<PAGE>
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the Fiscal Year Ended September 30, 1998
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
Commission File Number: 1-13823
HERITAGE BANCORP, INC.
(Exact name of registrant as specified in its charter)
<TABLE>
<S> <C>
Delaware 58-2356162
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
201 W. Main Street, Laurens, South Carolina 29360
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (864) 984-4581
----------------
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 $.01 per share
--------------------------------------
(Title of Class)
</TABLE>
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (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
-----
As of December 7, 1998, there were issued and outstanding 4,623,750 shares
of the registrant's common stock. The common stock is listed for trading on the
Nasdaq National Market under the symbol "HBSC." Based on the closing price on
December 7, 1998, the aggregate value of the Common Stock outstanding held by
the nonaffiliates of the Registrant was $79,622,879. For purposes of this
disclosure, shares of common stock held by persons who hold more that 5% of the
outstanding common stock and common stock held by certain officers and directors
of the registrant have been excluded in that such persons may be deemed to be
"affiliates" as that term is defined under the rules and regulations promulgated
under the Securities Act of 1933, as amended.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of Definitive Proxy Statement for the 1999 Annual Meeting of
Stockholders to be held on February 3, 1999 (Part III).
<PAGE>
This report contains certain "forward-looking statements" concerning the
future operations of Heritage Bancorp, Inc. We have used forward-looking
statements to describe future plans and strategies, including our expectations
of our future financial results. Managements's ability to predict results or
the effect of future plans or strategies is inherently uncertain. Factors which
could affect actual results include interest rate trends, the general economic
climate in our market area and the country as a whole, our ability to control
costs and expenses, competitive products and pricing, loan delinquency rates,
changes in federal and state regulation, and the impact of year 2000 issues.
These factors should be considered in evaluating the forward-looking statements
contained in this report and undue reliance should not be placed on such
statements.
PART I
ITEM 1. BUSINESS
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GENERAL
Heritage Bancorp, Inc. ("Company"), a Delaware corporation, was organized
in November 1997 for the purpose of becoming the holding company for Heritage
Federal Savings and Loan Association, which changed its name to Heritage
Federal Bank ("Bank") upon its conversion from a federal mutual savings and loan
association to a federal stock savings bank ("Conversion"). The Conversion was
completed on April 6, 1998 through the sale of 4,628,750 shares of common stock
by the Company at a price of $15.00 per share.
The Bank, chartered in 1948, is a federally chartered savings bank located
in Laurens, South Carolina. The Bank is regulated by the Office of Thrift
Supervision ("OTS"), its primary federal regulator, and by the Federal Deposit
Insurance Corporation ("FDIC"), the insurer of its deposits. The Bank's
deposits are insured by the FDIC's Savings Association Insurance Fund ("SAIF").
The Bank has been a member of the Federal Home Loan Bank ("FHLB") System since
1948.
The Bank is a community oriented financial institution that operates out of
four offices in the Upstate region of South Carolina. The Bank's principal
business is attracting deposits from the general public and using those funds to
originate residential mortgage loans. The Bank emphasizes the origination of
adjustable rate mortgage ("ARM") loans and generally holds its loans for long-
term investment purposes.
MARKET AREA
The Company conducts operations out of its main office in Laurens, South
Carolina (in Laurens County) and three branch offices in Upstate South Carolina:
in Belton (in Anderson County), Ware Shoals (in Greenwood County) and
Simpsonville (in Greenville County). Most of the Company's depositors live in
the areas surrounding the Company's offices and most of the Company's loans are
made to persons in the counties in which its branches are located, as well as in
the Columbia, South Carolina metropolitan area.
Laurens County, with an estimated population of 62,000, is located to the
east of the Greenville-Spartanburg-Anderson metropolitan area. Although a rural
county, the completion of U.S. Interstate Routes I-26 and I-385 has provided
access to the larger population and employment centers of Columbia and
Greenville-Spartanburg-Anderson. The Company's Belton and Simpsonville branches
are within the Greenville-Spartanburg-Anderson metropolitan area, while the Ware
Shoals branch is in a rural area between Laurens and the city of Greenwood.
South Carolina's economy, historically dependent on the textile industry, has
expanded into a broad variety of employment sectors in recent years as the
textile industry has declined. The development of major transportation routes,
low cost of living and labor, and aggressive marketing by local and state
government have resulted in an increase in industrial development. As a result,
the Company's market areas have reported increases in population, households and
income in recent years.
The Company faces intense competition for deposits and loan originations
from the many financial institutions conducting business within its market area.
See "-- Competition."
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<PAGE>
LENDING ACTIVITIES
GENERAL. At September 30, 1998, the Company's total loans receivable
portfolio amounted to $212.4 million, or 69.7% of total assets at that date.
The Company has traditionally concentrated its lending activities on mortgage
loans, with such loans amounting to $199.6 million, or 94.0% of total loans
receivable at September 30, 1998. At that date, $158.5 million, or 74.6%, of
the Company's total loans receivable had adjustable interest rates. In addition
to one- to four-family mortgage loans, the Company originates construction
loans, commercial real estate loans, home equity loans and savings account
loans. All of the Company's mortgage loan portfolio is secured by real estate,
either as primary or secondary collateral, located in South Carolina.
LOAN PORTFOLIO ANALYSIS. The following table sets forth the composition of
the Company's loan portfolio (excluding loans held-for-sale) at the dates
indicated. The Company had no concentration of loans exceeding 10% of total
loans receivable other than as disclosed below.
<TABLE>
<CAPTION>
AT SEPTEMBER 30,
----------------------------------------------------------------------------------------------
1998 1997 1996 1995 1994
----------------- ----------------- ----------------- ----------------- ------------------
AMOUNT PERCENT AMOUNT PERCENT AMOUNT PERCENT AMOUNT PERCENT AMOUNT PERCENT
-------- ------- -------- ------- -------- ------- -------- ------- -------- -------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Mortgage loans:
One- to four-family......... $173,891 81.9% $180,609 90.0% $173,925 90.4% $167,092 90.2% $151,238 89.9%
Builder construction........ 11,261 5.3 2,601 1.3 3,836 2.0 2,735 1.5 2,763 1.6
Commercial.................. 14,484 6.8 8,136 4.0 6,450 3.3 7,573 4.1 7,536 4.5
-------- ----- -------- ----- -------- ----- -------- ----- -------- -----
Total mortgage loans...... 199,636 94.0 191,346 95.3 184,211 95.7 177,400 95.8 161,537 96.0
Savings account loans......... 1,077 0.5 1,419 0.7 1,146 0.6 1,439 0.8 1,133 0.7
Home equity loans............. 8,925 4.2 8,124 4.0 7,050 3.7 6,429 3.4 5,607 3.3
Commercial loans.............. 2,785 1.3 -- -- -- -- -- -- -- --
-------- ----- -------- ----- -------- ----- -------- ----- -------- -----
Total loans receivable.... 212,423 100.0% 200,889 100.0% 192,407 100.0% 185,268 100.0% 168,277 100.0%
===== ===== ===== ===== =====
Less:
Undisbursed loan funds 14,514 6,989 8,375 5,995 7,584
Deferred loan origination
fees...................... 360 363 412 424 389
Allowance for loan losses... 760 874 670 590 622
-------- -------- -------- -------- --------
Loans receivable, net..... $196,789 $192,663 $182,950 $178,259 $159,682
======== ======== ======== ======== ========
</TABLE>
The following table sets forth certain information at September 30, 1998
regarding the dollar amount of loans maturing in the Company's portfolio based
on their contractual terms to maturity, but does not include scheduled payments
or potential prepayments. Demand loans, loans having no stated schedule of
repayments and no stated maturity, and overdrafts are reported as becoming due
within one year. Loan balances do not include undisbursed loan proceeds,
unearned discounts, unearned income and allowance for loans losses.
<TABLE>
<CAPTION>
AFTER AFTER AFTER
ONE YEAR 3 YEARS 5 YEARS
WITHIN THROUGH THROUGH THROUGH BEYOND
ONE YEAR 3 YEARS 5 YEARS 10 YEARS 10 YEARS TOTAL
-------- -------- ------- -------- -------- --------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
Mortgage loans:
One- to four-family... $ 210 $3,481 $13,048 $47,987 $109,165 $173,891
Builder construction.. 11,261 -- -- -- -- 11,261
Commercial............ 610 5,422 1,802 5,382 1,268 14,484
Savings account loans..... 1,077 -- -- -- -- 1,077
Home equity loans......... 8,925 -- -- -- -- 8,925
Commercial loans.......... 2,785 -- -- -- -- 2,785
------- ------ ------- ------- -------- --------
Total................. $24,868 $8,903 $14,850 $53,369 $110,433 $212,423
======= ====== ======= ======= ======== ========
</TABLE>
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<PAGE>
The following table sets forth the dollar amount of all loans due after
September 30, 1999, which have fixed interest rates and have floating or
adjustable interest rates.
<TABLE>
<CAPTION>
FIXED-RATES FLOATING OR
ADJUSTABLE-RATES
----------- ----------------
(IN THOUSANDS)
<S> <C> <C>
Mortgage loans:
One- to four-family... $26,617 $147,064
Builder construction.. -- --
Commercial............ 2,661 11,213
Savings account loans..... -- --
Home equity loans......... -- --
Commercial loans.......... -- --
------- --------
Total................. $29,278 $158,277
======= ========
</TABLE>
Scheduled contractual principal repayments of loans do not reflect the
actual life of such assets. The average life of a loan is substantially less
than its contractual term because of prepayments. In addition, due-on-sale
clauses on loans generally give the Company the right to declare loans
immediately due and payable in the event, among other things, that the borrower
sells the real property subject to the mortgage and the loan is not repaid. The
average life of a mortgage loan tends to increase, however, when current
mortgage loan market rates are substantially higher than rates on existing
mortgage loans and, conversely, tends to decrease when rates on existing
mortgage loans are substantially higher than current mortgage loan market rates.
ONE- TO FOUR-FAMILY REAL ESTATE LOANS. The Company has concentrated its
lending activities on the origination of loans secured by first mortgages on
one- to four-family residences located in South Carolina. At September 30,
1998, $173.9 million, or 81.9%, of the Company's total loan portfolio consisted
of such loans. Included in this amount are $9.2 million of construction loans
that will convert to permanent mortgage loans after the completion of the
construction phase.
The Company offers ARM loans at rates and terms competitive with market
conditions. At September 30, 1998, $147.1 million, or 84.6%, of the Company's
one- to four-family real estate loans were subject to periodic interest rate
adjustments. Substantially all of the Company's ARM loans are underwritten and
documented in accordance with guidelines established by Federal Home Loan
Mortgage Corporation ("Freddie Mac"), even though the Company originates ARM
loans primarily for its own portfolio. The Company originates for its portfolio
ARM loans which provide for an interest rate that adjusts every year or that is
fixed for three or ten years and then adjusts every year after the initial
period. The Company's ARM loans generally provide for annual and lifetime
interest rate adjustment limits of 1% and 4%, respectively. The Company's ARM
loans adjust based on the National Median Cost of Funds Index. This index is a
lagging market index, which means that upward adjustments in this index may
occur more slowly than changes in the Company's cost of interest-bearing
liabilities, especially during periods of rapidly increasing interest rates. The
Company's ARM loans are typically based on a 30-year amortization schedule. The
initial rate on most of the Company's ARM loans is .75% to 1% below the fully
indexed rate for the loan.
The Company offers fixed-rate, one- to four-family mortgage loans with
maturities ranging from ten to 30 years. These loans are fully amortizing with
monthly payments sufficient to repay the total amount of the loan with interest
by the end of the loan term. Generally, they are underwritten and documented in
accordance with guidelines established by Freddie Mac. In recent years, as
part of its asset/liability management, the Company has retained for its
portfolio fixed-rate loans with terms of ten to 15 years. The Company
determines whether to sell or retain fixed-rate loans with terms of more than 15
years on a case-by-case basis.
The Company also offers loans to individuals for the construction and
acquisition of their personal residence. Such loans are made on the same terms
as the Company's one- to four-family mortgage loans, but provide for the payment
of interest only during the construction phase, which is usually six months. At
the end of the construction phase, the loan converts to a permanent mortgage
loan.
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<PAGE>
The Company offers second mortgage loans, although these have become less
popular since the introduction of home equity lines of credit. The Company's
second mortgage loans have fixed interest rates and terms of up to ten years.
At September 30, 1998, the Company had $902,000 of second mortgage loans
included in its one- to four-family mortgage loans.
Borrower demand for ARM loans versus fixed-rate mortgage loans is a
function of the level of interest rates, the expectations of changes in the
level of interest rates and the difference between the initial interest rates
and fees charged for each type of loan. The relative amount of fixed-rate
mortgage loans and ARM loans that can be originated at any time is largely
determined by the demand for each in a competitive environment.
The retention of ARM loans in the Company's loan portfolio helps reduce the
Company's exposure to changes in interest rates. There are, however,
unquantifiable credit risks resulting from the potential of increased costs due
to changed rates to be paid by the borrower. It is possible that, during
periods of rising interest rates, the risk of default on ARM loans may increase
as a result of repricing and the increased payments required by the borrower.
In addition, although ARM loans allow the Company to increase the sensitivity of
its asset base to changes in the interest rates, the extent of this interest
sensitivity is limited by the annual and lifetime interest rate adjustment
limits. Because of these considerations and its use of a lagging market index,
the Company has no assurance that yields on ARM loans will be sufficient to
offset increases in the Company's cost of funds. The Company believes these
risks, which have not had a material adverse effect on the Company to date,
generally are less than the risks associated with holding fixed-rate loans in
portfolio during a rising interest rate environment.
The Company generally requires title insurance insuring the status of its
lien or an acceptable attorney's opinion on all loans where real estate is the
primary source of security. The Company also requires that fire and casualty
insurance (and, if appropriate, flood insurance) be maintained in an amount at
least equal to the outstanding loan balance.
The Company's one- to four-family residential mortgage loans typically do
not exceed 80% of the appraised value of the security property. Pursuant to its
underwriting guidelines, the Company can lend up to 95% of the appraised value
of the property securing a one- to four-family residential loan; however, the
Company generally requires private mortgage insurance on the portion of the
principal amount that exceeds 80% of the appraised value of the security
property.
BUILDER CONSTRUCTION LOANS. The Company originates residential construction
loans to local home builders, generally with whom it has an established
relationship. At September 30, 1998, builder construction loans amounted to
$11.3 million, or 5.3%, of the Company's total loans receivable.
The Company's construction loans to builders generally have fixed interest
rates and are for a term of one year. Such loans to builders are typically made
with a maximum loan to value ratio of 80%. These loans are made either on a
pre-sold or speculative (unsold) basis. However, the Company generally limits
the number of outstanding loans on unsold homes under construction to individual
builders, with the amount dependent on the financial strength of the builder,
the present exposure of the builder, the degree of loan concentration and prior
sales of homes in the development. At September 30, 1998, the largest amount of
construction loans outstanding to one builder was $3.3 million, all of which was
for speculative construction.
Prior to making a commitment to fund a construction loan, the Company
requires an appraisal of the property by a state-licensed and qualified
appraiser. The Company's staff or a paid inspector also reviews and inspects
each project prior to disbursement of funds during the term of the construction
loan. Loan proceeds are disbursed after inspection of the project based on
percentage of completion.
Construction lending affords the Company the opportunity to earn higher
interest rates with shorter terms to maturity relative to single-family
permanent mortgage lending. Construction lending, however, is generally
considered to involve a higher degree of risk than single-family permanent
mortgage lending because of the inherent difficulty in estimating both a
property's value at completion of the project and the estimated cost of the
project. The nature of these loans is such that they are generally more
difficult to evaluate and monitor. If the estimate of construction cost proves
to be inaccurate, the Company may be required to advance funds beyond the amount
originally committed to permit completion of the project. If the estimate of
value upon completion proves to be inaccurate, the Company may be
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<PAGE>
confronted with a project whose value is insufficient to assure full repayment.
Projects may also be jeopardized by disagreements between borrowers and builders
and by the failure of builders to pay subcontractors. Loans to builders to
construct homes for which no purchaser has been identified carry more risk
because the payoff for the loan is dependent on the builder's ability to sell
the property prior to the time that the construction loan is due.
The Company has attempted to minimize the foregoing risks by, among other
things, limiting its construction lending primarily to residential properties.
It is also the Company's general policy to obtain personal guarantees from
financially capable parties where the loan is made to a corporation or other
legal entity.
COMMERCIAL REAL ESTATE LOANS. The Company originates mortgage loans for the
acquisition and refinancing of commercial real estate properties. At September
30, 1998, $17.3 million, or 8.1%, of the Company's total loans receivable
consisted of loans secured by existing commercial real estate properties. The
majority of the Company's commercial real estate loans are secured by office
buildings, churches, retail shops and warehouses, all of which are located in
South Carolina. Occasionally, the Company makes land acquisition and development
loans. At September 30, 1998, the Company's largest commercial real estate loan
was $1.5 million and is collateralized by improved and unimproved lots in a
subdivision near Greenwood, South Carolina.
Most of the Company's commercial real estate loans have adjustable interest
rates and 15-year terms. The Company requires appraisals of all properties
securing commercial real estate loans. Appraisals are performed by an
independent appraiser designated by the Company and are reviewed by management.
Commercial real estate lending affords the Company an opportunity to
receive interest at rates higher than those generally available from one- to
four-family residential lending. However, loans secured by such properties
usually are greater in amount and are more difficult to evaluate and monitor,
and, therefore, involve a greater degree of risk than one- to four-family
residential mortgage loans. Because payments on loans secured by commercial
properties are often dependent on the successful operation and management of the
properties, repayment of such loans may be affected by adverse conditions in the
real estate market or the economy. The Company seeks to minimize these risks by
limiting the maximum loan-to-value ratio to 80% and strictly scrutinizing the
financial condition of the borrower, the cash flow of the project, the quality
of the collateral and the management of the property securing the loan. The
Company also obtains loan guarantees from financially capable parties based on a
review of personal financial statements.
COMMERCIAL LOANS. The Company does not actively solicit commercial loans.
However, the Company may originate such loans on a limited basis, generally to
customers who are well known to the Company. At September 30, 1998, commercial
loans amounted to $2.8 million, or 1.3% of total loans receivable. Commercial
loans are prime based, variable rate loans and are collateralized by various
business assets. The terms for commercial loans vary with the business purpose
of the loan and the normal business cycle of the borrower. The Company also
obtains personal guarantees from financially capable parties when the loan is
made to a corporation or other legal entity.
Commercial lending affords the Company an opportunity to earn higher
interest rates as compared with residential lending. However, commercial lending
involves greater risk than residential mortgage and other real estate secured
lending. As collateral-based lending, real estate secured loans are made on
established loan-to-collateral values and the liquidation of the real estate is
considered as a primary source of repayment in case the borrower defaults.
Notwithstanding, business assets held as collateral for commercial loans in
default may be an insufficient source of repayment due to obsolescence,
illiquidity, uncollectibility, or shrinkage, among other reasons. Therefore, the
repayment of a commercial loan depends largely on the creditworthiness of the
borrower and the success of the borrower's business.
SAVINGS ACCOUNT LOANS. The Company offers loans secured by savings
deposits. At September 30, 1998, loans collateralized by savings accounts
totalled $1.1 million, or 0.5% of total loans receivable. Generally, such loans
are made up to 90% of the account balance.
HOME EQUITY LOANS. The Company originates home equity loans in the form of
lines of credit. At September 30, 1998, the Company had $8.9 million of home
equity loans and unused commitments to extend credit under home equity loans of
$7.9 million. Most of these loans are made to existing customers. The
Company's home equity loans have variable interest rates tied to the prime
lending rate as published in The Wall Street Journal. The Company imposes
-----------------------
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<PAGE>
a maximum loan-to-value ratio of 90% after considering the unpaid balances of
both the first and second mortgage loans on the collateralized property.
The Company's home equity loans may have greater credit risk than one- to
four-family residential mortgage loans because they are secured by mortgages
subordinated to an existing first mortgage on the property, which, in most
cases, is held by the Company.
LOAN SOLICITATION AND PROCESSING. The Company's lending activities are
subject to the written, non-discriminatory, underwriting standards and loan
origination procedures established by the Board of Directors and management.
Loan originations come from a number of sources. The customary sources of loan
originations are realtors, walk-in customers, referrals and existing customers.
The Company also uses two mortgage brokers in Columbia and one mortgage broker
in Greenwood to originate loans. For the year ended September 30, 1998, the
Company originated $15.7 million of loans, or 23.1% of total originations,
through these brokers. All loans originated through these mortgage brokers are
underwritten by the Company pursuant to the Company's underwriting guidelines.
All single-family residential mortgage loans up to $300,000 and all other
loans up to $200,000 must be approved by two members of the Loan Committee. All
loans in excess of such amounts but below $500,000 must be approved by a
committee consisting of the President, two Vice Presidents in charge of lending
operations and two outside Directors. All loans of $500,000 or more must be
approved by the Board of Directors.
LOAN ORIGINATIONS, PURCHASES AND SALES. While the Company originates both
adjustable-rate and fixed-rate loans, its ability to generate each type of loan
depends upon relative customer demand for loans in its primary market area.
During the years ended September 30, 1998, 1997 and 1996, the Company originated
$67.7 million, $45.1 million and $46.3 million of loans, respectively. Of the
$67.7 million of loans originated in the year ended September 30, 1998, $39.7
million, or 61.9%, had adjustable rates of interest.
In fiscal 1997, the Company began purchasing loans from a mortgage banking
company in Greenville, South Carolina. All of the loans purchased in fiscal
1998 were purchased through this company and all of the property securing such
loans is located in Upstate South Carolina. These loans are written to Freddie
Mac guidelines with all exceptions reviewed and approved by the Company. The
Company anticipates that it will continue to purchase loans from time to time to
supplement its own originations.
The Company sells loans in order to manage the interest rate risk
associated with holding long-term, fixed-rate mortgages, to enable the Company
to offer a wide variety of mortgage products, and to earn origination fees and
premiums. In 1995, the Company established a relationship with another financial
institution pursuant to which the Company sells fixed-rate, one- to four-family
mortgage loans with terms in excess of 15 years. The Company currently does not
retain servicing rights on the loans that it sells.
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<PAGE>
The following table sets forth total loans originated, purchased, sold and
repaid during the periods indicated.
<TABLE>
<CAPTION>
YEARS ENDED SEPTEMBER 30,
------------------------------
1998 1997 1996
-------- -------- --------
(IN THOUSANDS)
<S> <C> <C> <C>
Loans originated:
Mortgage loans:
One- to four-family..................... $ 43,458 $ 37,020 $ 36,450
Builder construction.................... 9,850 2,901 5,255
Commercial.............................. 6,274 1,958 1,739
Savings account loans........................ 709 1,128 572
Home equity loans............................ 3,793 2,139 2,243
Commercial loans............................. 3,664 -- --
-------- -------- --------
Total loans originated.................. 67,748 45,146 42,259
-------- -------- --------
Loans purchased:
Mortgage loans:
One- to four-family..................... 3,311 2,975 --
Builder construction.................... 6,008 -- --
Commercial.............................. 5,082 541 --
-------- -------- --------
Total loans purchased.............. 14,401 3,516 --
-------- -------- --------
Loans sold........................................ (1,224) (479) (954)
Principal repayments.............................. (84,117) (35,198) (42,970)
Transfer to real estate owned..................... (281) (996) (92)
Increase (decrease) in other items................ 7,408 (1,231) 2,448
-------- -------- --------
Net increase (decrease) in loans receivable, net.. $ 3,935 $ 10,758 $ 4,691
======== ======== ========
</TABLE>
LOAN COMMITMENTS. The Company issues commitments for mortgage loans
conditioned upon the occurrence of certain events. Such commitments are made in
writing on specified terms and conditions and are honored for up to 30 days from
approval, depending on the type of transaction. At September 30, 1998, the
Company had loan commitments (excluding undisbursed portions of interim
construction loans of $14.5 million) of $1.1 million and unused lines of credit
of $7.9 million. See Notes 2 and 10 of Notes to the Financial Statements.
LOAN FEES. In addition to interest earned on loans, the Company receives
income from fees in connection with loan originations, loan modifications, late
payments and for miscellaneous services related to its loans. Income from these
activities varies from period to period depending upon the volume and type of
loans made and competitive conditions.
The Company charges loan origination fees which are calculated as a
percentage of the amount borrowed or charged as a flat fee on the amount
borrowed, depending on the loan program. In accordance with applicable
accounting procedures, loan origination fees and discount points in excess of
loan origination costs are deferred and recognized over the contractual
remaining lives of the related loans on a level yield basis. Discounts and
premiums on loans purchased are accreted and amortized in the same manner. At
September 30, 1998, the Company had $360,000 of deferred loan fees. The Company
recognized $123,000, $151,000 and $162,000 of deferred loan fees during the
years ended September 30, 1998, 1997 and 1996, respectively, in connection with
loan refinancings, payoffs, sales and ongoing amortization of outstanding loans.
NONPERFORMING ASSETS AND DELINQUENCIES. When a borrowers fails to make a
required payment on a loan, the Company attempts to cure the deficiency by
contacting the borrower and seeking the payment. A late notice is mailed 15
days after a payment is due. In most cases, deficiencies are cured promptly.
If a delinquency continues, additional
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contact is made either through additional notices or other means and the Company
will attempt to work out a payment schedule. While the Company generally prefers
to work with borrowers to resolve such problems, the Company will institute
foreclosure or other proceedings, as necessary, to minimize any potential loss.
Loans are placed on nonaccrual status generally if, in the opinion of
management, principal or interest payments are not likely to be made in
accordance with the terms of the loan agreement, or when principal or interest
is past due more than 90 days. Interest accrued but not collected at the date
the loan is placed on nonaccrual status is reversed against income in the
current period. Loans may be reinstated to accrual status when payments are 90
days or less past due and, in the opinion of management, collection of the
remaining past due balances can be reasonably expected.
The Company's Board of Directors is informed on a monthly basis of the
amounts of loans delinquent more than 30, 60 and 90 days, all loans in
foreclosure and all foreclosed and repossessed property owned by the Company.
The following table sets forth information with respect to the Company's
nonperforming assets and restructured loans within the meaning of SFAS No. 15 at
the dates indicated.
<TABLE>
<CAPTION>
AT SEPTEMBER 30,
------------------------------------------
1998 1997 1996 1995 1994
------ ------ ------ ------ ------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Loans accounted for on a nonaccrual basis:
Mortgage loans:
One- to four-family.................. $ 628 $ 444 $ 679 $ 867 $1,010
Builder construction................. 89 411 348 40 121
Commercial........................... 33 33 -- 28 187
Savings account loans..................... -- -- -- -- --
Home equity loans......................... 37 46 -- -- 26
Commercial loans.......................... -- -- -- -- --
----- ------ ------ ------ ------
Total of non-accrual loans........... 787 934 1,027 935 1,344
Real estate owned......................... -- 410 86 104 388
----- ------ ------ ------ ------
Total non-performing assets.......... $ 787 $1,344 $1,113 $1,039 $1,732
===== ====== ====== ====== ======
Restructured loans........................ $ 396 $ 732 $ 769 $ 588 $ 479
===== ====== ====== ====== ======
Nonaccrual loans as a percent of
loans receivable, net....................... 0.40% 0.48% 0.56% 0.52% 0.84%
Nonaccrual loans as a percentage of
total assets................................ 0.26% 0.38% 0.42% 0.40% 0.63%
Non-performing assets as a percentage
of total assets............................... 0.26% 0.54% 0.45% 0.44% 0.81%
</TABLE>
Interest income that would have been recorded for the year ended
September 30, 1998 had nonaccruing loans been current in accordance with their
original terms amounted to $70,000. The amount of interest included in interest
income on such loans for the year ended September 30, 1998 amounted to $27,000.
Interest income that would have been recorded for the year ended September 30,
1998 had restructured loans been current in accordance with their original terms
and the amount of interest included in interest income on such loans for that
period were, in both cases, immaterial.
REAL ESTATE OWNED. Real estate acquired by the Company as a result of
foreclosure or by deed-in-lieu of foreclosure is classified as real estate owned
until sold. When property is acquired it is recorded at fair market value
-8-
<PAGE>
at the date of foreclosure. Subsequent to foreclosure, real estate owned is
carried at the lower of the foreclosed amount or fair value, less estimated
selling costs. At September 30, 1998, the Company had no real estate owned.
RESTRUCTURED LOANS. Under generally accepted accounting principles
("GAAP"), the Company is required to account for certain loan modifications or
restructuring as a "troubled debt restructuring." In general, the modification
or restructuring of a debt constitutes a troubled debt restructuring if the
Company for economic or legal reasons related to the borrower's financial
difficulties grants a concession to the borrower that the Company would not
otherwise consider. A debt restructuring or loan modification for a borrower
does not necessarily always constitute a troubled debt restructuring, however,
and a troubled debt restructuring does not necessarily result in a nonaccrual
loan. The Company had $396,000 of restructured loans as of September 30, 1998,
which consisted of four one- to four-family loans.
ASSET CLASSIFICATION. The OTS has adopted various regulations regarding
problem assets of savings institutions. The regulations require that each
insured institution review and classify its assets on a regular basis. In
addition, in connection with examinations of insured institutions, OTS examiners
have authority to identify problem assets and, if appropriate, require them to
be classified. There are three classifications for problem assets:
substandard, doubtful and loss. Substandard assets have one or more defined
weaknesses and are characterized by the distinct possibility that the insured
institution will sustain some loss if the deficiencies are not corrected.
Doubtful assets have the weaknesses of substandard assets with the additional
characteristic that the weaknesses make collection or liquidation in full on the
basis of currently existing facts, conditions and values questionable, and there
is a high possibility of loss. An asset classified as loss is considered
uncollectible and of such little value that continuance as an asset of the
institution is not warranted. If an asset or portion thereof is classified as
loss, the insured institution establishes specific allowances for loan losses
for the full amount of the portion of the asset classified as loss. All or a
portion of general loan loss allowances established to cover possible losses
related to assets classified substandard or doubtful can be included in
determining an institution's regulatory capital, while specific valuation
allowances for loan losses generally do not qualify as regulatory capital.
Assets that do not currently expose the insured institution to sufficient risk
to warrant classification in one of the aforementioned categories but possess
weaknesses are designated "special mention" and monitored by the Company.
The following table sets forth the number and amount of classified loans by
loan category at September 30, 1998.
<TABLE>
<CAPTION>
LOSS DOUBTFUL SUBSTANDARD
-------------- ---------------- --------------
NUMBER AMOUNT NUMBER AMOUNT NUMBER AMOUNT
------ ------ ------ -------- ------ ------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
Mortgage loans:
One- to four-family.... 1 $10 5 $346 13 $272
Builder construction... -- -- -- -- 2 89
Commercial loans....... -- -- 1 33 -- --
Savings account loans..... -- -- -- -- -- --
Home equity loans......... -- -- -- -- 2 37
Commercial loans.......... -- -- -- -- -- --
--- ---- --- ----- --- -----
Total.................. 1 $10 6 $379 17 $398
=== ==== === ===== === =====
</TABLE>
ALLOWANCE FOR LOAN LOSSES. In originating loans, the Company recognizes
that losses will be experienced and that the risk of loss will vary with, among
other things, the type of loan being made, the creditworthiness of the borrower
over the term of the loan, general economic conditions and, in the case of a
secured loan, the quality of the security for the loan. The allowance method is
used in providing for loan losses. Accordingly, all loan losses are charged to
the allowance and all recoveries are credited to it. The allowance for loan
losses is established through a provision for loan losses charged to operations.
The provision for loan losses is based on management's periodic evaluation of
such factors as the delinquency status of loans, current economic conditions,
the net realizable value of the underlying collateral and prior loan loss
experience.
At September 30, 1998, the Company had an allowance for loan losses of
$760,000. Although management believes that it uses the best information
available to establish the allowance for loan losses, future adjustments to the
-9-
<PAGE>
allowance for loan losses may be necessary and results of operations could be
significantly and adversely affected if circumstances differ substantially from
the assumptions used in making the determinations. Furthermore, while the
Company believes it has established its existing allowance for loan losses in
accordance with GAAP, there can be no assurance that regulators, in reviewing
the Company's loan portfolio, will not request the Company to increase
significantly its allowance for loan losses. In addition, because future events
affecting borrowers and collateral cannot be predicted with certainty, there can
be no assurance that the existing allowance for loan losses is adequate or that
substantial increases will not be necessary should the quality of any loans
deteriorate as a result of the factors discussed above. Any material increase
in the allowance for loan losses may adversely affect the Company's financial
condition and results of operations.
The following table sets forth an analysis of the Company's allowance for
loan losses.
<TABLE>
<CAPTION>
AT OR FOR THE YEAR ENDED SEPTEMBER 30,
---------------------------------------------
1998 1997 1996 1995 1994
-------- ------- -------- ------- ------
<S> <C> <C> <C> <C> <C>
(DOLLARS IN THOUSANDS)
Allowance at beginning of period...................... $ 874 $ 670 $ 590 $ 622 $ 560
Provision for loan losses (recovery of
allowance)......................................... (105) 337 (7) 47 62
Recoveries:
Mortgage loans:
One- to four-family................................. -- -- -- -- --
Builder construction................................ -- -- -- -- --
Commercial.......................................... -- -- 115 -- --
Savings account loans................................ -- -- -- -- --
Home equity loans.................................... -- -- -- -- --
Commercial loans..................................... -- -- -- -- --
------ ------ ------- ------ ------
Total recoveries.................................... -- -- 115 -- --
------ ------ ------- ------ ------
Charge-offs:
Mortgage loans:
One- to four-family................................. -- -- 28 -- --
Builder construction................................ -- -- -- -- --
Commercial.......................................... 9 133 -- 79 --
Savings account loans................................ -- -- -- -- --
Home equity loans.................................... -- -- -- -- --
Commercial loans..................................... -- -- -- -- --
------ ------ ------- ------ ------
Total charge-offs................................... 9 133 28 79 --
------ ------ ------- ------ ------
Net charge-offs..................................... 9 133 (87) 79 --
------ ------ ------- ------ ------
Balance at end of period............................ $ 760 $ 874 $ 670 $ 590 $ 622
====== ====== ======= ====== ======
Allowance for loan losses as a
percentage of total loans outstanding
at end of the period................................ 0.36% 0.44% 0.35% 0.32% 0.37%
Net charge-offs (recoveries) as a
percentage of average loans
outstanding during the period....................... 0.01% 0.07% (0.05)% 0.05% 0.00%
Allowance for loan losses as a
percentage of nonperforming loans
at end of period.................................... 96.57% 93.58% 65.24% 63.10% 46.28%
</TABLE>
-10-
<PAGE>
The following table sets forth the breakdown of the allowance for loan losses
by loan category at the dates indicated. Management believes that the allowance
can be allocated by category only on an approximate basis. The allocation of the
allowance to each category is not necessarily indicative of future losses and
does not restrict the use of the allowance to absorb losses in any other
category.
<TABLE>
<CAPTION>
AT SEPTEMBER 30,
-------------------------------------------------------------------------------------------------
1998 1997 1996 1995 1994
---------------- ---------------- ----------------- ---------------- ------------------
PERCENT PERCENT PERCENT PERCENT PERCENT
OF LOANS OF LOANS OF LOANS OF LOANS OF LOANS
IN IN IN IN IN
CATEGORY CATEGORY CATEGORY CATEGORY CATEGORY
TO TOTAL TO TOTAL TO TOTAL TO TOTAL TO TOTAL
AMOUNT LOANS AMOUNT LOANS AMOUNT LOANS AMOUNT LOANS AMOUNT LOANS
-------- --------- ------ ----------- -------- -------- ------ -------- ------- ----------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Mortgage loans:
One- to four-family......... $632 81.9% $668 90.0% $452 90.4% $540 90.2% $486 89.9%
Builder construction........ 39 5.3 42 1.3 26 2.0 8 1.5 12 1.6
Commercial.................. 51 6.8 138 4.0 175 3.3 19 4.1 111 4.5
Savings account loans........ -- 0.5 -- 0.7 -- 0.6 -- 0.8 -- 0.7
Home equity loans............ 29 4.2 26 4.0 17 3.7 23 3.4 13 3.3
Commercial loans............. 9 1.3 -- -- -- -- -- -- -- --
---- ----- ---- ----- ----- ----- ---- ----- ------ -----
Total allowance
for loan losses......... $760 100.0% $874 100.0% $670 100.0% $590 100.0% $622 100.0%
==== ===== ==== ===== ===== ===== ==== ===== ====== =====
</TABLE>
INVESTMENT ACTIVITIES
The Bank is permitted under federal law to invest in various types of
liquid assets, including U.S. Government obligations, securities of various
federal agencies and of state and municipal governments, deposits at the FHLB-
Atlanta, certificates of deposit of federally insured institutions, certain
bankers' acceptances and federal funds. Subject to various restrictions, the
Bank may also invest a portion of its assets in commercial paper and corporate
debt securities. Savings institutions like the Bank are also required to
maintain an investment in FHLB stock. The Bank is required under federal
regulations to maintain a minimum amount of liquid assets.
SFAS No. 115, "Accounting for Certain Investments in Debt and Equity
Securities," requires that investments be categorized as "held to maturity,"
"trading securities" or "available for sale," based on management's intent as to
the ultimate disposition of each security. SFAS No. 115 allows debt securities
to be classified as "held to maturity" and reported in financial statements at
amortized cost only if the reporting entity has the positive intent and ability
to hold those securities to maturity. Securities that might be sold in response
to changes in market interest rates, changes in the security's prepayment risk,
increases in loan demand, or other similar factors cannot be classified as "held
to maturity." Debt and equity securities held for current resale are classified
as "trading securities." Such securities are reported at fair value, and
unrealized gains and losses on such securities would be included in earnings.
The Company does not currently use or maintain a trading account. Debt and
equity securities not classified as either "held to maturity" or "trading
securities" are classified as "available for sale." Such securities are
reported at fair value, and unrealized gains and losses on such securities are
excluded from earnings and reported as a net amount in a separate component of
equity.
The Company's investment policies limit investments to obligations of the
U.S. Treasury and U.S. Government agencies, Federal Funds and overnight deposits
and mortgage-backed securities, such as those issued by Federal National
Mortgage Association ("Fannie Mae") and Freddie Mac. The Company's investment
policy does not permit engaging directly in hedging activities or purchasing
high risk mortgage derivative products. Investments are made based on certain
considerations, which include the interest rate, yield, settlement date and
maturity of the investment, the Company's liquidity position, and anticipated
cash needs and sources (which, in turn, include outstanding commitments,
upcoming maturities, estimated deposits and anticipated loan amortization and
repayments). The effect that the proposed investment would have on the Company's
credit and interest rate risk and risk-based capital is also considered.
The Company purchases investment securities to provide for necessary
liquidity for day-to-day operations. The Company also purchases investment
securities when investable funds exceed loan demand. In recent years, the
-11-
<PAGE>
Company's investment securities purchases have been limited to U.S. Treasury and
U.S. Government agency obligations with contractual maturities of up to five
years.
The following table sets forth the amortized cost and fair value of the
Company's securities, by accounting classification and by type of security, at
the dates indicated.
<TABLE>
<CAPTION>
AT SEPTEMBER 30,
---------------------------------------------------------
1998 1997 1996
---------------------------------------------------------
AMORTIZED FAIR AMORTIZED FAIR AMORTIZED FAIR
COST VALUE COST VALUE COST VALUE
--------- ----- -------- ----- --------- -----
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
AVAILABLE FOR SALE:
Investment securities:
U.S. Treasury obligations.............. $ 1,506 $ 1,515 $ 2,010 $ 2,008 $ 7,536 $ 7,472
U.S. Government agency
obligations................... 2,000 2,009 3,996 3,976 7,841 7,761
Freddie Mac common stock................ 57 3,374 57 2,406 57 1,666
------- ------- ------- ------- ------- -------
Total available for sale............. 3,563 6,898 6,063 8,390 15,434 16,899
------- ------- ------- ------- ------- -------
HELD TO MATURITY:
Investment securities:
U.S. Government agency
obligations......................... 17,112 17,208 15,988 15,954 20,993 20,778
Mortgage-backed securities:
Fannie Mae............................. 553 554 788 781 1,142 1,117
Freddie Mac............................ 1,142 1,137 5,877 5,854 8,584 8,467
------- ------- ------- ------- ------- -------
Total held to maturity............... 18,807 18,899 22,653 22,589 30,719 30,362
------- ------- ------- ------- ------- -------
Total................................ $22,370 $25,797 $28,716 $30,979 $46,153 $47,261
======= ======= ======= ======= ======= =======
</TABLE>
-12-
<PAGE>
The following table sets forth certain information regarding the carrying
value, weighted average yields and maturities or periods to repricing of the
Company's debt securities and mortgage-backed securities at September 30, 1997.
U.S. Treasury obligations and certain U.S. Government agency obligations are
exempt from state taxation. Their yields, however, have not been computed on a
tax equivalent basis for purposes of the table.
<TABLE>
<CAPTION>
LESS THAN ONE TO FIVE
ONE YEAR YEARS
------------------- -------------------
WEIGHTED WEIGHTED
AMORTIZED AVERAGE AMORTIZED AVERAGE
COST YIELD COST YIELD
--------- -------- --------- --------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
AVAILABLE FOR SALE:
Investment securities:
U.S. Treasury obligations........... $1,000 4.97% $ 506 6.35%
U.S. Government agency obligations.. 500 4.88 1,500 5.79
------ -------
Total available for sale.......... 1,500 4.95 2,006 5.93
------ -------
HELD TO MATURITY:
Investment securities:
U.S. Government agency obligations.. 2,998 5.68 14,114 6.08
Mortgage-backed securities:
Fannie Mae.......................... -- -- 553 5.80
Freddie Mac......................... 1,142 5.06 -- --
------ -------
Total held to maturity............ 4,140 5.60 14,667 6.07
------ -------
Total............................. $5,640 5.54% $16,673 6.05%
====== =======
</TABLE>
DEPOSIT ACTIVITIES AND OTHER SOURCES OF FUNDS
GENERAL. Deposits are the major external source of funds for the Company's
lending and other investment activities. In addition, the Company also
generates funds internally from loan principal repayments and prepayments and
maturing investment and mortgage-backed securities. Scheduled loan repayments
are a relatively stable source of funds, while deposit inflows and outflows and
loan prepayments are influenced significantly by general interest rates and
money market conditions. Borrowings from the FHLB-Atlanta may be used to
compensate for reductions in the availability of funds from other sources.
Presently, the Company has no other borrowing arrangements.
DEPOSIT ACCOUNTS. A substantial number of the Company's depositors reside
in South Carolina. The Company's deposit products include NOW accounts, money
market accounts, regular passbook savings and term certificate accounts.
Deposit account terms vary with the principal difference being the minimum
balance deposit, early withdrawal penalties and the interest rate. The Company
reviews its deposit mix and pricing weekly. The Company does not utilize
brokered deposits, nor has it aggressively sought jumbo certificates of deposit.
To attract larger deposits, from time to time the Company has paid bonus rates
on large deposits.
The Company believes it is competitive in the interest rates it offers on
its deposit products. The Company does not seek to pay the highest deposit
rates but competitive rates. The Company determines the rates paid based on a
number of conditions, including rates paid by competitors, the Company's
interest rate spread, loan demand and deposit balances.
-13-
<PAGE>
The following table indicates the amount of the Company's jumbo certificate
accounts by time remaining until maturity as of September 30, 1998. Jumbo
certificate accounts have principal balances of $100,000 or more.
<TABLE>
<CAPTION>
JUMBO
CERTIFICATE
MATURITY PERIOD ACCOUNTS
- --------------- -------------
(IN THOUSANDS)
<S> <C>
Three months or less.......................... $ 8,791
Over three months through six months.......... 9,701
Over six months through 12 months............. 19,353
Over 12 months................................ 19,047
-------
Total...................................... $56,892
=======
</TABLE>
The following table sets forth the balances (inclusive of interest
credited) and changes in dollar amounts of deposits in the various types of
accounts offered by the Company between the dates indicated.
<TABLE>
<CAPTION>
AT SEPTEMBER 30,
-------------------------------------------------------------------------------------
1998 1997 1996
-------------------------------- ------------------------------ ----------------
INCREASE INCREASE
AMOUNT PERCENT (DECREASE) AMOUNT PERCENT (DECREASE) AMOUNT PERCENT
--------- ------- ---------- ------ ------- ---------- ------ -------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Passbook accounts $ 9,946 4.8% $ (1,477) $ 11,423 5.3% $ (444) $ 11,867 5.6%
NOW and money market accounts 3,455 1.7 (317) 3,772 1.7 (149) 3,921 1.9
Fixed-rate certificate accounts which
mature in the year ending:
Within 1 year 133,201 64.6 (15,658) 148,859 69.1 39,787 109,072 52.0
After 1 year, but within 2 years 53,790 26.1 12,506 41,284 19.2 (18,054) 59,338 28.3
After 2 years, but within 5 years 5,712 2.8 (4,362) 10,074 4.7 (15,458) 25,532 12.2
-------- ------- --------- -------- ------- --------- -------- -------
Total $206,104 100.0% $ (9,308) $215,412 100.0% $ 5,682 $209,730 100.0%
======== ======= ========= ======== ======= ========= ======== =======
</TABLE>
The following table sets forth the amount of time deposits in the Company
categorized by rates at the dates indicated.
<TABLE>
<CAPTION>
AT SEPTEMBER 30,
------------------------------
1998 1997 1996
------------------------------
<S> <C> <C> <C>
(DOLLARS IN THOUSANDS)
3.01 - 4.00%................... $ 5,198 $ 5,575 $ 6,826
4.01 - 5.00%................... 2,338 1,218 2,216
5.01 - 6.00%................... 137,246 95,528 97,960
6.01 - 7.00%................... 46,895 92,245 81,430
7.01 - 8.00%................... 1,026 5,651 5,510
-------- -------- --------
Total $192,703 $200,217 $193,942
======== ======== ========
</TABLE>
-14-
<PAGE>
The following table sets forth the amount of time deposits in the Company
categorized by maturities at September 30, 1998.
<TABLE>
<CAPTION>
AMOUNT DUE
-------------------------------------------
LESS THAN 1 - 2 2 - 3 3 - 4 AFTER
ONE YEAR YEARS YEARS YEARS 4 YEARS TOTAL
--------- ------- ------ ------ ------- --------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
3.01 - 4.00%... $ 5,198 $ -- $ -- $ -- $ -- $ 5,198
4.01 - 5.00%... 2,338 -- -- -- -- 2,338
5.01 - 6.00%... 88,004 44,892 3,720 629 1 137,246
6.01 - 7.00%... 37,561 7,972 1,081 281 -- 46,895
7.01 - 8.00%... 100 926 -- -- -- 1,026
-------- ------- ------ ------ ------- --------
Total....... $133,201 $53,790 $4,801 $ 910 $ 1 $192,703
======== ======= ====== ====== ======= ========
</TABLE>
The following table sets forth the deposit activity of the Company for the
periods indicated.
<TABLE>
<CAPTION>
YEAR ENDED SEPTEMBER 30,
------------------------------
1998 1997 1996
-------- -------- --------
(IN THOUSANDS)
<S> <C> <C> <C>
Beginning balance..................... $215,412 $209,730 $201,473
-------- -------- --------
Net deposits (withdrawals)
before interest credited........... (18,893) (3,430) (821)
Interest credited..................... 9,585 9,112 9,078
-------- -------- --------
Net increase (decrease) in deposits... (9,308) 5,682 8,257
-------- -------- --------
Ending balance........................ $206,104 $215,412 $209,730
======== ======== ========
</TABLE>
BORROWINGS. The Bank has the ability to use advances from the FHLB-Atlanta
to supplement its supply of lendable funds and to meet deposit withdrawal
requirements. The FHLB-Atlanta functions as a central reserve bank providing
credit for savings associations and certain other member financial institutions.
As a member of the FHLB-Atlanta, the Bank is required to own capital stock in
the FHLB-Atlanta and is authorized to apply for advances on the security of such
stock and certain of its mortgage loans and other assets (principally securities
that are obligations of, or guaranteed by, the U.S. Government or agencies
thereof), provided certain creditworthiness standards have been met. Advances
are made pursuant to several different credit programs. Each credit program has
its own interest rate and range of maturities. Depending on the program,
limitations on the amount of advances are based on the financial condition of
the member institution and the adequacy of collateral pledged to secure the
credit.
The following table sets forth certain information regarding the Bank's use
of FHLB advances during the periods indicated.
<TABLE>
<CAPTION>
YEAR ENDED SEPTEMBER 30,
------------------------
1998 1997 1996
------------------------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
Maximum balance at any month end.. $ -- $5,000 $5,000
Average balance................... -- 3,082 5,000
Year end balance.................. -- -- 5,000
Weighted average interest rate:
At end of year................. -- -- 6.54%
During the year................ -- 7.33% 6.54%
</TABLE>
-15-
<PAGE>
COMPETITION
The Bank faces intense competition in its primary market area for the
attraction of deposits (its primary source of lendable funds) and in the
origination of loans. Its most direct competition for deposits has historically
come from commercial banks, credit unions, other thrifts operating in its market
area, and other financial institutions, such as brokerage firms and insurance
companies. Particularly in times of high interest rates, the Bank has faced
additional significant competition for investors' funds from short-term money
market securities and other corporate and government securities. The Bank's
competition for loans comes from commercial banks, thrift institutions, credit
unions and mortgage bankers. Such competition for deposits and the origination
of loans may limit the Bank's growth in the future.
SUBSIDIARY ACTIVITIES
The only subsidiary of the Company is the Bank. Under OTS regulations, the
Bank generally may invest up to 3% of its assets in service corporations,
provided that at least one-half of investment in excess of 1% is used primarily
for community, inner-city and community development projects. The Bank does not
have any subsidiaries.
PERSONNEL
As of September 30, 1998, the Company had 35 full-time and four part-time
employees, none of whom is represented by a collective bargaining unit. The
Company believes its relationship with its employees is good.
REGULATION
GENERAL
The Bank is subject to extensive regulation, examination and supervision by
the OTS as its chartering agency, and the FDIC, as the insurer of its deposits.
The activities of federal savings institutions are governed by the Home Owners'
Loan Act, as amended (the "HOLA") and, in certain respects, the Federal Deposit
Insurance Act ("FDIA") and the regulations issued by the OTS and the FDIC to
implement these statutes. These laws and regulations delineate the nature and
extent of the activities in which federal savings associations may engage.
Lending activities and other investments must comply with various statutory and
regulatory capital requirements. In addition, the Bank's relationship with its
depositors and borrowers is also regulated to a great extent, especially in such
matters as the ownership of deposit accounts and the form and content of the
Bank's mortgage documents. The Bank must file reports with the OTS and the FDIC
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 financial institutions. There are periodic
examinations by the OTS and the FDIC to review the Bank's compliance with
various regulatory requirements. The regulatory structure also gives the
regulatory authorities extensive discretion in connection with their supervisory
and enforcement activities and examination policies, including policies with
respect to the classification of assets and the establishment of adequate loan
loss reserves for regulatory purposes. Any change in such policies, whether by
the OTS, the FDIC or Congress, could have a material adverse impact on the Bank
and its operations.
FEDERAL REGULATION OF SAVINGS ASSOCIATIONS
OFFICE OF THRIFT SUPERVISION. The OTS is an office in the Department of
the Treasury subject to the general oversight of the Secretary of the Treasury.
The OTS generally possesses the supervisory and regulatory duties and
responsibilities formerly vested in the Federal Home Loan Bank Board. Among
other functions, the OTS issues and enforces regulations affecting federally
insured savings associations and regularly examines these institutions.
FEDERAL HOME LOAN BANK SYSTEM. The FHLB System, consisting of 12 FHLBs, is
under the jurisdiction of the Federal Housing Finance Board ("FHFB"). The
designated duties of the FHFB are to supervise the FHLBs, to ensure that the
FHLBs carry out their housing finance mission, to ensure that the FHLBs remain
adequately capitalized and able to raise funds in the capital markets, and to
ensure that the FHLBs operate in a safe and sound manner. The Bank, as a member
of the FHLB-Atlanta, is required to acquire and hold shares of capital stock in
the FHLB-Atlanta in an amount equal to the greater of (i) 1.0% of the aggregate
outstanding principal amount of residential mortgage loans,
-16-
<PAGE>
home purchase contracts and similar obligations at the beginning of each year,
or (ii) 1/20 of its advances (i.e., borrowings) from the FHLB-Atlanta. The Bank
is in compliance with this requirement with an investment in FHLB-Atlanta stock
of $2.0 million at September 30, 1998. Among other benefits, the FHLB-Atlanta
provides a central credit facility primarily for member institutions. It is
funded primarily from proceeds derived from the sale of consolidated obligations
of the FHLB System. It makes advances to members in accordance with policies and
procedures established by the FHFB and the Board of Directors of the FHLB-
Atlanta.
FEDERAL DEPOSIT INSURANCE CORPORATION. The FDIC is an independent federal
agency that insures the deposits, up to prescribed statutory limits, of
depository institutions. The FDIC currently maintains two separate insurance
funds: the Bank Insurance Fund ("BIF") and the SAIF. As insurer of the Bank's
deposits, the FDIC has examination, supervisory and enforcement authority over
the Bank.
The Bank's accounts are insured by the SAIF to the maximum extent permitted
by law. The Bank pays deposit insurance premiums based on a risk-based
assessment system established by the FDIC. Under applicable regulations,
institutions are assigned to one of three capital groups that are based solely
on the level of an institution's capital -- "well capitalized," "adequately
capitalized," and "undercapitalized" -- which are defined in the same manner as
the regulations establishing the prompt corrective action system, as discussed
below. These three groups are then divided into three subgroups which reflect
varying levels of supervisory concern, from those which are considered to be
healthy to those which are considered to be of substantial supervisory concern.
The matrix so created results in nine assessment risk classifications, with
rates that until September 30, 1996 ranged from 0.23% for well capitalized,
financially sound institutions with only a few minor weaknesses to 0.31% for
undercapitalized institutions that pose a substantial risk of loss to the SAIF
unless effective corrective action is taken.
Pursuant to the Deposit Insurance Funds Act ("DIF Act"), which was enacted
on September 30, 1996, the FDIC imposed a special assessment on each depository
institution with SAIF-assessable deposits which resulted in the SAIF achieving
its designated reserve ratio. In connection therewith, the FDIC reduced the
assessment schedule for SAIF members, effective January 1, 1997, to a range of
0% to 0.27%, with most institutions, including the Bank, paying 0%. This
assessment schedule is the same as that for the BIF, which reached its
designated reserve ratio in 1995. In addition, since January 1, 1997, SAIF
members are charged an assessment of .065% of SAIF-assessable deposits for the
purpose of paying interest on the obligations issued by the Financing
Corporation ("FICO") in the 1980s to help fund the thrift industry cleanup. BIF-
assessable deposits will be charged an assessment to help pay interest on the
FICO bonds at a rate of approximately .013% until the earlier of December 31,
1999 or the date upon which the last savings association ceases to exist, after
which time the assessment will be the same for all insured deposits.
The DIF Act provides for the merger of the BIF and the SAIF into the
Deposit Insurance Fund on January 1, 1999, but only if no insured depository
institution is a savings association on that date. The DIF Act contemplates the
development of a common charter for all federally chartered depository
institutions and the abolition of separate charters for national banks and
federal savings associations. It is not known what form the common charter may
take and what effect, if any, the adoption of a new charter would have on the
operation of the Bank.
The FDIC may terminate the deposit insurance of any insured depository
institution if it determines after a hearing that the institution has engaged or
is engaging in unsafe or unsound practices, is in an unsafe or unsound condition
to continue operations, or has violated any applicable law, regulation, order or
any condition imposed by an agreement with the FDIC. It also may suspend
deposit insurance temporarily during the hearing process for the permanent
termination of insurance, if the institution has no tangible capital. If
insurance of accounts is terminated, the accounts at the institution at the time
of termination, less subsequent withdrawals, shall continue to be insured for a
period of six months to two years, as determined by the FDIC. Management is
aware of no existing circumstances that could result in termination of the
deposit insurance of the Bank.
LIQUIDITY REQUIREMENTS. Under OTS regulations, each savings institution is
required to maintain an average daily balance of liquid assets (cash, certain
time deposits and savings accounts, bankers' acceptances, and specified U.S.
Government, state or federal agency obligations and certain other investments)
equal to a monthly average of not less than a specified percentage (currently
4.0%) of its net withdrawable accounts plus short-term borrowings. Monetary
penalties may be imposed for failure to meet liquidity requirements.
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PROMPT CORRECTIVE ACTION. Under the FDIA, each federal banking agency is
required to implement a system of prompt corrective action for institutions that
it regulates. The federal banking agencies have promulgated substantially
similar regulations to implement this system of prompt corrective action. Under
the regulations, an institution shall be deemed to be (i) "well capitalized" if
it has a total risk-based capital ratio of 10.0% or more, has a Tier I risk-
based capital ratio of 6.0% or more, has a leverage ratio of 5.0% or more and is
not subject to specified requirements to meet and maintain a specific capital
level for any capital measure; (ii) "adequately capitalized" if it has a total
risk-based capital ratio of 8.0% or more, has a Tier I risk-based capital ratio
of 4.0% or more, has a leverage ratio of 4.0% or more (3.0% under certain
circumstances) and does not meet the definition of "well capitalized;" (iii)
"undercapitalized" if it has a total risk-based capital ratio that is less than
8.0%, has a Tier I risk-based capital ratio that is less than 4.0% or has a
leverage ratio that is less than 4.0% (3.0% under certain circumstances); (iv)
"significantly undercapitalized" if it has a total risk-based capital ratio that
is less than 6.0%, has a Tier I risk-based capital ratio that is less than 3.0%
or has a leverage ratio that is less than 3.0%; and (v) "critically
undercapitalized" if it has a ratio of tangible equity to total assets that is
equal to or less than 2.0%.
A federal banking agency may, after notice and an opportunity for a
hearing, reclassify a well capitalized institution as adequately capitalized and
may require an adequately capitalized institution or an undercapitalized
institution to comply with supervisory actions as if it were in the next lower
category if the institution is in an unsafe or unsound condition or has received
in its most recent examination, and has not corrected, a less than satisfactory
rating for asset quality, management, earnings or liquidity. (The OTS may not,
however, reclassify a significantly undercapitalized institution as critically
undercapitalized.)
An institution generally must file a written capital restoration plan that
meets specified requirements, as well as a performance guaranty by each company
that controls the institution, with the appropriate federal banking agency
within 45 days of the date that the institution receives notice or is deemed to
have notice that it is undercapitalized, significantly undercapitalized or
critically undercapitalized. Immediately upon becoming undercapitalized, an
institution shall become subject to various mandatory and discretionary
restrictions on its operations.
At September 30, 1998, the Bank was categorized as "well capitalized" under
the prompt corrective action regulations of the OTS.
STANDARDS FOR SAFETY AND SOUNDNESS. The federal banking regulatory
agencies have prescribed, by regulation, standards for all insured depository
institutions relating to: (i) internal controls, information systems and
internal audit systems; (ii) loan documentation; (iii) credit underwriting; (iv)
interest rate risk exposure; (v) asset growth; (vi) asset quality; (vii)
earnings; and (viii) compensation, fees and benefits ("Guidelines"). The
Guidelines set forth the safety and soundness standards that the federal banking
agencies use to identify and address problems at insured depository institutions
before capital becomes impaired. If the OTS determines that the Bank fails to
meet any standard prescribed by the Guidelines, the agency may require the Bank
to submit to the agency an acceptable plan to achieve compliance with the
standard. OTS regulations establish deadlines for the submission and review of
such safety and soundness compliance plans.
QUALIFIED THRIFT LENDER TEST. All savings associations are required to
meet a qualified thrift lender ("QTL") test to avoid certain restrictions on
their operations. A savings institution that fails to become or remain a QTL
shall either convert to a national bank charter or be subject to the following
restrictions on its operations: (i) the Bank may not make any new investment or
engage in activities that would not be permissible for national banks; (ii) the
Bank may not establish any new branch office where a national bank located in
the savings institution's home state would not be able to establish a branch
office; (iii) the Bank shall be ineligible to obtain new advances from any FHLB;
and (iv) the payment of dividends by the Bank shall be subject to the rules
regarding the statutory and regulatory dividend restrictions applicable to
national banks. Also, beginning three years after the date on which the savings
institution ceases to be a QTL, the savings institution would be prohibited from
retaining any investment or engaging in any activity not permissible for a
national bank and would be required to repay any outstanding advances to any
FHLB. In addition, within one year of the date on which a savings association
controlled by a company ceases to be a QTL, the company must register as a bank
holding company and become subject to the rules applicable to such companies. A
savings institution may requalify as a QTL if it thereafter complies with the
QTL test.
Currently, the QTL test requires that either an institution qualify as a
domestic building and loan association under the Internal Revenue Code or that
65% of an institution's "portfolio assets" (as defined) consist of certain
housing
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and consumer-related assets on a monthly average basis in nine out of every 12
months. Assets that qualify without limit for inclusion as part of the 65%
requirement are loans made to purchase, refinance, construct, improve or repair
domestic residential housing and manufactured housing; home equity loans;
mortgage-backed securities (where the mortgages are secured by domestic
residential housing or manufactured housing); FHLB stock; direct or indirect
obligations of the FDIC; and loans for educational purposes, loans to small
businesses and loans made through credit cards. In addition, the following
assets, among others, may be included in meeting the test subject to an overall
limit of 20% of the savings institution's portfolio assets: 50% of residential
mortgage loans originated and sold within 90 days of origination; 100% of
consumer loans; and stock issued by Freddie Mac or Fannie Mae. Portfolio assets
consist of total assets minus the sum of (i) goodwill and other intangible
assets, (ii) property used by the savings institution to conduct its business,
and (iii) liquid assets up to 20% of the institution's total assets. At
September 30, 1998, the Bank was in compliance with the QTL test.
CAPITAL REQUIREMENTS. Under OTS regulations a savings association must
satisfy three minimum capital requirements: core capital, tangible capital and
risk-based capital. Savings associations must meet all of the standards in
order to comply with the capital requirements.
OTS capital regulations establish a 3% core capital or leverage ratio
(defined as the ratio of core capital to adjusted total assets). Core capital is
defined to include common stockholders' equity, noncumulative perpetual
preferred stock and any related surplus, and minority interests in equity
accounts of consolidated subsidiaries, less (i) any intangible assets, except
for certain qualifying intangible assets; (ii) certain mortgage servicing
rights; and (iii) equity and debt investments in subsidiaries that are not
"includable subsidiaries," which is defined as subsidiaries engaged solely in
activities not impermissible for a national bank, engaged in activities
impermissible for a national bank but only as an agent for its customers, or
engaged solely in mortgage-banking activities. In calculating adjusted total
assets, adjustments are made to total assets to give effect to the exclusion of
certain assets from capital and to account appropriately for the investments in
and assets of both includable and non-includable subsidiaries. Institutions that
fail to meet the core capital requirement would be required to file with the OTS
a capital plan that details the steps they will take to reach compliance. In
addition, the OTS's prompt corrective action regulation provides that a savings
institution that has a leverage ratio of less than 4% (3% for institutions
receiving the highest CAMELS examination rating) will be deemed to be
"undercapitalized" and may be subject to certain restrictions. See "-- Federal
Regulation of Savings Associations -- Prompt Corrective Action."
Savings associations also must maintain "tangible capital" not less than
1.5% of adjusted total assets. "Tangible capital" is defined, generally, as core
capital minus any "intangible assets" other than purchased mortgage servicing
rights.
Savings associations must maintain total risk-based capital equal to at
least 8% of risk-weighted assets. Total risk-based capital consists of the sum
of core and supplementary capital, provided that supplementary capital cannot
exceed core capital, as previously defined. Supplementary capital includes (i)
permanent capital instruments such as cumulative perpetual preferred stock,
perpetual subordinated debt and mandatory convertible subordinated debt, (ii)
maturing capital instruments such as subordinated debt, intermediate-term
preferred stock and mandatory convertible subordinated debt, subject to an
amortization schedule, and (iii) general valuation loan and lease loss
allowances up to 1.25% of risk-weighted assets.
The risk-based capital regulation assigns each balance sheet asset held by
a savings institution to one of four risk categories based on the amount of
credit risk associated with that particular class of assets. Assets not
included for purposes of calculating capital are not included in calculating
risk-weighted assets. The categories range from 0% for cash and securities that
are backed by the full faith and credit of the U.S. Government to 100% for
repossessed assets or assets more than 90 days past due. Qualifying residential
mortgage loans (including multi-family mortgage loans) are assigned a 50% risk
weight. Consumer, commercial, home equity and residential construction loans
are assigned a 100% risk weight, as are nonqualifying residential mortgage loans
and that portion of land loans and nonresidential construction loans that do not
exceed an 80% loan-to-value ratio. The book value of assets in each category is
multiplied by the weighing factor (from 0% to 100%) assigned to that category.
These products are then totalled to arrive at total risk-weighted assets. Off-
balance sheet items are included in risk-weighted assets by converting them to
an approximate balance sheet "credit equivalent amount" based on a conversion
schedule. These credit equivalent amounts are then assigned to risk categories
in the same manner as balance sheet assets and included risk-weighted assets.
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The OTS has incorporated an interest rate risk component into its
regulatory capital rule. Under the rule, savings associations with "above
normal" interest rate risk exposure would be 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 divided by the estimated economic value of the
Bank'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 risk 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 Bank'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 data and the effective date for the new capital requirement based on
that data. A savings association with assets of less than $300 million and risk-
based capital ratios in excess of 12% is not subject to the interest rate risk
component, unless the OTS determines otherwise. 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. Under certain circumstances, a savings
association may request an adjustment to its interest rate risk component if it
believes that the OTS-calculated interest rate risk component overstates its
interest rate risk exposure. In addition, certain "well-capitalized"
institutions may obtain authorization to use their own interest rate risk model
to calculate their interest rate risk component in lieu of the OTS-calculated
amount. The OTS has postponed the date that the component will first be deducted
from an institution's total capital.
LIMITATIONS ON CAPITAL DISTRIBUTIONS. OTS regulations impose uniform
limitations on the ability of all savings associations to engage in various
distributions of capital such as dividends, stock repurchases and cash-out
mergers. In addition, OTS regulations require the Bank to give the OTS 30 days'
advance notice of any proposed declaration of dividends, and the OTS has the
authority under its supervisory powers to prohibit the payment of dividends.
The regulation utilizes a three-tiered approach which permits various levels of
distributions based primarily upon a savings association's capital level.
A Tier 1 savings association has capital in excess of its capital
requirement (both before and after the proposed capital distribution). A Tier 1
savings association may make (without application but upon prior notice to, and
no objection made by, the OTS) capital distributions during a calendar year up
to 100% of its net income to date during the calendar year plus one-half its
surplus capital ratio (i.e., the amount of capital in excess of its requirement)
----
at the beginning of the calendar year or the amount authorized for a Tier 2
association. Capital distributions in excess of such amount require advance
notice to the OTS. A Tier 2 savings association has capital equal to or in
excess of its minimum capital requirement but below its requirement (both before
and after the proposed capital distribution). Such an association may make
(without application) capital distributions up to an amount equal to 75% of its
net income during the previous four quarters depending on how close the Bank is
to meeting its capital requirement. Capital distributions exceeding this amount
require prior OTS approval. Tier 3 associations are savings associations with
capital below the minimum capital requirement (either before or after the
proposed capital distribution). Tier 3 associations may not make any capital
distributions without prior approval from the OTS.
The Bank currently meets the criteria to be designated a Tier 1 association
and, consequently, could at its option (after prior notice to, and no objection
made by, the OTS) distribute up to 100% of its net income during the calendar
year plus 50% of its surplus capital ratio at the beginning of the calendar year
less any distributions previously paid during the year.
LOANS TO ONE BORROWER. Under the HOLA, savings institutions are generally
subject to the national bank limit on loans to one borrower. Generally, this
limit is 15% of the Bank's unimpaired capital and surplus, plus an additional
10% of unimpaired capital and surplus, if such loan is secured by readily-
marketable collateral, which is defined to include certain financial instruments
and bullion. The OTS by regulation has amended the loans to one borrower rule
to permit savings associations meeting certain requirements, including capital
requirements, to extend loans to one borrower in additional amounts under
circumstances limited essentially to loans to develop or complete residential
housing units. At September 30, 1998, the Bank's regulatory limit on loans to
one borrower was $8.9 million. At September 30, 1998, the Bank's largest
aggregate amount of loans to one borrower was $4.8 million.
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ACTIVITIES OF ASSOCIATIONS AND THEIR SUBSIDIARIES. A savings association
may establish operating subsidiaries to engage in any activity that the savings
association may conduct directly and may establish service corporation
subsidiaries to engage in certain preapproved activities or, with approval of
the OTS, other activities reasonably related to the activities of financial
institutions. When a savings association establishes or acquires a subsidiary
or elects to conduct any new activity through a subsidiary that the Bank
controls, the savings association must notify the FDIC and the OTS 30 days in
advance and provide the information each agency may, by regulation, require.
Savings associations also must conduct the activities of subsidiaries in
accordance with existing regulations and orders.
The OTS may determine that the continuation by a savings association of its
ownership control of, or its relationship to, the subsidiary constitutes a
serious risk to the safety, soundness or stability of the Bank or is
inconsistent with sound banking practices or with the purposes of the FDIA.
Based upon that determination, the FDIC or the OTS has the authority to order
the savings association to divest itself of control of the subsidiary. The FDIC
also may determine by regulation or order that any specific activity poses a
serious threat to the SAIF. If so, it may require that no SAIF member engage in
that activity directly.
TRANSACTIONS WITH AFFILIATES. Savings associations must comply with
Sections 23A and 23B of the Federal Reserve Act relative to transactions with
affiliates in the same manner and to the same extent as if the savings
association were a Federal Reserve member bank. A savings and loan holding
company, its subsidiaries and any other company under common control are
considered affiliates of the subsidiary savings association under the HOLA.
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 affiliate to an amount equal to 10% of such institution's capital and surplus
and place an aggregate limit on all such transactions with affiliates to an
amount equal to 20% of such capital and surplus, and (ii) require that all such
transactions be on terms substantially the same, or at least as favorable to the
institution or subsidiary, as those provided to a non-affiliate. The term
"covered transaction" includes the making of loans, the purchase of assets, the
issuance of a guarantee and similar types of transactions. Any loan or
extension of credit by the Bank to an affiliate must be secured by collateral in
accordance with Section 23A.
Three additional rules apply to savings associations: (i) a savings
association may not make any loan or other 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
issued by an affiliate (other than securities of a subsidiary); and (iii) the
OTS may, for reasons of safety and soundness, impose more stringent restrictions
on savings associations but may not exempt transactions from or otherwise
abridge Section 23A or 23B. Exemptions from Section 23A or 23B may be granted
only by the Federal Reserve, as is currently the case with respect to all FDIC-
insured banks.
The Bank's authority to extend credit to executive officers, directors and
10% shareholders, as well as entities controlled by such persons, is currently
governed by Sections 22(g) and 22(h) of the Federal Reserve Act, and Regulation
O thereunder. Among other things, these regulations require that such loans be
made on terms and conditions substantially the same as those offered to
unaffiliated individuals and not involve more than the normal risk of repayment.
Regulation O also places individual and aggregate limits on the amount of loans
the Bank may make to such persons based, in part, on the Bank's capital
position, and requires certain board approval procedures to be followed. The
OTS regulations, with certain minor variances, apply Regulation O to savings
institutions.
COMMUNITY REINVESTMENT ACT. Savings associations also are subject to the
provisions of the Community Reinvestment Act of 1977, which requires the
appropriate federal bank regulatory agency, in connection with its regular
examination of a savings association, to assess the saving association's record
in meeting the credit needs of the community serviced by the savings
association, including low and moderate income neighborhoods. The regulatory
agency's assessment of the savings association's record is made available to the
public. Further, such assessment is required of any savings association which
has applied, among other things, to establish a new branch office that will
accept deposits, relocate an existing office or merge or consolidate with, or
acquire the assets or assume the liabilities of, a federally regulated financial
institution.
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SAVINGS AND LOAN HOLDING COMPANY REGULATIONS
HOLDING COMPANY ACQUISITIONS. The HOLA and OTS regulations issued
thereunder generally prohibit a savings and loan holding company, without prior
OTS approval, from acquiring more than 5% of the voting stock of any other
savings association or savings and loan holding company or controlling the
assets thereof. They also prohibit, among other things, any director or officer
of a savings and loan holding company, or any individual who owns or controls
more than 25% of the voting shares of such holding company, from acquiring
control of any savings association not a subsidiary of such savings and loan
holding company, unless the acquisition is approved by the OTS.
HOLDING COMPANY ACTIVITIES. As a unitary savings and loan holding company,
the Company generally is not subject to activity restrictions under the HOLA.
If the Company acquires control of another savings association as a separate
subsidiary other than in a supervisory acquisition, it would become a multiple
savings and loan holding company. There generally are more restrictions on the
activities of a multiple savings and loan holding company than on those of a
unitary savings and loan holding company. The HOLA provides that, among other
things, no multiple savings and loan holding company or subsidiary thereof which
is not an insured association shall commence or continue for more than two years
after becoming a multiple savings and loan association holding company or
subsidiary thereof, any business activity other than: (i) furnishing or
performing management services for a subsidiary insured institution, (ii)
conducting an insurance agency or escrow business, (iii) holding, managing, or
liquidating assets owned by or acquired from a subsidiary insured institution,
(iv) holding or managing properties used or occupied by a subsidiary insured
institution, (v) acting as trustee under deeds of trust, (vi) those activities
previously directly authorized by regulation as of March 5, 1987 to be engaged
in by multiple holding companies or (vii) those activities authorized by the
Federal Reserve Board as permissible for bank holding companies, unless the OTS
by regulation, prohibits or limits such activities for savings and loan holding
companies. Those activities described in (vii) above also must be approved by
the OTS prior to being engaged in by a multiple savings and loan holding
company.
QUALIFIED THRIFT LENDER TEST. The HOLA provides that any savings and loan
holding company that controls a savings association that fails the QTL test, as
explained under "-- Federal Regulation of Savings Associations --Qualified
Thrift Lender Test," must, within one year after the date on which the Bank
ceases to be a QTL, register as and be deemed a bank holding company subject to
all applicable laws and regulations.
TAXATION
FEDERAL TAXATION
GENERAL. The Company and the Bank report their income on a fiscal year
basis using the accrual method of accounting and are subject to federal income
taxation in the same manner as other corporations with some exceptions,
including particularly the Bank's reserve for bad debts discussed below. The
following discussion of tax matters is intended only as a summary and does not
purport to be a comprehensive description of the tax rules applicable to the
Bank or the Company. For additional information regarding income taxes, see
Note 9 of Notes to Consolidated Financial Statements.
BAD DEBT RESERVE. Historically, savings institutions such as the Bank
which met certain definitional tests primarily related to their assets and the
nature of their business ("qualifying thrift") were permitted to establish a
reserve for bad debts and to make annual additions thereto, which may have been
deducted in arriving at their taxable income. The Bank's deductions with respect
to "qualifying real property loans," which are generally loans secured by
certain interest in real property, were computed using an amount based on the
Bank's actual loss experience, or a percentage equal to 8% of the Bank's taxable
income, computed with certain modifications and reduced by the amount of any
permitted additions to the non-qualifying reserve. Due to the Bank's loss
experience, the Bank generally recognized a bad debt deduction equal to 8% of
taxable income.
The thrift bad debt rules were revised by Congress in 1996. The new rules
eliminated the percentage of taxable income method for deducting additions to
the tax bad debt reserves for all thrifts for tax years beginning after December
31, 1995. These rules also required that all institutions recapture all or a
portion of their bad debt reserves added since the base year (last taxable year
beginning before January 1, 1988). For taxable years beginning after December
31, 1995, the Bank's bad debt deduction must be determined under the experience
method using a formula based on actual bad debt experience over a period of
years or, if the Bank is a "large" bank (assets in excess of $500 million), on
the
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basis of net charge-offs during the taxable year. The new rules allowed an
institution to suspend bad debt reserve recapture for the 1996 and 1997 tax
years if the institution's lending activity for those years is equal to or
greater than the institutions average mortgage lending activity for the six
taxable years preceding 1996 adjusted for inflation. For this purpose, only home
purchase or home improvement loans are included and the institution can elect to
have the tax years with the highest and lowest lending activity removed from the
average calculation. If an institution is permitted to postpone the reserve
recapture, it must begin its six year recapture no later than the 1998 tax year.
The unrecaptured base year reserves will not be subject to recapture as long as
the institution continues to carry on the business of banking. In addition, the
balance of the pre-1988 bad debt reserves continues to be subject to provisions
of present law referred to below that require recapture of the pre-1988 bad debt
reserve in the case of certain excess distributions to shareholders.
DISTRIBUTIONS. To the extent that the Bank makes "nondividend
distributions" to the Company, such distributions will be considered to result
in distributions from the balance of its bad debt reserve as of December 31,
1987 (or a lesser amount if the Bank's loan portfolio decreased since December
31, 1987) and then from the supplemental reserve for losses on loans ("Excess
Distributions"), and an amount based on the Excess Distributions will be
included in the Bank's taxable income. Nondividend distributions include
distributions in excess of the Bank's current and accumulated earnings and
profits, distributions in redemption of stock and distributions in partial or
complete liquidation. However, dividends paid out of the Bank's current or
accumulated earnings and profits, as calculated for federal income tax purposes,
will not be considered to result in a distribution from the Bank's bad debt
reserve. The amount of additional taxable income created from an Excess
Distribution is an amount that, when reduced by the tax attributable to the
income, is equal to the amount of the distribution. Thus, if, after the
Conversion, the Bank makes a "nondividend distribution," then approximately one
and one-half times the Excess Distribution would be includable in gross income
for federal income tax purposes, assuming a 34% corporate income tax rate
(exclusive of state and local taxes). See "REGULATION" for limits on the
payment of dividends by the Bank. The Bank does not intend to pay dividends
that would result in a recapture of any portion of its tax bad debt reserve.
CORPORATE ALTERNATIVE MINIMUM TAX. The Code imposes a tax on alternative
minimum taxable income ("AMTI") at a rate of 20%. The excess of the tax bad
debt reserve deduction using the percentage of taxable income method over the
deduction that would have been allowable under the experience method is treated
as a preference item for purposes of computing the AMTI. In addition, only 90%
of AMTI can be offset by net operating loss carryovers. AMTI is increased by an
amount equal to 75% of the amount by which the Bank's adjusted current earnings
exceeds its AMTI (determined without regard to this preference and prior to
reduction for net operating losses). For taxable years beginning after December
31, 1986, and before January 1, 1996, an environmental tax of 0.12% of the
excess of AMTI (with certain modification) over $2.0 million is imposed on
corporations, including the Bank, whether or not an Alternative Minimum Tax is
paid.
DIVIDENDS-RECEIVED DEDUCTION. The Company may exclude from its income 100%
of dividends received from the Bank as a member of the same affiliated group of
corporations. The corporate dividends-received deduction is generally 70% in
the case of dividends received from unaffiliated corporations with which the
Company and the Bank will not file a consolidated tax return, except that if the
Company or the Bank owns more than 20% of the stock of a corporation
distributing a dividend, then 80% of any dividends received may be deducted.
AUDITS. The Bank's federal income tax returns are in the process of being
audited through September 30, 1997. The Consolidated Financial Statements
include the effects of all probable adjustments related to the audit.
STATE TAXATION
DELAWARE. As a Delaware holding company not earning income in Delaware,
the Company is exempted from Delaware corporate income tax, but is required to
file an annual report with and pay an annual franchise tax to the State of
Delaware.
SOUTH CAROLINA. The provisions of South Carolina tax law mirror the
Code, with certain modifications, as it relates to savings and loans and banks.
The Bank is subject to South Carolina income tax at the rate of 6%. This rate
of tax is imposed on savings banks in lieu of the general state business
corporation income tax. The Bank's state income tax returns have not been
audited within the last five years.
-23-
<PAGE>
For additional information regarding taxation, see Note 9 of Notes to
Consolidated Financial Statements contained in the Annual Report.
ITEM 2. PROPERTIES
- -------------------
At September 30, 1998, the net book value of the Company's properties
(including land and buildings), fixtures, furniture and equipment was $4.1
million. The following table sets forth certain information regarding the
Company's offices at September 30, 1998, all of which are owned.
<TABLE>
<CAPTION>
APPROXIMATE
LOCATION YEAR OPENED SQUARE FOOTAGE DEPOSITS
- -------- ----------- -------------- -------------
(IN THOUSANDS)
<S> <C> <C> <C>
Main Office 1995(1) 24,500 $95,660
201 West Main Street
Laurens, SC 29360
Belton Office 1962 1,800 62,308
208 Anderson Street
Belton, SC 29627
Ware Shoals Office 1968 1,444 22,169
81 North Greenwood Avenue
Ware Shoals, SC 29692
Simpsonville Office 1977 3,668 25,967
514 North Main Street
Simpsonville, SC 29681
</TABLE>
___________
(1) The Bank occupied a smaller facility at the same location from 1955 to
1995.
ITEM 3. LEGAL PROCEEDINGS
- --------------------------
Periodically, there have been various claims and lawsuits involving the
Bank, such as claims to enforce liens, condemnation proceedings on properties in
which the Bank holds security interests, claims involving the making and
servicing of real property loans and other issues incident to the Bank's
business. Neither the Company nor the Bank is a party to any pending legal
proceedings that it believes would have a material adverse effect on the
financial condition or operations of the Company.
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, 1998.
-24-
<PAGE>
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
- -------------------------------------------------------------------------------
The Company's common stock has been listed on the Nasdaq National Market
since the Company's initial public offering on April 7, 1998. According to the
records of the Company's transfer agent, the Company had approximately 1,271
stockholders of record as of December 1, 1998. This number does not reflect
stockholders who hold their shares in "street name." The following table sets
forth the high and low sale price of the Company's common stock as of the close
of market and dividends paid in each the fiscal quarter's since the Company's
initial public offering.
<TABLE>
<CAPTION>
HIGH LOW DIVIDENDS
------- ------- ---------
<S> <C> <C> <C>
Fiscal 1988
Fourth Quarter... $20.00 $16.125 .15
Third Quarter.... $22.375 $19.00 --
</TABLE>
ITEM 6. SELECTED FINANCIAL DATA
- --------------------------------
<TABLE>
<CAPTION>
AT SEPTEMBER 30,
------------------------------------------------
1998 1997 1996 1995 1994
-------- -------- -------- -------- --------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
SELECTED BALANCE SHEET DATA:
Total assets................... $304,921 $247,499 $244,659 $233,780 $214,817
Investment securities.......... 24,010 24,378 37,892 29,823 32,819
Mortgage-backed securities..... 1,695 6,665 9,726 11,989 14,097
Loans receivable, net.......... 196,789 192,663 182,950 178,259 159,682
Loans held for sale............ 849 1,045 -- -- --
Deposit accounts............... 206,104 215,412 209,730 201,473 189,922
FHLB advances.................. -- -- 5,000 5,000 --
Total equity................... 95,330 29,235 26,740 25,692 23,367
</TABLE>
<TABLE>
<CAPTION>
FOR THE YEARS ENDED SEPTEMBER 30,
-----------------------------------------------
1998 1997 1996 1995 1994
------- ------- ------- ------- -------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
SELECTED OPERATING DATA:
Interest income............................ $19,880 $17,773 $16,974 $16,164 $15,361
Interest expense........................... 12,010 12,230 12,212 10,431 8,550
------- ------- ------- ------- -------
Net interest income........................ 7,870 5,543 4,762 5,733 6,811
Provision for loan losses (recovery of
allowance).............................. (105) 337 (7) 47 62
------- ------- ------- ------- -------
Net interest income after provision for
loan losses............................. 7,975 5,206 4,769 5,686 6,749
------- ------- ------- ------- -------
Other income............................... 246 202 227 218 107
Other operating expenses................... 2,857 2,362 3,877 (1) 2,379 2,255
------- ------- ------- ------- -------
Income before income taxes................. 5,364 3,046 1,119 3,525 4,601
Provision for income taxes................. 1,929 1,094 360 1,546 1,691
Cumulative effect of change in
accounting principle.................... -- -- -- -- 570(2)
------- ------- ------- ------- -------
Net income................................. $ 3,435 $ 1,952 $ 759 $ 1,979 $ 3,480
======= ======= ======= ======= =======
Basic and diluted earnings per share (3)... $0.53 N/A N/A N/A N/A
=======
</TABLE>
___________
(1) Includes one-time SAIF assessment of $1.2 million.
(2) Reflects adoption of Statement of Financial Accounting Standard No. 109,
"Accounting for Income Taxes."
(3) The Company's initial public offering closed on April 6, 1998. For purposes
of the earnings per share calculation for the year ended September 30,
1998, shares issued on April 6, 1998 have been assumed to be outstanding as
of April 1, 1998. Additionally, net income used in the calculation is for
the period from April 1, 1998 through September 30, 1998.
-25-
<PAGE>
<TABLE>
<CAPTION>
AT OR FOR THE YEARS ENDED SEPTEMBER 30,
---------------------------------------
1998 1997 1996 1995 1994
---------------------------------------
<S> <C> <C> <C> <C> <C>
SELECTED FINANCIAL RATIOS:
PERFORMANCE RATIOS:
Return on average assets (1).................... 1.22% 0.80% 0.32% 0.87% 1.62%
Return on average equity (2).................... 6.82 6.93 2.87 8.08 16.11
Average equity as a percent of average
assets......................................... 17.97 11.49 10.99 10.79 10.09
Interest rate spread (3)........................ 1.96 1.76 1.51 2.09 2.84
Net interest margin (4)......................... 2.89 2.33 2.04 2.59 3.24
Average interest-earning assets to
average interest-bearing liabilities........... 1.21 1.11 1.10 1.10 1.10
Other operating expenses as a
percent of average total assets................ 1.02 0.96 1.61 1.05 1.05
CAPITAL RATIOS:
Tangible........................................ 19.4 11.3 10.6 10.8 10.9
Core............................................ 19.4 11.3 10.6 10.8 10.9
Risk-based...................................... 40.8 23.3 22.2 23.1 23.6
ASSET QUALITY RATIOS:
Nonperforming loans as a percent of
loans receivable, net (5)...................... 0.40 0.48 0.56 0.52 0.84
Nonperforming loans as a percent of
total assets (6)............................... 0.26 0.54 0.45 0.44 0.81
Allowance for loan losses as a percent
of gross loans receivable...................... 0.36 0.44 0.35 0.32 0.37
Allowance for loan losses as a percent
of nonperforming loans......................... 96.57 93.58 65.24 63.10 46.28
Net charge-offs as a percent of
average outstanding loans.................. 0.01 0.07 (0.05) 0.05 --
</TABLE>
________________________________________
(1) Net income divided by average total assets.
(2) Net income divided by average total equity.
(3) Difference between weighted average yield on interest-earning assets and
weighted average cost of interest-bearing liabilities.
(4) Net interest income as a percentage of average interest-earning assets.
(5) Nonperforming loans consist of loans accounted for on a nonaccrual basis.
(6) Nonperforming assets consist of nonperforming loans and real estate
acquired in settlement of loans, but exclude restructured loans.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
- -------------------------------------------------------------------------
RESULTS OF OPERATIONS
- ----------------------
GENERAL
Management's discussion and analysis of financial condition and results of
operations is intended to assist in understanding the financial condition and
results of operations of the Company. The information contained in this section
should be read in conjunction with the Consolidated Financial Statements and
accompanying Notes thereto contained elsewhere in this report.
-26-
<PAGE>
OPERATING STRATEGY
The Company's business consists principally of attracting retail deposits
(primarily certificates of deposit) from the general public and using these
funds to originate mortgage loans secured by one- to four-family residences
located in South Carolina. To a lesser extent, the Company also originates
commercial real estate loans, home equity loans, builder construction loans,
commercial loans and savings account loans. The Company intends to continue to
fund its assets primarily with retail deposits, although FHLB-Atlanta advances
may be used as a supplemental source of funds.
The Company's profitability depends primarily on its net interest income,
which is the difference between the income it receives on its loan and
investment portfolio and its cost of funds, which consists of interest paid on
deposits and borrowings. Net interest income is also affected by the relative
amounts of interest-earning assets and interest-bearing liabilities. When
interest-earning assets equal or exceed interest-bearing liabilities, any
positive interest rate spread will generate net interest income. The Company's
profitability is also affected by the level of other operating income and
expenses. Other operating income includes service charges and fees, gain on
sale of mortgage loans and gain on sale of investments. Other operating
expenses primarily include compensation and benefits, occupancy and equipment
expenses, deposit insurance premiums and data processing expenses. The
Company's results of operations also are affected significantly by general
economic and competitive conditions, particularly changes in market interest
rates, government legislation and regulation and monetary and fiscal policies.
The Company's business strategy is to operate as a well-capitalized,
profitable and independent financial institution dedicated to financing home
ownership and providing quality customer service. In recent years the Company
has emphasized the origination for retention in its portfolio of adjustable-rate
mortgage loans in order to reduce its interest rate risk. Beginning in fiscal
year 1997, to increase the yield on its loan portfolio, the Company has
emphasized the origination for its portfolio of fixed-rate mortgage loans with
terms of 15 years or less and ARM loans with an interest rate that is fixed for
an initial period of ten years. In addition, the Company has purchased
conforming fixed-rate loans for its held for sale portfolio and plans to
continue this activity depending on market conditions. The Company relies
heavily on certificates of deposit as its source of funds. As a result, the
Company's cost of funds is generally higher than that of institutions that have
more checking and savings accounts. The Company's high cost of funds has
contributed to a lower interest rate spread and reduced profitability in recent
years. The Company intends to attempt to reduce its reliance on certificates of
deposit by increasing its emphasis on transaction accounts.
COMPARISON OF FINANCIAL CONDITION AT SEPTEMBER 30, 1998 AND 1997
Total assets increased $57.4 million, or 23.2%, to $304.9 million at
September 30, 1998 from $247.5 million at September 30, 1997. Loans receivable
increased $4.1 million to $196.8 million from $192.7 million. Following the
strategy begun in 1997, management continued to increase investment in loans and
decrease investment in mortgage-backed securities since loans offer the Company
the opportunity to earn higher yields. Mortgage-backed securities decreased to
$1.7 million from $6.7 million as a result of prepayments. Investment
securities decreased to $24.0 million from $24.4 million. The Company used the
cash generated by the reduction in its investment and mortgage-backed securities
portfolios to fund loan growth. Cash and cash equivalents increased to $73.9
million from $14.7 million as a result of the Company's initial public offering.
Total liabilities decreased $8.7 million, or 4.0%, to $209.6 million at
September 30, 1998. Deposit accounts decreased $9.3 million to $206.1 million
from $215.4 million. The decrease in deposit accounts was due largely to
depositors using approximately $28.7 million of funds on deposit at the Bank to
purchase stock of the Company in its initial public offering. The Company had
no FHLB advances in 1998 primarily due to the generation of funds in the initial
public offering.
Total equity increased $66.1 million, or 226.1%, to $95.3 million at
September 30, 1998 from $29.2 million at September 30, 1997. The increase was
due to $3.4 million in net income for the year ended September 30, 1998, an
increase of $635,000 in the unrealized gain on available-for-sale securities and
$62.6 million of net proceeds from the Company's initial stock offering.
-27-
<PAGE>
COMPARISON OF OPERATING RESULTS FOR THE YEARS ENDED SEPTEMBER 30, 1998 AND 1997
NET INCOME. Net income increased $1.5 million, or 76.0%, to $3.4 million
for the year ended September 30, 1998 from $2.0 million for the year ended
September 30, 1997. The increase was primarily the result of an increase in
interest income, a decrease in interest expense on FHLB borrowings, a recovery
of loan losses and a decline in deposit insurance premiums. This was offset by
an increase in employee compensation and real estate operations expense.
NET INTEREST INCOME. Net interest income increased $2.3 million, or 42.0%,
to $7.9 million for fiscal 1998 from $5.5 million for fiscal 1997. The
Company's interest rate spread increased 20 basis points to 1.96% for fiscal
1998 from 1.76% for fiscal 1997 as the Company experienced a 17 basis point
decrease in the yield on its interest-earning assets and a 37 basis point
decrease in the cost of its interest-bearing liabilities.
Total interest income increased $2.1 million, or 11.9%, from fiscal 1997 to
fiscal 1998. Interest income on loans receivable increased $756,000 largely as
a result of an increase of $5.5 million, or 2.9%, in the average balance of
loans and a 16 basis point increase in the yield on loans receivable for the
year ended September 30, 1998. The growth in interest income on loans was
partially offset by a reduction in interest income on mortgage-backed
securities, as the Company reduced the average balance and yield of these
investments. The average balance of interest-earning assets increased to $272.2
million in 1998 from $237.9 million in 1997. The increase in the average
balance was due in part to funds received from the proceeds of the initial
public offering and an increase in the average balance of loans receivable. The
yield on the Company's interest earning assets decreased to 7.30% from 7.47% as
a result of market trends and the investment of the offering proceeds in lower
yielding, short term investments.
Total interest expense decreased $220,000, or 1.8%, from fiscal 1997 to
fiscal 1998. The average balance of interest-bearing liabilities increased
$10.6 million, or 4.96%, while the average rate paid decreased to 5.34% from
5.71%. Interest paid on passbook, NOW and money market accounts decreased a
total of $35,000 primarily because of a decrease in the average balance and rate
of such accounts. Interest paid on certificates of deposit increased $41,000
because of an increase in the average balance of such accounts. This was
partially offset by a decrease in the average rate paid on certificates of
deposit to 5.53% from 5.91%. Interest paid on FHLB advances decreased $226,000
as a result of no borrowings in the year ended September 30, 1998.
PROVISION FOR LOAN LOSSES. Provisions for loan losses are charged to
operations to bring the total allowance for loan losses to a level considered by
management to be adequate to provide for estimated losses based on management's
evaluation of such factors as the delinquency status of loans, current economic
conditions, the net realizable value of the underlying collateral and prior loan
loss experience. The provision for loan losses was a net recovery of $105,000
in fiscal year 1998 compared with a provision of $337,000 in fiscal 1997. This
recovery came as the result of a loan previously classified as a loss being paid
off. Additionally, the Company added $10,000 to the allowance for loan losses
to provide for estimated losses on specific problem loans. It was not necessary
for the Company to add to the allowance for loan losses based on its re-
evaluation of the risks inherent in the loan portfolio because upon analysis
current reserves proved adequate. At September 30, 1998, the Company's
allowance for loan losses totalled $760,000 which equaled 0.36% of total loans.
Although management uses the best information available, future adjustments to
the allowance may be necessary due to changes in economic, operating, regulatory
and other conditions that may be beyond the Company's control. While the Company
maintains its allowance for loan losses at a level which it considers to be
adequate to provide for estimated losses, there can be no assurance that further
additions will not be made to the allowance for loan losses or that actual
losses will not exceed the estimated amounts.
OTHER INCOME. Other income increased $44,000, or 21.8%, to $246,000 for
fiscal 1998 from $202,000 for fiscal 1997. Substantially all of the Company's
other income is derived from service charges and fees. Service charges and fees
totalled $228,000 in fiscal 1998 compared with $206,000 in fiscal 1997. Gain on
sale of mortgage loans increased to $18,000 in fiscal 1998 from $6,000 in fiscal
1997 as a result of an increase in loan sales in 1998. The Company had no sale
of investments in fiscal 1998 resulting in no gains or losses compared to a loss
of $13,000 in fiscal 1997.
OTHER OPERATING EXPENSES. Other operating expenses were $2.9 million in
fiscal 1998 compared to $2.4 million in fiscal 1997. Employee compensation and
benefits expense increased $263,000, or 18.1%, as a result of normal wage
increases and new costs associated with the implementation of the Employee Stock
Ownership Plan.
-28-
<PAGE>
Expense from real estate operations was $69,000 in fiscal year 1998 compared
with income of $167,000 in fiscal 1997 as a result of gains on sales of real
estate owned.
INCOME TAXES. The provision for income taxes increased to $2.0 million for
fiscal 1998 from $1.1 million for fiscal 1997. The income tax provision was
higher in fiscal 1998 because of higher taxable income.
COMPARISON OF OPERATING RESULTS FOR THE YEARS ENDED SEPTEMBER 30, 1997 AND 1996
NET INCOME. Net income increased $1.2 million, or 157.2%, to $2.0 million
for the year ended September 30, 1997 from $759,000 for the year ended September
30, 1996. The results for fiscal 1996 reflect the payment of a one-time,
industry wide special assessment to recapitalize the SAIF, which for the Company
was $1.2 million. Without the payment of the SAIF special assessment, net
income for fiscal 1996 would have been $1.5 million.
NET INTEREST INCOME. Net interest income increased $781,000, or 16.4%, to
$5.5 million for fiscal 1997 from $4.8 million for fiscal 1996. The Company's
interest rate spread increased 25 basis points to 1.76% for fiscal 1997 from
1.51% for fiscal 1996 as the Company experienced a 19 basis point increase in
the yield on its interest-earning assets and a 6 basis point decrease in the
cost of its interest-bearing liabilities.
Total interest income increased $799,000, or 4.7%, from fiscal 1996 to
fiscal 1997. Interest income on loans receivable increased $996,000 largely as
a result of an increase of $11.6 million, or 6.5%, in the average balance of
loans. The Company's average yield on loans increased 5 basis points to 7.93%
in fiscal 1997. The growth in interest income on loans was partially offset by
a reduction in interest income on mortgage-backed securities and federal funds
sold and interest-bearing deposits, as the Company reduced the average balance
of these investments. The yield on the Company's interest-earning assets
increased to 7.47% from 7.28% as a result of having a larger percentage of
interest-earning assets invested in loans.
Total interest expense increased $18,000, or 0.1%, from fiscal 1996 to
fiscal 1997. The average balance of interest-bearing liabilities increased $2.6
million, or 1.2%, while the average rate paid decreased to 5.71% from 5.77%.
Interest paid on passbook, NOW and money market accounts decreased a total of
$25,000 primarily because of a decrease in the average balance of such accounts.
Interest paid on certificates of deposit increased $144,000 because of an
increase in the average balance of such accounts. This was partially offset by
a decrease in the average rate paid on certificates of deposit to 5.91% from
6.00%. Interest paid on FHLB advances decreased $101,000 as the decrease in the
average balance of advances was partially offset by the increase in the average
rate paid. By the end of fiscal 1997, the Company had repaid all of its FHLB
advances.
PROVISION FOR LOAN LOSSES. The provision for loan losses was $337,000 in
fiscal 1997 compared with a recovery of $7,000 in fiscal 1996. During fiscal
1997, the Company added $137,000 to the allowance for loan losses to provide for
estimated losses on specific problem loans. In addition, the Company added an
additional $200,000 to the allowance for loan losses based on its re-evaluation
of the risks inherent in the loan portfolio. At September 30, 1997, the
Company's allowance for loan losses totalled $874,000, which equaled 0.44% of
total loans.
OTHER INCOME. Other income decreased $25,000, or 11.0%, to $202,000 for
fiscal 1997 from $227,000 for fiscal 1996. Substantially all of the Company's
other income is derived from service charges and fees. Service charges and fees
totalled $205,000 in fiscal 1997 compared with $206,000 in fiscal 1996. Gain on
sale of mortgage loans decreased to $6,000 in fiscal 1997 from $16,000 in fiscal
1996 as a result of fewer loan sales in 1997. The Company realized a loss of
$13,000 on the sale of investments in fiscal 1997 compared with a gain of $2,000
in fiscal 1996.
OTHER OPERATING EXPENSES. Other operating expenses were $2.4 million in
fiscal 1997 compared to $3.9 million in fiscal 1996. Included in other
operating expenses for fiscal 1996 is the SAIF special assessment. Excluding
the SAIF special assessment, other operating expenses were $2.6 million for
fiscal 1996. As a result of the recapitalization of the SAIF, the FDIC
substantially reduced deposit insurance premiums. Since January 1, 1997, the
Company has paid deposit insurance premiums at the rate of $.065 per $100 of
deposits. Prior to the recapitalization of the SAIF, deposit insurance premiums
were $0.23 per $100 of deposits. Employee compensation and benefits expense
increased $106,000, or 7.9%, as a result of an increase in directors' fees,
normal wage increases and an increase in benefits costs. Income from real
estate operations was $167,000 in fiscal 1997 as a result of gains on sales of
real estate owned, as compared with $120,000 in fiscal 1996.
-29-
<PAGE>
INCOME TAXES. The provision for income taxes increased to $1.1 million for
fiscal 1997 from $360,000 for fiscal 1996. Income taxes in fiscal 1996 were
lower because of the SAIF special assessment.
AVERAGE BALANCES, INTEREST AND AVERAGE YIELDS/COSTS
The following table sets forth certain information for the periods
indicated regarding average balances of assets and liabilities as well as the
total dollar amounts of interest income from average interest-earning assets and
interest expense on average interest-bearing liabilities and average yields and
costs. Such yields and costs for the periods indicated are derived by dividing
income or expense by the average balances of assets or liabilities,
respectively, for the periods presented.
<TABLE>
<CAPTION>
FOR THE YEARS ENDED SEPTEMBER 30,
----------------------------------------------------------------------------------------------
1998 1997 1996
---------------------------- ------------------------------- -----------------------------
INTEREST AVERAGE INTEREST AVERAGE INTEREST AVERAGE
AVERAGE AND YIELD/ AVERAGE AND YIELD/ AVERAGE AND YIELD/
BALANCE DIVIDENDS COST BALANCE DIVIDENDS COST BALANCE DIVIDENDS COST
-------- --------- ------- --------- --------- ------- --------- --------- -------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Interest-earning assets:
Loans receivable, net(1).... $195,232 $15,790 8.09% $189,689 $15,034 7.93% $178,081 $14,038 7.88%
Mortgage-backed securities.. 4,268 208 4.87 8,401 450 5.36 11,192 626 5.59
Investment securities(2).... 27,104 1,442 5.32 32,397 1,856 5.73 35,684 1,815 5.09
FHLB stock.................. 2,042 149 7.31 2,042 148 7.25 2,042 147 7.20
Federal funds sold and
overnight deposits......... 43,546 2,291 5.26 5,335 285 5.34 6,317 348 5.51
-------- --------- ------- --------- --------- ------- --------- --------- -------
Total interest-
earning assets.......... 272,192 19,880 7.30 237,864 17,773 7.47 233,316 16,974 7.28
--------- ------- --------- ------- --------- -------
Noninterest-earning assets..... 8,219 7,315 7,328
-------- --------- ---------
Total average assets..... $280,411 $245,179 $240,644
======== ========= =========
Interest-bearing
liabilities(3):
Passbook accounts........... $ 11,025 304 2.27 $ 11,561 340 2.94 $ 12,270 362 2.95
NOW and money market
accounts................... 3,966 90 2.76 3,751 89 2.37 3,784 92 2.43
Certificates of deposit..... 209,893 11,616 5.53 195,853 11,575 5.91 190,572 11,431 6.00
-------- --------- ------- --------- --------- ------- --------- --------- -------
Total deposits........... 224,884 12,010 5.34 211,165 12,004 5.68 206,626 11,885 5.75
FHLB advances............... -- -- -- 3,082 226 7.33 5,000 327 6.54
-------- --------- ------- --------- --------- ------- --------- --------- -------
Total interest-
bearing liabilities..... 224,884 12,010 5.34 214,247 12,230 5.71 211,626 12,212 5.77
--------- ------- --------- ------- --------- -------
Noninterest-bearing
liabilities................... 5,125 2,759 2,570
-------- --------- ---------
Total average
liabilities............. 230,009 217,006 214,196
-------- --------- ---------
Average equity................. 50,402 28,173 26,448
-------- --------- ---------
Total average liabilities
and equity................. $280,411 $245,179 $240,644
======== ========= =========
Net interest income............ $ 7,780 $ 5,543 $ 4,762
========= ========= =========
Interest rate spread........... 1.96% 1.76% 1.51%
======= ======= =======
Net interest margin............ 2.89% 2.33% 2.04%
======= ======= =======
Ratio of average interest-
earning assets to average
interest-bearing liabilities.. 1.21x 1.11x 1.10x
</TABLE>
- -----------
(1) Loans receivable, net includes loans held-for-sale and nonaccrual loans.
Interest on loans receivable does not include interest on nonaccrual loans.
(2) Yield information does not give affect to changes in fair value that are
reflected as a component of equity.
(3) Does not include escrow balances.
-30-
<PAGE>
RATE/VOLUME ANALYSIS
The following table sets forth the effects of changing rates and volumes on
the interest income and interest expense of the Company. Information is provided
with respect: (i) to effects attributable to changes in volume (changes in
volume multiplied by prior rate); and (ii) to effects attributable to changes in
rate (changes in rate multiplied by prior volume). The net change attributable
to the combined impact of volume and rate has been allocated proportionately to
the change due to volume and the change due to rate.
<TABLE>
<CAPTION>
1998 COMPARED TO 1997 1997 COMPARED TO 1996
--------------------------------- ------------------------------
INCREASE (DECREASE) INCREASE (DECREASE)
DUE TO DUE TO
------------------- ------ ------------------- -----
RATE VOLUME NET RATE VOLUME NET
----- ------ ------ ----- ------ -----
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
Interest-earning assets:
Loans receivable, net (1)........................... $ 309 $ 447 $ 756 $ 88 $ 908 $ 996
Mortgage-backed securities.......................... (38) (204) (242) (25) (151) (176)
Investment securities............................... (126) (288) (414) 153 (112) 41
FHLB stock.......................................... 1 -- 1 1 -- 1
Federal funds sold and overnight deposits........... (4) 2,010 2,006 (11) (52) (63)
----- ------ ------ ----- ----- -----
Total net change in income on interest-earning assets.. 142 1,965 2,107 206 593 799
----- ------ ------ ----- ----- -----
Interest-bearing liabilities:
Passbook accounts................................... (20) (16) (36) (1) (21) (22)
NOW and money market accounts....................... (4) 5 1 (2) (1) (3)
Certificates of deposit............................. (355) 396 41 (171) 315 144
----- ------ ------ ----- ----- -----
Total average deposits........................... (379) 385 6 (174) 293 119
FHLB advances....................................... -- (226) (226) 48 (149) (101)
----- ------ ------ ----- ----- -----
Total net change in expense on interest-bearing
liabilities........................................... (379) 159 (220) (126) 144 18
----- ------ ------ ----- ----- -----
Net change in net interest income...................... $ 521 $1,806 $2,327 $ 332 $ 449 $ 781
===== ====== ====== ===== ===== =====
</TABLE>
- -----------
(1) Does not include interest on nonaccrual loans.
ASSET AND LIABILITY MANAGEMENT
QUANTITATIVE ASPECTS OF MARKET RISK. The Company does not maintain a
trading account for any class of financial instrument nor does the Company
engage in hedging activities or purchase high-risk derivative instruments.
Furthermore, the Company is not subject to foreign currency exchange rate risk
or commodity price risk. For information regarding the sensitivity to interest
rate risk of the Company's interest-earning assets and interest-bearing
liabilities, see the tables under "Lending Activities -- Maturity of Loan
Portfolio," "-- Investment Activities" and "-- Deposit Activities and Other
Sources of Funds."
QUALITATIVE ASPECTS OF MARKET RISK. The Company's principal financial
objective is to achieve long-term profitability while reducing its exposure to
fluctuating market interest rates. The Company has sought to reduce the exposure
of its earnings to changes in market interest rates by attempting to manage the
mismatch between asset and liability maturities and interest rates. The
principal element in achieving this objective is to increase the interest-rate
sensitivity of the Company's interest-earning assets by retaining for its
portfolio loans with interest rates subject to periodic adjustment to market
conditions and selling fixed-rate one- to- four family mortgage loans with terms
over 15
-31-
<PAGE>
years. In addition, the Company maintains an investment portfolio of U.S.
Treasury and U.S. Government agency obligations with contractual maturities of
between one and five years. The Company relies on retail deposits as its primary
source of funds. Management believes retail deposits, compared to brokered
deposits, reduce the effects of interest rate fluctuations because they
generally represent a more stable source of funds.
The Company uses interest rate sensitivity analysis to measure its interest
rate risk by computing changes in NPV (net portfolio value) of its cash flows
from assets, liabilities and off-balance sheet items in the event of a range of
assumed changes in market interest rates. NPV represents the market value of
portfolio equity and is equal to the market value of assets minus the market
value of liabilities, with adjustments made for off-balance sheet items. This
analysis assesses the risk of loss in market risk sensitive instruments in the
event of a sudden and sustained 100 to 400 basis point increase or decrease in
market interest rates with no effect given to any steps that management might
take to counter the effect of that interest rate movement. Using data compiled
by the FHLB, the Company receives a report which measures interest rate risk by
modeling the change in NPV over a variety of interest rate scenarios.
The following table is provided by the FHLB and sets forth the change in
the Company's NPV at September 30, 1998, based on FHLB assumptions, that would
occur in the event of an immediate change in interest rates, with no effect
given to any steps that management might take to counteract that change.
<TABLE>
<CAPTION>
Basis Point ("bp") Estimated Change in
Change in Rates Net Portfolio Value
------------------ -------------------
(In thousands)
<S> <C>
+400 (8,685)
+300 (5,651)
+200 (2,616)
+100 (1,308)
0 --
(100) 1,481
(200) 2,962
(300) 3,483
(400) 4,004
</TABLE>
The above table illustrates, for example, that an instantaneous 200 basis
point increase in market interest rates at September 30, 1998 would reduce the
Company's NPV by approximately $2.6 million, or 4.2%, at that date.
-32-
<PAGE>
The following table prepared with information supplied by the FHLB presents
the Company's financial instruments that are sensitive to changes in interest
rates, categorized by expected maturity.
<TABLE>
<CAPTION>
AFTER 3
WITHIN ONE YEAR YEARS TO BEYOND 5
1 YEAR TO 3 YEARS 5 YEARS YEARS TOTAL
-------- ---------- -------- -------- --------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Interest-earning assets:
Loans receivable............................ $159,558 $ 15,306 $ 8,265 $14,509 $197,638
Mortgage-backed securities.................. 1,142 553 -- -- 1,695
Investment securities....................... -- 24,010 -- -- 24,010
FHLB stock.................................. 2,042 -- -- -- 2,042
Federal funds sold and
overnight deposits....................... 72,003 -- -- -- 72,003
-------- -------- ------- ------- --------
Total interest-earning assets............ 234,745 39,869 8,265 14,509 297,388
======== ======== ======= ======= ========
Interest-bearing liabilities:
Passbook accounts........................... 1,691 2,568 1,674 4,013 9,946
NOW and money market accounts............... 1,315 1,150 310 680 3,455
Certificates of deposit..................... 132,582 59,084 1,037 -- 192,703
-------- -------- ------- ------- --------
Total deposits........................... 135,588 62,802 3,021 4,693 206,104
FHLB advances................................ -- -- -- -- --
-------- -------- ------- ------- --------
Total interest-bearing liabilities....... $135,588 $ 62,802 $ 3,021 $ 4,693 $206,104
======== ======== ======= ======= ========
Interest sensitivity gap per period.......... $ 99,157 $(22,933) $ 5,244 $ 9,816 $ 91,284
Cumulative interest sensitivity gap.......... $ 99,157 $ 76,224 $81,468 $91,284
Percentage of cumulative gap to
total earning assets...................... 33.3% 25.6% 27.4% 30.7%
Cumulative ratio of interest sensitive
assets to interest sensitive liabilities.. 1.73% 0.63% 2.74% 3.09%
</TABLE>
Certain assumptions utilized by the FHLB in assessing the interest rate
risk of savings associations within its region were utilized in preparing the
preceding tables. These assumptions relate to interest rates, loan prepayment
rates, deposit decay rates, and the market values of certain assets under
differing interest rate scenarios, among others.
As with any method of measuring interest rate risk, certain shortcomings
are inherent in the method of analysis presented in the foregoing tables. For
example, although certain assets and liabilities may have similar maturities or
periods to repricing, they may react in different degrees to changes in market
interest rates. Also, the interest rates on certain types of assets and
liabilities may fluctuate in advance of changes in market interest rates, while
interest rates on other types may lag behind changes in market rates.
Additionally, certain assets, such as ARM loans, have features which restrict
changes in interest rates on a short-term basis and over the life of the asset.
Further, in the event of a change in interest rates, expected rates of
prepayments on loans and early withdrawals from certificates could deviate
significantly from those assumed in calculating the table.
LIQUIDITY AND CAPITAL RESOURCES
The Company's primary sources of funds are customer deposits, proceeds from
principal and interest payments on and the sale of loans, maturing securities
and FHLB advances. While maturities and scheduled amortization of loans are a
predictable source of funds, deposit flows and mortgage prepayments are greatly
influenced by general interest rates, economic conditions and competition.
The Company must maintain an adequate level of liquidity to ensure the
availability of sufficient funds to fund loan originations and deposit
withdrawals, to satisfy other financial commitments and to take advantage of
investment opportunities. The Company generally maintains sufficient cash and
short-term investments to meet short-term liquidity needs. At September 30,
1998, cash and cash equivalents totalled $73.9 million, or 24.2% of total
assets, and investment
-33-
<PAGE>
securities classified as available-for-sale totalled $6.9 million. At September
30, 1998, the Company also maintained, but did not draw upon, an uncommitted
credit facility with the FHLB-Atlanta, which provided for immediately available
advances up to an aggregate amount of $32.0 million.
OTS regulations require savings institutions to maintain an average daily
balance of liquid assets (cash and eligible investments) equal to at least 4.0%
of the average daily balance of its net withdrawable deposits and short-term
borrowings. The Company's actual liquidity ratio at September 30, 1998 was
39.6%.
The Company's primary investing activity is the origination of one- to
four-family mortgage loans. During the years ended September 30, 1998, 1997 and
1996, the Company originated $43.5 million, $37.0 million and $36.5 million of
such loans, respectively. At September 30, 1998, the Company had loan
commitments totalling $1.1 million, unused lines of credit of $7.9 million and
undisbursed loans in process totalling $14.5 million. The Company anticipates
that it will have sufficient funds available to meet current loan commitments.
Certificates of deposit that are scheduled to mature in less than one year from
September 30, 1998 totalled $132.6 million. Historically, the Company has been
able to retain a significant amount of its deposits as they mature.
OTS regulations require the Bank to maintain specific amounts of regulatory
capital. As of September 30, 1998, the Bank complied with all regulatory
capital requirements as of that date with tangible, core and risk-based capital
ratios of 19.4%, 19.4% and 40.8%, respectively.
YEAR 2000 ISSUES
As the year 2000 approaches, the Bank's information and data processing
system must be assessed to insure appropriate operation after December 31, 1999.
Many systems in use worldwide may not be able to interpret dates after December
31, 1999 appropriately because such systems allow only two digits to indicate
the year in a date. Programmers initially chose January 1, 1900 as the first day
to be recognized by their software. Subsequently, systems have been created
using the two-digit method that could cause systems to function improperly or
fail on January 1, 2000. The problem could reside in computer programs, computer
hardware, or electronic devices that reference dates in the course of their
functions. Also, the Bank must consider the potential problems that Year 2000
could pose for third party service providers.
Year 2000 risk is present in virtually all of the Bank's normal operating
activities. To confront these risks, the Bank has developed a Year 2000 Plan,
which has been reviewed by senior management and the Board of Directors. The
Plan contains a review of Bank systems that could be affected by Year 2000
problems along with an assessment of the potential impact that Year 2000 system
problems could pose to the Bank's normal operation. Additionally, the Bank has
received Year 2000 readiness certifications from third party service providers,
whose services have been deemed critical to Bank operations. For critical
systems, contingency plans have been developed, which may include alternate
processing methods and/or manual processing. The Office of Thrift Supervision
is monitoring the Bank's Year 2000 progress.
The Bank's primary data processing provider is FiServ. FiServ has
developed a Year 2000 Plan and provides the Bank with periodic updates. FiServ
completed all program maintenance associated with its Year 2000 Plan in
November 1998. FiServ's Year 2000 activities are also monitored by the OTS.
The Bank has begun testing its software and hardware interfaces in conjunction
with FiServ's system and will conclude testing in early 1999.
The external costs associated with the Bank's Year 2000 compliance are
expected to be less than $50,000. The Bank does not track internal costs as
these are related to normal payroll costs. At this time, it is not possible to
make a reasonable estimate of the costs to the Company if the Bank or any
critical third party provider failed to complete Year 2000 measures as
scheduled. However, those costs would likely have a material impact on the
Company.
IMPACT OF ACCOUNTING PRONOUNCEMENTS AND REGULATORY POLICIES
See Note 1 to the Consolidated Financial Statements for a discussion of the
anticipated impact of recently issued accounting statements.
-34-
<PAGE>
EFFECT OF INFLATION AND CHANGING PRICES
The financial statements and related financial data presented herein have
been prepared in accordance with GAAP, which require the measurement of
financial position and operating results be in terms of historical dollars
without considering the change in the relative purchasing power of money over
time due to inflation. The primary impact of inflation is reflected in the
increased cost of the Company's operations. Unlike most industrial companies,
virtually all the assets and liabilities of a financial institution are monetary
in nature. As a result, interest rates generally have a more significant impact
on a financial institution's performance than do general levels of inflation.
Interest rates do not necessarily move in the same direction or to the same
extent as the prices of goods and services.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
- --------------------------------------------------------------------
For a discussion of the Company's market risk, see "Asset and Liability
Management" under Item 7 of this Form 10-K.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
- -----------------------------------------------------
The financial statements listed in the index to Consolidated Financial
Statement at Item 14 of this Form 10-K are incorporated by reference into this
Item 8 of Part II of this Form 10-K.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
- -------------------------------------------------------------------------
FINANCIAL DISCLOSURE
- --------------------
Not applicable.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
- ------------------------------------------------------------
EXECUTIVE OFFICERS
The following table sets forth certain information regarding the executive
officers of the Company.
<TABLE>
<CAPTION>
Name Age(1) Position
- ---- ------ --------
<S> <C> <C>
J. Edward Wells 59 Chairman of the Board, President, Chief Executive Officer and Secretary
Edwin I. Shealy 51 Chief Financial Officer and Treasurer
</TABLE>
The following table sets forth certain information regarding the executive
officers of the Bank.
<TABLE>
<CAPTION>
Name Age(1) Position
- ---- ------ --------
<S> <C> <C>
J. Edward Wells 59 President, Chief Executive Officer and Director
Edwin I. Shealy 51 Chief Financial Officer and Treasurer
James H. Wasson 54 Vice President and Secretary
John M. Swofford 53 Vice President
Will B. Ferguson 41 Vice President
</TABLE>
- -----------
(1) As of September 30, 1998.
-35-
<PAGE>
J. Edward Wells is the President and Chief Executive Officer of the Bank,
positions he has held since 1972. Mr. Wells joined the Bank in 1967.
Edwin I. Shealy is the Chief Financial Officer and Treasurer of the Bank,
positions he has held since 1990.
James H. Wasson, Jr. is Secretary and Vice President of the Bank responsible
for mortgage lending, positions he has held since 1977. Mr. Wasson has been
employed by the Bank since 1968.
John M. Swofford is a Vice President of the Bank and manager of the Bank's
Laurens branch, positions he has held since 1988. From 1976 to 1988, Mr.
Swofford served as the manager of the Bank's Simpsonville branch.
Will B. Ferguson is a Vice President of the Bank, a position he has held
since 1995. Mr. Ferguson has been employed by the Bank since 1984.
The information contained under the section captioned "Proposal 1 --
Election of Directors" contained in the Company's Proxy Statement is
incorporated herein by reference. Reference is made to the cover page of this
report for information regarding compliance with Section 16(a) of the Exchange
Act.
ITEM 11. EXECUTIVE COMPENSATION
- --------------------------------
The information contained under the sections captioned "Executive
Compensation" and "Directors' Compensation" in the Proxy Statement is
incorporated herein by reference.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
- ------------------------------------------------------------------------
(a) Security Ownership of Certain Beneficial Owners
Information required by this item is incorporated herein by reference to
the section captioned "Security Ownership of Certain Beneficial Owners
and Management" in the Proxy Statement.
(b) Security Ownership of Management
The information required by this item is incorporated herein by
reference to the sections captioned "Security Ownership of Certain
Beneficial Owners and Management" in the Proxy Statement.
(c) Changes in Control
The Company is not aware of any arrangements, including any pledge by
any person of securities of the Company, the operation of which may at a
subsequent date result in a change in control of the Company.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
- --------------------------------------------------------
The information set forth under the section captioned "Transactions with
Management" in the Proxy Statement is incorporated herein by reference.
-36-
<PAGE>
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
- ---------------------------------------------------------------------------
(a) The following documents are filed as part of this report:
1. Financial Statements
Page
----
Independent Auditors' Report................................... F-1
Consolidated Balance Sheets as of September 30, 1998 and 1997.. F-2
Consolidated Statements of Income for the Years Ended
September 30, 1998, 1997 and 1996............................ F-3
Consolidated Statements of Equity
for the Years Ended September 30, 1998, 1997 and 1996........ F-4
Consolidated Statements of Cash Flows for the Years Ended
September 30, 1998, 1997 and 1996............................ F-5
Notes to Consolidated Financial Statements..................... F-7
2. Financial Statement Schedules
All schedules have been omitted as the required information is either
inapplicable or included in the Consolidated Financial Statements or related
Notes contained in the Annual Report.
3. Exhibits
The exhibits listed below are filed as part of this Annual Report on
Form 10-K or are incorporated by reference herein.
3.1 Certificate of Incorporation of Heritage Bancorp, Inc. (incorporated
by reference to Exhibit 3.1 to the Company's Registration Statement on
Form S-1 (File No. 333-41857))
3.2 Bylaws of Heritage Bancorp, Inc. (incorporated by reference to Exhibit
3.2 to the Company's Registration Statement on Form S-1 (File No. 333-
41857))
10.1 Employment Agreement with J. Edward Wells
10.2 Form of Severance Agreement for Executive Officers
10.3 Heritage Federal Bank Employee Severance Compensation Plan
21 Subsidiaries of the Registrant
27 Financial Data Schedule
(b) Reports on Form 8-K
No Reports on Form 8-K were filed during the quarter ended September 30,
1998.
-37-
<PAGE>
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.
HERITAGE BANCORP, INC.
Date: December 29, 1998 By: /s/ J. Edward Wells
--------------------------------------
J. Edward Wells
President and Chief Executive Officer
Pursuant to 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 and on the dates indicated.
<TABLE>
<CAPTION>
SIGNATURES TITLE DATE
- ---------- ----- ----
<S> <C> <C>
/s/ J. Edward Wells President, Chief Executive Officer December 29, 1998
- -------------------------- and Director (Principal Executive Officer)
J. Edward Wells
/s/ Edwin I. Shealy Chief Financial Officer (Principal December 29, 1998
- -------------------------- Financial and Accounting Officer)
Edwin I. Shealy
/s/ Aaron H. King Director December 29, 1998
- --------------------------
Aaron H. King
/s/ J. Riley Bailes Director December 29, 1998
- ---------------------------
J. Riley Bailes
/s/ John H. Lake Director December 29, 1998
- ---------------------------
John H. Lake
/s/ John C. Owings, II Director December 29, 1998
- ---------------------------
John C. Owings, II
</TABLE>
-38-
<PAGE>
[Deloitte & Touche Logo]
INDEPENDENT AUDITORS' REPORT
Board of Directors
Heritage Bancorp, Inc.:
We have audited the accompanying consolidated balance sheets of Heritage
Bancorp, Inc. and its subsidiary (the "Company") as of September 30, 1998 and
1997, and the related consolidated statements of income, equity and cash flows
for each of the three years in the period ended September 30, 1998. These
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, such consolidated financial statements present fairly, in all
material respects, the financial position of the Company at September 30, 1998
and 1997, and the results of its operations and its cash flows for each of the
three years in the period ended September 30, 1998 in conformity with generally
accepted accounting principles.
/s/ Deloitte & Touche LLP
November 6, 1998
F-1
<PAGE>
HERITAGE BANCORP, INC. AND SUBSIDIARY
<TABLE>
<CAPTION>
CONSOLIDATED BALANCE SHEETS
SEPTEMBER 30, 1998 AND 1997
(IN THOUSANDS OF DOLLARS)
- ----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
ASSETS 1998 1997
Cash $ 1,917 $ 2,012
Federal funds sold and overnight interest-bearing deposits 72,003 12,647
---------- ---------
Total cash and cash equivalents 73,920 14,659
Investment securities (Note 2):
Held-to-maturity - at amortized cost (fair value: 1998 - $17,208; 1997 -
$15,954) 17,112 15,988
Available-for-sale - at fair value (amortized cost: 1998 - $3,563; 1997 -
$6,063) 6,898 8,390
Mortgage-backed securities - held to maturity - at amortized cost
(fair value: 1998 - $1,691; 1997 - $6,635) (Note 3) 1,695 6,665
Loans receivable - net (Notes 4 and 8) 196,789 192,663
Loans held-for-sale - at lower of cost or market (market value:
1998 - $869; 1997 - $1,065) 849 1,045
Office properties and equipment - net (Note 5) 4,103 4,278
Federal Home Loan Bank Stock - at cost (Note 8) 2,042 2,042
Accrued interest receivable 1,335 1,242
Real estate acquired in settlement of loans - net (Note 6) - 410
Other assets 178 117
---------- ---------
TOTAL $ 304,921 $ 247,499
========== =========
LIABILITIES AND EQUITY
LIABILITIES:
Deposit accounts (Note 7) $ 206,104 $ 215,412
Accrued interest on deposit accounts 359 338
Other liabilities (Note 9) 3,128 2,514
---------- ---------
Total liabilities 209,591 218,264
---------- ---------
COMMITMENTS AND CONTINGENCIES (Note 10)
EQUITY:
Common stock of $0.01 par value per share. Authorized 10,000,000 shares,
issued and outstanding at September 30, 1998 - 4,628,750 46 -
Additional paid-in capital 67,987 -
Retained income - substantially restricted (Notes 9 and 12) 30,565 27,769
Unallocated ESOP shares (Note 11) (5,369) -
Unrealized gain on available-for-sale securities, net of taxes (Note 9) 2,101 1,466
---------- ---------
Total equity 95,330 29,235
---------- ---------
TOTAL $ 304,921 $ 247,499
========== =========
</TABLE>
See notes to consolidated financial statements.
F-2
<PAGE>
HERITAGE BANCORP, INC. AND SUBSIDIARY
<TABLE>
<CAPTION>
CONSOLIDATED STATEMENTS OF INCOME
YEARS ENDED SEPTEMBER 30, 1998, 1997 AND 1996
(IN THOUSANDS OF DOLLARS, EXCEPT PER SHARE DATA)
- -----------------------------------------------------------------------------------------------------------------------
YEAR ENDED SEPTEMBER 30,
------------------------------------------
1998 1997 1996
<S> <C> <C> <C>
INTEREST INCOME:
Loans $ 15,790 $ 15,034 $ 14,038
Investment securities and other 3,882 2,289 2,310
Mortgage-backed securities 208 450 626
--------- --------- ---------
Total interest income 19,880 17,773 16,974
--------- --------- ---------
INTEREST EXPENSE:
Deposits 12,010 12,004 11,885
Federal Home Loan Bank borrowings - 226 327
--------- --------- ---------
Total interest expense 12,010 12,230 12,212
--------- --------- ---------
NET INTEREST INCOME 7,870 5,543 4,762
(RECOVERY OF ALLOWANCE)
PROVISION FOR LOAN LOSSES (Note 4) (105) 337 (7)
--------- --------- ---------
NET INTEREST INCOME AFTER PROVISION FOR
LOAN LOSSES 7,975 5,206 4,769
--------- --------- ---------
OTHER INCOME:
Service charges and fees 228 205 206
Gain on sale of mortgage loans held-for-sale 18 6 16
(Loss) gain on sale of investments available-for-sale - (13) 2
Other income, net - 4 3
--------- --------- ---------
Total other income 246 202 227
--------- --------- ---------
OTHER OPERATING EXPENSES:
Employee compensation and benefits (Note 11) 1,713 1,450 1,344
Deposit insurance premiums 124 234 1,725
Occupancy and equipment expense 413 397 413
Data processing - service bureau fees 134 132 129
Office supplies, postage, printing, etc. 101 81 97
Professional fees 82 56 54
Advertising and promotions 26 24 31
Expense (income) of real estate operations 69 (167) (120)
Other 195 155 204
--------- --------- ---------
Total other operating expenses 2,857 2,362 3,877
--------- --------- ---------
INCOME BEFORE INCOME TAXES 5,364 3,046 1,119
PROVISION FOR INCOME TAXES (Note 9) 1,929 1,094 360
--------- --------- ---------
NET INCOME $ 3,435 $ 1,952 $ 759
========= ========= =========
BASIC AND DILUTED EARNINGS PER SHARE $0.53 N/A N/A
WEIGHTED AVERAGE SHARES OUTSTANDING 4,265 N/A N/A
</TABLE>
See notes to consolidated financial statements.
F-3
<PAGE>
HERITAGE BANCORP, INC. AND SUBSIDIARY
<TABLE>
<CAPTION>
CONSOLIDATED STATEMENTS OF EQUITY
YEARS ENDED SEPTEMBER 30, 1998, 1997 AND 1996
(IN THOUSANDS OF DOLLARS)
- --------------------------------------------------------------------------------------------------------------------------
NET UNREALIZED
ADDITIONAL UNEARNED GAIN ON
COMMON PAID-IN RETAINED ESOP AVAILABLE-FOR-SALE
STOCK CAPITAL INCOME SHARES SECURITIES (1) TOTAL
<S> <C> <C> <C> <C> <C> <C>
BALANCE, SEPTEMBER 30, 1995 $ 25,058 $ 634 $ 25,692
Net income 759 - 759
Change in net unrealized gain
on available-for-sale securities - 289 289
--------- --------- --------
BALANCE, SEPTEMBER 30, 1996 25,817 923 26,740
Net income 1,952 - 1,952
Change in net unrealized gain
on available-for-sale securities - 543 543
--------- --------- --------
BALANCE, SEPTEMBER 30, 1997 27,769 1,466 29,235
Net income 3,435 - 3,435
Net proceeds of common stock issued $ 46 $ 67,930 - $ (5,555) - 62,421
Shares released from ESOP - 57 - 186 - 243
Dividends declared - - (639) - - (639)
Change in net unrealized gain
on available-for-sale securities - - - - 635 635
-------- --------- --------- --------- --------- --------
BALANCE, SEPTEMBER 30, 1998 $ 46 $ 67,987 $ 30,565 $ (5,369) $ 2,101 $ 95,330
======== ========= ========= ========= ========= =========
</TABLE>
(1) Net of deferred income taxes.
See notes to consolidated financial statements.
F-4
<PAGE>
HERITAGE BANCORP, INC. AND SUBSIDIARY
<TABLE>
<CAPTION>
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED SEPTEMBER 30, 1998, 1997 AND 1996
(IN THOUSANDS OF DOLLARS)
- -----------------------------------------------------------------------------------------------------------------------
YEAR ENDED SEPTEMBER 30,
----------------------------------------
1998 1997 1996
<S> <C> <C> <C>
OPERATING ACTIVITIES:
Net income $ 3,435 $ 1,952 $ 759
Adjustments to reconcile net income to net cash provided by
operating activities:
Deferred income taxes (72) 528 (110)
Release of ESOP shares 243 - -
Loss (gain) on sale of available-for-sale securities - 13 (2)
(Accretion) amortization of premium on investment and
mortgage-backed securities (7) 30 59
Gain on sale of loans held-for-sale (18) (6) (16)
Amortization of net deferred income (123) (151) (162)
(Recovery of allowance) provision for loan losses (105) 337 (7)
Proceeds from the sale of loans held-for-sale 1,243 485 970
Purchase of loans held-for-sale - (1,051) -
Originations of loans held-for-sale (1,225) (486) (954)
Principal repayments on loans held-for-sale 195 7 -
Depreciation on office properties and equipment 276 280 242
Loss on sale of property - - 37
Provision for losses (recovery of allowance) on real estate acquired
in settlement of loans 28 15 (1)
Loss (gain) on sales of real estate acquired in settlement of loans 34 (191) (122)
(Increase) decrease in accrued interest receivable and other assets (99) 199 (194)
(Decrease) increase in accrued interest payable and other liabilities (359) (1,184) 1,515
--------- -------- --------
Net cash provided by operating activities 3,446 777 2,014
--------- -------- --------
INVESTING ACTIVITIES:
Proceeds from maturities and calls of available-for-sale investment
securities 4,000 8,100 6,500
Proceeds from maturities and calls of held-to-maturity investment
securities 16,000 8,500 7,100
Proceeds from the sale of available-for-sale investment securities - 1,737 1,002
Purchases of available-for-sale investment securities (1,500) (500) (2,504)
Purchases of held-to-maturity investment securities (17,114) (3,492) (19,750)
Purchases of mortgage-backed securities - - (499)
Principal repayments on mortgage-backed securities 4,965 3,049 2,747
Purchase of loans receivable (14,401) (2,465) -
Net (increase) decrease in loans 10,223 (8,424) (4,614)
Proceeds from sales of real estate acquired in settlement of loans 1,080 986 232
Capitalized costs of real estate acquired in settlement of loans (450) (138) -
Acquisition of office properties and equipment (101) (28) (663)
--------- -------- --------
Net cash provided by (used in) investing activities 2,702 7,325 (10,449)
--------- -------- --------
</TABLE>
F-5
<PAGE>
HERITAGE BANCORP, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED SEPTEMBER 30, 1998, 1997 AND 1996
(IN THOUSANDS OF DOLLARS)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
YEAR ENDED SEPTEMBER 30,
----------------------------------------
1998 1997 1996
<S> <C> <C> <C>
FINANCING ACTIVITIES:
Net (decrease) increase in deposits $ (9,308) $ 5,682 $ 8,257
Net proceeds from sale of common stock 62,421
Principal repayments on Federal Home Loan Bank borrowings - (5,000) -
-------- -------- -------
Net cash provided by financing activities 53,113 682 8,257
-------- -------- -------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 59,261 8,784 (178)
CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR 14,659 5,875 6,053
-------- -------- -------
CASH AND CASH EQUIVALENTS AT END OF YEAR $ 73,920 $ 14,659 $ 5,875
======== ======== =======
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid during the year for:
Interest $ 11,988 $ 12,250 $12,211
======== ======== =======
Income taxes $ 1,815 $ 553 $ 650
======== ======== =======
SUPPLEMENTAL DISCLOSURE OF NON-CASH TRANSACTIONS:
Transfers from loans to real estate acquired in settlement of loans $ 281 $ 996 $ 92
======== ======== =======
Increase in net unrealized gain on available-for-sale investment
securities $ 635 $ 543 $ 289
======== ======== =======
Sale of common stock to ESOP $ 5,555 N/A N/A
======== ======== =======
</TABLE>
See notes to consolidated financial statements.
F-6
<PAGE>
HERITAGE BANCORP, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED SEPTEMBER 30, 1998, 1997 AND 1996
- --------------------------------------------------------------------------------
1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
BASIS OF PRESENTATION AND CONVERSION TO CAPITAL STOCK FORM OF OWNERSHIP -
Heritage Bancorp, Inc. (the "Corporation") was incorporated under Delaware
law in November 1997 by Heritage Federal Savings and Loan Association (the
"Association") in connection with the conversion of the Association from a
federally chartered mutual savings and loan association to a federally
chartered stock savings and loan association, the issuance of the
Association's stock to the Corporation and the offer and sale of the
Corporation's common stock by the Corporation (the "Conversion").
The Conversion was consummated by a subscription offering ("offering") of
the shares of common stock of the Corporation whereby the shares were
offered initially to eligible account holders, the Association's Employee
Stock Ownership Plan ("ESOP"), supplemental eligible account holders and
other members of the Association (collectively "subscribers"). During the
offering, subscribers submitted orders for common stock along with full
payment for the order in either cash, by an authorization to withdraw
funds or payment from an existing deposit account at the Association upon
issuance of the stock, or a combination of cash and account withdrawal.
Subscription funds received in connection with the offering were placed in
special escrow accounts in the Association. For those orders that were to
be funded through account withdrawals, the Association placed "holds" on
those accounts, restricting withdrawal of any amount which would reduce
the account balance below the amount of the order. The Conversion,
completed on April 6, 1998, resulted in the issuance and sale of 4.6
million shares of $0.01 par value common stock for proceeds of $69.4
million. The aggregate purchase price was determined by an independent
appraisal. As the Corporation received subscriptions in excess of shares
available, shares were allocated in accordance with the plan of
Conversion. Sources of proceeds were as follows (in thousands of dollars):
<TABLE>
<S> <C>
Subscription escrow accounts $ 35,204
Deposit account withdrawals 28,672
Note receivable from ESOP 5,555
--------
Gross proceeds $ 69,431
========
</TABLE>
All excess subscription funds were refunded and holds on deposit accounts
were released after the stock was issued.
Conversion expenses totaled approximately $1.4 million and were deducted
from gross proceeds to result in net proceeds of approximately $68.0
million.
The Association issued all its outstanding capital stock to the
Corporation in exchange for one-half of the net proceeds. The Corporation
accounted for the purchase in a manner similar to a pooling of interests
whereby assets and liabilities of the Association maintain their
historical cost basis in the consolidated company.
In April 1998, the Association changed its name to Heritage Federal Bank
(the "Bank").
F-7
<PAGE>
PRINCIPLES OF CONSOLIDATION - The accompanying consolidated financial
statements include the accounts of the Corporation and its wholly owned
subsidiary, the Bank (collectively referred to herein as the "Company").
All significant intercompany balances and transfers have been eliminated
in consolidation. The following is a description of the more significant
accounting policies which the Company follows in preparing and presenting
its consolidated statements.
BASIS OF ACCOUNTING - The accounting and reporting policies of the Company
conform to generally accepted accounting principles and, additionally, the
Bank conforms to reporting practices within the savings and loan industry.
USE OF ESTIMATES - The preparation of financial statements in conformity
with generally accepted accounting principles requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the
date of the financial statements and the reported amounts of revenues and
expenses during the reporting period. Actual results could differ from
those estimates. Material estimates that are particularly susceptible to
change relate to the determination of the allowance for loan losses and
the valuation of real estate owned.
CASH AND CASH EQUIVALENTS - For purposes of reporting cash flows, cash and
cash equivalents includes cash on hand, federal funds sold, overnight
interest-bearing deposits and amounts due from depository institutions.
INVESTMENT AND MORTGAGE-BACKED SECURITIES - Debt securities that the
Company has the positive intent and ability to hold to maturity are
classified as "held-to-maturity" securities and reported at amortized
cost. Debt and equity securities that are bought and held principally for
the purpose of selling in the near term are classified as "trading"
securities and reported at fair value with unrealized gains and losses
included in earnings. Debt and equity securities not classified as either
held-to-maturity or trading securities are classified as "available-for-
sale" securities and reported at fair value with unrealized gains and
losses excluded from earnings and reported, net of taxes, as a separate
component of equity. No securities have been classified as trading
securities.
Realized gains and losses on investment securities are recognized at the
time of sale based upon the specific identification method.
LOANS - Loans receivable that management has the intent and ability to
hold for the foreseeable future or until maturity or pay-off are reported
at their outstanding principal, adjusted for any charge-offs, the
allowance for loan losses and any deferred fees or costs on originated
loans and unamortized premiums or discounts on purchased loans.
Discounts and premiums on purchased residential real estate loans are
amortized to income using the interest method over the remaining period to
contractual maturity, adjusted for anticipated prepayments.
Loan origination fees and certain direct origination costs are capitalized
and recognized as an adjustment of the yield of the related loan.
Nonaccrual loans are those loans on which the accrual of interest has
ceased. Loans are placed on nonaccrual status if, generally, in the
opinion of management, principal or interest is not likely to be paid in
accordance with the terms of the loan agreement, or when principal or
interest is past due more than 90 days. Interest accrued but not collected
at the date a loan is placed on nonaccrual status is reversed against
interest income in the current period. Interest income on nonaccrual loans
is recognized only to the extent received in cash.
F-8
<PAGE>
Restructured loans are those for which concessions, such as the reduction
of interest rates or deferral of interest or principal payments, have been
granted due to a deterioration in the borrowers' financial condition. The
difference between interest that would have been recognized under the
original terms of nonaccrual and renegotiated loans and interest actually
recognized on such loans was not a material amount for the years ended
September 30, 1998, 1997 and 1996.
ALLOWANCES FOR LOSSES - The Company maintains allowances for loan losses.
Provisions for losses are charged to income when, in the opinion of
management, losses are probable.
The allowance for loan losses is based upon management's evaluation of the
loan portfolio. The evaluation considers such factors as the delinquency
status of loans, current economic conditions, the fair value of the
underlying collateral and prior loan loss experience.
Recovery of the carrying value of loans is dependent to some extent on
future economic, operating and other conditions that may be beyond the
Company's control. Unanticipated future adverse changes in such conditions
could result in material adjustments to allowances (and future results of
operations).
LOANS HELD-FOR-SALE - Loans intended for sale in the secondary market are
stated at the lower of cost or estimated market value as determined by
outstanding commitments from investors or current investor market yield
requirements calculated on an aggregate basis. Net unrealized losses are
recognized in a valuation allowance by charges against income.
OFFICE PROPERTIES AND EQUIPMENT - Office properties and equipment are
stated at cost less accumulated depreciation. Depreciation is computed
over the estimated useful lives of the related assets using straight-line
and accelerated methods.
REAL ESTATE ACQUIRED IN SETTLEMENT OF LOANS - Real estate acquired in
settlement of loans is initially stated at fair value at the date of
foreclosure, establishing a new cost basis. Valuations are performed
periodically by management and allowances for losses are established when
the cost of real estate acquired in settlement of loans exceeds fair value
less estimated costs to sell. Revenues, expenses and additions to the
valuation allowance related to real estate acquired in settlement of loans
are charged to operations.
Fair values are based primarily on independent appraisals of market value.
Recovery of estimated fair value is dependent to a great extent on
economic, operating and other conditions that may be beyond the Company's
control. Accordingly, these estimates are particularly susceptible to
changes that could result in material adjustment in the near term.
SAIF FUND ASSESSMENT - On September 30, 1996, legislation was enacted to
recapitalize the Savings Company Insurance Fund. The effect of this
legislation was to require a one-time assessment on all federally insured
savings deposits, payable by November 1996. The $1.2 million assessment
was accrued as a charge to earnings in the quarter ended September 30,
1996 and is included in deposit insurance premiums in the statement of
income. The assessment was paid by the Company in November 1996.
ADVERTISING COSTS - The Company expenses advertising costs as incurred.
INCOME TAXES - Provisions for income taxes are based on amounts reported
in the statements of income (after exclusion of nontaxable income such as
interest on municipal securities) and include changes in deferred income
taxes. Deferred tax assets and liabilities are reflected at currently
enacted income tax rates applicable to the period in which the deferred
tax assets or liabilities are expected to be realized or settled. As
changes in tax laws or rates are enacted, deferred tax assets and
liabilities are adjusted through the provision for income taxes.
F-9
<PAGE>
EARNINGS PER SHARE - The Company's initial public offering closed on April
6, 1998. For purposes of the earnings per share ("EPS") calculations for
the year ended September 30, 1998, shares issued on April 6, 1998 have
been assumed to be outstanding as of April 1, 1998.
Additionally, net income used in the calculation is for the period from
April 1, 1998 through September 30, 1998.
EPS for the years ended September 30, 1997 and 1996 are not presented
because no shares were issued or outstanding during those periods.
RECENTLY ISSUED ACCOUNTING STANDARDS - The Financial Accounting Standards
Board ("FASB") recently issued four new accounting standards that will
affect accounting, reporting and disclosure of financial information by
the Company. Adoption of these standards is not expected to have a
material impact on the financial condition or results of operations. The
following is a summary of the standards and their required implementation
dates:
. SFAS No. 130, REPORTING COMPREHENSIVE INCOME - This statement
establishes standards for reporting and disclosure of comprehensive
income and its components (revenues, expenses, gains and losses).
This statement requires that all items that are required to be
recognized under accounting standards as components of comprehensive
income (including, for example, unrealized holding gains and losses
on available-for-sale securities) be reported in a financial
statement similar to the statement of income and retained income. The
accumulated balance of other comprehensive income will be disclosed
separately from retained income in the equity section of the balance
sheet. This statement is effective for the Company's fiscal year
beginning October 1, 1998.
. SFAS No. 131, DISCLOSURES ABOUT SEGMENTS OF AN ENTERPRISE AND
RELATED INFORMATION - This statement establishes standards for the
way public business enterprises report information about operating
segments and establishes standards for related disclosures about
products and services, geographic areas and major customers.
Operating segments are components of an enterprise about which
separate financial information is available that is evaluated
regularly by the chief operating decision maker in deciding how to
allocate resources and in assessing performance. Information required
to be disclosed includes segment profit or loss, certain specific
revenue and expense items, segment assets and certain other
information. This statement is effective for the Company's fiscal
year ending September 30, 1999.
. SFAS No. 132, EMPLOYERS' DISCLOSURES ABOUT PENSIONS AND OTHER
POSTRETIREMENT BENEFITS - This statement revises employers'
disclosures about pension and other postretirement benefit plans. It
does not change the measurement or recognition of those plans. It
standardized the disclosure requirements for pensions and other
postretirement benefits to the extent practicable, requires
additional information on changes in the benefit obligations and fair
values of plan assets that will facilitate financial analysis, and
eliminates certain disclosures required by FASB statement No. 87,
EMPLOYERS' ACCOUNTING FOR PENSIONS, No. 88, EMPLOYERS' ACCOUNTING FOR
SETTLEMENTS AND CURTAILMENTS OF DEFINED BENEFIT PENSION PLANS AND FOR
TERMINATION BENEFITS, and No. 106, EMPLOYERS' ACCOUNTING FOR
POSTRETIREMENT BENEFITS. The statement suggests combined formats for
presentation of pension and other postretirement benefit disclosures.
This statement is effective for the Company's fiscal year ending
September 30, 1999.
. SFAS No. 133, ACCOUNTING FOR DERIVATIVE INSTRUMENTS AND HEDGING
ACTIVITIES - This statement establishes accounting and reporting
standards for derivative instruments, including certain derivative
instruments embedded in other contracts (collectively referred to as
derivatives) and for hedging activities. The new standard requires
that an entity recognize all derivatives as either assets or
liabilities in the statement of financial position and measure those
instruments at fair value. This statement is effective for interim
and annual periods after September 30, 1999.
F-10
<PAGE>
RECLASSIFICATIONS - Certain 1997 and 1996 amounts have been reclassified to
conform with the 1998 presentation.
2. INVESTMENT SECURITIES
Investment securities at September 30, 1998 and 1997 are summarized as
follows (in thousands of dollars):
<TABLE>
<CAPTION>
GROSS GROSS
AMORTIZED UNREALIZED UNREALIZED FAIR
SEPTEMBER 30, 1998 COST GAINS LOSSES VALUE
<S> <C> <C> <C> <C>
Held-to-maturity - U.S. Government
Agency obligations $ 17,112 $ 96 $ - $ 17,208
======== ======== ========= ========
Available-for-sale:
U.S. Treasury obligations $ 1,506 $ 9 $ - $ 1,515
U.S. Government Agency obligations 2,000 9 - 2,009
FHLMC common stock 57 3,317 - 3,374
-------- -------- --------- --------
Total $ 3,563 $ 3,335 $ - $ 6,898
======== ======== ========= ========
<CAPTION>
GROSS GROSS
AMORTIZED UNREALIZED UNREALIZED FAIR
SEPTEMBER 30, 1997 COST GAINS LOSSES VALUE
<S> <C> <C> <C> <C>
Held-to-maturity - U.S. Government
Agency obligations $ 15,988 $ 19 $ (53) $ 15,954
======== ======== ========= ========
Available-for-sale:
U.S. Treasury obligations $ 2,010 $ 6 $ (8) $ 2,008
U.S. Government Agency obligations 3,996 - (20) 3,976
FHLMC common stock 57 2,349 - 2,406
-------- -------- --------- --------
Total $ 6,063 $ 2,355 $ (28) $ 8,390
======== ======== ========= ========
</TABLE>
The amortized cost and fair value of debt securities at September 30, 1998,
by contractual maturity, follow (in thousands of dollars):
<TABLE>
<CAPTION>
AVAILABLE-FOR-SALE HELD-TO-MATURITY
------------------------- ------------------------
AMORTIZED FAIR AMORTIZED FAIR
COST VALUE COST VALUE
<S> <C> <C> <C> <C>
Due in one year or less $ 1,500 $ 1,500 $ 2,998 $ 3,007
Due after one year through five years 2,006 2,024 14,114 14,201
------- ------- -------- --------
Total $ 3,506 $ 3,524 $ 17,112 $ 17,208
======= ======= ======== ========
</TABLE>
Gross realized gains on sales of available-for-sale securities were
approximately $2,000 in fiscal 1996 and none for fiscal 1998 and 1997.
Gross realized losses on sales of available-for-sale investment securities
were $13,000 in fiscal 1997 and none in fiscal 1998 and 1996.
F-11
<PAGE>
Investment securities totaling $825,000 at September 30, 1998 and 1997 were
pledged as collateral for public deposits.
3. MORTGAGE-BACKED SECURITIES
Fixed rate mortgage-backed securities are classified as held-to-maturity
investments and consisted of the following types of investments (in
thousands of dollars):
<TABLE>
<CAPTION>
AMORTIZED UNREALIZED UNREALIZED FAIR
SEPTEMBER 30, 1998 COST GAINS LOSSES VALUE
<S> <C> <C> <C> <C>
FNMA $ 553 $ 3 $ (2) $ 554
FHLMC 1,142 - (5) 1,137
------- ----- ------ -------
Total $ 1,695 $ 3 $ (7) $ 1,691
======= ===== ====== =======
<CAPTION>
<CAPTION>
AMORTIZED UNREALIZED UNREALIZED FAIR
SEPTEMBER 30, 1997 COST GAINS LOSSES VALUE
<S> <C> <C> <C> <C>
FNMA $ 788 $ - $ (7) $ 781
FHLMC 5,877 2 (25) 5,854
------- ----- ------ -------
Total $ 6,665 $ 2 $ (32) $ 6,635
======= ===== ====== =======
</TABLE>
The amortized cost and fair value of mortgage-backed securities by
contractual maturity, was as follows at September 30, 1998 (in thousands of
dollars):
<TABLE>
<CAPTION>
AMORTIZED FAIR
COST VALUE
<S> <C> <C>
Due in one year or less $ 1,142 $ 1,137
Due after one year through five years 553 554
------- -------
Total $ 1,695 $ 1,691
======== =======
</TABLE>
F-12
<PAGE>
4. LOANS RECEIVABLE
Loans receivable consisted of the following (in thousands of dollars):
<TABLE>
<CAPTION>
SEPTEMBER 30,
----------------------------
1998 1997
<S> <C> <C>
Mortgage loans:
Residential (1-4 family) $ 173,891 $ 180,609
Builder construction loans 11,261 2,601
Commercial loans 14,484 8,136
Savings account loans 1,077 1,419
Home equity loans 8,925 8,124
Commercial loans 2,785 -
--------- ---------
Total loans 212,423 200,889
Less:
Undisbursed portion of loans in process (14,514) (6,989)
Deferred loan origination fees (360) (363)
Allowance for loan losses (760) (874)
--------- ---------
Total $ 196,789 $ 192,663
========= =========
Weighted average interest yield of loans 8.09 % 7.93 %
==== ====
</TABLE>
Subsequent to August 9, 1989, the Company may not make loans to one
borrower in excess of 15% of unimpaired capital under regulations of the
Office of Thrift Supervision ("OTS"). At September 30, 1998, the Company
had loans outstanding to individual borrowers ranging up to $4.8 million
and was in compliance with this regulation.
The Company sells mortgage loans in the secondary market. Generally such
loans are sold without recourse and servicing is retained. Servicing loans
for others consists of collecting mortgage payments, maintaining escrow
accounts, disbursing payments to investors and foreclosure processing. Loan
servicing income is recorded on the accrual basis and includes servicing
fees received from investors as well as certain charges collected from
borrowers, such as late payment fees. At September 30, 1998, 1997 and 1996,
the Company serviced loans for others with a total balance outstanding of
$4.1 million, $5.4 million and $6.0 million, respectively, and held
borrowers' escrow balances in the amounts of $32,000, $41,000 and $53,000,
respectively.
The following is a reconciliation of the allowance for loan losses for the
years ended September 30, 1998, 1997 and 1996 (in thousands of dollars):
<TABLE>
<CAPTION>
YEAR ENDED
SEPTEMBER 30,
--------------------------------
1998 1997 1996
<S> <C> <C> <C>
Balance at beginning of year $ 874 $ 670 $ 590
(Recovery of allowance) provision for losses (105) 337 (7)
Write-offs (9) (133) (28)
Recoveries - - 115
------ ------- ------
Balance at end of year $ 760 $ 874 $ 670
====== ======= ======
</TABLE>
F-13
<PAGE>
The total principal amount of impaired loans recognized in conformity with
FASB Statement No. 114, as amended by FASB Statement No. 118, was
immaterial at September 30, 1998 and 1997.
Directors and officers of the Company are customers of the institution in
the ordinary course of business. Deposits and loans of directors and
officers have terms consistent with those offered to other customers. At
September 30, 1998 and 1997, loans to officers or directors of the Company
totaled approximately $503,000 and $638,000, respectively.
5. OFFICE PROPERTIES AND EQUIPMENT
Office properties and equipment are summarized as follows (in thousands of
dollars):
<TABLE>
<CAPTION>
SEPTEMBER 30,
---------------------
1998 1997
<S> <C> <C>
Land $ 237 $ 237
Land improvements 271 271
Office buildings 3,457 3,453
Furniture, fixtures and equipment 1,254 1,157
------- -------
Total 5,219 5,118
Less accumulated depreciation (1,116) (840)
------- -------
Office properties and equipment - net $ 4,103 $ 4,278
======= =======
</TABLE>
6. REAL ESTATE ACQUIRED IN SETTLEMENT OF LOANS
Real estate acquired in settlement of loans is summarized as follows (in
thousands of dollars):
<TABLE>
<CAPTION>
SEPTEMBER 30,
---------------------
1998 1997
<S> <C> <C>
Real estate acquired in settlement of loans $ - $ 424
Less allowance for losses - (14)
------- ------
Total $ - $ 410
======= ======
</TABLE>
The changes in the allowance for losses on real estate acquired in
settlement of loans consisted of the following (in thousands of dollars):
<TABLE>
<CAPTION>
YEAR ENDED
SEPTEMBER 30,
-------------------------------
1998 1997 1996
<S> <C> <C> <C>
Balance at beginning of year $ 14 $ 923 $ 1,074
Provision for losses (recovery of allowance) 28 15 (1)
Total write-offs (42) (924) (150)
----- ------ -------
Balance at end of year $ - $ 14 $ 923
===== ====== =======
</TABLE>
F-14
<PAGE>
7. DEPOSIT ACCOUNTS
Deposit accounts are as follows (in thousands of dollars):
<TABLE>
<CAPTION>
SEPTEMBER 30,
-------------------------
1998 1997
<S> <C> <C>
ACCOUNT TYPE
Passbook Accounts (1998 - 2.7%; 1997 - 3.0%) $ 9,946 $ 11,423
---------- ---------
NOW Accounts (1998 - 2.1%; 1997 - 2.0%) 2,627 2,833
---------- ---------
Money Market Deposit Accounts (1998 - 3.0%; 1997 - 3.0%) 828 939
---------- ---------
Certificates of Deposit:
3.01-4.00% 5,198 5,575
4.01-5.00% 2,338 1,218
5.01-6.00% 137,246 95,528
6.01-7.00% 46,895 92,245
7.01-8.00% 1,026 5,651
--------- ---------
Total certificates of deposit 192,703 200,217
--------- ---------
Total $ 206,104 $ 215,412
========= =========
Weighted average rate:
Savings certificates 5.82 % 5.93 %
All deposit accounts 5.62 % 5.71 %
</TABLE>
At September 30, 1998, deposit accounts with balances of $100,000 and
greater totaled approximately $56.9 million. Deposits in excess of $100,000
are not federally insured. The Company does not accept brokered deposits.
Maturities of certificates of deposits (in thousands of dollars):
<TABLE>
<S> <C>
YEAR ENDING SEPTEMBER 30, 1998
Maturing:
Within 1 year $ 133,201
After 1 but within 2 years 53,790
After 2 but within 3 years 4,801
After 3 but within 4 years 910
After 4 but within 5 years 1
---------
Total $ 192,703
=========
</TABLE>
Interest expense by type of deposit is summarized as follows (in thousands
of dollars):
<TABLE>
<CAPTION>
YEAR ENDED SEPTEMBER 30,
------------------------------------
1998 1997 1996
<S> <C> <C> <C>
Demand accounts:
Passbook $ 304 $ 340 $ 362
NOW and Money Market Accounts 90 89 92
Certificate accounts 11,616 11,575 11,431
-------- -------- --------
Total $ 12,010 $ 12,004 $ 11,885
======== ======== ========
</TABLE>
F-15
<PAGE>
8. BORROWING ARRANGEMENTS WITH FEDERAL HOME LOAN BANK OF ATLANTA
The Company had no outstanding advances from the Federal Home Loan Bank of
Atlanta ("FHLB") at September 30, 1998 and 1997. The maximum amount of
outstanding advances at any month-end during fiscal years 1997 and 1996 was
$5,000,000. The average balance outstanding for such years was
approximately $3,082,000 and $5,000,000, respectively. The weighted average
interest rate during fiscal years 1997 and 1996 was 7.33% and 6.54%,
respectively. The Company had no advances during fiscal 1998.
The Company pledged as collateral for these borrowings its FHLB stock and
has entered into blanket collateral agreements with the FHLB whereby the
Company maintains, free of other encumbrances, qualifying mortgages (as
defined) with unpaid principal balances, when discounted at 75% of the
unpaid principal balances, of at least 100% of total advances.
Additionally, the Company may borrow under various line of credit programs
with the FHLB. Any amounts advanced to the Company under these programs are
secured by the Company's investment securities and bear interest at an
adjustable rate with interest payable monthly. At September 30, 1998 and
1997, the Company had no amounts outstanding with the FHLB under these
lines of credit.
9. INCOME TAXES
The tax effects of significant items comprising the Company's net deferred
tax liability as of September 30, 1998 and 1997 are as follows (in
thousands of dollars):
<TABLE>
<CAPTION>
SEPTEMBER 30,
---------------------
1998 1997
<S> <C> <C>
Deferred tax assets:
Allowance for loan losses $ 260 $ 355
Deferred loan fees 23 4
Difference between book and tax compensation under the ESOP 34 -
Difference between book and tax basis of fixed assets - 7
Other 62 9
------- ------
Total 379 375
------- ------
Deferred tax liabilities:
Difference between book and tax basis of Federal Home Loan
Bank stock 336 336
Unrealized gain on investments available-for-sale 1,234 861
Difference between book and tax basis of fixed assets 44 -
Recapture of tax basis bad debt reserve arising after December 31, 1987 214 326
------- -------
Total 1,828 1,523
------- -------
Net deferred tax liability $ 1,449 $ 1,148
======= =======
</TABLE>
The net deferred tax liability at September 30, 1998 and 1997 is included
in "other liabilities" in the balance sheet.
F-16
<PAGE>
The provision for income taxes is summarized as follows (in thousands of
dollars):
<TABLE>
<CAPTION>
YEAR ENDED SEPTEMBER 30,
--------------------------------------
1998 1997 1996
<S> <C> <C> <C>
Current provision:
Federal $ 1,842 $ 553 $ 470
State 159 13 -
-------- ------- --------
Total current 2,001 566 470
-------- ------- --------
Deferred (benefit) provision:
Federal (61) 443 (93)
State (11) 85 (17)
-------- ------- --------
Total deferred (72) 528 (110)
-------- ------- --------
Total provision for income taxes $ 1,929 $ 1,094 $ 360
======== ======= ========
</TABLE>
No valuation allowance on deferred tax assets has been established as
management believes that the existing deductible temporary differences will
reverse during periods in which the Company generates net taxable income.
In years ended September 30, 1996 and prior, the Company was allowed under
the Internal Revenue Code to deduct, subject to certain conditions, an
annual addition to a reserve for bad debts ("reserve method") in
determining taxable income. Legislation enacted in August 1996 repealed the
reserve method effective for the Company beginning with the fiscal year
ended September 30, 1997. Under the legislation, the Company will be
allowed to deduct actual bad debt charge-offs ("charge-off method") in
determining taxable income. The income tax deduction under the reserve
method has been historically greater than the provision for loan losses
recorded for financial accounting purposes. The income tax deduction under
the charge-off method for the year ended September 30, 1997 was less than
the provision for loan losses recorded for financial accounting purposes.
Deferred income taxes have been provided on differences between the bad
debt reserve for tax purposes determined under the formerly used reserve
method and the loan loss allowance for financial accounting purposes only
to the extent of differences arising subsequent to December 31, 1987. Under
the legislation previously mentioned, the Company was required to recapture
the post-1987 tax bad debt reserve of approximately $805,000 into expense
over a six-year period beginning with the fiscal year ended September 30,
1997. Since a deferred tax liability has been provided on this difference,
the recapture will have no impact on equity or results of operations.
Retained earnings as of September 30, 1998 includes approximately $4.9
million representing reserve method bad debt reserves originating prior to
December 31, 1987 for which no deferred income taxes are required to be
provided. These reserves may be included in taxable income if the Company
pays dividends in excess of its accumulated earnings and profits (as
defined by the Internal Revenue Code) or in the event of a distribution in
partial or complete liquidation of the Company.
F-17
<PAGE>
Income taxes differed from amounts computed by applying the statutory federal
rate of 34% to income before income taxes as follows (in thousands of dollars):
<TABLE>
<CAPTION>
YEARS ENDED SEPTEMBER 30,
----------------------------------
1998 1997 1996
<S> <C> <C> <C>
Tax at statutory federal income tax rate (34%) $ 1,824 $ 1,036 $ 380
Increase (decrease) resulting from:
State income taxes 98 66 (11)
Other - net 7 (8) (9)
------- ------- ------
Total $ 1,929 $ 1,094 $ 360
======= ======= ======
Effective rate 36.0% 35.9% 32.1%
</TABLE>
10. COMMITMENTS AND CONTINGENCIES
LOAN COMMITMENTS - Loan commitments are agreements to lend to a customer as
long as there is no violation of any condition established in the contract.
Commitments extend over various periods of time with the majority of such
commitments disbursed within a ninety day period. Commitments generally
have fixed expiration dates or other termination clauses and may require
payments of fees. Commitments to extend credit at fixed rates exposes the
Company to some degree of interest rate risk. The Company evaluates each
customer's creditworthiness on a case-by-case basis. The type or amount of
collateral obtained varies and is based on management's credit evaluation
of the potential borrower. At September 30, 1998, the Company had loan
commitments, excluding undisbursed portions of interim construction loans,
of approximately $1.1 million.
At September 30, 1998, the Company had approved home equity lines of credit
approximating $16.8 million, of which approximately $8.9 million was in use
and approximately $7.9 million was available for use.
The Company leases various property and equipment. The effect of these
leases on the financial position or results of operations is insignificant.
The Company has no additional financial instruments with off-balance sheet
risk.
POTENTIAL IMPACT OF CHANGES IN INTEREST RATES - The Company's profitability
depends to a large extent on its net interest income, which is the
difference between interest income from loans and investments and interest
expense on deposits. Like most financial institutions, the Company's short-
term interest income and interest expense are significantly affected by
changes in market interest rates and other economic factors beyond its
control. The Company's interest earning assets consist primarily of long-
term, fixed rate and adjustable rate mortgage loans and investments which
adjust more slowly to changes in interest rates than its interest bearing
liabilities which are deposits. Accordingly, the Company's earnings could
be affected adversely during periods of rising interest rates.
LITIGATION - The Company is involved in legal actions in the normal course
of business. Management, based on advice of counsel, does not expect any
material losses from current litigation.
F-18
<PAGE>
CONCENTRATIONS OF CREDIT RISK - The Company's business activity is
principally with customers located in South Carolina. Except for
residential loans in the Company's market area, the Company has no other
significant concentrations of credit risk.
EMPLOYMENT AND SEVERANCE AGREEMENT - Both the Corporation and the Bank have
entered into an employment agreement with J. Edward Wells, Chief Executive
Officer. The employment agreement establishes the duties and compensation
of Mr. Wells and has been executed in order to ensure a stable and
competent management base. The employment agreement provides for an initial
term of three years. The Board of Directors may agree after conducting a
performance evaluation of the executive, to extend an employment agreement
on each anniversary date for an additional year. The employment agreement
generally provides for the continued payment of specified compensation and
benefits for the remaining term of the agreement after Mr. Wells is
terminated, unless the termination is for "cause" as defined in the
employment agreement. Additionally, the employment agreements provide for
severance payments if employment is terminated following a change in
control in the amount of 2.99 times the average annual compensation paid
during the five years immediately preceding the change in control to the
respective executive.
SEVERANCE AGREEMENTS - The Bank and the Corporation have entered into
severance agreements with four senior officers ("officers") (none of whom
have entered into employment agreements) with an initial term of two years.
The Board of Directors may agree after conducting a performance evaluation
of the officers, to extend an employment agreement on each anniversary date
for an additional year. The severance agreements provide for severance
payments in the amount of 2 times annual salary during the 12-month period
preceding the change in control in connection with termination or other
specified actions in the event of a change in control of the Company.
EMPLOYEE SEVERANCE COMPENSATION PLAN ("SEVERANCE PLAN") - In general, all
employees (except for executives and officers who have entered into
separate employment or severance agreements) are eligible to participate in
the Severance Plan. Under the Severance Plan, employees terminated within
12 months of a change in control are entitled to a severance benefit up to
52 weeks of their current compensation based upon length of service.
11. BENEFIT PLANS
PENSION PLAN/401(K) PLAN - The Company has a noncontributory money purchase
pension plan covering substantially all full-time employees over the age of
twenty-one who have completed six months of continuous employment with the
Company at the anniversary date of the plan. Pension costs are computed by
multiplying eligible participants' annual salaries by ten percent. Amounts
credited to participants' accounts vest (become nonforfeitable) as follows:
. Twenty percent of the account balance after three years of service
. Twenty percent each year thereafter, until fully vested at the
completion of seven years of service.
The Company provides additional retirement benefits by means of a 401(k)
plan for substantially all employees over the age of twenty-one who have
completed six months of employment. Under the plan, employees may defer
from 1% to 10% of their compensation to be contributed to the plan. The
Company is allowed to make discretionary contributions, subject to certain
limitations. Participants are 100% vested upon participation in the plan.
F-19
<PAGE>
Total expense under both retirement plans for the years ended September 30,
1998, 1997 and 1996 was approximately $67,000, $151,000 and $156,000,
respectively.
The Company provides no other post-employment benefits.
EMPLOYEE STOCK OWNERSHIP PLAN ("ESOP") - The ESOP is a noncontributory
retirement plan adopted by the Company effective January 1, 1997 that
includes all employees who meet minimum eligibility requirements. The ESOP
acquired 370,000 shares of the Corporation's common stock in the Conversion
at a price of $15 per share with proceeds of a loan from the Corporation in
the amount of approximately $5.6 million. The Bank makes periodic cash
contributions to the ESOP in an amount sufficient for the ESOP to make the
scheduled payments under the note payable to the Corporation.
The note payable has a term of 15 years, bears interest at 8.5% and
requires a level quarterly payment of principal and interest of
approximately $165,000. The note is collateralized by the shares of common
stock held by the ESOP. As the note is repaid, shares are released from
collateral based on the proportion of the payment in relation to total
payments required to be made on the loan. The shares released from
collateral are then allocated to participants based upon compensation.
Compensation expense is determined by multiplying the per share market
price of the Corporation's stock at the time the shares are committed to be
released by the number of shares to be released. Any difference between the
value of the released shares at market and cost is recorded as an addition
or deduction to additional paid-in capital. The Company recognized
approximately $243,000 in compensation expense in the year ended September
30, 1998 related to the ESOP of which approximately $186,000 reduced the
cost of unallocated ESOP shares and $57,000 increased additional paid-in
capital on the balance sheet.
The cost of the unallocated shares is reflected as a reduction of equity.
Unallocated shares are considered neither outstanding shares for
computation of basic earnings per share nor potentially dilutive securities
for computation of diluted earnings per share. Dividends on unallocated
ESOP shares are reflected as a reduction in the note payable (and the
Bank's contribution reduced accordingly).
Shares released or committed to be released for allocation during the year
ended September 30, 1998 totaled 12,342. Shares remaining not released or
committed to be released for allocation at September 30, 1998 totaled
357,658 and had a market value of approximately $6.2 million.
12. EQUITY
LIQUIDATION ACCOUNT - At the time of Conversion, the Bank established a
liquidation account totaling approximately $29.8 million for the benefit of
eligible account holders as of June 30, 1996 and December 31, 1997 who
continue to maintain their accounts at the Bank after the Conversion. The
liquidation account will be reduced annually to the extent that eligible
account holders have reduced their qualifying deposits. Subsequent
increases will not restore an eligible account holder's interest in the
liquidation account. In the event of a complete liquidation of the Bank,
each eligible account holder will be entitled to receive a distribution
from the liquidation account in an amount proportionate to the current
adjusted qualifying balances for accounts then held before any distribution
may be made to the Corporation with respect to the Bank's capital stock.
DIVIDENDS - The Corporation's sources of income and funds for dividends to
its stockholders are earnings on its investments and dividends from the
Bank. The Corporation is not subject to any regulatory restrictions on the
payment of dividends to its stockholders. However, the Bank's primary
regulator, the Office of Thrift Supervision ("OTS"), has regulations that
impose certain restrictions on
F-20
<PAGE>
payment of dividends to the Corporation. The Corporation was dependent on
dividends from the Bank to support the level of dividends declared by the
Corporation during the year ended September 30, 1998. Current regulations
of the OTS allow the Bank (based upon its current capital level and
supervisory status assigned by the OTS) to pay a dividend of up to 100% of
net income to date during the calendar year plus 50% of its surplus capital
existing at the beginning of the calendar year. Supervisory approval is not
required, but 30 days prior notice to the OTS is required. Any capital
distribution in excess of this amount would require supervisory approval.
Capital distributions are further restricted should the Bank's capital
level fall below the full phased-in capital requirements of the OTS. In no
case will the Bank be allowed to make a capital distribution in excess of
the balance of the liquidation account. The Bank declared dividends to the
Corporation amounting to $694,000 in the year ended September 30,1998.
REGULATORY CAPITAL REQUIREMENTS - The Corporation is not subject to any
regulatory capital requirements. However, the Bank is subject to various
regulatory capital requirements administered by the federal financial
institution regulatory 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 also are 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. Under regulations
of the OTS, the Company must satisfy certain minimum capital requirements,
including a leverage capital requirement (expressed as a ratio of core or
Tier I capital to adjusted total assets) and risk-based capital
requirements (expressed as a ratio of core or Tier I capital and total
capital to total risk-weighted assets). As an OTS regulated institution,
the Bank also is subject to a minimum tangible capital requirement
(expressed as a ratio of tangible capital to adjusted total assets). In
measuring compliance with all three capital standards, institutions must
deduct from their capital (with several exceptions primarily for mortgage
banking subsidiaries and insured depository institution subsidiaries) their
investments in, and advances to, subsidiaries engaged (as principal) in
activities not permissible for national banks, and certain other
adjustments. Management believes, as of September 30, 1998, that the Bank
meets all capital adequacy requirements to which it is subject.
As of September 30, 1998 and 1997, the most recent respective notifications
from the OTS classified the Bank as well capitalized under the regulatory
framework for prompt corrective action. To be categorized as well
capitalized, the Bank must maintain minimum total risk-based, Tier I risk-
based, and Tier I leverage ratios as set forth in the table below.
Management believes that there are no conditions or events that would have
changed the Bank's category since the most recent notification.
F-21
<PAGE>
The following is a reconciliation of the Bank's equity reported in the financial
statements under generally accepted accounting principles to OTS regulatory
capital requirements (in thousands of dollars):
<TABLE>
<CAPTION>
TANGIBLE CORE RISK-BASED
CAPITAL CAPITAL CAPITAL
<S> <C> <C> <C>
SEPTEMBER 30, 1998
Total equity of the Bank $ 60,878 $ 60,878 $ 60,878
General allowance for loan losses - - 750
Net unrealized gain on available-for-sale securities (2,101) (2,101) (2,101)
-------- -------- --------
Regulatory Capital $ 58,777 $ 58,777 $ 59,527
======== ======== ========
SEPTEMBER 30, 1997
Total equity of the Association $ 29,235 $ 29,235 $ 29,235
General allowance for loan losses - - 750
Net unrealized gain on available-for-sale securities (1,466) (1,466) (1,466)
-------- -------- --------
Regulatory Capital $ 27,769 $ 27,769 $ 28,519
======== ======== ========
</TABLE>
The Bank's actual and required capital amounts and ratios are summarized as
follows (in thousands of dollars):
<TABLE>
<CAPTION>
TO BE WELL
CAPITALIZED UNDER
FOR CAPITAL PROMPT CORRECTIVE
ACTUAL ADEQUACY PURPOSES ACTION PROVISIONS
------------------- ------------------------- ----------------------
AMOUNT RATIO AMOUNT RATIO AMOUNT RATIO
<S> <C> <C> <C> <C> <C> <C>
SEPTEMBER 30, 1998
Tangible Capital (to adjusted-total assets) $ 58,777 19.4% $ 4,541 1.5% No Requirement
Tier I Capital (to adjusted-total assets) $ 58,777 19.4% $ 9,083 3.0% $ 15,138 5.0%
Tier I Capital (to risk-weighted assets) $ 58,777 40.3% No Requirement $ 8,760 6.0%
Total Capital (to risk-weighted assets) $ 59,527 40.8% $ 11,681 8.0% $ 14,601 10.0%
SEPTEMBER 30, 1997
Tangible Capital (to adjusted-total assets) $ 27,769 11.3% $ 3,690 1.5% No Requirement
Tier I Capital (to adjusted-total assets) $ 27,769 11.3% $ 7,381 3.0% $ 12,302 5.0%
Tier I Capital (to risk-weighted assets) $ 27,769 22.7% No Requirement $ 7,346 6.0%
Total Capital (to risk-weighted assets) $ 28,519 23.3% $ 9,796 8.0% $ 12,245 10.0%
</TABLE>
F-22
<PAGE>
13. FAIR VALUE OF FINANCIAL INSTRUMENTS
SFAS No. 107, DISCLOSURES ABOUT FAIR VALUE OF FINANCIAL INSTRUMENTS,
requires disclosure of fair value information regarding financial
instruments, whether or not recognized in the balance sheet, for which it
is practicable to estimate a value. The stated and estimated fair value
amounts of the Company's financial instruments, as of September 30, 1998
and 1997, are summarized below (in thousands of dollars):
<TABLE>
<CAPTION>
1998 1997
----------------------------- -----------------------------
STATED ESTIMATED STATED ESTIMATED
ASSETS AMOUNT FAIR VALUE AMOUNT FAIR VALUE
<S> <C> <C> <C>
Cash and cash equivalents $ 73,920 $ 73,920 $ 14,659 $ 14,659
Mortgage-backed securities 1,695 1,691 6,665 6,635
Investment securities 24,010 24,106 24,378 24,344
Loans receivable, net 196,789 201,342 192,663 196,037
Loans held-for-sale 849 869 1,045 1,065
Federal Home Loan Bank stock 2,042 2,042 2,042 2,042
Accrued interest receivable 1,335 1,335 1,242 1,242
--------- --------- --------- ---------
$ 300,640 $ 305,305 $ 242,694 $ 246,024
========= ========= ========= =========
LIABILITIES
Interest bearing demand deposits $ 9,946 $ 9,946 $ 11,423 $ 11,423
Money market accounts 828 828 939 939
NOW accounts 2,627 2,627 2,833 2,833
Certificates of deposit 192,703 194,174 200,217 200,832
Accrued interest payable 359 359 338 338
--------- --------- --------- ---------
$ 206,463 $ 207,934 $ 215,750 $ 216,365
========= ========= ========= =========
</TABLE>
The Company had off-balance sheet financial commitments, which include
commitments to originate loans, undisbursed portions of interim
construction loans and unused lines of credit (see Note 10). Since these
commitments are based on current rates, the commitment amount is considered
to be a reasonable estimate of fair value.
Estimated fair values were determined using the following methods and
assumptions:
CASH AND CASH EQUIVALENTS - Cash and cash equivalents have maturities of
three months or less and, accordingly, the carrying amounts of such
instruments are deemed to be reasonable estimates of fair value.
MORTGAGE-BACKED SECURITIES AND INVESTMENT SECURITIES - Fair values are
based on quoted market prices where available. If quoted market prices are
not available, fair values are based on quoted market prices of comparable
instruments.
LOANS RECEIVABLE, NET - Fair values for loans are estimated by segregating
the portfolio by type of loan and discounting scheduled cash flows using
current market interest rates for loans with similar terms, reduced by an
estimate of credit losses inherent in the portfolio.
F-23
<PAGE>
LOANS HELD-FOR-SALE - Loans held-for-sale are valued at the lower of cost
or market as determined by outstanding commitments from investors or
current investor yield requirements calculated on an aggregate loan basis.
FEDERAL HOME LOAN BANK STOCK - Investment in stock of the FHLB is required
by law for every federally insured savings institution. No ready market
exists for this stock and it has no quoted market value. However,
redemption of this stock has historically been at par value. Accordingly,
the carrying amount is deemed to be a reasonable estimate of fair value.
DEPOSITS - As required by SFAS No. 107, fair values for demand deposits,
money market accounts and savings accounts are the amounts payable on
demand as of the reporting date (i.e., their stated amounts). The fair
value of certificates of deposit is estimated by discounting the
contractual cash flows using current market interest rates for accounts
with similar maturities.
ACCRUED INTEREST RECEIVABLE AND PAYABLE - The stated amounts of accrued
interest receivable and payable approximate the fair value.
LIMITATIONS - Fair value estimates are made at a specific point in time,
based on relevant market information and information about the financial
instrument. These estimates do not reflect any premium or discount that
could result from offering for sale at one time the Company's entire
holdings of a particular financial instrument. Because no market exists for
a significant portion of the Company's financial instruments, fair value
estimates are based on judgments regarding future expected loss experience,
current economic conditions, risk characteristics of various financial
instruments and other factors. These estimates are subjective in nature and
involve uncertainties and matters of significant judgment and therefore
cannot be determined with precision. Changes in assumptions could
significantly affect the estimates.
Fair value estimates are based on existing on-and-off balance sheet
financial instruments without attempting to estimate the value of
anticipated future business and the value of assets and liabilities that
are not considered financial instruments. For example, a significant asset
not considered a financial asset is premises and equipment. In addition,
tax ramifications related to the realization of the unrealized gains and
losses can have a significant effect on fair value estimates and have not
been considered in any of the estimates.
F-24
<PAGE>
14. CONDENSED PARENT COMPANY FINANCIAL STATEMENTS
The following condensed balance sheet, as of September 30, 1998 and
condensed statements of income and cash flows for the period from April 6,
1998 (date of incorporation) to September 30, 1998 for Heritage Bancorp,
Inc. should be read in conjunction with the consolidated financial
statements and the notes thereto (in thousands of dollars):
<TABLE>
<S> <C>
BALANCE SHEET
ASSETS
Cash and cash equivalents $ 28,953
Investment in subsidiary 60,933
Note receivable 5,453
Other assets 773
--------
Total $ 96,112
========
LIABILITIES AND SHAREHOLDERS' EQUITY
Dividend payable $ 694
Income taxes payable 88
Shareholders' equity 95,330
--------
Total $ 96,112
========
STATEMENT OF INCOME
Interest income $ 724
Dividend income from bank 694
--------
Total income 1,418
--------
Provision for income taxes 273
Equity in earnings of subsidiary (1,115)
--------
Net income $ 2,260
========
STATEMENT OF CASH FLOWS
Operating activities:
Net income $ 2,260
Adjustments to reconcile net income to
cash provided by operating activities:
Equity in earnings of subsidiary (1,115)
Increase in other assets (773)
Increase in income taxes payable 88
--------
Net cash provided by operating activities 460
--------
Investing activities:
Purchase of capital stock of subsidiary (34,029)
Principal payments on ESOP loan receivable 101
--------
Net cash used in investing activities (33,928)
--------
Financing activities - net proceeds from sale of common stock 62,421
--------
Net increase in cash and cash equivalents 28,953
Cash and cash equivalents at beginning of period -
--------
Cash and cash equivalents at end of period $ 28,953
========
</TABLE>
F-25
<PAGE>
15. QUARTERLY RESULTS OF OPERATIONS (UNAUDITED)
Summarized unaudited quarterly operating results for the years ended
September 30, 1998 and 1997 are as follows (in thousands, except per share
data):
<TABLE>
<CAPTION>
FIRST SECOND THIRD FOURTH
SEPTEMBER 30, 1998 QUARTER QUARTER QUARTER QUARTER
<S> <C> <C> <C> <C>
Interest income $ 4,512 $ 4,794 $ 5,223 $ 5,351
Interest expense 3,118 3,178 2,826 2,888
------- ------- ------- -------
Net interest income 1,394 1,616 2,397 2,463
Provision for loan losses (recovery of allowance) 0 (115) 0 10
------- ------- ------- -------
Net interest income after provision for loan losses 1,394 1,731 2,397 2,453
Other income 48 57 81 60
Other expense 588 777 714 778
------- ------- ------- -------
Income before income taxes 854 1,011 1,764 1,735
Provision for income taxes 330 360 655 584
------- ------- ------- -------
Net income $ 524 $ 651 $ 1,109 $ 1,151
======= ======= ======= =======
Basic and diluted earnings per share (1) $ 0.00 $ 0.00 $ 0.26 $ 0.27
Weighted average shares outstanding (1) 0 0 4,262 4,268
<CAPTION>
FIRST SECOND THIRD FOURTH
SEPTEMBER 30, 1998 QUARTER QUARTER QUARTER QUARTER
<S> <C> <C> <C> <C>
Interest income $ 4,431 $ 4,377 $ 4,522 $ 4,443
Interest expense 3,096 3,030 3,042 3,062
------- ------- ------- -------
Net interest income 1,335 1,347 1,480 1,381
Provision for loan losses 0 21 40 276
------- ------- ------- -------
Net interest income after provision for loan losses 1,335 1,326 1,440 1,105
Other income 54 50 35 63
Other expense 581 537 598 646
------- ------- ------- -------
Income before income taxes 808 839 877 522
Provision for income taxes 310 296 311 177
------- ------- ------- -------
Net income $ 498 $ 543 $ 566 $ 345
======= ======= ======= =======
</TABLE>
(1) Heritage Bancorp, Inc.'s initial public offering closed on April 6,
1998. For purposes of earnings per share calculations for the third
quarter, shares issued on April 6, 1998 have been assumed to be
outstanding as of April 1, 1998.
F-26
<PAGE>
16. SUBSEQUENT EVENTS (UNAUDITED)
On November 17, 1998, the Company announced its intention to repurchase up
to 231,438 shares, or 5% of its common stock.
**********
F-27
<PAGE>
EXHIBIT 10.1
EMPLOYMENT AGREEMENT
THIS AGREEMENT is made effective as of April 3, 1998, by and between
HERITAGE FEDERAL BANK (the "BANK"), HERITAGE BANCORP, INC. (the "COMPANY"), a
Delaware corporation, and J. EDWARD WELLS ("EXECUTIVE").
WHEREAS, EXECUTIVE serves in a position of substantial responsibility;
WHEREAS, the BANK wishes to assure itself of the services of EXECUTIVE for
the period provided in this Agreement; and
WHEREAS, EXECUTIVE is willing to serve in the employ of the BANK on a full-
time basis for said period.
NOW, THEREFORE, in consideration of the mutual covenants herein contained,
and upon the other terms and conditions hereinafter provided, the parties hereby
agree as follows:
1. POSITION AND RESPONSIBILITIES.
During the period of his employment hereunder, EXECUTIVE agrees to serve as
President and Chief Executive Officer of the BANK. During said period,
EXECUTIVE also agrees to serve, if elected, as an officer and director of the
COMPANY or any subsidiary or affiliate of the COMPANY or the BANK. Executive
shall render administrative and management duties to the BANK such as are
customarily performed by persons situated in a similar executive capacity.
2. TERMS AND DUTIES.
(a) The term of this Agreement shall be deemed to have commenced as of the
date first above written and shall continue for a period of thirty-six (36) full
calendar months thereafter. Commencing on the first anniversary date, and
continuing at each anniversary date thereafter, the Board of Directors of the
BANK (the "Board") may extend the Agreement for an additional year. Prior to
the extension of the Agreement as provided herein, the Board of Directors of the
BANK will conduct a formal performance evaluation of EXECUTIVE for purposes of
determining whether to extend the Agreement, and the results thereof shall be
included in the minutes of the Board's meeting.
(b) During the period of his employment hereunder, except for periods of
absence occasioned by illness, reasonable vacation periods, and reasonable
leaves of absence, EXECUTIVE shall devote substantially all his business time,
attention, skill, and efforts to the faithful performance of his duties
hereunder including activities and services related to the organization,
operation and management of the BANK; provided, however, that, with the approval
of the Board, as evidenced by a resolution of such Board, from time to time,
EXECUTIVE may serve, or continue to serve, on the boards of directors of, and
hold any other offices or positions in, companies or organizations, which, in
such Board's judgment, will not present any conflict of interest with the BANK,
or materially affect the performance of EXECUTIVE's duties pursuant to this
Agreement.
<PAGE>
3. COMPENSATION AND REIMBURSEMENT.
(a) The compensation specified under this Agreement shall constitute the
salary and benefits paid for the duties described in Sections 1 and 2. The BANK
shall pay EXECUTIVE as compensation a salary of $151,000 per year ("Base
Salary"). Such Base Salary shall be payable in accordance with the customary
payroll practices of the BANK. During the period of this Agreement, EXECUTIVE's
Base Salary shall be reviewed at least annually; the first such review will be
made no later than one year from the date of this Agreement. Such review shall
be conducted by a Committee designated by the Board, and the Board may increase
EXECUTIVE's Base Salary. In addition to the Base Salary provided in this
Section 3(a), the BANK shall provide EXECUTIVE at no cost to EXECUTIVE with all
such other benefits as are provided uniformly to permanent full-time employees
of the BANK.
(b) The BANK will provide EXECUTIVE with employee benefit plans,
arrangements and perquisites substantially equivalent to those in which
EXECUTIVE was participating or otherwise deriving benefit from immediately prior
to the beginning of the term of this Agreement, and the BANK will not, without
EXECUTIVE's prior written consent, make any changes in such plans, arrangements
or perquisites which would adversely affect EXECUTIVE's rights or benefits
thereunder. Without limiting the generality of the foregoing provisions of this
Subsection (b), EXECUTIVE will be entitled to participate in or receive benefits
under any employee benefit plans including, but not limited to, retirement
plans, supplemental retirement plans, pension plans, profit-sharing plans,
health-and-accident plan, medical coverage or any other employee benefit plan or
arrangement made available by the BANK in the future to its senior executives
and key management employees, subject to, and on a basis consistent with, the
terms, conditions and overall administration of such plans and arrangements.
EXECUTIVE will be entitled to incentive compensation and bonuses as provided in
any plan, or pursuant to any arrangement of the BANK, in which EXECUTIVE is
eligible to participate. Nothing paid to EXECUTIVE under any such plan or
arrangement will be deemed to be in lieu of other compensation to which
EXECUTIVE is entitled under this Agreement, except as provided under Section
5(e).
(c) In addition to the Base Salary provided for by paragraph (a) of this
Section 3, the BANK shall pay or reimburse EXECUTIVE for all reasonable travel
and other obligations under this Agreement and may provide such additional
compensation in such form and such amounts as the Board may from time to time
determine.
4. PAYMENTS TO EXECUTIVE UPON AN EVENT OF TERMINATION.
(a) Upon the occurrence of an Event of Termination (as herein defined)
during EXECUTIVE's term of employment under this Agreement, the provisions of
this Section shall apply. As used in this Agreement, an "Event of Termination"
shall mean and include any one or more of the following: (i) the termination by
the BANK of EXECUTIVE's full-time employment hereunder for any reason other than
a Change in Control, as defined in Section 5(a) hereof; disability, as defined
in Section 6(a) hereof; death; retirement, as defined in Section 7 hereof; or
Termination for
2
<PAGE>
Cause, as defined in Section 8 hereof; (ii) EXECUTIVE's resignation from the
BANK's employ, upon (A) unless consented to by EXECUTIVE, a material change in
EXECUTIVE's function, duties, or responsibilities, which change would cause
EXECUTIVE's position to become one of lesser responsibility, importance, or
scope from the position and attributes thereof described in Sections 1 and 2,
above (any such material change shall be deemed a continuing breach of this
Agreement), (B) a relocation of EXECUTIVE's principal place of employment by
more than 35 miles from its location at the effective date of this Agreement, or
a material reduction in the benefits and perquisites to EXECUTIVE from those
being provided as of the effective date of this Agreement, (C) the liquidation
or dissolution of the BANK, or (D) any breach of this Agreement by the BANK.
Upon the occurrence of any event described in clauses (A), (B), (C) or (D),
above, EXECUTIVE shall have the right to elect to terminate his employment under
this Agreement by resignation upon not less than sixty (60) days prior written
notice given within a reasonable period of time not to exceed, except in case of
a continuing breach, four (4) calendar months after the event giving rise to
said right to elect.
(b) Upon the occurrence of an Event of Termination, the BANK shall pay
EXECUTIVE, or, in the event of his subsequent death, his beneficiary or
beneficiaries, or his estate, as the case may be, as severance pay or liquidated
damages, or both, a sum equal to the payments due to EXECUTIVE for the remaining
term of the Agreement, including Base Salary, bonuses, and any other cash or
deferred compensation paid or to be paid (including the value of employer
contributions that would have been made on EXECUTIVE's behalf over the remaining
term of the agreement to any tax-qualified retirement plan sponsored by the BANK
as of the Date of Termination), to EXECUTIVE for the term of the Agreement
provided, however, that if the BANK is not in compliance with its minimum
capital requirements or if such payments would cause the BANK's capital to be
reduced below its minimum capital requirements, such payments shall be deferred
until such time as the BANK is in capital compliance. All payments made
pursuant to this Section 4(b) shall be paid in substantially equal monthly
installments over the remaining term of this Agreement following EXECUTIVE's
termination; provided, however, that if the remaining term of the Agreement is
less than one (1) year (determined as of EXECUTIVE's Date of Termination), such
payments and benefits shall be paid to EXECUTIVE in a lump sum within thirty
(30) days of the Date of Termination.
(c) Upon the occurrence of an Event of Termination, the BANK will cause to
be continued life, medical, dental and disability coverage substantially
identical to the coverage maintained by the BANK for EXECUTIVE prior to his
termination. Such coverage shall cease upon the expiration of the remaining
term of this Agreement.
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5. CHANGE IN CONTROL.
(a) No benefit shall be paid under this Section 5 unless there shall have
occurred a Change in Control of the COMPANY or the BANK. For purposes of this
Agreement, a "Change in Control" of the COMPANY or the BANK shall be deemed to
occur if and when (a) there occurs a change in control of the BANK or the
COMPANY within the meaning of the Home Owners Loan Act of 1933 and 12 C.F.R.
Part 574, (b) any person (as such term is used in Sections 13(d) and 14(d)(2) of
the Exchange Act) is or becomes the beneficial owner, directly or indirectly, of
securities of the COMPANY or the BANK representing twenty-five percent (25%) or
more of the combined voting power of the COMPANY's or the BANK's then
outstanding securities, (c) the membership of the board of directors of the
COMPANY or the BANK changes as the result of a contested election, such that
individuals who were directors at the beginning of any twenty-four (24) month
period (whether commencing before or after the date of adoption of this
Agreement) do not constitute a majority of the Board at the end of such period,
or (d) upon the consummation of a merger, consolidation, sale or disposition of
all or substantially all of the COMPANY's or the BANK's assets, or a plan of
partial or complete liquidation that has been approved by the shareholders of
the COMPANY or the BANK.
(b) If any of the events described in Section 5(a) hereof constituting a
Change in Control have occurred, EXECUTIVE shall be entitled to the benefits
provided in paragraphs (c), (d) and (e) of this Section 5 upon his subsequent
involuntary termination following the effective date of a Change in Control (or
voluntary termination within twelve (12) months of the effective date of a
Change in Control following any demotion, loss of title, office or significant
authority, reduction in his annual compensation or benefits (other than a
reduction affecting the BANK's personnel generally), or relocation of his
principal place of employment by more than 35 miles from its location
immediately prior to the Change in Control), unless such termination is because
of his death, retirement as provided in Section 7, termination for Cause, or
termination for Disability.
(c) Upon the occurrence of a Change in Control followed by EXECUTIVE's
termination of employment, the BANK shall pay EXECUTIVE, or in the event of his
subsequent death, his beneficiary or beneficiaries, or his estate, as the case
may be, as severance pay or liquidated damages, or both, a sum equal to 2.99
times EXECUTIVE's "base amount," within the meaning of Section 280G(b)(3) of
the Internal Revenue Code of 1986 ("Code"), as amended. Such payment shall be
made in a lump sum paid within ten (10) days of EXECUTIVE's Date of Termination.
(d) Upon the occurrence of a Change in Control followed by EXECUTIVE's
termination of employment, the BANK will cause to be continued life, medical,
dental and disability coverage substantially identical to the coverage
maintained by the BANK for EXECUTIVE prior to his severance. In addition,
EXECUTIVE shall be entitled to receive the value of employer contributions that
would have been made on EXECUTIVE's behalf over the remaining term of the
agreement to any tax-qualified retirement plan sponsored by the BANK as of the
Date of Termination. Such coverage and payments shall cease upon the expiration
of thirty-six (36) months.
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(e) Upon the occurrence of a Change in Control, EXECUTIVE shall be entitled
to receive benefits due him under, or contributed by the COMPANY or the BANK on
his behalf, pursuant to any retirement, incentive, profit sharing, bonus,
performance, disability or other employee benefit plan maintained by the BANK or
the COMPANY on EXECUTIVE's behalf to the extent that such benefits are not
otherwise paid to EXECUTIVE upon a Change in Control.
(f) Notwithstanding the preceding paragraphs of this Section 5, in the
event that the aggregate payments or benefits to be made or afforded to
EXECUTIVE under this Section, together with any other payments or benefits
received or to be received by EXECUTIVE in connection with a Change in Control,
would be deemed to include an "excess parachute payment" under Section 280G of
the Code, then, at the election of EXECUTIVE, (i) such payments or benefits
shall be payable or provided to EXECUTIVE over the minimum period necessary to
reduce the present value of such payments or benefits to an amount which is one
dollar ($1.00) less than three (3) times EXECUTIVE's "base amount" under Section
280G(b)(3) of the Code or (ii) the payments or benefits to be provided under
this Section 5 shall be reduced to the extent necessary to avoid treatment as an
excess parachute payment with the allocation of the reduction among such
payments and benefits to be determined by EXECUTIVE.
6. TERMINATION FOR DISABILITY.
(a) If EXECUTIVE shall become disabled as defined in the BANK's then
current disability plan (or, if no such plan is then in effect, if EXECUTIVE is
permanently and totally disabled within the meaning of Section 22(e)(3) of the
Code as determined by a physician designated by the Board), the BANK may
terminate EXECUTIVE's employment for "Disability."
(b) Upon EXECUTIVE's termination of employment for Disability, the BANK
will pay EXECUTIVE, as disability pay, a bi-weekly payment equal to three-
quarters (3/4) of EXECUTIVE's bi-weekly rate of Base Salary on the effective
date of such termination. These disability payments shall commence on the
effective date of EXECUTIVE's termination and will end on the earlier of (i) the
date EXECUTIVE returns to the full-time employment of the BANK in the same
capacity as he was employed prior to his termination for Disability and pursuant
to an employment agreement between EXECUTIVE and the BANK; (ii) EXECUTIVE's
full-time employment by another employer; (iii) EXECUTIVE attaining the age of
sixty-five (65); or (iv) EXECUTIVE's death; or (v) the expiration of the term of
this Agreement. The disability pay shall be reduced by the amount, if any, paid
to EXECUTIVE under any plan of the BANK providing disability benefits to
EXECUTIVE.
(c) The BANK will cause to be continued life, medical, dental and
disability coverage substantially identical to the coverage maintained by the
BANK for EXECUTIVE prior to his termination for Disability. This coverage and
payments shall cease upon the earlier of (i) the date EXECUTIVE returns to the
full-time employment of the BANK, in the same capacity as he was employed prior
to his termination for Disability and pursuant to an employment agreement
between EXECUTIVE and the BANK; (ii) EXECUTIVE's full-time employment by another
employer; (iii)
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EXECUTIVE's attaining the age of sixty-five (65); (iv) EXECUTIVE's death; or (v)
the expiration of the term of this Agreement.
(d) Notwithstanding the foregoing, there will be no reduction in the
compensation otherwise payable to EXECUTIVE during any period during which
EXECUTIVE is incapable of performing his duties hereunder by reason of temporary
disability.
7. TERMINATION UPON RETIREMENT; DEATH OF EXECUTIVE; RESIGNATION.
Termination by the BANK of EXECUTIVE based on "Retirement" shall mean
retirement at or after attaining age sixty-five (65) or in accordance with any
retirement arrangement established with EXECUTIVE's consent with respect to him.
Upon termination of EXECUTIVE upon Retirement, EXECUTIVE shall be entitled to
all benefits under any retirement plan of the BANK or the COMPANY and other
plans to which EXECUTIVE is a party. Upon the death of EXECUTIVE during the
term of this Agreement, the BANK shall pay to EXECUTIVE's estate the
compensation due to EXECUTIVE through the last day of the calendar month in
which his death occurred. Upon the voluntary resignation of EXECUTIVE during
the term of this Agreement, other than in connection with an Event of
Termination, the BANK shall pay to EXECUTIVE the compensation due to EXECUTIVE
through his Date of Termination.
8. TERMINATION FOR CAUSE.
For purposes of this Agreement, "Termination for Cause" shall include
termination because of EXECUTIVE's personal dishonesty, incompetence, willful
misconduct, breach of fiduciary duty involving personal profit, intentional
failure to perform stated duties, willful violation of any law, rule, or
regulation (other than traffic violations or similar offenses) or final cease-
and-desist order, or material breach of any provision of this Agreement.
Notwithstanding the foregoing, EXECUTIVE shall not be deemed to have been
terminated for Cause unless and until there shall have been delivered to him a
copy of a resolution duly adopted by the affirmative vote of not less than
three-fourths (3/4) of the members of the Board at a meeting of the Board called
and held for that purpose (after reasonable notice to EXECUTIVE and an
opportunity for him, together with counsel, to be heard before the Board),
finding that in the good faith opinion of the Board, EXECUTIVE was guilty of
conduct justifying termination for Cause and specifying the reasons thereof.
EXECUTIVE shall not have the right to receive compensation or other benefits for
any period after termination for Cause. Any stock options granted to EXECUTIVE
under any stock option plan or any unvested awards granted under any other stock
benefit plan of the BANK, the COMPANY, or any subsidiary or affiliate thereof,
shall become null and void effective upon EXECUTIVE's receipt of Notice of
Termination for Cause pursuant to Section 10 hereof, and shall not be
exercisable by EXECUTIVE at any time subsequent to such Termination for Cause.
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9. REQUIRED PROVISIONS.
(a) The BANK may terminate EXECUTIVE's employment at any time, but any
termination by the BANK, other than Termination for Cause, shall not prejudice
EXECUTIVE's right to compensation or other benefits under this Agreement.
EXECUTIVE shall not have the right to receive compensation or other benefits for
any period after Termination for Cause as defined in Section 8 herein.
(b) If EXECUTIVE is suspended and/or temporarily prohibited from
participating in the conduct of the BANK's affairs by a notice served under
Section 8(e)(3) or (g)(1) of the Federal Deposit Insurance Act ("FDIA") (12
U.S.C. 1818(e)(3) and (g)(1)), the BANK's obligations under the Agreement shall
be suspended as of the date of service, unless stayed by appropriate
proceedings. If the charges in the notice are dismissed, the BANK may, in its
discretion, (i) pay EXECUTIVE all or part of the compensation withheld while its
contract obligations were suspended and (ii) reinstate (in whole or in part) any
of its obligations that were suspended.
(c) If EXECUTIVE is removed and/or permanently prohibited from
participating in the conduct of the BANK's affairs by an order issued under
Section 8(e)(4) or (g)(1) of the FDIA (12 U.S.C. 1818(e)(4) or (g)(1)), all
obligations of the BANK under the Agreement shall terminate as of the effective
date of the order, but vested rights of the contracting parties shall not be
affected.
(d) If the BANK is in default (as defined in Section 3(x)(1) of the FDIA),
all obligations under this Agreement shall terminate as of the date of default,
but this paragraph shall not affect any vested rights of the parties.
(e) All obligations under this Agreement shall be terminated (except to the
extent determined that continuation of the Agreement is necessary for the
continued operation of the BANK): (i) by the Director of the Office of Thrift
Supervision (the "Director") or his designee at the time the Federal Deposit
Insurance Corporation enters into an agreement to provide assistance to or on
behalf of the BANK under the authority contained in Section 13(c) of the FDIA or
(ii) by the Director, or his designee at the time the Director or such designee
approves a supervisory merger to resolve problems related to operation of the
BANK or when the BANK is determined by the Director to be in an unsafe or
unsound condition. Any rights of the parties that have already vested, however,
shall not be affected by such action.
(f) Any payments made to EXECUTIVE pursuant to this Agreement, or
otherwise, are subject to and conditioned upon compliance with 12 U.S.C. Section
1828(k) and any regulations promulgated thereunder.
10. NOTICE.
(a) Any purported termination by the BANK or by EXECUTIVE shall be
communicated by Notice of Termination to the other party hereto. For purposes
of this Agreement, a "Notice of
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Termination" shall mean a written notice which shall indicate the specific
termination provision in this Agreement relied upon and shall set forth in
reasonable detail the facts and circumstances claimed to provide a basis for
termination of EXECUTIVE's employment under the provision so indicated.
(b) "Date of Termination" shall mean (A) if EXECUTIVE's employment is
terminated for Disability, thirty (30) days after a Notice of Termination is
given (provided that he shall not have returned to the performance of his duties
on a full-time basis during such thirty (30) day period), and (B) if his
employment is terminated for any other reason, other than Termination for
Cause, the date specified in the Notice of Termination. In the event of
EXECUTIVE's Termination for Cause, the Date of Termination shall be the same as
the date of the Notice of Termination.
(c) If, within thirty (30) days after any Notice of Termination is given,
the party receiving such Notice of Termination notifies the other party that a
dispute exists concerning the termination, except upon the occurrence of a
Change in Control and voluntary termination by EXECUTIVE in which case the Date
of Termination shall be the date specified in the Notice, the Date of
Termination shall be the date on which the dispute is finally determined, either
by mutual written agreement of the parties, by a binding arbitration award, or
by a final judgment, order or decree of a court of competent jurisdiction (the
time for appeal there from having expired and no appeal having been perfected)
and provided further that the Date of Termination shall be extended by a notice
of dispute only if such notice is given in good faith and the party giving such
notice pursues the resolution of such dispute with reasonable diligence.
Notwithstanding the pendency of any such dispute, the BANK will continue to pay
EXECUTIVE his full compensation in effect when the notice giving rise to the
dispute was given (including, but not limited to, Base Salary) and continue him
as a participant in all compensation, benefit and insurance plans in which he
was participating when the notice of dispute was given, until the dispute is
finally resolved in accordance with this Agreement. Amounts paid under this
Section are in addition to all other amounts due under this Agreement and shall
not be offset against or reduce any other amounts due under this Agreement.
11. NON-COMPETITION.
(a) Upon any termination of EXECUTIVE's employment hereunder pursuant to an
Event of Termination as provided in Section 4 hereof, EXECUTIVE agrees not to
compete with the BANK and/or the COMPANY for a period of one (1) year following
such termination in any city, town or county in which the BANK and/or the
COMPANY has an office or has filed an application for regulatory approval to
establish an office, determined as of the effective date of such termination.
EXECUTIVE agrees that during such period and within said cities, towns and
counties, EXECUTIVE shall not work for or advise, consult or otherwise serve
with, directly or indirectly, any entity whose business materially competes with
the depository, lending or other business activities of the BANK and/or the
COMPANY. The parties hereto, recognizing that irreparable injury will result to
the BANK and/or the COMPANY, its business and property in the event of
EXECUTIVE's breach of this Subsection 11(a) agree that in the event of any such
breach by EXECUTIVE, the BANK and/or the COMPANY will be entitled, in addition
to any other remedies
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and damages available, to an injunction to restrain the violation hereof by
EXECUTIVE, EXECUTIVE's partners, agents, servants, employers, employees and all
persons acting for or with EXECUTIVE. EXECUTIVE represents and admits that in
the event of the termination of his employment pursuant to Section 4 hereof,
EXECUTIVE's experience and capabilities are such that EXECUTIVE can obtain
employment in a business engaged in other lines and/or of a different nature
than the BANK and/or the COMPANY, and that the enforcement of a remedy by way of
injunction will not prevent EXECUTIVE from earning a livelihood. Nothing herein
will be construed as prohibiting the BANK and/or the COMPANY from pursuing any
other remedies available to the BANK and/or the COMPANY for such breach or
threatened breach, including the recovery of damages from EXECUTIVE.
(b) EXECUTIVE recognizes and acknowledges that the knowledge of the
business activities and plans for business activities of the BANK and affiliates
thereof, as it may exist from time to time, is a valuable, special and unique
asset of the business of the BANK. EXECUTIVE will not, during or after the term
of his employment, disclose any knowledge of the past, present, planned or
considered business activities of the BANK or affiliates thereof to any person,
firm, corporation, or other entity for any reason or purpose whatsoever.
Notwithstanding the foregoing, EXECUTIVE may disclose any knowledge of banking,
financial and/or economic principles, concepts or ideas which are not solely and
exclusively derived from the business plans and activities of the BANK. In the
event of a breach or threatened breach by EXECUTIVE of the provisions of this
Section, the BANK will be entitled to an injunction restraining EXECUTIVE from
disclosing, in whole or in part, the knowledge of the past, present, planned or
considered business activities of the BANK or affiliates thereof, or from
rendering any services to any person, firm, corporation, other entity to whom
such knowledge, in whole or in part, has been disclosed or is threatened to be
disclosed. Nothing herein will be construed as prohibiting the BANK from
pursuing any other remedies available to the BANK for such breach or threatened
breach, including the recovery of damages from EXECUTIVE.
12. SOURCE OF PAYMENTS.
All payments provided in this Agreement shall be timely paid in cash or
check from the general funds of the BANK. The COMPANY, however, guarantees all
payments and the provision of all amounts and benefits due hereunder to
EXECUTIVE and, if such payments are not timely paid or provided by the BANK,
such amounts and benefits shall be paid or provided by the COMPANY.
13. EFFECT ON PRIOR AGREEMENTS AND EXISTING BENEFITS PLANS.
This Agreement contains the entire understanding between the parties hereto
and supersedes any prior employment agreement between the BANK or any
predecessor of the BANK and EXECUTIVE, except that this Agreement shall not
affect or operate to reduce any benefit or compensation inuring to EXECUTIVE of
a kind elsewhere provided. No provision of this Agreement shall be interpreted
to mean that EXECUTIVE is subject to receiving fewer benefits than those
available to him without reference to this Agreement.
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14. NO ATTACHMENT.
(a) Except as required by law, no right to receive payments under this
Agreement shall be subject to anticipation, commutation, alienation, sale,
assignment, encumbrance, charge, pledge, or hypothecation, or to execution,
attachment, levy, or similar process or assignment by operation of law, and any
attempt, voluntary or involuntary, to affect any such action shall be null,
void, and of no effect.
(b) This Agreement shall be binding upon, and inure to the benefit of,
EXECUTIVE, the BANK, the COMPANY and their respective successors and assigns.
15. MODIFICATION AND WAIVER.
(a) This Agreement may not be modified or amended except by an instrument
in writing signed by the parties hereto.
(b) No term or condition of this Agreement shall be deemed to have been
waived, nor shall there by any estoppel against the enforcement of any provision
of this Agreement, except by written instrument of the party charged with such
waiver or estoppel. No such written waiver shall be deemed a continuing waiver
unless specifically stated therein, and each such waiver shall operate only as
to the specific term or condition waived and shall not constitute a waiver of
such term or condition for the future as to any act other than that specifically
waived.
16. SEVERABILITY.
If, for any reason, any provision of this Agreement, or any part of any
provision, is held invalid, such invalidity shall not affect any other provision
of this Agreement or any part of such provision not held so invalid, and each
such other provision and part thereof shall to the full extent consistent with
law continue in full force and effect.
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17. HEADINGS FOR REFERENCE ONLY.
The headings of sections and paragraphs herein are included solely for
convenience of reference and shall not control the meaning or interpretation of
any of the provisions of this Agreement.
18. GOVERNING LAW.
This Agreement shall be governed by the laws of the State of South
Carolina, unless otherwise specified herein; provided, however, that in the
event of a conflict between the terms of this Agreement and any applicable
federal or state law or regulation, the provisions of such law or regulation
shall prevail.
19. ARBITRATION.
Any dispute or controversy arising under or in connection with this
Agreement shall be settled exclusively by arbitration, conducted before a panel
of three arbitrators sitting in a location selected by the employee within fifty
miles from the location of the BANK, in accordance with the rules of the
American Arbitration Association then in effect. Judgment may be entered on the
arbitrator's award in any court having jurisdiction; provided, however, that
EXECUTIVE shall be entitled to seek specific performance of his right to be paid
until the Date of Termination during the pendency of any dispute or controversy
arising under or in connection with this Agreement.
20. PAYMENT OF LEGAL FEES.
All reasonable legal fees paid or incurred by EXECUTIVE pursuant to any
dispute or question of interpretation relating to this Agreement shall be paid
or reimbursed by the BANK, if successful pursuant to a legal judgment,
arbitration or settlement.
21. INDEMNIFICATION.
The BANK shall provide EXECUTIVE (including his heirs, executors and
administrators) with coverage under a standard directors' and officers'
liability insurance policy at its expense, or in lieu thereof, shall indemnify
EXECUTIVE (and his heirs, executors and administrators) to the fullest extent
permitted under law against all expenses and liabilities reasonably incurred by
him in connection with or arising out of any action, suit or proceeding in which
he may be involved by reason of his having been a director or officer of the
BANK (whether or not he continues to be a directors or officer at the time of
incurring such expenses or liabilities), such expenses and liabilities to
include, but not be limited to, judgment, court costs and attorneys' fees and
the cost of reasonable settlements.
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22. SUCCESSOR TO THE BANK OR THE COMPANY.
The BANK and the COMPANY shall require any successor or assignee, whether
direct or indirect, by purchase, merger, consolidation or otherwise, to all or
substantially all the business or assets of the BANK or the COMPANY, expressly
and unconditionally to assume and agree to perform the BANK's or the COMPANY's
obligations under this Agreement, in the same manner and to the same extent that
the BANK or the COMPANY would be required to perform if no such succession or
assignment had taken place.
IN WITNESS WHEREOF, the BANK and the COMPANY have caused this Agreement to
be executed and their seal to be affixed hereunto by a duly authorized officer,
and EXECUTIVE has signed this Agreement, all on the 3rd day of April, 1998.
ATTEST: HERITAGE FEDERAL BANK
/s/ James H. Wosson, Jr. By: /s/ J. Edward Wells
- -------------------------------------- ------------------------------
[SEAL]
ATTEST: HERITAGE BANCORP, INC.
/s/ Edwin I. Shealy By: /s/ J. Edward Wells
- -------------------------------------- ------------------------------
[SEAL]
WITNESS:
/s/ Edwin I. Shealy By: /s/ J. Edward Wells
- -------------------------------------- ------------------------------
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EXHIBIT 10.2
AGREEMENT
---------
This AGREEMENT is made effective as of ___________________, 1998 by and
between HERITAGE FEDERAL BANK (the "BANK"); HERITAGE BANCORP, INC. ("COMPANY"),
a Delaware corporation; and _________________ ("EXECUTIVE").
WHEREAS, the BANK recognizes the substantial contribution EXECUTIVE has
made to the BANK and wishes to protect his position therewith for the period
provided in this Agreement in the event of a Change in Control (as defined
herein); and
WHEREAS, EXECUTIVE serves in a position of substantial responsibility;
NOW, THEREFORE, in consideration of the foregoing and upon the other terms
and conditions hereinafter provided, the parties hereto agree as follows:
1. TERM OF AGREEMENT
The term of this Agreement shall be deemed to have commenced as of the date
first above written and shall continue for a period of twenty-four (24) full
calendar months thereafter. Commencing on the first anniversary date of this
Agreement and continuing at each anniversary date thereafter, the Board of
Directors of the BANK ("Board") may extend the Agreement for an additional year.
The Board will conduct a performance evaluation of EXECUTIVE for purposes of
determining whether to extend the Agreement, and the results thereof shall be
included in the minutes of the Board's meeting.
2. PAYMENTS TO EXECUTIVE UPON CHANGE IN CONTROL.
(a) Upon the occurrence of a Change in Control (as herein defined) followed
within twelve (12) months of the effective date of the Change in Control by the
voluntary or involuntary termination of EXECUTIVE's employment, other than for
Cause, as defined in Section 2(c) hereof, the provisions of Section 3 shall
apply. For purposes of this Agreement, "voluntary termination" shall be limited
to the circumstances in which EXECUTIVE elects to voluntarily terminate his
employment within twelve (12) months of the effective date of a Change in
Control following any demotion, loss of title, office or significant authority,
reduction in his annual compensation or benefits (other than a reduction
affecting the Bank's personnel generally), or relocation of his principal place
of employment by more than 35 miles from its location immediately prior to the
Change in Control.
(b) A "Change in Control" of the COMPANY or the BANK shall be deemed to
occur if and when (a) there occurs a change in control of the BANK or the
COMPANY within the meaning of the Home Owners Loan Act of 1933 and 12 C.F.R.
Part 574, (b) any person (as such term is used in Sections 13(d) and 14(d)(2) of
the Exchange Act) is or becomes the beneficial owner, directly or indirectly, of
securities of the COMPANY or the BANK representing twenty-five percent (25%) or
more of the combined voting power of the COMPANY's or the BANK's then
outstanding securities, (c) the membership of the board of directors of the
COMPANY or the BANK changes as the result
<PAGE>
of a contested election, such that individuals who were directors at the
beginning of any twenty-four (24) month period (whether commencing before or
after the date of adoption of this Agreement) do not constitute a majority of
the Board at the end of such period, or (d) upon the consummation of a merger,
consolidation, sale or disposition of all or substantially all of the COMPANY's
or the BANK's assets, or a plan of partial or complete liquidation that has been
approved by the shareholders of the COMPANY or the BANK.
(c) EXECUTIVE shall not have the right to receive termination benefits
pursuant to Section 3 hereof upon Termination for Cause. The term "Termination
for Cause" shall mean termination because of EXECUTIVE's intentional failure to
perform stated duties, personal dishonesty, incompetence, willful misconduct,
any breach of fiduciary duty involving personal profit, willful violation of any
law, rule, regulation (other than traffic violations or similar offenses) or
final cease and desist order, or any material breach of any material provision
of this Agreement. In determining incompetence, the acts or omissions shall be
measured against standards generally prevailing in the savings institution
industry. Notwithstanding the foregoing, EXECUTIVE shall not be deemed to have
been terminated for Cause unless and until there shall have been delivered to
him a copy of a resolution duly adopted by the affirmative vote of not less than
three-fourths of the members of the Board at a meeting of the Board called and
held for that purpose (after reasonable notice to EXECUTIVE and an opportunity
for him, together with counsel, to be heard before the Board), finding that in
the good faith opinion of the Board, EXECUTIVE was guilty of conduct justifying
Termination for Cause and specifying the particulars thereof in detail.
EXECUTIVE shall not have the right to receive compensation or other benefits for
any period after Termination for Cause.
3. TERMINATION
(a) Upon the occurrence of a Change in Control, followed within twelve (12)
months of the effective date of a Change in Control by the voluntary or
involuntary termination of EXECUTIVE's employment other than Termination for
Cause, the BANK shall be obligated to pay EXECUTIVE, or in the event of his
subsequent death, his beneficiary or beneficiaries, or his estate, as the case
may be, as severance pay, a sum equal to two (2) times Executive's annual
compensation. For purposes of this Agreement, "annual compensation" shall mean
and include all wages, salary, bonus, and other compensation, if any, paid
(including accrued amounts) by the Company or the Bank as consideration for the
Participant's service during the twelve (12) month period ending on the last day
of the month preceding the effective date of a Change in Control, which is or
would be includable in the gross income of the Participant receiving the same
for federal income tax purposes. Such amount shall be paid to EXECUTIVE in a
lump sum no later than thirty (30) days after the date of his termination.
(b) Upon the occurrence of a Change in Control of the BANK followed within
twelve (12) months of the effective date of a Change in Control by EXECUTIVE's
voluntary or involuntary termination of employment, other than Termination for
Cause, the BANK shall cause to be continued life, medical, dental and disability
coverage substantially identical to the coverage
2
<PAGE>
maintained by the BANK for EXECUTIVE prior to his severance. Such coverage and
payments shall cease upon expiration of twenty-four (24) months from the date of
EXECUTIVE's termination.
(c) Notwithstanding the preceding paragraphs of this Section 3, in the
event that the aggregate payments or benefits to be made or afforded to
EXECUTIVE under this Section, together with any other payments or benefits
received or to be received by EXECUTIVE in connection with a Change in Control,
would be deemed to include an "excess parachute payment" under Section 280G of
the Code, then, at the election of EXECUTIVE, (i) such payments or benefits
shall be payable or provided to EXECUTIVE over the minimum period necessary to
reduce the present value of such payments or benefits to an amount which is one
dollar ($1.00) less than three (3) times EXECUTIVE's "base amount" under Section
280G(b)(3) of the Code or (ii) the payments or benefits to be provided under
this Section 3 shall be reduced to the extent necessary to avoid treatment as an
excess parachute payment with the allocation of the reduction among such
payments and benefits to be determined by EXECUTIVE.
(d) Any payments made to EXECUTIVE pursuant to this Agreement, or
otherwise, are subject to and conditioned upon compliance with 12 U.S.C. Section
1828(k) and any regulations promulgated thereunder.
4. EFFECT ON PRIOR AGREEMENTS AND EXISTING BENEFIT PLANS
This Agreement contains the entire understanding between the parties hereto
and supersedes any prior agreement between the BANK and EXECUTIVE, except that
this Agreement shall not affect or operate to reduce any benefit or compensation
inuring to EXECUTIVE of a kind elsewhere provided. No provision of this
Agreement shall be interpreted to mean that EXECUTIVE is subject to receiving
fewer benefits than those available to him without reference to this Agreement.
5. NO ATTACHMENT
(a) Except as required by law, no right to receive payments under this
Agreement shall be subject to anticipation, commutation, alienation, sale,
assignment, encumbrance, charge, pledge, or hypothecation, or to execution,
attachment, levy, or similar process or assignment by operation of law, and any
attempt, voluntary or involuntary, to affect any such action shall be null,
void, and of no effect.
(b) This Agreement shall be binding upon, and inure to the benefit of,
EXECUTIVE, the COMPANY, the BANK and their respective successors and assigns.
3
<PAGE>
6. MODIFICATION AND WAIVER
(a) This Agreement may not be modified or amended except by an instrument
in writing signed by the parties hereto.
(b) No term or condition of this Agreement shall be deemed to have been
waived, nor shall there by an estoppel against the enforcement of any provision
of this Agreement, except by written instrument of the party charged with such
waiver or estoppel. No such written waiver shall be deemed a continuing waiver
unless specifically stated therein, and each such waiver shall operate only as
to the specific term or condition waived and shall not constitute a waiver of
such term or condition for the future or as to any act other than that
specifically waived.
7. REQUIRED PROVISIONS
(a) The BANK may terminate EXECUTIVE's employment at any time, but any
termination by the BANK, other than Termination for Cause, shall not prejudice
EXECUTIVE's right to compensation or other benefits under this Agreement.
EXECUTIVE shall not have the right to receive compensation or other benefits for
any period after Termination for Cause as defined in Section 2(c) herein.
(b) If EXECUTIVE is suspended and/or temporarily prohibited from
participating in the conduct of the BANK's affairs by a notice served under
Section 8(e)(3) or (g)(1) of the Federal Deposit Insurance Act ("FDIA") (12
U.S.C. 1818(e)(3) and (g)(1)), the BANK's obligations under the Agreement shall
be suspended as of the date of service, unless stayed by appropriate
proceedings. If the charges in the notice are dismissed, the BANK may, in its
discretion, (i) pay EXECUTIVE all or part of the compensation withheld while its
contract obligations were suspended and (ii) reinstate (in whole or in part) any
of its obligations that were suspended.
(c) If EXECUTIVE is removed and/or permanently prohibited from
participating in the conduct of the BANK's affairs by an order issued under
Section 8(e)(4) or (g)(1) of the FDIA (12 U.S.C. 1818(e)(4) or (g)(1)), all
obligations of the BANK under the Agreement shall terminate as of the effective
date of the order, but vested rights of the contracting parties shall not be
affected.
(d) If the BANK is in default (as defined in Section 3(x)(1) of the FDIA),
all obligations under this Agreement shall terminate as of the date of default,
but this paragraph shall not affect any vested rights of the parties.
(e) All obligations under this Agreement may be terminated: (i) by the
Director of the Office of Thrift Supervision (the "Director") or his or her
designee at the time the Federal Deposit Insurance Corporation enters into an
agreement to provide assistance to or on behalf of the BANK under the authority
contained in Section 13(c) of the FDIA and (ii) by the Director, or his or her
designee at the time the Director or such designee approves a supervisory merger
to resolve problems related to operation of the BANK or when the BANK is
determined by the Director to be
4
<PAGE>
in an unsafe or unsound condition. Any rights of the parties that have already
vested, however, shall not be affected by such action.
8. SEVERABILITY
If, for any reason, any provision of this Agreement, or any part of any
provision, is held invalid, such invalidity shall not affect any other provision
of this Agreement or any part of such provision not held so invalid, and each
such other provision and part thereof shall to the full extent consistent with
law continue in full force and effect.
9. HEADINGS FOR REFERENCE ONLY
The headings of sections and paragraphs herein are included solely for
convenience of reference and shall not control the meaning or interpretation of
any of the provisions of this Agreement.
10. GOVERNING LAW
The validity, interpretation, performance, and enforcement of this
Agreement shall be governed by the laws of the State of South Carolina, unless
preempted by Federal law as now or hereafter in effect.
Any dispute or controversy arising under or in connection with this
Agreement shall be settled exclusively by arbitration, conducted before a panel
of three arbitrators sitting in a location selected by the employee within fifty
(50) miles from the location of the BANK, in accordance with the rules of the
American Arbitration Association then in effect.
11. SOURCE OF PAYMENTS
All payments provided in this Agreement shall be timely paid in cash or
check from the general funds of the BANK. The COMPANY, however, guarantees all
payments and the provision of all amounts and benefits due hereunder to
EXECUTIVE and, if such payments are not timely paid or provided by the BANK,
such amounts and benefits shall be paid or provided by the COMPANY.
12. PAYMENT OF LEGAL FEES
All reasonable legal fees paid or incurred by EXECUTIVE pursuant to any
dispute or question of interpretation relating to this Agreement shall be paid
or reimbursed by the BANK if EXECUTIVE is successful on the merits pursuant to a
legal judgment, arbitration or settlement.
5
<PAGE>
13. SUCCESSOR TO THE BANK OR THE COMPANY
The BANK and the COMPANY shall require any successor or assignee, whether
direct or indirect, by purchase, merger, consolidation or otherwise, to all or
substantially all the business or assets of the BANK or the COMPANY, expressly
and unconditionally to assume and agree to perform the BANK's or the COMPANY's
obligations under this Agreement, in the same manner and to the same extent that
the BANK or the COMPANY would be required to perform if no such succession or
assignment had taken place.
14. SIGNATURES
IN WITNESS WHEREOF, the BANK and the COMPANY have caused this Agreement to
be executed and their seal to be affixed hereunto by a duly authorized officer,
and EXECUTIVE has signed this Agreement, all on the ____ day of _____________,
1998.
ATTEST: HERITAGE FEDERAL BANK
_______________________________ BY:_________________________________
[SEAL]
ATTEST: HERITAGE BANCORP, INC.
_______________________________ BY:________________________________
[SEAL]
WITNESS:
_______________________________ _______________________________
[EXECUTIVE]
6
<PAGE>
EXHIBIT 10.3
HERITAGE FEDERAL BANK
EMPLOYEE SEVERANCE COMPENSATION PLAN
PLAN PURPOSE
The purpose of this Heritage Federal Bank Employee Severance Compensation
Plan is to assure the services of Employees of the Bank in the event of a Change
in Control. The benefits contemplated by the Plan recognize the value to the
Bank of the services and contributions of the Employees of the Bank and the
effect upon the Bank resulting from the uncertainties of continued employment,
reduced Employee benefits, management changes and relocations that may arise in
the event of a Change in Control. The Board believes that the Plan will also
aid the Bank in attracting and retaining the highly qualified individuals who
are essential to its success and that the Plan's assurance of fair treatment of
the Bank's Employees will reduce the distractions and other adverse effects on
Employees' performance in the event of a Change in Control.
ARTICLE I
ESTABLISHMENT OF PLAN
1.1 Establishment of Plan
---------------------
As of the Effective Date of the Plan as defined herein, the Bank hereby
establishes an Employee severance compensation plan to be known as the "Heritage
Federal Bank Employee Severance Compensation Plan." The purposes of the Plan
are as set forth above.
1.2 Application of Plan
-------------------
The benefits provided by this Plan shall be available to all Employees of
the Bank, who, at or after the Effective Date, meet the eligibility requirements
of Article III, except for those officers of the Bank who have entered into, or
who enter into in the future, and continue to be subject to, an employment or
change in control agreement with the Employer.
1.3 Contractual Right to Benefits
-----------------------------
This plan establishes and vests in each Participant a contractual right to
the benefits to which each Participant is entitled hereunder in the event of a
Change in Control, enforceable by the Participant against the Employer, the
Bank, or both. The Plan does not provide, and should not be construed as
providing, benefits of any kind to any Employee, except in the event of a Change
in Control and, in the event of a Change in Control, only upon the involuntary
or voluntary termination of an Employee in the manner contemplated herein.
1
<PAGE>
ARTICLE II
DEFINITIONS AND CONSTRUCTION
2.1 Definitions
-----------
Whenever used in the Plan, the following terms shall have the meanings set
forth below.
"Annual Compensation" of a Participant means and includes all wages,
salary, bonus, and cash compensation, if any, paid (including accrued amounts)
by an Employer as consideration for the Participant's service during the 12-
month period ending on the last day of the month preceding the date of a
Participant's termination pursuant to Section 4.2. For purposes of this Plan, a
Participant's "Monthly Compensation" shall equal one-twelfth of a Participant's
Annual Compensation as determined in accordance with this paragraph.
"Bank" means Heritage Federal Bank or any successor as provided for in
Article VII hereof.
"Board" means the Board of Directors of the Bank.
"Change in Control" shall mean an event deemed to occur if and when (a)
there occurs a change in control of the Bank or the Company within the meaning
of the Home Owners Loan Act of 1933 and 12 C.F.R. Part 574, (b) any person (as
such term is used in Sections 13(d) and 14(d)(2) of the Exchange Act) is or
becomes the beneficial owner, directly or indirectly, of securities of the
Company or the Bank representing twenty-five percent (25%) or more of the
combined voting power of the Company's or the Bank's then outstanding
securities, (c) the membership of the board of directors of the Company or the
Bank changes as the result of a contested election, such that individuals who
were directors at the beginning of any twenty-four (24) month period (whether
commencing before or after the date of adoption of this Plan) do not constitute
a majority of the Board at the end of such period, or (d) upon the consummation
of a merger, consolidation, sale or disposition of all or substantially all of
the Company's or the Bank's assets, or a plan of partial or complete liquidation
that has been approved by the shareholders of the Company or the Bank. If any
of the events enumerated in clauses (a) - (d) occur, the Board shall determine
the effective date of the change in control resulting therefrom, for purposes of
the Plan.
"Company" means Heritage Bancorp, Inc., a Delaware corporation, the holding
company of the Bank.
"Disability" means the permanent and total inability by reason of mental or
physical infirmity, or both, of an Employee to perform the work customarily
assigned to him. Additionally, a medical doctor selected or approved by the
Board must advise the Board that it is either not possible to determine if or
when such Disability will terminate or that it appears probable that such
Disability will be permanent during the remainder of said Employee's lifetime.
2
<PAGE>
"Effective Date" means the date the Plan is approved by the Board of the
Bank, or such other date as the Board shall designate in its resolution
approving the Plan.
"Employee" means an employee of the Bank or another Employer.
"Employer" means (i) the Bank or (ii) a subsidiary of the Bank or a parent
company of the Bank which has adopted the plan pursuant to Article VI hereof.
"Expiration Date" means a date ten (10) years from the Effective Date
unless earlier terminated pursuant to Section 8.2 or extended pursuant to
Section 8.1.
"Just Cause" shall means termination because of Participant's personal
dishonesty, incompetence, willful misconduct, any breach of fiduciary duty
involving personal profit, intentional failure to perform stated duties, willful
violation of any law, rule or regulation (other than traffic violations or other
similar offenses) or any final cease-and-desist order.
"Participant" means an Employee who meets the eligibility requirements of
Article III.
"Payment" means the payment of severance compensation as provided in
Article IV hereof.
"Plan" means this Heritage Federal Bank Employee Severance Compensation
Plan.
2.2 Applicable Law
--------------
The laws of the State of South Carolina shall be controlling law in all
matters relating to the Plan to the extent not preempted by Federal law.
2.3 Severability
------------
If a provision of this Plan shall be held illegal or invalid, the
illegality or invalidity shall not affect the remaining parts of the Plan and
the Plan shall be construed and enforced as if the illegal or invalid provision
had not been included.
ARTICLE III
ELIGIBILITY
3.1 Participation
-------------
The term "Participant" shall include an Employee who has completed at least
three (3) years of service with the Employer at the time of any termination
pursuant to Section 4.2 herein. Notwithstanding the foregoing, persons who have
entered into and continue to be covered by an individual employment contract or
change in control agreement with an Employer shall not be entitled to
participate in this Plan.
3
<PAGE>
3.2 Duration of Participation
-------------------------
A Participant shall cease to be a Participant in the Plan when the
Participant ceases to be an Employee of an Employer, unless such Participant is
entitled to a Payment as provided in the Plan. A Participant entitled to
receipt of a Payment shall remain a Participant in this Plan until the full
amount of such Payment has been paid to the Participant.
ARTICLE IV
PAYMENTS
4.1 Right to Payment
----------------
A Participant shall be entitled to receive from his or her Employer a
Payment in the amount provided in Section 4.3 if a Change in Control occurs and
if, within one (1) year thereafter, the Participant's employment by an Employer
shall terminate for any reason specified in Section 4.2. A Participant shall
not be entitled to a Payment if termination occurs by reason of death, voluntary
retirement, voluntary termination other than for the reasons specified in
Section 4.2, Disability or for Just Cause.
4.2 Reasons for Termination
-----------------------
Following a Change in Control, a Participant shall be entitled to a Payment
in accordance with Section 4.3 if employment by an Employer is terminated,
voluntary or involuntary, for any one or more of the following reasons:
(a) The Employer reduces the Participant's base salary or rate of
compensation as in effect immediately prior to the Change in Control, or as the
same may have been increased thereafter.
(b) The Employer materially changes the Participant's function, duties
or responsibilities which would cause the Participant's position to be one of
lesser responsibility, importance or scope with the Employer than immediately
prior to the Change in Control.
(c) The Employer requires the Participant to change the location of
the Participant's job or office, so that such Participant will be based at a
location more than thirty-five (35) miles from the location of the Participant's
job or office immediately prior to the Change in Control provided that such new
location is not closer to Participant's home.
(d) The Employer materially reduces the benefits and perquisites
available to the Participant immediately prior to the Change in Control;
provided, however, that a material reduction in benefits and perquisites
generally provided to all Employees of the Bank on a nondiscriminatory basis
shall not trigger a Payment pursuant to this Plan.
4
<PAGE>
(e) A successor to the Employer fails or refuses to assume the
Employer's obligations under this Plan, as required by Article VII.
(f) The Employer, or any successor to the Employer, breaches any other
provisions of this Plan.
(g) The Employer terminates the employment of a Participant at or
after a Change in Control other than for Just Cause.
4.3 Amount of Payment
-----------------
Each Participant entitled to a Payment under this Plan shall receive
from the Employer a lump sum cash payment equal to the product of the
Participant's Monthly Compensation and the Participant's years of service
(including partial years rounded up to the nearest full month) from the
Employee's date of hire through the date of termination. Notwithstanding
anything herein to the contrary, (i) the maximum payment to a Participant under
the Plan shall not exceed one hundred percent (100%) of Annual Compensation and
(ii) each Employee of an Employer who is not a Participant (other than Employees
who have entered into and continue to be covered by an individual employment
contract or change in control agreement with an Employer) shall receive a
payment equal to fifty percent of their Monthly Compensation if such Employee
would otherwise have been entitled to a Payment had they qualified as a
Participant.
A Participant shall not be required to mitigate damages on the amount of
the Payment by seeking other employment or otherwise, nor shall the amount of
such Payment be reduced by any compensation earned by the Participant as a
result of employment after termination of employment hereunder.
4.4 Time of Payment
---------------
The Payment to which a Participant is entitled shall be paid to the
Participant by the Employer or the successor to the Employer, in cash and in
full, not later than thirty (30) business days after the termination of the
Participant's employment. If any Participant should die after termination of
the employment but before all amounts have been paid, such unpaid amounts shall
be paid to the Participant's named beneficiary, if living, otherwise to the
personal representative of behalf of or for the benefit of the Participant's
estate.
4.5 Suspension of Payment
---------------------
Notwithstanding the foregoing, no payments or portions thereof shall be
made under this Plan, if such payment or portion would result in the Bank
failing to meet its minimum regulatory capital requirements as required by 12
C.F.R. Section 567.2. Any payments or portions thereof not paid shall be
suspended until such time as their payment would not result in a failure to meet
the Bank's minimum regulatory capital requirements. Any portion of benefit
payments which have not been
5
<PAGE>
suspended will be paid on an equitable basis, pro rata based upon amounts due
each Participant, among all eligible Participants.
ARTICLE V
OTHER RIGHTS AND BENEFITS NOT AFFECTED
5.1 Other Benefits
--------------
Neither the provisions of this Plan nor the Payment provided for hereunder
shall reduce any amounts otherwise payable, or in any way diminish the
Participant's rights as an Employee of an Employer, whether existing now or
hereafter, under any benefit, incentive, retirement, stock option, stock bonus,
stock ownership or any employment agreement or other plan or arrangement.
5.2 Employment Status
-----------------
This Plan does not constitute a contract of employment or impose on the
Participant's Employer any obligation to retain the Participant, to maintain the
status of the Participant's employment, or to change the Employer's policies
regarding termination of employment.
ARTICLE VI
PARTICIPATING EMPLOYERS
6.1 Upon approval by the Board of the Bank, this Plan may be adopted by
any subsidiary of the Bank or by the Company. Upon such adoption, the
subsidiary or the Company shall become an Employer hereunder and the provisions
of the Plan shall be fully applicable to the Employees of that subsidiary or the
Company. The term "subsidiary" means any corporation in which the Bank,
directly or indirectly, holds a majority of the voting power of its outstanding
shares of capital stock.
ARTICLE VII
SUCCESSOR TO THE BANK
7.1 The Bank shall require any successor or assignee, whether direct or
indirect, by purchase, merger, consolidation or otherwise, to all or
substantially all the business or assets of the Bank, expressly and
unconditionally to assume and agree to perform the Bank's obligations under this
plan, in the same manner and to the same extent that the Bank would be required
to perform if no such succession or assignment had taken place.
6
<PAGE>
ARTICLE VIII
DURATION, AMENDMENT AND TERMINATION
8.1 Duration
--------
If a Change in Control has not occurred, this Plan shall expire as of the
Expiration Date, unless sooner terminated as provided in Section 8.2, or unless
extended for an additional period or periods by resolution adopted by the Board.
Notwithstanding the foregoing, if a Change in Control occurs this Plan
shall continue in full force and effect, and shall not terminate or expire until
such date as all Participants who become entitled to Payments hereunder shall
have received such Payments in full.
8.2 Amendment and Termination
-------------------------
The Plan may be terminated or amended in any respect by resolution adopted
by a majority of the Board of the Bank, unless a Change in Control has
previously occurred. If a Change in Control occurs, the Plan no longer shall be
subject to amendment, change, substitution, deletion, revocation or termination
in any respect whatsoever.
8.3 Form of Amendment
-----------------
The form of any proper amendment or termination of the Plan shall be a
written instrument signed by a duly authorized officer or officers of the Bank,
certifying that the amendment or termination has been approved by the Board. A
proper termination of the Plan automatically shall effect a termination of all
Participants' rights and benefits hereunder.
8.4 No Attachment
-------------
(a) Except as required by law, no right to receive payments under this Plan
shall be subject to anticipation, commutation, alienation, sale, assignment,
encumbrance, charge, pledge, or hypothecation, or to execution, attachment,
levy, or similar process or assignment by operation of law, and any attempt,
voluntary or involuntary, to affect such action shall be null, void, and of no
effect.
(b) This Plan shall be binding upon, and inure to the benefit of, each
Employee, the Employer and their respective successors and assigns.
7
<PAGE>
ARTICLE IX
LEGAL FEES AND EXPENSES
9.1 All reasonable legal fees and other expenses paid or incurred by a
party hereto pursuant to any dispute or question of interpretation relating to
this Plan shall be paid or reimbursed by the prevailing party in any legal
judgment, arbitration or settlement.
ARTICLE X
REQUIRED PROVISIONS
10.1 The Bank may terminate the Employee's employment at any time, but any
termination by the Bank, other than Termination for Cause, shall not prejudice
Employee's right to compensation or other benefits under this Agreement if the
Employee is otherwise entitled to a benefit. The Employee shall not have the
right to receive compensation or other benefits for any period after termination
for Just Cause as defined in Section 2.1 hereinabove.
10.2 If the Employee is suspended and/or temporarily prohibited from
participating in the conduct of the Bank's affairs by a notice served under
Section 8(e)(3) or 8(g)(1) of the Federal Deposit Insurance Act, 12 U.S.C.
Section 1818(e)(3) or (g)(1), the Bank's obligations under this Plan to such
Employee shall be suspended as of the date of service, unless stated by
appropriate proceedings. If the charges in the notice are dismissed, the Bank
may in its discretion (i) pay the Employee all or part of the compensation
withheld while their contract obligations were suspended and (ii) reinstate (in
whole or in part) any of the obligation which were suspended.
10.3 If the Employee is removed and/or permanently prohibited from
participating in the conduct of the Bank's affairs by an order issued under
Section 8(e)(4) or 8(g)(1) of the Federal Deposit Insurance Act, 12 U.S.C.
Section 1818(e)(4) or (g)(1), all obligations of the Bank under this Plan to the
Employee shall terminate as of the effective date of the order, but vested
rights of the contracting parties shall not be affected.
10.4 If the Bank is in default as defined in Section 3(x)(1) of the
Federal Deposit Insurance Act, 12 U.S.C. Section 1818(x)(1), all obligations of
the Bank under this Plan shall terminate as of the date of default, but this
paragraph shall not affect any vested rights of the contracting parties.
10.5 All obligations of the Bank under this contract shall be terminated,
except to the extent determined that continuation of the contract is necessary
for the continued operation of the institution, (i) by the Director of the OTS
(or his designee) or (ii) the Federal Deposit Insurance Corporation ("FDIC") at
the time FDIC enters into an agreement to provide assistance to or on behalf of
the Bank under the authority contained in Section 13(c) of the Federal Deposits
Insurance Act, 12 U.S.C. Section 1823(c); or (ii) by the Director of the OTS (or
his designee) at the time the Director (or his designee) approves a supervisory
merger to resolve problems related to the operations of the Bank or when the
Bank is determined by the Director to be in an unsafe or unsound condition. Any
rights of the parties that have already vested, however, shall not be affected
by such action.
8
<PAGE>
10.6 Any payments made to an Employee pursuant to this Plan or otherwise
shall be conditioned upon compliance under 12 U.S.C. Section 1828(k) and any
regulations promulgated thereunder.
ARTICLE XI
ADMINISTRATION OF THE PLAN
11.1 The Plan shall be administered by the Board (or, by a committee of
non-Employee directors designated by the Board). Subject to the other
provisions of the Plan, the Board shall have authority to adopt, amend, alter
and repeal such administrative rules, guidelines and practices governing the
operation of the Plan as it shall from time to time consider advisable, to
interpret the provisions of the Plan and to decide all disputes arising in
connection with the Plan. The Board may correct any defect or supply any
omission or reconcile any inconsistency in the Plan in the manner and to the
extent it shall deem appropriate to carry the Plan into effect, in its sole and
absolute discretion. The Board's decision and interpretations shall be final and
binding. Any action of the Board with respect to the administration of the Plan
shall be taken pursuant to a majority vote or by the unanimous written consent
of its members.
Having been adopted by its Board on April 6, 1998, this Plan is executed
by duly authorized officer of the Bank this 6th day of April, 1998.
Attest
/s/ J. Edward Wells
- ------------------------ -------------------------------------
J. Edward Wells
President and Chief Executive Officer
9
<PAGE>
EXHIBIT 21
SUBSIDIARIES OF THE REGISTRANT
<PAGE>
EXHIBIT 21
SUBSIDIARIES OF REGISTRANT
Parent
- ------
Heritage Bancorp, Inc.
Percentage Jurisdiction or
Subsidiaries (a) of Ownership State of Incorporation
- ---------------- ------------ ----------------------
Heritage Federal Bank 100% United States
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 9
<LEGEND>
THIS SCHEDULE CONTAINS FINANCIAL INFORMATION EXTRACTED FROM THE CONSOLIDATED
FINANCIAL STATEMENTS OF HERITAGE BANCORP, INC. FOR THE YEAR ENDED SEPTEMBER 30,
1998 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> SEP-30-1998
<PERIOD-END> SEP-30-1998
<CASH> 1,917
<INT-BEARING-DEPOSITS> 68,828
<FED-FUNDS-SOLD> 3,175
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 6,898
<INVESTMENTS-CARRYING> 18,807
<INVESTMENTS-MARKET> 18,899
<LOANS> 197,638
<ALLOWANCE> 760
<TOTAL-ASSETS> 304,921
<DEPOSITS> 206,104
<SHORT-TERM> 0
<LIABILITIES-OTHER> 3,487
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0
0
<COMMON> 46
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<INTEREST-LOAN> 15,790
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<NET-INCOME> 3,435
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<RECOVERIES> 0
<ALLOWANCE-CLOSE> 760
<ALLOWANCE-DOMESTIC> 760
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 0
</TABLE>
