OFFICE OF THRIFT SUPERVISION
Washington, D.C. 20552
FORM 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 or 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the Fiscal Year Ended Office of Thrift Supervision
September 30, 1996 Docket Number: 3175
FIRST FEDERAL SAVINGS BANK OF BRUNSWICK, GEORGIA
(Exact name of registrant as specified in its charter)
Chartered by the Office of Thrift Supervision
under the laws of the United States 58-0175025
(State or other jurisdiction (I.R.S. Employer
of incorporation or organization) Identification No.)
777 Gloucester Street, Brunswick, Georgia 31520
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (912) 265-1410
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, par value $1.00 per share
(Title of Class)
Indicate by check mark whether the registrant has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. YES X NO
Indicate by check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K is not contained herein, and will not be contained,
to the best of Registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [ X ]
The aggregate market value of the Common Stock held by non-affiliates of
the registrant is $83,031,444, based on the price at which shares of Common
Stock were sold on December 24, 1996.
As of December 24, 1996 there were issued and outstanding 1,499,939
shares of the registrant's Common Stock.
DOCUMENTS INCORPORATED BY REFERENCE
1. Portions of the 1996 Annual Report to Stockholders for year ended
September 30, 1996 are incorporated into Part II, Items 5 - 9 of this Annual
Report on Form 10-K.
2. Portions of the Proxy Statement for the Annual Meeting of Stockholders
to be held on January 22, 1997, to be filed with the Office of Thrift
Supervision pursuant to Regulation 14A within 120 days of the registrant's
fiscal year end are incorporated into Part III, Items 10 - 13 of this Annual
Report on Form 10-K.
PART I
Item 1. Business
General
First Federal Savings Bank of Brunswick, Georgia ("Brunswick") began its
operations in 1926 as a Georgia-chartered building and loan association.
Brunswick converted to a federal savings and loan association in 1935,
conducting its business under the name of Brunswick Federal Savings and Loan
Association, and changed its name to First Federal Savings and Loan Association
of Brunswick in 1959. Brunswick converted to a federal mutual savings bank on
December 5, 1983, and became a federal capital stock savings bank on July 21,
1984. Brunswick is subject to supervision and regulation by the Office of Thrift
Supervision ("OTS") and the Federal Deposit Insurance Corporation ("FDIC"), and
its deposits are insured through the Savings Association Insurance Fund ("SAIF")
of the FDIC. Brunswick's operations are conducted from its headquarters, two
branch offices in Brunswick, and two branch offices on St. Simons Island,
Georgia.
Brunswick primarily engages in the business of attracting deposits from
the general public and investing those funds in real estate, commercial and
consumer loans.
Lending Activities
General. As a federally chartered thrift institution, Brunswick may
invest in real estate loans throughout the United States. Brunswick has,
however, limited its lending area primarily to Southeast Georgia. Historically,
Brunswick's lending activities have concentrated on the origination of
conventional permanent loans on single-family dwellings and, to a lesser degree,
on construction loans for residential dwellings. Brunswick's loans are
predominantly conventional loans, i.e., loans that are not insured by the
Federal Housing Administration ("FHA") or guaranteed by the Veterans
Administration ("VA").
In recent years Brunswick has sought to increase the amount of
construction, commercial, and consumer loans in its portfolio. The shorter term
and the normally higher interest rates available on these loans are consistent
with Brunswick's efforts to shorten the term of its loan portfolio and to
improve the spread between the average yield on its assets and its cost of
funds. In addition, in an effort to increase the interest-sensitivity of
Brunswick's loan portfolio, Brunswick offers a variety of adjustable-rate loan
products. By originating adjustable-rate loans, management believes that
Brunswick is better able to match increases in the rates paid on its liabilities
with increased rates received on its assets.
First Mortgage Loans. On September 30, 1996, Brunswick held in its loan
portfolio approximately $150.3 million of first mortgage loans (including $19.9
million in construction loans) secured by one-to four-family residential units,
which represented 71.6% of its total net loan portfolio. As of that date,
Brunswick also held $42.3 million, or 20.2% of its total net loan portfolio of
first mortgage loans secured by commercial real estate, multi-family residential
property and land. For purposes of this discussion, the term "net" when used
with respect to Brunswick's total loan portfolio, means (i) net of loans in
process, deferred loan fees and other, and the allowance for possible loan
losses and (ii) inclusive of mortgage loans held for sale.
Reflecting prior federal regulations, approximately $67 million or 37.7%
of Brunswick's total mortgage loans due subsequent to one year after September
30, 1996 provided for fixed rates of interest and for repayment of principal
over a fixed period. Regulatory changes in recent years have provided
substantial flexibility to federally chartered institutions such as Brunswick in
structuring the terms of mortgage loans to adjust more easily to changes in
interest rates. These regulations permit, among other things, mortgage loans
1
to be written for shorter maturities and at adjustable interest rates, as
compared to longer term, fixed rate mortgage instruments. Approximately $110
million or 62.3% of Brunswick's total mortgage loans due subsequent to one year
after September 30, 1996 were adjustable rate loans, compared to 67.4% and 63.2%
due subsequent to one year after September 30, 1995 and 1994, respectively. The
adjustable-rate loans that are currently being made have terms of 30 years or 15
years and interest rate adjustment periods of one or three years. However, the
extent of this interest-sensitivity is limited by annual and lifetime "caps" on
interest rate adjustments. The terms of such loans also increase the likelihood
of delinquencies in periods of high interest rates, particularly if such loans
are offered with initial discounted interest rates. Generally, Brunswick offers
adjustable-rate mortgage loans with annual adjustment caps of 2.0% and lifetime
adjustment caps of 6.0%.
Permanent residential mortgage loans originated by Brunswick have
generally been 30-year fixed and adjustable rate loans amortized on a monthly
basis with principal and interest due monthly. Based upon historical experience,
these loans generally have average lives of approximately 12 years. Most of the
residential loans originated by Brunswick are conventional loans. Brunswick's
permanent loans on commercial real estate have been 15 to 25 year loans with
principal and interest due monthly. The loans generally have a three or five
year adjustable rate or balloon feature.
Construction Loans. As of September 30, 1996, construction loans totalled
$21.6 million, or 10.3% of Brunswick's net total loan portfolio. This amount is
composed of $19.9 million of construction loans secured by one- to four-family
residential units. In past years, Brunswick has solicited construction loans for
a variety of structures, including residences, nursing homes, strip shopping
centers, medical buildings, warehouses, condominiums and motels. Generally, the
loans are made for six to 12 months at interest rates tied to the prime rate and
adjusted monthly. Because of certain lending restrictions based on the amount of
the institution's regulatory capital, Brunswick sometimes sells participations
in the construction loans that it originates. Brunswick also makes combined
construction and permanent loans.
Commercial Loans. A federally chartered savings institution is permitted
to invest up to 10% of its assets in commercial loans not secured by real
estate. Brunswick makes commercial loans for purposes such as working capital,
inventory accumulations, equipment acquisition and similar purposes. These loans
are either made at a fixed rate of interest or at an interest rate tied to a
regional bank's prime rate, with rate adjustments at monthly, annual or less
frequent intervals. At September 30, 1996, commercial loans totalled
approximately $7.4 million, or 3.5% of Brunswick's total net loan portfolio.
Consumer Loans. A federally chartered savings institution is permitted to
make secured and unsecured consumer loans up to 35% of the institution's assets.
Certain consumer loans may be made without being included in the 35% limitation.
At September 30, 1996, Brunswick's consumer loans included $1.5 million of loans
secured by deposit accounts at Brunswick, $9.6 million of consumer loans
(including unsecured loans, boat loans, automobile loans, equipment loans and
educational loans) and $17.3 million of home equity loans secured in part by a
mortgage on the borrower's home. At September 30, 1996, all consumer loans
comprised 13.6% of Brunswick's total net loan portfolio. Home equity consumer
loans generally have adjustable rates of interest tied to a regional bank's
prime rate, with monthly rate adjustments. Other consumer loans are generally
made for a term of three to five years and have fixed rates of interest.
Brunswick also offers lines of credit secured by home equity. This type of loan,
which is made at an interest rate at a margin above the prime rate that adjusts
monthly, is intended to combine both high quality and high yield.
2
The composition of Brunswick's loan portfolio at the end of the fiscal
years during the three-year period ended September 30, 1996 is set forth below.
At September 30, 1996, Brunswick's total net loan portfolio represented 84.2% of
its total assets.
At September 30,
1996 1995 1994
------------ --------------- ----------
Conventional real estate
loans:
Interim construction loans ............... $ 21,564,508 $ 12,951,880 $ 11,016,556
Loans on existing property ............... 129,083,083 140,932,677 136,781,662
Loans refinanced ......................... 31,803,954 9,439,855 10,234,595
Insured or guaranteed real
estate loans............................. 446,415 507,609 564,504
Commercial loans........................... 7,441,666 4,512,256 5,046,800
Consumer loans
Education loans........................... 48,490 74,523 106,314
Savings account loans..................... 1,525,713 1,379,482 1,262,012
Home improvement loans.................... 17,279,232 15,836,687 14,018,318
Others.................................... 9,585,484 6,866,660 5,183,438
------------ ------------ -----------
Total loans receivable.................. $218,778,545 $192,501,629 $184,214,199
Less:
Undisbursed loans in process............... $ 7,279,329 $ 4,212,944 $3,458,863
Deferred loan fees and other............... 830,384 763,316 925,589
Allowance for possible
loan losses ............................. 800,786 861,356 812,585
------------- --------- ------------
Total net loan portfolio............ $209,868,046 $186,664,013 $179,017,162
=========== =========== ===========
Type of Security:
Residential real estate
Single-family............................. $ 150,261,872 $ 136,233,631 $124,195,721
2-to-4 family............................. 3,323,157 5,074,844 5,754,995
Other dwelling units...................... 4,255,430 2,324,341 2,971,440
Commercial or industrial
real estate ............................ 42,336,733 36,035,892 39,693,479
Savings accounts.......................... 1,525,713 1,379,482 1,262,012
Other..................................... 17,075,640 11,534,439 10,336,552
----------- ---------- -----------
Total loans receivable.................. $218,778,545 $192,501,629 $184,214,199
Less:
Undisbursed loans in process............... 7,279,329 4,212,944 3,458,863
Deferred loan fees and other............... 830,384 763,316 964,957
Allowance for possible
loan losses.............................. 800,786 861,356 812,585
------------- --------- ------------
Total net loan portfolio ........... $209,868,046 $186,664,013 $179,017,162
=========== =========== ===========
FIRREA makes applicable to savings associations the current national bank
limits on loans to one borrower. Generally, national banks may lend to a single
or related group of borrowers, on an unsecured basis, an amount equal to 15% of
its unimpaired capital and surplus. An additional amount, equal to 10% of
unimpaired capital and surplus, may be loaned if such loan is secured by readily
marketable collateral, which is defined to include certain securities and
bullion, but generally does not include real estate. Under such provisions, as
of September 30, 1996, Brunswick could lend to a single borrower and its related
entities
3
on an unsecured basis an amount not to exceed $3.9 million. Also, as of such
date, it could lend an additional $2.6 million secured by readily marketable
collateral. As of September 30, 1996, the amount outstanding to the largest
single borrower of Brunswick was approximately $3.3 million.
Loan Originations. Loan originations were approximately $91.9 million for
the year ended September 30, 1996. Loan originations come from a number of
sources. Most real estate loans are attributable to walk-in customers at
Brunswick's offices, real estate brokers and referrals by a mortgage broker. In
addition, Brunswick has solicited applications for consumer loans through
newspaper advertisements.
Each loan is underwritten by qualified personnel in Brunswick's main
office, and independent appraisers are engaged to appraise property intended to
secure real estate loans. The underwriting procedures of Brunswick are intended
to assess a borrower's ability to repay the loan and the value of any collateral
property. Loan applications must be reviewed and approved by authorized officers
or directors in accordance with Brunswick's loan policy. After a loan
application is approved, Brunswick customarily gives the applicant a commitment
to make the loan at any time within 30 days thereafter on terms determined on
the basis of market conditions as of the date of the commitment. Commitments for
longer periods are issued at rates to be set at the time of closing, and,
generally, a 1% commitment fee is charged.
Federal regulations require boards of directors of federally chartered
savings institutions to establish their own loan-to-value ratios for loans made
on the security of real estate, subject to certain conditions. The regulations
provide that an institution must require appropriate credit enhancement in the
form of mortgage insurance or readily marketable collateral for all
owner-occupied family or home equity loans which at the time of origination are
in excess of 90% of the appraised value of the collateral property. Brunswick
makes permanent residential mortgage loans with up to a 95% loan-to-value ratio.
Brunswick usually lends up to 75% of the appraised value for construction loans
on commercial real estate and 80% of the appraised value for permanent loans on
commercial real estate.
Although Brunswick continues to originate long-term fixed-rate loans,
most of the loans are originated with documentation and underwriting guidelines
which will allow their sale in the secondary market to the Federal National
Mortgage Association ("FNMA") or the Federal Home Loan Mortgage Corporation
("FHLMC"). All other long-term loans originated by Brunswick are adjustable-rate
loans.
Brunswick includes due-on-sale provisions in its permanent real estate
loans. Due-on-sale clauses give Brunswick the right to declare a loan
immediately due and payable in the event that the borrower sells the property
securing the mortgage. This provides Brunswick with a means of increasing the
interest rate on existing low interest fixed-rate loans. It is Brunswick's
policy to waive the due-on-sale clause, subject to the approval of the borrower,
and to increase the interest rate to the market rate of interest at the time of
the sale if the loan is saleable or to charge an adjustable rate of interest if
it is not saleable. The effect of this policy, however, is essentially the same
as enforcing the due-on-sale clause.
Brunswick requires title insurance to insure the priority of its property
lien on its mortgage loans. It also requires fire and casualty insurance to be
maintained on all security property in amounts at least equal to the principal
balance on the loans.
4
The following table sets forth certain information at September 30, 1996,
regarding the dollar amount of loans maturing in Brunswick's portfolio based on
their contractual terms to maturity. Demand loans, loans having no stated
schedule of repayments and no stated maturity, and overdrafts are reported as
due in one year or less.
Principal Repayments Contractually Due
in the Year(s) Ending September 30,
2012
and
2000 2002 2007 there-
1997 1998 1999 2001 2006 2011 after Total
---- ---- ---- ---- ---- ---- ------- -----
(Dollars in Thousands)
Real estate mortgage....... $14,038 $ 6,855 $2,231 $7,603 $20,928 $44,617 $65,061 $161,333
Real estate construction... 21,565 0 0 0 0 0 0 21,565
Consumer................... 4,888 3,675 3,526 7,118 8,580 605 47 28,439
Commercial................. 1,801 618 844 1,055 3,124 0 0 7,442
------ ------ ----- ------ ------- -------- -------- --------
Total.................... $42,292 $11,148 $6,601 $15,776 $32,632 $45,222 $65,108 $218,779
====== ====== ===== ====== ====== ====== ====== =======
The following table sets forth the dollar amount of all loans due more
than one year after September 30, 1996, which have pre-determined interest rates
and have floating or adjustable interest rates.
Predetermined Floating or
Rates Adjustable Rates
(Dollars in Thousands)
Real estate mortgage................ $51,781 $ 95,514
Real estate construction............ -- --
Consumer............................ 13,971 9,580
Commercial.......................... 825 4,816
------- -----
Total......................... $66,577 $109,910
====== =======
In comparison, at September 30, 1995, Brunswick had total loans due more
than one year after such date with predetermined interest rates and floating or
adjustable interest rates of approximately $56.5 million and $104.1 million,
respectively.
Loan Purchases and Sales. Most of the loans in Brunswick's portfolio have
been originated by Brunswick. However, prior to 1986, Brunswick purchased
construction or adjustable-rate mortgage loans during periods when it was unable
to originate a sufficient amount of such loans to meet its intended investment
goals. After fiscal year 1985, Brunswick deemphasized such activities because
management believed that there was a lack of such loans that met Brunswick's
underwriting standards.
Brunswick is active in the sale of participations and whole loans in the
secondary market to thrift institutions, commercial banks, FNMA and FHLMC.
Participations in construction loans are sold particularly to ensure compliance
with regulatory limitations on investment in loans to a single borrower.
Brunswick also sells loans to provide additional funds for lending or to reduce
Brunswick's investment in long-term, fixed-rate mortgage loans. Brunswick also
has exchanged participating interests in pools of mortgage loans. From time to
time, Brunswick converts additional amounts of its fixed-rate, long-term
mortgage loans into mortgage-backed securities through similar transactions. The
purpose of these transactions is to convert the loans into marketable securities
which can be easily sold for cash or used as collateral for borrowings.
Brunswick did not sell any loans with recourse against Brunswick in fiscal years
1996, 1995, and 1994. At September 30,
5
1996, Brunswick was servicing approximately $133.3 million in loans for others,
on which it receives an average of 27% per annum in servicing fees.
The Bank sells loans on a cash gain or loss basis, a method which does
not necessitate the creation of an excess servicing balance upon sale. The Bank
has continued this policy during fiscal year 1996, and generally all gains
(losses) recorded during fiscal year 1996 reflect such treatment.
Set forth below is a table showing Brunswick's loan origination,
purchase, and sales for the periods indicated.
Year Ended September 30,
1996 1995 1994
--------------- -------------- ---------
Loans Originated:
Conventional real
estate loans:
Construction loans............. $18,367,505 $11,274,329 $14,069,125
Loans on existing
property ..................... 30,886,985 49,630,201 51,947,624
Loans refinanced .............. 33,423,992 10,392,350 22,627,910
Other Loans (1) ................ 9,246,959 9,128,733 7,263,905
---------- ---------- -----------
Total Loans
Originated................... $91,925,441 $80,425,613 $95,908,564
========== ========== ==========
Loans Sold:
Participation loans............. $ 950,000 $ -0- $ -0-
Whole Loans (2) ................ 32,330,171 12,019,672 33,500,598
---------- ---------- ----------
Total loans sold............... $33,280,171 $12,019,672 $33,500,598
========== ========== ==========
- -------------------
(1) Includes consumer loans on a net change basis. Total consumer loan
originations, including multiple rollovers of short term credits, for the
fiscal years 1996, 1995, and 1994 were $25,263,332, $22,500,501, and
$20,400,473, respectively.
(2) Fiscal year 1996 amount includes $6,445,235 in loans exchanged with the
Federal Home Loan Mortgage Corporation for mortgage-backed securities.
Income from Lending Activities. Brunswick's primary source of income is
from the interest earned on the loans that it has in its loan portfolio.
Interest rates charged on loans originated by Brunswick are primarily determined
by the level of prevailing interest rates, the availability of lendable funds,
the demand for such loans and competitive conditions.
In addition to interest earned on loans, Brunswick receives fees in
connection with loan originations, long-term commitments to lend funds and the
servicing of loans sold by Brunswick. Brunswick also receives other income
relating to existing loans in its portfolio, including loan prepayment
penalties, late charges and fees collected in connection with loan
modifications. Income realized from these sources varies significantly from
period to period with the volume and types of loans made in response to
competitive factors.
6
At September 30, 1996, Brunswick had $690,856 in deferred mortgage loan
fees. Pursuant to Financial Accounting Standards Board ("FASB") Statement of
Financial Accounting Standards No. 91, loan fees and costs are deferred and
amortized net as an adjustment of yield over the life of the related loan.
Nonperforming Assets. Brunswick's collection procedures on delinquent
loans provide that the borrower will be contacted by mail and payment will be
requested when a loan payment is 15 days past due and again after 30 days. If
the delinquency continues, subsequent efforts will be made to contact the
delinquent borrower by telephone. If the loan continues in a delinquent status
for 90 days, Brunswick generally will initiate foreclosure proceedings. Any
property acquired by Brunswick as a result of foreclosure or by deed in lieu of
foreclosure is then sold to recover all or part of Brunswick's investment.
The table below sets forth the amounts and categories of Brunswick's
non-performing assets, as computed by Brunswick.
At September 30,
1996 1995 1994
------------ ------------ --------
Non-accrual loans (1)............... $261,193 $ 788,116 $1,080,021
Restructured Loans (2) ............. 779,706 1,143,462 776,959
Real estate owned (3)............... 954,904 2,208,679 1,743,374
--------- --------- ---------
Total non-performing
assets............................. 1,995,803 4,140,257 3,600,354
--------- --------- ---------
Potential problem
loans (4).......................... 2,904,673 210,416 1,422,471
Total non-performing
assets and potential
problem loans...................... $4,900,476 $4,350,673 $5,022,825
Non-performing assets
and potential problem
loans as a percentage
of assets.......................... 1.97% 1.72% 2.17%
- --------------------
(1) Generally refers to (i) certain loans (based primarily on the age of the
loans) that are contractually delinquent for 60 to 90 days, or (ii)
certain mortgage loans on which taxes on the security property are
delinquent for two or more years.
(2) Refers to certain loans wherein concessions have been granted to the
borrower(s) for economic reasons related to the borrower's financial
difficulties, as defined by FASB Statement No. 15, "Accounting by Debtors
and Creditors for Troubled Debt Restructuring."
(3) Refers to real estate acquired by Brunswick through foreclosure or
voluntary deed.
(4) Potential problem loans are those loans that management has identified as
having certain characteristics that could impair the ability of the
borrower to comply with the present loan repayment terms and that may
result in such loans being placed on non-accrual status or becoming a
troubled debt restructuring, or real estate owned in the future. These
loans are generally 60 days past due and are monitored by management to
facilitate further attention if necessary.
Also, at September 30, 1996, Brunswick had 10 properties that were real
estate owned, which were composed of five residential and five commercial
properties. The five residential properties consist of one
7
apartment building having a value of $47,109, one developed tract of residential
lots valued at $45,932, and one individual residential lot valued at $4,979.
Residential properties also include two single family units valued at $27,953 in
aggregate, net of amounts owned by investors. Of the five commercial properties,
three represent improved properties having a value in aggregate of $303,708. The
remaining commercial properties consist of two developed parcels of land having
values of $212,034 and $313,189, respectively. The properties are recorded at
the lower of cost or fair value at the date of acquisition and are carried at
the lower of acquisition value or net realizable value subsequent to the date of
acquisition. If the amount is less than cost, the difference is charged to
operations.
Loans on which accrual of interest has been discontinued amounted to
approximately $1.0 million at September 30, 1996. If interest on these loans had
been accrued in accordance with the original contractual terms, such income for
the year ended September 30, 1996 would have approximated $32,000. Interest
payments on these loans of approximately $100,000 were received and recorded as
interest income in the year ended September 30, 1996.
Provision and Allowance for Probable Loan Losses. The following table
sets forth an analysis of loan losses for the periods indicated:
Year Ended September 30,
1996 1995 1994
----------- ---------- -------
Balance at beginning
of period.......................... $834,882 $786,111 $869,297
Provision for possible
loan losses....................... 240,000 195,000 180,000
Amounts charged off................ (299,318) (189,497) (300,605)
Recoveries......................... 25,222 43,768 37,419
------- ------ --------
Balance at end of
period............................. $800,786 $834,882 $786,111
======= ======= =======
Management establishes an allowance for probable loan losses based upon
management's evaluation of the pertinent factors underlying the types and
quality of loans, current and anticipated economic conditions, collection
experience, detailed analysis of individual loans to which full collectibility
may not be assured, and determination of the existence and realizable value of
the collateral and guarantees securing such loans. At September 30, 1996,
Brunswick had $800,786 in general and $-0- in specific reserves for potential
losses. Brunswick's total reserves at September 30, 1996 were allocated at
approximately 43%, 25% and 32% to its three primary loan types, i.e., first
mortgages, commercial loans, and consumer loans, respectively. Management
believes that the allowance for probable loan losses was adequate at September
30, 1996. Although management believes that it uses the best information
available to make determinations with respect to loan loss reserves, subsequent
adjustments to reserves may be necessary if future economic conditions differ
substantially from the assumptions used in making the initial determinations.
SFAS No. 114 and 118. On October 1, 1994, Brunswick adopted Statements of
Financial Accounting Standards No. 114 and 118 ("SFAS 114 and 118"). These
Statements address the accounting by creditors for impairment of certain loans.
The Statements generally require Brunswick to identify loans for which Brunswick
probably will not receive full payment of principal and interest, as impaired
loans. The Statements require that impaired loans be valued at the present value
of expected future cash flows, discounted at the loan's effective interest rate,
or at the observable market price of the loan, or the fair value of the
underlying collateral if the loan is collateral dependent. Brunswick has
implemented the Statements by modifying its periodic review of the adequacy of
the allowance for loan losses to also identify in value impaired loans in
accordance with guidance in the Statements. The adoption of the Statements did
not have any material effect on the results of operations for the year ended
September 30, 1996.
8
For impairment recognized in accordance with SFAS 114 and 118, the entire
change in the present value of expected cash flows, or the entire change in
estimated fair value of collateral for collateral dependent loans, is reported
as a provision for credit losses in the same manner in which impairment was
initially recognized or as a reduction in the amount of the provision that
otherwise would be reported. Brunswick maintains an allowance for the possible
loss of accrued but uncollected interest on impaired loans when management
believes that the collection of the interest is doubtful. If the ultimate
collectibility of principal, either in whole or in part, is in doubt, any
payment received on a loan for which the accrual of interest has been
discontinued is applied to reduce principal to the extent necessary to eliminate
such doubt. If the ultimate collectibility of principal is not in doubt,
interest is credited to income in the period of recovery.
The following summarizes the September 30, 1996 amounts that were
reclassified as a result of Brunswick adopting SFAS 114 and 118, the amounts of
impaired loans at September 30, 1996, and the average net investment in impaired
loans and interest income recognized and received on impaired loans during the
years ended September 30, 1996 and 1995:
September 30,
1996
Insubstance foreclosures reclassified to loans receivable $ 0
Allowance for loss on insubstance foreclosures reclassified
to allowances for losses 0
Loans identified as impaired:
Gross loans with no related allowance for losses 779,706
Gross loans with related allowance for losses recorded 0
Less: Allowances on these loans 0
----------
Net investment in impaired loans 779,706
Year Ended September 30
1996 1995
------------ -----------
Average investment in impaired loans $ 951.646 $ 831,869
Interest income recognized on impaired loans 78,466 113,610
Interest income received on impaired loans 78,466 85,169
Other Investment Activities
Brunswick invests in short-term and long-term government securities
primarily for the purpose of meeting the federal regulation requiring savings
institutions to maintain a ratio of cash and short-term securities to net
withdrawable deposit accounts and short-term borrowings of 5%. At September 30,
1996, Brunswick maintained a liquidity ratio of 8.4%. See "Regulation and
Supervision -- Liquidity." It has been Brunswick's policy to maintain liquidity
above the required amounts.
9
Investment Securities and Mortgage-Backed Securities
Brunswick's investment securities at September 30, 1996, 1995, and 1994
consisted of U.S. Government treasury and agency and tax-free municipal
obligations. The carrying values and estimated market values of investment
securities on the dates indicated were as follows:
Amortized Estimated
Cost Market Value
September 30, 1996 $ 8,032,109 $ 8,024,132
September 30, 1995 $ 16,353,511 $ 16,488,815
September 30, 1994 $ 15,976,701 $ 15,815,769
At September 30, 1996, Brunswick had unrealized gains and losses in its
investment securities portfolio of $33,366 and $41,343, respectively, as
compared to unrealized gains and losses at September 30, 1995 of $156,286 and
$20,982, respectively. At September 30, 1996, Brunswick had unrealized gains and
losses of $3,612 and $246,354, respectively, as compared to unrealized gains and
losses of $77,895 and $89,917, respectively, at September 30, 1995 on
mortgage-backed securities.
The amortized cost and estimated market values of debt securities held as
investments at September 30, 1996, by contractual maturity, are shown below.
Expected maturities will differ from contractual maturities because issuers may
have the right to call or prepay obligations with or without penalties.
Estimated
Amortized Cost Market Value
Due in one year or less $3,004,145 $3,010,320
Due after one year
through five years 4,027,964 4,040,681
Due after five years
through ten years 1,000,000 973,131
Due after ten years -- --
-------------- -------------
$8,032,109 $8,024,132
Mortgage-backed securities 8,582,633 8,339,891
---------- ----------
$16,614,742 $16,364,023
========== ==========
Sources of Funds
General. Savings accounts and other types of deposits have traditionally
been the primary source of funds for Brunswick's lending activities and for
other general business purposes. In addition, Brunswick derives funds from loan
repayments and Federal Home Loan Bank ("FHLB") advances, as well as other
borrowings. Loan repayments are a relatively stable source of funds while
deposit inflows and outflows vary widely and are influenced by prevailing
interest rates and market conditions. Borrowings may be used to compensate for
reductions in deposits or deposit inflows at less than projected levels and may
be used on a longer term basis to support expanded lending activities.
10
Deposits. Brunswick offers a variety of savings programs and related
services. Deposits are obtained primarily from the communities in which
Brunswick's offices are located. Brunswick does not advertise outside of these
areas and does not solicit deposits from brokers. It offers premiums on certain
accounts in order to attract funds.
Savings deposits in Brunswick as of September 30, 1996, were represented
by the various types of savings programs set forth below.
Percentage
Interest Minimum Minimum Total of
Category Rate (1) Term Balance Amount Savings
- --------------------------- -------- -------- ------- ------ -----------
Now Account-Non Interest None None $ -- $ 10,099,015 4.63%
Now Account 2.25% None 50 21,309,582 9.77
Passbook Statement Account 2.50% None 50 20,104,167 9.22
Wall Street Checking 2.25%(3) None 2,500 4,161,181 1.91
Money Market Deposit Account 2.25%(4) None 2,500 10,570,806 4.85
Commercial Check-Interest 2.25% None 50 5,525,179 2.53
Commercial Checking None None 50 7,729,774 3.55
Gold Edge 2.50% 90 days 50 524,762 .24
----------- ------
$ 80,024,466 36.70%
---------- -----
Certificates of Deposit:
Fixed-Term - Fixed-Rate 5.50% 48 months 500 7,415,705 3.40
Fixed-Term - Fixed-Rate 5.30% 12 months 500 46,392,962 21.27
Fixed-Term - Fixed-Rate 5.30% 18 months 500 3,297,778 1.51
6-Month Money Market 5.00% 182 days 1,000 12,758,797 5.85
3-Month Money Market 4.25% 91 days 1,000 2,142,585 .98
Fixed-Term - Fixed-Rate 5.50% 36 months 500 5,756,833 2.64
Negotiated Jumbo 5.30%(2) 1-12 mos. 100,000 27,261,881 12.50
Fixed-Term - Fixed-Rate 5.30% 24 months 500 15,676,559 7.19
Fixed-Term - Fixed-Rate * % 30 months NONE 163,335 .08
Fixed-Term - Fixed-Rate 5.50% 60 months 500 17,184,958 7.88
------------ ------
138,051,393 63.30
$218,075,859 100.00%
* Plan no longer offered ============ ======
- -----------------
(1) Rates offered as of September 30, 1996.
(2) Rate on 12-month term.
(3) Rate tiers up to 3.00%.
(4) Rate tiers up to 3.50%.
11
The following table sets forth the time deposits in Brunswick classified
by rates being paid as of the dates indicated.
At September 30,
1996 1995 1994
------------- ------------- ---------
1.75% - 3.75% $ 325,001 $ 658,691 $ 25,931,085
3.76% - 5.75% 72,406,637 31,124,375 62,478,823
5.76% - 7.75% 64,594,186 111,556,545 27,855,210
7.76% - 9.75% 334,156 608,452 1,795,672
9.76% - 11.75% 391,413 451,427 529,075
11.76% - 13.75% -0- -0- 78,433
---------------- ---------------- -------------
$138,051,393 $144,399,490 $118,668,298
=========== =========== ===========
The following table sets forth the amount and maturities of time deposits
in Brunswick at September 30, 1996.
Amount Due
Less than 3 Years and
Rate One Year 1-2 Years 2-3 Years Thereafter Total
2 - 4% $ -0- $ 135,344 $ 221,393 $ -0- $ 356,737
4 - 6% 1,086,629 77,439,888 12,390,921 7,532,768 98,450,206
6 - 8% 5,329,589 17,702,328 8,656,900 6,895,066 38,583,883
8 - 10% -0- 52,307 567,885 -0- 620,192
10 - 12% -0- -0- 40,375 -0- 40,375
------------- --------------- ------------ --------------- -------------
$6,416,218 $95,329,867 $21,877,474 $14,427,834 $138,051,398
============ ========== ========== ========== ===========
As part of its strategy to maintain its interest rate sensitivity within
desired tolerances, Brunswick periodically seeks to lengthen the term of its
liabilities so as to match such liabilities with assets of similar terms.
Brunswick seeks to attract such deposits through advertising campaigns and by
offering competitive rates, gifts and incentives to employees.
12
The following table sets forth the deposit activities of Brunswick for
the periods indicated.
Year Ended September 30,
1996 1995 1994
------------------ ------------------ -----------
Deposits......................... $1,268,795,400 $1,144,975,849 $1,063,073,724
Withdrawals ..................... 1,282,953,549 1,131,564,224 1,065,862,680
------------- -------------
Net cash increase
(decrease) before
interested credited............ (14,158,149) 13,411,625 (2,788,956)
Interest credited................ $9,428,012 $ 8,678,990 6,957,844
---------- ---------- ---------
Net increase (decrease) in
deposits...................... $ (4,730,137 $ 22,090,615 $ 4,168,888
========== ========== =========
The following table sets forth time deposits of $100,000 or more (jumbo
deposits) by remaining time to maturity, as of September 30, 1996.
0 - 3 months........................... $ 7,198,719
4 - 6 months........................... 5,316,189
7 - 12 months........................... 8,844,676
Greater than 12 months........................... 10,639,697
----------
$31,999,281
==========
Borrowings. Brunswick periodically obtains funds through borrowings from
the FHLB of Atlanta. At September 30, 1996, Brunswick had $1,500,000 in advances
at interest rates ranging from 7.90% to 7.91% compared to advances of $2,200,000
and $4,000,000 at September 30, 1995 and 1994, respectively. FHLB borrowings
have been made on the security of Brunswick's FHLB stock, mortgage-backed
securities, investment securities and cash. Brunswick had no other short-term
borrowings during fiscal years 1996, 1995, and 1994.
A savings institution is required to be a "qualified thrift lender" in
order to have full access to FHLB advances. Generally, an institution must have
at least 65% of its portfolio assets invested in housing and housing related
investments in order to qualify. As of September 30, 1996, Brunswick satisfied
the qualified thrift lender test. For information regarding the "qualified
thrift lender" requirements, see "Regulation and Supervision" below.
Interest Rate Comparison and Profitability
Brunswick's earnings are affected by its "spread", that is, the
difference between the rate of return on its loan and investment portfolios and
its cost of money (consisting principally of interest paid on savings deposits
and on borrowings). The return on its loan portfolio changes primarily as a
result of the rates and volumes of new and existing loans, and the return on its
investment portfolio depends on the interest rates paid on such securities and
the amount of funds invested. The cost of money is primarily dependent on
short-term interest rates, which are subject to volatile movements. Expanded
investment authority and the ability to make adjustable rate mortgage loans has
provided Brunswick with better means to match the maturities of its assets and
liabilities.
Brunswick has implemented a number of measures in recent years in an
effort to make the yields on its loan and investment portfolios more responsive
to changes in its cost of money. These steps include an emphasis on consumer,
construction and other short-term or variable rate loans, and efforts to reduce
the amount of long-term, fixed-rate real estate loans with low interest rates in
Brunswick's portfolio. Moreover,
13
substantially all long-term, fixed-rate loans currently being originated are
being sold in the secondary market. In addition, Brunswick is trying to solicit
deposits with longer terms, to increase core deposits and to match assets with
liabilities to the extent possible.
The following tables set forth for the periods and at the dates indicated
the weighted average yields earned on Brunswick's assets and the weighted
average interest rates paid on Brunswick's liabilities (e.g., deposits and
borrowings), together with the net spread on interest-earning assets for the
periods indicated (loan portfolio data includes mortgage-backed securities and
non-accrual loans) and selected performance ratios.
Year Ended September 30,
1996 1995 1994
-------------- -------------- ---------
Weighted average yield
on loan portfolio.................... 8.64% 8.68% 8.10%
Weighted average yield
on mortgage-backed
securities........................... 6.74 6.99 6.84
Weighted average yield
on investment securi-
ties ............................. 6.56 6.43 5.81
Weighted average yield
on other investments................. 5.65 6.36 4.24
Weighted average
yield on all
interest-earning
assets ............................. 8.31 8.27 7.62
Weighted average rate
paid on savings
deposits............................. 4.66 4.40 3.71
Weighted average rate
paid on FHLB advances................ 6.96 5.87 5.99
Weighted average rate
paid on short-term borrowings....... 2.25 2.50 --
Weighted average rate
paid on all
interest-bearing
liabilities.......................... 4.69 4.42 3.77
Net yield on average
interest earning assets.............. 4.05 4.21 4.16
Return on assets...................... .86 1.28 1.42
Return on equity...................... 8.31 12.82 13.89
Equity to assets...................... 10.31 10.01 9.80
14
At September 30,
1996 1995 1994
---------------- ---------------- ----------
Weighted average yield
on loan portfolio........................ 8.62% 8.59% 8.34%
Weighted average yield
on mortgage-backed
securities............................... 6.44 6.99 6.88
Weighted average yield
on investment
securities............................... 6.48 6.41 6.08
Weighted average yield
on other investments..................... 5.47 5.74 4.77
Weighted average
yield on all
interest-earning
assets................................... 8.30 8.08 7.90
Weighted average rate
paid on savings
deposits................................. 4.43 4.81 3.77
Weighted average rate
paid on FHLB advances.................... 7.91 6.82 6.32
Weighted average rate
paid on all
interest-bearing
liabilities.............................. 4.46 4.83 3.82
Net spread on average
interest earning
assets................................... 3.84 3.25 4.08
Equity to assets ratio.................... 10.45 10.07 10.24
15
The following table sets forth certain information regarding changes in
interest income and interest expense of Brunswick for the periods indicated. For
each category of interest-earning assets and interest-bearing liabilities,
information is provided on changes attributable to (i) changes in volume of
assets or liabilities outstanding (changes in volume multiplied by old rate),
(ii) changes in the interest rate earned or paid on those balances (changes in
rate multiplied by old volume), and (iii) a combination of changes in rate and
volume (change in rate multiplied by the change in volume).
Year Ended September 30,
1996 vs. 1995 1995 vs. 1994 1994 vs. 1993
Increase (Decrease) Increase (Decrease) Increase (Decrease)
Due to Due to Due to
Rate/ Rate/ Rate/
(Dollars in Thousands) Volume Rate Volume Volume Rate Volume Volume Rate Volume
------ ------ --------- ------ ------ ------ ------- ------- ------
Interest earning
assets:
Loans ...................... $1,359 $(75) $(6) $643 $1,043 $46 $1,074 $(434) $(34)
Mortgage-backed
securities................. 242 (29) (8) (6) 18 -- 108 (38) (6)
Investment securities....... (232) 20 (5) (119) 109 (13) (372) (154) 38
Other interest..............
earning assets............. (174) (121) 19 162 281 81 57 71 10
Total interest earning
assets .................... 893 93 4 736 1,446 63 811 (467) (23)
Interest bearing
liabilities:
Savings deposits............ 397 544 24 375 1,375 70 274 (654) (23)
Advances from the
FHLB....................... (62) 39 (11) (96) (6) 2 72 (30) (8)
Short-term borrowings....... -- (1) -- -- -- 3 -- -- --
Total interest-bearing
liabilities................ 334 576 20 337 1,328 58 325 (668) (27)
Service Corporation Activities
Federally chartered thrift institutions may invest in service
corporations as a vehicle to engage in securities, real estate development and
other activities that may not be directly permissible. Brunswick is permitted to
invest an amount equal to 3% of its assets in its service corporation. In
addition, a federal thrift institution meeting its applicable minimum regulatory
capital requirements may invest, but subject to restrictions on loans to one
borrower, up to 50% of the institution's total capital in conforming loans to
service corporations.
Brunswick formed a wholly owned service corporation, First Shelter
Service Corporation ("First Service"), in 1971 primarily for the purpose of
providing appraisal and construction inspection services to Brunswick. In the
past, First Shelter had engaged in limited land development and joint venture
activities, in addition to providing appraisal and construction inspection
services. At present, First Shelter is inactive. As of September 30, 1996, the
net book value of Brunswick's investment in its service corporation, which
consisted of its investment in the stock and accumulated undistributed retained
earnings of the service corporation, was approximately $304,000 or .12% of
assets.
16
Regulation and Supervision
General. Brunswick is a member of the FHLB system ("FHLB System") and its
deposit accounts are insured up to applicable limits by the SAIF of the FDIC.
Brunswick is subject to extensive regulation by the OTS and the FDIC and must
file reports with the OTS concerning its activities and financial condition, in
addition to obtaining regulatory approvals prior to entering into certain
transactions such as mergers with or acquisitions of other depository
institutions. The OTS conducts periodic examinations to determine Brunswick's
compliance with various regulatory requirements.
In 1989, the Financial Institutions Reform, Recovery and Enforcement Act
of 1989 ("FIRREA") was enacted. This law was designed to reduce the number of
problem savings and loan associations, to recapitalize the thrift insurance
fund, and to reform and reorganize the regulatory structure applicable to
savings associations that were regulated by the Federal Home Loan Bank Board
("FHLBB") prior to FIRREA. Under FIRREA, the Federal Savings and Loan Insurance
Corporation ("FSLIC") was dissolved and the SAIF was created as the new
insurance fund for savings institutions. The insurance fund for commercial banks
was renamed the Bank Insurance Fund ("BIF"), the assets of which are not
commingled with those of the SAIF. The OTS, which replaced the FHLBB and is the
primary federal regulator for all thrift institutions, is a bureau of the
Department of the Treasury.
In 1991, a comprehensive deposit insurance and banking reform plan, the
Federal Deposit Insurance Corporation Improvement Act of 1991 ("FDICIA"), became
law. FDICIA, which was enacted to recapitalize the BIF, effects a number of
regulatory reforms that impact both savings institutions and banks. FDICIA
authorizes the regulators to take prompt corrective action to solve the problems
of critically undercapitalized institutions. As a result, the banking regulators
are required to take certain supervisory actions against undercapitalized
institutions, the severity of which increases as an institution's level of
capitalization decreases. Pursuant to FDICIA, the federal banking agencies have
established the levels at which an insured institution is considered to be "well
capitalized," "adequately capitalized," "undercapitalized," "significantly
undercapitalized" or "critically undercapitalized." See "Capital Requirements"
below for a discussion of the applicable levels. In addition, FDICIA requires
each federal banking agency to establish standards relating to internal
controls, information systems, and internal audit systems that are designed to
assess the financial condition and management of the institution; loan
documentation; credit underwriting; interest rate exposure; asset growth; and
compensation, fees and benefits. FDICIA lowered the qualified thrift lender
(QTL) investment percentage applicable to SAIF-insured institutions. FDICIA
further requires annual on-site full examinations of depository institutions,
with certain exceptions, and annual reports on institutions' financial and
management controls.
The following material summarizes certain of the regulatory requirements
applicable to Brunswick.
Federal Home Loan Bank System. The FHLB System, which consists of 12
regional FHLBs, provides a central credit facility primarily for member
institutions. As a member of the FHLB of Atlanta, Brunswick is required to
acquire and hold shares of capital stock in that FHLB in an amount at least
equal to the greater of 1% of the aggregate principal amount of Brunswick's
unpaid residential mortgage loans, home purchase contracts, and similar
obligations at the beginning of each year, or 5% of its aggregate outstanding
advances (borrowings) from the FHLB of Atlanta. As of September 30, 1996,
Brunswick was in compliance with this requirement, with an investment in FHLB of
Atlanta stock of approximately $1.6 million.
The FHLB of Atlanta serves as a reserve or central bank for the member
institutions within its assigned region. It is funded primarily from the sale of
consolidated obligations of the FHLB System. It makes advances to members in
accordance with policies and procedures established by the Federal Housing
Finance Board and the Board of Directors of the FHLB of Atlanta. At September
30, 1996, Brunswick had $1.5 million in advances from the FHLB of Atlanta, at
interest rates ranging from 7.90% to 7.91%. The advances will mature by January
27, 1997.
17
Liquidity. Brunswick is required to maintain an average daily balance of
liquid assets (cash, balances maintained in or passed through to a Federal
Reserve Bank, certain time deposits, certain bankers' acceptances, specified
United States government, state or Federal agency obligations, shares of certain
mutual funds, certain corporate debt securities, certain commercial paper, and
certain mortgage-related securities) equal to a monthly average of not less than
a specified percentage of its net withdrawable accounts plus borrowings payable
on demand or in one year or less ("Short Term Borrowings"). This liquidity
requirement may be changed from time to time by the Director of the OTS
("Director") to between 4% to 10%; it is currently 5%. OTS regulations also
require each member savings institution to maintain an average daily balance of
short-term liquid assets at a specified percentage (currently 1%) of the total
of its net withdrawable accounts and short-term borrowings. Monetary penalties
may be imposed for failure to meet those liquidity requirements. The daily
average liquidity of Brunswick for September 1996 was 10.47% and exceeded the
then-applicable 5% liquidity requirement. Its short-term daily average liquidity
ratio for September 1996 was 4.14% and exceeded the then-applicable 1%
short-term liquidity requirement.
In addition, Federal Reserve regulations generally require that reserves
of 3% be maintained against aggregate transaction accounts of $49.3 million or
less (subject to adjustment by the Federal Reserve), and that an initial reserve
of 10% (subject to adjustment by the Federal Reserve between 8% and 14%) be
maintained against that portion of total transaction accounts in excess of such
amount. In addition, the Federal Reserve may require an initial reserve of
between 0% and 9% to be maintained on nonpersonal time deposits with, or
regarded as having, an original maturity of less than one and one-half (1.5)
years. Money market deposit accounts are subject to the reserve requirement
applicable to nonpersonal time deposits when not held by a natural person. The
first $4.4 million of otherwise reservable balances (subject to adjustments by
the Federal Reserve) are exempted from the reserve requirements.
The balances maintained to meet the reserve requirements imposed by the
Federal Reserve may be used to satisfy liquidity requirements that may be
imposed by the OTS. 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 Federal Reserve, the effect of the
reserve requirement is to reduce Brunswick's interest-earning assets.
FHLB System members also are authorized to borrow from the Federal
Reserve discount window, but Federal Reserve regulations require institutions to
exhaust all FHLB sources before borrowing from a Federal Reserve Bank.
Insurance of Deposit Accounts. Brunswick's deposit accounts are insured
by the FDIC to the maximum amount permitted by law, currently $100,000 for each
insured account, through the SAIF fund. With respect to assessments paid by
associations, the FDIC historically imposed assessments on each association
based on the institution's assessment risk classification. The rates ranged from
$.23 to $.31 for each $100 of domestic deposits. The rate at which a SAIF member
institution paid assessments was determined on the basis of capital and
supervisory measures. For the fiscal year ended September 30, 1996, Brunswick's
assessment rate was $.23 for each $100 of domestic deposits. On September 30,
1996, legislation was enacted which, among other things, imposed a special
one-time assessment on SAIF member institutions, including Brunswick, in order
to recapitalize the SAIF and allocate to SAIF and BIF-insured institutions an
annual assessment to cover interest payments on Financing Corp. (FICO) bonds
issued in the 1980's to assist the thrift industry. The special one-time
assessment levied by the FDIC amounts to 65.7 basis points on SAIF assessable
deposits held by an institution as of March 31, 1995. SAIF-insured institutions
were required to recognize the special assessment, which is tax deductible, as
of September 30, 1996. Accordingly, Brunswick took a charge of $2.36 million
before taxes as a result of the FDIC special assessment. Beginning on January 1,
1997, SAIF members will pay an annual assessment of 6.4 basis points on
SAIF-insured deposits to cover interest payments on the FICO bonds. The FDIC
also has proposed a base assessment schedule for SAIF institutions which would
range from 4 to 31 basis points, with an adjusted assessment schedule that would
immediately reduce those rates by 4 basis points. Accordingly, well-capitalized
thrifts, similar to BIF-insured members, would
18
effectively have an assessment rate of zero for deposit insurance, excepting the
FICO assessment of 6.4 basis points discussed above. The new rate would apply to
all SAIF-insured institutions beginning January 1, 1997.
The FDIC has the authority to suspend the deposit insurance of any thrift
without tangible capital. However, if a thrift achieves positive capital by
including qualifying supervisory goodwill, the FDIC cannot suspend deposit
insurance unless the FDIC's Board of Directors determines that: (i) the thrift's
capital has declined materially; (ii) the thrift is engaging in an unsafe or
unsound practice or is in an unsafe or unsound condition; or (iii) the thrift
has violated an applicable law, rule, regulation, or order, or any condition
imposed by, or written agreement entered into with, a federal banking agency, or
has failed to enter timely into an acceptable capital improvement plan. At
September 30, 1995, Brunswick had tangible capital of 10.01% of total assets.
Loans to One Borrower and Certain Loan Limits. FIRREA provides that the
same limits on loans to one borrower that apply to national banks apply to
savings institutions. Generally, a savings association may lend to a single or
related group of borrowers, on an unsecured basis, an amount equal to 15% of its
unimpaired capital and surplus. An additional amount equal to 10% of unimpaired
capital and surplus, may be loaned if secured by readily marketable collateral,
which is defined to include securities and bullion, but generally does not
include real estate. Notwithstanding such provisions, a savings association may
make loans to one borrower (i) for any purpose, up to $500,000, or (ii) to
develop domestic residential housing units, up to the lesser $30 million or 30%
of the association's unimpaired capital and unimpaired surplus, if certain
conditions are satisfied. In addition, a savings association's loans to one
borrower to finance a sale of real property acquired in satisfaction of debts
previously contracted in good faith may not exceed the 15% limit.
Under the regulations described above, as of September 30, 1996,
Brunswick could lend to a single borrower and its related entities on an
unsecured basis an amount not to exceed $3.9 million based upon its unimpaired
capital and surplus. Also as of that date, it could lend an additional $2.6
million if secured by readily marketable collateral. As of September 30, 1996,
the amount outstanding to the largest single borrower of Brunswick was $3.3
million.
FIRREA also imposes limits on a federal savings association's aggregate
"nonresidential real property loans." FIRREA generally limits the aggregate
amount of "loans on the security of liens upon nonresidential real property" to
400% of the association's capital as determined under the capital standards of
FIRREA. FIRREA also permits the Director to allow an association to exceed the
aggregate limitation if the Director determines that exceeding the limitation
would pose no significant risks to the safe and sound operation of the
association, and would be consistent with prudent operating practices.
Qualified Thrift Lender Test. The QTL test generally requires that a
savings association's qualified thrift investments equal or exceed 65% of the
association's "portfolio assets" (total assets less (i) specified liquid assets
up to 20% of total assets, (ii) intangibles, including goodwill, and (iii) the
value of property used to conduct business) on a monthly average basis in nine
of every twelve months.
"Qualified thrift investments" include all investments related to
domestic residential real estate or mobile homes, the book value of property
used by the savings association in conducting its business and stock issued by
any FHLB. "Investments related to domestic residential real estate" include:
home mortgages; homeimprovement loans; other loans on the security of
residential real estate; obligations of the FHLB System; investments in deposits
of other insured institutions; securities issued or guaranteed by the FHLMC,
Federal National Mortgage Association, or Government National Mortgage
Association, or issued by the FSLIC Financing Corporation; mortgage servicing
rights; and other mortgage-related securities. Investments related to domestic
residential real estate also include investment in a corporation, partnership,
or trust in proportion to the amount of gross revenues derived by that entity
from activities related to domestic housing. In addition to investments related
to domestic residential real estate and property used in conducting the
association's business, qualified thrift investments also include specified
liquid assets and 50% of the residential mortgage
19
loans originated by the association and sold within 90 days of origination, but
those liquid assets and mortgage loans may not exceed 20% of the association's
tangible assets.
Any savings institution that fails to become or remain a QTL must either
convert to a commercial bank charter or be subject to restrictions specified in
the OTS regulations. A savings institution that converts to a bank must pay all
SAIF insurance assessments until the date of its conversion to BIF membership.
Any such institution that does not become a bank is prohibited from: (i)
engaging in any new activity not permissible for a national bank; (ii) paying
dividends not permissible under national bank regulations; (iii) obtaining
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, beginning three years after the association failed the QTL test, the
association would be prohibited from engaging in any activity not permissible
for a national bank and would have to repay any outstanding advances from an
FHLB as promptly as possible. A savings institution may requalify as a QTL if it
thereafter complies with the QTL test. As of September 30, 1996, Brunswick was
in compliance with the QTL test as amended by FDICIA.
Enforcement Powers. Pursuant to FIRREA, the OTS was granted enhanced,
extensive enforcement authority over all savings associations. This enforcement
authority includes, among other things, the ability to assess civil money
penalties, to issue cease and desist or removal orders and to initiate
injunctive actions. In general, these enforcement actions may be initiated for
violations of laws and regulations and unsafe or unsound practices. Since the
enactment of FIRREA, the OTS has significantly increased the use of written
agreements to correct compliance deficiencies with respect to applicable laws
and regulations and to ensure safe and sound practices; violations of such
written agreements are grounds for initiation of cease and desist proceedings.
FIRREA significantly increased the amount of and grounds for civil money
penalties assessable against savings associations and "institution-affiliated
parties." FDICIA granted the FDIC back-up enforcement authority to recommend
enforcement to an appropriate federal banking agency (i.e., the OTS) and to
bring such enforcement action against a savings association or an
institution-affiliated party if such federal banking agency fails to follow the
FDIC's recommendation. In addition, FIRREA requires, except under certain
circumstances, public disclosure of final enforcement actions by the OTS. FIRREA
also expanded the group of persons subject to administrative enforcement
proceedings to include any "institution-affiliated party," including (i)
controlling shareholders, (ii) certain persons who participate in the affairs of
an institution, and (iii) attorneys, appraisers, and accountants who knowingly
or recklessly participate in wrongful action that had or is likely to have an
adverse effect on an insured depository institution. The FDIC Act, as amended by
FIRREA, provides that an institution-affiliated party may be subject to removal
or suspension whenever such person has violated any law, regulation, or order or
has engaged in an unsafe or unsound practice that causes the institution to
suffer financial loss.
FIRREA substantially increased the civil money penalties that may be
assessed for violations of law to as much as $1 million per day. Sentences now
range from up to 30 years for most financial institutions-related crimes
involving theft, fraud, and embezzlement to as much as life imprisonment in the
case of "financial kingpins" who derive more than $5 million from their crimes
within a certain period. Federal financial institutions agencies also have the
authority to prevent the dissipation of assets wrongfully obtained by
institution-affiliated parties and amends federal bankruptcy laws to prevent
such persons from using bankruptcy to avoid payment of civil and criminal money
penalties. It also is a crime to knowingly conceal an asset or property from the
FDIC or the Resolution Trust Corporation ("RTC") or to obstruct the examination
of a financial institution.
FIRREA also expanded the grounds for appointment for a conservator or
receiver for a savings association. Grounds for such appointment include:
insolvency; substantial dissipation of assets or earnings; existence of an
unsafe or unsound condition to transact business; likelihood that the
association will be unable to pay its obligations in the normal course of
business; and insufficient capital or the likely incurring of losses that will
deplete substantially all capital with no reasonable prospect for replenishment.
FIDIC added additional grounds for the appointment of a conservator or receiver
of a savings association.
20
As a result of FIRREA and FDICIA, federal regulators have greater
flexibility to impose enforcement action on an institution that fails to comply
with its regulatory requirements, particularly with respect to the capital
requirements. Possible enforcement action ranges from the imposition of a
capital plan to the termination of deposit insurance. While the OTS has primary
responsibility over savings associations, the FDIC is empowered to recommend
enforcement action to the Director. If the Director does not take action, the
FDIC has authority to compel such action under certain circumstances.
Capital Requirements. FIRREA and the implementing regulations of the OTS
and the FDIC changed the capital requirements applicable to savings
associations, including Brunswick, and the consequences of failing to comply
with those requirements. The capital standards include (i) a core capital
requirement, (ii) a tangible capital requirement, and (iii) a risk-based capital
requirement. As described in more detail below, if an association fails to meet
any of the three capital standards, it must submit a capital restoration plan to
be approved by the OTS. Such failure may also result in the imposition of
various restrictions on the association.
The core capital standard requires a savings association to maintain
"core capital" of not less than 3% of adjusted total assets. "Core capital"
includes common stockholders' equity (including retained earnings),
noncumulative perpetual preferred stock and related surplus, minority interests
in the equity accounts of fully consolidated subsidiaries, certain
nonwithdrawable accounts, pledged deposits of mutual savings associations, and
certain goodwill resulting from prior regulatory accounting practices.
While the items mentioned above are included in core capital, intangible
assets must be deducted in computing core capital because they are excluded from
assets under FIRREA's capital rules. There are exceptions to that rule of
deduction, however. Purchased credit card relationships and mortgage servicing
rights may be included in core capital, in an amount not in excess of 50% of
core capital computed before deducting any disallowed intangible assets or
mortgage servicing rights. Purchased mortgage servicing rights, provided that
such rights must be valued at the lower of 90% of fair market value to the
extent determinable, or current amortized book value, and that any amount
written off must be deducted from core capital. Qualifying supervisory goodwill
held by an eligible savings association must be deducted from assets in
determining core capital. Finally, investments in subsidiaries engaged in
activities not permissible for a national bank generally must be deducted from
assets in determining core capital.
The tangible capital requirement requires a savings association to
maintain tangible capital in an amount not less than 1.5% of adjusted total
assets. "Tangible capital" is defined as core capital minus intangible assets.
FIRREA authorizes the inclusion of up to 90% of purchased mortgage servicing
rights in calculating tangible capital, but OTS regulations prohibit the
inclusion of supervisory goodwill in calculating tangible capital.
The risk-based capital requirement requires a savings association to
maintain risk-based capital of not less than 8% of risk-weighted assets.
Risk-based capital includes core capital and supplementary capital, provided
that the amount of supplementary capital counting toward the requirement may not
exceed core capital.
In calculating the risk-based capital requirement for a savings
association, risk-weighted assets equals total assets plus consolidated
off-balance sheet items, where each asset or item is multiplied by the
appropriate risk weight as described below. Before an off-balance sheet item is
assigned a risk weight, it must be converted to an on-balance sheet credit
equivalent amount. That conversion generally is accomplished by multiplying the
item by either 100%, 50%, 20%, or 0%, whichever is applicable under the OTS
regulations. Each asset and each credit equivalent amount is assigned a risk
weight as follows: (i) 0%, for cash and certain government securities; (ii) 20%,
for securities of the United States government or its agencies not backed by the
full faith and credit of the United States government and for high-quality
mortgage-related securities; (iii) 50%, for certain revenue bonds and qualifying
residential mortgage loans; or (iv) 100%, for most other loans.
21
For purposes of determining the core and tangible capital components,
FIRREA requires that investments in certain "nonincludable subsidiaries" be
deducted from assets. Nonincludable subsidiaries are generally those engaged in
activities not permissible for national banks. However, certain exemptions
generally apply where the subsidiary: (i) is engaged in the activities solely as
an agent for its customers; (ii) is engaged solely in mortgage-banking
activities; (iii) (a) is an insured depository institution or a company whose
sole investment is an insured depository institution and (b) was acquired by the
association prior to May 1989; or (iv) is a federal savings association that
existed as such on August 9, 1989, and was, or acquired its principal assets
from, an association that was chartered before October 15, 1982, as a state
savings or cooperative bank. At September 30, 1996, Brunswick had no investments
in or advances to nonincludable subsidiaries.
OTS regulations provide that a savings association's total capital is
equal to its core capital plus its supplementary capital (up to 100% of its core
capital). However, in addition to assets otherwise required to be deducted in
calculating core capital, reciprocal holdings of depository institution capital
instruments must be deducted from assets in determining total capital. In
addition, that portion of land and nonresidential construction loans in excess
of 80% loan-to-value ratio, as well as all equity investments, must be deducted
from assets in determining total capital. At September 30, 1996, Brunswick's
investment in the portion of land and nonresidential construction loans in
excess of 80% loan-to-value ratio and all equity investments was not
significant.
Brunswick must maintain core capital at least equal to 3.0% of total
adjusted assets and risk-based capital at least equal to 8.0% of risk-weighted
assets. Additionally, Brunswick must maintain tangible capital at least equal to
1.5% of total adjusted assets.
The following table presents Brunswick's capital levels at September 30, 1996,
relative to these requirements.
Amount Percent Actual Actual Excess
(Dollars in thousands) Required Required Amount Percent Amount
Core Capital..................... $7,478 3.0% $26,174 10.5% $18,696
Tangible Capital................. 3,739 1.5 26,174 10.5 22,435
Risk-Based Capital............... 13,874 8.0 26,758 15.4 (1) 12,884
(1) Represents risk-based capital as a percentage of risk-weighted
assets.
Although those capital ratios exceed the minimum capital requirements
imposed by the implementing OTS regulations at September 30, 1996, future
events, such as increased interest rates, asset write-downs, or a downturn in
the economy in areas where Brunswick has most of its loans, could adversely
affect future earnings and, consequently, the ability of Brunswick to meet its
future minimum capital requirements.
Savings associations with "above normal" interest rate risk exposure are
subject to a deduction from total capital for purposes of calculating their
risk-based capital requirements. 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) that would result from a
hypothetical 200-basis point increase or decrease in market interest rates
(except when the 3-month Treasury bond equivalent yield falls below 4%, then the
decrease will be equal to one-half of that Treasury rate) divided by the
estimated economic value of the association's assets, as calculated in
accordance with guidelines set forth by the OTS. A savings association whose
measured interest rate risk exposure exceeds 2% must deduct an interest rate
component in calculating its total capital under the risk-based capital rule.
The interest rate risk component is an amount equal to one-half of the
difference between the institution's measured interest rate risk and 2%,
multiplied by the estimated economic value of the association's assets. That
dollar amount is deducted from an association's total capital in calculating
compliance with its risk-based capital requirement. Under the rule, there is a
two quarter lag between the reporting date of an institution's financial
22
data and the effective date for the new capital requirement based on that data.
The rule also provides that the Director of the OTS may waive or defer an
association's interest rate risk component on a case-by-case basis.
The OTS also has adopted regulations to implement the system of prompt
corrective action established by FDICIA. The rules permit the OTS to take
certain supervisory actions when an insured association falls within one of five
specifically enumerated capital categories. Under the rules, an institution will
be deemed to be (i) "well-capitalized" if the association has a total risk-based
capital ratio of 10% or greater, a Tier 1 risk-based capital ratio of 6% or
greater, and a leverage ratio of 5% or greater, and the association is not
subject to any enforcement agreement relating to capital; (ii) "adequately
capitalized" if the association exceeds a riskbased capital ratio of 8%, a Tier
1 risk-based capital ratio of 4%, and a leverage ratio of 4% (3% if the
association has a composite one rating); (iii) "under capitalized" if the
association's risk-based capital ratio is less than 8%, Tier 1 capital ratio is
less than 4%, or leverage ratio is less than 4% (3% if it has a composite one
rating); (iv) "significantly under capitalized" if the association's risk-based
capital is less than 6%, Tier 1 capital ratio is less than 3%, or leverage ratio
is less than 3%; and (v) "critically under capitalized" if the association has a
ratio of tangible equity to total assets that is 2% or below. The regulations
provide a framework of supervisory actions based on the capital level of an
insured association. Generally, an association may not declare any dividends,
make any other capital distribution, or pay a management fee if, following the
distribution or payment, the institution would be within any one of the three
under capitalized categories. There is a limited exception to this prohibition
for stock redemptions that do not result in any decrease in an association's
capital and would improve the association's financial condition, provided the
redemption has been approved by the OTS. Institutions that are classified as
under capitalized also are subject to additional mandatory supervisory actions,
including increased monitoring by the OTS, a requirement to submit a capital
restoration plan, and restrictions on growth of the institution's assets as well
as a limitation on its ability to make acquisitions and open branches. In
addition to the foregoing, a significantly under capitalized institution may not
pay bonuses or raises to its senior executive officers without prior OTS
approval and also must comply with additional mandatory requirements regarding
the operation of the association in the interim. Based upon the foregoing
regulations and First Federal's capital ratios as of September 30, 1996, First
Federal would be considered in the well-capitalized category.
The Director may grant an exemption from a capital directive imposing
operational restrictions or corrective actions if: (i) the exemption would pose
no significant risk to the affected deposit insurance fund; (ii) the
association's management is competent; (iii) the association is in substantial
compliance with all applicable statutes, regulations, orders, and supervisory
agreements and directives; and (iv) the association's management has not engaged
in any activities that have jeopardized the association's safety and soundness
or contributed to impairing its capital. In addition, a savings association that
does not meet applicable capital standards may not increase its assets without
the Director's prior written approval, and in no event may increase its assets
beyond the amount of net interest credited to its deposit liabilities.
In addition to the foregoing prompt corrective action provisions, FDICIA
also sets forth requirements that the federal banking agencies, including the
OTS, review their capital standards every two years to ensure that their
standards require sufficient capital to facilitate prompt corrective action and
to minimize loss to the SAIF and the BIF.
Appointment of Receiver or Conservator. FIRREA and FDICIA significantly
expand the grounds upon which a receiver or conservator may be appointed for a
savings association. That expansion enhanced the ability of regulatory
authorities to engage in "early intervention" to take control of an association
before it is insolvent. Included in the new grounds for appointment are (i)
"having substantially insufficient capital," (ii) incurrence or likely
incurrence of losses that will substantially deplete all of the association's
capital and no reasonable prospect for replenishing that capital without federal
assistance, and (iii) a violation of law or regulation that is likely to weaken
the association's condition.
23
Limitation on Capital Distributions. The OTS has promulgated a rule
governing capital distributions such as dividends, stock repurchases, and
cash-out mergers by savings associations. The rule establishes three tiers of
institutions. An institution that meets or exceeds its fully phased-in capital
requirement after giving effect to a proposed distribution is considered a "Tier
1 Institution" under the rule and may make aggregate capital distributions
during a calendar year, without prior OTS approval, of up to the greater of (i)
all of its net income to date during the year plus an amount that would reduce
its excess capital ratio to one-half of such excess capital ratio at the
beginning of the calendar year or (ii) 75% of its net income over the most
recent four quarterly period. An institution that meets its current regulatory
capital requirement, but not its fully phased-in requirement, after giving
effect to a proposed distribution is a "Tier 2 Institution" and may make capital
distributions without prior OTS approval of up to the following percentage of
net income for the most recent four-quarter period: (i) 75% of such net income
if the association meets its fully phased-in risk-based capital requirements
before the distribution; or (ii) 50% of such net income if the association meets
only its current risk-based capital standards before the distribution. A savings
association that fails to meet its regulatory capital requirements (a "Tier 3
Institution") may not make capital distributions without the OTS's prior written
approval. An institution meeting the Tier 1 capital criteria but that has been
notified by the OTS that it is in need of more than normal supervision may be
treated as a Tier 2 or a Tier 3 institution. As of September 30, 1996, Brunswick
was a Tier 1 Institution and would be permitted to distribute 100% of net income
and one-half of its excess capital in a given year. However, there can be no
assurance that Brunswick will remain a Tier 1 Institution for purposes of the
rule.
The OTS also may determine that any capital distribution would constitute
an unsafe or unsound practice and prohibit the distribution, in particular if
Brunswick's capital were decreasing due to substantial losses.
Transactions with Affiliates. FIRREA made Federal Reserve Act ("FRA")
Sections 23A, 23B, and 22(h) applicable to savings associations. Those sections
limit extensions of credit to affiliated institutions, executive officers,
directors, and 10% stockholders. Generally, Sections 23A and 23B (i) limit the
extent to which the insured association or its subsidiaries may engage in
certain covered transactions with an affiliated institution to an amount equal
to 10% of such institution's capital stock and surplus, and place an aggregate
limit on all such transactions with all affiliated institutions of an amount
equal to 20% of such capital stock and surplus, and (ii) require that all such
transactions be on terms consistent with safe and sound banking practices.
"Covered transactions" include the making of loans, the purchasing of assets,
the issuance of a guarantee, and similar transactions. FIRREA also imposed three
additional rules on savings associations: (i) a savings association may not make
any extension of credit to an affiliate unless that affiliate is engaged only in
activities permissible for bank holding companies; (ii) a savings association
may not purchase or invest in securities insured by an affiliate, other than a
subsidiary; and (iii) the Director may impose more stringent restrictions on
savings associations than those set forth in Sections 23A, 23B, and 22(h) of the
FRA.
Brokered Deposits. FIRREA also added a new Section 29 to the FDI Act
generally prohibiting the acceptance or renewal of brokered deposits by any
under-capitalized insured depository institution after December 7, 1989, except
upon the specific application to and waiver of that prohibition by the FDIC. The
statute defines "brokered deposits" to include not only (i) deposits solicited
through the assistance of a third-party deposit broker, but also (ii) deposits
obtained by a depository institution by offering a rate of interest that is at
least 50 basis points (0.5%) higher than the prevailing rate offered by similar
depository institutions in the same market area. As of September 30, 1996,
Brunswick had no deposits that would be considered to be "brokered deposits"
under the statute and the FDIC's regulations.
Corporate Debt Securities Below Investment Grade. FIRREA also generally
prohibits savings associations and their subsidiaries from acquiring or
retaining any corporate debt security that, at the time of acquisition, is not
(or, in the case of previously acquired securities, was not) rated in one of the
four highest rating categories by at least one nationally recognized statistical
rating organization. At September 30, 1996, Brunswick had no corporate debt
securities below investment grade.
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Investment Portfolio Accounting. Savings associations are required to
account for transactions in accordance with GAAP, which requires that investment
securities held to maturity be accounted for at amortized cost; securities
available-for-sale, at the lower of cost or market; and trading securities, at
market.
Asset Classification. The OTS has a classification system for problem
assets of insured institutions which covers all problem assets, including assets
that previously had been treated as "scheduled items." Under that classification
system, problem assets of insured institutions are classified as "substandard,"
"doubtful," or "loss," depending on the presence of certain characteristics as
discussed below.
An asset is considered "substandard" if inadequately protected by the
current net worth and paying capacity of the obligor or of the collateral
pledged, if any. "Substandard" assets include those characterized by the
"distinct possibility" that the insured institution will sustain "some loss" if
the deficiencies are not corrected. Assets classified as "doubtful" have all of
the weaknesses inherent in those classified "substandard," with the added
characteristic that the weaknesses make "collection or liquidation in full," on
the basis of currently existing facts, conditions, and values, "highly
questionable and improbable." Assets classified as "loss" are those considered
"uncollectible" and of such little value that their continuance as assets
without the establishment of a specific loss reserve is not warranted.
When an insured institution classifies problem assets as either
substandard or doubtful, it is required to establish general allowances for loan
losses in an amount deemed prudent by management. General allowances represent
loss allowances that have been established to recognize the inherent risk
associated with lending activities, but that, unlike specific allowances, have
not been allocated to particular problem assets. When an insured institution
classifies problem assets as "loss," it is required either to establish a
specific allowance for losses equal to 100% of the amount of the asset so
classified or to charge off such amount. An institution's determination as to
the classification of its assets and the amount of its valuation allowances is
subject to review by the institution's Principal Supervisory Agent, who can
order the establishment of additional general or specific loss allowances.
Service Corporation Subsidiaries. The HOLA authorizes federally chartered
savings associations to invest up to 3% of their assets in the stock of service
corporation subsidiaries. In addition, federal thrift institutions meeting their
applicable minimum regulatory capital requirements may invest up to 50% of
regulatory capital in conforming loans to service corporations. The OTS's
implementing regulations require that the activities of a service corporation be
reasonably related to the activities of a federal association and generally
provide that OTS approval must be obtained before a service corporation may
commence any new activity. However, the regulations list a number of activities
in which a service corporation may engage without prior OTS approval, including:
(i) originating and servicing mortgage, consumer, educational, and commercial
loans; (ii) providing escrow, liquidity and credit analysis, and other backroom
services for other financial institutions; (iii) developing and managing real
estate; and (iv) providing certain securities brokerage services.
Under Section 18(m) of the FDI Act, also added by FIRREA, all savings
associations must provide the FDIC and the OTS with 30 days' notice prior to (i)
establishing or acquiring a new subsidiary or (ii) commencing a new activity
through an existing subsidiary, and, as part of the notice, must furnish such
information regarding the new subsidiary or activity as either agency may
require.
Assessments. FIRREA also amended the HOLA to allow the OTS to assess fees
on savings associations to fund the operations of the OTS, to recover the costs
of examining institutions under its jurisdiction, and to provide for the
processing of various types of applications, notices, requests, and securities
filings. Prior to the enactment of FIRREA, the FHLBB had obtained its funding
primarily from FHLB contributions and FSLIC insurance premiums. The OTS has
adopted regulations which implement these statutory provisions. The regulations
provide for OTS assessments to be made either quarterly or semiannually based on
the total consolidated assets of a savings association as shown on its most
recent report to the agency. Troubled savings
25
associations are to be assessed at a rate 50% higher than similarly sized
thrifts that are not experiencing problems.
Restrictions on Acquisition. Brunswick must obtain approval from the OTS
before acquiring control of any other savings association. Such acquisitions are
generally prohibited if they result in a savings and loan holding company
controlling savings associations in more than one state. However, such
interstate acquisitions are permitted based on specific state authorization or
in a supervisory acquisition of a failing savings association. Brunswick may
acquire up to 5%, in the aggregate, of the voting stock of any nonsubsidiary
savings association or savings and loan holding company without being deemed to
acquire "control" of the association or holding company. In addition, a savings
and loan holding company may hold shares of a savings association or a savings
and loan holding company for certain purposes, including a bona fide fiduciary,
as an underwriter or in an account solely for trading purposes. Under certain
conditions, a savings and loan holding company may acquire up to 15% of the
shares of a savings association or savings and loan holding company in a
qualified stock issuance; such acquisition is not deemed a controlling interest.
Federal statutes applicable to all depository institutions require a
person or entity seeking to obtain control of Brunswick to obtain the prior
approval of the OTS as the principal regulatory agency of federally chartered
savings banks. FIRREA amended the Change in Bank Control Act (the "Control Act")
to apply to savings associations. The Control Act provides that no person,
acting directly, indirectly, or through or in concert with one or more other
persons, may acquire "control" of a savings association without giving at least
60 days' prior written notice to the Director and having the Director not object
or extend such 60-day period. Federal law also generally provides that no
company may acquire "control" of an insured savings association without the
Director's prior approval, and that any company that acquires such control
becomes a "savings and loan holding company" subject to registration,
examination, and regulation under Section 10 of the HOLA and regulations adopted
pursuant thereto.
FIRREA also authorizes the Federal Reserve to approve bank holding
company acquisitions of savings associations and provides that the Federal
Reserve may not impose "tandem restrictions" in connection with such approvals.
Those provisions of FIRREA specifically reverse a long-standing policy of the
Federal Reserve precluding acquisitions of healthy thrift institutions by bank
holding companies.
Federal Income Taxation. Brunswick and its subsidiary are subject to
taxation as corporations under applicable provisions of the Internal Revenue
Code. Brunswick's federal income tax returns have been audited by the Internal
Revenue Service through September 30, 1992. Brunswick and its subsidiary file a
consolidated federal income tax return on the basis of a September 30 fiscal
year using the accrual method of accounting. Although Brunswick is included in a
consolidated tax return with its subsidiary, certain federal income tax rules
are applicable to Brunswick only.
For example, savings institutions like Brunswick that meet certain
definitional tests, primarily relating to their assets and the nature of their
business, are permitted to deduct annual additions to a reserve for bad debts,
within specified formula limits. In each tax year, the deductible addition may
be computed using the more favorable of either: (i) a method based generally on
the institution's average loan loss experience over the six-year period ending
with the taxable year (the "Experience Method"), or (ii) a method based on a
specified percentage of the institution's taxable income (the "Percentage
Method").
Brunswick uses the Percentage Method for computing additions to its bad
debt reserve for "qualifying real property loans" (generally those loans secured
by interests in real property). Additions to the reserve for nonqualifying real
property loans must be computed under the Experience Method.
Under the Percentage Method, the allowable deduction is computed as a
percentage of Brunswick's taxable income before the deduction, as adjusted for
certain items (such as the dividends-received deduction, withdrawals from excess
bad debt reserves, as discussed below, and certain gains), and is generally
equal to
26
8% of adjusted taxable income, less any amounts deducted in connection with
nonqualifying real property loans. The allowable deduction for qualifying real
property loans computed under the Percentage Method is also subject to various
other limitations that historically have not affected Brunswick.
To the extent that Brunswick's reserve for losses on qualifying real
property loans exceeds the amount that would have been allowed under the
Experience Method, then amounts that are considered to have been withdrawn from
that excess reserve to make distributions to stockholders will be included in
Brunswick's taxable income. Dividend distributions in excess of Brunswick's
current or accumulated earnings and profits as calculated for federal income tax
purposes will be considered to result in withdrawals from its bad debt reserve.
Distributions in redemption of stock or in partial or complete liquidation also
are considered to result in withdrawals from the bad debt reserve regardless of
the level of current or accumulated earnings and profits. In the case of
Brunswick, no such distributions have taken place, nor does management
anticipate that any such distributions will take place in the near future.
Certain other special rules apply to financial institutions such as
Brunswick. For example, financial institutions are permitted to carry net
operating losses ("NOLs") back for three years or forward for fifteen years. In
addition, although taxpayers generally are not permitted to deduct interest
expense allocable to the purchase or carrying of tax-exempt obligations,
financial institutions are entitled to deduct 80% of their interest expense
deemed allocable to tax-exempt obligations acquired before August 8, 1986 (100%
for obligations acquired before 1983). A financial institution is not permitted
to deduct any portion of its interest expense allocable to tax-exempt
obligations acquired after August 7, 1986, other than designated tax-exempt
obligations issued by small municipal issuers, which remain subject to the 80%
limit.
Corporations are liable for an alternative minimum tax ("AMT") equal to
20% of alternative minimum taxable income (taxable income after making certain
"adjustments" and adding certain "preferences") if and to the extent the AMT
exceeds the regular income tax. The preference and adjustment items include (but
are not limited to): (i) the excess of the allowable bad debt deduction over the
deduction that would have been allowable on the basis of actual experience, (ii)
for taxable years beginning after 1989, 75% of the difference (positive or
negative) between "Adjusted current earnings" and alternative minimum taxable
income (as specifically determined for this purpose), (iii) interest on certain
"private activity" bonds( issued for the benefit of nongovernmental persons)
issued after August 7, 1986, and (iv) replacement of the regular NOL deduction
with the alternative minimum tax NOL deduction (computed with the AMT
adjustments and reduced by preference items) which may be utilized to offset
only 90% of the alternative minimum taxable income. Brunswick was not liable for
the AMT for its taxable year ended September 30, 1996.
State Income Taxation. Under Georgia law, financial institutions
generally are subject to the same taxes, state and local, as other corporations
in Georgia. The state corporation income tax rate to which Brunswick is subject
is 6% of Georgia taxable net income, which is equal to federal taxable income
with certain adjustments. In addition to the corporate income tax, financial
institutions in Georgia are subject to a corporate net worth tax, intangible,
tangible, real and personal property taxes, and a special occupation tax at a
rate of .25% of gross receipts. The appropriate county or city is also permitted
to levy a business license fee at a rate of .25% of gross receipts. The total
amount of the license fee and occupation tax is allowed as a credit against the
corporation income tax.
27
Effect of Governmental Policies
The earnings and business of Brunswick are and will be affected by the
policies of various regulatory authorities of the United States, especially the
Federal Reserve Board. The Federal Reserve Board, among other things, regulates
the supply of credit and deals with general economic conditions within the
United States. The instruments of monetary policy employed by the Federal
Reserve Board for these purposes influence in various ways the overall level of
investments, loans, other extensions of credit and deposits, and the interest
rates paid on liabilities and received on assets.
Interest and Usury
Brunswick is subject to numerous state and federal statutes that affect
the interest rates that may be charged on loans. These laws do not, under
present market conditions, deter Brunswick from continuing the process of
originating loans.
Competition
Brunswick encounters significant competition in its market from
commercial banks, thrift institutions, other financial institutions and
financial intermediaries. Brunswick not only competes with other banks
performing banking services in its markets, but also competes with various other
types of financial institutions for deposits, certain commercial, fiduciary and
investment services and various types of loans and certain other financial
services. Brunswick also competes for interest-bearing funds with a number of
other financial intermediaries and investment alternatives, including
"money-market" mutual funds and brokerage firms.
Brunswick competes not only with financial institutions based in the State
of Georgia, but also with a number of out-of-state banks, bank holding companies
and other financial institutions which have an established market presence in
Georgia. Many of the financial institutions operating in Georgia are engaged in
local, regional, national and international operations and have more assets and
personnel than Brunswick. Most of the southeastern states, including Georgia,
have enacted legislation that allows bank holding companies (and in certain
cases, thrift institutions) in those states to acquire banks (and in certain
cases, thrift institutions) and bank holding companies in other states located
in the region, which has the effect of causing competition to intensify.
Employees
As of September 30, 1996, Brunswick and its subsidiary had 102 full-time
employees and 35 part-time employees. The employees are not represented by a
collective bargaining unit. Brunswick believes that its employee relations are
excellent.
28
Item 2. Properties
Properties
The following table sets forth certain information concerning Brunswick's
offices. All were full service offices at September 30, 1996. The total net book
value of such offices at September 30, 1996 was approximately $1.4 million.
Year
Facility Title to
Office Location Opened the Building (1)
Main Office 1974 Leasehold. Lease
777 Gloucester Street terminates in
Brunswick, GA 31520 2003 and has one
ten-year renewal
option.
St. Simons Ocean Boulevard Office 1961 Fee Simple.
621 Ocean Boulevard
St. Simons Island, GA 31522
St. Simons Plaza Office 1986 Leasehold. Lease
1600 Frederica Road terminates in
St. Simons Island, GA 31522 2006 and has two
ten-year renewal
options.
Glynn Place Mall Office 1986 Fee Simple.
167 Altama Connector
Brunswick, GA 31520
Altama Office 1966 Leasehold. Lease
4401 Altama Avenue terminates in
Brunswick, GA 31520 1998 and has two
ten-year renewal
options.
- -----------------------
(1) Brunswick owns the land on which all of its offices, except the St. Simons
Plaza, is located.
Brunswick uses the services of an outside data processing firm for its
data processing and recordkeeping functions.
Item 3. Legal Proceedings
In 1988, Brunswick entered into an agreement with The Citizens & Southern
Corporation and certain related affiliates which provided for the acquisition of
Brunswick by C&S and the exchange of Brunswick common stock for C&S common
stock. The agreement was amended in 1990 to provide for receipt of C&S/Sovran
Corporation stock by Brunswick stockholders as a result of the merger in 1990 of
C&S with Sovran
29
Financial Corporation (which was acquired by NationsBank Corporation
("NationsBank") in late 1991). On September 27, 1991, Brunswick filed a suit in
Glenn County Superior Court against C&S/Sovran and its affiliated entities
asserting that they had breached the agreement entered into with Brunswick. In
May, 1994, a jury found that C&S/Sovran breached the agreement in March, 1991 by
not filing certain regulatory applications to pursue the acquisition of
Brunswick. On December 16, 1994, the court issued an order which provided that
Brunswick would be entitled to the remedy of specific performance of the
agreement entered into with C&S/Sovran. The order also provided that a
subsequent jury trial would be held to determine when the merger should have
closed. The order also required the defendants to make an acquisition proposal
to Brunswick stockholders to acquire Brunswick stock in exchange for NationsBank
stock. On July 18, 1996, a Glynn County jury determined that the merger would
have closed on June 19, 1991. On October 15, 1996, the Court issued an Order
finding that the number of NationsBank shares required to be offered to
Brunswick stockholders is 1,280,268 shares, increased by the number of
NationsBank shares in an amount equal to the difference between dividends paid
by the defendants since December 1991 less dividends paid on all Brunswick
shares from June 19, 1991 to the date of the offer. The Order stated that the
number of NationsBank shares to be offered is subject to reduction by the amount
payable by First Federal pursuant to employment severance agreements as well as
legal fees paid by Brunswick which exceed amounts set forth in the Court's
Order. On November 12, 1996, Brunswick sent a share calculation letter to
NationsBank addressing the method by which the Order will be implemented and
advising NationsBank that, after Brunswick pays approximately $12.5 million for
its contractual obligations for litigation attorneys' fees and $1.3 million to
four senior executive officers pursuant to change of control agreements,
Brunswick's stockholders will receive .80 shares of NationsBank stock for each
share of Brunswick stock. The parties anticipate that the closing of the
NationsBank transaction will occur in the second quarter of 1997.
Brunswick and its subsidiary are party to various legal proceedings in
the normal course of their business; however, Brunswick management believes that
the ultimate outcome in such proceedings in the aggregate would not have a
material adverse effect on the financial position or results of operations of
Brunswick and its subsidiary on a consolidated basis.
Item 4. Submission of Matters to a Vote of Security Holders
No matters were submitted to a vote of security holders during the fourth
quarter of the fiscal year ended September 30, 1996.
PART II
Item 5. Market for the Registrant's Common Equity and Related Stockholder
Matters
The information contained under the section captioned "Capital Stock" in
the Annual Report is incorporated herein by reference.
Item 6. Selected Financial Data
The information contained in the table captioned "Selected Financial
Highlights" in the Annual Report is incorporated herein by reference.
30
Item 7. Management's Discussion and Analysis of Financial Condition and Results
of Operations
The information contained in the section captioned "Management's
Discussion and Analysis of Financial Condition and Results of Operations" in the
Annual Report is incorporated herein by reference.
Item 8. Financial Statements and Supplementary Data
The consolidated financial statements contained in the Annual Report are
incorporated herein by reference.
Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure
The registrant has not had any disagreements with its accountants on any
matter of accounting principles or practices or financial statement disclosure.
PART III
Item 10. Directors and Executive Officers of the Registrant
The information contained under the sections captioned "Directors" and
"Executive Officers" under "Proposal One - Election of Directors" in the
registrant's definitive Proxy Statement for the Annual Meeting of Stockholders
to be held on January 22, 1997, to be filed with the OTS pursuant to Regulation
14A within 120 days of the registrant's fiscal year end (the "Proxy Statement"),
is incorporated herein by reference.
Item 11. Executive Compensation
The information contained in the sections captioned "Information About
the Board of Directors and Its Committees", "Executive Compensation and
Benefits" and "Information on Benefit Plans and Policies" under "Proposal One -
Election of Directors" in the Proxy Statement, is incorporated herein by
reference.
Item 12. Security Ownership of Certain Beneficial Owners and Management
Information contained in the sections captioned "Directors" and
"Management Stock Ownership" under "Proposal One - Election of Directors," and
"Ownership of Equity Securities" in the Proxy Statement, is incorporated herein
by reference.
Item 13. Certain Relationships and Related Transactions
The information contained in the section captioned "Certain Transactions"
under "Proposal One Election of Directors" in the Proxy Statement, is
incorporated herein by reference.
31
PART IV
Item 14. Exhibits, Financial Statement Schedules, and Reports on
Form 8-K
The following are contained in the registrant's Annual Report to
Stockholders.
(a) 1. Financial Statements
Report of Independent Public Accountants - First
Federal Savings Bank of Brunswick, Georgia and
Subsidiary
Consolidated Statements of Financial Condition as of
September 30, 1996 and 1995
Consolidated Statements of Income for the Years Ended
September 30, 1996, 1995, and 1994
Consolidated Statements of Changes in Stockholders'
Equity for the Years Ended September 30, 1996, 1995 and
1994
Consolidated Statements of Cash Flows for the Years
Ended September 30, 1996, 1995 and 1994
Notes to Consolidated Financial Statements
2. Financial Statement Schedules
All schedules have been omitted as the required
information is either inapplicable or included in the
Notes to Consolidated Financial Statements.
3. Exhibits
3.1 Charter and By-laws of First Federal Savings Bank of
Brunswick, Georgia (Incorporated by reference to
Exhibit 3 to Brunswick's Form 10 filed with the FHLBB
on June 28, 1984)
3.2 Assistant Secretary's Certificate dated November 18,
1991 setting forth Corporate Resolutions amending
Bylaws of First Federal Savings Bank of Brunswick,
Georgia (Incorporated by reference to Exhibit 3.2 to
Brunswick's Annual Report on Form 10-K for the fiscal
year ended September 30, 1993)
10.1 First Federal Savings Bank of Brunswick, Georgia 1984
Stock Option Plan, as amended (Incorporated by
reference to Exhibit 10 to Brunswick's Annual Report on
Form 10-K for the fiscal year ended December 31, 1986)
10.2 Form of Agreement entered into January 1, 1995 between
First Federal Savings Bank of Brunswick, Georgia and
each of Ben T. Slade, III, John J. Rogers and James H.
Gash (incorporated by reference to Exhibit 10.2 to
Brunswick's Annual Report on Form 10-K for the fiscal
year ended September 30, 1994)
32
13.1 First Federal Savings Bank of Brunswick, Georgia 1996
Annual Report
21.1 Subsidiary of the Registrant
(b) Reports on Form 8-K
No Current Reports on Form 8-K were filed by Brunswick during
the last fiscal quarter covered by this report.
33
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, in the City of
Brunswick, State of Georgia, on December 26, 1996.
FIRST FEDERAL SAVINGS BANK
OF BRUNSWICK, GEORGIA
By: /s/ Ben T. Slade, III
--------------------------------
Ben T. Slade, III, President
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 December 26, 1996.
Signature Title
/s/ Ben T. Slade, III Chairman of the Board and President
- ----------------------------
Ben T. Slade III
/s/ John J. Rogers Senior Vice President - Mortgage Banking,
- ---------------------------- Chief Financial
John J. Rogers Officer, and Director
/s/ Robert B. Sams Vice President and Controller
- ----------------------------
Robert B. Sams
/s/ James H. Gash Senior Vice President - Commercial Banking
- ---------------------------- and Director
James H. Gash
/s/ James F. Barger Director
- ----------------------------
James F. Barger
/s/ J. Dewey Benefield, Jr. Director
- ----------------------------
J. Dewey Benefield, Jr.
- ---------------------------- Director
William O. Faulkner
/s/ Mack F. Mattingly Director
- ----------------------------
Mack F. Mattingly
/s/ T. Gillis Morgan, III Director
- ----------------------------
T. Gillis Morgan, III
/s/ D. Paul Owens Director
- ----------------------------
D. Paul Owens
- ---------------------------- Director
Jack Torbett
/s/ L. Gerald Wright Director
- ----------------------------
L. Gerald Wright
34
First Federal Savings Bank of Brunswick, Georgia
Form 10-K
For Fiscal Year Ending September 30, 1996
EXHIBIT INDEX
Exhibit Page
No. Exhibit No.
13.1 First Federal Savings Bank of Brunswick,
Georgia 1996 Annual Report
22.1 Subsidiary of the Registrant
35
Exhibit 13.1
First Federal Savings Bank of Brunswick, Georgia
Annual Report to Stockholders
For Fiscal Year Ended September 30, 1996
A MESSAGE FROM THE PRESIDENT
Our net income for the fiscal year ended __________________
September 30, 1996 was $2,156,717 (earnings per
share of $1.42) compared to $3,114,460 (earnings
per share of $2.05) for the prior year. The primary Picture
reason for the decline was the one-time expense to
the Bank of approximately $1,362,000 ($885,000 after
tax) representing a special assessment on deposits of of
65.7 basis points required to recapitalize the Savings
and Loan Insurance Fund ("SAIF"). Now that the fund is
recapitalized, our premiums for Federal Deposit Insurance The President
will decline dramatically and this will have a beneficial
effect on our future income. Another reason for the
decline in net income is the $171,518 increase in legal Goes Here
fee expense because of the July 1996 trial in our
litigation with NationsBank. ----------------
Return on average assets for the year ended September 30, 1996 was .86%
compared with 1.28% for 1995. Exclusive of the one-time SAIF assessment and the
net increase in legal fees, our return on average assets would have been 1.25%.
During July of 1996, we celebrated the 70th birthday of First Federal Savings
Bank. This was a delightful occasion and gave us the opportunity to thank many
long-time customers for their loyalty over the years. Several customers who have
been with us for the full seventy years attended the birthday party.
As previously reported, the NationsBank litigation has now been settled
pursuant to the Court Order of October 5, 1996. The result will be the
acquisition of First Federal by NationsBank Corporation in a tax-free exchange
of stock. Stockholders of First Federal will be offered .80 shares of
NationsBank stock for each First Federal share. The full details of the proposed
transaction will be described in the proxy materials that should be mailed in
March of 1997. The projected closing should occur between March 31, 1997 and
April 30, 1997.
We are, of course, pleased to have this lengthy litigation behind us and feel
that the result will be rewarding for all stockholders of First Federal. At
current prices for NationsBank stock, the transaction will be valued at
approximately $115 million. When you consider that our original stock issue was
approximately $2.7 million, this is quite a substantial increase in value over
the twelve-year period that we've been a public company.
We've been assured by NationsBank that they are eager to conclude this
transaction and bring their array of services to the people of Brunswick and
Glynn County. All of us at First Federal will do our best to provide for a
smooth transition and hope all of our stockholders and customers will be pleased
with the resulting changes.
Yours very truly,
/s/ Ben T. Slade, III
Ben T. Slade, III
President
3
HIGHLIGHTS OF 1996
NET INTEREST INCOME DIVIDENDS PAID
(graph appears below (graph appears below
and plot points appears and plot points appears
as follows:) as follows:)
Millions of Dollars Thousands of Dollars
1992 7.74 1992 868
1993 8.57 1993 913
1994 9.26 1994 1,123
1995 9.78 1995 1,334
1996 9.84 1996 1,395
Shifts in net interest income are a function of volume, movements in interest
rates, and the positioning of the Bank with respect to interest rate risk
management. The Bank works to maximize net interest income within the parameters
of interest rate risk management so as to provide for stability in net interest
income over varying movements in interest rates.
The $5,633,000 in cash dividends paid to shareholders over the past five years
exceeds the net amount raised in 1984, in the Bank's only public offering, by
$3,250,000.
SELECTED FINANCIAL HIGHLIGHTS
1996 1995 1994 1993 1992
Gross Income $22,736,355 $21,309,238 $19,020,263 $19,217,317 $21,171,010
Total Interest Income 20,191,565 19,202,040 16,957,142 16,636,594 18,487,263
Total Interest Expense 10,353,532 9,423,311 7,700,190 8,069,801 10,750,488
Net Interest Income 9,838,033 9,778,729 9,256,952 8,566,793 7,736,775
Income Before Income Taxes 3,348,967 4,815,060 4,224,524 4,109,802 3,536,157
Net Income 2,156,717 3,114,460 3,280,424 2,660,712 2,245,357
Net Income Per Share1 1.42 2.05 2.17 1.77 1.50
Cash Dividends Declared .95 .89 .75 .61 .58
Book Value Per Share 2 17.29 17.00 15.44 14.33 13.19
Real Estate Loans 3 182,897,960 163,832,021 158,597,317 155,377,526 141,230,291
Total Net Loans 3 209,868,046 186,664,013 179,017,162 173,200,538 158,257,837
Mortgage-Backed
Securities 8,339,891 12,232,044 11,074,637 11,086,923 9,092,030
Investment Securities 8,024,132 16,488,815 15,976,701 20,247,531 22,164,392
Total Assets 249,117,444 253,287,453 231,514,862 228,145,524 220,644,738
Total Deposits 218,075,859 222,805,996 200,715,381 196,546,493 192,374,447
Total Borrowings 1,500,000 2,200,000 4,000,000 5,300,000 3,300,000
Total Net Worth 26,025,085 25,506,415 23,622,064 21,449,495 19,701,917
Total Regulatory Capital 26,758,000 26,101,000 24,114,000 22,318,000 20,445,000
Total Full Service Offices 5 5 5 5 5
1 Calculated based on fully diluted shares outstanding.
2 Calculated assuming all options exercised.
3 Includes mortgage loans held for sale.
4
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
General Overview:
From the Bank's headquarters and two branch offices located in Brunswick, along
with two branch offices on St. Simons Island, the Bank is primarily engaged in
the business of attracting deposits from the general public and investing those
funds in real estate, consumer, and commercial loans. Deposits averaged $218.4
million in the current year compared to average deposits of $209.3 million in
the year ago period. The Bank's loan portfolio averaged $203.4 million in the
current year, rising from an average of $187.7 million during the period one
year ago.
The Bank recorded net income of $2,156,717 or $1.42 per share for the fiscal
year ended September 30,1996 compared to net income of $3,114,460 ($2.05 per
share) and $3,280,424 ($2.17 per share) for the years ended September 30,1995
and 1994. Fiscal year 1996 results included a charge of $1,362,018 representing
a provision made for the payment of a special assessment imposed by Congress
intended to re-capitalize the "thrift" portion of the Federal Deposit Insurance
Fund. This charge reduced net income by approximately $885,000 or 5.58 per
share.
Liquidity and Capital Resources:
The Bank is required to maintain minimum liquidity levels of cash and eligible
securities equal to 5% of withdrawable savings accounts and short-term
borrowings. Cash and eligible securities include cash and due from banks,
interest-bearing deposits in other banks, federal funds sold, other short-term
investments and certain investment securities. At September 30, 1996 and 1995,
cash and eligible securities totalled $24.0 million and $46.0 million,
respectively. It has been the Bank's policy to maintain liquidity in excess of
the required 5% amount. A secondary source of liquidity to the Bank has resulted
from the conversion of single family mortgage loans to Federal Home Loan
Mortgage Corporation ("FreddieMac") participation certificates ("PC's"). During
fiscal year 1996, $6.4 million in loans were exchanged with FreddieMac for PC's.
While not eligible to be considered for regulatory liquidity, these certificates
may be readily sold to raise additional cash and may also be used as collateral
for both short and long-term borrowings. At September 30,1996, the Bank held
approximately $3.9 million in PC's resulting from such exchanges with
FreddieMac. Average daily liquidity was 10.47% and 19.90% for the months of
September 1996 and 1995, respectively.
The Bank's one year interest rate gap was a positive $34.8 million at September
30,1996 compared to a positive $38.0 million at September 30,1995. The interest
rate gap calculation involves measuring the difference between maturing or
repricing interest earning assets and maturing or repricing interest bearing
liabilities over a given time frame, e.g., one year. Measurement of the Bank's
gap has historically categorized NOW and passbook deposit accounts as
non-interest rate sensitive liabilities. At September 30, 1996, NOW and passbook
accounts totalled, in aggregate, $55.9 million, and should interest rates remain
at or rise from current levels, the rates paid by the Bank on these accounts
could rise as well. The decrease in the Bank's positive one year gap resulted
primarily from a decrease in short term liquid investments from $23.4 million at
September 30,1995 to $14.1 million at September 30,1996. Funds held in
short-term liquid investments at September 30,1995, consisting of federal funds
sold, interest bearing deposits in other banks, and treasury and agency
securities maturing within one year, were shifted into mortgage, consumer, and
commercial loans throughout the current fiscal year as loan demand and interest
rate risk considerations allowed. This action provided for an increase in the
Bank's weighted yield on interest earning assets from 8.08% at September 30,
1995 to 8.30% at September 30, 1996, despite a decline in both the prime and
federal funds rates of 50 basis points during the current fiscal year.
Total loan originations for the year ended September 30, 1996 increased to $91.9
million from $80.4 million one year ago, reflective of a healthy economy
combined with accommodative levels of interest rates. Loans secured by real
estate increased to $200.2 million at September 30,1996 from $179.7 million at
September 30, 1995. Construction loans accounted for 40% of this increase,
rising from $13.0 million one year ago to $21.2 million at September 30,1996.
Total deposits decreased to $218.1 million at September 30, 1996 from $222.8
million at September 30,1995, as certificate of deposit balances declined $6.3
million in the current year. During the first two quarters of fiscal year 1995,
as the Federal Reserve board ("FRB") increased short term interest rates in
order to cool economic activity, the rates offered on certificates of deposit
increased to levels attractive to investors as certificate balances increased by
$25.7 million. During the fourth quarter of fiscal year 1995, the FRB began
lowering short-term interest rates in response to several months of acceptable
economic and inflation indicators and continued this posture into the first two
quarters of the current year. In response to this action, the rates offered on
certificates declined significantly and some proceeds from maturing accounts
were transferred to investments outside the Bank.
Advances from the Federal Home Loan Bank declined from $2.2 million at September
30,1995 to $1.5 million at September 30,1996. Twelve million dollars in new
short-term advances were drawn and repaid during the current fiscal year and an
additional $.7 million, drawn in prior years, was repaid as well.
At September 30,1996, the Bank had approximately $2.1 million in outstanding
commitments to fund loans. Of this amount, approximately $1.2 million were
commitments to fund loans on single family residential homes, approximately $.7
million were to fund loans on other real estate, and approximately $.2 million
were to fund various consumer and non-real estate commercial loans. The cash
needed to fund these loans will be derived from principal repayments on
outstanding loans and through the fulfillment of commitments to sell loans in
the secondary markets.
The Financial Institutions Reform, Recovery and Enforcement Act of 1989 (FIRREA)
requires that savings associations must now satisfy three separate capital
standards. The Bank must maintain core capital at least equal to 3.0% of
adjusted total assets and risk- based capital at least equal to 8.0% of
risk-weighted assets. Additionally, the Bank must maintain tangible capital at
least equal to 1.5% of total adjusted assets. At September 30,1996, the Bank's
position with respect to these requirements was as follows:
5
(Dollars in Amount Percent Actual Actual Excess
Thousands) Required Required Amount Percent Amount
Core Capital $7,478 3.0% $26,174 10.5% $18,696
Tangible Capital 3,739 1.5 26,174 10.5 22,435
Risk-Based Capital 13,874 8.0 25,758 15.4(1) 12,884
(1) Represents risk-based capital as a percentage of risk-weighted assets.
Impact of Inflation and Changing Prices:
The financial statements and related data presented herein have been prepared in
accordance with generally accepted accounting principles which require the
measurement of financial position and operating results in terms of historical
dollars without considering changes in the relative purchasing power of money
over time due to inflation. The principal element of the Bank's earnings is
interest income which may be significantly affected by the level of inflation
and by government monetary and fiscal policies adopted in response to
inflationary or deflationary pressures.
During fiscal year 1994, in response to significantly higher levels of economic
activity, the FRB increased the federal funds rate from 3.00% to 3.25%, and
followed up with four additional increases to raise the rate to 4.75% at
September 30, 1994. During the first two quarters of fiscal year 1995, the FRB
continued its efforts to cool the economy and raised the federal funds rates to
6.00%. Early in the fourth quarter of fiscal year 1995, responding to several
months of acceptable economic and inflationary indicators the FRB reduced the
federal funds rate by 25 basis points to 5.75%. During December and January of
the current year the funds rate was cumulatively lowered an additional 50 basis
points to 5.25% and remained at this level through September 30,1996.
Any future measures designed to restrict the growth in the monetary supply could
cause an increase in short-term interest rates. These rates have a greater
effect on the Bank than the general level of inflation and changing prices
and give added importance to the need to manage the interest rate gap.
Results of Operations:
Net income for the fiscal year ended September 30,1996 was $2,156,717 ($1.42 per
share) compared to $3,114,460 ($2.05 per share) for the fiscal year ended
September 30,1995, which followed net income of $3,280,424($2.17 per share) for
the fiscal year ended September 30, 1994. Fiscal year 1996 included a one-time
charge to the Bank of approximately $1,362,000 representing a special assessment
on deposits of 65.7 basis points enacted by Congress on September 30,1996 as a
measure to recapitalize the Savings Association Insurance Fund. This charge
reduced net income by approximately $885,000 or approximately $.58 per share.
Fiscal year 1994 net income included income of $525,000 ($.35 per share)
resulting from the required adoption of the Financial Accounting Standards Board
Statement of Financial Accounting Standards No. 109 ("SFAS No. 109"),
"Accounting for Income Taxes". The rules set forth in SFAS No. 109 changed the
manner in which income tax expense is determined for financial statement
purposes. Adoption of SFAS No. 109 during the first quarter of fiscal year 1994
resulted in a reduction in the Bank's deferred tax liability with a resulting
benefit recorded through the income statement as a cumulative effect of a change
in accounting principle.
The largest components of the Bank's total income and total expenses are
interest income from loans and investments and interest expense on deposits and
borrowings. The difference between these items is net interest income, and the
difference between the combined yield on loans and investments and the cost of
deposits and borrowings is referred to as the yield spread.
Total interest income for the years ended September 30, 1996, 1995 and 1994 was
approximately $20,191,565, $19,202,040, and $16,957,142, respectively. Of the
increase in interest income from fiscal year 1995 to 1996 of approximately $l.0
million, approximately $.1 million was due to an increase in rate and
approximately $.9 million was due to an increase in volume.
The primary factor in the increase in interest income from fiscal year 1995 to
1996 was the increase in the Bank's earning assets. The fiscal year 1995
increase in the Bank's total assets of $21.8 million (resulting from
certificates of deposit inflow) occurred primarily during the third and fourth
quarters, and although total assets did decline during fiscal year 1996 by $4.2
million, interest earning assets averaged $242.7 million in the current year
compared to $232.2 million during fiscal year 1995. Additionally, the weighted
average yield on the Bank's interest earning assets increased from 8.27% during
fiscal year 1995 to 8.31% during fiscal year 1996, despite a 50 basis point
decline in both the prime and federal funds rates in the current year. This
improvement in yield resulted from a shift in funds from both federal funds sold
and securities available for sale accounts into higher yielding loan products.
The Bank's loan to deposit ratio increased from 83.8% at September 30,1995 to
96.2% at September 30, 1996.
Interest on mortgage-backed securities increased to $1,021,788 in the current
year from $817,223 during fiscal year 1995 resulting from an increase in the
average portfolio balance from $11.7 million during fiscal year 1995 to $15.1
million in the current year. During the first quarter of fiscal year 1996,
short-term liquid funds were invested in mortgage-backed securities so as to
lock-in yields in a then declining rate environment. During subsequent periods
of fiscal year 1996, certain of these mortgage-backed securities were sold to
provide funding for new loans.
Interest on investment securities declined from $1,002,301 in 1995 to $785,315
in the current year due primarily to lower average portfolio volume of
approximately $3.6 million.
The primary factor in the increase in interest income from fiscal year 1994 to
1995 was the increase in the weighted average yield on interest earning assets
from 7.62% during fiscal year 1994 to 8.27% in fiscal year 1995, reflective of
the 300 basis point increase in the federal funds rate over a period of five
quarters beginning in the second quarter of fiscal year 1994. Adjustable rate
loans represented 63.4% of the total loan portfolio during fiscal year 1994 and
64.1% during fiscal year 1995. The primary indices to which these loans are
tied, prime and one year treasury bills which averaged 6.69% and 4.61%,
respectively, during fiscal year 1994, rose to averages of 8.71% and 6.62% for
fiscal year 1995.
Total interest expense for the years ended September 30, 1996, 1995 and 1994 was
$10,353,532, $9,423,311, and $7,700,190, respectively. Of the increase in
interest expense from fiscal year 1995 to 1996 of approximately $.9 million,
approximately $.4 million was due to an increase in volume
6
and approximately $.5 million was due to an increase in rate. The major
component of the Bank's interest expense is interest on deposits. The cost of
deposits increased from 4.40% for the fiscal year ended September 30, 1995 to
4.66% for the fiscal year ended September 30,1996, primarily resulting from an
increase in the cost of certificates of deposit from 5.70% one year ago to 6.13%
in the current period. Rates offered on certificates of deposit rose sharply
during the second and third quarters of fiscal year 1995. This rise in rates not
only affected the then maturing certificates of deposit, but also attracted
funds from outside the Bank as certificate balances increased from $130.2
million at March 31, 1995 to $144.4 million at September 30, 1995. The timing
of the rollover and acquisition along with the related maturity terms of these
higher yielding certificates served to impact the current fiscal year to a
greater extent than the year ended September 30,1995. Additionally, certificates
of deposit as a percentage of total deposits increased from 62.1% during fiscal
year 1995 to 64.0% for fiscal year 1996, serving to further increase the Bank's
cost of deposits. The increase in interest expense from $7.7 million for the
fiscal year 1994 to $9.4 million for fiscal year 1995 resulted primarily from
the increase in the weighted rate paid on certificates of deposit from 4.77% in
fiscal year 1994 to 5.70% in fiscal year 1995 as well as the significant
increase in certificates of deposit balances from $118.7 million at September
30,1994 to $144.4 million at September 30,1995.
Net interest income for the fiscal years ended September 30,1996, 1995 and 1994
was $9.84 million, $9.78 million and $9.26 million, respectively. The increase
from fiscal year 1995 to 1996 was the result of the Bank's growth of $10.5
million in average earning assets as the net yield on interest earning assets
declined from 4.21% in fiscal year 1995 to 4.05% in fiscal year 1996. The
growth in average interest earning assets was funded primarily by average
deposit growth of $9.0 million and to a lesser extent, earnings from operations.
Average advances outstanding from the Federal Home Loan Bank decreased $1.1
million during the current year as compared to fiscal year 1995.
The increase in the net yield from fiscal year 1994 to 1995, from 4.16% to
4.21%, was due primarily to the Bank's positive one year interest rate gap which
generally benefits the net spread during periods of rising interest rates. From
the second quarter of fiscal year 1994 to the fourth quarter of fiscal year
1995, the federal funds and prime rates increased by 300 basis points along with
a generally commensurate increase across the entire yield curve.
Noninterest income increased to $2,544 790 for the year ended September 30,1996
from $2,107,198 for the year ended September 30,1995, which followed $2,146,954
for the year ended September 30, 1994. Service charges and other fees were
$2,086,188 for the year ended September 30, 1996, compared to $1,894,101 and
$1,750,739 for the years ended September 30,1995 and 1994, respectively. The
increase in fiscal year 1996 over the two prior years resulted primarily from
increases in various service charges on deposit accounts due to increases in fee
structure, transaction activity, and volume of accounts.
Gains on the sale of loans increased to $211,688 for the year ended September
30,1996 from $121,398 for the year ended September 30,1995, Which followed
$195,954 for fiscal year 1994. Gains on the sale of loans have, for the past
three fiscal years, been generated primarily from the sale of thirty year fixed
rate conforming residential first mortgage loans. Gains realized are a function
of the Bank's pricing levels relative to local market competition. The general
trend and level of interest rates, and the volume of loans sold. The volume of
loans sold during fiscal year 1996 increased to $26.8 million from $11.0 million
and $16.7 million in fiscal years 1995 and 1994, respectively. During fiscal
year 1996, the Bank continued its policy of selling current production of
thirty year fixed rate residential mortgage loans in the secondary market,
while retaining ten to fifteen year fixed rate and thirty year adjustable
rate residential mortgage loans in its portfolio either in the form of
loans or mortgage backed securities, subject to liquidity and interest
rate risk parameters. A gradual decline in the general level of
interest rates which began during the fourth quarter of fiscal year
1995 continued throughout the first 5 months of fiscal year 1996, and
attracted residential mortgage customers to fixed rate fifteen
and thirty year loans for new purchases as well as for the refinancing of
existing residences. With this increase in thirty year fixed rate loan
production came increased loan sale activity in order to manage the Bank's
interest rate risk exposure. During the first three quarters of fiscal year
1995, the general trend of interest rates had been upward and the demand for
residential mortgage loans had favored adjustable rate and to a lesser extent,
shorter-term ten to fifteen year fixed rate products, while the volume of thirty
year fixed rate originations had declined significantly. The general trend of
long-term interest rates during the first two quarters of fiscal year 1994 had
been toward lower levels, and had thus provided a more favorable environment for
fixed rate loan originations and sales than was the case during the first three
quarters of fiscal year 1995. Although the Bank's market area has witnessed
increased competition for these loans, no significant changes in the Bank's
pricing of these loans has occurred.
The sale of securities available for sale generated losses of $47,420 and
$30,972, respectively, during fiscal years 1996 and 1995, compared to a gain of
$87,905 during fiscal year 1994. Securities available for sale include Treasury
and Agency securities with maturities of generally five years or less, as well
as various types of mortgage-backed securities acquired through both
securitization of the Bank's own portfolio of originations or through
purchases in the open market. Subject to interest rate risk and asset
quality considerations, securities are acquired for the purpose of
attaining the highest possible yield on funds not required to fund loan
demand or to satisfy short-term liquidity requirements. Gains and
losses recorded on the sale of these securities are dependent upon the
volume of securities sold as well as the market level of interest rates.
During primarily the third and fourth quarters of fiscal year
1996, the Bank sold securities totalling $19.7 million in order to meet
increasing loan demand. Securities sales totalled $4.0 and $14.2 million,
respectively, during fiscal years 1995 and 1994.
Other income increased to $294,334 in the current year compared to $122,671 and
$112,356, respectively, for the years ended September 30, 1995 and 1994. The
fiscal year 1996 amount includes income of $149,306 resulting from the Bank's
adoption of SFAS No. 122. "Accounting for Mortgage Servicing Rights". This
statement requires that the value of mort-
7
gage servicing rights associated with mortgage loans originated and sold by the
Bank be capitalized as an asset. All capitalized amounts are amortized against
future servicing revenues, and are subject to subsequent measurement for
impairment based on the then fair value estimates. SFAS No. 122 is more fully
described in footnote 1 of these financial statements.
Noninterest expense increased to $8,793,856 for the year ended September 30,1996
from $6,875,867 for the year ended September 30,1995 which followed expense of
$6,999,382 for the year ended September 30, 1994. Salaries and related benefits
increased to $3,788,706 in fiscal year 1996 from $3,573,873 in the prior year,
which followed an increase from $3,491,966 in 1994. These increases have
resulted primarily from increased wages and payroll taxes related to general
year-to-year raises of approximately four percent, and additionally from
increases in the cost of employee medical insurance.
Federal deposit insurance premiums were $502,244, $463,010, and $452,181 for the
years ended September 30, 1996,1995 and 1994, respectively. Variances in these
amounts have resulted from changes in the volume of deposits subject to
coverage, as the underlying rate charged by the FDIC over these periods has
remained constant. The Bank was also assessed a one-time charge of $1,362,018
during fiscal year 1996 due to legislation enacted on September 30, 1996 to
recapitalize the SAIF. This legislation is more fully discussed in footnote
number 16 contained in this year's audited financial statements.
Net occupancy and equipment expense decreased to $997,586 in fiscal year 1996
from $1,031,636 and $997,091 in fiscal years 1995 and 1994, respectively. The
decrease from 1995 to 1996 resulted primarily from lower depreciation costs
related to furniture, fixtures and equipment, while the increase from fiscal
year 1994 to 1995 resulted primarily from increases in equipment repair and
maintenance charges as well as general branch site maintenance.
Data processing and outside service fees were $477,376 for the year ended
September 30, 1996 compared to $465,021 and $478,136 for the years ended
September 30,1995 and 1994, respectively. The increase in expense from fiscal
year 1995 to 1996 resulted primarily from increases in both transaction volume
and customer files. The decrease in expense from fiscal year 1994 to 1995 was
the result of a negotiated decrease in the Bank's contract with its outside data
processor.
Legal expense increased to $465,021 for the year ended September 30,1996 from
$293,503 and $510,370 for the years ended September 30,1995 and 1994,
respectively. Legal expense increased during the current fiscal year due to
increased litigation in connection with the Bank's lawsuit against NationsBank,
which is more fully described in footnote number 17 contained in this year's
audited financial statements. Legal expense decreased in fiscal year 1995 from
1994 due to very little activity occurring during fiscal year 1995 as we awaited
the damages trial, following a liability lawsuit in 1994 in which the Bank
prevailed.
Telephone and postage expense increased to $270,4)4 in the current year compared
to $248,965 and $235,970 for fiscal years 1995 and 199, respectively, due
primarily to increased postal rates.
Advertising expense rose to $111,094 for fiscal year 1996 from $78,020 and
$86,782 for fiscal years 1995 and 1994, respectively, resulting from increased
media exposure, including promotional requirements related to both the
introduction of the Bank's new credit card service as well as the commemorative
celebration of the Bank s seventieth anniversary of service to Glynn County.
Expense (income) from real estate owned, net was $45,182, $32,132, and ($26,611)
for the years ended September 30, 1996 1995, and 1994, respectively. Expense
from real estate owned encompasses the normal costs of ownership such as
property taxes, maintenance and repairs, utilities, and insurance. Additionally,
the above cited amounts include the results from both gains and losses
recognized upon disposal and write-downs subsequent to foreclosure and are thus
dependent upon various economic and market conditions. Expenses related to
ownership amounted to approximately $8,000, $11,000 and $49,000 for the years
ended September 30,1996, 1995, and 1994, respectively and are relatively
proportional to the level of real estate owned.
Other expense was $774,225, $689,707, and $793,497 for the years ended September
30,1996,1995, and 1994, respectively. The increase in expenses from fiscal year
1995 to 1996 resulted primarily from the disposal of various obsolete fixed
assets and from expenses incurred resulting from the commencement of the Bank's
proprietary credit card program. The decrease in expenses from fiscal year 1994
to 1995 resulted primarily from reductions in write-downs of excess servicing
fees and charges for equipment obsolescence along with lower premiums paid on
business insurance.
The ratio of noninterest expense to total income was 38.7%, 32.3%, and 36.6% for
the years ended September 30, 1996, 1995, and 1994, respectively. The increase
from fiscal year 1995 to 1996 was due primarily to an increase in legal expense
in the current fiscal year, as well as the one-time special assessment to
recapitalize the SAIF. The decrease from fiscal year 1994 to 1995 resulted
from a decrease in legal expense for fiscal year 1995.
The provision for loan losses was $240,000, $195,000 and $180,000 for the years
ended September 30,1996,1995, and 1994, respectively. Non-accrual loans
decreased to $261,193 at September 30,1996 from $788,116 at September 30,1995.
Potential problem loans increased to $2,904,673 at September 30,1996 from
$210,416 one year ago. Included in the current year amount are 12 loans
totalling $2.7 million, in aggregate, secured by commercial real estate, and are
generally delinquent sixty days. The Bank is well collateralized on these loans
and believes them to be fully collectible. Management believes the allowance for
loan losses to be adequate at September 30, 1996, based upon conditions
reasonably known to management; however, the allowance may be increased based
upon future economic changes or conditions.
The provision for income taxes decreased to $1,192,250 for the year ended
September 30,1996 from $1,700,600 for fiscal year 1995, which followed
$1,469,100 for fiscal year 1994. The decrease in provision for the current
fiscal year was due primarily to a decrease in taxable income due to increased
litigation expenses and the one-time SAlF assessment in 1996.
8
FIRST FEDERAL SAVINGS BANK OF BRUNSWICK, GEORGIA, AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
SEPTEMBER 30, 1996 AND 1995
(Note 17)
ASSETS 1996 1995
CASH AND DUE FROM BANKS $ 4,788,450 $ 7,077,786
INTEREST-BEARING DEPOSITS WITH OTHER BANKS 10,504,682 11,551,711
FEDERAL FUNDS SOLD 545,000 10,675,000
SECURITIES AVAILABLE FOR SALE (Note 3) 16,364,023 28,720,859
LOANS, net (Note 4) 209,868,046 186,664,013
REAL ESTATE OWNED, net 954,904 2,208,679
PREMISES AND EQUIPMENT, net (Note 6) 1,994,142 2,258,326
FEDERAL HOME LOAN BANK STOCK, at cost 1,598,700 1,598,700
ACCRUED INTEREST:
Loans 1,583,448 1,388,875
Investments 172,297 400,131
OTHER ASSETS 743,752 743,373
$249,117,444 $253,287,453
LIABILITIES AND STOCKHOLDERS' EQUITY
DEPOSITS (Note 7):
Checking accounts $13,561,385 $10,860,048
NOW accounts 35,293,128 34,702,626
Savings accounts 20,598,108 20,000,808
Money market deposit accounts 10,571,845 12,843,024
Certificates of deposit 138,051,393 144,399,490
Total deposits 218,075,859 222,805,996
ADVANCES FROM THE FHLB (Note 8) 1,500,000 2,200,000
ADVANCE PAYMENTS BY BORROWERS FOR TAXES AND INSURANCE 1,251,325 1,475,065
ACCRUED EXPENSES AND OTHER LIABILITIES 2,192,353 796,255
DEFERRED INCOME TAXES (Note 14) 72,822 503,722
Total liabilities 223,092,359 227,781,038
COMMITMENTS AND CONTINGENCIES (Notes 13, 15 and 17)
STOCKHOLDERS' EQUITY (Note 10):
Common stock, $1 par value; 4,000,000 shares authorized,
1,499,939 shares issued and outstanding 1,499,939 1,499,939
Additional paid-in capital 1,550,208 1,550,208
Retained earnings 23,137,905 22,376,131
Net unrealized (depreciation) appreciation on securities
available for sale, net of tax of $87,752 and $43,145 in
1996 and 1995 (Note 1) (162,967) 80,137
Total stockholders' equity 26,025,085 25,506,415
$249,117,444 $253,287,453
The accompanying notes are an integral part of these consolidated statements.
9
FIRST FEDERAL SAVINGS BANK OF BRUNSWICK, GEORGIA, AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF INCOME
ENDED SEPTEMBER 30, 1996, 1995, AND 1994
FOR THE YEARS
1996 1995 1994
INTEREST INCOME:
Interest on loans $17,573,029 $16,295,326 $14,563,642
Interest on securities
available for sale 1,807,103 1,819,524 1,830,475
Interest on federal funds sold
and interest-bearing deposits
with banks 695,088 972,291 472,833
Dividends on FHLB stock 116,345 114,899 90,192
Total interest income 20,191,565 19,202,040 16,957,142
INTEREST EXPENSE:
Interest on deposits (Note 11) 10,175,709 9,210,751 7,391,055
Interest on advances from the
FHLB and other 177,823 212,560 309,135
Total interest expense 10,353,532 9,423,311 7,700,190
NET INTEREST INCOME 9,838,033 9,778,729 9,256,952
PROVISION FOR LOAN LOSSES 240,000 195,000 180,000
NET INTEREST INCOME AFTER PROVISION
FOR LOAN LOSSES 9,598,033 9,583,729 9,076,952
NONINTEREST INCOME:
Service charges and other fees 2,056,188 1,894,101 1,750,739
Gain on sale of loans, net
(Note 1) 211,688 121,398 195,954
(Loss) gain on sale of securities
available for sale (47,420) (30,972) 87,905
Other 294,334 122,671 112,356
Total noninterest income 2,544,790 2,107,198 2,146,954
NONINTEREST EXPENSE:
Salaries and related benefits 3,788,706 3,573,873 3,491,966
SAIF assessment (Note 16) 1,362,018 0 0
Federal deposit insurance premiums 502,244 463,010 452,181
Net occupancy and equipment expense 997,586 1,031,636 977,091
Data processing and outside
service fees 477,376 465,021 478,136
Legal 465,021 293,503 510,370
Telephone and postage 270,404 248,965 235,970
Advertising 111,094 78,020 86,782
Expense (income) from real
estate owned, net 45,182 32,132 (26,611)
Other 774,225 689,707 793,497
Total noninterest expense 8,793,856 6,875,867 6,999,382
INCOME BEFORE INCOME TAXES 3,348,967 4,815,060 4,224,524
INCOME TAX EXPENSE (Note 14) 1,192,250 1,700,600 1,469,100
INCOME BEFORE CUMULATIVE EFFECT OF
A CHANGE IN ACCOUNTING PRINCIPLE 2,156,717 3,114,460 2,755,424
CUMULATIVE EFFECT OF A CHANGE IN
ACCOUNTING PRINCIPLE (Note 1) 0 0 525,000
NET INCOME $ 2,156,717 $3,114,460 $3,280,424
EARNINGS PER SHARE BEFORE
CUMULATIVE EFFECT OF A CHANGE
IN ACCOUNTING PRINCIPLE (Note 1) $1.42 $2.05 $1.82
CUMULATIVE EFFECT OF A CHANGE IN
ACCOUNTING PRINCIPLE 0 0 0
EARNINGS PER SHARE $1.42 $2.05 $2 17
The accompanying note are an integral part of these consolidated statements.
10
FIRST FEDERAL SAVINGS BANK OF BRUNSWICK GEORGIA, AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
FOR THE YEARS ENDED SEPTEMBER 30, 1996, 1995, AND 1994
(Note 10)
Net
Unrealized
Appreciation
(Depreciation)
Additional on Securities
Common Paid-In Retained Available for
Stock Capital Earnings Sale Total
BALANCE, September 30,1993 $1,496,939 $1,514,208 $18,438,348 $ 0 $21,449,495
Net income 0 0 3,280,424 0 3,280,424
Dividends declared ($.75 per share) 0 0 (1,122,855) 0 (1,122,855)
Stock options exercised 1,000 14,000 0 0 15,000
BALANCE, September 30, 1994 1,497,939 1,528,208 20,595,917 0 23,622,064
Net income 0 0 3,114,460 0 3,114,460
Dividends declared ($.89 per share) 0 0 (1,334,246) 0 (1,334,246)
Stock options exercised 2,000 22,000 0 0 24,000
Change in net unrealized
appreciation on securities
available for sale, net of taxes
of $43,145 (Note 1) 0 0 0 80,137 80,137
BALANCE, September 30, 1995 1,499,939 1,550,208 22,376,131 80,137 25,506,415
Net income 0 0 2,156,717 0 2,156,717
Dividends declared ($.93 per share) 0 0 (1,394,943) 0 (1,394,943)
Change in net unrealized
depreciation on securities
available for sale, net of taxes
of $87,752 (Note 1) 0 0 0 (243,104) (243,104)
BALANCE, September 30,1996 $1,499,939 $1,550,208 $23,137,905 $(162,967) $26,025,085
The accompanying notes are an integral part of these consolidated statements.
11
FIRST FEDERAL SAVINGS BANK OF BRUNSWICK, GEORGIA, AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED SEPTEMBER 30, 1996, 1995, AND 1994
(Note 1)
1996 1995 1994
CASH FLOWS FROM OPERATING ACTIVITIES:
Interest received on loans $ 17,038,817 $ 15,648,553 $ 14,055,687
Interest and dividends received on securities available for sale 2,846,370 2,836,623 2,490,370
Loan fees collected 799,968 583,199 955,427
Service charges on deposit accounts 1,486,568 1,182,844 958,074
Other fees collected 1,009,549 875,841 962,965
Interest paid on deposits (10,234,098) (9,164,898) (7,381,855)
Payments for salaries and related benefits (3,954,050) (3,823,418) (4,002,239)
Payments for general and administrative expenses (3,231,601) (2,876,778) (3,094,923)
Income taxes paid, net (1,435,153) (1,498,000) (1,683,872)
Interest paid on borrowings (195,823) (212,560) (309,135)
Net cash provided by operating activities 4,130,547 3,551,406 2,950,499
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from sales of loans 26,834,936 11,003,152 16,722,929
Purchases of securities available for sale (9,778,004) (9,188,300) (5,522,533)
Principal collected on loans and mortgage-backed securities 71,720,864 75,623,568 75,923,574
Loans funded (124,581,499) (94,936,408) (114,608,300)
Purchase of premises and equipment (101,892) (119,960) (340,842)
Proceeds from sales and maturities of securities available for
sale 24,865,055 7,507,264 25,268,555
Other, net 448,708 459,706 (745,836)
Cash flows used in investing activities (10,591,832) (9,650,978) (3,302,453)
CASH FLOWS FROM FINANCING ACTIVITIES:
Net increase (decrease) in:
Checking accounts 2,701,337 860,806 1,454,147
NOW accounts 590,502 (1,454,841) 3,674,259
Savings and money market deposit accounts (1,673,879) (3,046,542) (1,307,960)
Proceeds from issuance of certificates of deposit 240,267,682 223,502,234 179,412,768
Payments for maturing certificates of deposit (246,615,779) (197,771,042) (179,064,326)
Payments of maturing FHLB advances (12,700,000) 6,000,000 (2,000,000)
Proceeds from FHLB advances 12,000,000 (7,800,000) 700,000
Proceeds from other borrowed money 12,000,000 11,000,000 0
Payments of other borrowed money (12,000,000) (11,000,000) 0
Dividends paid (1,394,943) (1,334,246) (1,122,855)
Net cash (used in)provided by financing activities (6,825,080) 18,956,369 1,746,033
Net (decrease) increase in cash and cash equivalents (13,286,365) 12,856,797 1,394,079
CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR 29,304,497 16,447,700 15,053,621
CASH AND CASH EQUIVALENTS AT END OF YEAR $ 16,018,132 $ 29,304,497 $ 16,447,700
NET INCOME $ 2,156,717 $ 3,114,460 $ 3,280,424
ADJUSTMENTS TO RECONCILE NET INCOME TO NET
CASH PROVIDED BY OPERATING ACTIVITIES:
Depreciation 366,076 403,029 359,986
Provision for loan losses 240,000 195,000 180,000
(Benefit) provision for deferred income taxes (418,846) (602,470) 163,181
Loan and excess servicing fees deferred, net (64,521) (111,767) 33,335
(Increase) decrease in interest receivable 33,261 (251,358) 85,746
Increase (decrease) in interest payable (58,389) 45,853 9,200
Increase (decrease) in accrued expenses and other liabilities 1,412,221 (478,414) (314,961)
Other, net 464,028 1,237,073 (846,412)
Total adjustments 1,973,830 436,946 (329,925)
NET CASH PROVIDED BY OPERATING ACTIVITIES $ 4,130,547 $ 3,551,406 $ 2,950,499
SUPPLEMENTAL SCHEDULE OF NONCASH INVESTING ACTIVITIES:
Loans exchanged for mortgage-backed securities $ 6,445,235 $ 1,016,520 $ 16,777,670
The accompanying notes are an integral part of these consolidated statements.
12
FIRST FEDERAL SAVINGS BANK OF BRUNSWICK, GEORGIA, AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 1996, 1995, AND 1994
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
First Federal Savings Bank of Brunswick, Georgia (the "Bank"), is a savings bank
primarily engaged in the business of obtaining deposits and providing mortgage
and other loans to the general public. The more significant accounting and
reporting policies not described elsewhere in these notes to financial
statements are discussed below.
Principles of Consolidation and
Basis of Presentation
The accompanying consolidated financial statements include the accounts of the
Bank and its wholly owned subsidiary, First Shelter Service Corporation ("First
Shelter"). All significant intercompany balances and transactions have been
eliminated in consolidation. As of September 30, 1996 and 1995, the investment
in First Shelter amounted to $304,398 and $303,954, respectively.
Certain 1995 and 1994 amounts have been reclassified to conform with the 1996
presentation.
Accounting Estimates
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the accompanying financial statements and disclosures. Actual results
could differ from those estimates.
Cash Equivalents
For purposes of reporting cash flows, cash and cash equivalents include cash and
due from banks, interest-bearing deposits with banks, and federal funds sold,
all of which have an original maturity of less than 90 days from the date of
purchase.
Securities Available for Sale
The Bank adopted Statement of Financial Accounting Standards ("SFAS") No. 115,
"Accounting for Certain Investments in Debt and Equity Securities" as of October
1,1994. In accordance with SFAS No. 115, securities are classified as either
held-to-maturity, trading, or available-for-sale. Held-to-maturity securities
are carried at amortized cost. Trading securities are carried at fair value,
with unrealized gains and losses included in earnings. Available-for-sale
securities are carried at fair value, with unrealized gains and losses excluded
from earnings and reported in stockholders' equity. The Bank classifies all of
its securities as available-for-sale which were reported at their fair value of
$16,364,023 on September 30, 1996. The net unrealized depreciation on securities
available for sale of $250,719 was recorded net of taxes as a separate component
of stockholders' equity.
Premiums and discounts are recognized in interest income using the interest
method over the period of maturity.
Loans
During 1996, the Bank adopted SFAS No. 118, "Accounting by Creditors for
Impairment of a Loan-Income Recognition and Disclosures," which amended SFAS No.
114, "Accounting by Creditors for Impairment of a Loan." These statements
require that impaired loans, as defined, be measured based on the discounted
present value of expected future cash flows, the observable market price of the
loan, or the fair value of the collateral if the loan is collateral-dependent.
There was no effect on current period earnings as a result of the adoption of
SFAS No. 118. Additionally, as permitted by these statements, in-substance
foreclosures of $0 and $845,036 were reclassified to loans, net, from real
estate owned at September 30, 1996 and 1995, respectively.
Allowance for Loan Losses
The allowance for loan losses is based on management's estimate of the allowance
required to reflect the risks in the loan portfolio based on circumstances and
conditions known or anticipated at each reporting date. A provision for loan
losses is charged to operations based on management's periodic evaluation of
these risks. Provisions not specifically identified are based on the Bank's
experience and other factors. It is the opinion of management that the allowance
for loan losses is adequate at September 30, 1996 based on conditions reasonably
known to management; however, the allowance may be increased based on future
economic changes or conditions.
Real Estate Owned
Real estate properties acquired through, or in lieu of, loan foreclosure are to
be sold and are initially recorded at fair value at the date of foreclosure
establishing a new cost basis. After foreclosure, valuations are periodically
performed by management and the real estate is carried at the lower of carrying
amount or fair value less costs to sell. Costs related to holding real estate
and charges to write down real estate for subsequent declines in net realizable
value are charged to operations. Real estate owned by the Bank at September 30,
1996 and 1995 is recorded net of a valuation allowance of $41,000 and $25,000,
respectively.
Gains on sales of real estate acquired through foreclosure are recognized using
cash down payment guidelines established by authoritative accounting
pronouncements.
Premises and Equipment
Premises and equipment are stated at cost, less accumulated depreciation and
amortization. Depreciation and amortization are provided principally using the
straight-line method over the estimated useful lives of the assets of 20 to 30
years for buildings, 10 years for leasehold improvements, and 3 to 10 years for
furniture, fixtures, and equipment.
Federal Home Loan Bank Stock
The Bank, as a member of the Federal Home Loan Bank System, is required to
maintain an investment in capital stock of the Federal Home Loan Bank ("FHLB")
in an amount equal to the greater of 1% of its outstanding permanent residential
mortgage loans or 5% of its outstanding advances. No ready market exists for the
FHLB stock, and it has no quoted value. For disclosure purposes, such stock is
assumed to have a market value equal to cost.
Interest Income
Income on loans and investments is recognized when the interest is earned in
order to yield a constant rate of return on funds outstanding.
Uncollected Interest
Loans 90 days or more delinquent are placed on nonaccrual status. Non-accrual
and restructured loans totalled approximately $1,040,899 and $1,932,000 at
September 30,1996 and 1995, respectively. Interest on these loans, if ultimately
collected, is credited to income in the period of recovery. During 1996, 1995,
and 1994, additional gross interest income totaling approximately $31,000,
$62,000 and $113,000, respectively, would have been recorded on nonaccrual and
restructured loans if all such loans at September 30,1996, 1995, and 1994 had
been accruing interest at the original contractual rate. Interest payments
recorded in 1996,1995, and 1994 as income, excluding reversals of previously
accrued interest, for all such nonperforming loans at September 30,1996, 1995,
and 1994 were approximately $100,000,
13
$104,000, and $44,000, respectively. The Bank does not have significant
commitments to lend additional funds to any of these borrowers.
Loan Fees
Loan fees and direct costs of originating successful loans are being deferred
and amortized, net, as an adjustment to interest yield over the life of the
related loan.
Loan Sales and Loan Servicing
Additional funds for lending are provided by selling participating interests in
loans or whole loans. Under most sales agreements, the Bank continues to provide
loan servicing, which includes collecting payments and remitting its portion
thereof to the buyer, net of servicing fees. On October 1, 1996, the Bank
adopted SFAS No. 122, "Accounting for Mortgage Servicing Rights" which, among
other provisions, requires that the value of mortgage servicing rights
associated with mortgage loans originated by an entity, which it intends to
sell, be capitalized as assets. The cost of these mortgage servicing rights is
amortized in proportion to, and over the period of, the estimated net servicing
revenues. In connection with the October 1, 1995 adoption of SFAS No. 122, the
Bank has capitalized mortgage servicing rights of $149,306 in 1996. Amortization
of mortgage servicing rights was $8,815 in 1996. No valuation allowance was
recorded during 1996. Accordingly, adoption of SFAS No. 122 increased net income
after taxes by $97,049, or $.06 per share. Impairment of mortgage servicing
rights is assessed based on the fair value of those rights. Fair values are
estimated using discounted cash flows based on a current market interest rate.
For purposes of measuring impairment, the rights are stratified based on the
predominant risk characteristics of the underlying loans. The predominant risk
characteristics of the Bank's loans are the interest rate and loan type. The
amount of impairment recognized is the amount by which the capitalized mortgage
servicing rights for a stratum exceed their fair value.
When participating interests in loans sold have an average contractual interest
rate, adjusted for normal servicing fees, that differs from the agreed yield to
the purchaser, gains or losses are recognized equal to the present value of such
differential over the estimated remaining life of such loans. The resulting
"excess servicing receivable," included in other assets, is amortized over the
estimated useful life using the level yield method.
Quoted market prices are not available for the excess servicing receivables.
Thus, the excess servicing receivables and the amortization thereon are
periodically evaluated in relation to estimated future servicing revenues,
taking into consideration changes in interest rates, current prepayment rates,
and expected future cash flows. The Bank evaluates the carrying value of the
excess servicing receivables by estimating the future servicing income of the
excess servicing receivables based on management's best estimate of remaining
loan lives and discounted at the original discount rate.
Income Taxes
Effective October 1,1993,the Bank adopted SFAS No.109, "Accounting for Income
Taxes" which requires the asset and liability method of accounting for deferred
income taxes. The Bank previously accounted for deferred taxes under the
deferral method required by Accounting Principles Board Opinion No. 11. This
change resulted in the Bank recording a cumulative effect of a change in
accounting principle in the consolidated statement of income for the year ended
September 30,1994 of $525,000.
Earnings per Share
Earnings per share are calculated based on the weighted average common shares
and common stock equivalents outstanding during the year of 1,523,693,
1,516,868, and 1,514,017 in 1996,1995, and 1994, respectively.
2. FAIR VALUES OF FINANCIAL INSTRUMENTS
The following methods and assumptions were used by the Bank in determining
estimates of fair value disclosures for financial instruments:
Cash and Due From Banks, Interest-Bearing Deposits With
Banks, and Federal Funds Sold
The carrying amount for these cash equivalents approximates their fair value.
Securities Available for Sale
Fair values of securities available for sale are based on quoted market prices,
where available. In the event that quoted market prices are not available, fair
values are based on quoted market prices of comparable instruments. The
estimated fair value of securities available for sale was $16,364,023 and
$28,720,859 at September 30,1996 and 1995, respectively.
Loans, Net
The fair values of conforming residential mortgage loans are based on quoted
market prices or quoted market prices of similar loans sold, adjusted for
differences in loan characteristics. The fair values of other loans are
estimated using discounted future cash flow analyses using interest rates or
secondary market yield requirements currently being offered for loans with
similar terms and credit quality. The carrying amount of accrued interest
approximates its fair value. The estimated fair value of loans, net, were
approximately $208,825,000 and $186,862,000 at September 30, 1996 and 1995,
respectively.
Off-Balance Sheet Instruments
The fair values of commitments to sell mortgage loans and commitments to extend
credit approximate their carrying amounts. Commitments or commercial letters of
credit are not significant, and their related fair value would be nominal.
Deposits
The fair values of checking, NOW, savings, and money market deposit accounts are
equal to the reported carrying amount, which is the amount payable on demand as
of the reporting date. Fair values for certificates of deposit are estimated
using a discounted future cash flow method, which applies rates currently
offered for deposits of similar remaining maturities. The estimated fair value
of certificates of deposit were approximately $138,824,000 and $145,154,000 at
September 30,1996 and 1995, respectively.
Borrowings
The fair value of the Bank's borrowings is determined by estimates using
discounted future cash flow analyses based on the Bank's current incremental
borrowing rates for similar types of instruments. The estimated fair value of
advances from the FHLB were approximately $1,509,000 and $2,200,000 at September
30,1996 and 1995, respectively.
The techniques used to estimate fair values are significantly affected by the
assumptions used, including the discount rate and estimated future cash flows.
Therefore, the fair value estimates for these financial instruments cannot be
substantiated by comparison to independent markets and, in many cases, could not
be realized in immediate settlement of a particular financial instrument of the
Bank. The aggregate fair value amounts presented herein do not represent the
aggregate underlying value of the Bank and may not be indicative of amounts that
might ultimately be realized upon disposition of those assets and liabilities
individually or in aggregate.
14
3. SECURITIES AVAILABLE FOR SALE
Securities available for sale at September 30, 1996 and 1995 consist solely of
U.S. Treasury notes, agency bonds, mortgage-backed securities, and tax-free
municipal securities.
The amortized cost and estimated fair value of securities available for sale
were as follows at September 30, 1996 and 1995:
Gross Gross Estimated
Amortized Unrealized Unrealized Market
Cost Gains Losses Value
1996:
Investment securities $ 8,032,109 $ 33,366 $ 41,343 $ 8,024,132
Mortgage-backed securities 8,582,633 3,612 246,354 8,339,891
$16,614,742 $ 36,978 $ 287,697 $16,364,023
1995:
Investment securities $16,353,511 $ 156,286 $ 20,982 $16,488,815
Mortgage-backed securities 12,244,066 77,895 89,917 12,232,044
$28,597,577 $ 234,181 $ 110,899 $28,720,859
Gross realized gains and losses on sale of investments in securities were as
follows:
1996 1995 1994
Gross realized gains:
Investment securities $ 34,042 $ 0 $ 0
Mortgage-backed securities 17,660 0 139,528
$ 51,702 $ 0 $139,528
Gross realized losses:
Investment securities $ 11,231 $28,471 $ 0
Mortgage-backed securities 87,891 2,501 51,623
$ 99,122 $30,972 $ 51,623
The amortized cost and estimated market values of securities available for sale
at September 30,1996, by contractual maturity, are shown below. Expected
maturities will differ from contractual maturities because borrowers may have
the right to call or prepay obligations with or without penalties.
Estimated
Amortized Market
Cost Value
Due in 1 year or less $ 3,078,251 $ 3,085,253
Due after 1 year through 5 years 5,078,965 5,071,150
Due after 5 years through 10 years 2,160,170 2,112,830
Due after 10 years and thereafter 6,297,356 6,094,790
$16,614,742 $16,364,023
At September 30,1996 and 1995,certain of the Banks'assets(primarily investment
securities and mortgage-backed securities) with amortized cost of approximately
$14,356,136 and $16,277,639, respectively, were pledged to secure certain
certificates of deposit, public deposits, a letter of credit, advances from the
FHLB, and treasury tax and loan balances with the Federal Reserve Bank of
Atlanta.
15
Loans at September 30,1996 and 1995 are summarized as follows:
1996 1995
Real estate loans:
Conventional mortgage $160,887,037 $150,372,532
Construction 21,564,508 12,951,880
Partially guaranteed by Federal Housing
Administration or Veterans Administration 446,415 507,609
Consumer loans 28,438,919 24,157,352
Commercial loans 7,441,666 4,512,256
218,778,545 192,501,629
Less:
Allowance for loan losses (800,786) (834,882)
Deferred loan fees and other, net (830,384) (789,790)
Undisbursed portions of loans in process (7,279,329) (4,212,944)
Net loans $209,868,046 $186,664,013
During fiscal years ended September 30,1996,1995, and 1994, loans foreclosed and
transferred to real estate owned totaled $825,255, $1,569,144, and $317,430,
respectively.
The Bank has made loans to directors and executive officers for the purchase of
their primary residences and other short-term loans aggregating $1,603,716 and
$1,838,969 at September 30,1996 and 1995, respectively. In the opinion of
management, these loans are fully collectible. No loans due from directors or
executive officers were charged off during the current fiscal year. The
following sets forth information regarding the activity during fiscal year 1996
in loans due from directors and executive officers:
Balance at September 30, 1995 $1,838,969
Repayments (588,481)
New borrowings 353,228
Balance at September 30,1996 $1,603,716
A reconciliation of the allowance for loan losses for the years ended September
30,1996,1995, and 1994 is as follows:
1996 1995 1994
Balance at beginning of year $834,882 $786,111 $869,297
Provision for loan losses 240,000 195,000 180,000
Amounts charged off (299,318) (189,497) (30,605)
Recoveries 25,222 43,268 37,419
Balance at end of year $800,786 $834,882 $786,111
5. LOAN SERVICING
The Bank was servicing mortgage loans (which are not included in the
accompanying statements of financial condition) with unpaid principal balances
totaling $133,264,664, $128,526,732, and $133,599,102 for the benefit of others
at September 30, 1996,1995, and 1994, respectively.
Custodial escrow balances maintained in connection with the foregoing loan
servicing were $1,251,325 and $1,475,065 at September 30,1996 and 1995,
respectively.
16
6. PREMISES AND EQUIPMENT
Premises and equipment at September 30,1996 and 1995 consisted of the following:
1996 1995
Cost
Land $ 766,574 $ 766,574
Buildings 1,152,599 1,152,599
Furniture, fixtures, and equipment 2,760,477 2,758,403
Leasehold improvements 584,523 561,917
Total cost 5,264,173 5,239,493
Less accumulated depreciation and
amortization (3,270,031) (2,981,167)
$ 1,994,147 $ 2,258,326
7. DEPOSITS
Included in deposits at September 30,1996 and 1995 are certificates of deposit
in denominations of $100,000 or more aggregating $31,999,281 and $34,389,564,
respectively.
At September 30,1996, the scheduled maturities of CDs are as follows:
1997 $100,408,617
1998 18,052,590
1999 12,724,537
2000 5,680,789
2001 and thereafter 1,184,860
$138,051,393
8. ADVANCES FROM THE FHLB
Advances from the FHLB as of September 30,1996 and 1995 amounted to $1,500,000
and $2,200,000, respectively. The advances are due in their entirety in 1997.
The weighted average interest rate for outstanding FHLB advances was 7.9% and
6.82% at September 30,1996 and 1995, respectively.
9. RESTRICTIONS ON RETAINED EARNINGS
The Bank is subject to certain restrictions on the amount of dividends that it
may declare prior to regulatory approval. At September 30,1996, approximately
$6,819,000 of retained earnings were available for dividend declaration without
prior regulatory approval.
10. REGULATORY MATTERS
The Bank is subject to various capital requirements administered by the federal
banking agencies. Failure to meet minimum capital requirements can initiate
certain mandatory, and possibly additional discretionary, actions by regulators
that, if undertaken, could have a direct material effect on the Bank's financial
statements. Under capital adequacy guidelines and the regulatory framework for
prompt corrective action, the Bank must meet specific capital guidelines that
involve quantitative measures of the Bank's assets, liabilities, and certain
off-balance-sheet items as calculated under regulatory accounting practices. The
Bank's capital amounts and classification are also subject to qualitative
judgments by the regulators about components, risk weightings, and other
factors.
Quantitative measures established by regulation to ensure capital adequacy
require the Bank to maintain minimum amounts and ratios (set forth in the table
below) of total and Tier I capital (as defined in the regulations) to
risk-weighted assets (as defined). Management believes, as of September 30,1996,
that the Bank meets all capital adequacy requirements to which it is subject.
As of September 30, 1996 and September 30, 1995, the most recent notification
from the Office of Thrift Supervision categorized the Bank as well-capitalized
under the regulatory framework for prompt corrective action. To be categorized
as well-capitalized, the Bank must maintain certain tangible capital, Tier I
(core) capital, and total risk-based capital ratios as set forth in the table.
There are no conditions or events since that notification that management
believes have changed the Bank's category.
17
The Bank's actual amounts (in thousands) and ratios are also presented
in the table.
Minimum To Be Well
for Capital Capitalized for
Adequacy Prompt Corrective
Actual Purposes Action Provisions
Ratio Amount Ratio Amount Ratio Amount
Stockholder's equity,
and ratio to total
assets 10.4% 26,025
Unrealized loss on
securities available
for sale 163
Intangible assets (14)
Tangible capital, and
ratio to adjusted
total assets 10.5 26,174 1.5 $3,739
Tier I(core) capital,
and ratio to adjusted
total assets 10.5 26,174 3.0 7,478 5.0 $12,464
Tier I capital, and
ratio to risk-
weighted assets 15.1 26,174 6.0 10,406
Allowance for loan
losses 801
Assets required to
be deducted (217)
Tier 2 capital 584
Total risk-based
capital and ratio to
risk-weighted assets 15.4% $26,758 8.0% $13,874 10.0% $17,343
Total Assets $249,117
Adjusted total assets $249,266
Risk-weighted assets $173,425
11. INTEREST ON DEPOSITS
Interest on deposits at September 30, 1996, 1995, and 1994 is comprised
of the following:
1996 1995 1994
Checking accounts $ 155,806 $ 144,307 $ 123,974
NOW accounts 471,133 571,564 475,820
Savings accounts 502,580 510,523 575,075
Money market deposit
accounts 472,478 546,611 514,054
Certificates of deposit 8,573,732 7,437,746 5,702,132
$10,175,709 $9,210,751 $7,391,055
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12. EMPLOYEE BENEFIT PLANS
The bank has a stock option plan for key employees authorizing the
granting of options for up to 199,800 shares of common stock. such stock is
to be issued from the Bank's authorized but unissued shares. These options are
exercisable in equal increments over three years and have a term of five years.
No charges are reflected in income as a result of the granting or exercising
of the stock options.
The following table presents further information on this plan:
1996 1995 1994
Number Option Number Option Number Option
of Price of Price of Price
Shares Per Share Shares Per Share Shares Per Share
Option outstanding at
end of
prior year 30,311 $12-$15 30,311 $12-$15 32,311 $12-$15
Granted 0 0 0 0 0 0
Exercised 0 0 2,000 12 1,000 15
Canceled or expired 0 0 0 0 0 0
Options out standing at
end of year 30,311 $12-$15 30,311 $12-$15 32,311 $12-$15
Shares exercisable at
end of year 30,311 $12-$15 30,311 $12-$15 32,311 $12-$15
In October 1995, the Financial Accounting Standards Board issued SFAS No.
123, "Accounting for Stock-Based Compensation," which the Bank is required to
adopt in fiscal year 1997. SFAS No. 123 will require the Bank to estimate the
value of all stock-based compensation using a recognized pricing model. The
Bank will have the option of recognizing this value as an expense or by
disclosing its effects on net income. The Bank's management has not yet
determined its method of adoption or the financial statement impact of the
adoption of SFAS No. 123.
The Bank and its subsidiary have a noncontributory profit-sharing plan
which covers substantially all of their employees. The annual contribution to
the plan is established each year by the board of directors. Profit-sharing
plan expense was $268,640, $298,156 and $271,210 for the years ended September
30, 1996, 1995, and 1994, respectively.
The Bank has also established a savings plan. Under the terms of the
plan, eligible employees can make tax-deferred 401(k) contributions. The
Bank matches the employee contribution 100% up to the first 2% contributed by
an employee, 75% of the next 2%, and 50% of the third 2%. For the years ended
September 30, 1996, 1995, and 1994, the Bank's 401(k) contributions were
$101,413, $92,644, and $96,849, respectively.
13. OPERATING LEASE OBLIGATIONS
At September 30, 1996, the Bank leased office facilities under agreements
with terms of more than one year. Amounts charged to retail expense for
operating leases were $342,809, $346,226, and $344,885 for the years ended
September 30 1996, 1995, and 1994, respectively.
At September 30, 1996 the Bank's minimum rental commitments under
noncancelable operating leases for office space with initial or remaining terms
of more than one year were as follows:
Fiscal Year:
1997 $ 344,904
1998 343,704
1999 314,544
2000 314,544
2001 314,544
Thereafter 687,212
$2,319,452
19
14. INCOME TAXES
Income tax expense for the three years ended September 30, 1996 is summarized
as follows:
1996 1995 1994
Federal
Current $1,467,123 $2,047,029 $734,511
Deferred (359,411) (512,099) 612,106
1,107,712 1,534,930 1,346,617
State:
Current 143,973 256,041 46,408
Deferred (59,435) (90,371) 76,075
84,538 165,670 122,483
Total $1,192,250 $1,700,600 $1,469,100
The differences between income taxes at the federal statutory rate and the
provision at the effective tax rate for the tree years ended September 30, 1996
are as follows, net of the cumulative effect of a change in accounting for
income taxes:
1996 1996 1994
Statutory federal income tax $1,138,649 $1,637,120 $1,436,338
Increases (reductions) in
taxes resulting from:
State income tax, net of
federal benefit 53,773 168,987 109,829
Tax-free interest income (27,285) (71,470) (81,600)
Other, net 27,113 34,037 4,533
$1,192,250 $1,700,600 $1,469,100
Temporary differences between the financial statement carrying amounts and tax
bases of assets and liabilities that gave rise to significant portions of the
deferred tax liability at September 30, 1996 and 1995 relate to the following:
1996 1995
Effect of loans mark-to-market deduction $360,969 $253,949
Deferred loan fees 195,578 178,460
Dividend received deduction 182,153 182,153
Sale of loan participations 58,214 81,624
Depreciation 55,827 101,608
SAIF assessment (517,567) 0
Effect of bad debt deduction (119,775) (215,141)
Other, net (142,577) (79,931)
$ 72,822 $503,722
Under the Internal Revenue Code (the "Code"), the Bank was allowed a special
bad debt deduction related to additions to tax bad debt reserves established
for the purpose of absorbing losses. The provisions of the Code permitted the
Bank to deduct from taxable income an allowance for bad debt equal to the
greater of 8% of taxable income before such deduction or actual charge-offs.
Retained earnings at September 30, 1996 include approximately $2,477,000 for
which no federal income tax has been provided. These amounts represent
allocations of income to bad debt reserves and are subject to federal income
tax in future years, at the then current corporate rate, if the Bank no longer
qualifies as a Bank for federal income tax purposes and in certain other
circumstances.
On August 2, 1996, Congress passed the Small Business Job Protection Act that
will, among other things, repeal the tax bad debt reserve method for thrifts
effective for taxable years beginning after December 31,1995. As a result, the
Bank must recapture into taxable income the amount of its post-1987 tax bad
debt reserves over a six-year period beginning in fiscal year 1997. The Bank
is expected to recapture approximately $187,000 of its tax bad debt reserves
into taxable income over six years as a result of this new law. The recapture
will not have any effect on the Bank's financial statements because the related
tax expense has already been accrued. Effective for the fiscal year ending
September 30, 1997, the Bank will be required to utilize the six-year average
experience method of loan charge-offs in determining its annual tax bad debt
deduction.
As discussed in Note 1, the Bank adopted SFAS No. 109 in the first fiscal
quarter of 1994.
15.FINANCIAL INSTRUMENTS WITH OFF-BALANCE SHEET RISK
The Bank is a party to financial instruments with off-balance sheet risk in
the normal course of business to meet the financing needs of its customers and
to reduce its own exposure to fluctuations in interest rates. These financial
instruments include
20
commitments to extend credit, standby letters of credit, and loans sold with
recourse. These instruments involve, to varying degrees, elements of credit
and interest rate risk in excess of the amount recognized in the statements of
financial condition. The contract amounts of these instruments reflect the
extent of involvement the Bank has in particular classes of financial
instruments. The Bank, however, does not hold or issue futures, forward, swap,
or option contracts.
The Bank's exposure to credit loss in the event of nonperformance by the
counterpart to the financial instrument for commitments to extend credit and
standby letters of credit and to reimburse the investor for losses on loans
sold with recourse is represented by the contractual amount of those
instruments. The Bank uses the same credit policies in making commitments and
conditional obligations as it does for on-balance sheet instruments.
Commitments to extend credit, exclusive of the undisbursed portion of loans in
process, which amounted to $667,000 at fixed interest rates and $1,433,000 at
variable interest rates at September 30, 1996, represent legally binding
agreements to lend to customers with various expiration dates, but in no event
later than 30 days after September 30, 1996. As some commitments are expected
to expire without being funded, the total commitment amounts do not necessarily
represent future liquidity requirements.
Standby letters of credit are conditional commitments issued by the Bank
guaranteeing the performance of a customer to a third party. These guarantees
are primarily issued to support public and private borrowing arrangements. The
credit risk involved in issuing letters of credit is essentially the same as
that involved in extending loan facilities to customers. The Bank had
approximately $1,798,000 in irrevocable standby letters of credit outstanding at
September 30, 1996.
The Bank generally sells participating interests in loans without recourse.
However, because of market conditions in certain prior years, the Bank sold
certain participating interests in loans with recourse in the event of default
by borrowers on the related residential mortgage loans. The credit risk
involved in selling loans with recourse is essentially the same as that involved
in extending loan facilities to customers. As of September 30, 1996, the
balance of loans sold with recourse that remains uncollected totals
approximately $4,000,000.
The majority of the Bank's business activity is with customers located within
its southeast Georgia market area. The Bank's only significant concentration of
credit at September 30, 1996 occurs in real estate loans (including certain
commercial real estate loans) which totaled $200,177,192 or 92% of total loans.
Of total real estate loans, 14% were for construction, land acquisition, and
development, 67% were for permanent mortgage loans for one-to-four-family
dwellings, and 19% were other loans secured by real estate, primarily commercial
properties. It is the Bank's policy to review each prospective credit in order
to determine an adequate level of security or collateral prior to making the
loan. The type of collateral will vary and ranges from liquid assets to real
estate.
16.LEGISLATION
The Bank's savings deposits are insured by the Savings Association Insurance
Fund ("SAIF"), which is administered by the FDIC. The assessment rate currently
ranges from .23% of deposits for well-capitalized institutions to .31% of
deposits for undercapitalized institutions. The FDIC also administers the Bank
Insurance Fund ("BIF"), which has the same designated reserve ratio as the SAIF.
On August 8, 1995, the FDIC adopted an amendment to the BIF risk-based
assessment schedule which lowered the deposits insurance assessment rate for
most commercial banks and other depository institutions with deposits insured by
the BIF to a range of .31% of insured deposits for undercapitalized BIF-insured
institutions to .04% of deposits for well-capitalized institutions, which
constitutes over 90% of BIF-insured institutions. The FDIC amendment became
effective for the quarter ended September 30, 1995. The amendment created a
substantial disparity in the deposit insurance premiums paid by BIF and SAIF
members.
Legislation was enacted on September 30, 1996 to recapitalize the SAIF in
order to eliminate the premium disparity. The Treasury Department, the FDIC,
and Congress provided for a one-time assessment of .657% of insured deposits on
all SAIF-insured deposits held at March 31, 1995. Under this legislation, the
BIF and SAIF will be merged into one fund as soon as practicable after they both
reach their designated reserve ratios, but no later than January 1, 1998,
provided that there are no longer any thrift chartered institutions. The
special assessment as described above resulted in a one-time charge to the Bank
of approximately $1,362,000, which is included in accrued expenses and other
liabilities on the consolidated statement of financial condition as of September
30, 1996, and SAIF assessment in noninterest expense on the consolidated
statement of income for the year ended September 30, 1996.
17.LITIGATION
In 1988, the Bank entered into an agreement with The Citizens and Southern
Corporation ("C&S") and certain related affiliates which provided for the
acquisition of the Bank by C&S and the exchange of bank common stock for C&S
common stock. The agreement was amended in 1990 to provide for receipt of C&S/
Sovran Financial Corporation ("Sovran") common stock by Bank stockholders as a
result of the merger in 1990 of C&S with Sovran (which was acquired by
NationsBank Corporation ("NationsBank") in late 1991). On September 27, 1991,
the Bank filed a complaint against C&S/Sovran for breach of their merger
agreement. C&S/Sovran answered denying liability. The trial court divided the
case into two trial, one on liability and a second on damages. In May 1994, in
the liability trial, a jury determined C&S/Sovran breached the merger agreement.
On December 19, 1994, the trial court ordered C&S/Sovran to specifically
perform the agreement with the Bank. On December 4, 1995, the Supreme Court
affirmed the trial court decision. The case then was remanded to the trial
court for determination of the closing date which would be utilized to determine
the terms of the specific performance remedy. A second jury trial was held on
July 8, 1996. On July 18, 1996, the second jury determined that the merger
agreement would have closed on June 19, 1991, had defendants filed and pursued
the regulatory approvals on March 8, 1991. On October 15, 1996 the trial court
entered judgment thereon. The Bank and NationsBank have, consistent with the
court's order, finalized the terms for consummation of the merger such that,
after the Bank pays its contractual obligations for attorneys' fees and senior
management agreements of approximately $13.8 million, the Bank's stockholders
will receive .80 shares of NationsBank stock for each share of the Bank's stock.
The parties anticipate a closing on or before April 30, 1997. Other assets at
September 30, 1996 and 1995 include approximately $182,000 of capitalized fees
related to the costs of the merger.
The Bank is party to various legal and administrative proceedings and claims.
While any litigation contains an element of uncertainty, management believes
that the outcome of such proceedings or claims pending or known to be threatened
will not have a material adverse effect on the Bank's consolidated financial
position.
21
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Stockholders of First Federal Savings Bank of Brunswick, Georgia:
We have audited the accompanying consolidated statements of financial
condition of FIRST FEDERAL SAVINGS BANK OF BRUNSWICK, GEORGIA (a federal
capital stock savings bank), AND SUBSIDIARY as of September 30, 1996 and 1995
and the related consolidated statements of income, changes in stockholders'
equity, and cash flows for each of the three years in the period ended
September 30, 1996. These financial statements are the responsibility of the
Banks's management. Our responsibility is to express an opinion on these
financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respect, the financial position of First Federal Savings Bank
of Brunswick, Georgia, and subsidiary as of September 30, 1996 and 1995 and the
results of their operations and their cash flows for each of the three years
in the period ended September 30, 1996 in conformity with generally accepted
accounting principles.
Atlanta, Georgia
December 16, 1996
ARTHUR ANDERSEN LLP
Capital Stock:
At the present, there is no established market in which shares of the
Bank's capital stock are regularly traded, nor are there any uniformly quoted
prices for such shares. Buyers and sellers are matched as possible by a
national firm as an accommodation. On October 21, 1985, the Bank declared a
stock split in the form of a 100% stock dividend to stockholders of record as
of October 31, 1985. On June 16, 1986, the Bank declared an additional stock
split in the form of a 100% stock dividend to stockholders of record as of June
30, 1986. During fiscal year 1996, the Board of Directors approved the payment
of cash dividends on its common stock totalling approximately $1,395,000.
The Bank may not declare or pay a cash dividend on any of its stock if the
effect thereof would cause the Bank's net worth to be reduced below (i) the
amount required for the liquidation account or (ii) the regulatory net worth
requirements. Additionally, the Bank may make aggregate capital distribution
during a calendar year, without prior approval of the Office of Thrift
Supervision, of up to all of its net income to date during the year plus an
amount that would reduce its excess capital ratio to one-half of such excess
capital ratio at the beginning of the calendar year. Further, for a period of
three years after July 21, 1984, the date of the Bank's conversion to stock
form, the Bank was not permitted (except with the prior approval of the FSLIC)
to declare or pay a cash dividend on any of its stock in an amount in excess
of one-half of the greater of (i) the Bank's net income for the fiscal year in
which the dividend is declared or (ii) the average of the Bank's net income for
the current fiscal year and no more that two of the immediately preceding
fiscal years.
As of September 30, 1996, the Bank had 552 stockholders.
Business of the Bank
First Federal Savings Bank of Brunswick is a federally chartered capital
stock saving bank headquartered in Brunswick, Georgia. The Bank began its
operations in 1926 as a Georgia-chartered mutual building and loan association.
In 1935, it converted to a federal mutual savings and loan association, and in
1983, First Federal became a federal mutual saving bank. It completed its
conversion to a federal capital stock savings bank in July 1984. First Federal
is a member of the Federal Home Loan Bank system, and its deposits are insured
by the Federal Deposit Insurance Corporation, through its savings association
conduit, the Savings Association Insurance Fund.
The Bank is primarily engaged in the business of obtaining funds in the
form of deposits and investing such funds in mortgage loans on residential and
commercial real estate, various types of consumer and commercial loans,
mortgage-backed securities, and other types of securities. First Federal, like
most other federal thrift institutions, has traditionally concentrated its
lending activities on the origination of conventional first mortgage loans
secured by residential property and, to a lesser extent, construction loans and
loans secured by commercial property. Since 1982, the Bank has been seeking
(i) to reduce the amount of low interest rate loans in its loan portfolio, (ii)
to increase the origination of loans with shorter terms, such as construction
loans, consumer loans and commercial loans, and (iii) to originate long-term,
fixed-rate loans for sale in the secondary market and to retain variable-rate
loans.
- -22-
BOARD OF DIRECTORS
James F. Barger J. Dewey Benefield, Jr. William O. Faulkner, Jr.
Partner, Tiller, Director, Sea Island Retired, Citizens &
Stewart & Co. Company Southern National
LLC CPA Bank
James H. Gash (FIRST FEDERAL SAVINGS Mack F. Mattingly
Senior Vice Pres. BANK logo appears here) Former U.S. Senator
Commercial Banking
First Federal
Savings Bank
T. Gillis Morgan, III D. Paul Owens John J. Rogers
President Retired Senior Vice President
Tidewater Coastal Chevrolet Mortgage Banking
Companies, Inc. First Federal Savings
Bank
Ben T. Slade, III Jack Torbett L. Gerald Wright
President Manufacturers Investor
First Federal Representative
Savings Bank
23
OFFICERS & CORPORATE INFORMATION
Chairman and President
BEN T SLADE, III
Senior Vice Presidents
JAMES H. GASH
Commercial Banking
JOHN J. ROGERS
Mortgage Banking
Group Vice Presidents
JERRY E. BUTLER
Commercial Banking
ROBERT B. SAMS
Controller
ROBERT E. STRANGE
Mortgage Banking
Vice Presidents
NANCY BARNA
Human Resources
DONALD L. BLALOCK
Commercial Banking
JAMES L. DAVIS
Consumer Lending
SALLY B. MILES
Operations
WANDA T. MILLER
Branch Coordination
GREGORY T. STRICKLAND
Manager
Glynn Place Mall Office
JO USHER
Mortgage Loan Servicing
BETTY WHITWORTH
Credit Control
Assistant Vice Presidents
CHESTER ANDERSON
Manager
Altama Avenue Office
STEPHEN PARKER
Manager
Ocean Boulevard Office
LINDSAY VINYARD
Marketing
Banking Officers
HELEN BEECHER
Mortgage Lending
BERT CASON
Consumer Lending
GERRY EARP
Corporate Secretary
Stockholder Relations
ALICE EDENFIELD
Account Processing
ANGIE FERRA
Training
DONNA GIBBS
Assistant manager
Altama Avenue Office
JANE S. GREENE
Loan Servicing
GAIL T. JACKSON
Assistant Manager
Plaza Office
LYNETTE MAASSEN
Assistant Manager
Glynn Place Mall Office
KATHY D. MILLS
Assistant Controller
MARY SLAUGHTER
Account Servicing
DAWN SMITH
Internal Auditor
TARA T. STEPHENS
Construction Lending
Main Office
777 Gloucester Street
Brunswick, Georgia 31520
Telephone: (912) 265-1410
Annual Meeting
The annual meeting of First Federal Savings Bank will be held Wednesday,
January 22, 1997 at 5 p.m. in the lobby of the Main Office, 777 Gloucester
Street, Brunswick, Georgia
Stock Transfer Agent and Registrar
Wachovia Bank of North Carolina, N.A.
Corporate Trust Department
P.O. Box 3001
Winston-Salem,
North Carolina 27102-3001
Common Stock Listing
First Federal's common stock is traded in the National Market System under the
NASDAQ symbol FFBG and is listed as "FFdBrun" in newspapers. For further
information, contact Mrs. Gerry Earp.
Independent Public Accountants
Arthur Andersen LLP
133 Peachtree Street, N.E.
Atlanta, Georgia 30303
Legal Counsel
Smith, Mackinnon, Harris, Greeley, Bowdoin & Edwards, P.A.
Suite 800
255 South Orange Avenue
Orlando, Florida, 32801
Form 10-K
A copy of the Form 10-K, including financial statement schedules as filed
with the Office of Thrift Supervision, will be furnished without charge to
stockholders as of the record date upon written request to:
Mrs. Gerry Earp, First Federal Savings Bank, P.O. Box 1877, Brunswick,
Georgia 31521
24
Exhibit 21.1
First Federal Savings Bank of Brunswick, Georgia
Subsidiary of Registrant
First Shelter Service Corporation