 1.25% of insured deposits. The BIF
achieved the required reserve rate, and, as discussed below, 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. 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 established a special assessment
necessary to recapitalize the SAIF at 65.7 basis points of SAIF
assessable deposits held by affected institutions as of March 31,
1995. Based upon its level of SAIF deposits as of March 31,
1995, the Bank recorded its special assessment of approximately
$864,000 during the year ended September 30, 1996. Upon
recapitalization of the SAIF, premiums paid by SAIF-insured
institutions were reduced. 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.
19. STOCK CONVERSION
On September 15, 1995, the Conversion of the Bank from a
federally-chartered mutual institution to a federally-chartered
stock savings bank through amendment of its charter and issuance
of common stock to the Company was completed. Related thereto,
the Company sold 4,628,750 shares of common stock, par value $.01
per share, at an initial price of $10 per share in subscription
and community offerings. Costs associated with the Conversion
were approximately $1,285,000, including underwriting fees.
These conversion costs were deducted from the gross proceeds of
the sale of the common stock.
In connection with the Offering, the Bank established a
liquidation account in an amount equal to its regulatory capital
as of the latest practicable date prior to consummation of the
Offering.
The Company's ability to pay dividends will be largely dependent
upon dividends to the Company from the Bank. Pursuant to OTS
regulations, the Bank will not be permitted to pay dividends on
its capital stock or repurchase shares of its stock if its
stockholders' equity would be reduced below the amount required
for the liquidation account or if stockholders' equity would be
reduced below the amount required by the OTS.
20. SIGNIFICANT EVENT
On May 2, 1997, the Company's Board of Directors declared a
special dividend of $2.50 per share. The dividend, payable
May 30, 1997, to shareholders of record as of May 16, 1997,
totaled approximately $10.6 million.
21. PARENT COMPANY FINANCIAL STATEMENTS
Separate condensed financial statements of Community Federal
Bancorp, Inc. (the "Parent Company") as of and for the year ended
September 30, 1998 and 1997 are presented below:
Statement of Financial Condition
September 30, 1998 and 1997
(Dollar amounts in thousands)
1998 1997
ASSETS:
Cash and cash equivalents $ 2,147 $ 5,902
Securities available for
sale 1,192 11,260
Investment in subsidiary 50,876 48,604
ESOP loan receivable 3,255 3,368
Premises and equipment 436 811
Other assets 8 313
Total assets $57,914 $70,258
LIABILITIES:
FHLB advances $ 0 $10,500
Other liabilities 349 1,195
Total liabilities 349 11,695
STOCKHOLDERS' EQUITY:
Preferred stock 0 0
Common stock 46 46
Additional paid-in capital 45,210 45,113
Retained earnings 15,488 13,714
Treasury stock, at cost (5,546) 0
Unearned compensation (5,277) (5,998)
Unrealized gain on securities
available for sale, net 7,644 5,688
Total stockholder's equity 57,565 58,563
Total liabilities and
stockholders' equity $57,914 $70,258
Statement of Income
For the Year Ended September 30, 1998 and 1997
(Dollar amounts in thousands)
1998 1997
INTEREST INCOME:
Interest and dividends on
securities available for sale $ 452 $ 963
Interest income from subsidiary 393 415
Dividends from subidiary 3,500 0
Total income 4,345 1,378
INTEREST EXPENSE 377 232
Net interest income 3,968 1,146
NONINTEREST EXPENSE:
Loss on sale of securities 0 29
Other operating expenses 127 165
INCOME BEFORE INCOME TAXES AND
DISTRIBUTION (IN EXCESS OF)
UNDER EQUITY BASIS EARNINGS
OF SUBSIDIARY 3,841 952
INCOME TAXES 107 347
INCOME BEFORE DISTRIBUTIONS
(IN EXCESS OF) UNDER EQUITY
BASIS EARNINGS OF SUBSIDIARY 3,734 605
DISTRIBUTIONS (IN EXCESS OF)
UNDER EQUITY BASIS EARNINGS
OF SUBSIDIARY (683) 2,431
Net income $3,051 $3,036
Statement of Cash Flows
For the Year Ended September 30, 1998 AND 1997
(Dollar amounts in thousands)
1998 1997
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 3,051 $3,036
Distribution (in excess of) under
equity basis earnings of subsidiary 683 (2,431)
605
Adjustments to reconcile net income
to net cash provided by operating
activities:
Loss on sale of securities available
for sale 0 29
Amortization of premiums and discounts,
net (39) 13
Decrease in other assets 305 75
Increase in other liabilities (825) 530
Net cash provided by operating
activities 3,175 1,252
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from the sale of available
for sale securities 10,804 5,397
(Purchase)sale of property and
equipment,net 375 (811)
Purchase of securities available
for sale (3,018) (1,920)
Proceeds from maturities, principal
collections and calls on securities
available for sale 2,266 2,682
Net cash provided by investing
activities 10,427 5,348
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from (repayment of)FHLB
advances, net (10,500) 10,500
Contributions to stock plan trusts (147) (1,127)
Purchase of treasury stock, at cost (5,546) 0
Payments received on ESOP loan 113 130
Dividends paid (1,277) (11,834)
Net cash provided by financing
activities (17,357) (2,331)
NET INCREASE(DECREASE)IN CASH
AND CASH EQUIVALENTS (3,755) 4,269
CASH AND CASH EQUIVALENTS,
beginning of year 5,902 1,633
CASH AND CASH EQUIVALENTS,
end of year $ 2,147 $5,902
Earnings are presented on a retroactive basis, recognizing
earnings of the subsidiary for the years ended September 30, 1998
and 1997. This presentation is based on the accounting for the
Conversion at historical cost, in a manner similar to that
utilized in a pooling of interests.
MANAGEMENET'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
General
Community Federal Bancorp, Inc. (the "Company") was incorporated
under the laws of Delaware effective March 25, 1996. The Company
is classified as a unitary savings institution holding company
and is subject to regulation by the Office of Thrift Supervision
("OTS").
The Company is the sole shareholder of Community Federal Savings
Bank (the "Bank"). The Bank was organized in 1933 as a federally
chartered mutual savings and loan association. In that year, it
became a member of the Federal Home Loan Bank ("FHLB") system and
obtained federal deposit insurance. Today the Bank's deposits
are insured by the Federal Deposit Insurance Corporation
("FDIC").
The Bank's primary market area includes Lee County and its six
contiguous counties, which it serves from two Tupelo locations.
The Bank's business strategy centers around the concept of
operating as a profitable, community-oriented organization
dedicated to providing high-quality products and service to this
market. As part of this strategy, the Bank pursues the following
concepts.
Emphasis on Traditional Banking Products. Traditionally, the
Bank has focused on originating a portfolio of one-to-four family
residential first mortgage loans in its primary market area. In
recent years, the Bank has added consumer and commercial loan
products and has experienced outstanding growth in delivering
these loans to its customers. Historically, the major sources of
funds have been savings deposits and certificates of deposit. In
recent years, checking accounts for consumers and businesses have
been offered by the Bank.
Management of Interest Rate Risk. The Bank has actively sought
to reduce vulnerability of its operations to changes in interest
rates by managing the imbalance between its interest-earning
assets and interest-bearing liabilities with shorter-term and
more liquid securities and other investments. To achieve this
goal, the Bank has invested new funds from deposit growth,
earnings and funds from repayments of loans and securities into
mortgage-backed securities and collateralized mortgage
obligations and government-related securities with a maturity or
average life of five years or less. Moreover, the consumer and
commercial loans that the Bank recently began to originate has
added additional shorter-term loans that will be held in the
Bank's loan portfolio.
Emphasis on Asset Quality. Management believes that high asset
quality is a key to long-term financial success. As a result,
the loans which are emphasized by the Bank and its related
policies and practices are intended to be of high quality. At
September 30, 1998, the Bank's non-performing assets, which
consist of non-accrual loans, accruing loans greater than 90 days
delinquent and real estate acquired through foreclosure or by
deed-in-lieu thereof, amounted to $1.1 million or .40% of the
Bank's total assets. Total charge offs were $68,715 or .05% of
average loans for the fiscal year ended September 30, 1998.
Utilization of Capital. It is the Company's policy to maintain a
prudent, adequate level of capital. Presently, the Company's
capital far exceeds the level established by regulatory
guidelines. In September of 1997, the Company embarked on a
growth program designed to leverage the Company's capital to a
higher degree. The program involves the use of new deposits and
borrowings from the FHLB to fund the purchase of securities. The
goal of this program is to increase net income and improve the
return on shareholders' equity.
Financial Condition Review
At September 30, 1998, the Company's assets totaled $275 million,
as compared to $216 million at September 30, 1997. Total assets
increased by $59 million, or 27.5%, from September 30, 1997 to
September 30, 1998.
The increase in other assets can be primarily attributed to a $2.4
million Contribution to the ESOP Trust which will be used to repay
the loan the Company made to the ESOP Trust to form the ESOP.
Major uses of funds were loans and investment securities.
Overall net loan growth in 1998 was $14 million, up 11.1% from
$127.3 million at September 30, 1997 to $141.4 million at
September 30, 1998. Consumer loans increased $729,000 or 16%
from $4.6 million at September 30, 1997 to $5.3 million at
September 30, 1998. Commercial loans increased $4.7 million or
64.3% to $12 million at September 30, 1998, compared to $7.3
million at September 30, 1997. Mortgage loans increased $8.8
million or 7.6% from $116.5 million at September 30, 1997 to
$125.2 million at September 30, 1998.
The securities portfolio is utilized to provide a quality
investment alternative for available funds as well as a stable
source of interest income. Investment securities, along with
mortgage-backed and related securities, totaled $122.5 million at
September 30, 1998, an increase of $44.4 million or 56.8% from
$78.1 million at September 30, 1997. The portfolio mix at
September 30, 1998 consisted of 83.2% U.S. Government and federal
agencies bonds and notes, 14% equity securities and 2.8% mutual
funds.
Major sources of funds are deposits and advances from the Federal
Home Loan Bank. During the fiscal year ended September 30, 1998,
total deposits increased by $12.1 million or 9.1% to $144.8
million, compared to $132.7 million at September 30, 1997. The
deposit mix has remained substantially unchanged with the
exception of a slight shift toward more time deposits.
The Company used advances from the FHLB to leverage the purchase
of mortgage-backed and related securities during the fiscal year
ended September 30, 1998. Advances from FHLB amounted to $65.5
million at September 30, 1998, an increase of $47.2 million over
September 30, 1997.
At September 30, 1998, stockholders' equity totaled $57.6 million
or 20.9% of assets. This represents a decrease of $998,000 or
1.7%, compared to September 30, 1997. The Company entered a
stock repurchase program in early 1998, which is recorded as
treasury stock and, in turn, reduced stockholders' equity by $5.5
million. During fiscal 1998, the Company paid regular dividends
of $.32 per share amounting to $1.3 million. Net income
continued to be a strong contributor to stockholders' equity
during fiscal 1998 as the Company's net income amounted to $3.1
million. In addition, the amortization of unearned compensation
increased stockholders' equity by $1 million and realized gains
on securities available for sale increased $2 million.
Results of Operations
Net Income. The Company had consolidated net earnings of $3.1
million for the fiscal year ended September 30, 1998,
representing a return on average assets of 1.2%, a return on
average equity of 5.2%, and basic earnings per share of $.76 and
fully diluted of $.72. For the fiscal year ended September 30,
1997, the Company's net income amounted to $3.0 million or fully
diluted earnings per share of $.70 compared to $2.1 million for
the fiscal year ended September 30, 1996. Net income for 1996
was materially affected by the $864,000 ($535,000, net of tax
benefit), one-time special assessment of 65.7 basis points on
SAIF insured deposits as of March 31, 1995. But for this event,
the Company's net income for fiscal 1996 would have been $2.6
million as compared to the $2.1 reported in the consolidated
statements of income.
Net Interest Income. Net interest income is the largest
component of the Company's net income and is determined by the
difference between the yields earned on its interest-earning
assets and the rates paid on interest-bearing liabilities.
Changes in net income can be broken down into two components, the
change in earning assets, less the change in average interest
bearing liabilities, and the change in net interest spread. Net
interest income was $7.0 million, $7.5 million, and $6.2 million
for the years ended September 30, 1998, 1997, and 1996,
respectively. The $450,000 decrease for fiscal 1998 is a
combination of the two components. Net interest margin decreased
to 2.87% from 3.65% for fiscal 1997, and average interest earning
assets increased $40 million or 19.5%, while average interest
bearing liabilities increased $46 million or 32.9%. The net
interest margin for fiscal 1997 increased 24 basis points to
3.65% from 3.41% for fiscal 1996. The main reason for the
increase in net interest income for fiscal year 1997 compared to
fiscal 1996 can be attributed to the $22.8 million increase in
average interest earning assets while there was only a slight
increase of $4 million in average interest bearing liabilities.
Total interest income increased $2.1 million or 14.5% from $14.5
million at September 30, 1997 to $16.6 million at September 30,
1998. Total interest income increased $1.4 million or 10.3% from
September 30, 1996 to September 30, 1997.
Total interest expense increased $2.5 million or 36.3% to $9.5
million at September 30, 1998 from $7 million at September 30,
1997. At September 30, 1997, total interest expense increased
$74,000 or 1.1% over September 30, 1996.
Provision for Loan Losses. The Bank's provision for loan losses
was $235,000 for the fiscal year ended September 30, 1998
compared to $20,000 each during fiscal 1997 and 1996. Provisions
for loan losses are charged to earnings to bring the total
allowance to a level deemed appropriate by management based on
the volume and type of lending conducted by the Bank. Provision
in fiscal 1998 was made in order to adjust the allowance for the
outstanding growth of the consumer and commercial loan portfolio
as well as the mortgage loan portfolio. At September 30, 1998,
the reserve for loan losses amounted to $756,000 or .53% of total
loans outstanding, which is an amount that management considers
to be sufficient to protect against loan loss inherent in the
portfolio.
Non-Interest Income. Non-interest income for September 30, 1998
was $1.9 million, a $1.7 million increase, compared to fiscal
1997. In an effort to maximize earnings on assets, management
sold equity securities for a gain of $1.6 million. The sales
proceeds were reinvested in higher yielding loans and securities.
The remainder of the growth was in the other income category for
service release premiums on fixed rate mortgage loans that were
sold and increased fee income. Non-interest income for fiscal
1997 was $227,000, an increase of $39,000, compared to
non-interest income of $188,000 in fiscal 1996, which was mainly
increased fee income.
Non-Interest Expense. Non-interest expense increased $933,000 to
$3.9 million in fiscal 1998 compared to fiscal 1997.
Compensation and benefits increased $330,000 to $2.3 million due
primarily to expenses associated with the valuation of stock
released from the Employee Stock Ownership Plan and increased
participation in benefit plans. General and administrative
expense accounted for the remaining $218,000 increase.
Non-interest expense decreased $109,000 to $2.9 million in fiscal
1997, compared to fiscal 1996. The primary reasons for the
decrease were attributed to the one-time special assessment of
$864,000 to recapitalize the SAIF in 1996, the $194,000 decrease
in regular deposit insurance premiums; offset by the $810,000
increase in compensation and benefits resulting from an increase
in personnel, merit raises, the Employee Stock Ownership Plan and
Management Recognition Plan, and $101,000 increase in other
general expenses.
Impact of Inflation and Changing Prices
The financial statements and related financial data presented
herein have been prepared in accordance with GAAP, which requires
the measurement of financial position and operating results in
terms of historical dollars, without considering change in
relative purchasing power over time due to inflation.
Changing prices generally have an impact on interest rates, which
can affect the Bank's earning stream and the market valuation of
its assets.
Year 2000 Problem
The Company is aware of the issue associated with the programming
code in existing computer systems as the Year 2000 approaches.
The Year 2000 issue is the result of computer programs being
written to store and process data using two digits rather than
four to define the applicable year. Computer programs that have
time sensitive coding may recognize a date using "00" as the year
1900 rather than the year 2000. Systems that do not properly
recognize such information could generate erroneous data or cause
systems to fail.
The Bank has conducted a review of its computer systems to
identify the systems that could be affected by the Year 2000
Issue and has developed an implementation plan to resolve the
issue. The majority of the Bank's data processing is provided by
a third party service bureau. The service bureau is actively
involved in resolving Year 2000 issues and has provided the Bank
with frequent updates regarding its progress. The service bureau
has advised the Bank that it has resolved the majority of thee
Year 2000 issue. The Bank tested the service bureau's system for
Year 2000 compliance during November of 1998. The Bank presently
believes that, based on the progress and testing of the Bank's
service bureau, the Year 2000 problem will not pose significant
operational problems for the Bank's computer system. The total
cost of Year 2000 projects are not estimated to be material to
the financial performance of the Company.
Average Balance, Interest, and Average Yields and Rates
The following table sets forth certain information relating to
the Company's average interest-earning assets and
interest-bearing liabilities and reflects the average yield on
assets and the average cost of liabilities for the periods and at
the date indicated. Such yields and costs are derived by
dividing income or expense by the average monthly balance of
assets or liabilities, respectively, for the periods indicated.
The table also presents information for the periods indicated and
at September 30, 1998 with respect to the difference between the
weighted average yield earned on interest-earning assets and the
weighted average rate paid on interest-bearing liabilities, or
"interest rate spread," which savings institutions have
traditionally used as an indicator of profitability. Another
indicator of an institution's net interest income is its "net
yield on interest-earning assets," which is its net interest
income divided by the average balance of interest-earning assets.
Net interest income is affected by the interest rate spread and
by the relative amounts of interest-earning assets and
interest-bearing liabilities. When interest-earning assets
approximate or exceed interest-bearing liabilities, any positive
interest rate spread will generate net interest income.
Year Ended September 30,
1998
Average Yield
Balance Interest /Rate
Interest-earning assets:
Loans receivable, net(3) $136,626 $10,795 7.90%
Securities:
Available for sale 98,230 5,280 5.38
Held to maturity 3,513 196 5.58
Other interest-earning assets(1) 6,401 336 5.25
Total interest-earning assets 244,770 16,607 6.78
Non-interest-earning assets 5,386
Total assets $250,156
Interest-bearing liabilities:
Transaction accounts $ 23,641 608 2.57
Certificates of deposit 115,413 6,568 5.69
Borrowings 45,263 2,397 5.30
Total interest-bearing
liabilities 184,317 9,573 5.19
Non-interest-bearing
liabilities 6,841
Total liabilities 191,158
Equity 58,998
Total liabilities and equity $250,156
Net interest income;
interest rate spread $7,034 1.59%
Net interest margin (2) 2.87%
Average interest-earning
assets to average
interest-bearing liabilities 132.80%
Year Ended September 30,
1997
Average Yield
Balance Interest /Rate
Interest-earning assets:
Loans receivable, net(3) $123,610 $ 9,797 7.93%
Securities:
Available for sale 71,645 4,164 5.81
Held to maturity 4,542 266 5.86
Other interest-earning assets(1) 5,001 281 5.62
Total interest-earning assets 204,798 14,508 7.08
Non-interest-earning assets 3,132
Total assets $207,930
Interest-bearing liabilities:
Transaction accounts $ 19,959 $ 589 2.95
Certificates of deposit 111,745 6,061 5.42
Borrowings 6,945 374 5.39
Total interest-bearing liabilities 138,649 7,024 5.07
Non-interest-bearing liabilities 5,024
Total liabilities 143,673
Equity 64,257
Total liabilities and equity $207,930
Net interest income;interest rate spread $ 7,484 2.02%
Net interest margin (2) 3.65
Average interest-earning assets to
average interest-bearing liabilities 147.71
Year Ended September 30,
1996
Average Yield
Balance Interest /Rate
Interest-earning assets:
Loans receivable, net(3) $104,425 $ 8,610 8.25%
Securities:
Available for sale 56,340 3,249 5.77
Held to maturity 11,998 825 6.88
Other interest-earning assets(1) 9,242 465 5.03
Total interest-earning assets 182,005 13,149 7.22
Non-interest-earning assets 5,214
Total assets $187,219
Interest-bearing liabilities:
Transaction accounts $ 26,507 621 2.79
Certificates of deposit 107,848 6,309 5.85
Borrowings 250 19 7.60
Total interest-bearing liabilities 134,605 6,949 5.16
Non-interest-bearing liabilities 3,531
Total liabilities 138,136
Equity 49,083
Total liabilities and equity $187,219
Net interest income;interest rate spread $6,200 2.06%
Net interest margin (2) 3.41
Average interest-earning assets to
average interest-bearing liabilities 135.21%
(1) Consists primarily of interest-bearing deposits in banks.
(2) Net interest margin is net interest income divided by
average interest-earning assets.
(3) Nonaccrual loans are included in loans receivable.
Rate/Volume Analysis
The following table describes the extent to which changes in
interest rates and changes in volume of interest-related assets
and liabilities have affected the Company's interest income and
expense during the periods indicated. For each category of
interest-earning assets and interest-bearing liabilities,
information is provided on changes attributable to (i) changes in
volume (change in volume multiplied by prior year rate), (ii)
changes in rate (change in rate multiplied by prior year volume),
and (iii) total change in rate and volume. The combined effect
of changes in both rate and volume has been allocated
proportionately to the change due to rate and the change due to
volume.
Year Ended September 30,
1998 Compared to 1997
Increase Increase Total
(Decrease) (Decrease) Increase
Due to Rate Due to Volume (Decrease)
Interest-Earning Assets:
Loans $ (30) $1,028 $ 998
Securities:
Available for sale (283) 1,399 1,116
Held to maturity (12) (58) (70)
Other interest-earning assets (17) 72 55
Total interest-earning assets $(342) 2,441 2,099
Interest-Bearing Liabilities:
Transaction accounts (44) 63 19
Certificates of deposit 304 203 507
Borrowings (6) 2,029 2,023
Total interest-bearing
liabilities 254 2,295 2,549
Increase (decrease) in
net interest income $(596) $ 146 $ (450)
Year Ended September 30,
1997 Compared to 1996
Increase Increase Total
(Decrease) (Decrease) Increase
Due to Rate Due to Volume (Decrease)
Interest-Earning Assets:
Loans $ (317) $1,504 $1,187
Securities:
Available for sale 26 889 915
Held to maturity (108) (451) (559)
Other interest-earning assets 63 (247) (184)
Total interest-earning assets $1,695 1,695 1,359
Interest-Bearing Liabilities:
Transaction accounts (659) 627 (32)
Certificates of deposit (492) 244 (248)
Borrowings (4) 359 355
Total interest-bearing
liabilities (1,155) 1,230 75
Increase (decrease) in
net interest income $ 819 $ 465 $ 465
Year Ended September 30,
1996 Compared to 1995
Increase Increase Total
(Decrease) (Decrease) Increase
Due to Rate Due to Volume (Decrease)
Interest-Earning Assets:
Loans $ 463 $1,106 $1,569
Securities:
Available for sale (158) 1,085 927
Held to maturity 77 (684) (607)
Other interest-earning assets (12) 256 244
Total interest-earning assets 370 1,763 2,133
Interest-Bearing Liabilities:
Transaction accounts (61) 133 72
Certificates of deposit 948 (209) 739
Borrowings 37 (166) (129)
Total interest-bearing
liabilities 924 (242) 682
Increase (decrease) in
net interest income $ (554) $2,005 $1,451
Liquidity and Capital Resources
The Company continues to maintain a high level of liquid assets
in order to meet its funding requirements. At September 30,
1998, the Company had approximately $3.3 million in cash on hand
and interest-bearing deposits in other banks, which represented
1.2% of total assets. At September 30, 1998, the Company's level
of liquid assets, as measured for regulatory compliance purposes
was 66%, or $94.8 million, in excess of the minimum liquidity
requirement of 4%.
At September 30, 1998, the Savings Bank had $50.9 million of
total equity or 18.6% of total assets. The Savings Bank
continues to exceed its regulatory capital requirements ratios at
September 30, 1998. Tangible and core capital were $43.2
million, which represented 16.5% of adjusted total assets and
risk-based capital was $44 million which represented 40.6% of
total risk-weighted assets at September 30, 1998. Such amounts
exceeded the minimum required ratios of 1.5%, 3%, and 8%,
respectively. At September 30, 1998, the Savings Bank continued
to meet the definition of a "well-capitalized" institution, the
highest of the five categories under the FDICIA prompt corrective
action standards.
Directors
Medford M. Leake Robert R. Black, Sr.
Chairman of the Board Retired--Periodontist
President--Steel City Lumber Co. Tupelo, MS
Birmingham, AL
Jim Ingram Michael R. Thomas
Chief Executive Officer President--Washington
Community Federal Bancorp, Inc./ Furniture Mfg., Inc.
Community Federal Savings Bank Houlka, MS
Tupelo, MS
Charles V. Imbler, Sr. Robert W. Reed III
President and Chief Executive Account Executive--Reed
Officer--Truck Center, Inc. Mfg. Co.
Tupelo, MS Tupelo, MS
J. Leighton Pettis H. Lewis Whitfield
Ophthalmologist President
Tupelo, MS Community Federal Bancorp, Inc
Community Federal Savings Bank
Tupelo, MS
L.F. Sams, Jr.
Partner, Law Firm
Mitchell, McNutt, Threadgill,
Smith & Sams
Tupelo, MS
Officers
Jim Ingram, CEO
H. Lewis Whitfield, President
Gill Simmons, Vice President
Jack Johnson, Vice President
Mark Burleson, Vice President
Sherry McCarty, CFO
Terry Baker, Assistant Vice
President
Lynda Riley, Treasurer
Judy Ballard, Secretary
Corporate Headquarters Independent Public Accountants
333 Court Street Arthur Andersen LLP
Tupelo, MS 38801 Birmingham, AL
(601) 842-3981
Transfer Agent Special Counsel
Registrar and Transfer Co. Elias, Matz, Tiernan and
Cranford, NJ Herrick, LLP
(800) 368-5948 Washington, DC
Listing of Common Stock Special Counsel
Traded Over-the-Counter Mitchell, McNutt, Threadgill,
NASDAQ National Market Smith & Sams, PA
System/ Symbol: CFTP Tupelo, MS
10-K Information
This report is available to
stockholders upon request to:
The Chief Financial Officer
PO Box F
Tupelo, MS 38802
(601) 840-0302
Annual Meeting
The 1999 Annual Meeting of the Stockholders of Community Federal
Bancorp, Inc. will be held at 5:00 p.m. on January 21, 1999, in
the Lobby of Community Federal Savings Bank, 333 Court Street,
Tupelo, Mississippi.