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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
|X| ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 1996
|_| TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from ______ to ______
Commission File No. 0-24532
FLAG FINANCIAL CORPORATION
(Exact name of Registrant as specified in its charter)
Georgia 58-2094179
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
101 North Greenwood Street, LaGrange, Georgia 30240
(Address of principal executive offices)
(706) 845-5000
(Registrant's telephone number)
_______________________________
Securities registered pursuant to Section 12(b) of the Act: None
________________________________
Securities registered pursuant to Section 12(g) of the Act: Common Stock, $1.00
par value
Indicate by check mark whether the Registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months and (2) has been subject to such filing requirements for
the past 90 days. Yes X No
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of the Registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. X
The aggregate market value of the Registrant's outstanding Common Stock held by
non-affiliates of the Registrant on March 15, 1997 was $20,310,939. There were
2,036,990 shares of Common Stock outstanding as of March 15, 1997.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Registrant's 1996 Annual Report are incorporated by reference in
Part II hereof. Portions of the Registrant's Proxy Statement for the 1997 Annual
Meeting of Shareholders to be held on April 16, 1997 are incorporated by
reference in Part III hereof.
FLAG FINANCIAL CORPORATION
Annual Report on Form 10-K
For the Fiscal Year Ended December 31, 1996
Table of Contents
-----------------
Item Page
Number Number
- ------ ------
Part I
1. Business ......................................................... 3
2. Properties ....................................................... 39
3. Legal Proceedings ................................................ 40
4. Submission of Matters to a Vote of
Security Holders .............................................. 40
4(A) Executive Officers of the Registrant ............................. 40
Part II
5. Market for Registrant's Common Stock and Related
Shareholder Matters ........................................... 41
6. Selected Financial Data .......................................... 41
7. Management's Discussion and Analysis of Financial
Condition and Results of Operations ........................... 41
8. Financial Statements and Supplementary Data ...................... 41
9. Changes in and Disagreements with Accountants on
Accounting and Financial Disclosure ........................... 42
Part III
10. Directors and Executive Officers of the Registrant ............... 43
11. Executive Compensation ........................................... 43
12. Security Ownership of Certain Beneficial Owners and
Management .................................................... 43
13. Certain Relationships and Related Transactions ................... 43
PART IV
14. Exhibits, Financial Statement Schedules and Reports
on Form 8-K ................................................... 43
Signatures............................... 47
Index of Exhibits ....................... 49
2
PART I
ITEM 1. BUSINESS
SPECIAL CAUTIONARY NOTICE REGARDING FORWARD-LOOKING STATEMENTS
Certain of the matters discussed in this document and in documents
incorporated by reference herein, including matters discussed under the caption
"Management's Discussion and Analysis of Financial Condition and Results of
Operations," may constitute forward-looking statements for purposes of the
Securities Act of 1933, as amended, and the Securities Exchange Act of 1934, as
amended, and as such may involve known and unknown risks, uncertainties and
other factors which may cause the actual results, performance or achievements of
the Company to be materially different from future results, performance or
achievements expressed or implied by such forward-looking statements. The words
"expect," "anticipate," "intend," "plan," "believe," "seek," "estimate," and
similar expressions are intended to identify such forward-looking statements.
The Company's actual results may differ materially from the results anticipated
in these forward-looking statements due to a variety of factors, including,
without limitation: the effects of future economic conditions; governmental
monetary and fiscal policies, as well as legislative and regulatory changes; the
risks of changes in interest rates on the level and composition of deposits,
loan demand, and the values of loan collateral, securities and interest rate
protection agreements, as well as interest rate risks; the effects of
competition from other commercial banks, thrifts, mortgage banking firms,
consumer finance companies, credit unions, securities brokerage firms, insurance
companies, money market and other mutual funds and other financial institutions
operating in the Company's market area and elsewhere, including institutions
operating locally, regionally, nationally and internationally, together with
such competitors offering banking products and services by mail, telephone, and
computer and the Internet; and the failure of assumptions underlying the
establishment of reserves for possible loan losses and estimations of values of
collateral and various financial assets and liabilities. All written or oral
forward-looking statements attributable to the Company are expressly qualified
in their entirety by these cautionary statements.
The Company
FLAG Financial Corporation (the "Company") is the holding company for First
Federal Savings Bank of LaGrange (the "Bank"). The Company was incorporated
under the laws of the State of Georgia on February 9, 1993 at the direction of
the Bank for the purpose of becoming the holding company for the Bank. On March
1, 1994, FLAG Interim Corporation, a wholly-owned subsidiary of the Company
organized for the purpose of effecting the Reorganization, was merged with and
into the Bank, and the Company issued shares of its Common Stock to shareholders
of the Bank in exchange for all of the outstanding Common Stock of the Bank (the
"Reorganization"). As a result, shareholders of the Bank became shareholders of
the Company, with the same proportional interests in the Company as they
previously held in the Bank (excluding the nominal effect on their ownership
interest of the exercise of dissenters' rights by certain shareholders of the
Bank).
Following the Reorganization, the Bank continued its business operations as
a federally-chartered stock savings bank under the same name, charter and
bylaws. The directors, officers and employees of the Bank were unchanged
following the Reorganization. The directors of the Bank also serve as the
directors of the Company, and the Chairman of the Board, President and Chief
Executive Officer of the Bank serves as the Chairman of the Board, President and
Chief Executive Officer of the Company.
As a bank holding company, the Company is intended to facilitate the Bank's
ability to serve its customers' requirements for financial services. The holding
company structure permits diversification by the Company into a broader range of
financial services and other business activities than currently are permitted to
the Bank under applicable law. The holding company structure also provides
greater financial and operating flexibility than is permitted to the Bank.
Additionally, the Articles of Incorporation and Bylaws of the Company contain
terms that provide a degree of anti-takeover protection to the Company that is
currently unavailable to the Bank and its shareholders under regulations of the
Office of Thrift Supervision (the "OTS") but is permissible for the Company
under Georgia law. See "Supervision and Regulation" below.
3
The Bank
The Bank is a federally chartered stock savings bank headquartered in
LaGrange, Troup County, Georgia. The Bank was originally chartered by the State
of Georgia in January 1927 under the name "Home Building and Loan Association."
The Bank received its federal charter and changed its name to First Federal
Savings and Loan Association of LaGrange in 1955, and at that time its deposits
became insured by the Federal Savings and Loan Insurance Corporation (the
"FSLIC"). In December 1986, the Bank converted from a federal mutual savings and
loan association to a federal stock savings and loan association by selling
805,000 shares of Common Stock to the public pursuant to a plan of conversion
approved by the members of the institution. In June 1989, the Bank converted
from a federal stock savings and loan association to a federal stock savings
bank and changed its name to "First Federal Savings Bank of LaGrange." Based on
total assets of approximately $222 million at December 31, 1996, the Bank is the
10th largest of 38 thrift institutions headquartered in Georgia and the largest
financial institution headquartered in Troup County.
The Bank's deposits are now insured by the Federal Deposit Insurance
Corporation (the "FDIC"), as the successor to the FSLIC. Primarily for the
protection of depositors, the Bank is subject to comprehensive examination,
supervision and regulation by the OTS and the FDIC.
The Bank's business consists primarily of attracting deposits from the
general public and, with these and other funds, making residential mortgage
loans and, to a lesser extent, consumer loans, commercial loans, commercial real
estate loans, residential construction loans and securities investments. In
addition to deposits, sources of funds for the Bank's loans and other
investments include amortization and prepayment of loans, loan origination and
commitment fees, sales of loans or participations in loans, fees received for
servicing loans sold to others and advances from the Federal Home Loan Bank of
Atlanta (the "FHLB of Atlanta"). The principal sources of income for the Bank
are interest and fees collected on loans, including fees received for
originating and selling loans and for servicing loans sold to others, and, to a
lesser extent, interest and dividends collected on other investments and service
charges on deposit accounts. In addition, the Bank's wholly owned service
corporation subsidiary, Piedmont Mortgage Service, Inc., operates a full-service
appraisal office under the name of Piedmont Appraisal Service and offers certain
securities brokerage services under the name of Piedmont Investment Service. The
principal expenses of the Bank are interest paid on deposits, interest paid on
FHLB of Atlanta advances, employee compensation, federal deposit insurance
premiums, office expenses and other overhead expenses.
The Company's financial performance has been determined primarily by the
results of operations of the Bank because the Company's only significant asset
is the Common Stock of the Bank. For information regarding the consolidated
financial condition and results of operations of the Company, the Bank and the
Bank's wholly owned subsidiary, Piedmont Mortgage Service, Inc., as of December
31, 1995 and 1996 and for the three years in the period ended December 31, 1996,
see "Management's Discussion and Analysis of Financial Condition and Results of
Operations" and the Consolidated Financial Statements of the Company and the
related notes thereto which are contained in the Company's 1996 Annual Report
(the "1996 Annual Report"). The 1996 Annual Report is filed as Exhibit 13 to
this report. All average balances presented in this report were derived based on
monthly averages.
As used herein, the term "Company" includes FLAG Financial Corporation, the
Bank and Piedmont Mortgage Service, Inc. unless the context indicates otherwise.
References to, or information with respect to, the "Company" or the "Bank" for
periods ended prior to the Reorganization (March 1, 1994) refer to First Federal
Savings Bank of LaGrange and Piedmont Mortgage Service, Inc. unless the context
indicates otherwise.
4
The table below sets forth certain measures of the Company's performance for
the periods indicated.
Years Ended December 31,
1996 1995 1994
---- ---- ----
Net Interest Margin (net interest
income divided by average
interest-earning assets) ................ 3.98% 3.39% 3.25%
Return on Average Assets
(Net income divided by average
total assets) ........................... -0.08% 0.87% .79%
Return on Average Equity
(Net income divided by
average equity) ......................... -0.88% 9.78% 9.00%
Equity-to-Assets (Average equity
divided by average total assets) ........ 8.96% 8.94% 8.76%
Dividend Payout Ratio (Dividends
declared divided by net income) ......... -377.18% 29.56% 34.15%
5
Net Interest Income
The Bank's (and, therefore, the Company's) earnings depend primarily on its
"net interest income," which is the difference between the interest income it
receives from its assets (primarily its loans and other investments) and the
interest expense (or "cost of funds") which it pays on its liabilities
(primarily its deposits and borrowings). The Bank's net interest income before
provision for loan losses has increased in each of the last three fiscal years.
Such net interest income was $8,172,716 for 1996, an increase of 12.22% over the
1995 amount of $7,282,756, and the 1995 amount represented an increase of 6.52%
over the 1994 amount of $6,836,718.
Net interest income is a function of (i) the difference between rates of
interest earned on the Bank's interest-earning assets and rates of interest paid
on its interest-bearing liabilities (the "interest rate spread" or "net interest
spread") and (ii) the relative amounts of its 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. The Bank adheres to an asset and liability management
strategy which is intended to control the impact of interest rate fluctuations
upon the Bank's earnings and to make the yields on its loan portfolio and other
investments more responsive to its cost of funds, in part by more closely
matching the maturities and repricing of its interest-earning assets and its
interest-bearing liabilities, while still maximizing net interest income.
Nevertheless, the Bank is and will continue to be affected by changes in the
levels of interest rates and other factors beyond its control. See "Asset and
Liability Management" below.
The following table sets forth average balances of various categories of
interest-earning assets and interest-bearing liabilities, interest income on
interest-earning assets and related average yields, interest expense on
interest-bearing liabilities and related average rates paid, the interest rate
spread (the difference between interest rates earned and interest rates paid),
the net interest margin (net interest income divided by average interest-earning
assets) and the ratio of interest-earning assets to interest-bearing liabilities
for the periods indicated.
6
Years Ended December 31,
1996
---------------------------------
Interest Weighted
Average Income/ Average
Balance Expense Rate
------- ------- --------
ASSETS
Interest-earning assets:
Loans ............................ $ 151,084,092 $14,039,683 9.29%
Mortgage-backed securities ....... 40,000,629 2,458,011 6.14
Investment securities ............ 11,254,754 698,079 6.20
Interest-bearing deposits
in other Banks ................. 1,692,240 90,599 5.35
Federal funds sold ............... 1,342,879 76,988 5.73
Repurchase Agreements ............ -- -- --
Other short-term investments ..... -- -- --
------------- ----------- -----
Total interest-
earning assets ................ $ 205,374,594 $17,363,360 8.45%
Other assets ................... 19,978,721
Total assets ................... $ 225,353,315
LIABILITIES AND SHAREHOLDERS' EQUITY
Interest-bearing liabilities:
Savings deposits ................. $ 55,508,307 $1,485,966 2.68%
Other time deposits .............. 114,371,184 6,525,050 5.71
Federal Funds Purchased .......... 206,710 11,665 5.64
FHLB advances .................... 21,530,738 1,167,963 5.42
------------- ----------- -----
Total interest-
bearing liabilities .......... $ 191,616,939 $9,190,644 4.80%
Other liabilities .................. 13,553,489
Shareholders' equity ............... 20,182,887
Total liabilities and
shareholders' equity ......... $ 225,353,315
Interest rate spread................ 3.65%
Net interest margin................. 3.98%
Interest-earning assets/
interest-bearing liabilities ...... 107%
Years Ended December 31,
1995
----------------------------------
Interest Weighted
Average Income/ Average
Balance Expense Rate
------- ------- ----
ASSETS
Interest-earning assets:
Loans ............................ $ 146,143,602 $12,745,773 8.72%
Mortgage-backed securities ....... 46,239,347 3,018,244 6.53
Investment securities ............ 19,006,528 1,247,822 6.57
Interest-bearing deposits
in other Banks ................. 2,959,588 138,372 4.68
Federal funds sold ............... 333,088 18,238 5.48
Repurchase Agreements ............ -- -- --
Other short-term investments ..... -- -- --
------------- ----------- -----
Total interest-
earning assets ................ $ 214,682,153 $17,168,449 8.00%
Other assets ................... 17,012,997
Total assets ................... $ 231,695,150
LIABILITIES AND SHAREHOLDERS' EQUITY
Interest-bearing liabilities:
Savings deposits ................. $ 49,777,172 $ 1,473,125 2.96%
Other time deposits .............. 114,793,340 6,551,062 5.71
Federal Funds Purchased .......... -- -- --
FHLB advances .................... 31,961,667 1,861,506 5.82
------------- ----------- -----
Total interest-
bearing liabilities .......... $ 196,532,179 $ 9,885,693 5.03%
Other liabilities .................. 14,445,623
Shareholders' equity ............... 20,717,348
Total liabilities and
shareholders' equity ......... $ 231,695,150
Interest rate spread................ 2.97%
Net interest margin................. 3.39%
Interest-earning assets/
interest-bearing liabilities ...... 109%
Years Ended December 31,
1994
-----------------------------------
Interest Weighted
Average Income/ Average
Balance Expense Rate
------- ------- ----
ASSETS
Interest-earning assets:
Loans ............................ $ 140,610,236 $11,273,849 8.02%
Mortgage-backed securities ....... 47,673,253 2,550,982 5.35
Investment securities ............ 19,065,624 1,125,221 5.90
Interest-bearing deposits
in other Banks ................. 3,226,604 108,438 3.36
Federal funds sold ............... -- -- --
Repurchase Agreements ............ -- -- --
Other short-term investments ..... -- -- --
------------- ----------- -----
Total interest-
earning assets ................ $ 210,575,717 $15,058,490 7.15%
Other assets ................... 13,454,295
Total assets ................... $ 224,030,012
LIABILITIES AND SHAREHOLDERS' EQUITY
Interest-bearing liabilities:
Savings deposits ................. $ 50,608,968 $ 1,469,691 2.90%
Other time deposits .............. 104,059,715 5,059,436 4.86
Federal Funds Purchased .......... -- -- --
FHLB advances .................... 36,000,834 1,692,645 4.70
------------- ----------- -----
Total interest-
bearing liabilities .......... $ 190,669,517 $ 8,221,772 4.31%
Other liabilities .................. 13,720,050
Shareholders' equity ............... 19,640,445
Total liabilities and
shareholders' equity ......... $ 224,030,012
Interest rate spread................ 2.84%
Net interest margin................. 3.25%
Interest-earning assets/
interest-bearing liabilities ...... 110%
At December 31,
1996
----------------------
Weighted
Actual Average
ASSETS Balance Rate
------- ----
Interest-earning assets:
Loans ............................ $ 150,394,436 9.34%
Mortgage-backed securities ....... 37,458,698 6.56
Investment securities ............ 8,953,394 7.80
Interest-bearing deposits
in other Banks ................. 3,557,138 2.55
Federal funds sold ............... -- --
Repurchase Agreements ............ -- --
Other short-term investments ..... -- --
------------- -----
Total interest-
earning assets ................ $ 200,363,666 8.67%
Other assets ................... 21,594,215
Total assets ................... $ 221,957,881
LIABILITIES AND SHAREHOLDERS' EQUITY
Interest-bearing liabilities:
Savings deposits ................. $ 53,500,777 2.78%
Other time deposits .............. 116,128,638 5.62
Federal Funds Purchased .......... 2,210,000 0.53
FHLB advances .................... 17,370,833 6.72
------------- -----
Total interest-
bearing liabilities .......... $ 189,210,248 4.86%
Other liabilities .................. 12,229,341
Shareholders' equity ............... 20,518,292
Total liabilities and
shareholders' equity ......... $ 221,957,881
Interest rate spread................ 3.81%
Net interest margin................. 4.08%
Interest-earning assets/
interest-bearing liabilities ...... 106%
7
Changes in interest income and interest expense are attributable to three
factors: (i) a change in volume or amount of an asset or liability; (ii) a
change in interest rates; or (iii) a change caused by the combination of changes
in volume and interest rates. The following table describes the extent to which
changes in interest rates and changes in volume of interest-earning assets and
interest-bearing liabilities have affected the Bank's interest income and
expense during the periods indicated. For each category of interest-earning
asset and interest-bearing liability, information is provided as to changes
attributable to change in volume (change in volume multiplied by old rate),
change in rates (change in rate multiplied by old volume), and changes
attributable to changes in both rate and volume. The net change attributable to
changes in both volume and rate has been allocated proportionately to the change
due to volume and the change due to rate.
Years Ended December 31,
1996 Compared to 1995 1995 Compared to 1994
---------------------------------- --------------------------------
Rate/ Net Rate/ Net
Volume Rate Volume Change Volume Rate Volume Change
------ ---- ------ ------ ------ ---- ------ ------
(dollars in thousands)
Interest income:
Loans(1) ................... $ 432 $ 834 $ 28 $ 1,294 $ 445 $ 986 $ 41 $1,472
Mortgage-backed securities . (406) (179) 25 (560) (77) 562 (18) 467
Investment securities(2) ... (509) (70) 29 (550) (3) 127 (1) 123
Interest-bearing deposits in
other banks .............. (59) 20 (9) (48) (9) 43 (4) 30
Federal funds sold ......... 55 1 3 59 - - 18 18
----- ----- ---- ------- ----- ------ ---- ------
Total interest income ... $(487) $ 606 $ 76 $ 195 $ 356 $1,718 $ 36 $2,110
----- ----- ---- ------- ----- ------ ---- ------
Interest expense:
Savings deposits ........... $ 168 $(140) $(17) $ 11 $ (24) $ 29 $ (1) $ 4
Other time deposits ........ (24) - - (24) 520 882 89 1,491
Federal funds purchased .... - - 12 - - - - -
FHLB advances ................ (607) (128) 41 (694) (189) 403 (45) 169
----- ----- ---- ------- ----- ------ ---- ------
Total interest expense .. $(463) $(268) $ 36 $ (695) $ 307 $1,314 $ 43 $1,664
----- ----- ---- ------- ----- ------ ---- ------
Net interest income .......... $ (24) $ 874 $ 40 $ 890 $ 49 $ 404 $ (7) $ 446
===== ===== ==== ======= ===== ====== ==== ======
(1) Interest income generally is not accrued on loans delinquent 90 days
or more. These figures do not include interest accrued but not paid on
certain loans which were delinquent 90 days or more at December 31,
1996, 1995 and 1994. Interest accrued on loans delinquent 90 days or
more has shown no significant variances from 1994 through 1996. Loan
commitment and origination fees and certain direct loan origination
costs are deferred, and the net amount is amortized as an adjustment
of the related loan's yield in accordance with Financial Accounting
Standards Board Statement No. 91. The amortization of these fees into
income was not material in the years ended December 31, 1996, 1995 and
1994.
(2) Stock dividends on Federal Home Loan Bank stock are exempt from
federal and state income taxes. A certain percentage of cash
dividends received on stock owned by the Bank qualified for the
dividends received deduction for state and federal tax purposes.
These figures are not calculated on a tax equivalent basis.
8
Asset and Liability Management
As noted above, the Bank's earnings are largely dependent upon the
difference between the interest it receives from its loans and other
interest-earning assets and the interest it pays on its deposits and other
interest-bearing liabilities. Like the deposit base of many other thrift
institutions, a significant portion of the Bank's deposit base historically has
consisted of relatively short-term deposits which bear interest at rates
determined by current market conditions. By contrast, a significant portion of
the Bank's loan portfolio historically has consisted of longer-term loans and,
to a lesser extent, fixed rate loans having yields which do not vary as rapidly
or to the same extent as the Bank's cost of funds. The Bank's deposit base
therefore historically has been more sensitive than its loan portfolio to
changes in interest rates so that when interest rates rose, the Bank's cost of
funds increased more rapidly than the yield on its loan portfolio.
A primary long-term financial objective of the Bank has been to reduce the
sensitivity of its earnings to interest rate fluctuations while maximizing net
interest income. To counter interest rate volatility and the historical mismatch
between its relatively short-term rate sensitive liabilities and its relatively
long-term rate insensitive assets, the Bank, through its Asset and Liability
Management Committee, has implemented certain asset and liability management
strategies designed to reduce its exposure to changes in interest rates by more
closely matching the maturities and pricing characteristics of its liabilities
with those of its assets. These strategies include (i) acquiring or originating
more residential mortgage loans with adjustable interest rates, (ii) increasing
lending activities involving the origination of commercial, consumer and other
installment loans, which typically bear higher interest rates than residential
mortgage loans and offer greater interest rate sensitivity through shorter
maturities, (iii) selling long-term fixed rate mortgage loans in the secondary
market and participating in the "Swap" program of the Federal Home Loan Mortgage
Corporation ("FHLMC") and the mortgage-backed securities or "MBS" program of the
Federal National Mortgage Association ("FNMA") to convert these whole loans to
more liquid mortgage-backed securities, (iv) maintaining a significant
percentage of short-term liquid assets, such as interest-bearing deposits,
investment securities maturing within one year and cash, (v) significant
investments in adjustable rate mortgage-backed securities and collateralized
mortgage obligations, (vi) developing marketing policies designed to give
priority to longer-term and non-interest sensitive deposits, and (vii) using
computer software to facilitate the implementation of the asset and liability
management program to monitor the Bank's repricing opportunities. At December
31, 1996, the Bank's adjustable rate mortgage loans, adjustable rate
mortgage-backed securities ("MBSs") and collateralized mortgage obligations
("CMOs") which mature or interest rate adjust in one year or less totaled
approximately $81 million or 51% of gross loans receivable. Commercial and
consumer loans which mature or interest rate adjust in one year or less totalled
approximately $20 million or 12.6% of gross loans receivable. The combination of
these adjustable rate and short-term loans and adjustable rate MBSs and CMOs
help insulate the Bank to the effect of adverse long-term interest rate
fluctuations.
The difference between the amounts of interest rate sensitive assets and
interest rate sensitive liabilities to be repriced during a specific time period
is referred to as the "interest rate sensitivity gap." A positive interest rate
sensitivity gap indicates an excess of rate sensitive assets over rate sensitive
liabilities, while a negative gap indicates an excess of rate sensitive
liabilities over rate sensitive assets. While management of the interest rate
sensitivity gap is affected by many factors not within the control of the Bank,
including federal regulatory policies and depositor and customer reaction to
changes in deposit and loan interest rates, it generally is the case that in
periods of rising interest rates, the gap will move toward a negative position
and that in periods of falling interest rates, the gap will tend to be
increasingly positive. Historically, the Bank, like most other thrift
institutions, typically had an excess of interest-sensitive liabilities which
mature or reprice within one year over interest-sensitive assets which mature or
reprice within one year (a negative "one-year gap"). A financial institution
with a negative one year gap ordinarily will experience an adverse impact on net
interest income during a period of rising interest rates, while an institution
with a positive one year gap will tend to experience an increase in such income.
The Bank's asset liability strategies have limited the Bank's interest rate
sensitivity and exposure to interest rate risk. At December 31, 1996, the Bank
had a positive one-year interest rate sensitivity gap of approximately $4
million or 1.84% of total assets. The Bank's ratio of total interest-earning
assets compared to interest-bearing liabilities was 106% at December 31, 1996.
The Bank's liabilities, due to their generally longer term to maturity or
repricing, are now less sensitive than the Bank's assets to interest rate
9
changes. Management believes that the Bank's net interest income will increase
during a period of rising interest rates and will decrease during a period of
falling interest rates.
The following table summarizes the amounts of interest-earning assets and
interest-bearing liabilities outstanding as of December 31, 1996 which are
expected to mature, prepay or reprice in each of the future time periods shown
(i.e., the interest rate sensitivity). Except as stated below, the amounts of
assets or liabilities shown which mature or reprice during a particular period
were determined in accordance with the contractual terms of the asset or
liability. Adjustable rate loans and securities are primarily included in the
period in which interest rates are next scheduled to adjust rather than in the
period in which they are due, and fixed rate loans and mortgage-backed
securities are included in the periods in which they are anticipated to be
repaid based on scheduled maturities and estimated projected repayments of loans
and mortgage-backed securities with specified characteristics. The Bank's
passbook accounts, interest-bearing checking accounts and money market deposit
accounts, which generally are subject to immediate withdrawal, are included in
the various categories based upon decay rate assumptions.
Maturing or Repricing in
Over 1 Year Over 3 Years
One Year Through Through Over
or Less 3 Years 5 Years 5 Years Total
---------- --------- ---------- ------- -----
(dollars in thousands)
Interest-earning assets:
Adjustable rate mortgages and
mortgage-backed securities ........... $ 80,852 $ 8,160 $ - $ - $ 89,012
Fixed rate mortgages and
mortgage-backed securities ........... 28,114 8,325 6,411 25,235 68,085
Other loans ........................... 20,082 4,105 2,370 4,200 30,757
Investment securities ................. 4,858 1,982 - 2,113 8,953
Interest-bearing deposits
in other banks ...................... 3,557 - - - 3,557
-------- -------- -------- -------- --------
Total interest-earning assets ....... $137,463 $ 22,572 $ 8,781 $ 31,548 $200,364
-------- -------- -------- -------- --------
Interest-bearing liabilities:
Fixed maturity deposits................ $ 84,679 $ 18,059 $ 10,496 $ 2,895 $116,129
NOW and money market demand
accounts ........................... 20,949 5,256 3,384 7,397 36,986
Passbook accounts ..................... 9,585 690 537 5,702 16,514
Federal funds purchased ............... 2,210 - - - 2,210
FHLB advances ......................... 15,950 400 - 1,021 17,371
-------- -------- -------- -------- --------
Total interest-bearing
liabilities.............. $133,373 $ 24,405 $ 14,417 $ 17,015 $189,210
-------- -------- -------- -------- --------
Interest rate sensitivity gap........... $ 4,090 $ (1,833) $ (5,636) $ 14,533 $ 11,154
Cumulative interest rate
sensitivity gap....................... $ 4,090 $ 2,257 $ (3,379) $ 11,154 --
Cumulative interest rate
sensitivity gap to total assets ...... 1.84% 1.02% -1.52% 5.03% --
Certain shortcomings are inherent in the method of analysis presented in the
foregoing table. For example, although certain assets and liabilities may have
similar maturities or periods of repricing, they may react in different degrees
to changes in market interest rates. Additionally, the interest rates on certain
types of assets and liabilities may fluctuate in advance of changes in market
10
interest rates while interest rates on other types may lag behind changes in
market rates. Further, certain assets, such as adjustable rate mortgages
("ARMs"), MBSs and collateralized mortgage obligations have features which
restrict changes in interest rates both on a short-term basis and over the life
of the asset. Moreover, prepayment rates, early withdrawal levels and the
ability of borrowers to service their debt, among other factors, may change
significantly from the assumptions used in the table in the event of a change in
interest rates.
Lending Activities
Federal laws and regulations prescribe the types and amounts of loans which
may be made by federal savings institutions such as the Bank and generally
permit such institutions to make residential real estate loans, commercial real
estate loans, consumer loans, commercial loans and agricultural loans.
The Bank's principal lending activity has been the origination of permanent
residential mortgage loans. The Bank also makes consumer loans, commercial loans
and leases, commercial real estate loans and residential construction loans. At
December 31, 1996, the Bank's loan portfolio (including loans held for sale)
constituted approximately 68.92% of the Bank's total assets. The following table
sets forth the composition of the Bank's loan portfolio at the indicated dates.
December 31,
1996 1995
-------------------------------------
Amount Percent Amount Percent
------ ------- ------ -------
(dollars in thousands)
Residential mortgage loans:
Residential 1-4 family................ $77,162 50.55% $87,540 59.39%
Residential multi-family.............. 1,101 0.72 1,178 0.80
-------- ------ -------- -----
Total residential mortgage loans ... 78,263 51.27 88,718 60.19
Commercial real estate loans............ 33,844 22.17 23,976 16.27
Consumer loans.......................... 18,166 11.90 14,732 9.99
Commercial loans/leases................. 17,780 11.65 16,916 11.48
Residential construction loans.......... 11,812 7.74 9,665 6.56
-------- ------ -------- ------
Gross loans receivable................ $159,865 104.73% $154,007 104.48%
Less:
Undisbursed proceeds on loans
in process $2,663 1.74% $ 4,978 3.38%
Deferred loan fees and discounts ..... 219 0.14 287 0.19
Unearned interest on loans............ - - - -
Allowance for loan losses............. 4,339 2.84 1,339 0.91
-------- ------ -------- -------
Total net loans......................... $152,644 100.00% $147,402 100.00%
======== ======= ======== ======
Prior to 1984, the Bank's lending activities, like those of other thrift
institutions, consisted primarily of the origination of long-term, fixed-rate
permanent residential mortgage loans for its own portfolio. Since then, the Bank
has expanded its consumer, business and other short-term lending. Although the
Bank continues originating long-term residential mortgage loans, generally these
loans are either sold directly in the secondary mortgage market or pooled into
MBSs for sale in the secondary market. See "Origination, Purchase and Sale of
Loans" below. In addition, the Bank has purchased ARMs and MBSs for its
portfolio. These policies, together with certain other asset and liability
management strategies, have been implemented to make the Bank's assets more
sensitive to changes in interest rates, thereby better matching the Bank's
interest-sensitive short-term liabilities and reducing the Bank's interest rate
risk. See "Asset and Liability Management" above and "Permanent Residential
Mortgage Loans" below. The following table sets forth certain information as of
December 31, 1996 regarding loans in the Bank's loan portfolio which are due
after one year and which have fixed interest rates or floating or adjustable
interest rates. All loans with floating or adjustable interest rates reprice
either at stated intervals or upon changes in a "prime" interest rate or other
specified index.
11
December 31,
Fixed Rate Adjustable Rate
---------- ---------------
Percent of Percent of
Amount Portfolio Amount Portfolio
------ --------- ------ ---------
(dollars in thousands)
Residential mortgage................... $29,739 25.41% $41,067 35.09%
Commercial real estate................. 14,247 12.17 9,901 8.46
Consumer .............................. 8,565 7.32 - -
Commercial loans/leases ............... 6,589 5.63 6,568 5.61
Residential construction............... - - 347 0.30
------- ----- ------- ------
Total............................... $59,140 50.54% $57,883 49.46%
======= ===== ======= =====
The following table sets forth the scheduled maturities of the loans in the
Bank's loan portfolio as of December 31, 1996 based on their contractual terms
of maturity. Demand loans, loans having no stated repayment schedule and no
stated maturity, and overdrafts are reported as due in less than one year. Loans
unpaid at maturity are renegotiated based on current market rates and terms.
Maturing in
----------------------------------------------------------------------
Less Than 1-2 2-3 3-5 5-10 10-15 After
1 Year Years Years Years Years Years 15 Years Total
------- ----- ----- ----- ----- ----- -------- -----
(dollars in thousands)
Residential mortgage... $ 7,457 $1,936 $ 2,825 $ 7,437 $12,435 $ 7,581 $38,592 $ 78,263
Commercial real estate. 9,696 3,828 2,359 6,024 4,212 5,099 2,626 33,844
Consumer .............. 9,601 2,658 2,641 3,253 2 9 2 18,166
Commercial loans/leases 4,624 1,167 1,839 3,680 2,101 513 3,856 17,780
Residential construction 11,465 347 - - - - - 11,812
------ ------ ------ ------- ------- ------- ------- --------
Total............... $42,843 $9,936 $9,664 $20,394 $18,750 $13,202 $45,076 $159,865
======= ====== ====== ======= ======= ======= ======= ========
Types of Loans
Permanent Residential Mortgage Loans
The origination of one-to-four family permanent residential mortgage loans
traditionally has been, and continues to be, the Bank's principal lending
operation, with such loans totaling approximately $77.2 million or 50.55% of the
net outstanding loan portfolio at December 31, 1996. The Bank offers both ARMs
and fixed rate mortgage loans. The interest rates on the Bank's currently
available ARMs are subject to adjustment, primarily at one year intervals, in
accordance with a rate yielding a predetermined margin over the "weekly average
yield of U.S. Treasury Securities adjusted to a constant maturity of one year"
(the "One-year Treasury Security Index"), a statistic published by the Board of
Governors of the Federal Reserve System and verifiable by the borrower. Interest
rates on ARMs have limitations on upward adjustments equal generally to 2% per
year and 6% over the life of the loan.
Depending on market conditions, the Bank offers various types of ARMs to
meet customer demand and its investment needs. The volume and types of ARMs
originated by the Bank are affected by such market factors as interest rates on
various types of loans, competition, consumer preferences and the availability
of funds. In periods of relatively low interest rates, the Bank's customers have
12
a preference for fixed-rate loans for single family residences. In periods of
higher rates, customers have a preference for ARMs. When qualifying a borrower
with a loan to value ratio greater than 70% for an ARM, the Bank adheres to FNMA
requirements that the interest rate used to calculate the borrower's
debt-to-income ratio is the maximum rate that could be in effect after the first
year.
The interest rate, maturity, loan-to-value ratio and other provisions of the
Bank's residential mortgage loans generally reflect the policy of making the
maximum loan permissible consistent with applicable regulations, market
conditions and the Bank's lending practices and underwriting standards. Interest
rates and points charged on residential mortgage loans originated by the Bank
are competitive with those of other financial institutions in the general market
area. Such interest rates are affected principally by the demand for such loans
and the supply of money available for lending purposes.
Permanent residential mortgage loans made by the Bank are generally
long-term loans, amortized on a monthly basis, with principal and interest due
each month. The initial contractual loan payment period for fixed rate
residential mortgage loans typically ranges from 15 to 30 years, while the
Bank's ARMs generally have terms of 20 to 30 years. The Bank's experience
indicates that permanent residential mortgage loans normally remain outstanding
for much shorter periods (seven years on average) than their stated maturity
because the borrowers repay the loans in full upon the sale of the security
property or upon refinancing the original loan.
Since December 1988, the Bank has offered a biweekly mortgage product. The
Bank's biweekly mortgage loans provide for payments and loan amortization on a
biweekly (i.e., every 14 days) basis, which results in an increased number of
collections annually and, accordingly, a shorter term of maturity and a faster
equity build-up than monthly mortgage loans. The Bank had approximately $4.3
million in biweekly mortgage loans outstanding as of December 31, 1996.
In the case of owner-occupied single family residences, permanent
residential mortgage loans are made for up to 95% of the appraised value of the
property securing the loan. When the loan is secured by real estate containing a
non-owner occupied dwelling of not more than four family units, loans generally
are made at up to 80% of the appraised value. All conventional loans with a
loan-to-value ratio in excess of 80% must have private mortgage insurance
covering that portion of the loan in excess of 75% of the appraised value. The
cost of this insurance is included in the borrower's monthly payments. The Bank
also requires title insurance to insure the priority of the property lien on
most of its mortgage loans and requires fire and casualty insurance on all of
its loans. The borrower also must pay monthly into an escrow account an amount
equal to 1/12 of the annual hazard insurance premium and property taxes on the
security property.
The permanent residential mortgage loans originated by the Bank contain a
"due-on-sale" clause which provides that the unpaid balance of the loan may be
declared immediately due and payable upon the sale of the mortgaged property.
Such clauses are an important means of reducing the average loan life and
increasing the yield on existing fixed-rate mortgage loans, and it is the Bank's
policy to enforce due-on-sale clauses with respect to fixed-rate loans. ARMs are
assumable, subject to payment of an assumption fee, to the extent of the
creditworthiness of the purchaser, but due-on-sale clauses on ARMs are enforced
if the Bank is not satisfied with such credit.
There are, in connection with ARMs, certain risks resulting from increased
costs to the borrower as a result of periodic repricing. Despite the benefits of
ARMs to the Bank's asset and liability management program, they do pose
potential additional risks, primarily because as interest rates rise, the
underlying payment by the borrower rises, thereby increasing the potential for
default. At the same time, the marketability of the underlying property may be
adversely affected by higher interest rates.
Commercial Real Estate Loans
Current regulations permit federal thrifts such as the Bank to invest up to
400% of their capital in commercial real estate loans. The Bank's permanent
commercial real estate loans, including loans secured by multi-family apartment
projects with more than four units, amounted to approximately $34 million or
22.17% of the Bank's loan portfolio at December 31, 1996. The Bank's permanent
commercial real estate loans are typically secured by improved commercial real
estate located in the Bank's primary lending areas, including small office
13
buildings, apartments, warehouses and shopping centers. Permanent commercial
real estate loans are generally made in amounts up to 75% of the appraised value
of the property and generally have an initial contractual loan payment period of
from 10 to 20 years. Many of these loans have interest rates that adjust either
daily based on The Wall Street Journal prime rate or annually based on the
One-year Treasury Security Index. Some of the Bank's commercial real estate
loans have fixed interest rates with contractual payment periods of from three
to five years. Monthly payments of these loans are computed based on an assumed
amortization period of 10 to 15 years, with balloon payments becoming due at the
end of the contractual loan term for the remaining outstanding principal
balance.
Permanent commercial real estate loans usually have higher interest rates
than residential mortgage loans, in part because real estate lending on income
producing property entails certain significant risks. Commercial real estate
loans typically involve relatively large loan balances to single borrowers or
groups of related borrowers. The payment experience on such loans is typically
dependent on the successful operation of the real estate project. These risks
can be significantly impacted by supply and demand conditions in the market for
commercial space and, as such, may be subject to a greater extent to adverse
conditions in the economy generally. In dealing with these risk factors, the
Bank generally limits itself to the real estate market in the Bank's Troup
County market area and/or to borrowers with which it has substantial knowledge
and experience. In setting interest rates and origination fees on new loans and
loan extensions, management analyzes the risk associated with the particular
project to ensure that a project's cash flow will be sufficient to cover
operating expenses and debt service payments.
Consumer Loans
The Bank is authorized to make both secured and unsecured consumer loans for
any personal or household purposes in amounts up to 35% of its total assets. In
addition, federal thrifts such as the Bank have lending authority above the 30%
limit for certain consumer loans, such as home equity loans (loans secured by
the equity in the borrower's residence but not necessarily for the purpose of
home improvement), property improvement loans, mobile home loans, deposit
account secured loans and education loans. The Bank also is authorized to make
secured and unsecured loans for business purposes in amounts up to 10% of its
total assets. At December 31, 1996, consumer loans totaled approximately $18.2
million or 11.90% of the total loan portfolio.
Most of the Bank's consumer loans are automobile loans and leases, boat
loans, home equity loans, property improvement loans, student loans and loans to
depositors on the security of their savings accounts. These loans are made at
fixed interest rates for terms of up to 10 years. The Bank considers consumer
loans to involve a relatively high credit risk compared to permanent residential
mortgage loans. Consumer loans therefore generally yield a relatively high
return to the Bank and provide a relatively short maturity. The Bank believes
that the generally higher yields and the shorter terms available on various
types of consumer loans contribute to a positive spread between the Bank's
average yield on earning assets and the Bank's cost of funds.
Consumer loans, particularly automobile loans and secured savings loans,
have constituted an increasing area of emphasis in the Bank's lending
activities. The Bank intends to continue to expand its consumer lending
activities, subject to market conditions, as part of its plan to provide a wide
range of personal financial services to its customers.
14
Commercial Loans/Leases
The Bank is authorized to make secured and unsecured loans to commercial
businesses up to a limit of 20% of total assets. The Bank makes various types of
commercial loans and leases to creditworthy borrowers for the purpose of
financing equipment, capital projects, working capital and other legitimate
business needs requiring financing. The terms of these loans range from three to
five years, with the longer maturities sometimes being subject to balloon
payments. Commercial loans normally carry interest rates indexed to The Wall
Street Journal prime rate. Interest rates on leases are in the 10% to 14% range.
At December 31, 1996, commercial loans and leases outstanding totaled $17.8
million.
At December 31, 1996, the Bank had a lease portfolio with an outstanding
balance of approximately $4.5 million that was purchased from Bennett Funding
Group, Inc. (Bennett funding). Bennett Funding is an equipment leasing and
finance company based in Syracuse, New York. For several years, the Bank, along
with many other financial institutions and individuals throughout the United
States, invested in office equipment leases sold through Bennett Funding. During
1996, Bennett Funding filed for Chapter 11 bankruptcy protection, and certain
officers of Bennett Funding are being investigated for possible wrongdoing,
including criminal securities fraud. At December 31, 1996, the Bank had a $3
million specific loan loss reserve for Bennett Funding and related companies.
The $4.5 million lease portfolio is classified as "Doubtful," a classification
that generally requires reserves equal to 50 percent of the carrying value of
the asset (See "Bennett Funding Group, Inc." In the "Management Discussion and
Analysis of Financial Condition and Results of Operation," "Allowance for Loan
Losses" and "Non-Performing Assets," of the Company's 1996 Annual Report.)
Residential Construction Loans
Approximately $11.8 million or 7.74% of the loans held by the Bank at
December 31, 1996 were residential construction loans, consisting primarily of
residential construction mortgage loans to owner-occupants and, to a lesser
extent, to persons building residential properties for resale. These loans are
made for an initial term of up to six months, have fixed rates of interest, are
generally limited to 75% of the appraised value of the lot and the completed
value of the proposed structure, but construction loans of up to 90% can be
issued with private mortgage insurance coverage for owner occupants. These loans
also provide for disbursement of loan funds based on receipts submitted by the
builder during construction and periodic site inspections. The loans are then
completed, extended or sold. Extensions for additional fees are permitted if
construction has continued satisfactorily and if the loan is current and other
circumstances warrant the extension. In response to competitive conditions, the
Bank permits a portion of its single-family residential construction loan
portfolio to consist of loans made without commitments for "take-out" or
permanent financing from third parties.
Residential construction financing, like commercial real estate lending, is
generally considered to involve a higher degree of credit risk than permanent
mortgage financing of residential properties, and this additional risk usually
is reflected in higher interest rates. The higher risk of loss on construction
loans is attributable in large part to the fact that loan funds are estimated
and advanced upon the security of the project under construction, which is of
uncertain value prior to the completion of construction. Moreover, because of
the uncertainties inherent in estimating construction costs, delays arising from
labor problems, material shortages and other unpredictable contingencies, it is
relatively difficult to accurately evaluate the total loan funds required to
complete a project and to accurately evaluate the related loan-to-value ratios.
If the estimates of construction costs and the salability of the property upon
completion of the project prove to be inaccurate, the Bank may be required to
advance funds beyond the amount originally committed to permit completion of the
project. If the estimate of value proves to be inaccurate, the Bank may be
confronted, at or prior to the maturity of the loan, with a project with a value
which is insufficient to assure full repayment.
The Bank's underwriting criteria are designed to evaluate and minimize the
risk of each residential construction loan. Among other things, the Bank
considers evidence of the availability of permanent financing or a take-out
commitment to the borrower, the financial strength and reputation of the
borrower, an independent appraisal and review of cost estimates, and, if
applicable, the amount of the borrower's equity in the project, pre-construction
sale or leasing information and cash flow projections of the borrower.
Origination, Purchase and Sale of Loans
15
Origination, Purchase and Sale of Loans
The Bank is permitted by applicable regulations to originate or purchase
loans secured by real estate located in any part of the United States. The Bank
originates loans in Troup County, Georgia through its main office, its Lee's
Crossing office and its LaFayette Parkway office, all located in LaGrange,
Georgia. The Bank also originates loans in Muscogee County and Harris County,
Georgia and Russell County, Alabama through a loan production office located in
Columbus, Muscogee County, which the Bank operates under the name Piedmont
Mortgage Service. The Bank also operates a second loan production office under
the name of Piedmont Mortgage Service in Auburn, Lee County, Alabama which
originates loans in Lee County. As of December 31, 1996, Troup County had a
population of approximately 59,000, Muscogee County had a population of
approximately 187,000, Harris County had a population of approximately 20,000,
Russell County had a population of approximately 52,000 and Lee County had a
population of approximately 94,000, based on Troup County, Muscogee County,
Harris County, Russell County and Lee County Chambers of Commerce estimates.
Loans are originated by seven loan officers in the Bank's main office and
one loan officer in each of the Lee's Crossing and LaFayette Parkway offices in
LaGrange, Georgia. In addition, two loan officers operate from the Piedmont
Mortgage Service office in Columbus, Georgia, and one loan officer operates from
the Piedmont Mortgage Service office in Auburn, Alabama. These loan officers
solicit loan applications from existing customers, real estate agents, builders,
real estate developers and others. The Bank also receives loan applications as a
result of customer referrals and walk-ins to its offices.
Upon receipt of a loan application and all required supporting information
from a prospective borrower, a credit report is obtained and verification is
made of specific information relating to the loan applicant's employment, income
and credit standing. An appraisal of any real estate intended to secure the
proposed loan is undertaken by an independent appraiser approved by the Bank.
The Bank's loan officers and underwriters then analyze the loan applications and
any collateral involved. All real estate loans, regardless of amount, and all
consumer and commercial loans in excess of the loan officer's lending limit, as
set by the Board of Directors, are approved by a loan committee comprised of
executive officers and one outside director.
Almost all loans in the Bank's portfolio were originated by the Bank. The
Bank generally does not purchase loans; however, in order to improve the Bank's
interest rate sensitivity, the Bank has purchased a small number of adjustable
rate loans for its portfolio. The Bank originates adjustable rate loans
primarily for its portfolio and generally originates permanent fixed-rate
residential mortgage loans for sale in the secondary market or for pooling into
MBSs for sale in the secondary market. All fixed rate conforming residential
mortgage loans originated by the Bank in 1996 either were sold in the secondary
market or are carried on the balance sheet (at the lower of cost or market) as
"loans held for sale."
The sale of fixed-rate loans in the secondary mortgage market not only
reduces the Bank's risk of an unfavorable interest rate spread over the cost of
funds but also allows the Bank to continue to make loans during periods when
savings flows decline or funds are not otherwise available for lending purposes.
The Bank generally retains the servicing (i.e., collection of principal and
interest payments) of the loans sold in the secondary market, for which it
generally receives a fee of 1/4% to 1/2% per annum of the unpaid balance of each
loan. Secondary market sales are made primarily to mortgage companies,
commercial banks, other thrift institutions and governmental and
quasi-governmental agencies such as the FHLMC, the FNMA and the Government
National Mortgage Association ("GNMA") which purchase residential mortgage loans
from financial institutions. As market conditions dictate, the Bank may elect to
hold permanent mortgage loans in its portfolio where favorable spreads over the
cost of funds make these investments advantageous. All secondary market sales
are made without recourse to the Bank.
16
The table below shows the Bank's loan origination, purchase (including MBSs)
and sale activity during the periods indicated.
Years Ended December 31,
1996 1995
-----------------
(dollars in thousands)
Loans originated:
Residential mortgage ......................... $ 79,597 $ 66,812
Commercial real estate ....................... 23,481 15,610
Consumer ..................................... 10,399 22,377
Commercial loans/leases ...................... 25,116 8,228
Residential construction ..................... 11,296 7,286
Loans refinanced ............................. 19,212 20,260
-------- --------
Total loans originated .................... $169,101 $140,573
Loans purchased ................................ 449 2,987
-------- --------
Total loans originated and purchased ...... $169,550 $143,560
Loans sold:
Residential mortgage ......................... $ 63,042 $ 47,962
Commercial real estate ....................... -- --
Consumer ..................................... -- --
Commercial loans/leases ...................... -- --
Residential construction ..................... -- --
-------- --------
Total loans sold ............................... $ 63,042 $ 47,962
-------- --------
Net loan activity ......................... $106,508 $ 95,598
======== ========
Loan Fee Income
In addition to interest earned on loans, the Bank receives fees for
originating loans, fees for commitments to make certain loans, fees for
continuing to service loans (i.e., collecting principal and interest payments)
after selling such loans in the secondary market, purchased servicing fees and
other fees for miscellaneous loan-related services. Such fee income varies with
the volume of loans made, prepaid or sold, and the rates of fees vary from time
to time depending on the supply of funds and competitive conditions in the
mortgage markets.
Origination fees are a percentage of the principal amount of the loan which
are charged to the borrower for the granting of the loan. Origination fees
normally are deducted from the proceeds of the loan and generally range from 1%
to 2% of the principal amount, depending on the type and volume of loans made
and market conditions such as the demand for loans, the availability of money
and general economic conditions.
It is the policy of the Bank to make loan commitments for a term not to
exceed 30 days without charging a commitment fee. From time to time, however,
the Bank receives commitment fees for certain longer term forward commitments on
permanent fixed-rate residential mortgage loans, generally not in excess of 1%
of the requested loan amount. The Bank has not experienced a significant number
of loan applications/commitments that were not funded within the commitment
period. The Bank did not receive any commitment fees during the year ended
December 31, 1996.
17
Servicing fees are payable monthly in an amount equal to 1/4% to 1/2% per
annum of the unpaid principal balance of each loan serviced. As of December 31,
1996, 1995 and 1994, the Bank was servicing loans for others with principal
balances aggregating approximately $247.9 million, $249.3 million and $273.1
million, respectively. Loan servicing income expressed as a percentage of net
interest income for the years ended December 31, 1996, 1995 and 1994 was 3.90%,
5.91%, and 5.36%, respectively.
The Bank also receives fee income from late payment charges, prepayment
premiums, loan assumption fees, property inspection fees, property transfer fees
and miscellaneous services related to its existing loans. These fees and charges
have not constituted a material source of income for the Bank.
In accordance with the Financial Accounting Standards Board ("FASB")
Statement of Financial Accounting Standards No. 91, "Accounting for
Nonrefundable Fees and Costs Associated with Originating or Acquiring Loans and
Initial Direct Costs of Leases," the Bank records income from loan origination
and commitment fees, net of certain direct loan origination costs (such as
advertising, administrative, occupancy and equipment costs and a portion of
employee compensation and benefit amounts), for each loan as an adjustment of
yield over the contractual life of the loan rather than recognizing such income
in full at the time of origination. The Bank had net deferred origination fees
totaling $218,314 at December 31, 1996 that will be recognized in future
periods. See Note 2 of Notes to Consolidated Financial Statements contained in
the Company's 1996 Annual Report, which information is incorporated by reference
in Item 8 hereof.
Credit Risk Management
Classification and Collection of Problem Loans
In originating loans, the Bank recognizes that credit losses will be
experienced and that the risk of loss will vary with, among other things, the
type of loan being made, the creditworthiness of the borrower over the term of
the loan and, in the case of a secured loan, the guarantee of the security for
the loan. The loan portfolio is continually reviewed by the Bank's management to
identify deficiencies and to take corrective actions as necessary. As discussed
below, each of the Bank's loans is assigned a rating in accordance with the
Bank's internal loan rating system and is reviewed regularly to update its
rating in accordance with the performance of the loan. All past due loans are
reviewed weekly by the Bank's collection manager and monthly by the Loan Review
Committee of the Bank and by the Board of Directors, and all loans classified as
"substandard" or "doubtful" are reviewed at least quarterly by the Asset Review
Committee of the Board of Directors. In addition, all loans to a particular
borrower, regardless of classification, are reviewed by the originating loan
officer and the collection manager each time such borrower requests a renewal or
extension of any loan or requests an additional loan. All lines of credit are
reviewed annually prior to renewal. Such reviews include, but are not limited
to, the ability of the borrower to repay the loan, the loan to value ratio, the
value of any collateral and the estimated loss to the Bank, if any.
The Bank's internal loan rating system establishes three classifications
for problem assets: substandard, doubtful and loss. Additionally, in connection
with regulatory examinations of the Bank, federal examiners have authority to
identify problem assets and, if appropriate, to require the Bank to classify
them. Assets that have one or more defined weaknesses and are characterized by
the distinct possibility that the Bank will sustain some loss if the
deficiencies are not corrected are classified as "substandard. Assets that have
the weaknesses of substandard assets with the additional characteristic that the
weaknesses make collection or liquidation in full, on the basis of currently
existing facts, conditions and values, highly questionable and improbable are
classifed as "doubtful." An asset classified as "loss" is considered
uncollectible and of such little value that continuance as an asset of the Bank
is not warranted.
Assets classified as substandard or doubtful require the Bank to establish
general allowances for loan losses. If an asset or portion thereof is classified
as loss, the Bank must either establish a specific allowance for loan loss in
the amount of 100% of the portion of the asset classified as loss or charge off
such amount. General loss allowances established to cover possible losses
related to assets classified as substandard or doubtful may be included, up to
certain limits, in determining the Bank's regulatory capital, while specific
valuation allowances for loan losses do not qualify as regulatory capital.
18
The Bank's collection procedures provide that when a loan becomes ten days
delinquent, the borrower is contacted by mail and payment is requested. If the
delinquency continues, subsequent efforts are made to contact and request
payment from the delinquent borrower. Most loan delinquencies are cured within
30 days and no legal action is required. In certain circumstances, the Bank may
modify the loan, grant a limited moratorium on loan payments or revise the
payment schedule to enable the borrower to restructure his or her financial
affairs. Generally, the Bank stops accruing interest on delinquent loans when
payment is in arrears for 90 days or when collection otherwise becomes doubtful.
If the delinquency exceeds 120 days and is not cured through the Bank's normal
collection procedures or through a restructuring, the Bank will institute
measures to enforce its remedies resulting from the default, including
commencing a foreclosure, repossession or collection action. In certain cases,
the Bank will consider accepting a voluntary conveyance of collateral in lieu of
foreclosure or repossession. Real property acquired by the Bank as a result of
foreclosure or by deed in lieu of foreclosure is classified as "real estate
owned" until it is sold and is carried at the lower of (i) fair value minus
estimated costs to sell or (ii) the adjusted cost basis.
Allowance for Loan Losses
The allowance or reserve for possible loan losses is a means of absorbing
future losses which could be incurred from the current loan portfolio.
Management utilizes a systematic methodology each month to independently
evaluate the adequacy of the allowance for loan losses. The Bank's Asset Review
Committee meets monthly. During this meeting, presentations are made, reports
are reviewed and discussions arise regarding the Bank's loan portfolio, loan
delinquencies, non-performing and classified loans, and loan payment activity.
During the course of this meeting, management considers the risk inherent in the
Bank's loan portfolio and determines the adequacy of the reserve for loan losses
This determination is based on such factors as the levels of non-performing and
substandard loans, portfolio mix, borrowers' financial condition, estimated
underlying collateral values, current and prospective local economic conditions,
and historical loss experience. The Bank establishes specific allowances for
assets or portions thereof classified as a loss in an amount equal to 100% of
the loan or a portion thereof. As explained in "Commercial Loans/Leases," the
Allowance for Loan Losses includes a specific reserve of approximately $3
million for a lease portfolio with a remaining balance of $4.5 million purchased
from Bennett Funding. The following table presents this specific reserve on the
line identified as " "Commercial loans/leases."
The following table summarizes the Bank's allocation of the allowance for
loan losses for each of the following types of loans at the dates indicated.
December 31,
------------
1996 1995
------------------- --------------------
Percent of Percent of
Amount Total Loans Amount Total Loans
------ ----------- ------ -----------
(dollars in thousands)
Residential mortgage loans .......... $ -- -- $ 16 0.01%
Commercial real estate loans ........ 261 0.17 257 0.17
Consumer loans ...................... 7 0.01 19 0.01
Commercial loans/leases ............. 2,978 1.93 -- --
Residential construction loans ...... -- -- -- --
------ ---- ------ ----
Total loans ....................... $3,246 2.11% $ 292 0.19%
Unallocated allowance ............... 1,093 0.71 1,047 0.70
------ ---- ------ ----
Total allowance for possible
loan losses ..................... $4,339 2.82% $1,339 0.89%
====== ==== ====== ====
19
General and specific valuation allowances will be maintained at the levels
as determined above by periodic charges against income. A loan or portion
thereof is charged off against the allowance when management has determined that
losses on such loans are probable. Recoveries on any loans charged off in prior
fiscal periods are credited to the allowance. It is the opinion of the Bank's
management that the balance in the allowance for loan losses as of December 31,
1996 is adequate to absorb possible losses from loans currently in the
portfolio.
The following table sets forth information regarding changes in the
allowance for loan losses for the periods indicated.
Years Ended December 31,
------------------------
1996 1995
-------- -------
(dollars in thousands)
Average net loans ...................................... $151,084 $146,144
Allowance for possible loan losses,
beginning of the period ............................... 1,339 1,244
Charge-offs for the period:
Consumer loans ....................................... 87 118
Commercial loans/leases .............................. -- --
Residential construction loans ....................... 22 23
Residential mortgage loans ........................... 410 60
Commercial real estate loans ......................... -- 364
-------- --------
Total charge-offs.............................. $ 519 $ 565
-------- --------
Recoveries for the period:
Consumer loans........................................ $ 35 $ 30
Commercial loans/leases .............................. -- --
Residential construction loans ....................... -- --
Residential mortgage loans ........................... -- --
Commercial real estate loans ......................... -- --
-------- --------
Total recoveries................................... $ 35 $ 30
-------- --------
Net charge-offs for the period .................. 484 535
Provision for loan losses .............................. 3,484 630
-------- --------
Allowance for possible loan losses,
end of period ......................................... $ 4,339 $ 1,339
======== ========
Ratio of allowance for loan losses to
total net loans outstanding ........................... 2.84% 0.91%
Ratio of net charge-offs during the
period to average net loans outstanding
during the period ..................................... 0.32% 0.37%
20
Non-Performing Assets
The following table sets forth information regarding the Bank's
non-performing assets and troubled debt restructurings as of the dates
indicated. Non-performing assets consist of nonaccruing loans and foreclosed
properties. The Bank has no loans 90 days or more past due as to which interest
is still accruing and has no loans categorized as in-substance foreclosures.
Material potential problem loans (i.e., those with respect to which management
has serious doubts regarding the ability of the borrowers to comply with present
loan repayment terms) have been classified as nonaccrual loans, regardless of
payment status. Included in non-performing/nonaccruing loans is the lease
portfolio with a remaining balance of approximately $4.5 million purchased from
Bennett Funding (see "Bennett Funding Group, Inc." In Management's Discussion
and Analysis of Financial Condition and Results of Operation in the Company's
1996 Annual Report).
December 31,
------------
1996 1995
---------- ----------
(dollars in thousands)
Nonaccruing loans:
Residential mortgage loans:
1-4 family .................................... $1,327 $1,064
Multi-family .................................. -- --
Commercial real estate loans .................... 662 207
Consumer loans .................................. 83 123
Commercial loans/leases ......................... 4,616 --
------ ------
Total nonaccruing loans ....................... $6,688 $1,394
Real estate acquired through
foreclosure and other repossessed
collateral ....................................... 525 801
------ ------
Total non-performing assets ..................... $7,213 $2,195
====== ======
Ratio of total non-performing assets to:
Total loans and real estate acquired
through foreclosure ........................... 4.70% 1.46%
Total assets .................................... 3.25% 0.95%
Troubled debt
restructurings .................................... $1,843 $2,126
For the year ended December 31, 1996, the Bank recorded no interest income
on the non-performing assets listed above subsequent to their classification as
non-performing assets. The gross interest income that would have been recorded
during the year ended December 31, 1996 if the assets listed above had been
current in accordance with their original terms would have been approximately
$470,000. The amount of interest income on those assets that was actually
recorded during the year ended December 31, 1996 prior to their classification
as non-performing assets was approximately $148,000.
The Bank attempts to sell real estate owned promptly after foreclosure.
During 1996, seven commercial and residential properties were foreclosed with
aggregate investments, net of reserves, of $769,398. The aggregate charge-off to
the loan loss reserve for these properties was $227,822. During 1996, 14
residential properties were sold with carrying values of $570,007. At December
31, 1996, foreclosed properties consisted of three residential properties with
an aggregate investment, net of reserves, of approximately $525,000. All of
these properties are in the Bank's west central Georgia or east central Alabama
market areas.
21
Investment Activities
Federally chartered savings institutions such as the Bank have authority to
invest in various types of liquid assets, including U.S. Treasury obligations,
securities of various federal agencies and of state and municipal governments,
certificates of deposits at federally insured banks and savings and loan
associations, certain bankers' acceptances and federal funds. Subject to various
restrictions, federally chartered savings institutions may also invest a portion
of their assets in commercial paper, corporate debt securities and mutual funds,
the assets of which conform to the investments that federally chartered savings
institutions are otherwise authorized to make directly. Federally chartered
savings institutions are required to classify their securities in one of three
categories: securities purchased or held for investment, for sale, or for
trading. Such investments must be carefully managed for quality, maintenance of
current market yields and matching of rate sensitivity. Investment decisions are
made within formal policy guidelines established by the Board of Directors.
Income from investments in securities provides the second largest source of
revenues for the Company after interest on loans, constituting approximately
$3.2 million or 15.50% of total interest and other income for the year ended
December 31, 1996. The Bank's investment portfolio totaled approximately $50
million as of December 31, 1996 or 22.73% of total assets and consisted of FHLB
stock, United States Government and federal government agency obligations and
other investments, as compared to $65 million or 28.03% of total assets at
December 31, 1996. At December 31, 1996, the investment portfolio had a net
unrealized loss of approximately $572,000. See Notes 3 and 4 of Notes to
Consolidated Financial Statements contained in the Company's 1996 Annual Report,
which information is incorporated by reference in Item 8 hereof.
The following table sets forth the book value of the Bank's investments at
the dates indicated.
December 31,
------------
1996 1995
--------- --------
(dollars in thousands)
Mortgage-backed securities ................... $37,920 $44,608
U.S. Government and federal
agency securities ........................... 4,018 9,250
Other debt securities ........................ 1,096 -
Interest-bearing deposits
and bankers' acceptances .................... 3,557 1,539
FHLB stock and
other equity investments .................... 3,857 7,210
Federal funds sold ........................... - 2,010
------- -------
Total ........................................ $50,448 $64,617
======= =======
22
The following table sets forth the book value of the Bank's investments at
December 31, 1996, the weighted average yields on the Bank's investments at
December 31, 1996 and the periods to maturity of the Bank's investments from
December 31, 1996. Yields on tax exempt obligations have not been computed on a
tax equivalent basis.
Periods to Maturity from December 31, 1996
------------------------------------------
After 1 through After 5 through
1 Year or Less 5 Years 10 Years After 10 Years Total
---------------- --------------- --------------- ----------------- ---------------
Weighted Weighted Weighted Weighted Weighted
Average Average Average Average Average
Amount Yield Amount Yield Amount Yield Amount Yield Amount Yield
------ ------- ------ -------- ------ ------- ------ ------- ------ ---------
(dollars in thousands)
Mortgage-backed
securities .......... $ 999 5.63% $4,829 6.08% $2,904 6.22% $29,188 6.39% $37,920 6.32%
U.S. Government
and federal
agency securities ... - - 2,000 5.72 2,018 6.44 - - 4,018 6.08
Other debt
securities .......... - - 981 7.27 115 6.81 - - 1,096 7.22
Interest-bearing
deposits and bankers'
acceptances ......... 3,557 5.35 - - - - - - 3,557 5.35
FHLB stock and
preferred stock ..... 3,857 9.01 - - - - - - 3,857 9.01
Federal funds sold ... - - - - - - - - - -
------ ---- ------ ---- ------ ---- ------- ---- ------- ----
Total ................ $8,413 7.06% $7,810 6.14% $5,037 6.32% $29,188 6.39% $50,448 6.46%
====== ==== ====== ==== ====== ==== ======= ==== ======= ====
As of December 31, 1996, none of the Bank's investment in securities of
other issuers exceeded 10% of the shareholders' equity of the Bank. the Bank.
Sources of Funds
General
Time, money market, savings and demand deposits are the major sources of the
Bank's funds for lending and other investment purposes. In addition, the Bank
obtains funds from loan principal repayments, proceeds from sales of loans, loan
participations and investment securities, and advances from the FHLB of Atlanta.
Loan repayments are a relatively stable source of funds, while deposit inflows
and outflows and sales of loans, loan participations and investment securities
are significantly influenced by prevailing interest rates, economic conditions
and the Bank's asset and liability management strategies. Borrowings may be used
on a short-term basis to compensate for reductions in the availability of other
sources of funds or on a longer term basis to support expanded lending
activities and for other general business purposes.
Deposits
The Bank offers several types of deposit accounts, with the principal
differences relating to the minimum balance required, the time period the funds
must remain on deposit and the interest rate. Deposits are obtained primarily
from the Bank's Troup County market area. The Bank does not advertise for
deposits outside of this area, and an insignificant amount of the Bank's
deposits are from out-of-state sources. The Bank generally does not solicit
funds from brokers, although the Bank occasionally consults with brokers to
obtain information on competitive market rates offered on jumbo certificates of
deposit ("CDs") which the Bank occasionally offers in minimum denominations of
$100,000.
23
The Bank does not rely upon any single person or group of related persons for a
material portion of its deposits. The Bank held CDs with minimum denominations
of $100,000 totaling $33.1 million at December 31, 1996.
The following table sets forth the composition of deposits, excluding
accrued interest payable, by type of account and interest rate category at the
dates indicated.
December 31, Increase (Decrease)
------------------ During the
1996 1995 Year Ended
------------------------------------------------------
Interest Interest December 31,
Type of Account Rate Amount Percent(1) Rate Amount Percent 1996
- --------------- ------ ------ ------- ------ ------ ------- --------
(dollars in thousands)
Regular savings deposits 2.75% $16,514 9.27% 2.75% $ 16,401 9.22% $ 113
NOW accounts........... 2.25% 28,820 16.19 2.25% 27,977 15.67 843
Super NOW accounts..... 2.70% 1,828 1.03 2.70% 2,100 1.24 (272)
Money market deposits.. 3.20% 14,709 8.26 3.20% 15,438 8.68 (729)
------- ----- -------- ------ ------
Total............... $61,871 34.75% $ 61,916 34.81% $ (45)
------- ----- -------- ----- ------
Certificates of deposit Below 4% $ 50 0.03% Below 4% $ 89 0.05% $ (39)
4-6% 84,258 47.34 4-6% 60,608 34.08 23,650
6-8% 31,821 17.88 6-8% 54,731 30.77 (22,910)
8-10% - - 8-10% 504 0.29 (504)
-------- ------ -------- ------ ------
Total time deposits .. $116,129 65.25% $115,932 65.19% $ 197
-------- ----- -------- ------ ------
Total deposits..... $178,000 100.00% $177,848 100.00% $ 152
======== ====== ======== ====== =======
- ----------------
(1) Represents percentage of deposits in the respective category of deposits to
total deposits.
24
The following table sets forth information with respect to interest expense
and average deposit balances for the periods indicated.
Years Ended December 31,
------------------------
1996 1995
------------------------------------------------------
Average Average
Average Interest Rate Average Interest Rate
Balance Expense Paid Balance Expense Paid
(dollars in thousands)
Deposits:
Noninterest- bearing
demand deposits....... $ 8,370 $ - - $ 10,066 $ - -
Interest-bearing
demand deposits....... 23,074 546 2.37 17,581 529 3.01
Money market deposit
accounts.............. 15,497 532 3.43 15,844 540 3.41
Passbook and statement
savings............... 16,937 408 2.41 16,352 404 2.47
Time deposits.......... 114,371 6,525 5.71 114,793 6,551 5.71
-------- ------ ---- -------- ------ ----
Total deposits..... $178,249 $8,011 4.49% $174,636 $8,024 4.58%
======== ====== ==== ======== ====== ====
The following table sets forth the amount of time deposits at December
31, 1996 maturing in the periods indicated.
Amount Maturing
Within Within Within After
Interest Rate 1 Year 2 Years 3 Years 3 Years Total
- ------------- -------- ------- ------- ------- -----
(dollars in thousands)
Below 4%.......... $ 40 $ 10 $ - $ - $ 50
4% - 6%.......... 65,240 10,891 4,525 3,602 84,258
6% - 8%.......... 18,092 8,518 2,411 2,800 31,821
8% - 10%......... - - - - -
------- ------- ------ ------- --------
Total .......... $83,372 $19,419 $6,936 $ 6,402 $116,129
======= ======= ====== ======= ========
25
The following table sets forth the maturity distribution of time CDs of
$100,000 or more and other time deposits of $100,000 or more at December 31,
1996.
December 31,
------------
Other
Time Time
Time to Maturity CDs Deposits
- ---------------- --- --------
(dollars in thousands)
3 months or less............................. $ 8,791 $-
Over 3 months through 6 months............... 8,715 -
Over 6 months through 12 months.............. 10,878 -
Over 12 months............................... 4,716 -
------- ---
Total outstanding......................... $33,100 $-
In the event of liquidation of the Bank, savings account holders of the
Bank would be entitled to full payment of their savings accounts prior to any
payment to the holders of capital stock of the Bank.
Borrowings
Deposits are the primary source of funds for the Bank's lending and
investment activities and for its general business purposes. However, the Bank
periodically borrows from the FHLB of Atlanta to supplement its supply of
lendable funds and to meet deposit withdrawal requirements. The FHLB of Atlanta
functions as a central reserve bank providing credit for thrift institutions and
certain other member financial institutions. See "Supervision and Regulation --
Regulation of Federal Savings Associations -- Federal Home Loan Bank System"
below. As a member, the Bank is required to own capital stock in the FHLB of
Atlanta and is authorized to apply for advances on the security of such stock
and certain of the Bank's home mortgages and other assets (principally,
securities which are obligations of, or guaranteed by, the United States)
provided certain standards related to creditworthiness have been met.
Advances are made pursuant to several different programs. Each credit
program has its own interest rate and range of maturities, and the FHLB of
Atlanta may prescribe the acceptable uses to which the advances pursuant to each
program may be put, as well as limit the size of such advances. Depending on the
program, limitations on the size of advances are based either on a fixed
percentage of the Bank's net worth or on the FHLB of Atlanta's assessment of the
Bank's creditworthiness. The Bank's advances from the FHLB of Atlanta are
typically secured by the Bank's stock in the FHLB of Atlanta and its pledge of
qualified first mortgage loans equal to 165% of the advances outstanding. The
Bank's advances in the short-term credit program are secured by MBSs and
CMOs.
The following table sets forth the borrowing activities of the Bank at the
end of and during the periods indicated.
Years Ended December 31,
------------------------
1996 1995
---- ----
(dollars in thousands)
Balance, end of period ....................... $17,371 $29,504
Highest month-end balance .................... $25,413 $39,230
Weighted average interest rate
at end of period ............................ 5.28% 5.47%
Average balances for period .................. $21,585 $31,962
Weighted average interest rate
during the period ........................... 5.32% 5.82%
26
The Bank has not used and does not plan to use subordinated debentures,
CMOs or reverse purchase agreements as borrowing tools in the immediate future.
Retail Services
The Bank provides its customers with a variety of retail banking services.
The Bank has 24-hour automatic teller machines ("ATMs") at five of its offices
in LaGrange as well as at LaGrange College and the West Georgia Medical Center
in LaGrange. The Bank is a member of the Southeast Switch, Inc. system of
automatic tellers, and the PLUS(R) and CIRRUS(R) systems, which provide Bank
customers with access to HONOR(R), PLUS(R) and CIRRUS(R) services at more than 1
million locations throughout the United States and the world. Also, the Bank
offers the First Federal Check Card which gives Bank customers access to VISA(R)
merchants world-wide through point of sale transactions. The Bank provides (in
addition to the lending and deposit services described above), checking
accounts, savings programs, night depository services and safe deposit
facilities. The Bank also provides cash management services for its business
customers. The Bank offers certain securities brokerage services through its
wholly owned service corporation, Piedmont Mortgage Service, Inc., under the
name of Piedmont Investment Service, and, based on an arrangement with the
brokerage firm of Attkisson, Carter & Akers, Inc., a registered broker-dealer
and a member firm of the New York Stock Exchange. This service provides
customers with a variety of investment products and services that are common in
the financial markets of today.
Competition
Based on total assets of approximately $222 million at December 31, 1996,
the Bank is the 10th largest of 38 thrift institutions headquartered in Georgia
and the largest financial institution headquartered in Troup County.
The Bank's most direct competition, for both deposits and loans, comes from
commercial banks, other thrift institutions and mortgage banking companies.
NationsBank N.A.(South), Commercial Bank & Trust Company and SunTrust Company
Bank of Columbus, N.A. are the Bank's major competitors for deposits. These
institutions along with Charter Federal Savings and Loan Association and various
mortgage bankers are also the Bank's major competitors with regard to mortgages
and consumer lending. Some of these institutions are affiliated with large
regional financial institutions and have substantially greater resources and
lending limits than the Bank. The Bank also faces competition in certain areas
of its business from consumer finance companies, insurance companies, money
market mutual funds and investment banking firms, some of which are not subject
to the same degree of regulation as the Bank.
The Bank competes for deposits principally by offering depositors a variety
of deposit programs with competitive interest rates, quality service and
convenient location and hours. The Bank competes for loan originations by
offering a variety of loan programs, competitive interest rates, discount points
and loan fees, timely processing and quality service.
The competitive pressures among thrift institutions, commercial banks and
other entities have increased significantly in recent years and are expected to
continue to do so. The establishment of money market accounts and the
elimination of rate controls for interest rates paid on deposits in the early
and mid-1980s, for example, have increased the competition for deposits and tend
to increase the Bank's cost of funds, especially during periods of high interest
rates.
The Riegle-Neal Interstate Banking and Branching Efficiency Act of 1994
(the "Interstate Banking Act"), which became effective on September 29, 1995,
repealed the prior statutory restrictions on interstate acquisitions of banks by
bank holding companies, such that banks and bank holding companies may acquire
banks located in other states, regardless of state law to the contrary, subject
to certain deposit-percentage limitations, aging requirements, and other
restrictions. The Interstate Banking Act also generally provides that, after
June 1, 1997, national and state-chartered banks may branch interstate through
acquisitions of banks in other states. By adopting legislation prior to that
date, a state has the ability either to "opt in" and accelerate the date after
which interstate branching is permissible or "opt out" and prohibit interstate
branching altogether. Georgia has enacted "opt in" legislation that permits
interstate branching in Georgia on a reciprocal basis through June 1, 1997, and
on an unlimited basis thereafter. Competition within Georgia among financial
27
institutions generally, and among savings institutions in particular, may
increase, due in part to this "opt in" legislation, as well as the increased
number of newly-chartered financial institutions, the increased incidence of
branching by savings institutions headquartered in other parts of the state and
the country, and the acquisition of Georgia-based financial institutions by
out-of-state financial institutions although the extent to which such
competition will increase, or the timing of such increase, cannot be predicted.
Employees
As of December 31, 1996, the Bank had 102 full-time and 17 part-time
employees. The employees are not represented by any collective bargaining unit,
and the Bank considers its relationship with its employees to be good.
Supervision and Regulation
General
As a federal savings bank, the Bank is subject to extensive regulation,
examination and supervision by the OTS, as its primary regulator, and the FDIC,
as its deposit insurer. The Bank is a member of the FDIC's Savings Association
Insurance Fund ("SAIF"), and its deposit accounts are insured up to applicable
limits by the FDIC. The deposit premiums paid by the Bank to the FDIC for
deposit insurance are currently paid to the SAIF. The Bank is also a member of
the FHLB of Atlanta. The Bank must file reports with the OTS and the FDIC
concerning its activities and financial condition, and it must obtain regulatory
approvals prior to entering into certain transactions, such as mergers with, or
acquisitions of, other depository institutions. The OTS and the FDIC conduct
periodic examinations to assess the Bank's compliance with various regulatory
requirements. This regulation and supervision establishes a comprehensive
framework of activities in which a savings association can engage and is
intended primarily for the protection of the insurance fund and depositors. The
Company, as a savings and loan holding company, is subject to the regulation,
examination and supervision of the OTS and files certain reports with, and
otherwise complies with, the rules and regulations of the OTS and the Securities
and Exchange Commission under the federal securities laws.
The OTS and the FDIC have significant discretion in connection with their
supervisory and enforcement activities and examination policies, including
policies with respect to the classification of assets and the establishment of
adequate loan loss reserves for regulatory purposes. Any change in such
policies, whether by the OTS, the FDIC or the United States Congress, could have
a material adverse impact on the Company, the Bank, and the operations of both.
The following discussion is intended to be a summary of the material
statutes and regulations applicable to savings associations and their holding
companies, and generally does not purport to be a comprehensive description of
all such statutes and regulations.
Regulation of Savings and Loan Holding Companies
As a savings and loan holding company, the Company is subject to OTS
regulations, examinations, supervision and reporting requirements. In addition,
the OTS has enforcement authority over the Company and its non-savings
association subsidiaries. Among other things, this authority permits the OTS to
restrict or prohibit activities that are determined to be a serious risk to the
financial safety, soundness or stability of a subsidiary savings association.
The Home Owners' Loan Act, as amended ("HOLA") prohibits a savings and loan
holding company, directly or indirectly, or through one or more subsidiaries,
from acquiring another savings association or holding company thereof, without
prior written approval of the OTS; acquiring or retaining, with certain
exceptions, more than 5.0% of a non-subsidiary savings association, a
non-subsidiary holding company or a non-subsidiary company engaged in activities
other than those permitted by HOLA; or acquiring or retaining control of a
depository institution that is not insured by the FDIC. In evaluating an
application by a holding company to acquire a savings association, the OTS must
consider the financial and managerial resources and future prospects of the
28
company and savings association involved, the effect of the acquisition on the
risk to the FDIC's insurance funds, the convenience and needs of the community
and competitive factors.
As a unitary savings and loan holding company, the Company generally is not
restricted under existing laws as to the types of business activities in which
it may engage, provided that the Bank continues to satisfy the qualified thrift
tender ("QTL") test. See "Regulation of Federal Savings Associations -- QTL
Test" for a discussion of the QTL requirements. Upon any non-supervisory
acquisition by the Company of another savings association or savings bank that
meets the QTL test, is deemed to be a savings association by the OTS and will be
held as a separate subsidiary, the Company would become a multiple savings and
loan holding company and would be subject to limitations on the types of
business activities in which it could engage. HOLA limits the activities of a
multiple savings and loan holding company and its non-insured association
subsidiaries primarily to activities permissible for bank holding companies
under Section 4(c)(8) of the Bank Holding Company Act of 1956, as amended (the
"BHC Act"), subject to the prior approval of the OTS, and to other activities
authorized by OTS regulation.
The OTS is prohibited from approving any acquisition that would result in a
multiple savings and loan holding company controlling savings associations in
more than one state, subject to two exceptions: an acquisition of a savings
association in another state (i) in a supervisory transaction, and (ii) pursuant
to authority under the laws of the state of the association to be acquired that
specifically permit such acquisitions. The conditions imposed upon interstate
acquisitions by those states that have enacted authorizing legislation vary.
Some states impose conditions of reciprocity, which have the effect of requiring
that the laws of both the state in which the acquiring holding company is
located (as determined by the location of its subsidiary savings association)
and the state in which the association to be acquired is located, have each
enacted legislation allowing its savings associations to be acquired by
out-of-state holding companies on the condition that the laws of the other state
authorize such transactions on terms no more restrictive than those imposed on
the acquirer by the state of the target association. Some of these states also
impose regional limitations, which restrict such acquisitions to states within a
defined geographic region. Other states allow full nationwide banking without
any condition of reciprocity. Some states do not authorize interstate
acquisitions of savings associations.
Transactions between the Bank and the Company and its other subsidiaries are
also subject to various conditions and limitations. See "Regulation of Federal
Savings Associations -- Transactions with Related Parties." The Bank is required
to give 30-days written notice to the OTS prior to any declaration of the
payment of any dividends or other capital distributions to the Company. See
"Regulation of Federal Savings Associations -- Limitation on Capital
Distributions."
During 1996, Congress entertained various industry restructuring proposals
that would require all federal savings banks to convert to national or state
bank charters and to be subject to regulation as commercial banks. Under such
proposals, all savings and loan holding companies, in turn, would be required to
register as bank holding companies under the BHC Act, and those holding
companies that were not unitary savings and loan holding companies on a
specified date would become subject to the activities restrictions set forth in
the BHC Act as well as the restrictions on affiliations with entities primarily
engaged in securities underwriting contained in the Glass-Steagall Act. While
the outcome of the ongoing efforts to merge the thrift industry into the banking
industry and to reorganize and consolidate the federal regulatory structure are
uncertain at this time, the foregoing proposal, if enacted, would cause the
Company to be regulated as a bank holding company. As such, the Company would be
subject to examination, regulation and periodic reporting under the BHC Act, as
administered by the Board of Governors of the Federal Reserve System (the
"FRB"). The end result of such initiatives, and the resulting impact on the
Company's business and operations, are unclear at this time.
Regulation of Federal Savings Associations
Business Activities
The Bank derives its lending and investment powers from the HOLA, and the
regulations of the OTS thereunder. Under these laws and regulations, the Bank
may invest in mortgage loans secured by residential and commercial real estate,
commercial and consumer loans, certain types of debt securities, and certain
other assets. The Bank may also establish service corporations that may engage
29
in activities not otherwise permissible for the Bank, including certain real
estate equity investments and securities and insurance brokerage. These
investment powers are subject to various limitations, including: (i) a
prohibition against the acquisition of any corporate debt security that is not
rated in one of the four highest rating categories; (ii) a limit of 400% of an
association's capital on the aggregate amount of loans secured by nonresidential
real estate property; (iii) a limit of 20% of an association's assets on
commercial loans provided that amounts in excess of 10% of total assets are used
only for small business loans; (iv) a limit of 35% of an association's assets on
the aggregate amount of consumer loans and acquisitions of certain debt
securities; (v) a limit of 5.0% of assets on non-conforming loans (loans in
excess of the specific limitations of HOLA); and (vi) a limit of the greater of
5.0% of assets or an association's capital on certain construction loans made
for the purpose of financing what is or is expected to become residential
property.
Loans to One Borrower
Under HOLA, savings associations are generally subject to the same limits
on loans to one borrower as are imposed on national banks. Generally, under
these limits, a savings association may not make a loan or extend credit to a
single or related group of borrowers in excess of 15% of the association's
unimpaired capital and surplus. An additional amount may be lent, equal to 10%
of unimpaired capital and surplus, if such loan or extension of credit is fully
secured by readily-marketable collateral. Such collateral is defined to include
certain debt and equity securities and bullion, but generally does not include
real estate.
The OTS has indicated that it considers a series of leases and secured
loans made by the Bank to Bennett Funding Group, Inc. and certain of its
affiliates to be transactions with one borrower.[These leases and loans have an
aggregate principal balance of $4.5 million which exceeds the Bank's legal
lending limit of $3.2 million.] To the extent that these transactions are
aggregated, the Bank will be deemed to be in violation of the loans to one
borrower rule under HOLA, as discussed above. The Bank has agreed with the OTS
to develop a plan to remedy the situation, although the details of such plan
have not yet been determined. Bennett Funding Group, Inc. is presently the
subject of bankruptcy proceedings in which the Trustee is contesting the secured
status of the Bank's loans. The Bank is vigorously defending its status as a
fully secured, perfected creditor and has established a reserve of approximately
$3 million to cover potential losses incurred in connection with the
proceedings. See "Litigation." The outcome of such proceedings may affect the
Bank's method of addressing the loans to one borrower violation, and the
outcome, timing, and effect of such proceedings and such violation cannot be
determined at this time.
QTL Test
Under the QTL test, a savings association is required to maintain at least
65% of its "portfolio assets" in certain "qualified thrift investments" in at
least 9 months of the most recent 12-month period. "Portfolio assets" mean, in
general, an association's total assets less the sum of (i) specified liquid
assets up to 20% of total assets, (ii) certain intangibles, including goodwill
and credit card and purchased mortgage servicing rights, and (iii) the value of
property used to conduct the association's business. "Qualified thrift
investments" include various types of loans made for residential and housing
purposes, investments related to such purposes, including certain
mortgage-backed and related securities, and consumer loans up to 10% of the
association's portfolio assets. At December 31, 1996, the Bank maintained 74.86%
of its portfolio assets in qualified thrift investments.
A savings association that fails the QTL test must either operate under
certain restrictions on its activities or convert to a bank charter. The initial
restrictions include prohibitions against (i) engaging in any new activity not
permissible for a national bank, (ii) paying dividends not permissible under
national bank regulations, (iii) obtaining new advances from any FHLB, and (iv)
establishing any new branch office in a location not permissible for a national
bank in the association's home state. In addition, within one year of the date a
savings association ceases to meet the QTL test, any company controlling the
association would have to register under, and become subject to the requirements
of, the BHC Act. If the savings association does not requalify under the QTL
test within the three-year period after it failed the QTL test, it would be
required to terminate any activity and to dispose of any investment not
permissible for a national bank and would have to repay as promptly as possible
30
any outstanding advances from an FHLB. A savings association that has failed the
QTL test may requalify under the QTL test and be free of such limitations, but
it may do so only once.
Capital Requirements
The OTS regulations require savings associations to meet three minimum
capital standards: a tangible capital ratio requirement of 1.5% of total assets
as adjusted under the OTS regulations, a leverage ratio requirement of 3.0% of
core capital to such adjusted total assets, and a risk-based capital ratio
requirement of 8.0% of core and supplementary capital to total risk-based
assets. The 3.0% core capital requirement has been effectively superseded by the
OTS' prompt corrective action regulations, which impose a 4.0% core capital
requirement for "adequately capitalized" thrifts and a 5.0% core capital
requirement for "well capitalized" thrifts. See "Prompt Corrective Regulatory
Action." In determining the amount of risk-weighted assets for purposes of the
risk-based capital requirement, a savings association must compute its
risk-based assets by multiplying its assets and certain off-balance sheet items
by risk-weights, which range from 0% for cash and obligations issued by the
United States Government or its agencies to 100% for consumer and commercial
loans, as assigned by the OTS based on the risks the OTS believes are inherent
in the type of asset.
Tangible capital is defined, generally, as common stockholders' equity
(including retained earnings)and certain noncumulative perpetual preferred stock
and related earnings, minority interests in equity accounts of fully
consolidated subsidiaries, less intangibles other than certain purchased
mortgage servicing rights and investments in and loans to subsidiaries engaged
in activities not permissible for a national bank. Core capital is defined
similarly to tangible capital, but core capital also includes certain purchased
credit card relationships. Supplementary capital currently includes cumulative
preferred stock, long-term perpetual preferred stock, mandatory convertible
securities, subordinated debt and intermediate preferred stock and the allowance
for loan and lease losses. The allowance for loan and lease losses includable in
supplementary capital is limited to a maximum of 1.25% of risk-weighted assets,
and the amount of supplementary capital that may be included as total capital
cannot exceed the amount of core capital.
When determining its compliance with the risk-based capital requirement, a
savings association with "above normal" interest rate risk is required to deduct
a portion of such capital from its total capital to account for the "above
normal" interest rate risk. A savings association's interest rate risk is
measured by the decline in the net portfolio value of its assets (i.e., the
difference between incoming and outgoing discounted cash flows from assets,
liabilities and off-balance sheet contracts) resulting from a hypothetical 2.0%
increase or decrease in market rates of interest, divided by the estimated
economic value of the association's assets, as calculated in accordance with
guidelines set forth by the OTS. At the times when the 3-month Treasury bond
equivalent yield falls below 4.0%, an association may compute its interest rate
risk on the basis of a decrease equal to one-half of that Treasury rate rather
than on the basis of 2.0%. A savings association whose measured interest rate
risk exposure exceeds 2.0% would be considered to have "above normal" risk. The
interest rate risk component is an amount equal to one-half of the difference
between the association's measured interest rate risk and 2.0%, multiplied by
the estimated economic value of the association's assets. That dollar amount is
deducted from an association's total capital in calculating its risk-based
capital. Any required deduction for interest rate risk becomes effective on the
last day of the third quarter following the reporting date of the association's
financial data on which the interest rate risk was computed. The regulations
authorize the Director of the OTS to waive or defer an association's interest
rate risk component on a case-by-case basis. At December 31, 1996, the Bank was
not required to maintain any additional risk-based capital under this rule.
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At December 31, 1996, the Bank met each of the OTS capital requirements, in
each case on a fully phased-in basis. The table below presents the Bank's
regulatory capital as compared to the OTS regulatory capital requirements at
December 31, 1996:
December 31,
-------------------------------------------------
Actual Required Excess
-------------------------------------------------
Amount % Amount % Amount %
------ - ------ - ------ -
(dollars in thousands)
Core capital........... $19,694 8.84% $ 6,681 3.00% $13,013 5.84%
Tangible capital....... 19,694 8.84 3,340 1.50 16,354 7.34
Risk-based capital..... 21,568 14.38 12,000 8.00 9,568 6.38
The OTS has adopted the Federal Financial Institutions Examination
Council's ("FFIEC") updated statement of policy entitled "Uniform Financial
Institutions Rating System" ("UFIRS") effective January 1, 1997. UFIRS is an
internal rating system used by the federal and state regulators for assessing
the soundness of financial institutions on a uniform basis and for identifying
those institutions requiring special supervisory attention. Under the previous
UFIRS, each financial institution was assigned a confidential composite rating
based on an evaluation and rating of five essential components of an
institution's financial condition and operations including Capital adequacy,
Asset quality, Management, Earnings, and Liquidity (the "CAMEL Rating"). In
updating UFIRS, the FFIEC increased its emphasis on the quality of risk
management practices and added a sixth component for sensitivity to market risk.
For most institutions, the FDIC has indicated that market risk primarily
reflects exposures to changes in interest rates. When regulators evaluate this
component, consideration is expected to be given to: management's ability to
identify, measure, monitor, and control market risk; the institution's size; the
nature and complexity of its activities and its risk profile; and the adequacy
of its capital and earnings in relation to its level of market risk exposure.
31
Market risk is rated based upon, but not limited to: an assessment of the
sensitivity of the financial institution's earnings or the economic value of its
capital to adverse changes in interest rates, foreign exchanges rates, commodity
prices, or equity prices; management's ability to identify, measure, monitor,
and control exposure to market risk; and the nature and complexity of interest
rate risk exposure arising from nontrading positions.
Limitation on Capital Distributions
OTS regulations currently impose limitations upon capital distributions by
savings associations, such as cash dividends, payments to repurchase or
otherwise acquire its shares, payments to stockholders of another institution in
a cash-out merger, and other distributions charged against capital. At least
30-days written notice must be given to the OTS of a proposed capital
distribution by a savings association, and capital distributions in excess of
specified earnings or by certain institutions are subject to approval by the
OTS. An association that has capital in excess of all fully phased-in regulatory
capital requirements before and after a proposed capital distribution and that
is not otherwise restricted in making capital distributions, could, 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 earnings 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
earnings for the previous four quarters. Any additional capital distributions
would require prior OTS approval. In addition, the OTS can prohibit a proposed
capital distribution, otherwise permissible under the regulation, if the OTS has
determined that the association is in need of more than normal supervision or if
it determines that a proposed distribution by an association would constitute an
unsafe or unsound practice. Furthermore, under the OTS prompt corrective action
regulations, the Bank would be prohibited from making any capital distribution
if, after the distribution, the Bank failed to meet its minimum capital
requirements, as described above. See "Prompt Corrective Regulatory Action."
The OTS has proposed regulations that would simplify the existing procedures
governing capital distributions by savings associations. Under the proposed
regulations, the approval of the OTS would be required only for an association
that is deemed to be in troubled condition or that is undercapitalized or would
be undercapitalized after the capital distribution. A savings association would
be able to make a capital distribution without notice to or approval of the OTS
if it is not held by a savings and loan holding company, is not deemed to be in
troubled condition, has received either of the two highest composite supervisory
32
ratings and would continue to be adequately capitalized after such distribution.
Notice would have to be given to the OTS by any association that is held by a
savings and loan holding company or that had received a composite supervisory
rating below the highest two composite supervisory ratings. An association's
capital rating would be determined under the prompt corrective action
regulations. See "Prompt Corrective Regulatory Action."
Liquidity
The Bank is required to maintain an average daily balance of liquid assets
(cash, certain time deposits, bankers' acceptances, specified United States
Government, state or federal agency obligations, shares of certain mutual funds
and certain corporate debt securities and commercial paper) equal to a monthly
average of not less than a specified percentage of its net withdrawable deposit
accounts plus short-term borrowings. This liquidity requirement may be changed
from time to time by the OTS to any amount within the range of 4.0% to 10%
depending upon economic conditions and the savings flows of member institutions,
and is currently 5.0%. OTS regulations also require each savings association to
maintain an average daily balance of short-term liquid assets at a specified
percentage (currently 1.0%) of the total of its net withdrawable deposit
accounts and borrowings payable in one year or less. Monetary penalties may be
imposed for failure to meet these liquidity requirements. The Bank's liquidity
ratio at December 31, 1996 was 7.75%, and its short-term liquidity ratio was
3.83%, which exceeded the applicable requirements.
Assessments
Savings associations are required by OTS regulation to pay assessments to
the OTS to fund the operations of the OTS. The general assessment, paid on a
semi-annual basis, is computed upon the savings association's total assets,
including consolidated subsidiaries, as reported in the association's latest
quarterly Thrift Financial Report.
Branching
Subject to certain limitations, HOLA and the OTS regulations permit
federally chartered savings associations to establish branches in any state of
the United States. The authority to establish such a branch is available (i) in
states that expressly authorize branches of savings associations located in
another state and (ii) to an association that qualifies as a "domestic building
and loan association" under the Code of Federal Regulations, which imposes
qualification requirements similar to those for a "qualified thrift lender"
under HOLA. See "QTL Test." The authority for a federal savings association to
establish an interstate branch network would facilitate a geographic
diversification of the association's activities. This authority under HOLA and
the OTS regulations preempts any state law purporting to regulate branching by
federal savings associations.
Community Reinvestment
Under the Community Reinvestment Act ("CRA"), as implemented by OTS
regulations, a savings association has a continuing and affirmative obligation
consistent with its safe and sound operation to help meet the credit needs of
its entire community, including low and moderate income neighborhoods. The CRA
does not establish specific lending requirements or programs for financial
institutions,nor does it limit an institution's discretion to develop the types
of products and services that it believes are best suited to its particular
community, consistent with the CRA. The CRA requires the OTS, in connection with
its examination of a savings association, to assess the association's record of
meeting the credit needs of its community and to take such record into account
in its evaluation of certain applications by such association. The CRA also
requires all institutions to make public disclosure of their CRA ratings.
In April 1995, the OTS and the other federal banking agencies adopted
amendments revising their CRA regulations. Among other things, the amended CRA
regulations substitute for the prior process-based assessment factors a new
evaluation system that would rate an institution based on its actual performance
in meeting community needs. In particular, the proposed system would focus on
three tests: (i) a lending test, to evaluate the institution's record of making
loans in its service areas; (ii) an investment test, to evaluate the
institution's record of investing in community development projects, affordable
33
housing and programs benefiting low or moderate income individuals and
businesses; and (iii) a service test, to evaluate the institution's delivery of
services through its branches, ATMs and other offices.
The joint agency CRA regulations provide that an institution evaluated
under a given test receive one of five ratings for that test: outstanding; high
satisfactory; low satisfactory; needs to improve; or substantial non-compliance.
The ratings for each test are then combined to produce an overall composite
rating of either outstanding, satisfactory (including both high and low
satisfactory,) needs to improve, or substantial non-compliance. In the case of a
retail-oriented institution, its lending test rating forms the basis for its
composite rating. That rating is then increased by up to two levels in the case
of outstanding or high satisfactory investment performance, increased by one
level in the case of outstanding service, and decreased by one level in the case
of substantial non-compliance in service. An institution found to have engaged
in illegal lending discrimination is rebuttably presumed to have a
less-than-satisfactory composite CRA rating. The Bank received an "outstanding"
CRA rating in its most recent examination.
Small savings associations are to be assessed pursuant to a streamlined
approach focusing on a lesser range of information and performance standards.
The term "small savings association" is defined as including associations with
less than $250 million in assets or an affiliate of a holding company with
banking and thrift assets of less than $1.0 billion, which would include the
Bank. An institution's CRA performance record is considered in certain
regulatory applications and may be used as a basis for denying an application.
Transactions with Related Parties
The Bank's authority to engage in transactions with its "affiliates" is
limited by the OTS regulations and by Sections 23A and 23B of the Federal
Reserve Act ("FRA"). In general, an affiliate of the Bank is any company that
controls the Bank or any other company that is controlled by a company that
controls the Bank, excluding the Bank's subsidiaries other than those that are
insured depository institutions. The OTS regulations prohibit a savings
association (i) from lending to any of its affiliates that are engaged in
activities that are not permissible for bank holding companies under Section
4(c) of the BHC Act and (ii) from purchasing the securities of any affiliate
other than a subsidiary. Section 23A limits the aggregate amount of transactions
with any individual affiliate to 10% of the capital and surplus of the savings
association and also limits the aggregate amount of transactions with all
affiliates to 20% of the savings association's capital and surplus. Extensions
of credit to affiliates are required to be secured by collateral in an amount
and of a type described in Section 23A, and the purchase of low quality assets
from affiliates is generally prohibited. Section 23B provides that certain
transactions with affiliates, including loans and asset purchases, must be on
terms and under circumstances, including credit standards, that are
substantially the same or at least as favorable to the association as those
prevailing at the time for comparable transactions with nonaffiliated companies.
In the absence of comparable transactions, such transactions may only occur
under terms and circumstances, including credit standards, that in good faith
would be offered to or would apply to nonaffiliated companies.
The Bank's authority to extend credit to its directors, executive officers
and 10% stockholders, as well as to entities controlled by such persons, is
currently governed by the requirements of Sections 22(g) and 22(h) of the FRA
and Regulation O of the FRB thereunder. Among other things, these provisions
require that extensions of credit to insiders (i) be made on terms that are
substantially the same as, and follow credit underwriting procedures that are
not less stringent than, those prevailing for comparable transactions with
unaffiliated persons and that do not involve more than the normal risk of
repayment or present other unfavorable features with the exceptions of (1) the
benefit compensation must be widely available to employees of the bank and (2)
the benefit or compensation does not give preference to any insider over other
employees of the Bank and (ii) not exceed certain limitations on the amount of
credit extended to such persons, individually and in the aggregate, which limits
are based, in part, on the amount of the association's capital. In addition,
extensions of credit in excess of certain limits must be approved by the
association's board of directors.
34
Enforcement
Under the Federal Deposit Insurance Act, as amended (the "FDI Act"), the OTS
has primary enforcement responsibility over savings associations and has the
authority to bring enforcement action against all "institution-affiliated
parties," including any controlling stockholder or any stockholder, attorney,
appraiser and accountant who knowingly or recklessly participates in any
violation of applicable law or regulation or breach of fiduciary duty or certain
other wrongful actions that causes or is likely to cause a more than a minimal
loss or other significant adverse effect on an insured savings association.
Civil penalties cover a wide range of violations and actions and range from
$5,000 for each day during which violations of law, regulations, orders and
certain written agreements and conditions continue, up to $1,000,000 per day for
such violations if the person obtained a substantial pecuniary gain as a result
of such violation or knowingly or recklessly caused a substantial loss to the
institution. Criminal penalties for certain financial institution crimes include
fines of up to $10 million and imprisonment for up to 30 years. In addition,
regulators have substantial discretion to take enforcement action against an
institution that fails to comply with its regulatory requirements, particularly
with respect to its capital requirements. Possible enforcement actions range
from the imposition of a capital plan and capital directive to receivership,
conservatorship or the termination of deposit insurance. Under the FDI Act, the
FDIC has the authority to recommend to the Director of OTS that enforcement
action be taken with respect to a particular savings association. If action is
not taken by the Director of the OTS, the FDIC has authority to take such action
under certain circumstances.
Standards for Safety and Soundness
The FDI Act, as amended by the Federal Deposit Insurance Corporation
Improvement Act of 1991, as amended ("FDICIA") and the Riegle Community
Development and Regulatory Improvement Act of 1994 ("Community Development
Act"), requires the OTS, together with the other federal bank regulatory
agencies, to prescribe standards, by regulations or guidelines, relating to
internal controls, information systems and internal audit systems, loan
documentation, credit underwriting, interest rate risk exposure, asset growth,
asset quality, earnings, stock valuation and compensation, fees and benefits and
such other operational and managerial standards as the agencies deem
appropriate. The OTS and the federal bank regulatory agencies have adopted,
effective August 9, 1995, a set of guidelines prescribing safety and soundness
standards pursuant to FDICIA. The guidelines establish general standards
relating to internal controls and information systems, internal audit systems,
loan documentation, credit underwriting, interest rate exposure, asset growth
and compensation, fees and benefits. In general, the guidelines require, among
other things, appropriate systems and practices to identify and manage the risks
and exposures specified in the guidelines. The guidelines prohibit excessive
compensation as an unsafe and unsound practice and describe compensation as
excessive when the amounts paid are unreasonable or disproportionate to the
services performed by an executive officer, employee, director or principal
stockholder. The OTS and the other agencies determined that stock valuation
standards were not appropriate. In addition, the OTS adopted regulations that
authorize, but do not require, the OTS to order an institution that has been
given notice by the OTS that it is not satisfying any of such safety and
soundness standards to submit a compliance plan. If, after being so notified, an
institution fails to submit an acceptable compliance plan or fails in any
material respect to implement an accepted compliance plan, the OTS must issue an
order directing action to correct the deficiency and may issue an order
directing other actions of the types to which an undercapitalized association is
subject under the "prompt corrective action" provisions of FDICIA. See "Prompt
Corrective Regulatory Action." If an institution fails to comply with such an
order, the OTS may seek to enforce such order in judicial proceedings and to
impose civil money penalties.
Real Estate Lending Standards
The OTS and the other federal banking agencies adopted regulations to
prescribe standards for extensions of credit that (i) are secured by real estate
or (ii) are made for the purpose of financing the construction of improvements
on real estate. The OTS regulations require each savings association to
establish and maintain written internal real estate lending standards that are
consistent with safe and sound banking practices and appropriate to the size of
the association and the nature and scope of its real estate lending activities.
The standards also must be consistent with accompanying OTS guidelines, which
include loan-to-value ratios for the different types of real estate loans.
Associations are also permitted to make a limited amount of loans that do not
conform to the proposed loan-to-value limitations so long as such exceptions are
reviewed and justified appropriately. The guidelines also list a number of
35
lending situations in which exceptions to the loan-to-value standards are
justified.
Prompt Corrective Regulatory Action
Under the OTS prompt corrective action regulations, the OTS is required to
take certain, and is authorized to take other, supervisory actions against
undercapitalized savings associations. For this purpose, a savings association
would be placed in one of five categories based on the association's capital.
Generally, a savings association is treated as "well capitalized" if its ratio
of total capital to risk-weighted assets is at least 10.0%, its ratio of Tier 1
(core) capital to risk-weighted assets is at least 6.0%, its ratio of Tier 1
(core) capital to total assets is at least 5.0%, and it is not subject to any
order or directive by the OTS to meet a specific capital level. A savings
association will be treated as "adequately capitalized" if its ratio of total
capital to risk-weighted assets is at least 8.0%, its ratio of Tier 1 (core)
capital to risk-weighted assets is at least 4.0%, and its ratio of Tier 1 (core)
capital to total assets is at least 4.0% (3.0% if the association receives the
highest rating on the CAMEL financial institutions rating system).
A savings association that has a total risk-based capital of less than 8.0%
or a leverage ratio or a Tier 1 (core) capital ratio that is less than 4.0%
(3.0% leverage ratio if the association receives the highest rating on the CAMEL
financial institutions rating system) is considered to be "undercapitalized." A
savings association that has a total risk-based capital of less than 6.0% or a
Tier 1 (core) risk-based capital ratio or a leverage ratio of less than 3.0% is
considered to be "significantly undercapitalized." A savings association that
has a tangible capital to assets ratio equal to or less than 2.0% is deemed to
be "critically undercapitalized." The elements of an association's capital for
purposes of the prompt corrective action regulations are defined generally as
they are under the regulations for minimum capital requirements. See "Capital
Requirements."
The severity of the action authorized or required to be taken under the
prompt corrective action regulations increases as an association's capital
deteriorates within the three undercapitalized categories. All associations are
prohibited from paying dividends or other capital distributions or paying
management fees to any controlling person if, following such distribution, the
association would be undercapitalized. An undercapitalized association is
required to file a capital restoration plan within 45 days of the date the
association receives notice that it is within any of the three undercapitalized
categories. The OTS is required to monitor closely the condition of an
undercapitalized association and to restrict the asset growth, acquisitions,
branching and new lines of business of such an association. Significantly
undercapitalized associations are subject to restrictions on compensation of
senior executive officers; such an association may not, without OTS consent, pay
any bonus or provide compensation to any senior executive officer at a rate
exceeding the officer's average rate of compensation (excluding bonuses, stock
options and profit-sharing) during the 12 months preceding the month when the
association became undercapitalized. A significantly undercapitalized
association may also be subject, among other things, to forced changes in the
composition of its board of directors or senior management, additional
restrictions on transactions with affiliates, restrictions on acceptance of
deposits from correspondent associations, further restrictions on asset growth,
restrictions on rates paid on deposits, forced termination or reduction of
activities deemed risky and any further operational restrictions deemed
necessary by the OTS.
If one or more grounds exist for appointing a conservator or receiver for an
association, the OTS may require the association to issue additional debt or
stock, sell assets, be acquired by a depository association holding company or
combine with another depository association. The OTS and the FDIC have a broad
range of grounds under which they may appoint a receiver or conservator for an
insured depository association. Under FDICIA, the OTS is required to appoint a
receiver (or with the concurrence of the FDIC, a conservator) for a critically
undercapitalized association within 90 days after the association becomes
critically undercapitalized or, with the concurrence of the FDIC, to take such
other action that would better achieve the purposes of the prompt corrective
action provisions. Such alternative action can be renewed for successive 90-day
periods. However, if the association continues to be critically undercapitalized
on average during the quarter that begins 270 days after it first became
critically undercapitalized, a receiver must be appointed, unless the OTS makes
certain findings with which the FDIC concurs and the Director of the OTS and the
Chairman of the FDIC certify that the association is viable. In addition, an
association that is critically undercapitalized is subject to more severe
restrictions on its activities, and is prohibited, without prior approval of the
36
FDIC from, among other things, entering into certain material transactions or
paying interest on new or renewed liabilities at a rate that would significantly
increase the association's weighted average cost of funds.
Where appropriate, the OTS can impose corrective action by a savings and
loan holding company under the "prompt corrective action" provisions of FDICIA.
Insurance of Deposit Accounts
Pursuant to FDICIA, the FDIC established a new risk-based assessment system
for determining the deposit insurance assessments to be paid by insured
depository institutions. Under the new assessment system, which began in 1993,
the FDIC assigns an institution to one of three capital categories based on the
institution's financial information as of the reporting period ending seven
months before the assessment period. The three capital categories consist of (i)
well capitalized, (ii) adequately capitalized or (iii) undercapitalized. The
FDIC also assigns an institution to one of three supervisory subcategories
within each capital group. The supervisory subgroup to which an institution is
assigned is based on a supervisory evaluation provided to the FDIC by the
institution's primary federal regulator and information that the FDIC determines
to be relevant to the institution's financial condition and the risk posed to
the deposit insurance funds. An institution's assessment rate depends on the
capital category and supervisory category to which it is assigned. Under the
regulation, there are nine assessment risk classifications (i.e., combinations
of capital groups and supervisory subgroups) to which different assessment rates
are applied. Asessment rates originally ranged from 0.04% (for the Bank
Insurance Fund (the "BIF"), which primarily insures commercial banks) or 0.23%
(for the SAIF) of deposits for an institution in the highest category (i.e.,
well-capitalized and financially sound, with no more than a few minor
weaknesses) to 0.31% of deposits for an institution in the lowest category
(i.e., undercapitalized and substantial supervisory concern).These rates were
established for both funds to achieve a designated ratio of reserves to insured
deposits (i.e., 1.25%) within a specified period of time.
Once the designated ratio for the BIF was reached in May 1995, the FDIC
reduced the assessment rate applicable to BIF deposits in two stages, so that,
beginning in 1996, the deposit insurance premiums for 92% of all BIF members in
the highest capital and supervisory categories were set at $2,000 per year,
regardless of deposit size. The FDIC elected to retain the assessment rate range
of 23 to 31 basis points for SAIF members given the undercapitalized nature of
that insurance fund.
Recognizing that the disparity between the SAIF and BIF premium rates have
adverse consequences for SAIF-insured institutions and other banks with SAIF
assessed deposits, including reduced earnings and an impaired ability to raise
funds in capital markets and to attract deposits, in July 1995, the FDIC, the
Treasury Department, and the OTS released statements outlining a proposed plan
to recapitalize the SAIF, the principal feature of which was a special one-time
assessment on depository institutions holding SAIF-insured deposits, which was
intended to recapitalize the SAIF at a reserve ratio of 1.25%. This proposal
contemplated elimination of the disparity between the assessment rates on BIF
and SAIF deposits following recapitalization of the SAIF.
A variation of this proposal designated the Deposit Insurance Funds Act of
1996 (the "Funds Act") was enacted by Congress as part of omnibus budget
legislation and signed into law on September 30, 1996. As directed by the Funds
Act, the FDIC has implemented a special one-time assessment of approximately
65.7 basis points (0.657%) on a depository institution's SAIF-insured deposits
held as of March 31, 1995 (or approximately 52.6 basis points on SAIF deposits
acquired by banks in certain qualifying transactions). The Bank recorded charges
against earnings for the special assessment in the quarter ended September 30,
1996 in the amount of approximately $1,156,000 pre-tax.
In addition, on December 24, 1996, in order to avoid collecting more than
needed to maintain the SAIF's capitalization rate at 1.25 percent of aggregate
insured deposits, the FDIC adopted in final a revision in the SAIF assessment
rate schedule which retroactively effected, as of December 11, 1996, (i) a
widening in the assessment rate spread among institutions in the different
capital and risk assessment categories, (ii) an overall reduction of the
assessment rate range assessable on SAIF deposits of from 0 to 27 basis points,
and (iii) a special interim assessment rate range for the last quarter of 1996
of from 18 to 27 basis points on institutions subject to assessments with
37
respect to certain bonds issued in the late 1980s by the Financing Corporation
("FICO") to recapitalize the now-defunct FSLIC. Effective January 1, 1997, FICO
assessments are imposed on both BIF- and SAIF-insured deposits in annual amounts
presently estimated at 1.29 basis points and 6.44 basis points, respectively.
[The Bank anticipates that the net effect of the decrease in the premium
assessment rate on SAIF deposits will result in a reduction in their total
deposit insurance premium assessments for the years 1997 through 1999, assuming
no further changes in announced premium assessment rates.]
Accounting for Bad Debt Reserves
The Small Business Job Protection Act of 1996 repealed the reserve method
of accounting for bad debts by thrift institutions, effective for taxable years
beginning after 1995. As a result, large thrift institutions with more than $500
million in assets are no longer able to deduct additions to a reserve for bad
debts but are permitted to deduct bad debts only as they occur. In addition, a
large thrift institution generally is required to recapture (i.e., take into
income) its post-1987 additions to its bad debt reserve, that is, the amount by
which its bad debt reserve exceeds the balance of such reserve as of the end of
its last taxable year ending before 1988.
Small thrift institutions with not more than $500 million in assets, such
as the Bank, are no longer permitted to make additions to their bad debt
reserves based upon a percentage of the Bank's taxable income (the "PTI Method")
but may make additions to their bad debt reserves based upon the Bank's actual
loss experience (the "Experience Method") in lieu of deducting bad debts only as
they occur. In the case of a small thrift institution, the recapture of
post-1987 additions to its bad debt reserve is limited to the amount of
recapture that reduces the reserve to the balance it would have had if the
institution had always computed its additions to reserves under the Experience
Method.
The excess reserves are recaptured into income over a period of six years,
which may be extended to seven or eight years if the thrift meets a residential
loan requirement. The Bank had no excess reserves. Thus, it was not subject to
any recapture.
The remainder of the Bank's pre-1988 bad debt reserves is subject to
recapture if the Bank ceases to qualify as a bank for federal income tax
purposes, or if the Bank makes certain distributions to the Company in excess of
the Bank's current and accumulated earnings and profits, distributions in
redemption of stock, or distributions in partial or complete liquidation. In the
event of a distribution considered to be made from its bad debt reserves, the
amount restored to income would be the amount which, when reduced by the amount
of tax on such income, is equal to the amount of the distribution. The Bank does
not intend to make any distribution that would result in recapture of any
portion of its pre-1988 bad debt reserves.
Federal Home Loan Bank System
The Bank is a member of the FHLB of Atlanta, which is one of the regional
FHLBs composing the FHLB System. Each FHLB provides a central credit facility
primarily for its member institutions. The Bank, as a member of the FHLB of
Atlanta, is required to acquire and hold shares of capital stock in the FHLB of
Atlanta in an amount at least equal to the greater of 1.0% of the aggregate
principal amount of its unpaid residential mortgage loans and similar
obligations at the beginning of each year or 1/20 of its advances (borrowings)
from the FHLB of Atlanta. The Bank was in compliance with this requirement at
December 31, 1996 with an investment in FHLB of Atlanta stock , of $1,895,900.
Any advances from a FHLB must be secured by specified types of collateral, and
all long-term advances may be obtained only for the purpose of providing funds
for residential housing finance.
The FHLBs are required to provide funds for the resolution of insolvent
thrifts and to contribute funds for affordable housing programs. These
requirements could reduce the amount of earnings that the FHLBs can pay as
dividends to their members and could also result in the FHLBs imposing a higher
rate of interest on advances to their members. If dividends were reduced, or
interest on future FHLB advances increased, the Bank's net interest income would
likely also be reduced.
38
Federal Reserve System
The Bank is subject to provisions of the FRA and the FRB's regulations
pursuant to which depository institutions may be required to maintain
non-interest-earning reserves against their deposit accounts and certain other
liabilities. Currently, reserves must be maintained against transaction accounts
(primarily NOW and regular checking accounts). The FRB regulations generally
require that reserves be maintained in the amount of 3.0% of the aggregate of
transaction accounts up to $52.0 million. The amount of aggregate transaction
accounts in excess of $52.0 million are currently subject to a reserve ratio of
10.0%, which ratio the FRB may adjust between 8.0% and 12%. The FRB regulations
currently exempt $4.3 million of otherwise reservable balances from the reserve
requirements, which exemption is adjusted by the FRB at the end of each year.
The Bank is in compliance with the foregoing reserve requirements. Because
required reserves must be maintained in the form of either vault cash, a
non-interest-bearing account at a Federal Reserve Bank, or a pass-through
account as defined by the FRB, the effect of this reserve requirement is to
reduce the Bank's interest-earning assets. The balances maintained to meet the
reserve requirements imposed by the FRB may be used to satisfy liquidity
requirements imposed by the OTS. FHLB System members are also authorized to
borrow from the Federal Reserve discount window, but FRB regulations require
such institutions to exhaust all FHLB sources before borrowing from a Federal
Reserve Bank.
ITEM 2. PROPERTIES
The Company and the Bank operate from a main office which contains
approximately 28,400 square feet of usable office space and is located on
approximately two acres of land at 101 North Greenwood Street, LaGrange,
Georgia. The Bank owns both the building and the land.
The Bank also operates three full-service branch offices and one
drive-through facility in LaGrange. One of the full-service branches contains
approximately 360 square feet of office space in the Winn-Dixie Marketplace
grocery store at 908 Hogansville Road in LaGrange. This office is leased by the
Bank for $3,000 per month pursuant to a lease that expires in August 1997. A
second full-service branch office is located at 1795 West Point Road at Lee's
Crossing in LaGrange. This office contains approximately 2,700 square feet of
office space on one acre of land, and both the land and the building are owned
by the Bank. The third full-service branch office is located at 1417 LaFayette
Parkway in LaGrange. This office contains approximately 2,300 square feet of
office space on 1.2 acres of land, and it has three drive through lanes. Both
the building and the land are owned by the Bank. The drive-through facility is
located at 306 Vernon Street in LaGrange. This facility contains approximately
1,800 square feet of space, and both the building and the land are owned by the
Bank.
The Bank leases approximately 1,230 square feet of office space at 5820
Veterans Parkway, Suite 104, Columbus, Georgia, where its loan production office
is located. The monthly lease payments are $1,175, and the lease expires on
December 31, 1997. The Bank also operates a loan production office of
approximately 450 square feet at 1710 Catherine Court, Suite F, Auburn, Alabama.
The monthly payments on the lease are $500, and the lease expires in April 1997.
The Bank leases approximately 1,000 square feet of office space at 300
Broome Street, The Georgia Building, LaGrange, Georgia. This office space is
where Piedmont Mortgage Service, Inc., operating under the name "Piedmont
Appraisal Service," is located. The lease requires monthly lease payments of
$615.
The Bank leases approximately 216 square feet of office space at 250
Prairie Center Drive, Suite 146, Eden Prairie, Minnesota, where its lease
production office is located. The lease requires monthly payments of $475, and
the lease expires on March 31, 1997.
The net book value of the Company's investment in land, premises,
furniture, fixtures and equipment, less accumulated depreciation, totaled
approximately $5.4 million at December 31, 1996. See Note 9 of Notes to
Consolidated Financial Statements contained in the Company's 1996 Annual Report,
which information is incorporated by reference in Item 8 hereof. Most of the
Bank's data processing equipment is held by the Bank under capitalized leases,
and the Bank uses an independent service bureau for most of its data processing
needs.
39
All of the Company's and the Bank's offices are in good condition and are
adequate for the Company's and the Bank's current and foreseeable needs.
The Bank is unaware of any potential environmental liability that it may
incur in connection with any properties or other assets owned by it.
ITEM 3. LEGAL PROCEEDINGS
The Bank is periodically involved as plaintiff or defendant in various
legal actions in the ordinary course of its business. During August 1992
through October 1995, the Bank entered into a series of leases and secured loans
with Bennett Funding Group, Inc. and certain of its affiliates. Bennett Funding
Group, Inc. and its affiliates allegedly operated in a fraudulent manner and are
now the subject of bankruptcy proceedings, In re Bennett Funding Group, Inc., et
al, Case No. 96-61376 et seq., which are pending in the United States Bankruptcy
Court for the Northern District of New York. These leases and loans have an
aggregate principal balance of $4.5 million and a reserve of approximately $3
million. The Trustee is contesting the secured status of the Bank's loans, and
the Bank is vigorously defending its status as a fully secured, perfected
creditor.
In addition, in 1994 the Bank was named as a defendant in Paul A. Minor and
Wanda J. Minor on behalf of themselves and all others similarly situated v.
Castle Mortgage Corporation and First Federal Savings Bank of LaGrange, U.S.
District Court, Middle District of Alabama, Case No. CV-94-D-1042-N. The alleged
representatives of a proposed plaintiffs' class action filed their complaint on
August 10, 1994, alleging violation of the Truth in Lending Act in connection
with mortgage loans for which the Bank acts as a servicing agent. On February
20, 1996, the court entered an order dismissing the Bank from this lawsuit with
prejudice to the plaintiffs.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matter was submitted by the Company to a vote of its shareholders
during the fourth quarter of 1996.
ITEM 4(A). EXECUTIVE OFFICERS OF THE REGISTRANT
Set forth below, in accordance with General Instruction G(3) to Form
10-K and Instruction 3 to Item 401(b) of Regulation S-K, is certain information
regarding the executive officers of the Company and the Bank.
John S. Holle, 46, has served as Chairman of the Board, President, Chief
Executive Officer and a director of the Company since 1993, and he has been
President, Chief Executive Officer and a director of the Bank since 1985 and
40
Chairman of the Board of the Bank since 1990. Mr. Holle previously served in
various other executive positions with the Bank after joining the Bank in 1972.
Mr. Holle also has been President of the Bank's wholly-owned subsidiary,
Piedmont Mortgage Service, Inc., since 1988.
Ellison C. Rudd, 52, has served as Executive Vice President, Chief
Financial Officer and Treasurer of the Company since 1994. Mr. Rudd has also
been Executive Vice President of the Bank since 1993 and Chief Financial Officer
and Treasurer since 1989 when he joined the Bank as a Vice President.
Annette F. Woodyard, 64, has served as Senior Vice President, Branch
Administration and Personnel, of the Bank since February 1993 and as the Bank's
Personnel Officer since 1985. From 1978 until February 1993, Ms. Woodyard served
as Vice President in charge of internal operations. Mrs. Woodyard has been
employed by the Bank since 1958 and has served in various executive positions
since 1963. Mrs. Woodyard has announced her intention to retire in February
1997.
Lee W. Washam, 35, has served as Senior Vice President and Secretary of the
Company and the Bank since 1995. From 1993 to 1995, he served as Vice President
and Assistant Secretary of the Bank. Mr. Washam joined the Bank in 1983 and has
served in various management positions since 1987.
Raymond C. Smith, Jr., 48, has served as Senior Vice President, Human
Resources since June 1996, having 16 years previous bank personnel experience.
Mr. Smith most recently served as Human Resources Manager for the Retail
Division of Bank South, N.A.
Mary E. Winks, 45, has served as Senior Vice President, Retail Banking and
Marketing since July 1996, having 27 years prior bank and consulting experience.
Most recently, Ms. Winks was a Senior Bank consultant with LSI, Inc. of Atlanta.
The officers of the Company and the Bank are elected annually by the Board
of Directors for terms of one year or until their successors are elected and
qualified.
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON STOCK AND RELATED SHAREHOLDER MATTERS
Information relating to the market for, holders of and dividends paid on
the Company's Common Stock is set forth under the caption "Corporate
Information-Stock Prices and Dividends" on page 48 of the Company's 1996 Annual
Report. Such information is incorporated herein by reference. The 1996 Annual
Report is filed as Exhibit 13 to this report.
ITEM 6. SELECTED FINANCIAL DATA
Selected consolidated financial data for the Company and its subsidiaries
for each year of the five-year period ended December 31, 1996 is set forth under
the caption "Financial Highlights" on page 3 of the 1996 Annual Report. Such
financial data is incorporated herein by reference.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
A discussion of the consolidated financial condition and results of
operations of the Company and its subsidiaries at and for the dates and periods
covered by the financial statements set forth in the 1996 Annual Report is set
forth under the caption "Management's Discussion and Analysis of Financial
Condition and Results of Operations" on pages 12 through 19 of the 1996 Annual
Report. Such discussion is incorporated herein by reference.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The following consolidated financial statements of the Company and its
subsidiaries, together with the Independent Auditors' Report thereon, which are
set forth beginning on pages 20 through 46 of the 1996 Annual Report, are
incorporated herein by reference:
Consolidated Statements of Condition at December 31, 1996 and 1995
Consolidated Statements of Income for each of the three years in the period
ended December 31, 1996
Consolidated Statements of Stockholders' Equity for each of the three years
in the period ended December 31, 1996
Consolidated Statements of Cash Flows for each of the three years in the
period ended December 31, 1996
41
Notes to Consolidated Financial Statements
The Company is not required to furnish the supplementary financial
information specified by Item 302 of Regulation S-K.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
On February 20, 1997, the Company engaged Porter Keadle Moore, LLP as
independent accountants to audit the Company's financial statements for the
fiscal year ending December 31, 1997, and elected not to renew the engagement of
the Company's previous independent accountants, Robinson, Grimes & Company, P.C.
No adverse opinions or disclaimers of opinion were given by Robinson, Grimes &
Company, P.C. during the fiscal years ended December 31, 1995 and 1996, nor were
any of their opinions qualified as to uncertainty, audit scope, or accounting
principle, during the time Robinson, Grimes & Company was engaged. There were no
disagreements or "reportable events" of any nature between the Company and
Robinson, Grimes & Company, P.C. during the fiscal years ended December 31,
1995, 1996, and the subsequent interim period through February 20, 1997, as
described in Items 304(a) (1) (iv) and (v) of Regulation S-K. The decision was
approved by the Company's Audit Committee and Board of Directors.
42
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
Information relating to the directors of the Company is set forth under the
captions "Proposal 1 - Election of Directors-Nominees" and "Proposal 1 -
Election of Directors-Information Regarding Nominees and Continuing Directors"
in the Company's Proxy Statement for its 1997 Annual Meeting of Shareholders to
be held on April 16, 1997. Such information is incorporated herein by reference.
Pursuant to Instruction 3 to Item 401(b) of Regulation S-K and General
Instruction G(3) to Form 10-K, information relating to the executive officers of
the Company and the Bank is set forth in Item 4(A) of this report under the
caption "Executive Officers of the Registrant." Information regarding compliance
with Section 16(a) of the Securities Exchange Act of 1934, as amended, by
directors and executive officers of the Company and the Bank is set forth under
the caption "Compliance with Section 16(a) of the Securities Exchange Act of
1934" in the Proxy Statement referred to above. Such information is incorporated
herein by reference. To the Company's knowledge, no person was the beneficial
owner of more than 10% of the Company's Common Stock during 1996.
ITEM 11. EXECUTIVE COMPENSATION
Information relating to executive compensation and the sale of stock to
certain directors is set forth under the captions "Proposal 1 - Election of
Directors - Director Compensation" and "Executive Compensation" in the Proxy
Statement referred to in Item 10 above. Such information is incorporated herein
by reference.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
Information regarding ownership of the Company's Common Stock as of
December 31, 1996 by certain persons is set forth under the captions "Voting -
Stock Ownership" and "Proposal 1 - Election of Directors - Information Regarding
Nominees and Continuing Directors" in the Proxy Statement referred to in Item 10
above. Such information is incorporated herein by reference.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Information regarding certain transactions between the Bank and affiliates
of the Company and the Bank is set forth under the caption "Executive
Compensation - Loans to Management" in the Proxy Statement referred to in Item
10 above. Such information is incorporated herein by reference.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a) Documents Filed as Part of This Report:
1. Financial Statements
The consolidated financial statements and the independent
auditors' report thereon which are required to be filed as part
of this report are included in the Company's 1996 Annual Report
and are incorporated by reference in Item 8 hereof. These
financial statements are as follows:
Consolidated Statements of Condition at December 31, 1996 and
1995
Consolidated Statements of Income for each of the three years in
the period ended December 31, 1996
43
Consolidated Statements of Stockholders' Equity for each of the
three years in the period ended December 31, 1996
Consolidated Statements of Cash Flows for each of the three years
in the period ended December 31, 1996
Notes to Consolidated Financial Statements
2. Financial Statement Schedules
All financial statement schedules for which provision is made in
the applicable accounting regulations of the Securities and
Exchange Commission and the OTS have been omitted because such
schedules are not required under the related instructions or are
inapplicable or because the information required is included in
the financial statements or notes thereto incorporated by
reference herein.
3. Exhibits
The following exhibits are filed as part of or incorporated by
reference in this report. Where such filing is made by
incorporation by reference to a previously filed registration
statement or report, such registration statement or report is
identified in parentheses. The Company will furnish any exhibit
upon request to Susan R. Huckabee, Investor Relations Department,
FLAG Financial Corporation, 101 North Greenwood Street, LaGrange,
Georgia 30240. There is a charge of $.50 per page to cover
expenses of copying and mailing.
44
Exhibit No. Description
3.1 (i) Articles of Incorporation of the Company, as amended through
October 15, 1993 (Exhibit 3.1(i) to the Company's Annual Report on
Form 10-K for the fiscal year ended December 31, 1993)
(ii) Bylaws of the Company, as amended through September 16, 1993
(Exhibit 3.1(ii) to the Company's Annual Report on Form 10-K for the
fiscal year ended December 31, 1993)
10.1 Agreement and Plan of Merger and Reorganization dated February 28,
1994 among the Bank, the Company and FLAG Interim Savings Bank
(Exhibit 2.1 to the Company's Annual Report on Form 10-K for the
fiscal year ended December 31, 1993)
10.2 Tax Sharing Agreement dated March 1, 1994, among the Company, the Bank
and Piedmont Mortgage Service, Inc. (Exhibit 10.1 to the Company's
Annual Report on Form 10-K for the fiscal year ended December 31,
1993)
10.3 Management Contracts and Compensatory Plans:
a. Employment Agreement between John S. Holle and the Bank dated as
of January 1, 1993 (Exhibit 10.4 to the Company's Registration
Statement on Form S-4, Registration No. 33-58392)
b. Employment Agreement between Ellison C. Rudd and the Bank dated
as of January 1, 1995 - (Exhibit 10.3b to the Company's 10-K for
the fiscal year ended December 31, 1995)
c. 1986 Stock Option and Incentive Plan (Exhibit 10.1 to the
Company's Registration Statement on Form S-4, Registration No.
33-58392)
d. FLAG Financial Corporation 1994 Employees Stock Incentive Plan
(Exhibit 10.6 to the Company's Annual Report on Form 10-K for the
fiscal year ended December 31, 1993)
e. FLAG Financial Corporation 1994 Directors Stock Incentive Plan
(Exhibit 10.7 to the Company's Annual Report on Form 10-K for the
fiscal year ended December 31, 1993)
f. Profit Sharing Thrift Plan, as amended through November 1, 1992
(Exhibit 10.2 to the Company's Registration Statement on Form
S-4, Registration No. 33-58392)
g. Pension Retirement Plan (Exhibit 10.3 to the Company's
Registration Statement on Form S-4, Registration No. 33-58392)
11 Statement regarding computation of per share earnings
13 1996 Annual Report
16 Letter regarding change in certifying accountant (Exhibit 16 to the
Company's Form 8-K/A filed March 12, 1997)
21 Subsidiaries (Exhibit 21 to the Company's Annual Report on Form 10-K
for the fiscal year ended December 31, 1994)
23 Consent of Robinson, Grimes & Company, P.C.
45
(b) Reports on Form 8-K.
No Current Reports on Form 8-K were filed by the Company with the
Securities and Exchange Commission during the quarter ended December
31, 1996.
(c) See Item 14(a)(3) above.
(d) See Item 14(a)(2) above.
- ------------------
+ All or portions of page 3 and pages 12 through 46 of the Company's 1996 Annual
Report, as indicated in this report, are incorporated herein by reference. Other
than as noted herein, the Company's 1996 Annual Report is furnished to the
Securities and Exchange Commission solely for its information and is not deemed
to be "filed" with the Securities and Exchange Commission or subject to the
liabilities of Section 18 of the Securities Exchange Act of 1934, as amended.
46
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
FLAG FINANCIAL CORPORATION
(Registrant)
Date: March 31, 1997 By: /S/ John S. Holle
------------------------
John S. Holle
Chairman of the Board, President
and Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
Registrant and in the capacities indicated on March 31, 1997.
Signature Title
Chairman of the Board, President and Chief Executive Officer
John S. Holle
/s/Ellison C. Rudd
- -------------------- Executive Vice President, Chief Financial Officer,
Ellison C. Rudd Treasurer and Director (Principal Financial and
Accounting Officer)
/s/ Dr. Albert Glenn Bailey
- --------------------------- Director
Dr. Albert Glenn Bailey
/s/ H. Speer Burdette III
- ------------------------ Director
H. Speer Burdette, III
/s/ Fred A. Durand, III
- ------------------------ Director
Fred A. Durand, III
/s/ Kelly R. Linch
- ------------------------ Director
Kelly R. Linch
/s/ Gordon M. Smith
- ------------------------ Director
Gordon M. Smith
47
/s/ John S. Stewart, Jr.
- ------------------------ Director
John W. Stewart, Jr.
/s/ Dr. Steven P. Teaver
- ------------------------ Director
Dr. Steven P. Teaver
/s/ Robert W. Walters
- ------------------------ Director
Robert W. Walters
*By: _____________________________
John S. Holle
As Attorney-in-Fact
47
FLAG FINANCIAL CORPORATION
Index of Exhibits
The following exhibits are filed as part of or incorporated by reference in
this report. Where such filing is made by incorporation by reference to a
previously filed registration statement or report, such registration statement
or report is identified in parentheses.
Exhibit No. Description
3.1 (i) Articles of Incorporation of the Company, as amended
through October 15, 1993 (Exhibit 3.1(i) to the Company's
Annual Report on Form 10-K for the fiscal year ended
December 31, 1993)
(ii) Bylaws of the Company, as amended through September 16,
1993 (Exhibit 3.1(ii) to the Company's Annual Report on Form
10-K for the fiscal year ended December 31, 1993)
10.1
Agreement and Plan of Merger and Reorganization dated
February 28, 1994 among the Bank, the Company and FLAG
Interim Savings Bank (Exhibit 2.1 to the Company's Annual
Report on Form 10-K for the fiscal year ended December 31,
1993)
10.2 Tax Sharing Agreement dated March 1, 1994, among the
Company, the Bank and Piedmont Mortgage Service, Inc.
(Exhibit 10.1 of the Company's Annual Report on Form 10-K
for the fiscal year ended December 31, 1993)
10.3 Management Contracts and Compensatory Plans:
a. Employment Agreement between John S. Holle and the Bank
dated as of January 1, 1993 (Exhibit 10.4 to the Company's
Registration Statement on Form S-4, Registration No.
33-58392)
b. Employment Agreement between Ellison C. Rudd and the Bank
dated as of January 1, 1995 - (Exhibit 10.3 b to the
Company's 10-K for the fiscal year ended December 31, 1995)
c. 1986 Stock Option and Incentive Plan (Exhibit 10.1 to the
Company's Registration Statement on Form S-4, Registration
No. 33-58392)
d. FLAG Financial Corporation 1994 Employees Stock Incentive
Plan (Exhibit 10.6 to the Company's Annual Report on Form
10-K for the fiscal year ended December 31, 1993)
48
e. FLAG Financial Corporation 1994 Directors Stock Incentive
Plan (Exhibit 10.7 to the Company's Annual Report on Form
10-K for the fiscal year ended December 31, 1993)
f. Profit Sharing Thrift Plan, as amended through November 1,
1992 (Exhibit 10.2 to the Company's Registration Statement
on Form S-4, Registration No. 33-58392)
g. Pension Retirement Plan (Exhibit 10.3 to the Company's
Registration Statement on Form S-4, Registration No.
33-58392)
11 Statement regarding computation of per share earnings
13 1996 Annual Report
16 Letter regarding change in certifying accountant (Exhibit 16 to
the Company's Form 8-K/A filed March 12, 1997)
21 Subsidiaries (Exhibit 21 to the Company's Annual Report
on Form 10-K for the fiscal year ended December 31, 1994)
23 Consent of Robinson, Grimes & Company, P.C.
- ---------------
+ All or portions of page 3 and pages 12 through 46 of the Company's 1996
Annual Report, as indicated in this report, are incorporated herein by
reference. Other than as noted herein, the Company's 1996 Annual Report is
furnished to the Securities and Exchange Commission solely for its
information and is not deemed to be "filed" with the Securities and Exchange
Commission or subject to the liabilities of Section 18 of the Securities
Exchange Act of 1934, as amended.
49