-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: keymaster@town.hall.org Originator-Key-Asymmetric: MFkwCgYEVQgBAQICAgADSwAwSAJBALeWW4xDV4i7+b6+UyPn5RtObb1cJ7VkACDq pKb9/DClgTKIm08lCfoilvi9Wl4SODbR1+1waHhiGmeZO8OdgLUCAwEAAQ== MIC-Info: RSA-MD5,RSA, UzubHjF2G6zcUtq5TW/Du00DQnAZD/Iu47YoO0fGcvCq5ZdE0VqHBoqmqczGncdv 9uwicoILxK3skUHAtezfAw== 0000950168-94-000129.txt : 19940418 0000950168-94-000129.hdr.sgml : 19940418 ACCESSION NUMBER: 0000950168-94-000129 CONFORMED SUBMISSION TYPE: 8-K/A PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 19940211 ITEM INFORMATION: Financial statements and exhibits FILED AS OF DATE: 19940415 FILER: COMPANY DATA: COMPANY CONFORMED NAME: SOUTHERN NATIONAL CORP /NC/ CENTRAL INDEX KEY: 0000092230 STANDARD INDUSTRIAL CLASSIFICATION: 6021 IRS NUMBER: 560939887 STATE OF INCORPORATION: NC FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 8-K/A SEC ACT: 1934 Act SEC FILE NUMBER: 001-10853 FILM NUMBER: 94522976 BUSINESS ADDRESS: STREET 1: 500 N CHESTNUT ST CITY: LUMBERTON STATE: NC ZIP: 28358 BUSINESS PHONE: 9196712000 MAIL ADDRESS: STREET 1: 500 NORTH CHESTNUT STREET CITY: LUMBERTON STATE: NC ZIP: 28358 8-K/A 1 SOUTHERN NATIONAL CORP 8-K AMEND. 1 4/14/94 #89569.1 UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 Form 8 AMENDMENT TO APPLICATION OR REPORT Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 Southern National Corporation (Exact name of registrant as specified in its charter) Commission file number: 0-4641 AMENDMENT NO. 1 The undersigned registrant hereby amends the following items, financial statements, exhibits or other portions of its Current Report on Form 8-K dated February 11, 1994 as set forth in the pages attached hereto. Item 7(a). Financial statements of business acquired. Item 7(b). Proforma financial information. Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this amendment to be signed on its behalf by the undersigned thereunto duly authorized. SOUTHERN NATIONAL CORPORATION Date: April 15, 1994 By: /s/ SHERRY A. KELLETT Sherry A. Kellett Vice President and Controller Pursuant to Items 7(a) and 7(b) of the registrant's Current Report on Form 8-k dated February 11, 1994, the registrant hereby files the following financial statements and proforma financial information: Item 7. FINANCIAL STATEMENTS AND EXHIBITS (a) Financial statements of business acquired: The First Savings Bank, FSB ("The First") Consolidated Statements of Financial Condition as of June 30, 1993 and 1992 Consolidated Statements of Operations for the Years Ended June 30, 1993, 1992 and 1991 Consolidated Statements of Cash Flows for the Years Ended June 30, 1993, 1992 and 1991 Notes to Consolidated Financial Statements Independent Auditors' Report (b) Proforma combined financial information: Proforma Condensed Statement of Condition as of December 31, 1993 (Unaudited) Proforma Condensed Statement of Operations for the Year Ended December 31, 1993 (Unaudited) CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
JUNE 30, 1993 1992 ASSETS Cash and cash equivalents................................................................. $ 79,158,801 52,730,405 Investment securities: Principal (market value $79,542,484 and $74,789,510, respectively)...................... 79,233,792 74,315,506 Accrued interest receivable............................................................. 626,957 487,332 79,860,749 74,802,838 Mortgage-backed certificates, net: Held for sale (market value $8,780,368)................................................. -- 8,780,368 Held for investment (market value $372,370,000 and $254,588,589, respectively).......... 357,723,237 241,793,041 Accrued interest receivable............................................................. 2,688,198 2,029,227 Total mortgage-backed certificates, net............................................ 360,411,435 252,602,636 Loans receivable, net: Held for sale........................................................................... 201,393,958 172,347,918 Held for investment..................................................................... 1,244,659,853 1,300,680,299 Accrued interest receivable, net........................................................ 7,016,657 9,086,144 Total loans receivable, net........................................................ 1,453,070,468 1,482,114,361 Real estate............................................................................... 36,373,235 44,662,544 Premises and equipment.................................................................... 30,758,166 32,721,615 Goodwill.................................................................................. 28,749,404 29,954,334 Other assets.............................................................................. 17,963,655 21,401,802 $2,086,345,913 1,990,990,535 LIABILITIES AND STOCKHOLDERS' EQUITY Liabilities: Deposits................................................................................ 1,520,635,224 1,540,064,155 Advances from Federal Home Loan Bank.................................................... 272,731,995 221,524,788 Subordinated capital notes.............................................................. 7,927,635 7,903,216 Other borrowed money.................................................................... 59,936,491 40,275,040 Escrow deposits by borrowers for insurance and taxes.................................... 24,157,372 20,759,740 Income taxes: Current.............................................................................. 1,400,792 1,006,131 Deferred............................................................................. 1,739,000 1,536,000 Investor custodial accounts............................................................. 40,069,911 14,702,884 Other liabilities....................................................................... 32,176,610 29,984,955 Total liabilities.................................................................. 1,960,775,030 1,877,756,909 Commitments and contingencies Stockholders' Equity: Serial preferred stock, 15,000,000 shares authorized and unissued....................... -- -- Common stock, $1.00 par value, 25,000,000 shares authorized; 9,070,319 and 5,846,709 shares issued and outstanding, respectively.......................................... 9,070,319 5,846,709 Additional paid-in-capital.............................................................. 42,671,324 41,337,100 Retained earnings....................................................................... 73,829,240 66,049,817 Total stockholders' equity......................................................... 125,570,883 113,233,626 $2,086,345,913 1,990,990,535
The accompanying notes are an integral part of these consolidated financial statements. VII-16 CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
TOTAL COMMON ADDITIONAL RETAINED STOCKHOLDERS' STOCK PAID-IN-CAPITAL EARNINGS EQUITY Balance at June 30, 1990........................................... $4,687,076 35,915,436 54,784,997 95,387,509 Net earnings....................................................... -- -- 8,444,350 8,444,350 Ten percent stock dividend......................................... 473,021 1,596,446 (2,069,467) -- Cash dividend for fractional shares................................ -- -- (5,678) (5,678) Sale of common stock............................................... 73,277 234,348 -- 307,625 Balance at June 30, 1991........................................... 5,233,374 37,746,230 61,154,202 104,133,806 Net earnings....................................................... -- -- 8,602,798 8,602,798 Ten percent stock dividend......................................... 528,242 3,169,452 (3,697,694) -- Cash dividend for fractional shares................................ -- -- (9,489) (9,489) Sale of common stock............................................... 85,093 421,418 -- 506,511 Balance at June 30, 1992........................................... 5,846,709 41,337,100 66,049,817 113,233,626 Net earnings....................................................... -- -- 10,744,943 10,744,943 Three-for-two stock split.......................................... 2,958,020 -- (2,958,020) -- Cash dividend for fractional shares................................ -- -- (7,500) (7,500) Sale of common stock............................................... 265,590 863,257 -- 1,128,847 Tax benefit for non-incentive options exercised.................... -- 470,967 -- 470,967 BALANCE AT JUNE 30, 1993........................................... $9,070,319 42,671,324 73,829,240 125,570,883
The accompanying notes are an integral part of these consolidated financial statements. VII-17 CONSOLIDATED STATEMENTS OF OPERATIONS
YEARS ENDED JUNE 30, 1993 1992 1991 Interest and dividend income: Loans receivable............................................................. $122,827,624 137,914,688 156,175,288 Mortgage-backed certificates................................................. 24,640,633 23,909,634 39,862,713 Investment securities........................................................ 3,099,252 3,731,109 4,473,492 Other interest income........................................................ 1,363,390 2,559,311 1,914,231 Total interest and dividend income........................................ 151,930,899 168,114,742 202,425,724 Interest expense: Deposits..................................................................... 61,224,994 88,738,542 116,613,889 Short-term borrowings........................................................ 1,444,844 1,032,267 4,460,517 Long-term borrowings......................................................... 20,479,972 21,344,222 28,746,575 Total interest expense.................................................... 83,149,810 111,115,031 149,820,981 Net interest income..................................................... 68,781,089 56,999,711 52,604,743 Provision for loan losses...................................................... 8,699,105 10,468,740 10,480,775 Net interest income after provision for loan losses..................... 60,081,984 46,530,971 42,123,968 Other income (expense): Loan servicing fees.......................................................... 3,232,402 4,503,515 5,146,214 Gain on sale of loans receivable and MBCs, net............................... 3,930,928 5,550,983 7,348,917 Gain on sale of loan servicing, net.......................................... 2,017,227 4,204,163 5,693,016 Gain on sale of branch offices, net.......................................... -- 632,411 -- Loss on sale of securities, net.............................................. -- (44) (107,174) Real estate acquired for development and resale operations, net.............. (1,595,042) (2,156,313) (987,965) Real estate acquired through foreclosure operations, net..................... (3,675,379) (3,125,521) (2,344,127) Service fees on deposits..................................................... 10,175,941 11,117,807 11,477,665 Other........................................................................ 6,522,078 6,791,520 5,804,208 Total other income........................................................ 20,608,155 27,518,521 32,030,754 General and administrative expenses: Compensation and fringe benefits............................................. 33,347,974 32,517,111 30,468,294 Equipment.................................................................... 6,221,509 5,423,335 5,345,816 Net occupancy................................................................ 5,698,786 5,704,679 5,703,249 Deposit insurance premium.................................................... 3,671,089 3,657,933 3,620,111 Advertising.................................................................. 2,204,325 2,185,199 2,107,303 Amortization of goodwill..................................................... 1,204,930 1,205,196 1,205,284 Other........................................................................ 10,387,583 9,668,241 10,797,315 Total general and administrative expenses................................. 62,736,196 60,361,694 59,247,372 Earnings before income tax expense............................................. 17,953,943 13,687,798 14,907,350 Income tax expense............................................................. 7,209,000 5,085,000 6,463,000 Net earnings.............................................................. $ 10,744,943 8,602,798 8,444,350 Earnings per share............................................................. $ 1.15 .96 .98 Weighted average shares outstanding............................................ 9,327,861 8,969,407 8,618,545
The accompanying notes are an integral part of these consolidated financial statements. VII-18 CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED JUNE 30, 1993 1992 1991 Cash flows from operating activities: Net earnings.............................................................. $ 10,744,943 8,602,798 8,444,350 Adjustments to reconcile net earnings to net cash provided by operating activities: Depreciation........................................................... 5,261,210 4,312,328 4,386,379 Provision for losses................................................... 13,059,632 12,652,846 11,851,944 Amortization of fees, discounts, premiums and goodwill, net............ 2,767,058 (522,837) (1,689,347) Amortization of purchased and capitalized excess servicing rights...... 3,682,602 1,943,644 1,456,175 Gains on sales of investment securities, mortgage-backed certificates, loans receivable, servicing rights, branch offices and real estate acquired through foreclosure, net.................................... (5,890,936) (8,999,289) (11,749,862) Increase (decrease) in current income taxes............................ 865,628 (1,871,233) 2,877,364 Increase (decrease) in deferred income taxes........................... 203,000 (105,000) (787,000) Change in other assets, net............................................ 67,748 4,868,276 (901,920) Change in other liabilities............................................ 2,191,655 (5,728,199) 5,318,043 Change in investor custodial accounts.................................. 25,367,027 3,078,910 1,536,596 FHLB stock dividend.................................................... (883,700) (1,011,200) (1,227,962) Change in accrued interest............................................. 1,361,479 4,012,066 1,657,105 Proceeds from sale of loans held for sale................................. 691,938,009 376,089,721 355,159,579 Proceeds from sale of mortgage-backed certificates held for sale.......... 12,242,253 87,170,005 169,335,138 Principal reduction of loans held for sale................................ 37,727,190 9,927,521 12,942,387 Principal reduction of mortgage-backed certificates held for sale......... 168,089 1,503,837 -- Origination of mortgage loans held for sale............................... (568,096,010) (473,769,478) (387,673,144) Purchase of loans held for sale........................................... (96,773,358) (75,900,159) (169,696,988) Net cash provided (used) by operating activities....................... 136,003,519 (53,745,443) 1,238,837 Cash flows from investing activities: Proceeds from sale of investment securities............................... -- 1,045,656 9,454,996 Proceeds from maturity of investment securities........................... 52,349,019 63,790,610 54,733,387 Proceeds from sale of loans receivable and mortgage loan servicing rights................................................................. 2,051,416 43,168,823 63,742,221 Proceeds from sale of mortgage-backed certificates, net................... -- 39,781,336 164,600,374 Principal reduction of loans receivable, net.............................. 544,610,830 524,921,068 501,839,261 Principal reduction of mortgage-backed certificates, net.................. 92,960,028 42,085,627 43,459,498 Proceeds from sale of real estate acquired through foreclosure............ 16,591,343 11,033,523 15,476,775 Proceeds from sale of real estate acquired for development and resale, net.................................................................... 4,346,496 10,361,380 5,242,540 Proceeds from sale of premises and equipment, net......................... 967,750 29,342 30,142 Sale of branch offices: Deposits............................................................... -- (35,658,797) -- Premises and equipment, net............................................ -- 319,150 -- Installment loans...................................................... -- 10,021,034 -- Purchase of investment securities, net.................................... (56,444,342) (20,789,361) (119,386,784) Purchase of premises and equipment, net................................... (4,411,913) (3,331,589) (2,131,957) Purchase of mortgage servicing rights..................................... (55,420) (6,583,769) (1,739,658) Investment in real estate acquired for development and resale, net........ (1,753,606) (3,239,527) (3,005,781) Origination and purchase of loans receivable: Mortgage loans......................................................... (206,471,220) (109,278,234) (26,354,386) Commercial loans....................................................... (187,516,338) (228,067,690) (251,302,672) Installment loans...................................................... (208,305,466) (209,753,435) (178,476,118) Purchase of loans held for investment.................................. (158,650) -- -- Purchase of mortgage-backed certificates held for investment........... (213,645,412) (39,601,434) -- Net cash (used) provided by investing activities....................... (164,885,485) 90,253,713 276,181,838
VII-19 CONSOLIDATED STATEMENTS OF CASH FLOWS -- CONTINUED
YEARS ENDED JUNE 30, 1993 1992 1991 Cash flows from financing activities: Proceeds from new deposits................................................ 546,347,389 502,416,819 491,694,886 Interest credited to and accrued on deposits.............................. 48,938,931 66,856,188 81,766,910 Proceeds from FHLB advances............................................... 279,000,000 105,000,000 266,100,000 Proceeds from other borrowed money........................................ 20,369,289 23,142,735 1,716,006 Increase (decrease) in escrow deposits.................................... 3,397,632 1,867,080 (1,859,720) Proceeds from the sale of common stock.................................... 1,128,847 506,511 307,625 Withdrawals of deposits................................................... (615,269,075) (635,479,457) (679,704,964) Repayment of FHLB advances................................................ (227,874,703) (106,294,667) (345,852,000) Repayment of other borrowed money......................................... (716,448) (11,303,385) (99,077,588) Redemption of subordinated capital notes.................................. (4,000) (42,500) (14,000) Cash dividend for fractional shares....................................... (7,500) (9,489) (5,678) Net cash provided (used) by financing activities....................... 55,310,362 (53,340,165) (284,928,523) Net increase (decrease) in cash and cash equivalents........................ 26,428,396 (16,831,895) (7,507,848) Cash and cash equivalents at beginning of year.............................. 52,730,405 69,562,300 77,070,148 Cash and cash equivalents at end of year.................................... $ 79,158,801 52,730,405 69,562,300 Supplemental disclosure of cash paid during the year for: Interest expense.......................................................... $ 84,357,933 112,737,301 155,310,103 Income taxes.............................................................. $ 6,150,000 7,050,000 5,811,710
VII-20 THE FIRST SAVINGS BANK, FSB NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 1. SUMMARY OF SIGNIFICANT ACCOUNTING AND REPORTING POLICIES The following is a description of the more significant accounting and reporting policies which the Bank follows in preparing and presenting its consolidated financial statements. (A) PRINCIPLES OF CONSOLIDATION The accompanying consolidated financial statements include the accounts of the Bank and all subsidiaries, and in consolidation all significant intercompany items are eliminated. (B) CASH AND CASH EQUIVALENTS Cash on hand, cash items in transit to depository institutions, cash balances in depository institutions, federal funds sold, and overnight time deposits are defined as cash and cash equivalents for financial reporting purposes. (C) INVESTMENT SECURITIES The Bank maintained liquid assets in excess of the amount required by Office of Thrift Supervision (OTS) regulations during all periods included in these consolidated financial statements. The required amount is 5% of the average daily balances of deposits and short-term borrowings. Liquid assets consist principally of cash, including time deposits, and investment securities. Investment securities are carried at amortized cost and are not adjusted to the lower of cost or market because management has the intention and the ability to hold the securities to maturity. Premiums and discounts on investment securities are amortized over the life of the security using a method that approximates level yield. Gains and losses on sales of these securities are recognized when realized. The stock of the Federal Home Loan Bank has no quoted market value, and no ready market exists. The investment in the stock is required by law of every federally insured thrift. The cost of investments sold is determined by specific identification. (D) INTEREST INCOME Interest earned on loans receivable is recorded in the period earned. An allowance for uncollected interest is established for all interest accrued on delinquent loans in accordance with regulatory requirements. Delinquent interest ultimately collected is credited to income in the period of recovery. (E) LOAN ORIGINATION AND COMMITMENT FEES AND LOAN COSTS Loan origination and commitment fees are deferred net of specified costs as required by Statement of Financial Accounting Standards No. 91, "Accounting for Non-refundable Fees and Costs Associated with Originating or Acquiring Loans and Initial Direct Costs of Leases" (FAS 91). If no fees are charged, the FAS 91 specified loan cost is deferred. The net deferred fees or costs are accreted or amortized to interest income over the contractual lives of the loans using the level yield method. (F) UNEARNED AND UNAMORTIZED PREMIUMS AND DISCOUNTS All unearned and unamortized premiums or discounts on loans receivable are accreted or amortized to income over the remaining lives of the loans adjusted for prepayments using a method approximating a level yield. (G) ASSETS HELD FOR SALE Assets held for sale are carried at the lower of cost, committed purchase price, or market. A quarterly analysis is done to determine the market value of the held for sale assets, and an adjustment to the carrying value is made if necessary. When loans are sold with servicing rights retained, the Bank realizes additional gains or losses if the actual servicing fees to be received differ from the normal servicing fees. Such gains or losses are calculated as the present value of the VII-21 THE FIRST SAVINGS BANK, FSB NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED 1. SUMMARY OF SIGNIFICANT ACCOUNTING AND REPORTING POLICIES -- Continued differential between the actual servicing fee and the normal servicing fee over the remaining life of the loans serviced, adjusted for estimated prepayments. The resulting discount or premium is amortized over the estimated remaining lives of such loans, adjusted for actual prepayments. Normal servicing fees are recognized as income in the period earned. (H) PURCHASED MORTGAGE SERVICING Loan servicing rights purchased (PMSRs) are recorded at cost and are amortized over the estimated remaining lives of the loans serviced adjusted for prepayments. PMSRs are included in other assets. (I) PROVISION FOR LOAN LOSSES Valuation allowances for specific loans receivable are charged to income when declines in value reduce the market value of the collateral below their carrying value. In addition to specific valuation allowances, management has established a policy of providing amounts for loan valuation purposes not identified with any specific loan derived from actual loss experience ratios, loan types, loan volume, economic conditions, industry standards and other relevant factors. (J) REAL ESTATE For fiscal years prior to and including 1992, real estate acquired through foreclosure (REO) and in-substance foreclosure was recorded at the lower of cost or fair value. Subsequent to the transfer from loans to real estate acquired through foreclosure, the property was carried at the lower of the new cost basis or net realizable value. Prior to Statement of Position 92-3 "Accounting for Foreclosed Assets" (SOP 92-3), cost was defined as the principal balance (less any allowance for uncollected interest and/or valuation allowances) of the former mortgage loan. In accordance with SOP 92-3, that policy was changed for fiscal 1993 such that REO, as well as in-substance foreclosure, is carried at the lower of cost (which is now defined as fair value at the time of repossession less estimated disposition cost) or fair value less disposition costs. Real estate acquired for development and resale (READR) is stated at initial acquisition cost plus costs of improvements, including interest. READR investments are reviewed regularly and allowances for valuations are established when the carrying values exceed estimated net realizable values. Construction costs incurred in the residential land development operations are accounted for on a unit-by-unit basis. Land acquisition costs and other development costs not attributable to specific units are allocated based on the projected selling prices of the unsold units. Estimated additional costs to be incurred relating to units sold are accrued and considered in determining gains or losses on units sold. Interest charges during the development period of construction of READR projects are capitalized as a cost of the project. When construction is complete, interest charges are expended as a period cost. Interest charges on real estate acquired through foreclosure are expended as a period cost. Gains on the sale of real estate acquired for development and resale are recorded at the time of sale provided certain criteria relating to property type, cash down payment, loan terms, and other factors are met. If these criteria are not met at the date of sale, the gain is deferred and recognized using the installment or cost-recovery method until they are satisfied, at which time the remaining deferred gain is recorded as income. (K) PREMISES AND EQUIPMENT Premises and equipment are carried at cost, net of accumulated depreciation, which is based on the useful lives of the assets. Buildings are depreciated primarily over forty years using principally the straight-line method. Leasehold improvements are amortized over the lesser of their respective lives or the primary lease term using primarily the straight-line method. Furniture and equipment are depreciated over ten years using principally the straight-line method. Automobiles are depreciated over four years using the straight-line method. VII-22 THE FIRST SAVINGS BANK, FSB NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED 1. SUMMARY OF SIGNIFICANT ACCOUNTING AND REPORTING POLICIES -- Continued Certain premises and equipment were sold and leased back. The related gain on the sale has been deferred and is being amortized on a straight-line basis over the primary lease term (ten years). The related rental expense is being charged to earnings based on the average lease payments over the primary lease term. (L) INCOME TAXES Deferred income taxes result from timing differences in the recognition of income and expenses for financial statement and tax purposes. (M) PENSION EXPENSE Accrued pension expense is funded annually and includes a charge for prior service costs. (N) GOODWILL Goodwill, representing the excess of cost over fair value of assets acquired in transactions accounted for as purchases, is being amortized over thirty-five years using the straight-line method. The acquisitions giving rise to the goodwill were consummated prior to the Statement of Financial Accounting Standards No. 72, which became effective September 30, 1982. (O) PREMIUM ON DEPOSIT ACQUISITIONS Premium on deposit acquisitions is being amortized over the estimated lives of the deposits (primarily nineteen to twenty-two years) using the straight-line method. The amount amortized is included in interest expense on deposits. (P) DEBT ISSUANCE COST The cost of issuing the subordinated capital notes (SCN) was capitalized and is being amortized over ten years using a method approximating a level yield. Debt issuance costs are netted against the related debt amount and the amortization of such costs are included in interest expense on borrowings. (Q) MORTGAGE-BACKED CERTIFICATES SOLD UNDER AGREEMENTS TO REPURCHASE The Bank may enter into sales of mortgage-backed certificates (MBCs) under agreements to repurchase (reverse repurchase agreements and dollar price repurchase agreements). Reverse repurchase agreements are treated as financing transactions. The obligations to repurchase MBCs sold are reflected in other borrowed money and the MBCs underlying the agreements are reflected as assets in the consolidated statements of financial condition. Dollar price repurchase agreements are recorded as financing transactions if specific criteria are met, primarily the requirement to repurchase MBCs that are substantially the same as those delivered into the transaction. The Bank is required to record the transaction as a sale if the criteria to qualify as a financing transaction are not met. (R) OPTIONS AND FINANCIAL FUTURES The Bank periodically engages in hedging activities through the options and financial futures markets in an effort to protect interest-sensitive assets and liabilities against the effects of adverse changes in interest rates. Gains and losses on options or futures positions used to hedge the cost of variable-rate deposits are deferred and amortized as adjustments to interest expense over the contractual lives of the related deposits. Gains and losses on options or futures positions used to hedge the value of interest-sensitive assets are treated as adjustments to the basis of the related asset and are amortized as adjustments of yield to maturity. There were no open positions at June 30, 1993 and 1992. (S) EARNINGS PER SHARE Earnings per share is computed by dividing earnings by the weighted average number of common shares and common share equivalents outstanding during the year. Common share equivalents include, if applicable, dilutive stock option share equivalents determined by using the treasury stock method. VII-23 THE FIRST SAVINGS BANK, FSB NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED 1. SUMMARY OF SIGNIFICANT ACCOUNTING AND REPORTING POLICIES -- Continued The earnings per share data for all periods shown in the consolidated financial statements have been restated to reflect the three-for-two stock split effected as a 50% stock dividend in February 1993. 2. CASH AND CASH EQUIVALENTS Cash and cash equivalents at June 30, are summarized as follows:
1993 1992 Cash working funds............................................................................... $13,182,027 11,798,718 Non-interest-earning demand deposits............................................................. 52,397,400 36,126,403 Federal funds sold............................................................................... 10,000,000 -- Time deposits.................................................................................... 3,579,374 4,805,284 $79,158,801 52,730,405
The supplemental disclosure of non-cash investing and financing activities for the years ended June 30, is as follows:
1993 1992 1991 Exchange of loans for mortgage-backed certificates............................... $ 1,000,000 83,748,335 218,606,363 Loans receivable transferred to real estate acquired through foreclosure......... $ 14,473,476 25,931,599 25,131,933
3. INVESTMENT SECURITIES The amortized cost and market value of investment securities at June 30, are summarized as follows:
1993 GROSS GROSS AMORTIZED UNREALIZED UNREALIZED MARKET COST GAINS LOSSES VALUE U.S. Treasury securities and obligations of U.S. Government corporations and agencies.......................................................... $ 63,535,068 575,516 (266,824) 63,843,760 Debt securities issued by foreign governments........................... 25,000 -- -- 25,000 Stock in FHLB & FNMA.................................................... 15,673,724 -- -- 15,673,724 Accrued interest........................................................ 626,957 -- -- 626,957 $ 79,860,749 575,516 (266,824) 80,169,441
1992 GROSS GROSS AMORTIZED UNREALIZED UNREALIZED MARKET COST GAINS LOSSES VALUE U.S. Treasury securities and obligations of U.S. Government corporations and agencies.......................................................... $ 35,028,112 497,239 ( 23,235) 35,502,116 Other debt securities................................................... 24,873,970 -- -- 24,873,970 Stock in FHLB & FNMA.................................................... 14,413,424 -- -- 14,413,424 Accrued interest........................................................ 487,332 -- -- 487,332 $ 74,802,838 497,239 ( 23,235) 75,276,842
VII-24 THE FIRST SAVINGS BANK, FSB NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED 3. INVESTMENT SECURITIES -- Continued Investment securities by maturity date ranges at June 30, 1993 are summarized as follows:
AMORTIZED MARKET COST VALUE Due in one year or less.......................................................................... $ 6,116,889 6,117,144 Due after one year through five years............................................................ 11,695,156 11,836,180 Due after five years through ten years........................................................... 25,000 25,000 Due after ten years.............................................................................. 62,023,704 62,191,117 $79,860,749 80,169,441
There were no proceeds from sales of investments in debt securities during fiscal 1993 and fiscal 1992. The 1992 loss reported in the statement of operations related to 1991 activity. The stock in the Federal Home Loan Bank, and FNMA REMICs of $28,719,000 are pledged to secure advances. 4. MORTGAGE-BACKED CERTIFICATES, NET Mortgage-backed certificates, net at June 30, are summarized as follows:
1993 1992 Mortgage-backed certificates: GNMA (market value $223,717,593 and $64,130,897, respectively).............................. $219,903,035 62,125,735 FHLMC fixed-rate (market value $7,644,455 and $11,013,263, respectively).................... 7,249,610 10,623,293 FHLMC adjustable-rate (market value $21,230,017 and $34,495,441, respectively).............. 20,553,741 33,457,159 FNMA (market value $113,131,292 and $145,622,226, respectively)............................. 106,749,584 140,183,892 Other conventional (market value $6,646,643 and $8,107,130, respectively)................... 6,361,269 7,993,731 Accrued interest............................................................................ 2,688,198 2,029,227 363,505,437 256,413,037 Less unearned discounts..................................................................... 3,094,002 3,810,401 $360,411,435 252,602,636
Additional information relating to mortgage-backed certificates follows:
GROSS GROSS AMORTIZED UNREALIZED UNREALIZED MARKET AT COST GAINS LOSSES VALUE June 30, 1993..................................................... $357,723,237 14,650,365 (3,602) 372,370,000 June 30, 1992..................................................... $250,573,409 12,838,805 (43,257) 263,368,957
The contractual maturity dates of the mortgage-backed certificates are beyond ten years. However, the expected maturities differ from the contractual maturities because borrowers have the right to prepay obligations without prepayment penalties. The proceeds from the sales of mortgage-backed certificates during fiscal 1993 and fiscal 1992 were $12,242,000 and $126,951,000, respectively. Gross gains of $143,000 and $2,070,000, respectively were realized on the sales. There were no losses realized on the sales during fiscal 1993. Gross losses realized during fiscal 1992 were $28,045. As disclosed in Note 10, mortgage-backed certificates of $170,782,000 and $33,457,000 at June 30, 1993 and 1992, respectively, were pledged to secure advances. As disclosed in Note 11, certain GNMA, FNMA, and FHLMC mortgage-backed certificates are pledged to secure other borrowed money. In addition, GNMA, FNMA and FHLMC mortgage-backed certificates of approximately $50,074,000 and $60,958,000 at June 30, 1993 and 1992, respectively, are pledged to secure deposits. VII-25 THE FIRST SAVINGS BANK, FSB NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED 5. LOANS RECEIVABLE, NET Loans receivable, net at June 30, are summarized as follows:
1993 1992 Real estate loans: Fixed-rate.............................................................................. $ 450,920,440 432,206,576 Adjustable-rate......................................................................... 373,361,103 397,074,840 824,281,543 829,281,416 Real estate construction loans: Fixed-rate.............................................................................. 52,164,771 40,675,790 Adjustable-rate......................................................................... 26,127,914 29,142,610 78,292,685 69,818,400 Second mortgage loans................................................................... 3,850,980 4,937,329 Commercial loans........................................................................ 177,724,029 195,364,736 Installment loans....................................................................... 421,353,892 423,076,886 Accrued interest........................................................................ 11,110,107 12,589,308 1,516,613,236 1,535,068,075 Less: Allowance for uncollected interest...................................................... 4,093,450 3,503,164 Unamortized discounts and deferred fees on loans purchased.............................. 4,532,104 5,507,874 Unamortized discount on loans purchased through business combinations................... 1,025,224 1,479,049 Net deferred fees on loans originated................................................... 845,012 204,441 Allowance for loan losses............................................................... 15,483,326 12,557,416 Loans in process........................................................................ 37,563,652 29,701,770 63,542,768 52,953,714 $1,453,070,468 1,482,114,361
As disclosed in Note 10, certain loans of $170,074,000 and $304,223,000 as of June 30, 1993 and 1992, respectively were pledged to secure advances. Loans serviced for the benefit of others amounted to approximately $1,560,738,000, $1,582,311,000, and $1,383,735,000 at June 30, 1993, 1992, and 1991, respectively. An analysis of the allowance for loan losses for the years ended June 30, is as follows:
1993 1992 1991 Beginning allowance............................................................... $12,557,416 10,594,213 7,160,811 Provision for loan losses......................................................... 8,699,105 10,468,740 10,480,775 Losses incurred................................................................... (6,576,137) (12,004,714) (7,888,471) Recoveries........................................................................ 802,942 3,499,177 841,098 Ending allowance................................................................ $15,483,326 12,557,416 10,594,213
The Bank has restructured loans including interest amounting to approximately $16.0 million and $23.3 million at June 30, 1993 and 1992, respectively. These loans are secured by various types of collateral including shopping centers and a marina. The restructured terms do not change the original maturities of these loans. The amount of gross interest income that would have been recorded during 1993 and 1992 if these loans were in accordance with the original terms would have been approximately $1.7 million and $2.5 million, respectively. The amount of interest actually included in interest income amounted to approximately $822,000 and $1.4 million, respectively. VII-26 THE FIRST SAVINGS BANK, FSB NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED 6. REAL ESTATE Real estate at June 30, is summarized as follows:
1993 1992 Loans treated as in-substance foreclosures....................................................... $ 6,879,752 7,695,222 Real estate and repossessed assets acquired through foreclosure.................................. 21,347,093 24,763,754 Real estate acquired for development and resale.................................................. 12,200,774 14,939,431 40,427,619 47,398,407 Less: Accumulated depreciation....................................................................... 32,255 358,757 Allowance for valuation........................................................................ 4,022,129 2,377,106 4,054,384 2,735,863 $ 36,373,235 44,662,544
During fiscal 1993, the Bank capitalized no interest into real estate acquired for development and resale. The Bank capitalized $99,699, and $580,465 for the years ended June 30, 1992 and 1991, respectively. An analysis of the allowance for valuation for the years ended June 30, follows:
1993 1992 1991 Beginning allowance................................................................. $ 2,377,106 1,790,091 1,556,667 Provision for real estate losses.................................................... 4,360,527 2,184,106 1,371,169 Losses incurred..................................................................... (2,715,504) (1,597,091) (1,137,745) $ 4,022,129 2,377,106 1,790,091
The Bank adopted SOP 92-3 during the quarter ended March 31, 1993. As stated in the 1992 Annual Report, real estate acquired through foreclosure was previously carried at the lower of cost, estimated fair value, or net realizable value. SOP 92-3 requires that such assets be carried at the lower of cost or fair value less disposition costs. This change in accounting policy had a minimal impact on the recorded net real estate balances. See Regulatory Changes and Accounting and Reporting Changes for more discussion on this issue and its impact. Also see Note 1 of Notes to Consolidated Financial Statements for a discussion of the Bank's policy. 7. PREMISES AND EQUIPMENT Premises and equipment at June 30, are summarized as follows:
1993 1992 Land............................................................................................. $ 4,516,867 4,726,658 Office and other buildings....................................................................... 18,327,659 18,078,080 Furniture and equipment.......................................................................... 35,739,914 33,985,620 Leasehold improvements........................................................................... 4,316,008 4,578,713 Automobiles...................................................................................... 437,662 846,179 63,338,110 62,215,250 Less accumulated depreciation.................................................................... 32,579,944 29,493,635 $ 30,758,166 32,721,615
The balance of the deferred gain from the sale of the home office real estate, included in other liabilities in the consolidated statements of financial condition, amounted to $994,166 and $1,472,843 at June 30, 1993 and 1992, respectively. VII-27 THE FIRST SAVINGS BANK, FSB NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED 7. PREMISES AND EQUIPMENT -- Continued The Bank also leases other premises and equipment for its operations. The minimum future lease payments for all non-cancelable operating leases at June 30, 1993 are summarized as follows:
YEAR AMOUNT 1994................................................ $ 2,252,783 1995................................................ 2,229,729 1996................................................ 846,380 1997................................................ 805,692 1998................................................ 698,657 Thereafter.......................................... 2,965,472
Rental expense for premises and equipment aggregated $2,520,690, $2,610,138, and $2,651,394, for the years ended June 30, 1993, 1992, and 1991, respectively. 8. OTHER ASSETS Capitalized excess servicing derived from the sale of loans with retention of the servicing rights and purchased servicing rights included in other assets at June 30, follows:
1993 1992 Capitalized excess servicing rights............................................................... $ 293,478 423,054 Purchased servicing rights........................................................................ 7,712,337 11,244,132 $ 8,005,815 11,667,186
The Bank paid $55,420 and $6,583,769 for the servicing rights to approximately $8,161,000 and $306,200,000 of loans during 1993 and 1992, respectively. Moreover, there were no additions to capitalized excess servicing rights, net of sales during fiscal 1993 and $108,094 were generated during fiscal 1992. The amortization of capitalized excess servicing and purchased servicing rights included in loan servicing fees amounted to $3,682,602, $1,943,644 and $1,456,175 for the years ended June 30, 1993, 1992 and 1991, respectively. The purchase price for PMSRs purchased in the year ended June 30, 1992 was adjusted $34,189 in fiscal 1993 based on requirements concerning subsequent events in the contract. VII-28 THE FIRST SAVINGS BANK, FSB NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED 9. DEPOSITS Deposits outstanding by type at June 30, are summarized as follows:
DEPOSIT TYPE 1993 1992 Transactional deposits: Checking accounts: Non-interest-bearing................................................................. $ 105,763,477 88,002,762 Interest-bearing with weighted average rates of 2.25% and 3.11%, respectively........ 135,025,649 124,793,722 Money market demand accounts with weighted average rates of 2.90% and 3.71%, respectively......................................................................... 158,330,630 180,017,307 Total transactional deposits............................................................ 399,119,756 392,813,791 Savings deposits: Passbook deposits with weighted average rates of 2.78% and 4.01%, respectively.......... 126,469,299 128,830,755 Passbook Plus deposits with weighted average rates of 3.46% and 4.40%, respectively..... 132,601,253 23,695,910 Total savings deposits.................................................................. 259,070,552 152,526,665 Time deposits by rate range: 2.00 - 3.99%........................................................................... 442,362,451 -- 4.00 - 5.99............................................................................ 279,585,532 671,425,368 6.00 - 7.99............................................................................ 74,969,638 241,855,693 8.00 - 9.99............................................................................ 54,670,925 70,046,679 10.00 -11.99............................................................................ 14,288,146 15,349,353 12.00 -13.99............................................................................ 2,190,775 2,222,981 Total time deposits..................................................................... 868,067,467 1,000,900,074 Premium on deposit acquisitions........................................................... (5,622,551) (6,176,375) $1,520,635,224 1,540,064,155
Time deposits by rate range and maturity date at June 30, 1993, are summarized as follows:
AMOUNTS MATURING DURING FIRST SECOND THIRD SUCCEEDING SUCCEEDING SUCCEEDING YEARS RATE RANGE YEAR YEAR YEAR THEREAFTER TOTAL 2.00 - 3.99%..................................... $424,092,829 18,159,465 8,467 101,690 442,362,451 4.00 - 5.99...................................... 187,981,409 59,577,112 23,439,935 8,587,076 279,585,532 6.00 - 7.99...................................... 28,837,850 8,069,201 2,110,843 35,951,744 74,969,638 8.00 - 9.99...................................... 7,875,192 1,810,393 7,805,588 37,179,752 54,670,925 10.00 -11.99...................................... 1,425,442 11,816,615 568,031 478,058 14,288,146 12.00 -13.99...................................... -- 2,154,579 36,196 -- 2,190,775 $650,212,722 101,587,365 33,969,060 82,298,320 868,067,467
Certain penalties are assessed on depositors exercising early time deposit withdrawal privileges. These penalties are accounted for as reductions of interest expense on deposits in the year they are incurred. Interest expense by deposit types and penalties for the years ended June 30, are summarized as follows:
DEPOSIT TYPE 1993 1992 1991 Transactional deposits........................................................... $ 7,929,732 12,393,806 15,434,859 Passbook deposits................................................................ 7,240,102 6,603,670 6,795,167 Time deposits.................................................................... 46,233,475 69,983,353 94,685,882 Penalty income................................................................... (178,315) (242,287) (302,019) $61,224,994 88,738,542 116,613,889
VII-29 THE FIRST SAVINGS BANK, FSB NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED 10. ADVANCES FROM THE FEDERAL HOME LOAN BANK (FHLB) Advances at June 30, are summarized as follows:
WEIGHTED AVERAGE INTEREST RATE MATURITY DATE 1993 1992 1993 1992 1993................................................................. -- % 6.29 $ -- 53,874,703 1994................................................................. 7.00 10.43 158,436,036 78,436,036 1995................................................................. 7.82 7.87 16,702,703 16,702,703 1996................................................................. 6.16 8.06 23,302,703 8,302,703 1997................................................................. 8.16 8.18 8,302,703 8,302,703 1998................................................................. 8.48 8.49 14,969,369 14,969,369 1999................................................................. 7.87 8.55 28,302,703 18,302,703 2000................................................................. 8.44 8.45 11,636,036 11,636,036 2001................................................................. 8.35 8.37 8,302,703 8,302,703 2002................................................................. 7.87 7.93 675,676 675,676 2006................................................................. 8.50 8.50 500,000 500,000 Accrued interest payable............................................. -- -- 1,601,363 1,519,453 7.29 % 8.56 $ 272,731,995 221,524,788
The stock of the FHLB, loans receivable, and MBCs approximating $385,249,000 and $352,094,000 at June 30, 1993 and 1992, respectively, are pledged as collateral for these advances. 11. SUBORDINATED CAPITAL NOTES AND OTHER BORROWED MONEY During 1987, the Bank issued $8,188,500 in face amount of unsecured subordinated capital notes with a weighted average interest rate of 11.13% which mature during 1997. These notes may be redeemed only upon death of the holder, and to date $150,000 have been redeemed. OTS regulations provide for the inclusion of these subordinated capital notes in the calculation of regulatory capital. At June 30, 1993, 100% can be included in capital. Other borrowed money at June 30, is summarized as follows:
1993 1992 Parent only: Reverse repurchase agreements with interest rates of 3.18% and 3.75%, due July 1993 and 1992, respectively, collateralized by GNMA and other mortgage-backed certificates with a carrying value of approximately $61,745,000 and $18,710,000 and a market value of approximately $65,869,000 and $19,589,000, respectively................................................... $ 59,936,491 14,733,551 Dollar price repurchase agreements with an interest rate of 2.80% due July 1992 collateralized by GNMA and other mortgage-backed certificates with a carrying value of approximately $23,840,000 and a market value of approximately $25,060,000................................. -- 24,825,040 Notes of subsidiaries not guaranteed by Parent: Mortgage notes payable, with interest rates varying from 8.00% to 8.50% due in varying installments through February 1993 and collateralized by real estate with a carrying value of approximately $2,554,000................................................................. -- 716,449 $ 59,936,491 40,275,040
The mortgage-backed certificates underlying the reverse repurchase agreements (RRP) and dollar price repurchase agreements (DPR) were delivered to the primary government security dealers who arranged the transactions. At the maturity dates of the RRP transactions, the original securities will be returned to the Bank. The RRP's outstanding during 1993 and 1992 averaged $33,834,000 and $16,853,000, respectively. The maximum amounts of RRP's outstanding at any month-end during 1993 and 1992 were $62,050,000 and $32,494,000, respectively. The DPR securities may have been loaned, sold or otherwise disposed of by the dealers to other parties in their normal course of business and the dealers have agreed to resell to the Bank substantially identical securities upon maturity of the agreements. The DPRs outstanding during 1993 and 1992 VII-30 THE FIRST SAVINGS BANK, FSB NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED 11. SUBORDINATED CAPITAL NOTES AND OTHER BORROWED MONEY -- Continued averaged $11,908,000 and $7,951,000, respectively. The maximum amounts of DPRs outstanding at any month end during 1993 and 1992 were $34,096,000 and $30,459,000, respectively. 12. INCOME TAXES The components of income tax expense for the years ended June 30, are summarized as follows:
1993 1992 1991 Current: Federal............................................................................. $6,437,000 5,190,000 7,250,000 State............................................................................... 1,144,000 -- -- 7,581,000 5,190,000 7,250,000 Deferred: Federal............................................................................. (313,000) (369,000) (787,000) State............................................................................... (59,000) 264,000 -- Total................................................................................. $7,209,000 5,085,000 6,463,000 The components of deferred income taxes are as follows: Uniform capitalization of inventory................................................... $ 13,000 (97,000) (1,000) Accrual to cash adjustment............................................................ 32,000 345,000 (540,000) Deferred loss on sale of loans........................................................ (62,000) (142,000) (287,000) Deferred loan origination fees........................................................ -- (26,000) (324,000) FHLB stock dividend................................................................... 300,000 237,000 (207,000) Deferred hedging gains on sales of options............................................ 7,000 3,000 3,000 Deferred gain on sale of building..................................................... 163,000 163,000 163,000 Provision for losses on real estate acquired for development and resale............... (250,000) (114,000) (139,000) Depreciation.......................................................................... (267,000) 129,000 103,000 FAS 91 net deferred (credits) costs................................................... (232,000) (381,000) 421,000 Other................................................................................. (76,000) (222,000) 21,000 $ (372,000) (105,000) (787,000)
The differences between actual income taxes and the amount computed by applying the federal income tax rate of 34% are reconciled as follows:
1993 1992 1991 Computed federal income taxes......................................................... $6,104,000 4,654,000 5,069,000 Increase (decrease) in income taxes resulting from: Bad debt expense.................................................................... 957,000 (125,000) 878,000 Nontaxable income, primarily gains on sale of real estate acquired through foreclosure, tax exempt interest, and accretion of discount on purchased loans.................................................................. (784,000) (227,000) (271,000) Nondeductible expenses, primarily losses and expenses on real estate acquired through foreclosure and goodwill amortization........................... 655,000 571,000 814,000 Environment tax..................................................................... 14,000 11,000 21,000 State income tax, net of federal tax benefit........................................ 716,000 174,000 -- Other, net.......................................................................... (453,000) 27,000 (48,000) Income tax expense.................................................................. $7,209,000 5,085,000 6,463,000
VII-31 THE FIRST SAVINGS BANK, FSB NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED 12. INCOME TAXES -- Continued The Internal Revenue Code allows thrifts a special bad debt deduction based on the greater of actual experience or a percentage of taxable income before such deduction. The applicable percentage for the years ended June 30, 1993, 1992 and 1991 was approximately 8.0%. The bad debt deduction determined for tax purposes is not charged to earnings in the accompanying financial statements, but results in an appropriation to restricted retained earnings for tax purposes. The accumulated appropriation of bad debts in restricted retained earnings at June 30, 1993, 1992 and 1991 was approximately $16,851,000, $15,920,000 and $16,105,000, respectively. Reductions of such amounts for other than bad debt losses create earnings for tax purposes. The Bank's tax returns have been examined by the Internal Revenue Service (IRS) through June 30, 1990. Management settled with the IRS on a claim for refund due to net operating losses and bad debt deductions. As a result $600,000 was taken as a reduction to income tax expense. The Bank has not adopted Statement of Financial Accounting Standards No. 109 "Accounting for Income Taxes" for the year ending June 30, 1993. But if the adoption had occurred, net earnings would have increased $5.2 million or $.56 per share. 13. STOCKHOLDERS' EQUITY On December 15, 1983, the Bank converted from a federal mutual to a federal stock association. At that date, eligible deposit account holders were granted priority interest in the unlikely event of future liquidation of the Bank by the establishment of a liquidation account equal to net worth at June 30, 1983. In the event of such liquidation, and only in such event, an eligible deposit account holder who continues to maintain his deposit account shall be entitled to receive a distribution from the liquidation account, in the proportionate amount of the then current adjusted balance for deposit accounts, before any distributions may be made to the Bank's stockholders. Regulations of the OTS do not permit the Bank to pay dividends on common stock if its stockholders' equity would thereby be reduced below the amount required for the liquidation account or the Bank's regulatory capital requirement. A reconciliation of stockholders' equity to statutory capital requirements at June 30, 1993 (unaudited) follows:
TANGIBLE CORE RISK-BASED CAPITAL CAPITAL CAPITAL Stockholders' equity........................................................... $125,570,883 125,570,883 125,570,883 Additions: Qualifying supervisory goodwill.............................................. -- 15,378,382 15,378,382 Qualifying maturing capital instruments...................................... -- -- 8,038,500 General valuation loan allowances............................................ -- -- 12,372,261 Deductions: Goodwill..................................................................... 28,749,405 28,749,405 28,749,405 Non-includable purchased mortgage servicing rights........................... 3,900,917 3,900,917 3,900,917 Non-includable portion of investments in subsidiaries........................ 3,235,663 3,235,663 3,235,663 Non-includable portion of non-residential construction and land loans........ -- -- 17,011 Statutory capital.............................................................. 89,684,898 105,063,280 125,457,030 Statutory requirement.......................................................... 30,756,765 61,513,529 103,504,999 Excess......................................................................... $ 58,928,133 43,549,751 21,952,031 Statutory capital ratio........................................................ 1.50% 3.00% 8.00% Actual capital ratio........................................................... 4.37% 5.12% 9.70%
The Bank is in compliance with all the current statutory capital requirements. The Bank, as discussed in Management's Discussion and Analysis, is always looking for ways to augment capital and will continue to restructure its assets to improve its compliance with the risk-based requirement. VII-32 THE FIRST SAVINGS BANK, FSB NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED 14. STOCK DIVIDEND On January 21, 1993, the Board of Directors declared a three-for-two stock split effected as a 50% stock dividend payable to stockholders of record as of February 2, 1993. The distribution date was February 23, 1993 with fractional shares paid in cash based on the adjusted market value of the stock at the distribution date. The weighted average shares outstanding and earnings per share amounts for the prior years have been restated to reflect the distribution of the stock dividend. 15. STOCK OPTION AND INCENTIVE PLANS The Bank has two plans -- the 1983 Stock Option and Incentive Plan and the 1992 Stock Option and Incentive Plan. The stock options pursuant to the plans are to be granted primarily to directors, officers and other key employees. Options granted under the Option Plans may be incentive stock options or non-incentive stock options. The plans also provide for the granting of stock appreciation rights as well as restricted stock. The shares of stock reserved for the 1983 option plan amounted to 940,268, 739,642, and 785,554 shares at June 30, 1993, 1992, and 1991, respectively. On November 6, 1992, 40,500 options were issued to participants of the 1983 option plan. Unexercised options to purchase 273,183 shares were surrendered to the Bank during the year ended June 30, 1991. On November 17, 1992, the shareholders of the Bank approved, by a majority vote, the adoption of the 1992 Stock Option and Incentive Plan. The shares of stock reserved for the 1992 Plan amounted to 450,000 shares and grants made from this plan amounted to 113,700 options. At June 30, 1993, the Bank had the following options outstanding from both plans:
OPTION GRANT DATE SHARES PRICE EXPIRATION DATE December 15, 1983.......................................... 2,634 $3.30 December 8, 1993 December 18, 1987.......................................... 230,876 3.08 December 18, 1997 December 31, 1987.......................................... 54,450 3.14 December 31, 1997 August 30, 1990............................................ 161,490 2.28 August 30, 2000 November 6, 1992........................................... 154,200 7.58 November 6, 2002
During the years ended June 30, 1993 and 1992, options for 249,380 and 45,912 shares were exercised, respectively. Some of the options exercised this year were non-incentive options, which are treated as compensation to the employee and a tax deduction for the institution. The accounting procedure is to record a tax benefit to paid in capital equal to the tax rate multiplied by the total difference between fair market value on the date of exercise and the exercise price. The resulting impact was an increase to paid in capital of $471,000 and a corresponding reduction to current income taxes payable. 16. EMPLOYEE STOCK OWNERSHIP PLAN (ESOP) AND EMPLOYEE STOCK PURCHASE PLAN (ESPP) On July 21, 1987, the Board of Directors approved the establishment of an ESOP to enable eligible employees to acquire stock ownership interest in the Bank. The stockholders, at their annual meeting on October 27, 1987, approved the ESOP. The ESOP is a leveraged employee stock ownership plan as described in Section 497(e)(7) and is a "qualified" retirement plan under Section 401(a) and 501(a) of the Internal Revenue Code. All full-time salaried employees after one year of service and attaining 21 years of age are eligible to participate. Each participant will become fully vested after five years of service. The Board of Directors determines the amount, if any, to be contributed to the ESOP each year. The contribution will be shares of common stock, cash or other property. The Bank accrued $210,000 in fiscal 1993, $195,000 in fiscal 1992, and $170,000 in fiscal 1991 for the ESOP. The ESOP purchased unissued shares at the closing market price as summarized in the following table:
MARKET PRICE DATE SHARES PER SHARE August 17, 1992............................................................... 23,340 $ 8.08 August 20, 1991............................................................... 41,476 4.09 August 30, 1990............................................................... 64,075 2.27
VII-33 THE FIRST SAVINGS BANK, FSB NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED 16. EMPLOYEE STOCK OWNERSHIP PLAN (ESOP) AND EMPLOYEE STOCK PURCHASE PLAN (ESPP) -- Continued The Bank also has a plan called the Employee Stock Purchase Plan (ESPP) that allows employees to invest in the stock of the company and thereby increase ownership within the bank. On October 29, 1990, the shareholders approved an amendment to the ESPP that allowed the plan to purchase unissued shares directly from the bank on a specific day of each month at the market price for that date. Set forth in the table below are the total shares purchased and their weighted average purchase price.
1993 1992 1991 Shares purchased......................................................... 28,345 49,644 65,932 Weighted average price................................................... $8.84 4.40 2.46
17. EMPLOYEE BENEFITS The Bank has a non-contributory trustee retirement plan for all salaried employees who have attained the age of 21 years but not 60 years at the date of their employment and have one year of service prior to the next anniversary date of the plan. The normal retirement date is the first of the calendar month in which the participant reaches the age of 65. The following table sets forth the net periodic pension cost included in general and administrative expenses and the pension plan's funded status amounts recognized in the Bank's consolidated financial statements for the years ended June 30.
1993 1992 1991 NET PERIODIC PENSION COST: Service cost....................................................................... $ 961,913 851,108 779,698 Interest cost...................................................................... 792,562 737,729 726,715 Actual return on assets............................................................ (1,284,521) (489,899) (781,447) Other.............................................................................. 521,305 (186,498) 34,146 $ 991,259 912,440 759,112 Fair value of plan assets, primarily government guaranteed obligations or certificates of deposit............................................................ $10,491,763 8,786,148 8,838,430 Projected benefit obligation......................................................... 9,841,562 9,164,797 9,028,214 Accumulated benefit obligation....................................................... 6,800,873 6,452,607 6,567,699 Vested accumulated benefit obligation................................................ 6,564,765 6,285,772 6,504,794 Unrecognized prior service cost...................................................... 119,561 129,866 140,171 Unrecognized net loss................................................................ 1,945,891 2,739,180 2,394,348 Unrecognized net assets.............................................................. 620,001 676,365 732,729 Unfunded accumulated benefit obligation.............................................. -- -- -- Prepaid pension cost................................................................. 1,856,530 1,554,300 1,331,664
The weighted average discount rate used in valuing liabilities was 9.5% as was the expected return on plan assets for the current year. Anticipated salary increases were 6.5%. The Bank also has two incentive compensation plans, one for senior management and one for selected other employees. The plans provide for incentive bonuses to be paid if specified objectives, to be determined each year, are met. The senior management plan is tied to a corporate profitability objective (determined annually by the Board) that must be exceeded for any bonuses to be paid to senior management. The incentive bonuses, as provided for in the plans, may range up to 35% and 50% of annual compensation for selected other employees and senior management, respectively, with targeted bonus levels being established annually. The targeted bonus levels for the fiscal 1993 year were 10% and 15% for selected other employees and senior management, respectively. The amount expended for these plans in 1993, 1992 and 1991 was $634,000, $461,000, and $512,000, respectively. VII-34 THE FIRST SAVINGS BANK, FSB NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED 18. SALE OF BRANCHES On December 13, 1991, The First Savings Bank sold four of its branch offices to Carolina First Savings Bank, (formerly First Federal Savings and Loan Association of Georgetown), a subsidiary of Carolina First Corporation. The sale of the Myrtle Beach offices consisted of $10.0 million in installment loans, $319,000 in premises and equipment, and the assumption of $37.0 million in deposits by Carolina First. The resulting gain before income taxes, net of expenses, amounted to $632,000. 19. QUARTERLY FINANCIAL DATA (UNAUDITED) Quarterly operating data for the years ended June 30, is summarized as follows:
FIRST SECOND THIRD FOURTH QUARTER QUARTER QUARTER QUARTER (IN THOUSANDS, EXCEPT PER SHARE DATA) 1993 Total interest and dividend income................................................... $38,496 39,705 36,570 37,160 Net interest income.................................................................. 16,006 18,241 17,002 17,532 Net earnings......................................................................... $ 1,900 3,047 2,300 3,498 Net earnings per share............................................................... $ .20 .33 .25 .37 Weighted average shares outstanding.................................................. 9,243 9,299 9,359 9,411
1992 Total interest and dividend income................................................... $44,559 42,682 40,439 40,435 Net interest income.................................................................. 12,858 12,966 14,539 16,637 Net earnings......................................................................... $ 1,513 2,804 1,809 2,477 Net earnings per share............................................................... $ .17 .32 .20 .27 Weighted average shares outstanding.................................................. 8,883 8,898 8,975 9,122
20. LITIGATION The Bank is a defendant in a lawsuit filed in 1991 in the Court of Common Pleas, Thirteenth Judicial Circuit, State of South Carolina. On May 21, 1993, a jury awarded the plaintiffs a $4.1 million judgment against the Bank consisting of $500,000 in actual damages and $3.6 million in punitive damages for allegedly acting as a control person and aiding and abetting a state securities law violation. The plaintiffs, limited partners in a failed venture to construct and operate a residential health care facility for senior citizens, alleged that the Bank, as an escrow agent and lender for the project, knew or should have known, that its loan commitment was insufficient and that the Bank was therefore responsible for the losses suffered by the limited partners resulting from the actions of the general partners. Prior to this case going to the jury, the Bank made a motion for directed verdict which was not granted. Rule 50(b) of the South Carolina Rules of Civil Procedure states that when a motion for a directed verdict is not granted, the Court is deemed to have submitted the action to the jury subject to a later determination of the legal question raised in the motion. After the jury verdict, the Bank renewed that motion in the form of a motion for judgment not withstanding the verdict, as well as an alternative motion for a new trial. This motion and the Plaintiff's petition for legal fees, costs and interest were argued before the Circuit Judge on June 22, 1993, and as yet no decision has been rendered. It is the opinion of the Bank's legal Counsel that it is not probable that a loss in the amount of the present jury verdict will be incurred by The First. Furthermore, if a loss ultimately is incurred following post trial motions and appeals, it is not probable that the loss would exceed $750,000. Accordingly, the Bank has not established any specific allowances for this suit. However, the Bank's general reserves are adequate to support the range of loss estimated by its legal Counsel. Unless the Trial Judge dismisses this action in its entirety, management will vigorously appeal any judgment. Therefore, it is management's opinion, based upon Counsel's VII-35 THE FIRST SAVINGS BANK, FSB NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED 20. LITIGATION -- Continued analysis of the outcome of the suit, that any future liability arising from this suit will not have a material adverse effect on the consolidated financial position of the Bank. Except for the ultimate outcome of the suit previously discussed, the legal proceedings against the Bank are generally incidental to its business. Management believes that liabilities arising from these proceedings, if any, will not have a material adverse effect on the consolidated financial position of the Bank. 21. SALE OF BANK On August 5, 1993, the Bank announced that a definitive agreement had been reached with Southern National Corporation (SNC), (a national Bank holding company) headquartered in Lumberton, North Carolina. SNC will acquire The First in a fixed exchange stock swap transaction (pooling of interest). The terms of the agreement call for SNC to issue .855 shares of its common stock for each of the outstanding shares and options of the Bank at closing date. This transaction is valued at $181 million based on the exchange ratio, the closing price of SNC stock, and the shares of stock of The First outstanding on August 5, 1993. If certain conditions are met as specified in the agreement, the exchange ratio may be increased if SNC stock price falls below $21.625. Furthermore, under conditions as specified in the agreement, either party may terminate the agreement prior to closing. This transaction is subject to regulatory authority and shareholder approval. 22. FAIR VALUE OF FINANCIAL INSTRUMENTS The following table discloses the carrying values and fair values at June 30, 1993 for the financial instruments of the Bank determined under the requirements of FAS 107.
CARRYING VALUE FAIR VALUE Financial Assets: Cash, cash equivalents, and Investment securities....................................... $ 159,019,550 159,328,242 Mortgage-backed certificates, net....................................................... 360,411,435 375,058,198 Loans receivable, net................................................................... 1,453,070,468 1,486,533,382 $1,972,501,453 2,020,919,822 Financial Liabilities: Deposits................................................................................ $1,520,635,224 1,540,314,840 Advances from FHLB...................................................................... 272,731,995 284,407,259 Subordinated capital notes.............................................................. 7,927,635 8,833,618 Other borrowed money.................................................................... 59,936,491 59,936,491 $1,861,231,345 1,893,492,208 Commitments: To originate or purchase loans and MBCs................................................. $ 85,284,968 87,316,218 To sell mortgage loans.................................................................. $ 200,052,072 202,312,803 Unused lines and letters of credit...................................................... $ 130,448,386 130,448,386
The following methods and assumptions were used to estimate the fair value of each class of financial instruments for which it was practicable to estimate that value. CASH, CASH EQUIVALENTS, AND INVESTMENT SECURITIES For short-term instruments, the carrying amount is the best estimate for the fair value. For investment securities a quoted market bid price supplied by a primary broker dealer was used for each of the actual instruments. VII-36 THE FIRST SAVINGS BANK, FSB NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED 22. FAIR VALUE OF FINANCIAL INSTRUMENTS -- Continued MORTGAGE-BACKED CERTIFICATES, NET The MBCs were grouped into three categories for estimating fair value. MBCs securitized under FHLMC, FNMA, or GNMA were grouped by even coupons in 50 basis point increments and were valued using actual market bid prices on those securities. MBCs with odd coupons were valued by interpolating a price from a standard coupon security with similar characteristics. Privately issued MBCs were valued by using a similar FHLMC security price less two (2) percentage points. LOANS RECEIVABLE, NET For certain homogeneous categories of loans, fair value was estimated using the quoted market prices for securities backed by similar loans. The fair value of other types of loans was estimated by discounting the future cash flows using the current rates at which similar loans would be made to borrowers with similar credit ratings and for the same remaining maturities. DEPOSITS The fair value of demand deposits, savings accounts, and certain money market deposits is the amount payable on demand at the reporting date. For fixed-maturity deposits, the fair value was estimated by using the rates currently offered by the Bank for deposits of similar remaining maturities. ADVANCES FROM FHLB The fair value was determined under the FHLB methodology for calculating the prepayment penalty on the advances using a discounted present value. SUBORDINATED CAPITAL NOTES The fair value was determined by a discounted present value calculation using the 4 year treasury rate plus 350 basis points. At the time the notes were issued, they were sold at the 10 year treasury rate plus 250 basis points. The 4 year treasury rate was chosen to match the remaining maturity of the notes and the increased spread was used because retail sales are presently not allowed, so a premium was added to the original spread. OTHER BORROWED MONEY The fair value of other borrowed money was estimated at its carrying value due to the short term to maturity. COMMITMENTS The fair value of the commitments to originate loans was determined to be par for the loan originations. The commitment to purchase the MBC was valued at the current market price for that particular security. Commitments to sell mortgage loans were valued by using the actual price for closed loans and pipe-line loans plus an added value for the associated servicing rights retained. The fair value of commitments for unused lines and letters of credit was determined to be the carrying value since these are either variable rate or premium priced fixed-rate commitments. VII-37 THE FIRST SAVINGS BANK, FSB NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED 23. COMMITMENTS, CONTINGENCIES AND OTHER MATTERS The Bank had outstanding commitments to originate, purchase, or sell loans receivable at June 30, 1993 as follows: Firm commitments: To originate or purchase: Fixed-rate: Mortgage loans with a weighted average rate of 7.33%........................... $ 49,965,891 Mortgage-backed certificates with a rate of 9%................................. 25,000,000 Variable-rate: Mortgage loans................................................................. 9,168,214 Commercial loans............................................................... 1,150,863 $ 85,284,968 To sell: Mortgage loans................................................................... $ 200,052,072 Unused lines of credit: Overdraft lines at 18%.............................................................. 7,407,651 Home equity lines (variable-rate)................................................... 103,700,688 Commercial lines (variable-rate).................................................... 18,024,302 $ 129,132,641 Letters of credit (variable-rate)................................................... $ 1,315,745
At June 30, 1993, except for single-family home loans and the fact that the majority of the loan portfolio is located in the Bank's immediate market area, there were no concentrations of loans in any type of industry, type of property, or to one borrower that exceeded 10% of the Bank's total loan portfolio. In certain instances, the amounts reported in the prior periods' consolidated financial statements included herein have been reclassified to put them on a comparable basis to the amounts reported in the June 30, 1993, consolidated financial statements. VII-38 INDEPENDENT AUDITORS' REPORT THE BOARD OF DIRECTORS THE FIRST SAVINGS BANK, FSB Greenville, South Carolina We have audited the accompanying consolidated statements of financial condition of The First Savings Bank, FSB and subsidiaries as of June 30, 1993 and 1992, and the related consolidated statements of operations, stockholders' equity, and cash flows for each of the years in the three-year period ended June 30, 1993. These consolidated financial statements are the responsibility of the Bank's management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of The First Savings Bank, FSB and subsidiaries at June 30, 1993 and 1992, and the results of their operations and their cash flows for each of the years in the three-year period ended June 30, 1993, in conformity with generally accepted accounting principles. (Signature of KPMG Peat Marwick) KPMG PEAT MARWICK Greenville, South Carolina August 6, 1993 VII-39 Southern National Corporation And The First Savings Bank, FSB Proforma Combined Statement of Condition December 31, 1993 (Dollars in thousands) Assets Cash and due from depository institutions $ 280,919 Interest-bearing bank balances 39,855 Federal funds sold and securities purchased under resale agreements or similar arrangements 9,955 Securities held for sale 1,140,087 Investment securities 1,353,206 Loans held for sale 311,591 Loans and leases, net of unearned income 4,576,238 Less - allowance for losses (62,896) Net loans and leases 4,513,342 Premises and equipment, net 130,187 Other assets 134,320 Total assets $7,913,462 Liabilities and Shareholders' Equity Deposits: Noninterest-bearing $ 741,426 Interest-bearing 5,282,145 Total deposits 6,023,571 Short-term borrowings 756,343 Accounts payable and accrued liabilities 143,334 Long-term debt 451,177 Total liabilities 7,374,425 Shareholders' equity: Preferred stock, $5 par, 5,000,000 shares authorized, 770,000 issued and outstanding 3,850 Common stock, $5 par, 120,000,000 shares authorized, 39,738,244 proforma issued and outstanding 168,461 Paid-in capital 181,416 Retained earnings 189,671 Unearned compensation (4,361) Total shareholders' equity 539,037 Total liabilities and shareholders' equity $7,913,462 Southern National Corporation And The First Savings Bank, FSB Proforma Combined Statement of Income For the Year Ended December 31, 1993 (Dollars in thousands except per share data) 1993 Interest Income Interest and fees on loans and leases $380,334 Interest and dividends on securities 136,254 Interest on temporary investments 2,090 Total interest income 518,678 Interest Expense Interest on deposits 183,413 Interest on short-term borrowings 15,329 Interest on long-term debt 23,118 Total interest expense 221,860 Net Interest Income 296,818 Provision for loan and lease losses 26,423 Net Interest Income After Provision for Loan and Lease Losses 270,395 Noninterest Income Service charges on deposit accounts 36,005 Nondeposit fees and commissions 23,686 Securities gains, net 12,979 Other income 11,227 Total noninterest income 83,897 Noninterest Expense Personnel expense 125,479 Occupancy and equipment expense 36,537 Federal deposit insurance expense 13,384 Foreclosed property expense 21,914 Other expense 123,041 Total noninterest expense 320,355 Earnings Income before income taxes 33,937 Provision for income taxes 19,629 Income before cumulative effect of changes in accounting principles 14,308 Less: cumulative effect of changes in accounting principles, net of income taxes 27,304 Net Income (12,996) Preferred dividend requirements 5,196 Income applicable to common shares $(18,192) Per Common Share Net income: Primary Income before cumulative effect $ 0.24 Less: cumulative effect 0.70 Net income $ (0.46) Fully-diluted Income before cumulative effect $ 0.33 Less: cumulative effect 0.63 Net income $ (0.30) Cash dividends paid per common share $ 0.64 EXHIBIT INDEX 23.1 Consent of KPMG Peat Marwick ****************************************************************************** APPENDIX On Page VII-39 the signature of KPMG Peat Marwick appears where indicated. EX-23 2 EXHIBIT 23.1 INDEPENDENT AUDITORS' CONSENT The Board of Directors Southern National Corporation We consent to the use of our report on the consolidated statements of financial condition of The First Savings Bank, FSB and subsidiaries as of June 30, 1993 and 1992 and the related consolidated statements of operations, stockholders' equity and cash flows for each of the years in the three- year period ended June 30, 1993 included herein in the Form 8 of Southern National Corporation dated April 15, 1994. Greenville, South Carolina April 15, 1994 -----END PRIVACY-ENHANCED MESSAGE-----